Insights

Investment Watch is a quarterly publication produced by Morgans that delves into key insights for equity and economic strategy. This latest publication will cover;

• Asset Allocation – not the time to play defence
• Economic Strategy – averting a world recession
• Equity Strategy – attention turns to August
• Resources & Energy – domestic gas coming to the boil
• Banks – befuddling
• Updated Morgans Best Ideas

Morgans clients receive exclusive insights such as access to our latest Investment Watch publication. Download the preview now.

Preview

We think the investment landscape remains favourable. The US economic fundamentals are strong with no significant downside risks to growth in the near-term. European leading indicators suggest a turning point is near and China’s cyclical recovery is still gaining momentum after bottoming earlier in the year.

Meanwhile, the Australian economy continues to defy expectations of a sharper slowdown. In our view, this is not the time to play defence and continue to expect growth assets such as equities and property to do well. This quarter, we look at tactical opportunities in private credit, global equities and across the Australian equity market (resources, agriculture, travel and technology).

As interest rates normalise, earnings quality, market positioning and balance sheet strength will play an important role in distinguishing companies from their peers. We think stocks will continue to diverge in performance at the market and sector level, and investors need to take a more active approach than usual to manage portfolios.

Additions: This month we add Elders.

July best ideas

Elders (ELD)

Small cap | Food/Ag

ELD is one of Australia’s leading agribusinesses. It has an iconic brand, 185 years of history and a national distribution network throughout Australia. With the outlook for FY25 looking more positive and many growth projects in place to drive strong earnings growth over the next few years, ELD is a key pick for us. It is also trading on undemanding multiples and offers an attractive dividend yield.

Technology One (TNE)

Small cap | Technology

TNE is an Enterprise Resource Planning (aka Accounting) company. It’s one of the highest quality companies on the ASX with an impressive ROE, nearly $200m of net cash and a 30-year history of growing its earnings by ~15% and its dividend ~10% per annum. As a result of its impeccable track record TNE trades on high PE. With earnings growth looking likely to accelerate towards 20% pa, we think TNE’s trading multiple is likely to expand from here.

ALS Limited

Small cap | Industrials

ALQ is the dominant global leader in geochemistry testing (>50% market share), which is highly cash generative and has little chance of being competed away. Looking forward, ALQ looks poised to benefit from margin recovery in Life Sciences, as well as a cyclical volume recovery in Commodities (exploration). Timing around the latter is less certain, though our analysis suggests this may not be too far away (3-12 months). All the while, gold and copper prices - the key lead indicators for exploration - are gathering pace.

Clearview Wealth

Small cap | Financial Services

CVW is a challenger brand in the Australian retail life insurance market (market size = ~A$10bn of in-force premiums). CVW sees its key points of differentiation as its: 1) reliable/trusted brand; 2) operational excellence (in product development, underwriting and claims management); and 3) diversified distributing network. CVW's significant multiyear Business Transformation Program has, in our view, shown clear signs of driving improved growth and profitability in recent years. We expect further benefits to flow from this program in the near term, and we see CVW's FY26 key business targets as achievable. With a robust balance sheet, and with our expectations for ~21% EPS CAGR over the next three years, we see CVW's current ~11x FY25F PE multiple as undemanding.

GUD Holdings

Large cap | Consumer Discretionary

GUD is a high-quality business with an entrenched market position in its core operations and deep growth opportunities in new markets. We view GUD’s investment case as compelling, a robust earnings base of predominantly non-discretionary products, structural industry tailwinds supporting organic growth and ongoing accretive M&A optionality. We view the ~12x multiple as undemanding given the resilient earnings and long-duration growth outlook for the business ahead.

