Insights

Investing in Strong Leadership

When it comes to equity investment, the prowess of leadership can be a defining factor in a company's success. Visionary leaders inspire, unite, and drive businesses towards achieving enduring shareholder value. In the Month Ahead for July 2023, we spotlight four companies distinguished by their exceptional leadership.

Endeavour Group

Endeavour Group (EDV) is Australia’s largest retail liquor and hospitality business with a retail network of around 1,700 stores across two key brands – Dan Murphy’s and BWS – and operates a portfolio of around 350 licensed venues providing a range of hospitality services including food and beverage, gaming and accommodation.

EDV has strong market positions with ~40% share in the retail liquor sector (vs #2 Coles with ~14% share) and ~9% share in hotels (vs #2 Australian Venue Co. with ~4% share). We believe the share price weakness over the past 12 months reflects the market’s concern around the potential for tighter poker machines regulation, increased capex due to higher hotels acquisitions and whether management can achieve their 15% return on investment by year two, and the extent to which consumers will keep spending in hotels as cost-of-living pressures increase.

We see these concerns as valid but believe them to be more than reflected in the current share price. Using a sum-of-the-parts valuation, if we apply a multiple for the Retail division that is broadly in line with where Woolworths (WOW) and Coles Group (COL) are currently trading, at EDV’s current share price we estimate the market is valuing the Hotels division at 4x EBITDA.

Finding a direct comparison in the listed space for hotels is not easy but we note that the likes of Aristocrat Leisure (ALL), Tabcorp (TAH), Star Entertainment Group (SGR) and Sky City Entertainment Group (SKC) are all trading on EV/EBITDA multiples of 6.5–12.0x. Therefore, we think the balance of risks for EDV from here is weighted to the upside.

Goodman Group

Goodman Group (GMG) is an integrated property group with operations throughout Australia, New Zealand, Asia, Europe, the United Kingdom, North America and Brazil. GMG is the largest industrial property group listed on the Australian Securities Exchange (ASX) and one of the largest listed specialist investment managers of industrial property and business space globally.  

With continued increases in interest rates and persistent inflation (most notably construction costs), risks surround the REIT sector. Therefore, when buying shares in real estate companies (or trusts), it is important to seek out businesses that can push rents up to combat these headwinds - companies with actual pricing power.

This has driven our preference for industrial property ('sheds'), given the strength of those underlying operating markets. Given real estate's sensitivity to higher interest rates, we prefer those active managers who can grow Assets Under Management (AUM) and add value from an active buy, build, manage strategy. To this end, strong balance sheets are also key to navigating any decline in book values.

With these preferences in mind, we see a buying opportunity in industrial property giant Goodman Group (GMG), as a high-quality, founder-led group with a robust balance sheet and real pricing power.

GQG Partners

GQG Partners (GQG) is a global asset management boutique, that manages over US$95bn in funds across four primary equity strategies. The business has a philosophy of client alignment (fee structure and staff ownership), highly effective distribution, and scalable strategies that have enabled rapid funds under management (FUM) growth since being founded in 2016.

Against structural industry pressure on management fees, GQG's relatively recent inception has allowed its founders (CIO Rajiv Jain and CEO Tim Carver) to create a sustainable model suitable to the current industry backdrop.  

GQG's long-term investment performance has been solid (outperforming its strategy benchmarks) and the group’s investment style has seen this delivered with less volatility and through various market conditions. This outperformance has resulted in GQG continuing to attract fund flow (US$5.9bn in 2023 to May) whilst most domestically listed peers are seeing outflows.

The group has exceptional global distribution which it expects to leverage over time through additional teams or funds. Whilst key man risk (Rajiv Jain as CIO) is high in GQG, we think the valuation and dividend of around 9% outweigh the risk. GQG has delivered strong results against a tough market backdrop - with some market performance, we think the stock can perform well.

Corporate Travel Management

After hitting a recent high of $21.62 in mid-April, shares in Corporate Travel Management (CTD) have fallen to under $18.00. We note that the entire travel sector has been sold off in the last couple of weeks despite some generally positive updates, albeit they might not have included the earnings upgrades the bulls had hoped.

CTD is the world’s fifth-largest corporate travel management company. This founder-led business successfully managed the COVID travel downturn without raising new equity to restore its balance sheet, unlike many of its peers. Throughout COVID, its balance sheet remained strong and it has no debt.

