The Australian sharemarket's long-term trailing price-to-earnings ratio is around 14-15 times annual earnings. As of today the ASX All Ordinaries Index stands at a trailing P/E of 14.67.
Of course, P/E is but one albeit simplistic measurement of price – and indeed should be used just as a guide before further analysis – but on this measurement at least, the market seems roughly in line with historical averages (compared to 2009 where the average ASX All Ordinaries average P/E was 8, and reached 13.4 by the end of 2012). Relatively, the following companies look interesting.
Folkestone Education Trust
Early learning centre Australian real estate investment trust (A-REIT), Folkestone Education Trust (ASX: FET), has delivered an outstanding 55% per annum shareholder return over the last five years. On current metrics, it is very well positioned to continue its outperformance.
The $365 million market cap A-REIT owns 352 operating early-learning properties and five development sites, across five Australian states and in New Zealand. The company focuses on sites located within 15 kilometres of central business districts, particularly development sites so as to minimise stamp duty, and where it can later opportunistically sell property in areas suited to medium-density residential development.
Folkestone's properties are leased to 27 early-childhood learning providers, 59% of which belong to registered charity, Goodstart, the re-branded entity of the infamous ABC Learning. Other tenants include G8 Education Limited (ASX: GEM), Mission, and KidiCorp. FET maintains a 9% average 'passing yield' (the initial rental rate generated at the start of a lease).
The downside for investors in A-REITs is the non-application of franking credits, and different rules when calculating capital gains tax, and so advice should be taken to consider personal circumstances. However, given a reasonable five-year return on equity of 11.37%, P/E of 6.52, moderate debt levels, and a growth business model, Folkestone Education Trust looks set to continue to outperform the ASX over the medium term.
Reject Shop Ltd
Discount retailer The Reject Shop Ltd (ASX: TRS) is itself something of a market reject at present, with the company shedding more than half of its market capitalisation in 2014, owing to a succession of negative market updates, culminating in a 25% fall in NPAT in its FY14 results.
Its October trading update blamed the 5.4% comparable loss in store sales on negative retail sentiment, an unseasonably warm winter, and competition from the sales of liquidated competitor, Retail Adventures/Discount Superstore.
By the company's own admission, the task of opening 87 stores and a new distribution centre in WA in the previous two years – following the flooding of its Queensland centre – has stretched its resources across the board, resulting in a reduced customer offer.
The company has also seen increased pressure from Wesfarmers Ltd's (ASX: WES) Coles and Woolworth Limited (ASX: WOW) – which increasingly encroach into The Reject Shop's traditional product range – as well as from the duopoly's subsidiary businesses, K-Mart, Target, and Big W.
In response, The Reject Shop has undertaken a series of measures to stem the recent tide. It has closed poor-performing stores, hired new CEO Ross Sudano, shifted its marketing mix away from catalogues to regional media and online/social media, and recalibrated its product mix towards higher margin categories.
It also has a target store count of 400, compared to the current figure of 321 as of August 2014.
If The Reject Shop can realise these goals and improve its current return on equity from 11.83 to somewhere closer to its five-year average of 25, priced at a 10.81 forward P/E, this is a company that will reward investors prepared to buy in at an eight-year low.
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