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.

New additions this month: CSL Limited (ASX:CSL), Qantas (ASX:QAN), Mineral Resources (ASX:MIN) and Megaport (ASX:MP1).

Removals: BHP Group (ASX:BHP), AGL Energy (ASX:AGL), Incitec Pivot (ASX:IPL), Healius (ASX:HLS) and IDP Education (ASX:IEL).

Large cap best ideas

Commonwealth Bank (ASX:CBA)

The second largest stock on the ASX by market capitalisation. We view CBA as the highest quality bank and a core portfolio holding for the long term, but the trade-off is it is the most expensive on key valuation metrics (including the lowest dividend yield). Amongst the major banks, CBA has the highest return on equity, lowest cost of equity (reflecting asset and funding mix), and strongest technology. It is currently benefitting from the sugar hit of both the rising rate environment and relatively benign credit environment.

Westpac Banking Corp (ASX:WBC)

We view WBC as having the greatest potential for return on equity improvement amongst the major banks if its business transformation initiatives prove successful. The sources of this improvement include improved loan origination and processing capability, cost reductions (including from divestments and cost-out), rapid leverage to higher rates environment, and reduced regulatory credit risk intensity of non-home loan book. Yield including franking is attractive for income-oriented investors, while the ROE improvement should deliver share price growth.

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 despite softening macro-economic conditions.

CSL Limited (ASX:CSL) - New Addition

A key portfolio holding and key sector pick, we believe CSL is poised to break-out this year, a COVID exit trade, 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 offering good value trading around its long term forward multiple of 31.5x.

Treasury Wine Estates (ASX:TWE)

TWE owns much loved iconic wine brands, the jewel in the crown being Penfolds. We rate its management team highly. The foundations are now in place for TWE to deliver strong earnings growth from the 2H22 over the next few years. Trading at a material discount to our valuation and other luxury brand owners, TWE is a key pick for us.

ResMed Inc (ASX:RMD)

While we expect the next few quarters to be volatile as COVID-related demand for ventilators continues to slow and core sleep apnoea volumes gradually lift, nothing changes our medium/longer term view that the company remains well-placed as it builds a unique, patient-centric, connected-care digital platform that addresses the main pinch points across the healthcare value chain.

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.

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 9x FY23F PE.

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.

Telstra (ASX:TLS)

After a major turnaround, TLS has emerged in good shape with strong earnings momentum and a strong balance sheet. In late CY22 shareholders vote on Telstra's legal restructure, which opens the door for value to be released. TLS currently trades on ~7x EV/EBITDA. However some of TLS’s high quality long life assets like InfraCo are worth substantially more, in our view. We don’t think this is in the price so see it as value generating for TLS shareholders. This, free option, combined with likely reputational damage to its closest peer, following a major cybersecurity incident, means TLS looks well placed for the year ahead.

Qantas Airways (ASX:QAN) - New Addition

QAN is now our preferred pick out of our travel stocks under coverage given it has the most near-term earnings momentum. Looking across travel companies globally, airlines are now in the sweet spot given demand is massively exceeding supply. 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 EBITDA 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 (forecasting a A$400m on-market share buyback to be announced at 1H23 result). There is also likely upside to our forecasts and consensus if QAN achieves its FY24 strategic targets.

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.

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

Seek (ASX:SEK)

Of the classifieds players, we continue to see SEEK as the one with the most relative upside, a view that’s based on the sustained listings growth we’ve seen over the period. The tailwinds that have driven elevated job ads (~210k currently, broadly flat on the robust pcp) and strong FY22 result appear to still remain in place, i.e. subdued migration, candidate scarcity and the drive for greater employee flexibility. With businesses looking to grow headcount in the coming months and job mobility at historically high levels according to the RBA, we see these favourable operating conditions driving increased reliance on SEEK’s products.

Xero (ASX:XRO)

XRO is a high quality cash generative business with impressive customer advocacy and duration. Over the last 12 months rising interest rates and competition have made things harder for Xero. However, we see the current short-term weakness as a rare opportunity to buy a high quality global growth company at a discount to the life time value of its current customer base.

Morgans clients can download our full list of Best Ideas, including our mid-cap and small-cap key stock picks.

• As attention turns to the February first half reporting season, earnings estimates continue to defy expectations of an imminent slowdown. However, fears that they will materially decelerate in 2H23 will temper sentiment when anticipated headwinds from rising interest rates hits home.
• Quantity and quality of earnings will come into focus as the macro takes a back seat to company fundamentals. Key themes to watch include FY23 earnings trends, cyclical signposts (consumer demand, industrial margins), China restart short selling and positioning in resources.
• Morgans analysts preview the results for 145 stocks under coverage that report in February and call out likely surprise and disappoint candidates from page 14.
• Key tactical trades (page 3) include Qantas (ASX:QAN), Megaport (ASX:MP1), Lovisa (ASX:LOV), Coles (ASX:COL) and HomeCo Daily Needs REIT (ASX:HDN).

No imminent slowdown

As attention turns to the February first half reporting season, earnings estimates continue to defy expectations of an imminent slowdown. ASX 200 earnings remain resilient despite deep cuts to estimates in other developed markets.

We point to the lack of guidance, frequency of trading updates and less acute inflation as reasons why forecasts have held up against the negative sentiment.

Headline estimates point to ASX Industrials growing 5.5% EPS in FY23 before tracking sideways in FY24-25. While growth looks subdued, corporate performance divergence will provide investors with opportunities. The broad valuation de-rating in 2022 will also give some further shelter.

With renewed focus on fundamentals, identifying companies that are less prone to earnings erosion will be key. These include companies that have a growing earnings profile, strong cash flow profiles and are trading at reasonable valuations.

Our preferred exposures include Qantas (ASX:QAN), Telstra Group (ASX:TLS), QBE Insurance Group (ASX:QBE), Treasury Wine Estate (ASX:TWE), and Corporate Travel Management (ASX:CTD).

Consumer and commodities – playing the cycle

The long-anticipated consumer slowdown so far has been more gentle than the market feared. We expect 1H retail results overall to be reasonable, but investors will be ever-cautious on the 12-month outlook.

However, we don’t see a ‘cliff’s edge’ for retail with the pace of decline potentially less pronounced than analysts are forecasting. The current balance of market expectations supports price strength in the more resilient retailers, especially those capable of growing market share (JBH, BLX, and UNI).

Dramatically improved sentiment – fueled by China re-opening – has arguably pushed the resources sector slightly ahead of fundamentals. While the medium-term outlook is compelling, we expect a bumpy ride in 2023 and prefer to stick with key producers South32 (ASX:S32), Mineral Resources (ASX:MIN), Santos (ASX:STO), and Karoon Energy (ASX:KAR).

Volatility bound – decoding the short interest signals

As the ASX 200 closes in on its 2022 high, short interest has been accumulating. We think illiquidity and uncertain trading conditions have brought short positions sharply into focus.

We’ve argued that earnings will attract greater focus this season as macro concerns affecting equities have eased in recent weeks.

We think conditions are ripe for volatility in and around the results with average days-to-cover increasing and significant crowding in individual stocks.

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;

• 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:

1. 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.
2. 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.
3. 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.

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.

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.