It was one of the first travel companies to declare a dividend. Following two attractive acquisitions made during COVID, material new client wins and structural cost savings and automation benefits from its technology, CTD will come out of COVID as a much larger business. Pre-COVID, CTD had a strong track record of reporting double-digit earnings growth and industry-leading margins and we expect that this will continue in the future.

We think the current weakness represents a great buying opportunity for patient investors. When travel demand eventually recovers, we think CTD’s share price will be materially higher than it is today. Based on our forecasts, CTD is trading on an FY24 (full recovery year) PE of only 16.5x, the cheapest it has been in some time (pre-COVID it traded on 25x).

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• A new regime of heightened volatility is playing out. The impact of higher interest rates is starting to be felt and counting on broad market moves won’t do now, in our view. That shift comes as US and European economies enter a period of stagnant economic growth. But we don’t see central banks coming to the rescue with rate cuts.
• We see opportunities in relative pricing and structural trends. We maintain a slightly cautious tilt this quarter: overweight cash, underweight Developed Market (DM) stocks and neutral fixed interest/Australian equities. But we are ready to seize opportunities as macro damage gets priced in.

Patience required

The combination of faltering economic growth and central banks still focused on above-target inflation will remain a challenging backdrop for most risky assets.

The recession now taking hold across advanced economies means some short-term pain is in store: risk assets, such as equities, will not turn the corner decisively until the economic outlook in the US brightens, even if safe asset yields fall a bit further in the interim.

Poor investor sentiment and elevated cash levels will ensure a relatively short-lived pullback in asset prices, so it’s important to remain nimble. Our tactical position retains higher cash but remains near fully invested given our view that the inflection point for risk assets will be difficult to time.

China’s recovery stalls but stimulus will aid growth in 2H 2023

After a promising start to the year, China's economic growth has recently slowed down, falling short of expectations as shown by recent weakness in key economic data. The central government had anticipated a post-COVID recovery in consumer spending that could drive growth to the c5% GDP growth target. However, due to concerns about housing market stability, this recovery faltered.

To address the issue, key interest rates were reduced to encourage banks to lend and kick-start a recovery in the real estate sector, which accounts for more than a quarter of China's economy.

At this stage, stimulus looks set to be fairly modest, so the near-term outlook still depends primarily on the extent of second-round effects on consumer confidence and spending.

Still, we remain cautiously optimistic that stimulus will support the recovery in 2H 2023 more than most anticipated. We play the recovery through Australian Resources and overweight to Emerging Markets equities.

Think small

Since the start of 2022 small companies have been in a downward trend with MSCI global large caps outperforming smalls by 9% over the past two years. Rising interest rates, market liquidity and falling investor sentiment have institutional and retail investors alike shying away from this segment of the market.

While it’s too early to call the bottom, we think there are good reasons for reallocating to small companies:

1. Fundamentals have broadly improved post-COVID.
2. Recent trends point to an improvement in liquidity.
3. Small companies typically offer superior earnings growth relative to large cap peers.

Key changes to our asset allocation settings

We maintain a cautious tilt this quarter: overweight cash, underweight developed market (DM) equities and neutral Australian equities. This is because we don’t believe the market has fully discounted the risk to earnings from a global slowdown.

We take a more constructive view on Australian equities with a bias toward small caps. Resilient commodity prices and strong employment conditions should see the Australian equity market outperform global peers.

Figure 1: Morgans recommended asset allocation settings

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.

Your Wealth is a half-yearly publication produced by Morgans that delves into key insights for Wealth Management. This latest publication will cover;

• Why it is important to have a strategic asset allocation framework for your investment portfolio particularly when investing over the long term
• Unpacking the Government's proposal to apply an additional tax on earnings where a person holds more than $3 million in total superannuation
• When is a lump sum withdrawal a member benefit or a death benefit?
• Why the RBA will need to raise interest rates further
• Big Dry Friday 2023; A day to connect city and country, providing support where it's needed most

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 | Understanding asset allocation

Strategic asset allocation (SAA) provides a framework within which investors can target an expected return for a given level of risk. It is one of the most important but overlooked aspects of wealth management. Here we detail how Morgans tailors its systematic approach to suit investors’ objectives versus risk tolerance.

