Insights

Our 'Best Calls to Action' aim to navigate you through the current reporting season by showcasing stocks with strong buying potential. They also offer insights into stocks that might not be ideal for growth right now. These recommendations come from thorough analysis of market trends, financial health, and growth potential, ensuring you access high-value investment opportunities.

Happy to buy today

Reliance Worldwide (ASX:RWC) - Cost out mitigates weaker demand environment

RWC’s FY24 result overall was slightly better than expected. Key positives: FY24 underlying EBITDA margin (ex-Holman) rose 20bp to 22.3% vs management’s guidance for stable margins; Cost savings of US$23m were above management’s target of US$20m with further benefits expected in FY25.

We maintain our ADD rating.

Judo Capital Holdings (ASX:JDO) - Onwards and upwards

JDO met FY24 expectations and laid out the building blocks for 15% PBT growth into FY25. We think this outlook is an important stepping stone from the earnings nadir in 2H24 into the very strong growth we believe JDO can achieve in subsequent years (PBT +70% in FY26F and +42% inFY27F).

We maintain our ADD rating.

Trim/Funding Source

Ansell (ASX:ANN) - Moving in the right direction; but uncertainties remain

FY24 was mixed, with earnings tracking guidance but ahead of expectations, supported by one off items, but with revenue in line and OCF strong. Industrial sales and margins both improved on manufacturing efficiencies and carryover pricing, offsetting declining sales and contracting margins in Healthcare on inventory destocking and slowing of production to address inflated inventories.

We maintain our HOLD rating.

Baby Bunting Group (ASX:BBN) - Baby steps after a rocky year

BBN’s FY24 earnings were in line with recent guidance. Earnings came under real pressure in FY24. BBN expects to return to positive growth in sales and margins in FY25, but with an FY1 PE of 19.5x and with consensus NPAT sitting towards the top of the guidance range.

We adjust to a HOLD rating.

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Our ‘Best Calls to Action’ are designed to guide you through the current reporting season landscape by highlighting stocks with compelling buying prospects. It also provides insights into those that may not be viable for growth at this time. These selections are based on rigorous analysis of market trends, financial health, and growth potential, ensuring you have access to high-value investment opportunities.

Happy to buy today

Suncorp (ASX:SUN) - Looking to the future as a pure-play General Insurer

SUN's FY24 cash NPAT (A$1,372m) was ~-5% below consensus (A$1,425m), mainly due to a softer General Insurance result than expected. FY25 guidance points to solid earnings momentum continuing into this year, and we see SUN's unveiled FY25-FY27 business strategy as uncomplicated, and focused on driving the insurance business harder (which should be well received).

We maintain our ADD rating.

Trim/Funding Source

Westpac Banking Corp (ASX:WBC) - Q3 NIM improvement

The Q3 trading update indicated WBC is tracking ahead of previous expectations, with NIM higher and costs and impairment charges lower than prior forecasts. Mid-single digit EPS upgrades for FY25-26F. 12 month target price lifts 8% to $26.11 due DCF valuation upgrades.

We maintain our HOLD rating.

IRESS (ASX:IRE) - Stability and flexibility returned to the core

IRE reported 1H24 adjusted EBITDA of A$67m, up 52% on pcp (top-end of recent guidance); and up ~8% HOH (2% HOH revenue growth on stable costs). FY24 Adjusted EBITDA guidance was provided at A$126-132m, post asset sales. Whilst the previous 'exit run-rate' guidance is no longer being provided, we expect the 2H24 drivers should see the upper-end of guidance achievable.

We adjust to a HOLD rating.

Reece (ASX:REH) - Tough housing conditions persist

REH's FY24 result was slightly weaker than our expectations but largely in line with Bloomberg consensus. Key positives: Group EBITDA margin rose 30bp to 11.1% due to good cost control despite softer housing conditions in ANZ in 2H24; ROCE increased 20bp to 15.5%; Balance sheet remains strong with ND/EBITDA falling to 0.6x vs 0.9x in FY23. Key negatives: ANZ earnings were below our forecasts as conditions continued to soften; Management expects the near term to remain challenging in both regions.

We maintain our REDUCE rating.

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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.

Our ‘Best Calls to Action’ are designed to guide you through the current reporting season landscape by highlighting stocks with compelling buying prospects. It also provides insights into those that may not be viable for growth at this time. These selections are based on rigorous analysis of market trends, financial health, and growth potential, ensuring you have access to high-value investment opportunities.

Happy to buy today

Treasury Wine Estates (ASX:TWE) - Pivot to Luxury is paying off

TWE’s FY24 result held few surprises given the company’s recent trading updates. Pleasingly, its two Luxury portfolios and cashflow all slightly beat guidance. The much smaller and low margin Treasury Premium Brands (TPB) disappointed. Importantly, its targets for both of its Luxury wine businesses over the next few years were reiterated, and if delivered, will underpin double digit earnings growth out to FY27. While not without risk given macro headwinds, TWE’s trading multiples look attractive to us. and we maintain an Add recommendation.

