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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GrainCorp (ASX:GNC) has outperformed expectations in FY21, driven by a record east coast grain crop, strong demand, stellar Processing results, and strategic initiatives. The outlook for FY22 remains optimistic with another anticipated above-average crop.
FY21 Financial Results
In FY21, EBITDA soared to A$330.8m, surpassing the guidance range of A$310-330m. NPAT stood at A$139.3m, within the A$125-140m guidance range. The company declared a final dividend of 10cps ff and initiated a A$50m on-market share buyback.
GrainCorp's success is attributed to a record east coast grain crop, robust global demand, and the outstanding performance of strategic initiatives, notably in Processing (EBITDA A$77.7m, up 71%). The company improved market share, enhanced grower engagement, and optimized its supply chain.
Despite net debt rising to A$599.2m, core debt remained minimal at A$1.2m. Investments continued in areas like animal nutrition, alternative protein, and AgTech.
FY22 Outlook
Anticipating an above-average 2021/22 crop, GrainCorp expects significant benefits from the 4.3mt carry-over grain from FY21. This positions the company to commence high-margin grain exports immediately in FY22. Fee increases and sustained strong margins are forecasted, supported by robust demand and elevated crush margins due to high vegetable oil prices.
Investment View
Earnings forecasts for FY22 have been upgraded by 15.9% for EBITDA and 24.3% for NPAT. The positive crop outlook may also contribute to stronger FY23 earnings.
With the SOTP valuation rising, reflecting earnings upgrades, and a favourable operating environment, an Add rating is maintained. The upcoming ABARES Crop report on November 30 is expected to be a pivotal event for the stock.
Explaining ETFs
ETFs are primarily passive investments as they replicate indices with no active management value-add. The themed ETFs may be semi-active in that they may apply an independently-compiled index but with differing rules on how to define the theme.
While most ETFs available to Australian investors today track an index, some active managers also see an ETF as an attractive structure for growth and have made their strategies available as an actively managed ETF.
They are open-ended (i.e. they can create more units as demand requires) so in that regard they are similar to managed funds but ETFs have the advantage of greater transparency and liquidity through trading on the stock exchange.
ETFs also have an advantage over listed investment companies (LICs) in that they can be bought and sold for close to the value of the underlying asset (i.e. index) and do not suffer the discount/premium that being subject to demand places on LIC share prices. This usually results in the ETF price very closely matching the performance of the asset.
However, a buy/sell spread of prices does exist for ETFs. It can be quite narrow for large, liquid funds but wider when the underlying asset is less liquid (for example, some commodities), or if the market for its assets trades in a different time zone (i.e. international indices) meaning there is a risk premium paid to the ETF trader to cover unknown pricing outcomes.
If the ETF’s underlying assets produce income, investors will receive regular income distributions. Like managed funds, ETFs pass on this income untaxed and franking credits can also be passed through.
Management expense ratios (MERs) are quite low compared to managed funds, ranging from as little as 0.15% to 1.0% for some international share offerings.
Given the strong growth in ETFs, the range of products on offer has become very wide. New ETF providers entering the market are providing different choices to suit all types of investors, providing an opportunity to access new "themes" such as ESG, Climate Change, Cloud Computing, Robotics, etc. Importantly, prior to investing into any type of ETF it is imperative the investor understands the nature and risks of that ETF product.
Investment strategies using ETFs
The benefit of investing in ETFs is that it gives the investor access to markets that are not easily accessible in Australia and/or are not cost efficient such as international shares (particularly region or theme specific), currencies and commodities.
Diversification is gained across sectors in a cost-efficient manner (i.e. you like the outlook for Energy but don’t have the funds to buy more than one or two companies and don’t want the risk of picking an underperformer).
An investor can invest small amounts in a broadly diversified basket ETF as a low cost way to get exposure to the Australian sharemarket, or in addition to the Australian sharemarket to enhance diversification.
Use limit orders rather than market orders to better ensure a more favourable execution from a price perspective (speak to your broker or adviser about this).
An investor can also transition funds into the market without having to pick individual company exposure. This may be useful if you have large amounts to invest and want to do this over time and/or if you are uncertain which sectors may perform going forward but still want exposure to the sharemarket.
