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.
As interest rates normalise, earnings quality, market positioning and balance sheet strength will play an important role in distinguishing companies from their peers. We think stocks will continue to diverge in performance at the market and sector level, and investors need to take a more active approach than usual to manage portfolios.
Additions: This month we add Elders.
July best ideas
Elders (ELD)
Small cap | Food/Ag
ELD is one of Australia’s leading agribusinesses. It has an iconic brand, 185 years of history and a national distribution network throughout Australia. With the outlook for FY25 looking more positive and many growth projects in place to drive strong earnings growth over the next few years, ELD is a key pick for us. It is also trading on undemanding multiples and offers an attractive dividend yield.
Technology One (TNE)
Small cap | Technology
TNE is an Enterprise Resource Planning (aka Accounting) company. It’s one of the highest quality companies on the ASX with an impressive ROE, nearly $200m of net cash and a 30-year history of growing its earnings by ~15% and its dividend ~10% per annum. As a result of its impeccable track record TNE trades on high PE. With earnings growth looking likely to accelerate towards 20% pa, we think TNE’s trading multiple is likely to expand from here.
ALS Limited
Small cap | Industrials
ALQ is the dominant global leader in geochemistry testing (>50% market share), which is highly cash generative and has little chance of being competed away. Looking forward, ALQ looks poised to benefit from margin recovery in Life Sciences, as well as a cyclical volume recovery in Commodities (exploration). Timing around the latter is less certain, though our analysis suggests this may not be too far away (3-12 months). All the while, gold and copper prices - the key lead indicators for exploration - are gathering pace.
Clearview Wealth
Small cap | Financial Services
CVW is a challenger brand in the Australian retail life insurance market (market size = ~A$10bn of in-force premiums). CVW sees its key points of differentiation as its: 1) reliable/trusted brand; 2) operational excellence (in product development, underwriting and claims management); and 3) diversified distributing network. CVW's significant multiyear Business Transformation Program has, in our view, shown clear signs of driving improved growth and profitability in recent years. We expect further benefits to flow from this program in the near term, and we see CVW's FY26 key business targets as achievable. With a robust balance sheet, and with our expectations for ~21% EPS CAGR over the next three years, we see CVW's current ~11x FY25F PE multiple as undemanding.
GUD Holdings
Large cap | Consumer Discretionary
GUD is a high-quality business with an entrenched market position in its core operations and deep growth opportunities in new markets. We view GUD’s investment case as compelling, a robust earnings base of predominantly non-discretionary products, structural industry tailwinds supporting organic growth and ongoing accretive M&A optionality. We view the ~12x multiple as undemanding given the resilient earnings and long-duration growth outlook for the business ahead.
Stanmore Resources
Small cap | Metals & Mining
SMR’s assets offer long-life cashflow leverage at solid margins to the resilient outlook for steelmaking coal prices. We’re strong believers that physical coal markets will see future cycles of “super-pricing” well above consensus expectations, supporting further periods of elevated cash flows and shareholder returns. We like SMR’s ability to pay sustainable dividends and its inventory of organic growth options into the medium term, with meaningful synergies, and which look under-recognised by the market. We see SMR as the default ASX-listed producer for pure met coal exposure. We maintain an Add and see compelling value with SMR trading at less than 0.8x P/NPV.
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Following the Federal Reserve's latest two-day monetary policy meeting, Morgans Chief Economist Michael Knox says, "yes the FED rates will fall, but only so far."
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Following the RBA's recent decision to hold interest rates, RBA Governor Michelle Bullock said, "where we are now is where we need to be." Chief Economist Michael Knox gives his comments on this saying that the RBA are giving us stability for the near future.
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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: This month we add Pilbara Minerals (ASX:PLS), Universal Store (ASX:UNI), Beacon Lighting (ASX:BLX) and Avita Medical (ASX:AVH).
Removals: This month we remove Macquarie Group (ASX:MQG), Aristocrat Leisure (ASX:ALL), Lovisa (ASX:LOV), A2 Milk (ASX:A2M), Corporate Travel (ASX:CTD), Transurban (ASX:TCL), Qantas (ASX:QAN) and Tourism Holdings (ASX:THL).
Large cap best ideas
Treasury Wine Estates (ASX:TWE)
It may take some time for the market to digest TWE’s acquisition of Paso Robles luxury wine business, DAOU Vineyards (DAOU) for US$900m (A$1.4bn) given it required a large capital raising. The acquisition is in line with TWE’s premiumisation and growth strategy and will strengthen a key gap in Treasury Americas (TA) portfolio. Importantly, DAOU has generated solid earnings growth and is a high margin business. It consequently allowed TWE to upgrade its margins targets. While not without risk given the size of this transaction, if TWE delivers on its investment case, there is material upside to our valuation. The key near-term share price catalyst is if China removes the tariffs on Australian wine imports.
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.
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.
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. We see MIN’s lithium / iron ore market exposures as an ideal combination to benefit from the China gradual recover. 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.
Pilbara Minerals (ASX:PLS) - New addition
We view PLS as a fundamentally strong and globally significant hard-rock lithium miner. The company has successfully executed on ramping up the expansion of Pilgangoora, while progressing plans to expand output (P680 and P1000). Supported by a strong balance sheet, with net cash at ~A$2.1bn at the end of December, PLS’ expansion plans remain uniquely undeterred by the significant weakness in lithium prices. For PLS, the best form of defence against lithium prices is to stay on the attack, with its medium-term plans to continue expanding its production aimed primarily at building greater economies of scale and a more defensive margin.
