Best calls to action – Tuesday, 22 August 2023
About the author:
- Author name:
- By Andrew Tang
- Job title:
- Analyst - Equity Strategy
- Date posted:
- 22 August 2023, 6:00 AM
- Sectors Covered:
- Equity Strategy and Quant
The A2 Milk Company (ASX:A2M) - Too hard to ignore strong execution
A2M's FY23 result was slightly better than expected. Under difficult market conditions, A2M's execution was strong particularly for its China label (CL) IF and English Label (EL) CBEC IF products, while EL Daigou IF sales were weak.
2H23 sales trends were weak and given FY24 is a transition year for CL IF under the new GB standards, guidance was rightly conservative and has resulted in material earnings downgrades. While near term earnings uncertainty exists, we believe that decent growth should resume in FY25 and FY26.
Given A2M is trading on its lowest multiples in years, it has a strong brand, balance sheet and management team and there is 26.5% upside to our new valuation of (login to view), we upgrade to an Add rating.
Read our full reports and latest price targets on ASX:A2M here.
IRESS Limited (ASX:IRE) - Execution required, but is the Price right?
IRE missed 1H23 EBITDA expectations by ~8%; downgraded FY23 guidance by >17%; and cut the dividend to nil. The underlying dynamics (DPS cut/downgrade) weren't a surprise, however the quantum was larger than expected.
We have viewed IRE's balance sheet as stretched, but gearing logically improves from here. A divestment was announced (MFA business for A$52); Platforms expected in 2H23; and no dividend will see gearing drop quite rapidly.
From here, IRE expects a flat 2H23 result (EBITDA); 5-10% growth in FY24; and exiting FY24 with a +20-30% run-rate (implied >25% growth on FY23). Given the trajectory of earnings downgrades and business disruption, execution risk is obviously high.
To have higher conviction, revenue stabilisation in the core products and UK business is needed. However, we think this result (and FY23) reflects more the operations of the past. From here, IRE can focus on its core products; cycle significant expense inflation; deliver further cost-out; and de-lever the balance sheet.
We note execution risk (again), but see value. Upgrade to Add.
Read our full reports and latest price targets on ASX:IRE here.
Westpac Banking Corp (ASX:WBC) - Cost shock
WBC published its Q3 trading update and regulatory capital disclosures. We have made material downgrades to our forecasts and reduced our target price by to (login to view), mainly because of the unexpectedly high cost growth.
The share price performance is disappointing for existing WBC investors. However, for a new investor we think the current price offers potential returns of c.19% (including c.7% cash yield) even after allowing for the reduced target price.
Read our full reports and latest price targets on ASX:WBC here.
Hotel Prop. (ASX:HPI) - FY24 DPS ahead of pcp despite higher interest costs
HPI's result saw solid rental growth which helped offset higher interest costs. While around 68% of debt is hedged, higher interest costs remain a key factor.
FY24 DPS guidance is set at 19.0cps (vs 18.6c in the pcp and vs MorgansE at 19.2c) which equates to a distribution yield of +6%. Future development capex will likely be funded via asset sales.
We retain an Add rating with a (login to view) price target.
Read our full reports and latest price targets on ASX:HPI here.
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Disclaimer: Analyst may own shares. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.