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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Your Wealth is a half-yearly publication produced by Morgans that delves into key insights for Wealth Management. This latest publication will cover;
- Maximise your retirement savings with super splitting strategies
- Staying the course while Central Banks tighten
- Spotlighting the new income thresholds for the Commonwealth Seniors Health Card
- The basics of account-based pensions
- How to wind up your self-managed super fund
- Big Dry Friday 2022: 1.3 million reasons to say thank you
Morgans clients receive exclusive insights such as access to our latest Your Wealth publication. Contact us today to begin your journey with Morgans.
Feature Article | Splitting is still significant
The strategy of splitting superannuation contributions to your spouse still provides an opportunity for couples to maximise their retirement savings, particularly with the introduction of total super balance and transfer balance cap rules.
Overview of Contribution Splitting
The superannuation contribution splitting rules allows a person to split up to 85% of concessional contributions with their spouse. This includes carry forward concessional contributions. Non-concessional contributions cannot be split. Superannuation contribution splitting allows a couple to build two separate superannuation accounts even if one spouse is on a low income or not working.
The splitting operates under an “annual split” model: that is at the end of the financial year a super fund member will be able to nominate a percentage of concessional contributions made in that financial year to be split with their spouse. The amount to be split will be treated as a “rollover” to the receiving spouse; hence funds will not be counted against any contribution caps for that spouse. The concessional contributions that can be split can also include unused carry forward contributions, where applicable.
To read the full coverage from the latest Your Wealth, begin your journey with Morgans today.
Investment Watch is a quarterly publication produced by Morgans that delves into key insights for equity and economic strategy. This latest publication will cover;
- Asset allocation – Positioning for a cyclical slowdown/mild recession
- Economic strategy – US economic growth to slow
- Equity strategy – Moving from defensives
- Updated Morgans Best Ideas
- … and much more
Morgans clients receive exclusive insights such as access to our latest Investment Watch publication. Contact us today to begin your journey with Morgans.
Feature Article | 2024 Outlook
A rapidly evolving investment landscape and a year of likely political uncertainty make forecasting difficult in 2024. We outline three possible scenarios:
- Economic soft landing involves a modest deceleration below trend in major economies, without significant shocks disrupting markets. The decision to maintain higher interest rates will bring inflation near central banks’ target range. This would enable a shift towards reducing interest rates, alleviating the strain on households and companies.
- A cyclical slowdown/mild recession resilience driven by fiscally supported consumers and companies has been the biggest surprise of 2023, but barring something extraordinary, next year could see the global economy finally turn lower. Inflation would be sticky for a period before returning to target, with interest rates staying higher for longer periods, resulting in bouts of asset price volatility.
- Economic hard landing/balance sheet recession will be defined by a sharp downturn in the global economy. A sharp acceleration in corporate defaults would significantly reduce corporate and consumer spending. Central banks would respond by cutting interest rates as growth and inflation fall away.
Equity strategy - Moving on from defensives
Our Asset Allocation update discusses three possible economic scenarios in 2024 and their investment implications in terms of portfolio asset allocation. Our base case scenario expects economic growth to contract in the first half of 2024 before returning to growth later in the year. Sticky inflation will keep interest rates higher for longer. Equities will likely remain range-bound until there is more certainty on the interest rate trajectory either peaking/falling.
Given Australia’s economic sensitivity to falling commodity prices, investors need to tread carefully over the next 3-6 months. As tailwinds from commodity prices fade, we think above-average earnings growth for the market will be harder to come by. Accordingly, we prefer a targeted portfolio approach, tilting toward what we believe are the best relative opportunities and the best risk/return profile e.g., small caps, quality cyclicals.
To read the full coverage from the latest Investment Watch, begin your journey with Morgans today.
Helloworld Travel Ltd (ASX:HLO) - Finally profitable
HLO's FY22 result beat expectations with the group returning to modest (EBITDA) profitability in the 4Q, despite the sale of the Corporate travel business. Cashflow and the balance sheet were also stronger than expected.
In a sign of confidence, HLO has rewarded shareholders with a 10cps final dividend. Add maintained.
Tyro Payments (ASX:TYR) - Pointing to a clear increase in operating leverage in FY23
TYR's FY22 Reported NPAT appeared below Bloomberg consensus (-A$29m versus -A$20m), but the result beat at EBITDA (A$10.5m versus A$8m consensus) while the mid-point of FY23 EBITDA guidance was ~+25% above consensus.
Add maintained. Our key result takeaway was the market had been waiting for TYR to give evidence of improving operating leverage, with FY23 EBITDA guidance of A$23m-29m (FY21 A$10.5m) particularly meeting that criteria.