This has been a relevant strategy during the period when resources have outperformed but many investors were uncomfortable investing in them directly given their cyclical nature. An investment in the broader index would have meant not missing out on one sector’s significant contribution.
In summary, ETFs are a useful investment vehicle for:
- Transparency – you know what companies and/or exposure you have through a published index.
- Cost efficiency – low MERs compared to unlisted managed funds.
- Tax efficiency – passed through dividends and franking credits. Often low turnover usually only based on index changes so that forced capital gains are not a feature of ETFs.
- Liquidity – ETFs trade on a T+2 basis and are required to always have a buy/sell price on screen when the market is trading (achieved through a market maker).
- Diversification – allowing you more options to invest in baskets or specific themes/sectors.
However, you should also be aware of some of the risks:
- Structure – there are many different structures used by ETFs and some of these may expose investors to third party default risk. Investors need to examine the security of the issuer, whether the fund is physically-backed by assets, the custodial arrangement for the assets, the use of derivatives or security lending, and other issues.
- Passive investment – while many ETFs will provide broad or specific market returns they are still a passive investment. An astute investment adviser should add value to your portfolio returns through the active management of your investments.
Feel free to speak with your Morgans adviser to learn more about Exchange Traded Funds (ETFs) and whether they might be an appropriate investment choice for you.
Reference: Morningstar Australasia Pty Ltd, 2015
The third quarter of 2021 saw Viva Energy Australia (ASX:VEA) navigating through challenges, albeit slightly softer than anticipated. However, the company stands resilient, poised for growth as New South Wales (NSW) and Victoria (VIC) embark on the path to reopening. Let's delve into the details.
Performance Overview
Despite facing a marginally softer quarter, Viva Energy Group maintained a robust position. Retail volumes and margins may have trailed slightly behind expectations, while commercial performance remained steady. The refining sector experienced a mix of outcomes, reflecting the complex landscape of the period.
Anticipated Recovery
The imminent reopening of NSW and VIC presents a promising outlook for Viva Energy. As lockdown measures ease and 55% of the population resumes typical travel patterns, the company anticipates a robust fourth quarter in 2021. With this resurgence in retail fuel volumes, VEA stands primed for a significant rebound.
In conclusion, Viva Energy Australia emerges from the challenges of the past quarter in a favorable position. As lockdown restrictions diminish and consumer behavior normalizes, the company's trajectory toward recovery appears promising. Maintaining our Add recommendation, we foresee a period of growth and resilience for VEA.
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.
Perpetual (ASX: PPT) has released its 1Q22 business update, showcasing a solid performance and positive prospects.
Key Highlights
Perpetual Asset Management (PAM) Growth
AUM growth of 3% in Perpetual Asset Management (PAM) to A$101bn. Return to positive PAM inflows, totalling +A$0.1bn.
Corporate Trust and Perpetual Private Expansion
There has been 5%-9% FUA growth in Corporate Trust. Perpetual Private experiences 9% growth in FUA, reaching A$18.5bn.
Financial Outlook
Upgrade of PPT FY22F/FY23F earnings by 2%/4%. Our price target increased based on this outlook. Relatively undemanding valuation at ~16x FY22F PE.
1Q22 Update Details
In the 1Q22 update, PAM's total AUM reached A$101bn, with notable improvements in net inflows, particularly in Perpetual Asset Management Australia (PAMA). Corporate Trust and Perpetual Private also demonstrated substantial growth.
Despite mildly positive PAM fund flows, the overall trend is encouraging, and the recent acquisitions of Barrow Hanley and Trillium position PPT for a robust global investment management platform. With CEO Rob Adams leading the way, the company's valuation remains undemanding, presenting an attractive investment opportunity.
Investment Outlook
The recent acquisitions lay the foundation for PPT's global expansion, potentially driving significant share price upside. Trading at ~16x FY22F PE, the valuation is seen as undemanding, warranting an "ADD" recommendation.
Aristocrat Leisure (ASX:ALL) has set its sights on a strategic move that could reshape its position in the online real money gaming (RMG) space. The proposed acquisition of UK-listed Playtech for an enterprise value of A$5.0bn marks a significant step towards expansion and innovation in a rapidly evolving market.
