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.
With the market heading back to record highs, it leads me to ponder my next move.
Is the market so buoyant and frothy that I need to be concerned about a bubble?
There is some evidence in the tech and AI space in the US, where many of the big names have doubled in price in the last 12 to 18 months. Companies like Amazon, Apple, Google, Meta (Facebook), Microsoft and NVIDIA, all have trillion-dollar (+) valuations. True, they have changed the way we communicate, connect and do business. However, have short-term expectations outpaced what can realistically be achieved in the near-term?
Even here in Australia, the big banks, retailers and technology companies are enjoying valuations rarely seen. So, what should investors be doing?
At times like this I ask myself three question(s): What’s my strategy? What am I trying to achieve? And does it matter if a share price, and or even the market, falls 30% tomorrow? Sure, it wouldn’t be nice, but does the risk of such a possibility change my strategy?
To answer these questions, I apply the following framework.
- Do I have enough cash and cash flow to be a patient long-term investor?
You don’t want to be a forced seller, but if you are, better to face up to that fact while the market is buoyant, as opposed to waiting for a correction to bring home the reality of your position.
- Do I own quality businesses?
Good management, sound balance sheet, innovative and productive culture, able to compete and grow. If so, they’re not for sale, but unfortunately not every business that I buy will retain its ‘quality’ status, and a buoyant market is often the best time to weed out businesses with operational issues.
- Do I have a diversified portfolio?
As a rule of thumb each holding should be between 3% and 7% of the portfolio. Too many small holdings are hard to follow, and large holdings can have too much influence over a portfolio’s returns and strategy. A buoyant market can be the opportunity I need to trim large holdings in mature businesses, although I will be more patient with businesses delivering strong growth.
- Is the portfolio capable of achieving my return objective?
Typically, this means the portfolio will be generating income of around 5%, plus 5% EPS growth (Earnings Per Share), and be trading close to fair value, at least based on the Morgans analyst’s valuation. A portfolio will typically include quality stalwarts that produce reliable income + higher growth companies to deliver the EPS growth that the portfolio will need to grow over time.
- Should I be investing some of the surplus cash that I might have?
Price always matters. Cash is a valuable asset, and it gives you the capacity to buy things when the price is right. I’m not talking about waiting for a crash, they do happen, but there is no guarantee that I will have the understanding or conviction to act when they do. Plenty of wealth has been created by simply buying quality businesses at a fair price and compounding reasonable returns over time. A fair price is not about ‘knowing’ the future share price, it’s about considering historical valuations metrics, current conditions and opportunities and making a judgement call as to whether the current price is fair and reasonable?
I also like to review past performance, after all, that’s all we have to go on. It is true, no-one knows the future, including me, and arbitrary things can and do happen, and for better or worse mistakes will be made, but statistically the optimists have won. Despite the uncertainty and the inevitable crisis or two, the market has continued its relentless climb.
If an investor had bought the ASX 200 on the 1/7/1994 and held the ASX 200 for 30 years, until 30/6/2024, they would have received the income stream illustrated in the chart below. To be clear the investor takes and spends the income each year (the dividends haven’t been re-invested). Some years their income is cut, as it was during the GFC and during Covid. Some years it’s flat. But overtime the income stream has grown at 5% compound and that initial investment of $400,000 has grown to be worth more than $1.7million.
True investment returns do not come from trading securities, in some zero-sum game, but from owning businesses that produce the goods and services society needs and will pay for. Investors are savers and their savings have come from their work and it is because they have worked, saved and invested that we have the goods and services we need today for our lifestyle and living standard.
I am cautious about the level of the market, but more because I am used to volatility, as opposed to there being a specific issue; it could be inflation and interest rates, it could be the politics in multiple jurisdictions, or it could nothing at all. Just staying vigilant and asking the question, do you have enough cash and cash flow to be a patient investor?
More Information
Ken Howard is a Private Client Adviser at Morgans. Ken's passion is in supporting and educating clients so they can attain and sustain financial independence.
