Insights
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.
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.
Our 'Best Calls to Action' aim to navigate you through the current reporting season by showcasing stocks with strong buying potential. They also offer insights into stocks that might not be ideal for growth right now. These recommendations come from thorough analysis of market trends, financial health, and growth potential, ensuring you access high-value investment opportunities.
Happy to buy today
The Lottery Corporation (ASX:TLC) - FY24 earnings: 4.75 million and counting
FY24 earnings met our expectations, with the top line rising 14% yoy following a particularly strong period for the Lotteries segment. Strong Lotteries margins offset a decline in Keno profitability. NPAT exceeded our forecast by 1%, reaching $412m.
We maintain our ADD rating.
Superloop (ASX:SLC) - Buff enough to crack 100m in record time
Despite posting great numbers and impressive growth in FY24 it looks like FY24 was just the warm-up year. FY25 guidance is for underlying EBITDA to grow ~55% to ~$86m (FY25 guidance is unchanged at the mid-point but has upside risk). We see a bull case for SLC to crack $100m, subject to all things going well.
We maintain our ADD rating.
Hotel Property Investments (ASX:HPI) - Solid FY24
The FY24 result was in line with expectations. Proceeds from asset sales are being used to pay down debt as well as recycle into the ongoing capex program with its key tenant which is being rentalised at 7.5%. NTA stable at $4.01 with rental growth offsetting cap rate expansion.
We maintain our ADD rating.
MAAS Group (ASX:MGH) - Growth to continue through FY25
MGH delivered FY24 EBITDA at the upper end of its guidance range, with management expecting continued revenue and profit growth in FY25 – the company will provide further outlook and trading commentary at its AGM. The business continues to demonstrate a transition away from real estate towards a construction materials, namely quarry, lead industrial business – construction materials grew FY25 EBITDA 54% (existing businesses grew 44%).
We maintain our ADD rating.
IMDEX (ASX:IMD) - Darkest before dawn
The result was largely as expected. However, outlook commentary was downbeat as exploration activity has yet to increase despite positive macro trends. This may cause some disappointment, but it’s unsurprising given the lag and, in our view, should not be a deterrent. Our thesis is premised on a prolonged trough in raisings, which can only continue for so long, and the key lead indicators trending in the right direction.
We maintain our ADD rating.
Step One Clothing (ASX:STP) - Supremely comfortable
STP outperformed expectations, with earnings that were around 6% ahead of the guidance provided in June and 50% higher than FY23. All regions saw positive sales momentum. The efficiency of marketing expenditure was considerably better than last year (and even better than we’d expected), underlining STP’s successful pivot to a strategy of ‘profitable growth’.
We maintain our ADD rating.
Ebos Group (ASX:EBO) - Result and outlook in line with expectations
EBO posted its FY24 result which was in line with consensus forecasts. Importantly the FY25 guidance range sits comfortably within both MorgansF and consensus. EBO highlighted the base business (Ex-Chemist Warehouse contract) grew underlying EBITDA ~8% in FY24 and FY25 guidance implies underlying EBITDA growth ex-CW of 5% to 10%.
We maintain our ADD rating.
Trim/Funding Source
Cleanaway Waste Management (ASX:CWY) - Moderating
The EBIT growth progression from FY24 into FY26 is well understood, but the net finance cost and capex guidance and revised 5 year forward earnings growth outlook for impairment testing moderated our bullish stance on the stock. 12 month target price reduced, due to higher debt service, higher lease costs, higher maintenance spend, and lower long term EBITDA generation. With the TP decline and recent share price strength, we downgrade from ADD to HOLD
We adjust to a HOLD rating.
Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Begin your journey with Morgans today to view the exclusive coverage.
Our 'Best Calls to Action' aim to navigate you through the current reporting season by showcasing stocks with strong buying potential. They also offer insights into stocks that might not be ideal for growth right now. These recommendations come from thorough analysis of market trends, financial health, and growth potential, ensuring you access high-value investment opportunities.
Happy to buy today
Reliance Worldwide (ASX:RWC) - Cost out mitigates weaker demand environment
RWC’s FY24 result overall was slightly better than expected. Key positives: FY24 underlying EBITDA margin (ex-Holman) rose 20bp to 22.3% vs management’s guidance for stable margins; Cost savings of US$23m were above management’s target of US$20m with further benefits expected in FY25.
