Morgans Best Ideas: August 2021
About the author:
- Author name:
- By Andrew Tang
- Job title:
- Analyst - Equity Strategy
- Date posted:
- 02 August 2021, 9:30 AM
- Sectors Covered:
- Equity Strategy and Quant
Our best ideas are those that we think offer the highest risk-adjusted returns over a 12-month timeframe supported by a higher-than-average level of confidence. They are our most preferred sector exposures.
Also refer to our Reporting Season Playbook for our guide to the upcoming August reporting season.
New additions this month include Treasury Wine Estates (ASX:TWE), Transurban Group (ASX:TCL), AusNet Services (ASX:AST), Tabcorp Holdings (ASX:TAH) and Hotel Property Investments (ASX:HPI).
Transurban Group (ASX:TCL)
Removals this month include Sydney Airport (ASX:SYD), Spark Infrastructure (ASX:SKI), Aventus (ASX:AVN), Bega Cheese (ASX:BGA), Universal Store (ASX:UNI) & Baby Bunting (ASX:BBN)
Best Ideas — Large caps
Coles Group (ASX:COL)
While vaccines are being rolled out across Australia, we think people will continue to spend more time at home due to the ongoing risk of COVID flare-ups with the working-from-home trend also likely to stay for some time (eg, Sydney remains in lockdown indefinitely). This will be beneficial for the major supermarket operators. We continue to see COL (~24.5x FY22F PE and 3.5% yield) as offering better value than WOW (31x FY22F PE and 2.5% yield).
Treasury Wine Estates (ASX:TWE) - New Addition
TWE has the China reallocation risk and it will take 2-3 years to recover these earnings in new markets. However, outside of China, its key markets, particularly the US, are recovering faster than expected from COVID. The new business units centred around the brands, are now fully in place and we are excited to see what they can earn with TWE effectively creating the benefits of a demerger without the extra costs. It also demonstrates that the SOTP is worth materially more than the whole. It shines alight on Penfolds and its best-in-class margins and may ultimately lead to corporate activity in some form in the future. We rate this management team highly.
We expect the resilience of STO's growth profile and diversified earnings base see it best placed to outperform against a backdrop of a continuing broader sector recovery. While pre-FEED, we see Dorado as likely to provide attractive growth for STO, while its recent acquisition increasing its stake in Darwin LNG has increased our confidence in Barossa's development. PNG growth meanwhile remains a riskier proposition, with the government adamant it will keep a larger share of economic rents while operator Exxon has significantly deferred growth plans across its global portfolio.
Macquarie Group (ASX:MQG)
We still see MQG as relatively inexpensive and continue to like its exposure to long-term structural growth areas such as infrastructure and renewables. Near term MQG is likely to face earnings pressures from the impact of soft economic conditions but it remains well positioned to ride out the current COVID-19 period and seize opportunities on the other side.
QBE Insurance Group (ASX:QBE)
We see QBE as likely having positive underlying momentum into next year. QBE has been putting through top-line rate increases of around 9% in 1H20, which should assist margin expansion into FY21. With QBE's balance sheet recently reset, pricing tailwinds evident and the stock relatively inexpensive trading on ~12.8x FY22F PE.
We believe ANZ is the most compelling of the major banks on a valuation basis. We expect ANZ to benefit the most of the major banks from the tailwinds currently in place for treasury and markets income. We expect ANZ to continue to focus on absolute cost reduction over the medium term. ANZ has de-risked its loan book over recent years –particularly its institutional loan book –such that the quality of its loan book has increased.
Sonic Healthcare (ASX:SHL)
We see COVID-19 testing continuing into the foreseeable future, with growth potential in COVID serology testing. SHL’s global base business is increasingly resilient, benefitting from geographical diversity. Strong B/S (gearing 21.6x; A$1.3bn headroom) opening the door to acquisitions, contracts and JVs.
Transurban (ASX:TCL) - New Addition
TCL owns a pure play portfolio of toll road concession assets located in Melbourne, Sydney, Brisbane, and North America. This provides exposure to regional population and employment growth and urbanisation. Given very high EBITDA margins, earnings are driven by traffic growth (with recovery from COVID) and toll escalation (roughly half at CPI and the remainder fixed c.4% pa). We think TCL will continue to be attractive to investors given its market cap weighting (important for passive index tracking flows), the high quality of its assets, management team, balance sheet, and growth prospects. Watch for rapid recovery in DPS alongside traffic recovery and WestConnex acquisition prospects. A negative overhang is the contaminated soil disposal issues related to its West Gate Tunnel Project.
BHP Group (ASX:BHP)
We view BHP as relatively low risk given its superior diversification relative to its major global mining peers. The spread of BHP’s operations also supplies some defence against direct COVID-19 impact on earnings contributors. While there are more leveraged plays sensitive to a global recovery scenario, we see BHP as holding an attractive combination of upside sensitivity, balance sheet strength and resilient dividend profile.
For our full list of Best Ideas, including our mid-cap and small-cap key stock picks, download our full research note (Morgans clients only):
Best Ideas August 2021
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