Stanmore Resources

Small cap | Metals & Mining

SMR’s assets offer long-life cashflow leverage at solid margins to the resilient outlook for steelmaking coal prices. We’re strong believers that physical coal markets will see future cycles of “super-pricing” well above consensus expectations, supporting further periods of elevated cash flows and shareholder returns. We like SMR’s ability to pay sustainable dividends and its inventory of organic growth options into the medium term, with meaningful synergies, and which look under-recognised by the market. We see SMR as the default ASX-listed producer for pure met coal exposure. We maintain an Add and see compelling value with SMR trading at less than 0.8x P/NPV.

Morgans clients receive full access of the Best Ideas, including our large, mid and small-cap key stock picks.

There are many reasons to invest in equities. Historically, they have offered higher capital returns than many other asset classes. Furthermore, they provide liquidity and diversification and allow investors to participate in the growth of high performing businesses and sectors. Not to be overlooked, however, is their capacity to provide an income stream through regular dividends. In the Month Ahead for July, we highlight a selection of Australian equities that offer superior forecast dividend yields and may be suitable investments for those seeking income.

Happy New Financial Year!

BHP Group (BHP)

BHP Group (ASX: BHP) is the largest diversified mining company in the world. BHP has extensive iron ore, copper, nickel and coal operations, and will soon add potash to its portfolio once its massive Jansen project comes online in late 2026. Besides nickel, which has proven volatile, the rest of BHP’s basket of market exposures share the similar characteristic of typically boasting bumper margins throughout the cycle. Over the last decade BHP has shifted its corporate strategy toward streamlining its business, protecting its balance sheet, slowing its pace of investment and maximising shareholder returns. Despite an impressive shareholder performance over recent years, BHP’s dividend yield has remained above market.

Dalrymple Bay Infrastructure (DBI)

Dalrymple Bay Infrastructure (ASX: DBI). DBI owns a fully contracted coal export terminal in central Qld. It has strong revenue and cost risk mitigants, CPI-linked base revenues boosted by incremental revenues from commissioned sustaining capex projects, very high EBITDA margins, and an investment grade credit profile. Investors comfortable with the coal-related exposure also benefit from the ESG discount imputed into the stock price.

Ventia Services Group (VNT)

Ventia Services Group (ASX: VNT) delivers essential services predominantly to government (c.75% of revenue), with an average contract tenure of c.5-7 years and direct inflation passthrough (95% of revenue) in most contracts. The industry grows at 6-7% pa, with VNT growing 7-10% through industry growth and contract expansion, whilst margins should remain stable. The stock continues to deliver a strong dividend yield, which we expect to continue growing at mid-single digits, whilst trading on an undemanding low double-digit PER.

Eagers Automotive (APE)

Eagers Automotive Limited (ASX: APE) is the leading automotive retail group in Australia and New Zealand, operating for over 100 years and representing a diverse portfolio of OEM (original equipment manufacturer) brands. While current industry dynamics in the auto sector (margin pressure; cost of living impacts) are expected to persist in the near-term, we view the scale operators (such as APE) as best placed to navigate this challenging dynamic. Longer-term, we are positive on APE’s various strategic initiatives and expect it can continue to scale; and sustain a structurally higher return on sales through the cycle.

GQG Partners (GQG)

GQG Partners (ASX: GQG) is global asset management boutique, managing ~US$150bn in funds across four primary equity strategies. We like GQG given its highly effective distribution, scalable strategies, and strong long-term investment performance. We view the earnings tailwind from strong funds under management growth (a combination of investment performance and net fund inflows) will continue and we think GQG will continue to re-rate along with this to a higher earnings multiple in time.

HomeCo Daily Needs REIT (HDN)

HomeCo Daily Needs REIT (ASX: HDN) has a +$4.5bn real estate portfolio focused on daily needs retail (Large Format Retail; Neighbourhood; and Health Services) across +50 properties with the top five tenants being Woolworths, Coles, JB Hi-Fi, Bunnings and Spotlight. Most of leases are fixed. The portfolio has resilient cashflows, with the majority of tenants being national. Sites are in strategic locations with strong population growth. HDN offers an attractive distribution yield, with a +$600m development pipeline providing further growth.