We maintain our ADD rating.
Judo Capital Holdings (ASX:JDO) - Onwards and upwards
JDO met FY24 expectations and laid out the building blocks for 15% PBT growth into FY25. We think this outlook is an important stepping stone from the earnings nadir in 2H24 into the very strong growth we believe JDO can achieve in subsequent years (PBT +70% in FY26F and +42% inFY27F).
We maintain our ADD rating.
Trim/Funding Source
Ansell (ASX:ANN) - Moving in the right direction; but uncertainties remain
FY24 was mixed, with earnings tracking guidance but ahead of expectations, supported by one off items, but with revenue in line and OCF strong. Industrial sales and margins both improved on manufacturing efficiencies and carryover pricing, offsetting declining sales and contracting margins in Healthcare on inventory destocking and slowing of production to address inflated inventories.
We maintain our HOLD rating.
Baby Bunting Group (ASX:BBN) - Baby steps after a rocky year
BBN’s FY24 earnings were in line with recent guidance. Earnings came under real pressure in FY24. BBN expects to return to positive growth in sales and margins in FY25, but with an FY1 PE of 19.5x and with consensus NPAT sitting towards the top of the guidance range.
We adjust to a HOLD rating.
Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Begin your journey with Morgans today to view the exclusive coverage.
Our ‘Best Calls to Action’ are designed to guide you through the current reporting season landscape by highlighting stocks with compelling buying prospects. It also provides insights into those that may not be viable for growth at this time. These selections are based on rigorous analysis of market trends, financial health, and growth potential, ensuring you have access to high-value investment opportunities.
Happy to buy today
Suncorp (ASX:SUN) - Looking to the future as a pure-play General Insurer
SUN's FY24 cash NPAT (A$1,372m) was ~-5% below consensus (A$1,425m), mainly due to a softer General Insurance result than expected. FY25 guidance points to solid earnings momentum continuing into this year, and we see SUN's unveiled FY25-FY27 business strategy as uncomplicated, and focused on driving the insurance business harder (which should be well received).
We maintain our ADD rating.
Trim/Funding Source
Westpac Banking Corp (ASX:WBC) - Q3 NIM improvement
The Q3 trading update indicated WBC is tracking ahead of previous expectations, with NIM higher and costs and impairment charges lower than prior forecasts. Mid-single digit EPS upgrades for FY25-26F. 12 month target price lifts 8% to $26.11 due DCF valuation upgrades.
We maintain our HOLD rating.
IRESS (ASX:IRE) - Stability and flexibility returned to the core
IRE reported 1H24 adjusted EBITDA of A$67m, up 52% on pcp (top-end of recent guidance); and up ~8% HOH (2% HOH revenue growth on stable costs). FY24 Adjusted EBITDA guidance was provided at A$126-132m, post asset sales. Whilst the previous 'exit run-rate' guidance is no longer being provided, we expect the 2H24 drivers should see the upper-end of guidance achievable.
We adjust to a HOLD rating.
Reece (ASX:REH) - Tough housing conditions persist
REH's FY24 result was slightly weaker than our expectations but largely in line with Bloomberg consensus. Key positives: Group EBITDA margin rose 30bp to 11.1% due to good cost control despite softer housing conditions in ANZ in 2H24; ROCE increased 20bp to 15.5%; Balance sheet remains strong with ND/EBITDA falling to 0.6x vs 0.9x in FY23. Key negatives: ANZ earnings were below our forecasts as conditions continued to soften; Management expects the near term to remain challenging in both regions.
We maintain our REDUCE rating.
Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Begin your journey with Morgans today to view the exclusive coverage.
Our ‘Best Calls to Action’ are designed to guide you through the current reporting season landscape by highlighting stocks with compelling buying prospects. It also provides insights into those that may not be viable for growth at this time. These selections are based on rigorous analysis of market trends, financial health, and growth potential, ensuring you have access to high-value investment opportunities.
Happy to buy today
Treasury Wine Estates (ASX:TWE) - Pivot to Luxury is paying off
TWE’s FY24 result held few surprises given the company’s recent trading updates. Pleasingly, its two Luxury portfolios and cashflow all slightly beat guidance. The much smaller and low margin Treasury Premium Brands (TPB) disappointed. Importantly, its targets for both of its Luxury wine businesses over the next few years were reiterated, and if delivered, will underpin double digit earnings growth out to FY27. While not without risk given macro headwinds, TWE’s trading multiples look attractive to us. and we maintain an Add recommendation.
