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.

Additions: WH Soul Pattinson & Co (ASX:SOL).

Removals: There are no removals this month.

Large cap best ideas

Commonwealth Bank (ASX:CBA)

We rate CBA a HOLD at current prices. As well as being Australia’s largest bank, compared to its peers CBA has the highest ROE, lowest cost of capital, leading technology, largest position in the low risk residential mortgage market and largest low cost deposit base, and a loyal retail investor and customer base. However, investors pay for this quality via the highest earnings and asset-based multiples and lowest dividend yield amongst its peer group.

Westpac Banking Corp (ASX:WBC)

We endorse an ADD rating for WBC. WBC has a similar asset base, funding mix and domestic retail concentration as the premium priced CBA. However, its growth, profitability and ROE have been significantly weaker than this larger competitor, which is ultimately reflected in WBC’s lower earnings and asset-based trading multiples and higher cash yield. If WBC can materially improve its business performance (this is not without significant risk of disappointment) then an investment in its stock could deliver attractive returns as the share price rerates upwards and cash returns to investors lift.

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 and market share gains in a softening macroeconomic environment.

Treasury Wine Estates (ASX:TWE)

Given TWE's undemanding valuation compared to other luxury brand owners, we see value in TWE. With Penfolds outperforming expectations (makes up ~72% of our valuation) and a clear strategy to improve performance at Treasury America and Treasury Premium Brands, we expect earnings to accelerate from the 2H24 onwards. While risks remain, we back this management team to deliver. The key near term share price catalyst is if China removes the tariffs.

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.

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.

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.

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.

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.

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 in the sector. We see MIN’s lithium / iron ore market exposures as an ideal combination to benefit from the China re-opening increase in demand during 1H’CY23. 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.

Pilbara Minerals (ASX:PLS)

We rate PLS as our best pick of the pure-play lithium stocks. It is well funded, has a long resource life and is an established Australian operator with multiple growth options ahead of it. We think FY24’s starting cash balance of over $3.3bn combined with strong operating cashflow will allow the company to pursue a meaningful capital management program while simultaneously funding growth. Updates on the company’s downstream growth strategy are expected later this half which will guide towards the potential scope of special dividends and / or buy backs.

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.

Goodman Group (ASX:GMG)

GMG represents c.27% of the ASX A-REIT index and is one of the few offshore earners in the A-REIT space. GMG rarely screens cheap against domestic peers, but within the context of its offshore peers, it consistently delivers higher returns at lower levels of leverage and at a comparable price to book ratio. Growth in Assets Under Management and development completions are a key determinant of value and an AUM of A$80bn (US$50m) is comparatively modest in a global context, whilst A$7bn (US$5.5n) of completions pa we see as likely sustainable. With continued increases in interest rates and persistent inflation (most notably construction costs), risks abound the REIT sector. This drives our preference for beds and sheds, reflecting the strength of those underlying operating markets. Given the duration risk from higher rates, we prefer more active managers who can grow AUM and add value from an active buy, build, manage strategy. To this end, strong balance sheets are also key to navigate any deterioration in book values.

Qantas Airways (ASX:QAN)

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 earnings 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 (recently announced another A$500m on-market share buyback at its FY23 result).

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

Expanding Our Coverage Universe

Explore these new additions to our coverage and stay ahead of the curve in the ever-evolving investment landscape. Whether you're seeking stable blue-chip options or higher-risk opportunities, Morgans has you covered.

PolyNovo (PNV)

PolyNovo is a medical device company that specialises in the development and commercialisation of dermal regenerative solutions. The approved devices, NovoSorb® BTM and NovoSorb® MTX, are synthetic polymer-based scaffolds designed to be used in the treatment of burns and surgical wounds.

PolyNovo’s NovoSorb® technology has gained rapid market traction, initially in burns and extending into trauma. We talked to some surgeons about it and their conversations gave us confidence in the effectiveness of the product.

We believe PolyNovo’s growth trajectory will see revenue tip over $A100m within just two years. PolyNovo itself thinks the overall market potential of its current devices is US$1.7bn, of which it has less than 4% share. Clinical trials could support expanded indications.

