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.


Morgans clients receive full access of the Best Ideas, including our large, mid and small-cap key stock picks.

      
Contact us
      

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

News & 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.
Read full article
To help you navigate this reporting season, our team of analysts have handpicked a list of key stocks in the Bank and Fund Manager space that are worth keeping an eye on.
Read full article
Inflation has been sticky and interest rates higher for longer than forecast. However, as rates come down and economic conditions improve, money is expected to continue to flow into the stock market and the emerging healthcare space.
Read full article

News & 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.
Find out more