If you have any questions about your financial plan or your share portfolio, your strategy, investments or would just like to catch up, please do not hesitate to give Ken a call on 07 3334 4856.
General Advice warning: This article is made without consideration of any specific client’s investment objectives, financial situation or needs. It is recommended that any persons who wish to act upon this report consult with their investment adviser before doing so. Morgans does not accept any liability for the results of any actions taken or not taken on the basis of information in this report, or for any negligent misstatements, errors or omissions.
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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
IDP Education (ASX:IEL) - Difficult test, but uniquely placed to take market share
IEL reported FY24 underlying NPATA of A$154.3m, down 1% on the pcp. 2H24 reflected the impact of policy changes, with 2H NPATA down ~34% on pcp. Tighter and uncertain policy settings saw 2H24 IELTs volumes down ~24% HOH. Student Placement was solid (2H flat on pcp), although policy hadn’t fully impacted. IEL expects the international student market (new admissions) to be down ~20-25% in FY25. IEL expect to outperform this via meaningful market share gains. We think FY25 is likely to be the trough year for ‘student flows’, impacted by tighter policies and the associated uncertainty. We expect IEL’s earnings to fall ~12%, with some benefits from pricing; market share gains; and solid cost control.
We upgrade to an ADD rating.
Airtasker (ASX:ART) - Positive cashflow the likely new norm
With the recent quarterly trading update, ART had largely pre-released key operating metrics, with the FY24 result itself largely per expectations. However, it was a resilient performance by the marketplace overall, with an improved revenue profile despite top of funnel (GMV) headwinds. The business also achieved its planned target of being free cashflow positive (+A$1.2m) for the full year.
We maintain our ADD rating.
Alliance Aviation Services (ASX:AQZ) - Just too cheap
AQZ reported another record result in FY24, with underlying NPBT up 52% on the pcp and slightly ahead of MorgansF/consensus. We forecast earnings growth momentum (PBT growth of 10%) to continue into FY25 driven by deploying more E190 aircraft and increases in utilisation. We back this founder led management team with a strong track record to continue to execute from here.
We maintain our ADD rating.
Ai-Media Technologies (ASX:AIM) - An Olympic AI effort justifying investing for growth
AIM’s FY24 result showed the business is tracking well with revenue up 7% yoy, gross profits up 15% yoy and EBITDA up 25% yoy. Revenue and gross profit were inline with our expectations while our OPEX expectations were not high enough and consequently EBITDA was below our forecast, but still up 25% yoy. The AI transition risk is largely behind AIM now and operating conditions invert from headwinds to tailwinds. This has given management confidence in long term targets and on public conference call they talked to aspirational target of $150m of revenue and $60m of EBITDA in the next five year (FY29).
We maintain our ADD rating.
Trim/Funding Source
Wesfarmers (ASX:WES) - Kmart Group momentum continues
WES’ FY24 result was slightly above our forecast but in line with market expectations. Key positives: Kmart Group delivered strong earnings growth as its value proposition continued to resonate with customers; Group EBIT margin rose 10bp to 9.0%. Key negatives: Bunnings sales growth in early FY25 remains subdued, impacted by weakness in housing activity; Management expects Catch to be loss-making again in FY25, albeit at a reduced level relative to FY24.
We maintain our HOLD rating.
Tabcorp Holdings (ASX:TAH) - FY24 earnings: Off-track with costs
TAH’s FY24 result was one to forget. While the company’s topline slightly exceeded our estimates, it was overshadowed by a cost blowout and abandonment of TAB25 strategic targets. The company reported a statutory net loss of $1.36bn, mainly due to impairments. An unfranked 0.3c dividend was announced, bringing the total to 1.3c for FY24. While no quantitative trading update was provided, the company acknowledged that conditions remain challenging.
We downgrade 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
NEXTDC (ASX:NXT) - Laying the foundations for platform growth
NXT’s FY24 result was slightly stronger than expected while FY25 guidance was slightly lower than expected due to a slower ramp-up in revenue and faster ramp-up in scale-up costs, positioning the business for significant expansion.
