Insights

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.

One year is a long time in politics. After delivering a budget that straddled the right balance between balance sheet repair and fiscal expansion, the 2024/25 budget was delivered with an eye to next year’s election. Tonight’s announcements centred around cost-of-living relief for all and the well-publicised plan for a “Future Made in Australia” promising over $22bn in spending over the next ten years but also bringing higher deficits over the forecast period.

Treasurer Jim Chalmers’ third Budget shows the government is on track to achieve a budget surplus of $9.3bn, a $10bn turnaround on MYEFO that predicted a $1.1bn deficit. The surplus was again driven by a range of upside surprises to revenue, e.g. the strong labour market, solid wage growth and net overseas migration. Tax revenue was considerably higher than the previous forecast, with the government’s tax receipts at 25.8% of GDP - the highest level since 2007.

An improved fiscal position provides scope for the government to increase spending on temporary cost-of-living relief while committing to the “Future Made in Australia” program which involves tax concessions and subsidies to industries the government deems critical to achieving its net zero target. $7.2B has been committed to cost-of-living relief measures including energy rebates and rent assistance. However, there has been no meaningful attempt to tackle structural pressures from NDIS, aged care, and health care, which has seen growth outpace inflation over the past few years.

Ahead of the election next year, this was another chance for the government to demonstrate their economic credentials. With a helping hand from commodity prices and a strong labour market, we think the government has played it safe, opting to leave meaningful structural reform aside. In summary, the measures announced today is unlikely to move the dial on market sentiment.

Key highlights

•        Spending the surplus - At the headline level, a surplus of A$9.2b is expected in 2023-24 (+0.3% of GDP), significantly improving upon the $13.9b (0.5% of GDP) deficit predicted at last year’s Budget. That said, deficits are expected over forward estimates as commodity prices are forecast to ease and unemployment set to rise. Also, extra spending commitments (“Future Made in Australia”, stage 3 tax cuts) will weaken the fiscal position over the forecast period. The

•       Marginally inflationary but no big deal for equity markets – taking everything into account, a surprise surplus, the coming stage 3 tax cuts, a bump in government spending, and some targeted measures to address cost-of-living pressure should not worry investors. Importantly for the market, a strong fiscal position and few inflation-inducing spending measures should also reassure investors that a slowdown is possible without a recession.

•       Few consumption levers pulled this year – A feature of the previous Labor Budget’s such as large one-off cash payments, new welfare programs and tax offsets were notably absent. Instead, energy bill relief and the reworked stage 3 tax cuts are expected to do the heavy lifting on cost-of-living support. Big spending programs were replaced by targeted relief to and low-medium income households such as rent assistance. So this Budget will not provide the sugar hit to retailers we’ve seen over the past few years coming out of COVID.

•       Budget assumptions and a cut expected to net overseas migration – Forecasts provide a low hurdle for the December MYEFO or next year’s pre-election Budget. Key commodities are assumed to decline from elevated levels with iron ore price assumed to decline from US$117/tonne to US$60/tonne by March 2025; the metallurgical coal spot price declines from US$227 to US$140/tonne; the thermal coal spot price declines from US$105 to US$70/tonne. AUD is expected to remain at 65c through the forecast period. The Budget expects net overseas migration to be 395,000 this year, after 528,000 last year. The government forecasts that it will fall to 260,000 next year, to 255,000, and to 235,000 in the following years.

Our thoughts

Labor’s third Budget delivered another surprise surplus for the government leaving some wiggle room to spend ahead of the 2025 election year. While the “Future Made in Australia” promises to drive investment in the green economy, many questions remain about its implementation and effectiveness in competing in industries where we lack a comparative advantage. Implementing the re-cut stage 3 tax cuts and some cost-of-living relief will provide some support for domestic demand, which in our view is mildly inflationary but unlikely to move the dial meaningfully on corporate profitability.

Successive governments have lacked the determination to bring about significant structural reform, chiefly around genuine tax reform, productivity and housing. This Budget is no different. The lack of genuine long-term reform at time when the federal balance sheet has been boosted by elevated tax revenues, a strong job market and cyclically high commodity revenue is a missed opportunity for Labor.