Woodside Energy (ASX:WDS)
A tier 1 upstream oil and gas operator with high-quality earnings that we see as likely to continue pursuing an opportunistic acquisition strategy. WDS’s share price has been under pressure in recent months from a combination of oil price volatility and approval issues at Scarborough, its key offshore growth project. With both of those factors now having moderated, with the pullback in oil prices moderating and work at Scarborough back underway, we see now as a good time to add to positions. Increasing our conviction in our call is the progress WDS is making through the current capex phase, while maintaining a healthy balance sheet and healthy dividend profile. WDS still has to address long-term issues in its fundamentals (such as declining production from key projects NWS/Pluto), but will still generate substantial high-quality earnings for years to come.
Morgans clients can download our full list of Best Ideas, including our mid-cap and small-cap key stock picks.
- Australian corporates again shrugged another reporting test, navigating slowing demand and higher interest rates to post respectable half-year results in February.
- The market’s surge since late 2023, pushing prices to narrow discounts, appears a bigger hurdle to 2024 upside for the ASX20 leaders than earnings or economic fundamentals.
- We explore key themes including: 1) resurgent activity in mid/small caps including M&A; 2) politicisation of supermarket profits; 3) a resilient high-end consumer; and 4) better-than-feared A-REIT results.
- Our best ideas from reporting season include: RMD, NXT, TWE and QBE. Tactical small cap opportunities include: UNI, HLO, AVH, AHL, HCW and AIM.
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February results snapshot and 2024 outlook
Overall, February results provided another important signpost that the health of Australian listed companies remains in good shape. Large-cap stocks missing expectations did remain slightly elevated, reflecting a softer economy. However, this trend, along with a pickup in dividend payout ratios, did improve on August lows, offering comfort that Australian corporates are in robust shape.
Earnings expectations for FY24 actually ratcheted 0.5% higher led by the Banks, Healthcare and Retail. This suggests ongoing conservatism in market forecasts, offering some margin of safety against surging valuations. While plenty of companies did miss expectations, price reactions across the market were positively skewed reflecting a sense that results were largely better-than-feared.
We’re not calling the start of another bull market but do see plenty of reasons to be optimistic in 2024. A likely reduction in interest rates, cooling inflation and plenty of dry powder should be broadly supportive for equities. While there will be some bumps along the way, barring an economic collapse, we think the next 12 months will be kind to investors.
However, discounts to consensus price targets among the market leaders have narrowed significantly. In fact Morgans analysts retain an Add on only four out of the ASX20 large-caps we cover (COL, CSL, S32, WDS). This narrows the path for returns in 2024. We think the best opportunities lie among smaller caps and those positively leveraged to declining interest rates and stickier inflation (A-REITs, small growth and cyclicals).
Solid earnings not enough to sustain large cap valuations
The market’s 12% rally from November to January provided resistance against rewarding larger companies at February results. The ASX 20 large-caps had a sluggish February, easing 0.4%, as heavyweights BHP, WDS, CSL, TLS and WOW fell between 5-9%.
Results were mostly inline but we think a tepid growth outlook (Banks), political risk (Supermarkets) and above-average valuations (ex-Resources) contributed to these stocks’ inability to find another gear
Small-cap resurgence takes shape
Small/mid-cap growth and cyclicals were the bigger story in February, providing a higher proportion of results beating expectations, with a higher-than-average number positively surprising on margins and revenue. Earnings forecasts also held up well in key cyclical segments.
Notably, cyclicals (Retailers, Industrials) represent a larger proportion of the small cap index than for large-caps. So, if the slowdown proves to be milder than anticipated and earnings hold, valuations provide plenty of support here.
We expect plenty of ongoing opportunities in small-caps as the segment continues to re-base. Fresh small-cap opportunities being called out by Morgans analysts include Helloworld, NextDC and Universal Stores.
M&A tailwinds in place
M&A activity has returned with some vigour with ABC, BLD, CSR, APM, AWC, AND, SLC, and AVG having received recent interest.
Activity looks set to accelerate on belief in a turn in the interest rate cycle combined with plentiful cashed-up buyers (particularly private equity and super funds) seeking acquisitive growth as an alternative to sluggish organic growth.
Morgans analysts nominate 24 companies with takeover appeal including Judo Bank, Dalrymple Bay Infrastructure, Tyro Payments, Pilbara Minerals and AI Media.
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.
Trustees are required to prepare and implement an investment strategy for the SMSF. The investment strategy provides a framework by which investment decisions are made for the fund.
It should be unique to the requirements of the fund and its members. It should also be reviewed regularly and updated as required.
Preparing an investment strategy
The strategy must reflect the purpose and circumstances of the fund and consider:
- investing in such a way as to maximise member returns having regard to the risk associated with holding the investment
- appropriate diversification and the benefits of investing across a number of asset classes (eg shares, property, fixed interest, cash) in a long term investment strategy
- the ability of the fund to pay benefits as members reach retirement and other costs incurred by the super fund
Investment options
Members can tailor their own investment strategies and select specific investments such as listed shares, managed funds, term deposits, cash and property.
Investment restrictions
Trustees must understand investment restrictions of an SMSF. You cannot:
- carry on a business within the fund
- access funds until condition of release is met (cessation of employment, full retirement, incapacity or death)
- lend money
- breach in-house assets test
- use SMSF assets for personal use (ie don’t buy groceries with SMSF chequebook)
- acquire certain assets from a member or related party
Following the latest meeting of the Reserve Bank of Australia (RBA), Morgans Chief Economist Michael Knox explains that the RBA minutes don’t say rate cuts are a shoo in at all.
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