We maintain our ADD rating.
Flight Centre Travel (ASX:FLT) - Margin improvement will underpin strong growth
FLT’s FY24 result was in line with its recent update. The highlights were the increase in its revenue margin to 11.4% vs 10.4% in FY23, the 2H24 NPBT margin of 1.7% and strong operating cashflow up 170% on the pcp. FLT said that its outlook is positive however in line with usual practice, FY25 guidance won’t be provided until the AGM in November.
We maintain our ADD rating.
Karoon Energy (ASX:KAR) - Market confidence also needing maintenance
KAR posted a broadly steady 1H24 result, close to our estimates but appeared to come in below Visible Alpha consensus estimates. Management flagged additional maintenance planned for Bauna in an attempt to protect its flagship operation. KAR announced a maiden dividend of 4. cents per share fully franked, representing an annualised ~5% dividend yield.
We maintain our ADD rating.
Mach7 Technologies (ASX:M7T) - Better visibility prompting accelerated development
M7T posted its FY24 result which was broadly in line with expectations. With the recurring sales book now providing significantly better visibility into cashflows, we view this has given the Company the confidence to accelerate investment back into the products to improve the offering and implementation times. Key points: record sales order book (up 52%); ARR covering 72% of op costs; FY25 guidance of 15-25% revenue and CARR growth, and lower operating expenses than revenue growth. The notable omission in outlook was around operating cashflow positivity, which likely ties in with an acceleration of product development.
We maintain our ADD rating.
Camplify Holdings (ASX:CHL) - Plenty of wheels in motion for FY25
CHL’s FY24 result saw GTV increase ~13% on pcp to ~A$165m (~5% under MorgansF), however a higher than expected group take-rate (~28.9% vs MorgansF ~28%) saw revenue broadly in line with our estimate (~A$m, +~25% on pcp). Whilst the PaulCamper integration impacted bookings/revenue in the period, this is largely completed, with CHL expecting a return to a more normalised performance in FY25.
We maintain our ADD rating.
Trim/Funding Source
APA Group (ASX:APA) - Lenders and taxman to absorb FY25 EBITDA growth
The FY24 result was broadly in-line while FY25 EBITDA and DPS guidance was mildly below expectations. FY25 DPS guidance implies 7.3% cash yield. HOLD retained, given 12 month potential TSR of ~2%
We maintain our 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.
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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
BHP (ASX:BHP) - Copper Gains and Iron Chains: BHP’s Balanced Brains
Another strong result from BHP, posting an FY24 EBITDA margin of 54%, close to its decade-average of 55% (10 percentage points above its next closest peer). Strong opex performance, with earnings coming in slightly ahead with a final dividend of US74 cents, for an annualised dividend yield of 5.6% fully franked.
We maintain our ADD rating.
Lovisa (ASX:LOV) - FY24 result: Untarnished
There are not many global retailers achieving 17% sales growth and 21% EBIT growth in the current challenging consumer environment, but this is exactly what Lovisa did in FY24. A long period of stellar growth has trained investors to have very high expectations for the business and, while its comparable store sales growth should have been better in FY24, it has continued to deliver and will, in our opinion, continue to do so in the years ahead.
We maintain our ADD rating.
Woodside Energy (ASX:WDS) - A lot to be optimistic about
A strong 1H24 earnings and dividend result comfortably beating Visible Alpha consensus estimates. WDS maintained an 80% dividend payout ratio, for a solid 1H24 interim dividend of US69 cents. Strong inbound interest from potential partners on Driftwood LNG has given WDS confidence it can assemble a strong partnership on the project.
We maintain our ADD rating.
Worley (ASX:WOR) - Delivering margin uplift, against macro headwinds
WOR delivered a solid FY24 result, which came in broadly inline with MorgF and consensus, with EBITA of $751m (+24% YoY), driven by Aggregate revenue growth 18% and solid underlying EBITA margin expansion. The group is flagging a year of more moderate growth in FY25, with the group expecting slower revenue growth but at higher margins.