PolyNovo may also enter into new geographies. We estimate these factors will drive revenue growth by ~30% pa over the next three years. On 5 September, we initiated coverage with a target price of A$1.88 and an Add recommendation.

CSR Limited (CSR)

CSR manufactures and distributes building products to its 18,000+ customers across Australia and New Zealand, as well as maintaining a portfolio of surplus land and 25% interest in the Tomago aluminium smelter. We think CSR is well positioned for long-term growth, having cemented its position as a leading manufacturer and supplier of building materials.

We believe it is more than capable of innovating to capture further market share. In our opinion, investment in CSR’s sustainable building material, Hebel, and property earnings upside through FY25-30 will underpin sustainable earnings growth.

CSR’s property division holds a suite of projects capable of delivering material earnings over the next 5-10 years. Short-term macroeconomic factors mean that CSR’s FY24 result will likely disappoint the market (it has a March year-end), with earnings expected to decline on the prior year.

Over the medium-term, however, we do anticipate earnings to be resilient, with CSR to benefit from the residential construction backlog, along with the latent demand for additional affordable housing. At the time of our report on 11 September, we saw all this as largely reflected in the share price, which was up 30% for the year at that point (it has since fallen back a bit).

We initiated coverage with a Hold recommendation and a 12-month target price of A$6.30/share.

True North Copper (TNC)

True North Copper is an emerging copper producer in the Mount Isa district, of north-west Queensland. Immediate production from its Cloncurry Project offers True North the potential to self-fund exploration across an extensive portfolio of known copper deposits.

The company holds a highly strategic and complementary portfolio of copper assets in a well serviced copper region, where we think the value of in-situ copper will only continue to appreciate in line with the market.

The stock looks far too cheap to us against comparable peers given our expectation of a significant uplift in cash flows. Back on 5 September, we initiated coverage with a Speculative Buy rating and 45cps target.

We like True North’s multi-year production cashflow opportunity, especially given possible upside to the mine life. Furthermore there is an exciting, higher grade development prospect at Mt Oxide, which could deliver further value.

Morgans clients receive exclusive insights such as access to the latest stock and sector coverage featured in the Month Ahead. Contact us today to begin your journey with Morgans.

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: Treasury Wine Estates (ASX:TWE), A2 Milk (ASX:A2M), Pilbara Minerals (ASX:PLS), Tyro Payments (ASX:TYR) and Accent Group (ASX:AX1).

Removals: Telstra (ASX:TLS), Super Retail Group (ASX:SUL), Seek (ASX:SEK) and Orora (ASX:ORA).

Large cap best ideas

Commonwealth Bank (ASX:CBA)

We rate CBA a HOLD at current prices. As well as being Australia’s largest bank, compared to its peers CBA has the highest ROE, lowest cost of capital, leading technology, largest position in the low risk residential mortgage market and largest low cost deposit base, and a loyal retail investor and customer base. However, investors pay for this quality via the highest earnings and asset-based multiples and lowest dividend yield amongst its peer group.

Westpac Banking Corp (ASX:WBC)

We endorse an ADD rating for WBC. WBC has a similar asset base, funding mix and domestic retail concentration as the premium priced CBA. However, its growth, profitability and ROE have been significantly weaker than this larger competitor, which is ultimately reflected in WBC’s lower earnings and asset-based trading multiples and higher cash yield. If WBC can materially improve its business performance (this is not without significant risk of disappointment) then an investment in its stock could deliver attractive returns as the share price rerates upwards and cash returns to investors lift.

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 and market share gains in a softening macroeconomic environment.

Treasury Wine Estates (ASX:TWE) - New addition

Given TWE's undemanding valuation compared to other luxury brand owners, we see value in TWE. With Penfolds outperforming expectations (makes up ~72% of our valuation) and a clear strategy to improve performance at Treasury America and Treasury Premium Brands, we expect earnings to accelerate from the 2H24 onwards. While risks remain, we back this management team to deliver. The key near term share price catalyst is if China removes the tariffs.

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.

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.

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.

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.

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.