IPH Limited (IPH)

IPH Limited (ASX: IPH) is a prominent IP services group with market leading shares in Australia, Singapore and Canada. A defensive business, IPH has strong cash flow generation (with high conversion to EBITDA) and a long-track record of paying dividends to shareholders. We like IPH and consider the return to organic growth (albeit subdued) as a key near-term catalyst for the group. Longer-term, we expect IPH to continue to prosecute its consolidation and network expansion strategy offshore.

Suncorp (SUN)

Suncorp (ASX: SUN) is well positioned to benefit from continued strong price increases going through the home and motor insurance market in Australia, we expect these price increases to be supportive of SUN’s margins expanding further over the next couple of years. Additionally SUN’s recent divestment of its bank was done at an excellent price and will allow the company to focus completely on its strongest business, general insurance, where it is a market leader.  Finally, post the bank sale, SUN now has >A$4bn of excess capital to return to shareholders, which will occur most likely via the way of a share consolidation and a small special dividend.

Super Retail Group (SUL)

Super Retail Group (ASX: SUL) is a large discretionary retailer comprising four well-known brands which span several categories, including: Supercheap Auto; rebel Sport; Boating, Camping and Fishing (BCF), and Macpac. We like SUL given its market leading scale (>740 stores), deep data capabilities, strong loyalty base and diversified portfolio of brands. SUL has a very strong net cash balance sheet, and we expect it is positioned for further capital management initiatives in the near-term (i.e. potential special dividends).

Woodside Energy (WDS)

Woodside Energy (ASX: WDS) is the largest ASX-listed oil and gas producer, and in the top 10 globally. While its share price has come under pressure, Woodside’s fundamentals have benefited from resilient oil/LNG prices, steady group production, progress on delivering its key growth projects, a robust level of profitability, and clear focus on its dividend profile. Woodside’s dividend payout ratio has averaged 80% of earnings for the last +5 years, which is impressive given the last 2 years have been a capex-heavy phase as its progressed construction of the Scarborough, Pluto Train 2, and Sangomar projects. With gearing remaining low and cash flow set to grow post the current investment phase, we see Woodside as likely to remain an attractive yield play.

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.

Morgans’ Your Wealth publication is our half yearly scrutiny into current affairs for wealth management. Our latest Issue 27 is out now.

This latest publication will cover understanding the benefits of a CarePlus annuity for aged care, the proposed Div296 tax, averting a world recession, super and tax next financial year and expectations on how illiquid assets in SMSFs are valued.

Download your copy today to receive the latest insights.

An introduction to the benefits of Challenger CarePlus

Challenger CarePlus offers attractive fixed monthly payments for the lifetime of those requiring aged care, and returns 100% of the invested amount to beneficiaries or the estate upon death. It is suitable for individuals receiving or planning to receive Government-subsidised aged care services. CarePlus combines two products: CarePlus Annuity, providing guaranteed lifetime income with withdrawal and death benefits, and CarePlus Insurance, which ensures the death benefit equals 100% of the initial investment. This provides financial security and estate planning certainty, with lump sums typically paid quickly and tax-free. Investing in CarePlus can also increase Age Pension and reduce aged care costs by lowering assessable assets and income.

Morgans has reviewed a number of these innovative products, the details of which are summarised in the latest publication of Your Wealth.

Reviewing our coverage of residential developers, real estate credit providers and building materials businesses, the consistent theme is that Australia is on the cusp of a significant building boom, with record immigration levels and population growth exacerbating an already chronic housing undersupply issue. This month we add several names with leverage to this theme.

Additions: This month we add Technology One, ALS Limited, ClearView Wealth, GUD Holdings and Stanmore Resources.

Removals: This month we remove Tyro Payments and Objective Corp.

