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.
Morgans clients receive full access of the Best Ideas, including our large, mid and small-cap key stock picks.
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ESG stands for Environmental, Social and Governance; it refers to three main factors that investors consider with regard to an organisation’s ethical impact and sustainable practices. Socially conscious investors such as Not-For-Profits use ESG criteria to screen potential investments and assess whether they fit their values, mission or sustainability mandate.
According to the Responsible Investment Association Australasia (RIAA), 9 in 10 Australians expect their investments to be responsibly and ethically invested. This means investing funds in a way that does no harm, and ideally leaves the world in a better place.
Of particular interest to NFPs is the use of negative screening (also known as values-based or ethical screening). Negative screening is used to exclude companies from an investment portfolio on the basis of the industry in which they operate. This could involve screening for religious, ethical, moral and other social and environmental criteria (e.g. tobacco, gambling, weapons, animal testing). The other side is positive screening, where NFPs utilise ESG research to identify companies with superior ESG performance relative to industry peers.
In addition, incorporating ESG factors into an investment decision may even result in an outperformance effect.
It is important to be aware that particularly in the Australian context, there is a risk that imposing a large number of negative screens on a portfolio, can reduce the ability to diversify your portfolio. It may also deliver performance outcomes that differ from traditional market benchmarks.
Morgans has a specialist Not-For-Profit team that can assist you with all your ESG and negative screening questions. Get in touch with your Morgans adviser to find out more.
Examples of ESG issues
Environmental
- Climate change
- Waste and pollution
- Clean water and sanitation
- Affordable and clean energy
Social
- Supporting local communities
- Human rights
- Employee relations and diversity
- Quality Education
Governance
- Bribery and corruption
- Board diversity and structure
- Executive compensation
- Data security and customer privacy
Morgans Chief Economist Michael Knox's outlook for the world economy in 2024 is that growth will slow; inflation will fall; and money will flow into Stock Markets.
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In this analysis, we delve into the prospects of Aurizon Holdings (ASX:AZJ) and its anticipated performance in the upcoming fiscal years. While the company shows promising signs of robust EBITDA growth in FY24 and onwards, there are certain factors that might hinder its potential. Here, we examine the growth trajectory, dividend projections, and overall investment outlook for Aurizon Holdings.
Growth Projections
We anticipate Aurizon Holdings to exhibit significant EBITDA growth throughout FY24, with continued albeit slightly subdued growth in FY25-26. However, it's crucial to note that the potential escalation in debt service obligations might not be fully acknowledged in current market assessments.
Financial Outlook
Our analysis suggests a mid-teen compound growth in both earnings per share (EPS) and dividends per share (DPS) across FY24-26F. Notably, our forecast for FY26F dividends implies a noteworthy 7.1% cash yield at present prices, compared to 4.7% for FY24F. This signifies an attractive dividend proposition for investors considering Aurizon Holdings.
Investment Insights
Given the current market dynamics and our price target (accessible with login), we maintain a recommendation to HOLD Aurizon Holdings at current price levels. This stance is supported by the approximate 6% potential Total Shareholder Return (TSR) anticipated.
In conclusion, while Aurizon Holdings presents a solid growth narrative, it's essential for investors to consider the underlying factors, such as debt service obligations, before making investment decisions. With careful analysis and monitoring, Aurizon Holdings could still present an attractive investment opportunity despite the current pricing dynamics.
In this analysis, we delve into recent developments in the telecommunications (telco) sector, focusing on NBN and mobile pricing trends, updates on significant events such as the 5G spectrum auction, and our adjusted forecasts. Additionally, we'll discuss our revised sector view and provide insights into specific companies within the industry.
Revised Sector View
Based on our comprehensive analysis, we have adjusted our sector view for the telecommunications industry. This assessment considers various factors, including market dynamics, regulatory changes, and company performance.
Telstra Group (ASX:TLS)
While Telstra Group (ASX:TLS) remains a key player in the telco sector, we maintain a Hold rating on the stock. This decision is influenced by the perceived risk/reward profile, which we believe is negatively weighted due to its premium valuation.
TPG Telecom (ASX:TPG)
Conversely, we have an Add rating on TPG Telecom (ASX:TPG). We see a more favorable risk/reward scenario for TPG Telecom, driven by its comparatively lower valuation within the sector.
Superloop (ASX:SLC)
Despite its status in the small-cap segment, Superloop (ASX:SLC) continues to exhibit promising potential. We maintain an Add rating on Superloop, considering it to offer the best value proposition within its category.
In conclusion, the telco sector is undergoing significant changes, influenced by pricing trends, regulatory developments, and technological advancements.
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- Morgans research analysts re-set their sector views, strategies and best ideas as dynamic forces continue to challenge markets.
- Our approach in equities currently favours stocks with compelling risk/reward profiles among quality cyclicals and select mid-to-small caps.
- Preferred equity sectors include staples, healthcare and financials along with select travel exposure.
Our base case remains a cyclical slowdown / mild recession
Our Asset Allocation Update – 2024 Outlook 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 rangebound until there is more certainty on the interest rate trajectory either peaking/falling.
This scenario could have an interesting dynamic around small and mid-cap stocks. These companies were derated in 2023 as they grappled with higher interest rates, and their risk-reward profile looks attractive despite the recession risks. With central banks on high alert for persistent inflation, short-dated, high-quality credit should form the core part of the fixed income allocation. A mild recession would be positive for property because a small amount of inflation is positive for real estate. Furthermore, REIT prices have declined materially, which could lead to opportunities in areas that investors have overlooked in 2023 (retail/commercial REITs).
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.
Morgans sector analysts have downgraded their rating on the Telco sector to Slightly Underweight (from Neutral). Telco sits in the expensive defensive basket with the positives looking priced in. The sector could easily see downside risks, potentially as a funding source for a rotation into growth sectors in 2024.
Relative 3-month asset class performances
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Your Wealth is a half-yearly publication produced by Morgans, that delves into key insights for Wealth Management, including the key spotlight article ‘Innovative retirement income streams.’
This latest publication will also cover giving an early inheritance to your children, an economic update addressing a slowdown in US economic growth, and SMSF trustee education, emphasising the significance of a written investment strategy.
Download your copy today to receive the latest insights.
Innovative Retirement Income Streams
In February 2022, legislation was enacted which inserted a new covenant into the Superannuation Act that requires trustees of superannuation entities to develop a retirement income strategy for Australians who are retired or are approaching retirement. This covenant is known as the Retirement Income Covenant and requires large (non-SMSF) super fund trustees to have a strategy to assist beneficiaries to achieve and balance the following three objectives:
- maximising expected retirement income;
- managing expected risks to the sustainability and stability of their expected retirement income; and
- having flexible access to expected funds during retirement.
Since then, a number of new innovative products have been developed and introduced to the market.
Morgans has reviewed a number of these innovative products, the details of which are summarised in the latest publication of Your Wealth.
