IPOs & Share Offers

And just like that, we’re into December. It’s been a whirlwind year for Australian and global markets and we at Morgans have been busy expanding our depth and range of services to help you achieve your financial goals. This edition of the Month Ahead presents ideas from three areas of focus for Morgans: domestic equities, ETFs and global equities. We take a look at the opportunities presented by Light & Wonder, the Firetrail Australian Small Companies Fund and Eli Lilly.

Wishing you a very happy Christmas and a prosperous New Year.

Light & Wonder (ASX: LNW)

Light & Wonder is a Las Vegas-based global games company focused on content and digital markets. It generates revenue through the sale and leasing of land-based gaming machines, alongside free-to-play digital and online casino content. Its primary listing is on NASDAQ with a dual listing on the ASX. In March 2022, Light & Wonder rebranded from its former holding company, Scientific Games and has since pursued market share growth with revamped management and a new board. Since the rebranding, management has reduced leverage from 8x to 3x in under two years and set a 2025 earnings target that seems achievable to us given its growth trajectory. The strongest performance in the recent third quarter results came from global outright machine sales which rose 50% year-on-year, driven by strong European shipments.

In October, litigation ruling was handed down with Aristocrat Leisure over proprietary math models used in "Dragon Train." This led to the game's withdrawal and the dismissal of its designer. While significant, the game represents just one of Light & Wonder’s approximately 130 annual titles and would have contributed less than 5% to earnings. A revised version is in development and expected by mid-2025 which we see as a significant upcoming catalyst. While litigation remains an overhang, we think the share price decline is overdone. Negative sentiment around the injunction and upcoming legal catalysts will linger, but it shouldn’t detract from the company’s strong fundamentals. Light & Wonder has a solid track record of delivering and in our opinion has the potential to be a multi-year compounder. It boasts top-tier game developers, including much of the team behind Aristocrat's standout growth in the 2010s.

Light & Wonder is busy buying back stock as it believes the share price undervalues the business. We agree and regard the discount to Aristocrat on which Light & Wonder trades as unwarranted.

Firetrail Australian Small Companies Fund Active ETF (ASX: FSML)

The Firetrail Australian Small Companies Fund Active ETF provides Australian retail investors access to a high conviction portfolio of Firetrail’s best ideas in domestic small caps, boasting a long track record of 12% p.a. outperformance net of fees. Managed by a highly experienced team led by Patrick Hodgens, Matthew Fist, and Eleanor Swanson, the fund benefits from their extensive industry knowledge and proven track record. The team's significant equity ownership in the firm ensures their interests are closely aligned with those of the investors and reflects a strong commitment to achieving long-term performance.

FSML debuted on ASX last month, providing investors with one of the first active ETFs in Australian small caps. FSML provides investors with a simple, accessible, liquid and transparent means of gaining access to a higher performance, diversified small cap manager – a sector of the market we at Morgans are particularly bullish on.

The fund's investment process is designed to identify undervalued opportunities within the Australian small-cap market. By employing a bottom-up approach and utilising a proprietary quality scorecard, the team rigorously assesses potential investments based on management quality, business sustainability, and financial transparency. This structured process results in a concentrated strategy, typically holding between 20-50 stocks, ensuring that only high-quality companies are selected, enhancing the likelihood of strong returns for investors.

Performance-wise, the fund has consistently and handsomely outperformed its benchmark, the S&P/ASX Small Ordinaries Accumulation Index. This impressive track record is further supported by the fund's strong risk management practices and the team's disciplined approach to portfolio construction, making it a solid option for investors looking to diversify their portfolios beyond the mostly fully valued ASX large caps.

Eli Lilly (NYSE: LLY)

“When health is lost, the only thing you want is to get better”. That’s the slogan of US pharmaceutical giant Eli Lilly, a company thrust into the limelight over the past year as chronic weight management drug Zepbound, along with type 2 diabetes medication Mounjaro, which shares the same chemical backbone, have gained ‘blockbuster’ status (more than a billion dollars in sales) in short order, propelling shares to all-time highs back in September. Since that time, however, shares have fallen more than 15%, with the majority of loss recorded in this month alone.

So, what has happened and does this represent a good time to ‘buy the dip”? We think so and here’s why. First, while 3Q results reported on 30 October 2024 disappointed on lower sales of both Zepbound and Mounjaro, it was not due weak demand, but inadequate supply. Actually, a good problem to have (if you have a problem), but trying to balance the supply/demand equation has proven to be easier said than done. Although LLY continues to invest in manufacturing infrastructure, it will take time to adequately scale to consistently deliver its obesity and diabetes care medications. As such, it is not uncommon for inventory levels to ebb and flow and quarterly results to be a tad bit lumpy. But there appears to be no fundamental cause for concern.

