Australia’s overall economy hardly saw an increase in 3Q as the country saw subdued exports and households were reluctant to initiate any sort of spending. This was seen because were facing increased mortgage payments which limited their spending power. Therefore, the analysts and experts believed that rate hikes done by the Reserve Bank of Australia worked in the favour of central bank. Despite the country seeing the 8th straight quarter of growth, this was the slowest in a year. Real gross domestic product (GDP) saw an increase of ~0.2% during July-September in comparison to the previous quarter. This compared to the forecasts of ~0.4% and a result which further strengthens the case for RBA to go for rate cuts. Therefore, this should be the ideal time for top Australian shares to buy for medium term growth.
As per Australian Bureau of Statistics, annual GDP growth came in at ~2.1%, which was little changed from prior quarter. Economists believe that Australia’s economy had hit the wall for the quarter ended September. They believe that it was shocking to see significant weakness in consumer spending during the mentioned quarter. Higher inflation, increased interest and additional tax obligations continue to have a significant impact on the consumer spending. This led to the substantial decline in the real household disposable income. Thus, top Australian shares to buy are required to be the ones who can easily beat Australia’s inflation by a wide margin.
Income tax paid by the Australians saw an increase of ~23% from the year ago post the expiry of tax offset scheme. In addition to this, mortgage payments saw an increase of ~71% since more people came off fixed-rate mortgages to the increased variable rates. As a result of this, household savings ratio dropped further to ~1.1%. This was the lowest level since the year 2007.
With this in mind, we will now have a look at top Australian shares to buy for medium term growth.
1. Xero Limited
The company is global small business platform having ~3.95 million subscribers, including core accounting solution, payroll, workforce management, etc.
It has released its 1H24 results, in which it saw its operating revenue increase by 21% (20% in the constant currency terms (CC)) to $799.5 million. This, together with sound cost management and restructuring outcomes, led to the 90% growth in EBITDA in comparison to 1H23, to reach $206.1 million. It exhibited the company’s ongoing focus on balancing growth and profitability, and led to the FCF increasing to $106.7 million. This exhibits FCF margin of ~13.3% against 2.4% in the previous period. Focus of the company was seen in the company’s net profit too, which went up to $54.1 million compared to net loss of $16.1 million in 1H23.
The company saw good momentum in 1H24. Xero continues to sharpen its focus on levers of growth and plans are there to continue to balance growth and profitability, while delivering increased value to the shareholders.
Total subscribers of the company went up by 13% since 1H23 to 3.95 million, with annualised monthly recurring revenue (AMRR) seeing an increase of 19% to $1.8 billion (i.e., 22% in CC). Total lifetime value (LTV) saw an increase of 14% (17% in CC) to touch $14.8 billion, with average monthly churn (0.94%) remaining low and average revenue per user (ARPU) improving a further 6%.
The company is aiming operating expense to operating revenue ratio in FY24 of ~75%. This should see an improvement in operating income margin in comparison to FY23.
2. Cochlear Limited
The company is a medical device company which is in the business of designing, manufacturing, and supplying Nucleus cochlear implant, the Hybrid electro-acoustic implant and Baha bone conduction implant.
During FY23, sales revenue of the company went up by 19% (16% in constant currency) to touch $1,956 million, with strong growth seen throughout the business units. Cochlear implant units saw an increase of 16% as a result of combination of market growth, better clinical capacity and gains in market share.
Statutory net profit of the company saw an increase of 4% (7% in CC) to touch $301 million. Underlying net profit margin (pre cloud investment) came in at 17%, which was a point lower than 18% target. This was due to the decision to further lift growth investment due to increased sales momentum in 2H. Strong balance sheet and cash flow generation of the company supported its 21% growth in final dividend to $1.75 per share. This took the full-year dividends to $3.30 per share.
Underlying net profit for FY24 is expected in the range of $355 million-$375 million, which exhibits a 16%-23% growth on FY23. This is expected to be supported by combination of revenue growth and better net profit margin.
3. Seek Limited
The company has been categorised as Australia’s number one employment marketplace.
It has increased its revenue and earnings in FY23, with yield improvements seeing in the form of higher variable pricing and adoption of depth products. Yield performance offset the lower job volumes due to the slowdown in economic activity throughout all the markets in FY23, and mainly in the last quarter.
In ANZ, post the significant demand, which resulted in record job volumes in FY22, the volumes saw some moderation in FY23. However, job market remained tight with lower rate of unemployment.
For FY24, the company expects revenue of approximately A$1.18 billion to A$1.26 billion and EBITDA of approximately A$520 million – A$560 million. Adjusted NPAT of the company is expected to be in the range of A$220 million – A$260 million.
Conclusion
While above are some of the top Australian shares to buy for medium term growth, these stocks are expected to perform as and when the overall Australian economy recovers to the growth path.
Australian economy had narrowly avoided the recession in 2023 and this was because of much higher-than-expected migration surge, with over half a million people moving in the country. This supported the total demand even as there was a decline in per capita consumption.
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