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 in the sector. We see MIN’s lithium / iron ore market exposures as an ideal combination to benefit from the China re-opening increase in demand during 1H’CY23. 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.

Pilbara Minerals (ASX:PLS)

We rate PLS as our best pick of the pure-play lithium stocks. It is well funded, has a long resource life and is an established Australian operator with multiple growth options ahead of it. We think FY24’s starting cash balance of over $3.3bn combined with strong operating cashflow will allow the company to pursue a meaningful capital management program while simultaneously funding growth. Updates on the company’s downstream growth strategy are expected later this half which will guide towards the potential scope of special dividends and / or buy backs. We have an ADD rating on PLS based on rounding our DCF valuation to the nearest 10cps.

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.

Goodman Group (ASX:GMG)

GMG represents c.27% of the ASX A-REIT index and is one of the few offshore earners in the A-REIT space. GMG rarely screens cheap against domestic peers, but within the context of its offshore peers, it consistently delivers higher returns at lower levels of leverage and at a comparable price to book ratio. Growth in Assets Under Management and development completions are a key determinant of value and an AUM of A$80bn (US$50m) is comparatively modest in a global context, whilst A$7bn (US$5.5n) of completions pa we see as likely sustainable. With continued increases in interest rates and persistent inflation (most notably construction costs), risks abound the REIT sector. This drives our preference for beds and sheds, reflecting the strength of those underlying operating markets. Given the duration risk from higher rates, we prefer more active managers who can grow AUM and add value from an active buy, build, manage strategy. To this end, strong balance sheets are also key to navigate any deterioration in book values.

Qantas Airways (ASX:QAN)

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 earnings 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 (recently announced another A$500m on-market share buyback at its FY23 result).

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

Unveiling September's Investment Prospects

Insights from the August Reporting Season

We unlock the insights from the August reporting season and dive into the potential opportunities shaping the Month Ahead for September. As we analyse the outcomes and implications of the reporting season, we spotlight three key sectors deserving of your attention. From retail to travel and industrials, discover the trends and top picks influencing the investment landscape.

Reporting Season Wrap

Delve into our review of the August 23 reporting season and gain valuable insights into the resilient earnings outlook and market expectations post-pandemic.

Retail Sector Wrap

We were positively surprised by the resilience of the earnings of discretionary retailers in FY23. On average, the companies we follow grew sales by 9%, outstripping the rate of inflation, with pre-tax earnings growing by an average of 19%. The fastest growth was reported by Lovisa, Accent and Universal Store, while Baby Bunting and Domino’s Pizza Enterprises reported operating earnings more than 20% below the prior year.  

Consumer demand has clearly softened, but the decline has not been precipitous and there are reasons to expect growth to resume in the months ahead. Gross margins look likely to be stable in FY24, supported by lower freight and supplier costs, although operating profit margins will likely moderate as retailers absorb significant wage inflation.

Our key picks coming into FY24 are Lovisa, Accent and Beacon Lighting. These are businesses with strong brand equity and the ability to grow sales in a subdued consumer environment and to find cost efficiencies.

Travel Sector Wrap

Reporting season held few surprises given all the travel stocks either upgraded or provided trading updates in the weeks leading up to this event. For us, Helloworld Travel (HLO) had the strongest year. After three profit upgrades, HLO’s FY23 result came in at the top end of guidance. All companies continued to recover strongly from COVID. It was evident that the companies didn’t waste the COVID induced travel downturn and are coming out of it with structurally higher margins. Many have also made highly accretive acquisitions.

The Leisure travel recovery continued to lead Corporate travel. Following three years of travelling at home, the demand for international travel is very strong, despite the high airfares. HLO said there has never been a better time to be a travel agent. Given all the companies are generating strong cashflow, pleasingly, they have all returned to rewarding shareholders with a final dividend.

Outlook commentary was upbeat with consumer’s prioritising travel over other discretionary categories. It was noted that leisure travel has emerged as a non-discretionary item in the household budget. We believe that the AGM season over October/November will be the next catalyst for the sector given the companies will all provide trading updates and reiterate or issue FY24 earnings guidance. While we have all stocks on a BUY recommendation given positive industry fundamentals and their attractive valuations, our key pick of the sector is HLO.