Healius (ASX:HLS) - Pieces coming together- "a platform for growth"
FY22 underlying results were broadly in line with expectations, with double-digit revenue growth and ongoing cost outs driving leverage and robust cash flow. Not surprising, COVID testing underpinned the result, while Imaging and Day Hospitals went backwards on COVID-impacted elective surgery restrictions, lockdowns and increased costs.
We adjust our FY23-24 forecasts and roll forward valuation multiples. Add maintained.
Generation Dev Group (ASX:GDG) - A clean performance
In our view, this was a pretty clean result (without any obvious surprises), and it represented a relatively solid performance overall. Management also noted FY23 has seen a good start to the year for Investment Bond (IB) sales, albeit outlook commentary was pretty broad as per usual.
We continue to believe GDG is well positioned to execute a compound earnings growth story over time. Add maintained.
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.
In the latest fiscal year, Wesfarmers Limited (ASX:WES) has impressively surpassed expectations, showcasing resilience amid challenging conditions.
FY22 Results Exceeding Expectations
Kmart Group, a standout performer, demonstrated a strong recovery in 2H22 following 1H22 lockdown impacts. Additionally, the FY22 Dividend Per Share (DPS) of 180cps exceeded forecasts and Bloomberg consensus. The Group's Return on Equity (ROE) surged by 330 basis points to an impressive 29.4%.
Challenges and Areas of Concern include a 120 basis points drop in the Group's EBIT margin to 9.3%. The Health division's EBIT, for the initial three months of ownership in FY22, reported at -$24 million. Furthermore, operating cash flow declined by 32% due to higher working capital, predominantly in inventory.
Retail trading conditions have remained robust, as assured by management through the first seven weeks of FY23. Projections for FY23-25F group underlying EBIT changes range between -1% and +3%.
Financial Performance
FY22 Result Overview: Underlying EBIT declined by 4% to $3,633 million, a 3% decrease in underlying NPAT to $2,352 million. Earnings in retail divisions were mixed, with Bunnings EBIT up slightly (+1%), while Kmart Group (-36%) and Officeworks (-14%) experienced weakness due to 1H22 lockdowns. The Industrials businesses had a good year, with WesCEF EBIT up 41% on the back of higher commodity prices, and Industrial & Safety EBIT rose 30%. EBIT for the newly created Health division (3 months) was -$24 million, including several one-off charges. Excluding these charges, Health EBIT was $12 million.
Bunnings and Kmart Performance
Bunnings Highlights
Bunnings FY22 EBIT rose by 1% on the back of 4.8% LFL sales growth. Although earnings were slightly below (-1%) forecasts, it was a commendable result given the strong growth over the past two years. EBIT margin fell 60 basis points to 13.1%, attributed to operational challenges related to COVID and ongoing supply chain disruptions. The change in mix from higher Trade activity also had a negative impact on margins. For FY23, Bunnings EBIT is forecasted to decrease by 3% to $2,248 million.
Kmart Group Resilience
Kmart Group FY22 EBIT decreased by 36% to $506 million, yet the result was 23% above forecasts. 2H22 performance (EBIT +12%) significantly improved from 1H22 performance (-58%), which was significantly affected by lockdowns. Trading conditions improved in 2H22 as restrictions eased. For FY23, Kmart Group EBIT is forecasted to jump by 67% to $843 million after cycling the lockdown impact in FY22.
Retail Conditions and Future Projections
Retail trading conditions have remained robust, particularly strong in Kmart Group, with sales significantly higher on both a one-year and two-year basis. Bunnings also continues to see positive sales growth on a one-year and two-year basis. Overall, the forecast for FY23 group underlying EBIT anticipates a 5% increase to $3,827 million.
Adjustments and Investment Outlook
Adjustments have been made to FY23F/24F/25F underlying EBIT by +3%/-1%/-1%. Underlying NPAT changes by -2%/-6%/-5%, reflecting a remodelling of net interest expense. The equally-blended (PE, SOTP, DCF) target price falls, maintaining the Add rating. Trading at 22.5x FY23F PE and a 3.8% yield, WES remains an attractive investment with a diversified group of retail and industrial brands, a solid balance sheet, and a strong leadership team poised to deliver long-term value for shareholders.
Wesfarmers Limited (ASX:WES)
WES's FY22 result was comfortably above expectations.
Management said retail trading conditions have remained robust through the first seven weeks of FY23. FY23-25F group underlying EBIT changes by between -1% and +3%. We maintain our Add rating. We continue to view WES as a core portfolio holding for long-term investors.