Why is SAA important?

Strategic asset allocation ranks among the most crucial investment decisions as studies show that it accounts for up to 90% of long-term investing returns. That is, the distribution of investments across the asset classes explains most long-term returns, outweighing the impact of decisions made within each asset class such as stock selection

Understanding returns

Below, a matrix of Annual Asset Class Returns highlights the annual variability in returns per asset class. No single asset class will outperform another over the full course of an economic cycle. Each offers its benefits and risks depending on the prevailing economic conditions. It follows that investors should not stay concentrated within any one asset class over the course of an economic cycle.

To read the full coverage from the latest Your Wealth, begin your journey with Morgans today.

Domino's Pizza (ASX:DMP) recently announced significant measures to address ongoing challenges stemming from inflation, internal inefficiencies, and shifting customer demand. In response to these pressures, the company plans to implement radical cost-saving initiatives, aiming to achieve annualized savings of $53-59 million over the next two years. However, despite positive sales trends, margins continue to face challenges, leading to adjustments in earnings forecasts.

Addressing Operational Pressures

Domino's Pizza's decision to streamline its cost base reflects the company's proactive approach to addressing operational challenges. By identifying and implementing efficiency improvements, Domino's aims to enhance its profitability amid a changing business environment.

Trading Update and Forecast Adjustments

The latest trading update indicates a mixed performance, with sales showing improvement while margins remain under pressure. Consequently, we have revised down our EBIT forecasts for FY23 and FY24 by 12%, reflecting the impact of these challenges on the company's earnings outlook.

Investment Insights

Despite the recent headwinds, we maintain an Add rating on Domino's Pizza. While the company has faced setbacks in the past 18 months, we believe in its potential to rebound. Domino's track record of superior operating performance suggests resilience and adaptability, qualities that could drive a successful turnaround.

Domino's Pizza faces significant challenges in navigating the current business landscape, including inflationary pressures and shifting consumer preferences. However, the company's proactive approach to cost reduction and its history of operational excellence position it well for future growth. Investors should closely monitor Domino's performance as it works to overcome these obstacles and regain momentum.

In the wake of the current resource selloff, optimism towards China's near-term growth has tempered, providing an opportunity to accumulate quality sector exposures at a discount.

Commodity Compass and Strategic Insights

Iron ore stands out with surprising strength, closely followed by LNG and met coal, while copper, oil, and lithium chemicals show robust long-term fundamentals.

Preferred Sector Exposures

Discover our top sector picks among large caps, including BHP Group (ASX:BHP), Mineral Resources (ASX:MIN), and Santos (ASX:STO). Small caps present exciting opportunities with key selections like Karoon Energy (ASX:KAR), Whitehaven Coal (ASX:WHC), Strandline Resources (ASX:STA), and Panoramic Resources (ASX:PAN).

Resource Strategy Update

The resource market's value proposition is on the rise amid the ongoing broad selloff; however, a crucial element is still absent with Chinese growth persistently subdued.

This current downturn follows a surge in late 2022 share prices within the resource sector, driven by what we perceived as excessive optimism toward the prospects of a China recovery. It's not that we bear a negative stance on China; rather, we are cautious about paying upfront for a demand recovery without clear visibility.

Remarkably, investor sentiment appears to have swung excessively in the opposite direction, unveiling compelling opportunities within the sector.

While we maintain caution about China's return to growth, we acknowledge this caution is already factored into resource equities' pricing. This confidence in sector value prevails, with a preference for safety over aggressive upside potential.

Commodity Insights

Iron ore stability in view? Our optimistic take on iron ore takes a contrarian stance. Despite the ongoing challenges in China's property market, a surge in infrastructure activity and baseload consumption is poised to bring demand into equilibrium with supply. We anticipate iron ore to remain well-supported within a steady range of US$100-$120/t in CY23, surpassing the highest cost production at approximately ~US$100/t.

Copper emerges as a standout favorite. Despite recent supply increases and a dip in manufacturing and construction activity impacting copper prices, its performance remains superior to other metals. While short-term volatility persists, our long-term bullish outlook on copper is unwavering. Declining average grades mined and limited new supply, coupled with the electrification mega trend, position copper for robust growth.