Industrials Sector Wrap

On net, the FY23 results season was positively received by investors, with many stocks bouncing off the share price lows which followed the guidance downgrades of May/Jun-23. The highlight was GMG (BUY), with the share price up 13% (week post result), as the company beat FY23 guidance (EPS growth of +16% vs +15% guidance), issuing FY23 guidance (EPS growth of +9%), along with management’s discussion of the potential for their data centre business – which now comprises 1/3 of their $13Bn of work in progress.

In light of the recent shift in interest rates, investors were rightly focused on balance sheet health – MGH being a great example, where the stock responded positively as gearing came in below expectations and management outlined a plan for further capital recycling. Housing markets, and in turn the building material companies, remain circumspect about a quick turnaround in demand, albeit management across the board see the medium term opportunity from latent demand driven by underbuilding during Covid, increased immigration and record low rental vacancies.

Top picks from this diverse group of industrial companies which spans building materials, real estate, maintenance services and labour hire are Ventia (VNT), Qualitas (QAL) and MAAS Group (MGH).

Morgans clients receive exclusive insights such as access to the latest stock and sector coverage featured in the Month Ahead. Contact us today to begin your journey with Morgans.

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: Orora (ASX:ORA) and Helloworld (ASX:HLO).

Removals: Ventia Services (ASX:VNT)

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 and market share gains in a softening macroeconomic environment.

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.

CSL Limited (ASX:CSL)

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 ~30x.

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.

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.

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.

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.

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 in the sector. We see MIN’s lithium / iron ore market exposures as an ideal combination to benefit from the China re-opening increase in demand during 1H’CY23. 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.

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.

Goodman Group (ASX:GMG)

GMG represents c.27% of the ASX A-REIT index and is one of the few offshore earners in the A-REIT space. GMG rarely screens cheap against domestic peers, but within the context of its offshore peers, it consistently delivers higher returns at lower levels of leverage and at a comparable price to book ratio. Growth in Assets Under Management and development completions are a key determinant of value and an AUM of A$80bn (US$50m) is comparatively modest in a global context, whilst A$7bn (US$5.5n) of completions pa we see as likely sustainable. With continued increases in interest rates and persistent inflation (most notably construction costs), risks abound the REIT sector. This drives our preference for beds and sheds, reflecting the strength of those underlying operating markets. Given the duration risk from higher rates, we prefer more active managers who can grow AUM and add value from an active buy, build, manage strategy. To this end, strong balance sheets are also key to navigate any deterioration in book values.

Seek (ASX:SEK)

Of the classifieds players, we continue to see SEEK as the one with the most relative upside, a view that had previously been based on sustained listings growth. However, whilst the tailwinds that had driven elevated job ads in prior periods appear to be abating to a degree, we note businesses are continuing to look to grow headcount in the coming months and vacancy rates remain elevated. Candidates are returning to the platform with applications per job ad now approaching pre-COVID levels (on improved migration levels and labour mobility), suggesting SEEK has additional flexibility to pull the dynamic pricing lever – helping to drive yield growth into FY24.

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 voted on Telstra's legal restructure, which opens the door for value to be released from the separation of TLS’s infrastructure and core mobile business. TLS currently trades on ~8x 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 progressive price rises underpins positive earnings momentum and means TLS remains well placed for the year ahead.

Qantas Airways (ASX:QAN)

QAN is now our preferred pick 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 EBITaccretive fleet reinvestment and further capital management initiatives (recently announced a A$500m on-market share buyback at its 1H23 result). There is also likely upside to our forecasts and consensus if QAN achieves its FY24 strategic targets.

