Insights
Investment Watch is a quarterly publication for insights in equity and economic strategy. Recent months have been marked by sharp swings in market sentiment, driven by shifting global trade dynamics, geopolitical tensions, and policy uncertainty.
Investment Watch is a quarterly publication produced by Morgans that delves into key insights for equity and economic strategy.
This publication covers
Economics - 'The challenge of Australian productivity' and 'Iran, from the Suez blockade to the 12 day war'
Asset Allocation - 'Prioritise portfolio resilience amidst the prevailing uncertainty'
Equity Strategy - 'Rethinking sector preferences and portfolio balance'
Fixed Interest - 'Market volatility analysis: Low beta investment opportunities'
Banks - 'Outperformance driving the broader market index'
Industrials - 'New opportunities will arise'
Resources and Energy - 'Getting paid to wait in the majors'
Technology - 'Buy the dips'
Consumer discretionary - 'Support remains in place'
Telco - 'A cautious eye on competitive intensity'
Travel - 'Demand trends still solid'
Property - 'An improving Cycle'
Recent months have been marked by sharp swings in market sentiment, driven by shifting global trade dynamics, geopolitical tensions, and policy uncertainty. The rapid pace of US policy announcements, coupled with reversals, has made it difficult for investors to form strong convictions or accurately assess the impact on growth and earnings. While trade tariffs are still a concern, recent progress in US bilateral negotiations and signs of greater policy stability have reduced immediate headline risks.
We expect that more stable policies, potential tax cuts, and continued innovation - particularly in AI - will support a gradual pickup in investment activity. In this environment, we recommend prioritising portfolio resilience. This means maintaining diversification, focusing on quality, and being prepared to adjust exposures as new risks or opportunities emerge. This quarter, we update our outlook for interest rates and also explore the implications of the conflict in the Middle East on portfolios. As usual, we provide an outlook for the key sectors of the Australian market and where we see the best tactical opportunities.
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Medibank (ASX:MPL) recently held its Annual General Meeting (AGM), where it reaffirmed key guidance metrics for the fiscal year 2024. Additionally, the Australian Prudential Regulation Authority (APRA) has released industry statistics for the Private Health Insurance (PHI) sector for the September quarter. In this analysis, we'll delve into these updates and provide insights into their implications for Medibank and the broader industry.
Medibank AGM Highlights
At the AGM, Medibank reiterated its guidance metrics for the fiscal year 2024, signalling confidence in its performance and outlook. This reaffirmation provides stakeholders with clarity and reassurance regarding the company's trajectory.
APRA's PHI Industry Statistics
APRA's release of industry statistics for the PHI sector offers valuable insights into market dynamics. Notably, the statistics indicate continued reasonable growth in industry policyholders, albeit with rising hospital treatment benefit growth, suggesting evolving trends within the sector.
Forecast Adjustments
Following a review of our earnings assumptions, we have made nominal changes to our Medibank EPS forecasts, reflecting adjustments of approximately 2%. Despite these adjustments, our price target remains largely unchanged.
Analysis
While the current operating environment appears relatively favourable for Medibank, with continued growth in policyholders and reasonable industry dynamics, we maintain a cautious stance. Trading at 18x FY24F PE, we view Medibank as fair value. Therefore, we maintain our HOLD recommendation on the stock.
In conclusion, the updates from Medibank's AGM and APRA's industry statistics offer valuable insights into the company's performance and broader market trends. As always, investors should conduct thorough research and consider their investment goals before making any decisions.
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Webjet (ASX:WEB) recently reported a robust 1H24 result that surpassed expectations. In this analysis, we delve into the highlights of the report, including the exceptional performance of WebBeds, industry-leading margins, and strong operating cash flow.
Performance Highlights
The standout performer in the 1H24 result was WebBeds, which achieved record bookings, surpassing pre-COVID levels by 50%. Additionally, the company showcased industry-leading margins and demonstrated strong operating cash flow, indicating a healthy financial position.
Outlook Commentary
While the outlook commentary was upbeat, recent geopolitical events have impacted bookings over the last six weeks. Despite this, FY24 EBITDA guidance aligns with our forecasts. However, if the impact from the ongoing events is short-lived, it could potentially prove conservative.
Investment Insights
With significant market share still up for grabs, we maintain an Add rating on Webjet, considering it a high-quality growth stock. Based on our forecasts, WEB is currently trading at a FY25F PE of 15.8x, which is notably lower than its five-year average PE (pre-COVID) of 20.6x.
Technology One (ASX:TNE) recently announced its latest financial results, which surpassed expectations, with revenue momentum standing out as a highlight. Notably, management has advanced their target of achieving $500 million in Annual Recurring Revenue (ARR) to FY25, bringing it forward from the previously projected FY26. This represents a significant acceleration in the company's growth trajectory.
Revenue Momentum
The strong performance in revenue underscores Technology One's resilience and ability to capitalize on market opportunities. The company's ability to exceed expectations bodes well for its future prospects and reinforces investor confidence.
Forecast Analysis
While the financial results were slightly better than anticipated, we have made marginal adjustments to our forecasts. Despite the positive momentum, we maintain our Hold recommendation on the stock.
Technology One's decision to advance its ARR target demonstrates its confidence in its business model and growth strategy. The company's ability to adapt and innovate positions it as a leader in the technology sector. Investors should closely monitor Technology One's performance as it continues to supercharge its ARR and pursue its ambitious targets.
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Brickworks (ASX:BKW) recently provided a trading update ahead of its Annual General Meeting (AGM) today. The update revealed positive Q1FY24 Building Product EBIT results compared to the prior corresponding period (pcp). However, management expressed concerns regarding a softening outlook and announced plans to undertake maintenance work to manage stock levels. Additionally, the company anticipates a decline of approximately 10% in property net asset values for the first half of FY24, attributed to an increase in capitalization rates.
Trading Update Highlights
Brickworks' trading update presents a mixed picture, with positive EBIT results tempered by concerns about future prospects. Management's cautious commentary, particularly regarding the property segment, suggests potential challenges ahead.
Outlook and Analysis
The outlook commentary from Brickworks appears to be among the weakest within the building product peer group. Lower earnings are anticipated over the next 12 to 24 months, with the forecasted property cap rate change likely reflecting a catch-up with current market pricing trends.
Investment Insights
Despite Brickworks' share price trading at a discount to the inferred Net Asset Value (NAV), concerns about earnings headwinds relative to consensus forecasts lead us to maintain a Hold recommendation. We would consider upgrading our stance to Add if the share price were to approach $20/sh. However, our preferred exposure in the building products sector currently lies with CSR.
Brickworks faces short-term headwinds amid a challenging operating environment, particularly in the property segment. While the company's long-term value proposition remains intact, investors should exercise caution given the uncertainties in the near term.
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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.