Coal stands firm in its long-term trajectory. The recent downturn in thermal and met coal prices has been sharp, particularly for thermal coal, where we anticipate further short-term price adjustments. This contrasts starkly with the enduring fundamentals of the coal sector, marked by ESG pressures and sector headwinds resulting in increasingly constrained supply.

Preferred Large and Small Cap Picks

Anticipating ongoing volatility in the short term as markets eagerly await a China recovery, our optimism lies in commodities demonstrating reduced downside risk, specifically iron ore, LNG, and met coal, along with those boasting robust long-term fundamentals like copper, oil, coal, and lithium chemicals. Among large caps, our top preferences are BHP (most preferred), MIN, and STO, while in the small caps arena, key picks include KAR, WHC, STA, and PAN. Emphasizing shareholder returns, we anticipate a focus on earnings or cash flow, acknowledging potential volatility in dividends but expecting them to consistently outperform the market.

Sydney, a city brimming with opportunities and dreams, paints a picture of endless possibilities. However, for women like me, beyond Sydney's shimmering façade, the harsh reality of the lack of affordable housing in casts a shadow over their aspirations. In this blog post, I want to share my personal experience and shed light on the unique challenges women face in finding affordable housing in Sydney, Australia.

The Cost Barrier

The exorbitant cost of living in Sydney has reached alarming heights, making it increasingly difficult for women to secure affordable housing. As a university student and young professional, our limited financial resources are stretched to the brink by soaring rents and high bond payments. Many of us find ourselves locked out of the housing market, burdened by unaffordable rents that drain our bank accounts and leave us grappling for stability.

Gender Pay Gap Amplifies the Struggle

Adding to the financial strain is the persistent gender pay gap that women face in the workforce. It's disheartening to know that our male counterparts may have an easier time affording housing, putting us at a disadvantage from the start. Unequal access to income and career opportunities only exacerbate the housing crisis, perpetuating a cycle of financial insecurity and limited options for women. For example, Average affordable rent for women is lower than men, $482.70 p/w compared with $561.87 p/w ^{(Average weekly ordinary time earnings, full time adults, Australia, by sex, May 2022)} and the average female worker needs an extra year to save for a home deposit, compared to her male peer ^{(ABS 2021 Census, Time Series. Table T14)}.

Mental health and homelessness

The constant battle to find affordable housing takes a significant toll on womens' mental health. The stress and anxiety of navigating the housing market, worrying about rent hikes or eviction notices, can leave us feeling overwhelmed and disheartened. The persistent fear of homelessness or unstable living arrangements adds an emotional burden that affects our overall well-being and hampers our ability to focus on other aspects of our lives, such as education or career advancement. This is realised through the growing rates of female homelessness, particularly for older women aged 65-75 comprising the fasted growing group ^{(ABS 2049 Estimating Homelessness. 2006 Table 5, 2011 Table 12, 2011 Table 1.12)}

Further Domestic and Family Violence (DFV) is a leading cause of homelessness for women and children, with the proportion of Specialist Homelessness Services (SHS) clients experiencing DFV growing from 32 per cent of all clients in 2012–13 to 40 per cent in 2016–17.

Commute and Time Constraints

For women who cannot afford housing close to our workplaces or educational institutions, long commutes become a harsh reality. The hours spent traveling each day can eat into our precious time, leaving little room for self-care, social activities, or pursuing additional opportunities. The mental and physical exhaustion resulting from lengthy commutes further impedes our ability to excel in our academic or professional pursuits.

Demand Outstrips Supply

One of the fundamental problems underlying the lack of affordable housing in Sydney is the immense demand that far exceeds the available supply. As the city's population continues to grow, the strain on housing resources intensifies, leaving women in an increasingly precarious situation. In a city with the second most unaffordable housing market in the world ^{(Demographia International Housing Affordability report, 2022)}, renters and first home buyers routinely come off second-best, with women adding a second dimension to these findings.

Urgent action is needed to bridge this gap and create sustainable solutions that prioritize the needs of women seeking affordable housing, as Australia is currently short affordable housing solutions. If I know anything it's that women like me deserve access to safe, affordable housing as a foundation to tackling the growing intersectional challenges we face in the workforce, the family and greater society.

Kylie Harding is an Investment Adviser who believes in free access to information about building financial literacy at every stage in life has the potential to empower women and inspire economies.

Contact Kylie today on [email protected] or 02 9998 4206.