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A Comprehensive Guide

As reporting season approaches for companies with a June or December year-end, investors brace themselves for a flurry of activity on the stock market. August marks the time when most companies listed on the ASX unveil their earnings results. This period often brings heightened share price volatility and an influx of information for investors to digest. In our analysis of The Month Ahead for August, we've handpicked three stocks that warrant close attention during reporting season:

Hello World Travel Limited

Helloworld Travel (HLO) is a leading Australian & New Zealand travel distribution company, comprising retail leisure travel and business travel networks, travel broker networks, destination management services (inbound), air ticket consolidation, tourism transport operations, wholesale travel services, online operations and event-based freight operations. It has over 2,000 members across its travel agency networks in Australia and New Zealand. We think Helloworld has managed the COVID travel downturn and recovery extremely well. Recent bolt-on acquisitions, the ETG acquisition (and synergies), the scaling of its event-based freight operations and structural cost out means that Helloworld has more than offset the lost earnings from selling its Corporate business to Corporate Travel Management. Post all of this, its balance sheet is still strong with plenty of cash and no debt and it retains some of its shares in Corporate Travel Management. This position will allow it to fund further M&A and/or capital management. We think Helloworld is materially undervalued, especially when we back out its investment in Corporate Travel Management from its enterprise value.

The result

We are expecting a beat. Helloworld’s FY23 EBITDA guidance of A$38-42m still looks conservative despite two upgrades this financial year. If there isn’t a third one coming, we think the company will easily beat the top end of its guidance range when it reports in August. Guidance assumes a weaker 4Q vs 3Q, despite the 4Q being the seasonally stronger period. Its EBITDA margin will be a highlight. In line with seasonal trends, Helloworld should report strong operating cashflow in the 2H. FY24 is shaping up to be a big year for Helloworld. Not only will travel markets continue to recover post COVID, it will also benefit from all the rockstars coming to town (Taylor Swift and P!nk etc). The proposed acquisition of Express Group Travel (ETG) and the synergy benefits appear highly EPS accretive. None of the recently announced acquisitions are in consensus estimates, so large upgrades are expected when they complete.

CSL Limited

CSL (CSL) is a leading global speciality pharmaceutical company and vaccine manufacturer. Despite unfavourable Seqirus seasonality and Behring margin headwinds, CSL’s recent reaffirmation of its FY23 guidance net profit implies a solid second half in FY23, with declining plasma costs, ongoing demand across both Behring and Seqirus, along with full Vifor contribution. The fundamental outlook remains ‘really strong’.

The result

We think CSL’s result will reassure investors and remind them of the compelling fundamental attributes of the growth story. The result itself was pre-announced and so shouldn’t serve up many surprises. CSL is targeting the upper end of its guidance for constant currency growth of 28-30% in revenue and 13-18% in net income (net profit after tax before amortisation or ‘NPATA’). Currency headwinds are expected to shave US$230-250m off statutory NPATA, but this should be well understood by investors. Looking forward to FY24, CSL is targeting constant currency NPATA growth of a further 13-18%. Behring margins are expected to improve modestly. Cost per litre is expected to improve, but elevated donor fees and labour require other levers to pull (like operating efficiencies; yield improvement; new products; and pricing) to get margins back to pre-COVID levels over the medium term. Seqirus profit is skewed to the second half, with strong seasonal influenza vaccine uptake and shift to differentiated products, while Vifor remains on track, with integration going well, synergies on target and loss of EU patent exclusivity for IV iron Ferinject (c5% of group revenue) well known and in FY24 guidance.

Orora

Orora (ORA) is a global packaging manufacturer. We see it as a solid, defensive business with a healthy balance sheet and an experienced management team. We think the valuation looks attractive and have confidence in management’s ability to maintain pricing discipline and extract further business optimisation gains in North America. Lower commodity prices, such as of aluminium and soda ash, should also help Australasian margins. We think some key catalysts include value-accretive acquisitions and the AGM trading update in October.

The result

Orora rarely disappoints! It has a good track record of exceeding expectations with the last four EBIT results beating consensus forecasts by an average of 5%. This has mostly been driven by benefits from business optimisation initiatives in North America. For FY23, we forecast Australasia EBIT to be down 1% vs management’s guidance for earnings to be broadly in line with FY22. We estimate North America EBIT (in USD) to rise by 11%, compared with management’s guidance for ‘higher earnings’. We think Orora is unlikely to provide quantitative earnings guidance for the year ahead. In line with previous years, we expect management simply to say that FY24 earnings will be higher than in FY23.

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