Research Notes

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Research Notes

Cessation of coverage

Ansarada
3:27pm
September 9, 2024
Following ASIC approving the scheme of arrangement by which DS Answer Pty Ltd will acquire all of Ansarada (AND AU), we discontinue coverage of Ansarada. Our forecasts, target price and recommendation should no longer be relied upon for investment decisions.

The Gold Standard

Northern Star Resources
3:27pm
September 8, 2024
Northern Star Resources (NST) is an ASX-50 listed gold miner producing ~1.6moz per annum of gold. Operating across Western Australia and North America. Production is forecast to grow to 2Moz by FY26 before increasing to 2-2.2Mozpa following the KCGM expansion. Operating margins are well leveraged to the rising price of gold, operating at an attractive cost base and margin, FY24 AISC A$1,853/oz complimented by mines exclusively in advanced first world economies. We view the price of gold to remain strong, along with NST earnings in FY25 as the company transforms KCGM into a globally significant asset. We initiate with an ADD rating with a target price of A$16.90ps and potential 12-m TSR of 17.7%, with further upside contingent on long-term gold price.

Cost coming under control and cash starting to flow

TPG Telecom Ltd
3:27pm
August 30, 2024
TPG 1H24 result was largely as expected with the exception of better cashflow than we had anticipated. Less mobile handset costs resulted in improved working capital. Positive free cash flow was a highlight and a big improvement yoy. Revenue was flat yoy while underlying EBITDA lifted 2% yoy. Statutory NPAT declined 40% while Adjusted NPAT declined 5% YoY and was slightly above our forecast. We retain our Hold recommendation, while our Target Price lifts to $5.20.

FY24 earnings: Off-track with costs

Tabcorp Holdings
3:27pm
August 29, 2024
TAH’s FY24 result was one to forget. While the company’s topline slightly exceeded our estimates, it was overshadowed by a cost blowout and abandonment of TAB25 strategic targets. The company reported a statutory net loss of $1.36bn, mainly due to impairments. An unfranked 0.3c dividend was announced, bringing the total to 1.3c for FY24. While no quantitative trading update was provided, the company acknowledged that conditions remain challenging. We have reduced our EBITDA estimates by 22% in FY25 and 9% in FY26. Our Underlying EPS estimates reduce to 1.3c in FY25 and 3.2c in FY26. We downgrade TAH from Add to Hold with a revised target price of $0.50.

An Olympic AI effort justifying investing for growth

Ai-Media Technologies
3:27pm
August 29, 2024
AIM’s FY24 result showed the business is tracking well with revenue up 7% yoy, gross profits up 15% yoy and EBITDA up 25% yoy. Revenue and gross profit were inline with our expectations while our OPEX expectations were not high enough and consequently EBITDA was below our forecast, but still up 25% yoy. The AI transition risk is largely behind AIM now and operating conditions invert from headwinds to tailwinds. This has given management confidence in long term targets and on public conference call they talked to aspirational target of $150m of revenue and $60m of EBITDA in the next five year (FY29). We retain our Add recommendation and 70c target price The AI transition risk is largely behind AIM, they now have tailwinds. This has given management confidence in their long-term direction. On AIM’s public conference call management talked to a five-year aspirational target of $150m of revenue and $60m of EBITDA. This is entirely organic from: 1) geographic expansion; 2) taking ASR success to enterprise and government; & 3) product expansion.

A solid result in light of difficult conditions in 2H

Silk Logistics Holdings
3:27pm
August 28, 2024
SLH’s FY24 operating result was broadly in line with expectations and within the group’s FY24 guidance range, with underlying EBITDA of $95.4m (+11% YoY) and Revenue of $558.1m (+13.9%). Underlying NPAT of $11.5m was however lower than MorgF $13.2m forecasts due to higher interest costs. We make no material changes to our EBITDA forecasts, but increases to our forecast D&A and interest costs see our EPS estimates reduced by -18/-20% in FY25-26F, driving a revised price target of $2.00ps (from $2.10). We retain our ADD rating.

Laying the foundations for platform growth

NEXTDC
3:27pm
August 28, 2024
NXT’s FY24 result was slightly stronger than expected while FY25 guidance was slightly lower than expected due to a slower ramp-up in revenue and faster ramp-up in scale-up costs, positioning the business for significant expansion. MWs billing lifted 8MW yoy to 86MW. MWs contracted but not yet billing are double this, at 172.6MW, leaving a long runway for growth. Management talked to advanced discussions on a pipeline that is multiples of MWs currently contracted. We retain our Add rating with a $20.50 target price.