We maintain our ADD rating.

Dexus Industria REIT (ASX:DXI) - Solid occupancy

The FY24 result was in line with upgraded guidance with rental growth helping to offset loss of income from asset sales. Occupancy strong at +99%. FY25 guidance comprises FFO of 17.8c (+2.3% on the pcp) and DPS of 16.4c which equates to an implied distribution yield of 5.8%. The balance sheet remains solid with look-through gearing around 27% ensuring there is capacity to complete the committed development pipeline which will enhance future rental growth. Asset sales are also likely to be considered.

We maintain our ADD rating.

Trim/Funding Source

Telstra Group (ASX:TLS) - Adjusting for growth

The FY24 underlying result came in towards the lower end of expectations. NPS (customer advocacy) and return on capital continue to improve while the heavily lifters remained Mobile (61% of EBITDA and +9% yoy) and InfraCo Fixed (21% of EBITDA and +6% yoy). Growth here more than offset declines elsewhere.

We recommend a REDUCE rating.

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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.

If you’re making investment decisions today, consider focusing on these key opportunities. Our ‘Best Calls to Action’  feature stocks that present compelling buying prospects right now.

CSL (ASX:CSL) - Behring continues to do the heavy lifting

CSL Ltd. FY24 results were broadly in line, with double-digit underlying top and bottom line growth and strong OCF. Strong plasma collections drove Behring sales (+15%), while Seqirus was soft (+4%) on reduced immunisation rates, albeit above market, and Vifor grew modestly given follow-on products in some EU markets.

We retain our Add rating.

James Hardie (ASX:JHX) - 2QFY25 softness as the market awaits rate cuts

JHX has reiterated its FY25 guidance, while forecasting ‘particularly challenging’ conditions for 2QFY25, resulting in 2Q guidance falling c.13%short of consensus (and our) adjusted net income expectations. This weak 2Qinvariably places additional weight on 2H25, which includes a seasonally weaker December period. With management reiterating FY25 adjusted net income guidance of U$630-700m, we set our forecast at the lower end of the range, acknowledging that lower interest rates will be a positive, when they occur.

We retain our Add rating.

HealthCo REIT(ASX:HCW) - Asset sales, capital management remain on agenda

The FY24 result saw portfolio metrics remain stable (cash collection 100%; occupancy 99%; and WALE +12 years). NTA $1.64. Asset recycling has been a focus during FY24 and management has flagged it will continue to look at asset sales in FY25, although no further detail around the quantum of divestments at this stage.

We retain our Add rating.

Challenger (ASX:CGF) - Continuing to see good earnings momentum

CGF’s FY24 normalised NPAT (A$417m) was in-line with consensus and +14% on the pcp. Overall, we saw this as a positive FY24 result highlighted by a strong improvement in Life business margins/returns, good group cost control and an upward step change in CGF’s capital position.

We retain our Add rating.

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.

As reporting season kicks off, investors and analysts alike turn their attention to a critical period of corporate transparency. As ASX-listed companies disclose their earnings, our analysts identify key tactical calls around August results, where stock price reactions are flagged to surprise or disappoint.

To help you navigate this reporting season, our team of analysts have handpicked a list of key stocks in the Bank and Fund Manager space that are worth keeping an eye on.

Banks

Insight from Nathan Lead – Senior Analyst

Bank stocks have outpaced broader market performance recently. However, the high share prices do not seem fully supported by projected Return on Equity (ROE) and Dividend per Share (DPS) growth, which are expected to remain relatively flat over the coming years.

The recent share price performance has largely been driven by an increase in key valuation multiples (Price-to-Earnings (P/E) and Price-to-Book Value (PBV)); CBA’s multiples are especially elevated, trading well above historical norms and peers at about 23x P/E and 3x PBV. Meanwhile, cash dividend yields have compressed significantly, making banks less attractive as an income investment; CBA stands out again given its yield has compressed to about 3.4%. Major domestic banks also appear overvalued compared to global peers, based on the relationship between PBV and Return on Equity.; once again CBA’s valuation appears particularly stretched.

In summary, while bank stocks have performed well, their elevated prices may not be justified by future financial prospects and seem high relative to both domestic and international standards.

Commonwealth Bank of Australia

ASX: CBA | REDUCE | 14 August 2024

The REDUCE rating we apply to CBA is not a recommendation for complete divestment; rather, it is a directive to reduce overweight positions. Given current valuations and earnings outlook, it is difficult to foresee substantial returns from investments in CBA over the next 3-5 years. Loan growth is expected to strengthen, and the decline in Net Interest Margin (NIM) may moderate. However, cost pressures are anticipated from increased amortisation and staff expenses and upward normalisation of credit impairment charges.

