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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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.
GrainCorp (ASX:GNC) recently released its FY23 financial results, which, although down from the record previous corresponding period (pcp), still reflect a commendable performance. Strong operating cash flow and a significant core cash position stand out as key highlights. As a result, the company has been able to reward shareholders with a substantial dividend payout and initiate a A$50 million share buyback program.
Financial Performance Highlights
Despite challenges, GrainCorp's ability to generate robust operating cash flow and maintain a sizable core cash position underscores its financial strength and resilience. These factors have enabled the company to return value to shareholders through dividend payments and share buybacks.
Outlook and Forecast Analysis
Looking ahead, the outlook for GrainCorp's earnings in FY24 appears challenging. ABARES forecasts a substantial decline of approximately 29% in the 2023/24 east coast winter grain crop, which is likely to impact earnings for the fiscal year. Additionally, moderating grain marketing and oil crush margins, coupled with no more UMG revaluations, further contribute to the anticipated decline in earnings.
Insights and Considerations
While GrainCorp's intrinsic value exceeds its current share price, the anticipated decline in earnings for FY24, along with the possibility of the company utilizing a significant portion of its core cash position for a new oilseed crush facility, warrants caution. Therefore, we maintain a Hold rating on the stock.
GrainCorp faces both opportunities and challenges in determining the best utilization of its cash reserves amid a changing market landscape. Investors should closely monitor the company's strategic decisions and financial performance as it navigates through these uncertainties.
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Ramsay Health Care (ASX:RHC) recently hosted an investor day and site tour, placing a spotlight on its Australian operations and ambitious digital initiatives, while a recent Asian joint venture sale provides a boost for balance sheet repair.
Australian Operations and Growth Outlook
There is a promising outlook for Ramsay Health Care's Australian operations, where activity across most specialties is on an upward trend, with improving volumes expected to fuel top-line growth.
Operating Leverage and Strategic Plan
There is a delicate balance between higher volumes and efficiency gains, as Ramsay Health Care embarks on a 5-year strategic plan to establish a best-in-class, digital-enabled integrative health care system.
Digital Transformation Challenges and Adjusted Earnings
Assess the feasibility of Ramsay Health Care's complex and ambitious digital transformation plan, understanding the adjustments made to FY24-26 earnings and the resulting decrease in the price target.
Commonwealth Bank (ASX:CBA) recently unveiled its 1Q24 trading update, revealing a stable performance with revenue, pre-provision operating profit, and cash NPAT aligning with the 2H23 quarterly average.
Fiscal Projections and Downgrades for FY25-26F
Explore the financial landscape as 3-4% cash EPS downgrades for FY25-26F emerge, driven by a combination of mild earnings adjustments and smaller future buyback assumptions.
Target Price Adjustments and Holding Strategy
Delve into the details of the revised target price, as Commonwealth Bank retains a HOLD rating. Uncover the reasoning behind the decision, with a potential -5% Total Shareholder Return (TSR), including a 4.4% cash yield.