FY24 result: Bedding down cost savings

Adairs
3:27pm
August 28, 2024
Sales were even harder to come by in FY25 than we’d expected as reduced traffic both in-store and online resulted in a 7% decline on a 52-week basis. This was nearly 2% below our estimate. Costs, however, were well controlled, limiting the comparable decline in EBIT to 15%, 4% below our estimate. Although the start to FY25 was soft, we have reason to expect sales to pick up as the year goes on. If Adairs can achieve a better sales outcome while maintaining good discipline over pricing and operating costs, FY25 should be a year of positive earnings growth. A dividend yield of 7% underpins our retention of an ADD rating and $2.20 target price. With this note, lead coverage transfers to Emily Porter.

We’re not in Kansas anymore

Johns Lyng Group
3:27pm
August 27, 2024
JLG delivered a mixed FY24 result, with Group EBITDA of $129.6m (+8.5% yoy), coming in ~2% lower than MorgansF of $131.3m. Business as Usual EBITDA (ex. Commercial Construction) of $111.2m missed MorgansF of $114.4m by ~3%, whilst the group delivered stronger than expected CAT EBITDA of $27.0m (ahead of MorgansF of $25.1m). Although the outlook for BAU revenue growth of +15% in FY25 appears positive, JLG’s guidance implies underlying BAU EBITDA margins are expected to normalise lower following record job volumes in FY23/FY24 softening organic EBITDA growth to ~1%, whilst CAT roll off appears steeper than MorgansF, driving our downgrades. We reduce our EPS forecasts by ~20% in FY25-FY26F reflecting JLG’s revised guidance for a lower margin base and quicker roll off of CAT revenues into FY25. Our price target reduces to $5.10ps (from $7.30ps) and we retain our Add rating.

Delivering margin uplift, against macro headwinds

Worley
3:27pm
August 27, 2024
WOR delivered a solid FY24 result, which came in broadly inline with MorgF and consensus, with EBITA of $751m (+24% YoY), driven by Aggregate revenue growth 18% and solid underlying EBITA margin expansion. The group is flagging a year of more moderate growth in FY25, with the group expecting slower revenue growth but at higher margins. The group is Guiding to low-double digit EBITA growth (MorgF +10% in FY25), and EBITA margins (ex. Procurement) to improve ~8.0-8.5%. We reduce our Underlying EBITDA forecast by -4%, in FY25/26F, with our price target reducing to $17.40ps. (prev. $18.00), and retain our Add rating.

News & Insights

With the market heading back to record highs, it leads me to ponder my next move. Is the market so buoyant and frothy that I need to be concerned about a bubble?

With the market heading back to record highs, it leads me to ponder my next move.  

Is the market so buoyant and frothy that I need to be concerned about a bubble?  

There is some evidence in the tech and AI space in the US, where many of the big names have doubled in price in the last 12 to 18 months. Companies like Amazon, Apple, Google, Meta (Facebook), Microsoft and NVIDIA, all have trillion-dollar (+) valuations. True, they have changed the way we communicate, connect and do business. However, have short-term expectations outpaced what can realistically be achieved in the near-term?  

Even here in Australia, the big banks, retailers and technology companies are enjoying valuations rarely seen. So, what should investors be doing?  

At times like this I ask myself three question(s): What’s my strategy? What am I trying to achieve? And does it matter if a share price, and or even the market, falls 30% tomorrow? Sure, it wouldn’t be nice, but does the risk of such a possibility change my strategy?

To answer these questions, I apply the following framework.

  1. Do I have enough cash and cash flow to be a patient long-term investor?

You don’t want to be a forced seller, but if you are, better to face up to that fact while the market is buoyant, as opposed to waiting for a correction to bring home the reality of your position.

  1. Do I own quality businesses?

Good management, sound balance sheet, innovative and productive culture, able to compete and grow. If so, they’re not for sale, but unfortunately not every business that I buy will retain its ‘quality’ status, and a buoyant market is often the best time to weed out businesses with operational issues.

  1. Do I have a diversified portfolio?

As a rule of thumb each holding should be between 3% and 7% of the portfolio. Too many small holdings are hard to follow, and large holdings can have too much influence over a portfolio’s returns and strategy. A buoyant market can be the opportunity I need to trim large holdings in mature businesses, although I will be more patient with businesses delivering strong growth.

  1. Is the portfolio capable of achieving my return objective?

Typically, this means the portfolio will be generating income of around 5%, plus 5% EPS growth (Earnings Per Share), and be trading close to fair value, at least based on the Morgans analyst’s valuation. A portfolio will typically include quality stalwarts that produce reliable income + higher growth companies to deliver the EPS growth that the portfolio will need to grow over time.