We maintain our ADD rating.
Trim/Funding Source
Coles Group (ASX:COL) - Executing well
COL’s FY24 result was ahead of expectations with the performance of Supermarkets a key highlight. Key positives: Group EBIT margin rose 10bp to 4.7%; Own Brand growth was 2x the rate of proprietary brands as customers continue to seek value; Coles 360 media income jumped 20.5% with opportunities to grow this higher margin segment over time. Key negatives: Liquor performance was weaker than expected with market conditions remaining challenging; Cash realisation ratio fell to 98% vs 102% in FY23 due to higher working capital.
We downgrade to a HOLD rating.
Guzman y Gomez (ASX:GYG) - Spec-taco-ular start to listed life
GYG’s maiden result as a listed company was strong as we were expecting and ahead of prospectus forecasts, driven by higher than expected comp sales. Importantly GYG has had a strong start to FY25, with its comp sales growth for the first 7 weeks ahead of its comp sales guidance for FY25. We note, the comps GYG has to cycle also get easier from here. Despite the strong start, GYG said it expects to achieve its prospectus forecast (Visible Alpha is already above).
We downgrade to a HOLD rating.
Helloworld (ASX:HLO) - Near term uncertainty
HLO posted a solid 4Q which saw it deliver just under the mid-point of its FY24 EBITDA guidance. The highlights of FY24 were the acquisitions exceeding their investment cases, the group EBITDA margin, materially stronger than expected cashflow and HLO’s strong net cash position. Despite this, when the acquisitions are backed out, in the 2H24, the base business went backwards vs 1H24 and the 2H23.
We downgrade 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.
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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
Regal Partners (ASX:RPL) - Earnings materialise following fund outperformance
RPL’s HY24 result beat both our expectations and those of consensus as management fee revenue and principal investing income continued to grow. The earnings trajectory for recurring management fees should continue to rise, as the business grows FUM to $16.5bn (HY24 Ave. FUM: $11.7bn), while further cost-outs (CY24: $3-4m) will likely increase underlying NPAT.
We maintain our ADD rating.
Dalrymple Bay Infra. (ASX:DBI) - EBITDA growth, interest cost distortions
1H24 EBITDA growth was predictable as expected, but FFO beat on lower net interest costs than expected. Positive surprises were the 8X expansion cash received and previous NECAP spend yet to be added to the asset base.
We maintain our ADD rating.
Tyro Payments (ASX:TYR) - Under-appreciated delivery
While it remains a more difficult top line environment for TYR, this result demonstrated improved profitability through the benefits of TYR’s pricing transformation program, and efficiency improvements. We increase our TYR FY25F/FY26F EPS by +15%-25% on improved EBITDA margin assumptions and lower D&A forecasts
We maintain our ADD rating.
Stanmore Resources (ASX:SMR) - Steel uncertainty builds the next opportunity
The 4.4 US cps dividend was the biggest surprise amongst SMR’s 1H24 result. Re-affirmed production and adjusted cost guidance was also a good look. At this point we think large sector M&A activity looks unlikely for SMR. Surprisingly weak steel markets do pose short-term risks to earnings/ valuation. But we maintain our positive medium-term structural view, and see interim weakness as an opportunity.
We maintain our ADD rating.
Tasmea (ASX:TEA) - Beating forecasts and delivering acquisitions
TEA has announced its third acquisition since its Apr-24 IPO. TEA will acquire Future Engineering Group for $84.5m, with the transaction expected to deliver $15.5m of EBIT and be c.21% EPS accretive. The company has achieved its prospectus forecasts, with EBIT exceeding forecasts by 1.5% and NPAT exceeding forecasts by 10.3%.
We maintain 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.