We maintain our ADD rating.
Dexus Industria REIT (ASX:DXI) - Solid occupancy
The FY24 result was in line with upgraded guidance with rental growth helping to offset loss of income from asset sales. Occupancy strong at +99%. FY25 guidance comprises FFO of 17.8c (+2.3% on the pcp) and DPS of 16.4c which equates to an implied distribution yield of 5.8%. The balance sheet remains solid with look-through gearing around 27% ensuring there is capacity to complete the committed development pipeline which will enhance future rental growth. Asset sales are also likely to be considered.
We maintain our ADD rating.
Trim/Funding Source
Telstra Group (ASX:TLS) - Adjusting for growth
The FY24 underlying result came in towards the lower end of expectations. NPS (customer advocacy) and return on capital continue to improve while the heavily lifters remained Mobile (61% of EBITDA and +9% yoy) and InfraCo Fixed (21% of EBITDA and +6% yoy). Growth here more than offset declines elsewhere.
We recommend a REDUCE rating.
Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Begin your journey with Morgans today to view the exclusive coverage.
If you’re making investment decisions today, consider focusing on these key opportunities. Our ‘Best Calls to Action’ feature stocks that present compelling buying prospects right now.
CSL (ASX:CSL) - Behring continues to do the heavy lifting
CSL Ltd. FY24 results were broadly in line, with double-digit underlying top and bottom line growth and strong OCF. Strong plasma collections drove Behring sales (+15%), while Seqirus was soft (+4%) on reduced immunisation rates, albeit above market, and Vifor grew modestly given follow-on products in some EU markets.
We retain our Add rating.
James Hardie (ASX:JHX) - 2QFY25 softness as the market awaits rate cuts
JHX has reiterated its FY25 guidance, while forecasting ‘particularly challenging’ conditions for 2QFY25, resulting in 2Q guidance falling c.13%short of consensus (and our) adjusted net income expectations. This weak 2Qinvariably places additional weight on 2H25, which includes a seasonally weaker December period. With management reiterating FY25 adjusted net income guidance of U$630-700m, we set our forecast at the lower end of the range, acknowledging that lower interest rates will be a positive, when they occur.
We retain our Add rating.
HealthCo REIT(ASX:HCW) - Asset sales, capital management remain on agenda
The FY24 result saw portfolio metrics remain stable (cash collection 100%; occupancy 99%; and WALE +12 years). NTA $1.64. Asset recycling has been a focus during FY24 and management has flagged it will continue to look at asset sales in FY25, although no further detail around the quantum of divestments at this stage.
We retain our Add rating.
Challenger (ASX:CGF) - Continuing to see good earnings momentum
CGF’s FY24 normalised NPAT (A$417m) was in-line with consensus and +14% on the pcp. Overall, we saw this as a positive FY24 result highlighted by a strong improvement in Life business margins/returns, good group cost control and an upward step change in CGF’s capital position.
We retain our Add rating.
Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Begin your journey with Morgans today to view the exclusive coverage.
As reporting season kicks off, investors and analysts alike turn their attention to a critical period of corporate transparency. As ASX-listed companies disclose their earnings, our analysts identify key tactical calls around August results, where stock price reactions are flagged to surprise or disappoint.
To help you navigate this reporting season, our team of analysts have handpicked a list of key stocks in the Bank and Fund Manager space that are worth keeping an eye on.
Banks
Insight from Nathan Lead – Senior Analyst
Bank stocks have outpaced broader market performance recently. However, the high share prices do not seem fully supported by projected Return on Equity (ROE) and Dividend per Share (DPS) growth, which are expected to remain relatively flat over the coming years.
The recent share price performance has largely been driven by an increase in key valuation multiples (Price-to-Earnings (P/E) and Price-to-Book Value (PBV)); CBA’s multiples are especially elevated, trading well above historical norms and peers at about 23x P/E and 3x PBV. Meanwhile, cash dividend yields have compressed significantly, making banks less attractive as an income investment; CBA stands out again given its yield has compressed to about 3.4%. Major domestic banks also appear overvalued compared to global peers, based on the relationship between PBV and Return on Equity.; once again CBA’s valuation appears particularly stretched.
