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.
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Brickworks (ASX:BKW) recently provided a trading update ahead of its Annual General Meeting (AGM) today. The update revealed positive Q1FY24 Building Product EBIT results compared to the prior corresponding period (pcp). However, management expressed concerns regarding a softening outlook and announced plans to undertake maintenance work to manage stock levels. Additionally, the company anticipates a decline of approximately 10% in property net asset values for the first half of FY24, attributed to an increase in capitalization rates.
Trading Update Highlights
Brickworks' trading update presents a mixed picture, with positive EBIT results tempered by concerns about future prospects. Management's cautious commentary, particularly regarding the property segment, suggests potential challenges ahead.
Outlook and Analysis
The outlook commentary from Brickworks appears to be among the weakest within the building product peer group. Lower earnings are anticipated over the next 12 to 24 months, with the forecasted property cap rate change likely reflecting a catch-up with current market pricing trends.
Investment Insights
Despite Brickworks' share price trading at a discount to the inferred Net Asset Value (NAV), concerns about earnings headwinds relative to consensus forecasts lead us to maintain a Hold recommendation. We would consider upgrading our stance to Add if the share price were to approach $20/sh. However, our preferred exposure in the building products sector currently lies with CSR.
Brickworks faces short-term headwinds amid a challenging operating environment, particularly in the property segment. While the company's long-term value proposition remains intact, investors should exercise caution given the uncertainties in the near term.
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Technology One (ASX:TNE) recently announced its latest financial results, which surpassed expectations, with revenue momentum standing out as a highlight. Notably, management has advanced their target of achieving $500 million in Annual Recurring Revenue (ARR) to FY25, bringing it forward from the previously projected FY26. This represents a significant acceleration in the company's growth trajectory.
Revenue Momentum
The strong performance in revenue underscores Technology One's resilience and ability to capitalize on market opportunities. The company's ability to exceed expectations bodes well for its future prospects and reinforces investor confidence.
Forecast Analysis
While the financial results were slightly better than anticipated, we have made marginal adjustments to our forecasts. Despite the positive momentum, we maintain our Hold recommendation on the stock.
Technology One's decision to advance its ARR target demonstrates its confidence in its business model and growth strategy. The company's ability to adapt and innovate positions it as a leader in the technology sector. Investors should closely monitor Technology One's performance as it continues to supercharge its ARR and pursue its ambitious targets.
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GrainCorp (ASX:GNC) recently released its FY23 financial results, which, although down from the record previous corresponding period (pcp), still reflect a commendable performance. Strong operating cash flow and a significant core cash position stand out as key highlights. As a result, the company has been able to reward shareholders with a substantial dividend payout and initiate a A$50 million share buyback program.
Financial Performance Highlights
Despite challenges, GrainCorp's ability to generate robust operating cash flow and maintain a sizable core cash position underscores its financial strength and resilience. These factors have enabled the company to return value to shareholders through dividend payments and share buybacks.
Outlook and Forecast Analysis
Looking ahead, the outlook for GrainCorp's earnings in FY24 appears challenging. ABARES forecasts a substantial decline of approximately 29% in the 2023/24 east coast winter grain crop, which is likely to impact earnings for the fiscal year. Additionally, moderating grain marketing and oil crush margins, coupled with no more UMG revaluations, further contribute to the anticipated decline in earnings.
Insights and Considerations
While GrainCorp's intrinsic value exceeds its current share price, the anticipated decline in earnings for FY24, along with the possibility of the company utilizing a significant portion of its core cash position for a new oilseed crush facility, warrants caution. Therefore, we maintain a Hold rating on the stock.
GrainCorp faces both opportunities and challenges in determining the best utilization of its cash reserves amid a changing market landscape. Investors should closely monitor the company's strategic decisions and financial performance as it navigates through these uncertainties.
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In the fiscal year 2023 (FY23), Nufarm (ASX:NUF) faced a slight decline in EBITDA, acknowledging the challenge of comping two remarkable years. Despite this, the company outperformed its peers, with Seed Technologies emerging as a standout, while the Asia-Pacific (APAC) region fell short of expectations. Notably, Nufarm reported a cash outflow that surpassed expectations, resulting in a favourable adjustment of its gearing metrics back into its target range.
FY24 Projections Amidst Ongoing Challenges
Looking ahead, the company anticipates persisting challenging operating conditions in the first half of FY24. Modest EBITDA growth at best is expected for the fiscal year, with a subdued first half followed by a potential upswing in the second half. However, there is a projection of a decline in Net Profit After Tax (NPAT). Forecasts have been revised, but the likelihood of further downgrades to consensus estimates remains a concern.
Earnings Growth Prospects in FY25/26
Aligning with its FY26 revenue aspirations, Nufarm anticipates a surge in earnings growth in FY25/26. This trajectory suggests a recovery and acceleration in performance beyond the challenges faced in FY24.
Investment Outlook
Given the prevailing uncertainty in near-term earnings, our rating for Nufarm remains at "Hold." However, it's essential to acknowledge the potential for substantial upside if the company successfully attains its FY26 targets.
In conclusion, Nufarm's FY23 performance, though marred by a slight EBITDA dip, showcases resilience in comparison to industry peers. The company's strategic focus on Seed Technologies and the resilience in the face of challenging conditions position it for potential growth in the coming years. Investors should closely monitor developments, particularly the execution of FY26 targets, which could significantly impact the investment landscape.
In FY23, ALS exhibited robust financial performance, aligning closely with consensus expectations. Despite a slight revenue surplus above forecasts, the impact of heightened design and development expenditure was felt. Notably, FY23 NPATA soared by 13.0% in constant currency terms, reaching an impressive $1,327 million, surpassing initial forecasts by 3.9%.
Growth Trajectory and Expectations for FY24
While growth moderated in FY23, an anticipated further moderation is expected in FY24 as trading conditions normalize post the lockdown-induced surge in demand for land-based gaming. Encouragingly, we foresee a positive turnaround in growth for Pixel United in the coming years. Our FY24F NPATA remains largely unchanged at $1,382 million, indicating a steady constant currency growth of 1.6%.
Investment Insight and Retained Add Rating
Maintaining our confidence in ALS, we retain an Add rating. However, our target price adjusts to (login to view), primarily influenced by a higher weighted-average cost of capital (WACC). Despite this adjustment, Aristocrat remains a compelling investment opportunity, boasting substantial long-term growth prospects, a high Return on Invested Capital (ROIC) business model, and a robust balance sheet.
Commonwealth Bank (ASX:CBA) recently unveiled its 1Q24 trading update, revealing a stable performance with revenue, pre-provision operating profit, and cash NPAT aligning with the 2H23 quarterly average.
Fiscal Projections and Downgrades for FY25-26F
Explore the financial landscape as 3-4% cash EPS downgrades for FY25-26F emerge, driven by a combination of mild earnings adjustments and smaller future buyback assumptions.
Target Price Adjustments and Holding Strategy
Delve into the details of the revised target price, as Commonwealth Bank retains a HOLD rating. Uncover the reasoning behind the decision, with a potential -5% Total Shareholder Return (TSR), including a 4.4% cash yield.
