Australia is the home of kangaroos, great beaches and a solid economy. Despite having a population of just 26 million people, which is less than California at 39.24 million, the country has produced a range of great companies. Australia’s strong economy and leading companies combined with its location on the other side of the world makes it a great country for portfolio diversification. Thus, in this article, we will take a look at my two favorite Australian stocks; let’s dive in.
1. Atlassian
Atlassian (TEAM, Financial) is a pioneering software company that was founded in Australia in 2002. The company’s flagship platform is called “Jira,” and it helped to popularize and execute the agile software development workflow. According to a “State of Agile” survey in 2021, Jira was the number one product for agile teams.
Without going into too many complex details, the agile methodology basically enables faster, user-focused product development and iteration. This is used for the majority of major software projects and is an alternative to legacy “waterfall” project management techniques.
Atlassian sells its product with a low friction, product-led growth strategy. This enables a customer to sign up for free and then only pay as they use the platform more. The company has also expanded its offering to tools for IT service management and work management. In addition, Atlassian has grown through various acquisitions, including the popular workplace collaboration tool Trello in 2017.
Growing financials
For the first quarter of the company's fiscal year 2023, Atlassian reported solid financial results. The company generated $807 million in revenue, which beat analyst estimates by $971,000 and increased by a solid 35% since the same quarter last year.
This was driven by strong customer growth as the business added 6,550 customers in the quarter, which gave a total of 249,173 customers on the platform. Management did report slowing engagement on the platform and a reduced number of people converting from free to paid tiers. However, this was mainly driven by the macroeconomic environment and thus I believe it is short term in nature.
Atlassian has historically been reinvesting for growth and has thus struggled with profitability. The company reported a net loss of $34 million in the first quarter, which was a slight improvement over the prior quarter's net loss of $63.6 million.
The company has a robust balance sheet with $1.544 billion in cash and marketable securities versus $1 billion in long term debt.
Valuation
Atlassian trades at a price-sales ratio of 10, which is over 60% cheaper than its five-year average.
The GF Value chart indicates a fair value of $367 per share for the stock, making it significantly undervalued at the time of writing.
2. BHP Group
The mining industry is massive in Australia and accounts for around 10% of the gross domestic product. BHP Group (BHP, Financial) is a diversified Australian mining and petroleum company that is involved in the exploration and production of various resources. Its main natural resources include oil, gas, copper, nickel, coal and iron ore.
Energy security has become a major concern for countries all over the world. This is driven by a few factors from the changing climate to the Russia-Ukraine war. Oil prices previously reached $120 per barrel in May 2022, which was more than double the pre-pandemic price of $55 per barrel. Prices have since corrected down to ~$75 per barrel but still remain elevated.
China has recently announced plans to lift its ban on Australian coal, which should also benefit BHP Group and improve relations overall. China has the second-largest economy in the world and is thirsty for energy, thus the improvement of diplomatic relations is a positive sign.
BHP’s copper resources are also essential for the electric vehicle revolution. Copper is one of the most conductive materials on the planet and thus almost every electrical cable is made out of copper. According to a study by Precedence Research, the EV market is forecast to grow at a 23.1% compounded annual growth rate and be worth over $1.1 trillion by 2030.
BHP’s iron resources are also essential parts of the construction industry, which should benefit from increased infrastructure spending across nations. The easing of Covid-19 restrictions in China has caused iron ore prices to surge recently.
Steady financials
For the company's full fiscal year 2022, it reported a staggering $65 billion in revenue. This increased by a solid 14.37% year over year. In the fourth quarter of fiscal 2022, the business reported a solid $17.3 billion in revenue, which increased 5% year over year.
This result was driven by strong performance across all resource segments, and the company has produced stronger margins than its peers through various commodity cycles (see below chart).
Source: BHP investor materials
The iron ore segment reported a huge $21.7 billion in Ebitda at a high 71% Ebitda margin. This was followed by Copper, which drove $8.6 billion in Ebitda at a solid 61% Ebitda margin. Coal also reported solid financials, with $7.7 billion in Ebitda at a 61% Ebitda margin. Giving the increasing concerns about energy security across the world, many coal energy plants have been turned back on, at least for the time being. This should act as a positive tailwind for BHP.
The nickel segment generated $400 million in Ebitda at a 23% Ebitda margin. However, this was partially impacted by a smelter outage in the fourth quarter. Nickel is a rare earth metal and a key component to batteries used in electric vehicles. Because of this, Tesla (TSLA, Financial) CEO Elon Musk urged mining companies in an earnings call in 2021 to “mine more nickel!”
The management of BHP Group has also focused on cost discipline across all segments while also managing to improve safety, a rare feat which has resulted in three and half years of its operations being fatality-free. Although this may not seem like a great achievement in most businesses, the mining industry is very dangerous, and cutting costs can often mean more danger for employees.
The company pays a strong 11% forward dividend yield and has a solid balance sheet with ~$17.5 billion in cash and short term investments versus debt of ~$13.2 billion, $2.4 billion of which is current debt due within the next two years.
Valuation
Valuing a mining company is challenging as it is based upon the resources in the ground, cost to explore and price per resource. It is also highly cyclical. As a simple measure, we know the company is trading at a price-earnings ratio of 7, which is fairly valued relative to historic metrics.
Final thoughts
Atlassian and BHP Group are two very different Australian stocks, but both offer diversification and are leaders in their industries. Atlassian is my favorite of the two given its solid market position, high margins and scalable software model. Atlassian has also recently moved its primary listing from the London stock exchange to the U.S., which makes it easier to invest in for U.S. investors. This will also likely improve capital inflows into the stock from many pure U.S. funds. BHP Group should also not be ruled out as it offers exposure to the commodities sector, which has been hot recently due to many macroeconomic changes.
