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. We add The Lottery Corporation, Reliance Worldwide and Polynovo following the August reporting season. Removals this month: Coles, Inghams and Avita Medical.
September best ideas
The Lottery Corporation (TLC) - ADD
Large cap | Gaming
TLC's FY24 result was impressive, driven by a favourable year for Lotteries and strong active customer growth. Despite lapping a record period of growth in Lotteries, we remain positive on the stock as current lottery volumes continue to perform well. The company mentioned that Saturday Lotto will be the next game to receive an update, which should benefit the base game divisions significantly and likely come with a price increase, offsetting some recent softness. Additionally, TLC reported a leverage ratio of 2.5x, below the guided range of 3-4x, and has expressed interest in renewing the VIC licence. Based on our estimates, TLC is set to deliver a 4.5% FCF yield and a 4% dividend yield in FY25. The stock trades in line with its historical valuation ranges and we view it as a solid option for investors seeking stability.
Reliance Worldwide (RWC) - ADD
Mid cap | Industrials
RWC is highly leveraged to an improved demand back drop via its R&R exposure. Recent cost saving measures will make the leverage to improving demand even more appealing, while continued penetration of SharkBite Max and other new products will also assist. This is a great business with defensive characteristics, a healthy balance sheet, new product innovation and operating efficiencies to support future earnings growth.
Polynovo (PNV) - ADD
Small cap | Healthcare
PNV’s NovoSorb® technology has gained rapid market traction, initially in burns and extending into trauma. Consensus has revenue growing by >20% p.a. for the next three years. Factors that will drive the revenue growth include: 1) expansion into new regions like Japan, China and Brazil; 2) a successful tender application in India; and 3) construction of its third manufacturing facility which is expected to support an additional A$500m in sales (5 times current production volumes).
September removals
Coles (COL)
Large cap | Consumer Staples
While Liquor earnings remain weak, we expect the core Supermarkets division (94% of FY24 EBIT) to continue to be supported by further improvement in product availability, reduction in total loss, greater in-home consumption due to cost-ofliving pressures, and population growth. Benefits from recent supply chain investments should also start flowing through in FY25. Despite a reasonably positive outlook, we see COL's valuation as now fully captured in the price and we recently downgraded the stock to a Hold.
Inghams (ING)
Mid cap | Consumer Staples
Following the weak update at the result, ING is lacking catalysts. The stock is inexpensive but confidence is shaken by the loss of some WOW volumes. 1H25 result will likely fall on the pcp. They will return to growth in the 2H25.
Avita Medical (AVH)
Small cap | Healthcare
Avita has downgraded full year guidance which disappointed markets. Although the pipeline looks encouraging the market will take a little more convincing. The long-term opportunity remains but we remove AVH this month given the short term risks and replace it with PNV.
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