  1. Should I be investing some of the surplus cash that I might have?

Price always matters. Cash is a valuable asset, and it gives you the capacity to buy things when the price is right. I’m not talking about waiting for a crash, they do happen, but there is no guarantee that I will have the understanding or conviction to act when they do. Plenty of wealth has been created by simply buying quality businesses at a fair price and compounding reasonable returns over time. A fair price is not about ‘knowing’ the future share price, it’s about considering historical valuations metrics, current conditions and opportunities and making a judgement call as to whether the current price is fair and reasonable?

I also like to review past performance, after all, that’s all we have to go on. It is true, no-one knows the future, including me, and arbitrary things can and do happen, and for better or worse mistakes will be made, but statistically the optimists have won. Despite the uncertainty and the inevitable crisis or two, the market has continued its relentless climb.

If an investor had bought the ASX 200 on the 1/7/1994 and held the ASX 200 for 30 years, until 30/6/2024, they would have received the income stream illustrated in the chart below. To be clear the investor takes and spends the income each year (the dividends haven’t been re-invested). Some years their income is cut, as it was during the GFC and during Covid. Some years it’s flat. But overtime the income stream has grown at 5% compound and that initial investment of $400,000 has grown to be worth more than $1.7million.

True investment returns do not come from trading securities, in some zero-sum game, but from owning businesses that produce the goods and services society needs and will pay for. Investors are savers and their savings have come from their work and it is because they have worked, saved and invested that we have the goods and services we need today for our lifestyle and living standard.

I am cautious about the level of the market, but more because I am used to volatility, as opposed to there being a specific issue; it could be inflation and interest rates, it could be the politics in multiple jurisdictions, or it could nothing at all. Just staying vigilant and asking the question, do you have enough cash and cash flow to be a patient investor?


More Information

Ken Howard is a Private Client Adviser at Morgans. Ken's passion is in supporting and educating clients so they can attain and sustain financial independence.

If you have any questions about your financial plan or your share portfolio, your strategy, investments or would just like to catch up, please do not hesitate to give Ken a call on 07 3334 4856.

General Advice warning: This article is made without consideration of any specific client’s investment objectives, financial situation or needs. It is recommended that any persons who wish to act upon this report consult with their investment adviser before doing so. Morgans does not accept any liability for the results of any actions taken or not taken on the basis of information in this report, or for any negligent misstatements, errors or omissions.

Read more
Our 'Best Calls to Action' highlights today’s top stock picks, including IDP Education, Airtasker, Alliance Aviation Services, Ai-Media Technologies, Wesfarmers, and Tabcorp Holdings.

Our 'Best Calls to Action' aim to navigate you through the current reporting season by showcasing stocks with strong buying potential. They also offer insights into stocks that might not be ideal for growth right now. These recommendations come from thorough analysis of market trends, financial health, and growth potential, ensuring you access high-value investment opportunities.

Happy to buy today

IDP Education (ASX:IEL) - Difficult test, but uniquely placed to take market share

IEL reported FY24 underlying NPATA of A$154.3m, down 1% on the pcp. 2H24 reflected the impact of policy changes, with 2H NPATA down ~34% on pcp. Tighter and uncertain policy settings saw 2H24 IELTs volumes down ~24% HOH. Student Placement was solid (2H flat on pcp), although policy hadn’t fully impacted. IEL expects the international student market (new admissions) to be down ~20-25% in FY25. IEL expect to outperform this via meaningful market share gains. We think FY25 is likely to be the trough year for ‘student flows’, impacted by tighter policies and the associated uncertainty. We expect IEL’s earnings to fall ~12%, with some benefits from pricing; market share gains; and solid cost control.

We upgrade to an ADD rating.

Airtasker (ASX:ART) - Positive cashflow the likely new norm

With the recent quarterly trading update, ART had largely pre-released key operating metrics, with the FY24 result itself largely per expectations. However, it was a resilient performance by the marketplace overall, with an improved revenue profile despite top of funnel (GMV) headwinds. The business also achieved its planned target of being free cashflow positive (+A$1.2m) for the full year.

We maintain our ADD rating.

Alliance Aviation Services (ASX:AQZ) - Just too cheap

AQZ reported another record result in FY24, with underlying NPBT up 52% on the pcp and slightly ahead of MorgansF/consensus. We forecast earnings growth momentum (PBT growth of 10%) to continue into FY25 driven by deploying more E190 aircraft and increases in utilisation. We back this founder led management team with a strong track record to continue to execute from here.

We maintain our ADD rating.

Ai-Media Technologies (ASX:AIM) - An Olympic AI effort justifying investing for growth

AIM’s FY24 result showed the business is tracking well with revenue up 7% yoy, gross profits up 15% yoy and EBITDA up 25% yoy. Revenue and gross profit were inline with our expectations while our OPEX expectations were not high enough and consequently EBITDA was below our forecast, but still up 25% yoy. The AI transition risk is largely behind AIM now and operating conditions invert from headwinds to tailwinds. This has given management confidence in long term targets and on public conference call they talked to aspirational target of $150m of revenue and $60m of EBITDA in the next five year (FY29).