Second, while LLY currently enjoys a duology in the diabetes/weight loss realm with Danish pharmaceutical company Novo Nordisk (NVO), there are numerous other companies nipping at their heels. That said, the total addressable market is massive (pun intended!), with the latest projections surpassing US$100bn by 2030 (just two years ago it was cUS$25bn). In addition, the list of other diseases/disorders potentially amenable to treatment by these drugs keeps growing and runs the gamut from cancer and cardiovascular to neurological and even infections. So this expanding market is certainly big enough to support numerous players and is not a winner-take-all opportunity.

Third, while Zepbound and Mounjaro represent c40% of total sales and showcase LLY’s expertise in cardiometabolic health, it also has key franchises in cancer, immunology, neurodegeneration and pain, along with a deep R&D pipeline of more than 70 drug candidates (70% in mid/late-stage trials). Notably, Alzheimer’s Disease drug Kisunla (Donanemab) gained FDA approval last July and eczema injection Ebglyss was greenlighted last September, each targeting markets well over US$60bn. In addition, LLY is leading the pack in developing the first weight-loss drug pill, orforglipron, with late-stage data expected Apr-25. All concrete catalysts seemingly overlooked.

Finally, the recent Biden Administration proposal to allow Medicare/Medicaid coverage for the cost of weight-loss drugs could turn out to be an early Christmas gift, as it would expand access to more than 7 million Americans who currently are only covered (if at all) for conditions like diabetes and heart disease, but not for obesity alone. And while the future of the policy will be in the hands of President-elect Donald Trump's administration, to be enacted in 2026, it is likely to be a political landmine, one that the incoming administration is doubtful to denote, despite the added costs (CBO estimates that Medicare coverage of anti-obesity drugs would increase federal spending by US$35bn over 8 years), given it would be seen as taking away important health benefits. Given the above, the share sell-off appears unwarranted and an opportunity to ‘buy the dip’ in a company that make medicines that give people a chance at health.

Morgans clients receive exclusive insights such as access to the latest stock and sector coverage featured in the Month Ahead. Contact us today to begin your journey with Morgans.

We've previously spoken about the problem of the US budget deficit, and we've also discussed how the increasing size of the deficit is forcing up the level of debt year after year. Now, we're going to revisit this issue and then look into what Elon Musk and Vivek Ramaswamy are attempting to do about it through their Department of Government Efficiency, or DOGE.

Up until about 2019, things were fairly stable in terms of the US budget. However, at the beginning of the pandemic, the US budget deficit exploded from 5% of US GDP in 2019 to just under 14% of GDP in 2020. It peaked at 13.94% in that year. The level of debt in the US, which was around 80% of GDP, began to rise. By 2020, the deficit was 13.94% of GDP, and though it slowed a little in 2022 to just under 4% of GDP, it grew again to 7.1% of GDP in 2023, and is projected to be 7.6% of GDP in 2024.

The problem isn't just these current deficits; it's that there are continuing deficits built into the legislation. These deficits are expected to continue: 7.3% in 2025, 6.7% in 2026, 6.2% in 2027, 6.2% in 2028, and 6% in 2029.

Looking at the level of US debt, it was stable at around 80% of GDP from 2012 to 2018. However, the expansion of budget deficits caused the level of debt to GDP to rise. This rising level of debt to GDP was something that Jay Powell referred to at the last Federal Reserve meeting as unsustainable. The International Monetary Fund tell us that net debt to GDP in the US rose from 83% in 2019 to 97% in 2020, when the deficit hit 14% of GDP. It then stabilised at 97% of GDP, slightly declining to 93% in 2022.

However, with continuing forward deficits, US debt to GDP is projected to rise dramatically. By 2025, it is expected to hit 98% of GDP, 101.7% in 2026, 104% in 2027, 105.8% in 2028, and 109% by 2029. This steady rise in debt as a percentage of GDP is what makes the debt unsustainable.

In recent weeks, two individuals have come forward with an initiative to reduce the US budget deficit, as part of the Trump administration’s efforts. Elon Musk and Vivek Ramaswamy have released a full statement outlining their plans. Their goal is to generate reductions in the number of people working in the US government, thereby reducing the size of the deficit that finances these positions. As the deficit falls, they hope it will also stabilise the US economy.

