If you’re looking for ASX growth shares you’ve come to the right place. Here’s why I think it’s worth looking at shares of EML Payments Ltd (ASX: EML), Altium Limited (ASX: ALU) and Kip McGrath Education Centres Limited (ASX: KME).
Why Buy ASX Growth Shares?
The Australian securities exchange (ASX) has shares for thousands of companies. The best kind of shares to buy are those that can pay some income back to their shareholders (known as dividends) and keep enough cash in the bank to fuel long-term growth. In accounting, we call the money left inside a business to fund growth the ‘retained earnings’.
When it comes to growth shares, I think investors must be prepared to encounter periods when things seem highly uncertain or scary. For example, it wouldn’t be surprising to witness shares of a proper growth company rise or fall by 10% in a single day due to just one piece of news.
Having said that, growth shares can be extremely rewarding for investors willing to take the extra risk required to own these shares for the long run (5+ years).
Without further ado, here are three ASX growth shares on my watchlist today.
1. EML Payments
EML Payments develops financial technology to provide solutions for payouts, gifts, incentives, rewards and supplier payments. The company specialises in issuing and managing mobile, virtual and physical cards to some of the largest corporate brands. In doing so, EML processes billions of payments each year and manages more than 1,400 programs across 23 countries in North America, Australia, Europe and the Middle East.
EML has been a standout performer on the ASX this year, up more than 140% since January. The company’s FY19 result released to the market in August was received positively by investors, which saw the share price jump 10% on the day. Investors were particularly pleased to see both revenue and EBITDA guidance soundly beaten as well as each of EML’s segments posting strong revenue growth.
Despite the big share price run-up this year, I believe EML has a promising runway for growth ahead of it, buoyed by strong customer retention rates, new offerings, optionality in the business and solid management with skin in the game.
2. Altium Limited
As I’ve previously written, Altium has been on my watchlist for quite some time now. Altium is an Australian multinational software business that was founded in 1985. Its software is focused on the design of printed circuit boards (PCBs), which are the little electronic pieces (usually green or blue) that sit inside everyday devices.
Last month, Altium reported an impressive round of FY19 results, showing increasing margins, a growing subscriber count and confirmation of its medium-term revenue guidance.
The ‘internet of things’ tailwinds and increase in market share will underpin Altium’s growth well into the future, whilst cloud-based platform Altium 365 (set to launch in November) will round out the company’s full range of products. However, the FY19 presentation showed what appeared to be a change in market share forecasts compared to those previously displayed in prior years. As Altium embarks on its ambitious vision of market dominance and industry transformation, market share and the competitive landscape will be crucial determining factors of success.
In any case, Altium ticks a lot of the boxes I look for in a potential investment by way of competitive advantages, sticky revenue and management quality to name a few. Valuation is the main sticking point, with a lot of the company’s growth already seemingly priced in.
3. Kip McGrath Education Centres
Founded in 1976, Kip McGrath Education Centres (KMEC) has been helping primary and secondary school children over the world to improve or extend their learning. Kip McGrath have over 560 centres that provide 1.3 million lessons a year to a total of 40,000 students in 14 countries worldwide.
The company is led by Storm McGrath, son of co-founder Kip McGrath who retired from his role as Chairman last month. Notably, Kip has a significant ~35% stake in the company. This is pleasing as family run companies with members who still own a significant position in business have a greater incentive to maximise long-term shareholder value. Not only is their own wealth at stake, but also an emotional commitment for their company to succeed.
Over the years, KMEC has implemented a conscious shift in its business model, becoming a less labour intensive business and more capital light by way of franchising. In doing so, the company introduced a Gold Partner franchisee model where the KMEC head office takes on the admin burden (e.g. marketing and payroll) on behalf of franchisees and in return, gets a larger cut of revenue. KMEC has long been in the process of converting more franchisees into Gold Partners, a major contributor to revenue and profit growth. Currently, the company has 311 Gold Partners which now make up more than 80% of total franchise fees.
KMEC has been a strong performer on the ASX over the last couple of years, with its share price rising from 32 cents at the beginning of 2017 to a high of $1.13 in July this year. Despite this, there may still be plenty of growth left in the tank with online ‘onscreen tutoring’ progressing, increased brand awareness through national advertising campaigns and a new initiative to establish corporate owned centres in busy shopping centres.
Buy, Hold Or Sell?
Of the three, I’d be most comfortable buying shares of Altium today since it’s the only company I’d consider to be in my wheelhouse. That being said, my research into EML and Kip McGrath has only just begun.
Altium is the largest and most well-known company of the three, sporting a huge $4.5 billion market cap compared to Kip McGrath’s mere $43 million valuation, however investors would be likely paying a premium to snap up its shares today.
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Disclosure: At the time of writing, Cathryn has no financial interest in any of the companies mentioned.