.jpg)
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
MA Financial Group (ASX:MAF) - Earnings appear to have bottomed
MAF’s 1H24 NPAT (A$18m) was down -27% on the pcp, but it was broadly in line with Bloomberg consensus (A$20m). The 1H24 dividend (A6cps) was above consensus (A5cps). While this was a difficult result, MAF's outlook commentary points to EPS being materially stronger in 2H24 vs 1H24, and earnings appear to have bottomed.
We maintain our ADD rating.
Inghams (ASX:ING) - Woolworths contract spooks the market
Despite volumes being stronger than expected, ING’s FY24 result missed our forecast and consensus, likely due to lower prices in the wholesale channel in the 2H24. FY24 was a record result for ING despite weakness in out-of-home channels due to cost-of-living pressures. FY25 EBITDA guidance was also weaker than consensus estimates, however on a like for like basis (52 vs 53 weeks in FY24) and including a phased reduction in Woolworths (WOW) volumes under a new contract, ING is expecting flat to up to 6% growth.
We maintain our ADD rating.
Clinuvel Pharma. (ASX:CUV) - Potential short term trading opportunity
CUV’s share price has retreated significantly since our last update. So what has happened, and is there an opportunity? CUV provided a progress update on its Ph3 Vitiligo study, highlighting challenges in patient retention and recruitment. Consequently, protocol adjustments have been made, extending the recruitment timeline by approximately six months. A small negative, but adds another mark on the wrong side of the ledger. More pressing concerns include an ineffective/absent buy-back; board and management changes; and poor segmental performance disclosure. Despite all this, we continue to view the underlying asset in EPP as solid and will remain competition free for several more years over which time the cash backing should continue to build and one or more indications realised.
We adjust to ADD rating.
Jumbo Interactive (ASX:JIN) - FY24 earnings: No pain, no gain
JIN’s FY24 result exceeded consensus and our earnings expectations by 2%, driven by an exceptionally strong period in Lottery Retailing, which grew 40% yoy. However, the market was caught off guard by JIN’s guidance for softer margins in FY25, primarily due to a slowdown in Stride.
We maintain our ADD rating.
Wagners (ASX:WGN) - Refocused to grow the core materials business
As largely outlined within the trading update of Jul-24, WGN has delivered FY24 Operating EBIT of $39.7m, up 81% on the pcp, exceeding the upper end of the prior guidance range. The business benefited from strong operating conditions through the final months of 2H24, resulting in a Construction Materials EBIT margin of 16.4%, 330bps higher than 1H24 and 590 bps above the pcp.
We maintain our ADD rating.
VEEM (ASX:VEE) - Multiple growth avenues
VEE’s FY24 result was ahead of expectations and management’s guidance. All divisions generated strong revenue growth (Propulsion +30%, Gyros +146%, Defence +23%, Engineering Products & Services +17%) with margin improvement a key highlight reflecting efficiency benefits and good cost control. We make minor changes to earnings forecasts with FY25-27F EBITDA increasing by between 0-2% while underlying NPAT remains unchanged.
We maintain our ADD rating.
Accent Group (ASX:AX1) - FY24 earnings: Picking up the pace
AX1 achieved positive growth in sales in FY24, despite the challenging retail environment and a poor wholesale performance. Earnings were down yoy due to sales growth tracking below the rate of cost inflation (as well as material non-recurring costs relating to Glue), but this was in line with the guidance given in July. An improving retail and wholesale sales trajectory, moderating cost inflation and the elimination of some of the losses in Glue, will combine to see earnings recover in FY25.
We maintain our ADD rating.
Cedar Woods Prop. (ASX:CWP) - Strong demand for affordable residential land
On 21-Aug, CWP announced FY24 NPAT of $40.5m, up 28% (vs pcp) and above both the guidance range of $36m - $39m and our prior forecast of $37.8m. The key contributor was the sale of the William Land Shopping Centre, with lot revenue and gross profit broadly stable. Looking forward, the signs are positive, with guidance for +10% NPAT growth in FY25, supported by favorable operating conditions in most key states.
We maintain 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.