Musk and Ramaswamy have made it clear that they will not be employed by the government and will work without pay. They state they will serve as outside volunteers, not federal officials or employees. Unlike typical government commissions or advisory committees, they won’t just write reports or cut ribbons; they intend to cut costs. They are assisting the Trump transition team in identifying and hiring a lean team of small-government advocates, including some of the sharpest technical and legal minds in America. This team will work closely with the White House Office of Management and Budget.

They say that they aim to advise the Department of Government Efficiency on three key types of reform: regulatory rescissions (reducing regulations), administrative reductions, and cost savings. By reducing regulations, they argue, the number of employees required to enforce them will also be reduced, which in turn will lower government spending and lower the budget deficit. As regulations are cut, fewer employees will be needed, and as those employees retire or leave, federal spending will decline, which should reduce the size of the budget deficit.

Musk and Ramaswamy’s plan also focuses on driving change through executive action, based on existing legislation, rather than through new laws. They propose presenting a list of regulations to President Trump for executive action, which would immediately pause the enforcement of these regulations and begin the process of reviewing and rescinding them. They believe that removing such regulations will liberate individuals and businesses from burdensome rules never passed by Congress. This will stimulate the economy.

They further argue that the reduction of federal regulations will logically lead to mass headcount reductions across the federal bureaucracy. The Department of Government Efficiency (DOGE) plans to work with appointed officials in various agencies to identify the minimum number of employees necessary for agencies to perform their constitutionally permissible and statutorily mandated functions. The number of federal employees to be cut will be proportional to the regulations nullified. Fewer employees will be needed to enforce fewer regulations, and once the scope of authority is properly limited, the agencies will produce fewer regulations. This will result in further reductions in both personnel and spending.

Additionally, the DOGE aims to reduce federal overspending by targeting the $535 billion in annual federal expenditures that are unauthorised by Congress. These are funds spent by the administrative state on items like public broadcasting, grants to international organisations, and progressive groups like Planned Parenthood. Removing such spending is seen as another way to curb the budget deficit.

Their plan will focus on eliminating unnecessary regulations and the employees who enforce them, ultimately aiming to reduce the size of the Federal Government and its budget deficit. Their report on these efforts is expected to be completed by 4 July 2026, the 250th anniversary of the Declaration of Independence, marking the start of a national celebration of that milestone.

The process I follow begins with reviewing the outlook from the International Monetary Fund (IMF), then I run my models, and currently, I'm at the beginning of that process. I thought I'd share the IMF's base case outlook and where I might adjust it based on my models. I believe these nuances are important.

What is immediately clear when you examine the complete outlook is that there is no recession on the horizon. The US is experiencing growth at 2.2%.

Following a difficult period in the Euro area, despite a miserable past, recovery is underway with modest growth expected at 1.1% in 2024 and 1.6% in 2025. As for China, the IMF estimates growth at 4.8% this year, but I think it will be closer to 4.6%, with a slight recovery to 4.5% next year. However, I think 4.3% is more likely next year, primarily due to ongoing weak demand in the Chinese economy. That said, these are still excellent figures, especially considering the size of the Chinese economy, which is growing at a pace four times faster than Germany’s and nearly twice as fast as the US.

The standout performer in recent years has been India. It grew by 8.2% last year and 7% this year, with projections ranging from 6.5% to 7% next year. India's high growth is set to continue for the next two decades, driven by a rising working-age population. This is unlike China, where the working age population is shrinking.

In Australia, growth has been relatively soft this year, hovering around 1.2%, largely due to the decline from a record high commodities boom. The IMF forecasts 2.1% growth next year, but I think it will be closer to 2.5%. Still, this is modest growth compared to Australia's historical standards. On the inflation front, most places are experiencing low and falling inflation, except for Australia. The US's headline CPI is projected to decrease from 2.3% this year to 2% in 2025. The Euro Area is also seeing a slight reduction, from 2.4% this year to 2.2% next year. In China, inflation is low, with deflation last year and a forecast of around 0.9% to 1% this year, due to weak consumer demand. Usually, inflation in China is about 2%, and it should gradually increase as the economy recovers.

In India, inflation is targeted at 4%, and they are on track to meet that goal this year and next. In Australia, inflation this year could be around 2.7%, slightly lower than the 3% the IMF expects, with a slight increase to around 3.7% next year.

Overall, what we see is that the global economy is returning to reasonable growth. The fear of a recession has subsided, and the outlook is positive across most regions. Growth in the US is likely to exceed the Federal Reserve's estimate of 2%, with some models forecasting around 2.2%.

Thanks to the recovery in the Euro Area, India's strong performance, and Australia's rebound, the global outlook remains strong.

Still, it is possible that the market has already priced this in.