Seizing Opportunities in the Online RMG Sector
In a dynamic landscape where time is of the essence, Aristocrat Leisure recognizes the need for swift action. The US online RMG industry is undergoing rapid change and liberalization, presenting a window of opportunity for growth. With the acquisition of Playtech, ALL gains immediate access to technology platforms and B2B relationships, accelerating its journey towards becoming a powerhouse in the US and global online RMG market.
Leveraging Market-Leading Content
Aristocrat Leisure's strength lies in its market-leading content, particularly in iGaming. By marrying its robust content portfolio with Playtech's capabilities, the company positions itself for success in the competitive online RMG arena. While the inclusion of retail sports betting may present challenges, the overarching strategy remains compelling.
Financial Implications and Outlook
Despite potential imperfections in the deal, the acquisition of Playtech offers tangible benefits. Notably, the prospect of mid to high single-digit EPSA accretion in Year 1 and a pro forma ND/EBITDA below 2.5x underscores the soundness of the move. With updated estimates reflecting the premium for the acquisition, analysts remain bullish, reiterating an ADD rating and emphasizing the long-term value proposition of Aristocrat Leisure.
In conclusion, Aristocrat Leisure's proposed acquisition of Playtech signifies a bold strategic move with significant potential rewards. As the company navigates the complexities of the online RMG landscape, investors are encouraged to view this development through a lens of long-term growth and value creation. With a clear vision and a commitment to innovation, ALL stands poised to back the right horse in the evolving world of online gaming.
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.
With interest rates the lowest we have seen for years (for many, ever), the debate about whether we should be paying down non-deductible debt first or funding additional superannuation contributions is once again topical.
What is the best strategy?
In reality there is no right or wrong answer as it depends on the circumstances for each person or family. Some of the issues that would need to be considered are
- personal income tax rates
- age and how close you are to retirement
- single or family status
- level of debt
- desire for financial security (or certainty of the outcome)
Generally, a younger couple taking on a home loan could be more inclined to pay off as much of the debt as possible if surplus funds are available. Superannuation may not be on their radar given the length of time before they could access funds. If the younger couple are thinking about starting a family the current low-rate environment provides a great opportunity to get ahead in loan repayments should they have to move to one income.
An already established family may want to use the time to get ahead as much as possible with their loan repayments in case unexpected expenses occur in the future e.g. education costs, home renovations or a new family car.
A person, or couple, closer to retirement, however, may view super contributions as the better strategy to maximise returns on investment. Investing more into superannuation, with the ability to generate higher returns compared to repaying a lower rate of debt, could be a more effective strategy particularly if the person, or either of the couple, is on a high marginal tax rate. Salary sacrificing or deductible self-employed contributions, depending on the person's work status, may be a more attractive strategy for utilising surplus cashflow.
Case Study
Maggie has reached her preservation age of 57 years (date of birth: 7 February 1962). Her financial situation is:
Repaying Home Loan First
Maggie could use her surplus cash and increase loan repayments each year by $30,000 up to retirement. It is estimated her debt will be completely repaid by age 65, allowing Maggie to retire debt free.
Maximising Super Contributions First
Alternatively, Maggie could maximise her super contributions by contributing $30,000 each year until retirement into her super fund. Contributions could be a mix of concessional (deductible) and non-concessional contributions. At retirement at age 65, any debt outstanding could be repaid by withdrawing a tax free amount from super.
There may be other strategies available to pre-retirees which may also provide greater flexibility to enhance savings. Strategies such as a transition to retirement pension could be an option if preservation age has been reached. Salary sacrificing into super may be used in conjunction with this pension strategy. Again, at retirement any remaining debt could be paid using tax free withdrawals from super.
Outcome
Our analysis of the two scenarios identifies maximising superannuation as the better outcome for Maggie at retirement, which is what we would have expected.
Again, however, what is right for one person may not be right for another. It really depends on the circumstances and how much 'certainty' is desired by the individual or couple. That is, paying off a home loan and seeing the debt reduce can psychology be more rewarding for some more so than others.
Analysis
Chart A : Comparison of Net Assets at Retirement (in today's dollars)
Chart B : Comparison of Investment Returns over 7 years to Retirement
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