Insights

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.

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.

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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Ramsay Health Care (ASX:RHC) recently hosted an investor day and site tour, placing a spotlight on its Australian operations and ambitious digital initiatives, while a recent Asian joint venture sale provides a boost for balance sheet repair.

Australian Operations and Growth Outlook

There is a promising outlook for Ramsay Health Care's Australian operations, where activity across most specialties is on an upward trend, with improving volumes expected to fuel top-line growth.

Operating Leverage and Strategic Plan

There is a delicate balance between higher volumes and efficiency gains, as Ramsay Health Care embarks on a 5-year strategic plan to establish a best-in-class, digital-enabled integrative health care system.

Digital Transformation Challenges and Adjusted Earnings

Assess the feasibility of Ramsay Health Care's complex and ambitious digital transformation plan, understanding the adjustments made to FY24-26 earnings and the resulting decrease in the price target.

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.

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.

Additions: There are no new additions this month.

Removals: This month we remove Pilbara Minerals (ASX:PLS).

Large cap best ideas

Commonwealth Bank (ASX:CBA)

We rate CBA a HOLD at current prices. As well as being Australia’s largest bank, compared to its peers CBA has the highest ROE, lowest cost of capital, leading technology, largest position in the low risk residential mortgage market and largest low cost deposit base, and a loyal retail investor and customer base. However, investors pay for this quality via the highest earnings and asset-based multiples and lowest dividend yield amongst its peer group.

Westpac Banking Corp (ASX:WBC)

We endorse an ADD rating for WBC. WBC has a similar asset base, funding mix and domestic retail concentration as the premium priced CBA. However, its growth, profitability and ROE have been significantly weaker than this larger competitor, which is ultimately reflected in WBC’s lower earnings and asset-based trading multiples and higher cash yield. If WBC can materially improve its business performance (this is not without significant risk of disappointment) then an investment in its stock could deliver attractive returns as the share price rerates upwards and cash returns to investors lift.

Wesfarmers (ASX:WES)

WES possesses one of the highest quality retail portfolios in Australia with strong brands including Bunnings, Kmart and Officeworks. The company is run by a highly regarded management team and the balance sheet is healthy. We believe WES’s businesses, which have a strong focus on value, remain well-placed for growth and market share gains in a softening macroeconomic environment.

Treasury Wine Estates (ASX:TWE)

Given TWE's undemanding valuation compared to other luxury brand owners, we see value in TWE. With Penfolds outperforming expectations (makes up ~72% of our valuation) and a clear strategy to improve performance at Treasury America and Treasury Premium Brands, we expect earnings to accelerate from the 2H24 onwards. While risks remain, we back this management team to deliver. The key near-term share price catalyst is if China removes the tariffs.

Santos (ASX:STO)

The resilience of STO's growth profile and diversified earnings base see it well placed to outperform against the backdrop of a broader sector recovery. While pre-FEED, we see Dorado as likely to provide attractive growth for STO, while its recent acquisition increasing its stake in Darwin LNG has increased our confidence in Barossa's development. PNG growth meanwhile remains a riskier proposition, with the government adamant it will keep a larger share of economic rents while operator Exxon has significantly deferred growth plans across its global portfolio.

Macquarie Group (ASX:MQG)

We continue to like MQG’s exposure to long-term structural growth areas such as infrastructure and renewables. The company also stands to benefit from recent market volatility through its trading businesses, while it continues to gain market share in Australian mortgages.

CSL Limited (ASX:CSL)

While shares have struggled of late, we continue to view CSL as a key portfolio holding and sector pick, offering double-digit recovery in earnings growth as plasma collections increase, new products get approved and influenza vaccine uptake increases around ongoing concerns about respiratory viruses, with shares trading at 25x, a substantial discount (20%) to its long-term average.

ResMed Inc (ASX:RMD)

While weight loss drugs have grabbed headlines and investor attention, we see these products having little impact on the large, underserved sleep disorder breathing market, and do not view them as category killers. Although quarters are likely to remain volatile, nothing changes our view that the company remains well placed and uniquely positioned as it builds a patient-centric, connected-care digital platform that addresses the main pinch points across the healthcare value chain.