June best ideas

Technology One (TNE)

Small cap | Technology

TNE is an Enterprise Resource Planning (aka Accounting) company. It’s one of the highest quality companies on the ASX with an impressive ROE, nearly $200m of net cash and a 30-year history of growing its earnings by ~15% and its dividend ~10% per annum. As a result of its impeccable track record TNE trades on high PE. With earnings growth looking likely to accelerate towards 20% pa, we think TNE’s trading multiple is likely to expand from here.

ALS Limited

Small cap | Industrials

ALQ is the dominant global leader in geochemistry testing (>50% market share), which is highly cash generative and has little chance of being competed away. Looking forward, ALQ looks poised to benefit from margin recovery in Life Sciences, as well as a cyclical volume recovery in Commodities (exploration). Timing around the latter is less certain, though our analysis suggests this may not be too far away (3-12 months). All the while, gold and copper prices - the key lead indicators for exploration - are gathering pace.

Clearview Wealth

Small cap | Financial Services

CVW is a challenger brand in the Australian retail life insurance market (market size = ~A$10bn of in-force premiums). CVW sees its key points of differentiation as its: 1) reliable/trusted brand; 2) operational excellence (in product development, underwriting and claims management); and 3) diversified distributing network. CVW's significant multiyear Business Transformation Program has, in our view, shown clear signs of driving improved growth and profitability in recent years. We expect further benefits to flow from this program in the near term, and we see CVW's FY26 key business targets as achievable. With a robust balance sheet, and with our expectations for ~21% EPS CAGR over the next three years, we see CVW's current ~11x FY25F PE multiple as undemanding.

GUD Holdings

Large cap | Consumer Discretionary

GUD is a high-quality business with an entrenched market position in its core operations and deep growth opportunities in new markets. We view GUD’s investment case as compelling, a robust earnings base of predominantly non-discretionary products, structural industry tailwinds supporting organic growth and ongoing accretive M&A optionality. We view the ~12x multiple as undemanding given the resilient earnings and long-duration growth outlook for the business ahead.

Stanmore Resources

Small cap | Metals & Mining

SMR’s assets offer long-life cashflow leverage at solid margins to the resilient outlook for steelmaking coal prices. We’re strong believers that physical coal markets will see future cycles of “super-pricing” well above consensus expectations, supporting further periods of elevated cash flows and shareholder returns. We like SMR’s ability to pay sustainable dividends and its inventory of organic growth options into the medium term, with meaningful synergies, and which look under-recognised by the market. We see SMR as the default ASX-listed producer for pure met coal exposure. We maintain an Add and see compelling value with SMR trading at less than 0.8x P/NPV.

Morgans clients receive full access of the Best Ideas, including our large, mid and small-cap key stock picks.

As global markets continue to evolve, certain companies are uniquely positioned to capitalize on the substantial capital expenditure (capex) cycles driven by megatrends and shifting market dynamics. These companies, through strategic investments and a focus on future-oriented projects, stand to benefit significantly from large-scale capex initiatives. In the Month Ahead this month, we highlight three such companies: ALS Limited (ALQ), Worley Limited (WOR), and Woodside Energy Group (WDS). Each of these firms is leveraging its core strengths and market positioning to navigate and benefit from the upcoming waves of investment in their respective sectors.

Worley (WOR)

We see Worley as being well-positioned to capitalise on the increasing momentum of capex investment across its target Energy, Chemical and Resources markets. Most notably, megatrends such as the global energy transition, decarbonisation, and the push towards reaching global net-zero emissions by 2050, in our view represent a potential multi-decade tailwind for the business. Worley has been an early mover in the ECPM sector to take advantage of these emerging trends, having made a concerted shift towards taking on an increasing number of transitional and sustainability related projects, which has underpinned positive momentum in its project backlog growth over recent years.

Projections from the International Energy Agency (IEA) estimate that a ~2.3x uplift in annual global clean energy investment is required by 2030, to reach levels needed to achieve Net-Zero targets by 2050. With ~85% of Worley’s Top 20 customers having pledged a commitment to reaching Net-Zero by 2050 or earlier, we believe the company is in a strong position to benefit from this trend.

