Reporting season playbook
Investors are waiting for a circuit-breaker. Stretched valuations limit upside potential for a further re-rating of the market multiple (15.8x 12month forward PE, Industrials ex-Financials at 21.8x) and without clear earnings momentum in either direction the market is likely to remain rangebound.
We prefer to err on the side of caution and take profits where prices have run ahead of fundamentals (CSL, DMP, BKL, BAL and CGC) and think rotation within the market rather than a clear breakout will define FY18 reporting season. We stick by our conviction calls and supplement them with higher-than-average cash levels. This will give investors capacity to deploy capital into the inevitable bouts of volatility.
Watch
Three additions to our list this month
We add OZ Minerals (OZL), Atlas Arteria (ALX) and Volpara Health Technologies (VHT) to our list in August 2018.
OZ Minerals (OZL) enjoys robust cashflows from an established production base in copper, which has among the best outlooks in the commodities suite, driven by electrification of the developing world. OZL's counter-cyclical growth strategy will be rewarded as the Carrapateena development project is gradually de-risked in the coming 1-2 years, and could justify valuations closer to $12.50 per share upon successful commissioning.
Atlas Arteria (ALX) offers valuation support and strong potential distribution growth over coming years. French tollroad APRR is ALX's key asset. Cashflows are driven by growing toll revenues, cost containment, substantial decline in debt service and legislated corporate tax rate cuts.
Volpara Health Technologies (VHT) is a leading IT healthcare provider aiming to improve early detection of breast cancer. Volpara's SaaS model is linked to a growing medical need. Volpara's market share of breast screening in the US is currently 3.7% with a pathway to grow to 9% in FY19. VHT have a business model leveraged to growing and reoccurring revenue (FY19 guidance of NZ$9.0m) with the ability to pass on improved pricing over time.
Eight high conviction stocks in August
Our high conviction stocks 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 typically our preferred sector exposures.
Here are our eight high conviction stock picks this month:
- Westpac Bank (WBC)
- Suncorp (SUN)
- OZ Minerals (OZL)
- Atlas Arteria (ALX)
- Volpara Health Technologies (VHT)
- Kina Securities (KSL)
- CML Group (CGR)
- PWR Holdings (PWH)
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Disclosure of interest: Morgans may from time to time hold an interest in any security referred to in this report and may, as principal or agent, sell such interests. Morgans may previously have acted as manager or co-manager of a public offering of any such securities. Morgans affiliates may provide or have provided banking services or corporate finance to the companies referred to in the report. The knowledge of affiliates concerning such services may not be reflected in this report. Morgans advises that it may earn brokerage, commissions, fees or other benefits and advantages, direct or indirect, in connection with the making of a recommendation or a dealing by a client in these securities. Some or all of Morgans Authorised Representatives may be remunerated wholly or partly by way of commission.