Transurban (ASX:TCL)

TCL owns a pure play portfolio of toll road concession assets located in Melbourne, Sydney, Brisbane, and North America. This provides exposure to regional population and employment growth and urbanisation. Given very high EBITDA margins, earnings are driven by traffic growth (with recovery from COVID) and toll escalation (roughly 70% by at least CPI and approximately one-quarter at a fixed c.4.25% pa). We think TCL will continue to be attractive to investors given its market cap weighting (important for passive index tracking flows), the high quality of its assets, management team, balance sheet, and growth prospects.

QBE Insurance Group (ASX:QBE)

With strong rate increases still flowing through QBE's insurance book, and further cost-out benefits to come, we expect QBE's earnings profile to improve strongly over the next few years. The stock also has a robust balance sheet and remains relatively inexpensive overall trading on 8x FY24F PE.

Aristocrat Leisure (ASX:ALL)

We have three key reasons for being positive on ALL. They are: (1) long-term organic growth potential. ALL is better capitalised than many of its competitors and has what we regard as a strong platform to continue investment in design and development in both its land-based gaming and digital businesses; (2) strong cash conversion and ROCE. ALL is a capital-light business despite its ongoing investment in Gaming Operations capex and working capital. It has a high level of cash conversion and ROCE; and (3) strong platform for investment. ALL has funding capacity for organic and inorganic investment in online RMG, even after the recent buyback. Its current available liquidity is $3.8bn.

Mineral Resources (ASX:MIN)

MIN is a founder-led business and top tier miner and crusher that has grown consistently despite barely issuing a share over the last decade. Also helping our investment view is that MIN’s diversification leaves it far more capable of tolerating volatility in lithium markets than its peers in the sector. We see MIN’s lithium / iron ore market exposures as an ideal combination to benefit from the China re-opening increase in demand during 1H’CY23. We also see MIN as well placed to grow into its valuation, even if we see unexpected metal price volatility, given the magnitude of organic growth in the pipeline.

South32 (ASX:S32)

S32 has transformed its portfolio by divesting South African thermal coal and acquiring an interest in Chile copper, substantially boosting group earnings quality, as well as S32's risk and ESG profile. Unlike its peers amongst ASX-listed large-cap miners, S32 is not exposed to iron ore. Instead offering a highly diversified portfolio of base metals and metallurgical coal (with most of these metals enjoying solid price strength). We see attractive long-term value potential in S32 from de-risking of its growth portfolio, the potential for further portfolio changes, and an earnings-linked dividend policy.

Goodman Group (ASX:GMG)

GMG represents c.27% of the ASX A-REIT index and is one of the few offshore earners in the A-REIT space. GMG rarely screens cheap against domestic peers, but within the context of its offshore peers, it consistently delivers higher returns at lower levels of leverage and at a comparable price to book ratio. Growth in Assets Under Management and development completions are a key determinant of value and an AUM of A$80bn (US$50m) is comparatively modest in a global context, whilst A$7bn (US$5.5n) of completions pa we see as likely sustainable. With continued increases in interest rates and persistent inflation (most notably construction costs), risks abound the REIT sector. This drives our preference for beds and sheds, reflecting the strength of those underlying operating markets. Given the duration risk from higher rates, we prefer more active managers who can grow AUM and add value from an active buy, build, manage strategy. To this end, strong balance sheets are also key to navigate any deterioration in book values.

Qantas Airways (ASX:QAN)

QAN is trading at a material discount compared to pre-COVID multiples, despite having structurally higher earnings, a much stronger balance sheet, a better domestic market position, a higher returning International business and more diversification (stronger Loyalty/Freight earnings). The strong pent-up demand to travel post-COVID should result in a healthy demand environment for some time, underpinning further earnings growth over FY24/25. QAN’s balance sheet strength positions it extremely well for its upcoming EBIT-accretive fleet reinvestment and further capital management initiatives (recently announced another A$500m on-market share buyback at its FY23 result).

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