Additionally, we currently see this investment trend supported by regulation across North America and Europe (which accounts for the majority of Worley’s revenue), and consensus capex outlook for global majors in WOR’s end market also remains supportive of growth through to FY26F. Overall we see this as being supportive of WOR’s revenue growth, and ongoing margins expansion over the medium term, which underpins our forecasts for double digit EPS growth. We recently Initiated on Worley with an ADD recommendation and a price target of $18.00

ALS Limited (ALQ)

We think ALS is in for a strong few years. It looks poised to benefit from margin recovery in Life Sciences as well as a cyclical volume recovery in Commodities. Timing around the recovery in Commodities is less certain though:

1) the length of previous junior miner raisings prolonged troughs suggests that a recovery is not too far away;

2) commodity prices are supportive with gold & copper (70-75% of exploration) around all-time highs; and

3) we are already starting to see some green shoots in equity capital markets (a key funding source for junior miners) with gold & silver raisings picking up.

ALS is on 20x FY25 PE which feels cheap given the material upside risk to our forecasts for the years ahead. ALS is targeting mid-single-digit organic growth for FY25, consistent with our forecasts. Life Sciences is expected to deliver modest margin improvements, while Minerals and Environmental divisions should maintain margin resilience. Geochemistry sample volumes have started to trend positively year-on-year, indicating a potential recovery in exploration activities. Macro indicators are positive for Commodities, with spot prices for gold and copper up more than 20% compared to 2023 averages.

Historically, gold and copper prices have shown strong correlations with exploration spend, which bodes well for future growth. Although junior miner raisings have not yet shown significant improvement, historical trends suggest a recovery within the next few months. ALS, the global leader in geochemistry testing with around half the market, is well-positioned to leverage its cash-generative Commodities division to fund growth in Life Sciences. The company’s dominant market position and the resilience of its business model underpin our positive outlook. We rate ALS as an ADD with a price target of $15.50 and think there could be material upside risk to our forecasts should exploration spend align with current commodity prices.

Woodside Energy (WDS)

Woodside is unique among the companies in our coverage universe that benefit from capex megatrends, as it stands to directly benefit from the lack of significant global spend within global oil and LNG markets over multiple decades. In aggregate terms, 2022 and 2023 saw marked improvements in the rate of supply investment by the global oil and gas industry. However, this improved rate of spending still remains materially below the level needed to satisfy even the most bearish demand scenarios over the next decade.

To illustrate, if global oil production experienced an average natural field decline (supply decline) of 4% per annum, and aggregate oil demand decreased by 1% per annum, the oil industry would still need to add new supply equivalent to 3% per annum. Fixing this simple equation becomes more challenging the longer it remains out of balance. Woodside, meanwhile, has a robust pipeline of new projects, with the Sangomar oil project due to come online in 2024, Scarborough LNG in 2026, and the Trion oil project in 2028. Already deep into its investment cycle, Woodside is advanced in its construction spend on Sangomar and Scarborough.

Despite the peak capex associated with these projects, Woodside has managed to maintain low gearing and an 80% dividend payout ratio. The timing of Woodside’s investment cycle has also positioned it to substantially expand free cash flow starting in 2025, which could prove beneficial given our expectation that global oil demand will start to recover against a backdrop of restrained supply. We maintain an ADD rating on Woodside, which remains our top preference among our energy resources coverage. Having navigated peak capex while maintaining a healthy balance sheet and strong dividend profile, we have little doubt that Woodside is effectively deploying capital. The key risk to our call, outside of oil/LNG prices, is execution risk around its growth projects. However, the scale and pace at which capex rolls off over the coming years, while group EBITDA remains around ~US$8.7-$9.0bn per annum until approximately 2031, create a significant long-term value buffer supporting our call.

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.