Asset quality remains resilient, with low write-offs and limited provisioning growth potentially seeing credit impairment expenses being lower than consensus estimates.

For 2H24, we project pre-provision operating profit and Cash EPS to be 3% lower than 1H24, and the DPS remain flat on pcp at $2.40 per share with an increasing payout ratio.

Capital management will be a focus, with CBA undertaking only minimal share buyback activity ($130 million in 2H24) to distribute excess capital.

Key results to watch:

Loan Growth and NIM: Loan growth is expected to strengthen, while the decline in Net Interest Margin (NIM) is anticipated to moderate.

Cost Growth: An increase in costs is projected, primarily due to higher amortisation and staff expenses.

Asset Quality: Asset quality is likely to remain resilient, with low write-offs and minimal provisioning growth, potentially surpassing consensus expectations.

Capital Management: Watch for how CBA plans to distribute excess capital, given it spent only $130 million on share buybacks in 2H24.

Judo Capital aka Judo Bank

There’s more positive outlook on the small-cap JDO, which specialise in SME-focused business lending. As its ROE improves with earnings growth, we anticipate so too should its Price-to-Book Value. The company is reinvesting its earnings rather than paying dividends, which should result in high single-digit to low double-digit compound annual Book Value per share growth. Although JDO is a higher risk investment proposition than the major banks given it is a challenger bank, it offers the potential for higher returns. JDO presents a compelling opportunity if it meets its at-scale targets, potentially becoming Australia's fastest-growing, most efficient, and profitable bank. Current prices suggest a potential internal rate of return (IRR) of approximately 13% per annum over the next five years. For FY24, the projected profit before tax (PBT) is $107-112 million with gross loans of $10.5-10.7 billion. FY25 PBT is expected to rise to $123-129 million, reflecting about 15% growth.

Key results to watch:

Growth and Efficiency: If the company meets its ambitious targets, it could become the fastest-growing, most efficient, and most profitable bank in Australia.

Stock Valuation: Achieving its at-scale targets could make the stock worth around $2.50 per share, thanks to increased book value per share and a higher price-to-book ratio.

Investment Potential: Purchasing the stock at current prices could offer an estimated annual return of about 13% over the next five years.

Fund Managers | Platforms

Insights from Scott Murdoch – Senior Analyst

GQG Partners

ASX: GQG | ADD | 16 August 2024

Whilst current market conditions are volatile, we expect a positive reaction to GQG’s results. Key investment highlights include a potentially significant performance fee boost, notable operating leverage in the half, and impressive funds under management (FUM) growth of 29%, which supports a strong outlook. Additionally, diversification through the Private Capital Solutions business adds value long-term. Key financial expectations are for management fees up 49% compared to the previous period, and operating profit to increase by 65% including our performance fee expectations (57% excluding performance fees).

Key Results to watch:

Performance fee kicker: We think GQG can report above market expectations, with a kicker from performance fees.

Operating Leverage: Margin improvement is expected on the back of strong revenue growth.

Strong FUM growth: Funds under management grew by 29% in the last half, setting up a solid outlook.

Diversification: Expansion through the new Private Capital Solutions segment to provide diversification.

Want to unlock more investment insights? Our Reporting Season Playbook previews the upcoming results for the period to June 2024 of 155 stocks under coverage. In the report, we call out positive and negative surprise candidates and present an overview of the macroeconomic backdrop.

Become a Morgans client to download the 2024 Playbook.

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.

A strong result from Eli Lilly overnight came amid a 2.3% surge in the S&P 500, the best day for the index since 2022. Eli Lilly raised sales and profit guidance for the year after a strong performance by its diabetes and weight loss drugs Mounjaro and Zepbound.

Most of the US companies we’re watching have now reported and the frequency of results now slows down. Stocks of interest still yet to report include Home Depot (13 August), Cisco (14 August), Walmart (15 August), Palo Alto Networks (19 August) and NVIDIA (28 August).

Eli Lilly

In contrast to yesterday’s lacklustre result from Novo Nordisk, Eli Lilly knocked it out of the park overnight with a strong Q2 result and an increase in its full year guidance. Quarterly sales of the Zepbound weight-loss drug passed $1 billion for the first time. Supply of both Mounjaro and Zepbound increased during Q2 and Lilly said it was able to backfill orders and increase stocks at wholesalers. Lilly now expects adjusted profit of $45.4-46.6 billion in 2024, up from $42.4-43.6 billion. Some investors have speculated that the strong performance of Eli Lilly in the period means it is outmaneuvering Novo Nordisk in the push to increase manufacturing capacity.

The roundup

Almost all US companies have now released their quarterly earnings. The median EPS beat has been 4.2% and the median yoy EPS growth 9.7%.