Ramsay Health Care (ASX:RHC)
FY22 results continue to be materially impacted by COVID and higher costs, with margins contracting to multi-year lows and profit falling by double-digits.
Despite lingering volatility and FY24 a "normal" trading year, it takes a back seat to KKR's now revised offer, which we believe is likely to get up in some form. We have adjusted our FY23-24 earnings, rolled forward our valuation multiples, and maintained a takeout premium. Move to Add.
Universal Store (ASX:UNI)
We believe UNI will deliver double-digit growth in sales and earnings in FY23 as an expanded store network plays into the resilience of demand for fashion apparel from a young customer cohort experiencing high levels of employment, higher wages and more and more opportunities to go out and socialise.
FY22 earnings were slightly better than expectations. We have increased our EPS estimates by 5% in FY23 and by 1% in FY26.
Peter Warren (ASX:PWR)
PWR's FY22 underlying NPAT of A$61.7m was up 18% on the pcp, beating expectations.
We are conscious of the operating deleverage impact when GM 'normalises', however more constrained supply is likely to persist for some time.
Industry consolidation will continue - we expect PWR to be a participant (primary growth driver), or even a potential target in time.
Jumbo Interactive (ASX:JIN)
FY22 was a year of solid growth in revenue and earnings for JIN. The business continued to diversify its earnings base, with SaaS now making up nearly half of group EBITDA.
We reiterate our Add rating. We expect JIN to continue to achieve steady growth in the years ahead through a combination of organic contract wins, M&A and diversification.
Monash IVF Group Ltd (ASX:MVF)
MVF posted a solid FY22 result which was in line with expectations and sustained the high level of stimulated cycles on the bumper FY21 year. Strong industry fundamentals remain in play, and MVF continues to gain market share and attract new fertility specialists.
We maintain our Add recommendation.
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We preview the FY22 results of the five gaming stocks in our universe that report in August. We expect the best earnings growth from the two businesses primarily exposed to lotteries, Jumbo Interactive (JIN) and The Lottery Corporation (TLC).
Star Entertainment Group (SGR), Tabcorp (TAH) and BlueBet (BBT) are forecast to report a decline in EBITDA due mainly to the impact of COVID and increased operating expenditure. We have lowered EBITDA estimates in both FY22 and FY23 for all companies except JIN. We have downgraded SGR to HOLD.
The ratings for Aristocrat Leisure, BBT, JIN and TLC all remain ADD and TAH remains on a HOLD.
Watch
The Lottery Corporation (TLC) - ADD
TLC's FY22 result will be its first since the demerger with TAH. We expect a steady performance with EBITDA up 13% to $691m. The larger Lotteries division is forecast to deliver all of the growth in earnings (EBITDA up 18%), with Keno EBITDA down 15% after a strong FY21. We have updated the number of large jackpots in our model, which takes our FY22 EBITDA estimate down by 2%, 1% below consensus. We forecast 5% growth in EBITDA into FY23.
The Star Entertainment Group (SGR) - HOLD (previously ADD)
FY22 was a tough year for SGR. COVID restrictions enforced casino closures and operating restrictions. Regulatory investigations have been ongoing and could result in material penalties. We expect FY22 earnings to be down materially y/y. We have lowered our FY22 EBITDA forecast by 28% to $220m to take account of higher operating costs, bringing us in line with consensus.
Tabcorp (TAH) - HOLD
TAH held an investor day in June and we do not expect incremental new detail on the strategy to be released at the FY22 result. The focus is likely to be more on the costs and practicalities of the demerger, the impact of recent POCT changes and that of recent adverse weather. We have lowered our EBITDA estimate by 5% to $369m, 2% above consensus. We forecast 12% growth in EBITDA into FY23.
Jumbo Interactive (JIN) - ADD
We expect FY22 to have been another year of good growth for JIN. We have increased our EBITDA estimate by 3% to $55m, up 13% y/y with most of the growth driven by the rapidly expanding SaaS division. Higher assumed costs leave our EBITDA and EBIT estimates 3% below consensus. We forecast 24% growth in EBITDA into FY23.
BlueBet (BBT) - ADD
BBT's Australian business is forecast to achieve strong growth in turnover in FY22 (48%) as it increases marketing costs to drive customer acquisition. Those higher marketing costs are likely to reduce EBITDA in Australia to breakeven, with the investment in the US growth strategy pushing group EBITDA to a forecast loss of $1.2m. We have lowered our FY22 gross profit estimate by 4%. BBT has just signed an agreement for its fourth US state. The longer-term potential is significant.
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.