We maintain our ADD rating.

Trim/Funding Source

Wesfarmers (ASX:WES) - Kmart Group momentum continues

WES’ FY24 result was slightly above our forecast but in line with market expectations. Key positives: Kmart Group delivered strong earnings growth as its value proposition continued to resonate with customers; Group EBIT margin rose 10bp to 9.0%. Key negatives: Bunnings sales growth in early FY25 remains subdued, impacted by weakness in housing activity; Management expects Catch to be loss-making again in FY25, albeit at a reduced level relative to FY24.

We maintain our HOLD rating.

Tabcorp Holdings (ASX:TAH) - FY24 earnings: Off-track with costs

TAH’s FY24 result was one to forget. While the company’s topline slightly exceeded our estimates, it was overshadowed by a cost blowout and abandonment of TAB25 strategic targets. The company reported a statutory net loss of $1.36bn, mainly due to impairments. An unfranked 0.3c dividend was announced, bringing the total to 1.3c for FY24. While no quantitative trading update was provided, the company acknowledged that conditions remain challenging.

We downgrade to a HOLD rating.


Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Begin your journey with Morgans today to view the exclusive coverage.

      
Contact us
      
Read more
Our 'Best Calls to Action' highlights today’s top stock picks, including NEXTDC, Flight Centre Travel, Karoon Energy, Mach7 Technologies, Camplify Holdings, and APA Group.

Our 'Best Calls to Action' aim to navigate you through the current reporting season by showcasing stocks with strong buying potential. They also offer insights into stocks that might not be ideal for growth right now. These recommendations come from thorough analysis of market trends, financial health, and growth potential, ensuring you access high-value investment opportunities.

Happy to buy today

NEXTDC (ASX:NXT) - Laying the foundations for platform growth

NXT’s FY24 result was slightly stronger than expected while FY25 guidance was slightly lower than expected due to a slower ramp-up in revenue and faster ramp-up in scale-up costs, positioning the business for significant expansion.

We maintain our ADD rating.

Flight Centre Travel (ASX:FLT) - Margin improvement will underpin strong growth

FLT’s FY24 result was in line with its recent update. The highlights were the increase in its revenue margin to 11.4% vs 10.4% in FY23, the 2H24 NPBT margin of 1.7% and strong operating cashflow up 170% on the pcp. FLT said that its outlook is positive however in line with usual practice, FY25 guidance won’t be provided until the AGM in November.

We maintain our ADD rating.

Karoon Energy (ASX:KAR) - Market confidence also needing maintenance

KAR posted a broadly steady 1H24 result, close to our estimates but appeared to come in below Visible Alpha consensus estimates. Management flagged additional maintenance planned for Bauna in an attempt to protect its flagship operation. KAR announced a maiden dividend of 4. cents per share fully franked, representing an annualised ~5% dividend yield.

We maintain our ADD rating.

Mach7 Technologies (ASX:M7T) - Better visibility prompting accelerated development

M7T posted its FY24 result which was broadly in line with expectations. With the recurring sales book now providing significantly better visibility into cashflows, we view this has given the Company the confidence to accelerate investment back into the products to improve the offering and implementation times. Key points: record sales order book (up 52%); ARR covering 72% of op costs; FY25 guidance of 15-25% revenue and CARR growth, and lower operating expenses than revenue growth. The notable omission in outlook was around operating cashflow positivity, which likely ties in with an acceleration of product development.

We maintain our ADD rating.

Camplify Holdings (ASX:CHL) - Plenty of wheels in motion for FY25

CHL’s FY24 result saw GTV increase ~13% on pcp to ~A$165m (~5% under MorgansF), however a higher than expected group take-rate (~28.9% vs MorgansF ~28%) saw revenue broadly in line with our estimate (~A$m, +~25% on pcp). Whilst the PaulCamper integration impacted bookings/revenue in the period, this is largely completed, with CHL expecting a return to a more normalised performance in FY25.

We maintain our ADD rating.

Trim/Funding Source

APA Group (ASX:APA) - Lenders and taxman to absorb FY25 EBITDA growth

The FY24 result was broadly in-line while FY25 EBITDA and DPS guidance was mildly below expectations. FY25 DPS guidance implies 7.3% cash yield. HOLD retained, given 12 month potential TSR of ~2%

We maintain our HOLD rating.


Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Begin your journey with Morgans today to view the exclusive coverage.

      
Contact us
      
Read more