In summary, while bank stocks have performed well, their elevated prices may not be justified by future financial prospects and seem high relative to both domestic and international standards.
Commonwealth Bank of Australia
ASX: CBA | REDUCE | 14 August 2024
The REDUCE rating we apply to CBA is not a recommendation for complete divestment; rather, it is a directive to reduce overweight positions. Given current valuations and earnings outlook, it is difficult to foresee substantial returns from investments in CBA over the next 3-5 years. Loan growth is expected to strengthen, and the decline in Net Interest Margin (NIM) may moderate. However, cost pressures are anticipated from increased amortisation and staff expenses and upward normalisation of credit impairment charges.
Asset quality remains resilient, with low write-offs and limited provisioning growth potentially seeing credit impairment expenses being lower than consensus estimates.
For 2H24, we project pre-provision operating profit and Cash EPS to be 3% lower than 1H24, and the DPS remain flat on pcp at $2.40 per share with an increasing payout ratio.
Capital management will be a focus, with CBA undertaking only minimal share buyback activity ($130 million in 2H24) to distribute excess capital.
Key results to watch:
Loan Growth and NIM: Loan growth is expected to strengthen, while the decline in Net Interest Margin (NIM) is anticipated to moderate.
Cost Growth: An increase in costs is projected, primarily due to higher amortisation and staff expenses.
Asset Quality: Asset quality is likely to remain resilient, with low write-offs and minimal provisioning growth, potentially surpassing consensus expectations.
Capital Management: Watch for how CBA plans to distribute excess capital, given it spent only $130 million on share buybacks in 2H24.
Judo Capital aka Judo Bank
There’s more positive outlook on the small-cap JDO, which specialise in SME-focused business lending. As its ROE improves with earnings growth, we anticipate so too should its Price-to-Book Value. The company is reinvesting its earnings rather than paying dividends, which should result in high single-digit to low double-digit compound annual Book Value per share growth. Although JDO is a higher risk investment proposition than the major banks given it is a challenger bank, it offers the potential for higher returns. JDO presents a compelling opportunity if it meets its at-scale targets, potentially becoming Australia's fastest-growing, most efficient, and profitable bank. Current prices suggest a potential internal rate of return (IRR) of approximately 13% per annum over the next five years. For FY24, the projected profit before tax (PBT) is $107-112 million with gross loans of $10.5-10.7 billion. FY25 PBT is expected to rise to $123-129 million, reflecting about 15% growth.
Key results to watch:
Growth and Efficiency: If the company meets its ambitious targets, it could become the fastest-growing, most efficient, and most profitable bank in Australia.
Stock Valuation: Achieving its at-scale targets could make the stock worth around $2.50 per share, thanks to increased book value per share and a higher price-to-book ratio.
Investment Potential: Purchasing the stock at current prices could offer an estimated annual return of about 13% over the next five years.
Fund Managers | Platforms
Insights from Scott Murdoch – Senior Analyst
GQG Partners
ASX: GQG | ADD | 16 August 2024
Whilst current market conditions are volatile, we expect a positive reaction to GQG’s results. Key investment highlights include a potentially significant performance fee boost, notable operating leverage in the half, and impressive funds under management (FUM) growth of 29%, which supports a strong outlook. Additionally, diversification through the Private Capital Solutions business adds value long-term. Key financial expectations are for management fees up 49% compared to the previous period, and operating profit to increase by 65% including our performance fee expectations (57% excluding performance fees).
Key Results to watch:
Performance fee kicker: We think GQG can report above market expectations, with a kicker from performance fees.
Operating Leverage: Margin improvement is expected on the back of strong revenue growth.
Strong FUM growth: Funds under management grew by 29% in the last half, setting up a solid outlook.
Diversification: Expansion through the new Private Capital Solutions segment to provide diversification.
Want to unlock more investment insights? Our Reporting Season Playbook previews the upcoming results for the period to June 2024 of 155 stocks under coverage. In the report, we call out positive and negative surprise candidates and present an overview of the macroeconomic backdrop.
Become a Morgans client to download the 2024 Playbook.
Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Begin your journey with Morgans today to view the exclusive coverage.