In our view, the Budget is unlikely to bring about significant revisions to corporate earnings, however the ongoing commitment to support the vulnerable parts of the economy should help market sentiment and support earnings confidence. Moreover the surplus has reinforced Australia’s sovereign credit rating which can be viewed as favourable for inbound investment. We also see company dividends as sustainable if economic conditions hold. We prefer a targeted portfolio approach favouring quality (strong cashflow and market position e.g. COL, TWE, DBI, QBE, CSL), sectors linked to higher-for-longer inflation (Energy, Resources) and select cyclicals (MGH, CWP, QAL, BLX, ACF). See our Best Ideas for our most preferred exposures.

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Jim Chalmers talks as if he is delivering a big surplus. Certainly, $9.3 billion sounds like a lot of money. However, last year Australian GDP was an amazingly large $2.6 trillion. The Budget Papers (Table 1.2) show this budget surplus as just a small budget balance of 0.3% of GDP. Of course, a budget balance of 0.3% is better than no balanced budget at all.

This Budget seems to have been produced with detailed election polling in mind. There is something for everyone. There is a handout or a hand-up for every identifiable voting group. The Budget gives the government the flexibility to launch into an election campaign almost any time in the next year. Right now, in this document, almost every interest group is taken care of.

This is important because the major economic parameters tells us that the economy is softening. GDP growth for 2023-24 is only 1.75%. This is down from 3.1% in 2022-23. As a result, unemployment is expected to rise to 4% in the middle of 2024 and 4.5% by the middle of 2025. This unemployment of 4.5% stays at this level for three consecutive financial years up to and including 2026-27.

The result of this continued period of higher unemployment is that inflation falls. Still, it takes until the middle of 2027 for the RBA inflation target of 2.5% to be achieved. This low inflation is bought at the cost of a weak demand for labour.

Outlook for the Terms of Trade

The good news that has been delivered over the last couple of years in the shape of balanced budget has been achieved as a result of the highest terms of trade that has ever been recorded. Budget Paper 1, page 67, tells us that the terms of trade is forecast to decline from here over the next three years. The terms of trade is expected to stabilise in 2025-26 at around the average level of the past 15 years. Commodity prices are assumed to reach their long-term levels by the end of the March quarter 2025.

As we said, this is a budget which has something for everyone. The overwhelmingly largest function of expenditure is Social security and welfare. This accounts for spending of $266.7 billion, or 36.3% of outlays. Next comes Health with $112 billion, or 15.3% of outlays. Education comes next with $53 billion, or 7.2% of outlays. Following these is Defence with total expenditure of $48 billion, or 6.5% of expenditure.

The estimates of the increases in Australian General Government Expenses by Function show some very interesting movements. Of course, the largest total increase is Social security and welfare, with an increase of $14.35 billion. However, what is interesting in these numbers is the percentage changes.

By far the biggest percentage increase is spending on fuel and energy. These are subsidies for keeping prices low. The fuel and energy sector is seeing increases in expenditure of 51.6%. This is an increase in spending of $6.84 billion. The next big percentage of increased spending is Housing and community amenities with an increase of 25.7%. This is a total increase in spending of $2.044 billion.

Final thoughts

Jim Chalmers talks as if he is delivering a big surplus. The Budget Papers (Table 1.2) show this budget surplus as just a small budget balance of 0.3% of GDP. Of course, a budget balance of 0.3% is better than no balanced budget at all.

This Budget seems to have been produced with detailed election polling in mind. There is something for everyone. There is a handout or a hand-up for every identifiable voting group. The Budget gives the government the flexibility to launch into an election campaign almost any time in the next year. Right now in this document, almost every interest group is taken care of.

This is important because the major economic parameters tell us that the economy is softening. GDP growth for 2023-24 is only 1.75%. This is down from 3.1% in 2022-23. The result of this is that unemployment is expected to rise to 4% in the middle of 2024 and 4.5% by the middle of 2025. This 4.5% of unemployment stays at this level for three consecutive financial years.

Perhaps the government will want to move to an election before this period of weak employment and higher unemployment really sets in.