Research Notes

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Research Notes

4Q24 trading: Bets are off (for now)

The Star Entertainment Group
3:27pm
June 24, 2024
The Star Entertainment Group (SGR) has issued another disappointing trading update, attributing the decline to a continuation of declining premium gaming revenue across all properties, persistent cost of living pressures and rising remediation costs. This marks the second profit warning this year. We prefer to stay on the sidelines until conditions improve and clearer path back to recovery is established. Consequently, we have decreased our EBITDA and EPS estimates by 9% and 45% respectively in FY25, albeit off a low base. As part of today’s announcement, the company disclosed that newly appointed CFO, Neale O’Connell will assume CEO responsibilities until a permanent successor is found. We downgrade SGR from Add to Hold with a $0.50 target price (previously $0.65).

Cessation of coverage

Probiotec
3:27pm
June 19, 2024
Pursuant to the scheme of arrangement between PBP and its shareholders in connection with the acquisition of all the issued capital in PBP by PYFA Australia Pty Ltd, we discontinue coverage of Probiotec (PBP). Our forecasts, target price and recommendation should no longer be relied upon for investment decisions.

Green Light: Initiating with an ADD rating

Light & Wonder
3:27pm
June 14, 2024
We initiate coverage of Light & Wonder (LNW) with an ADD rating and a 12-month target price of A$172. LNW develops gaming content, hardware and technology solutions for traditional land-based, as well as digital customers and players. LNW is dual-listed on the Nasdaq (primary listing) and ASX. Since restructuring and rebranding from Scientific Games a few years ago, its experienced team has captured significant land-based share in Australia. We believe LNW can replicate this in the US. Additionally, its digital segments are also performing well with its social casino division, SciPlay, significantly outpacing the rest of the market. On our estimates, LNW is on an attractive FY25F PER (based on EPSA) of 14x, with an EV/EBITDA of 9x and a free cashflow (FCF) yield of 6%.

Approaching the on-ramp

Solvar
3:27pm
June 11, 2024
Looking through a difficult FY24, we see SVR nearing a new earnings baseline. Following management’s efforts to navigate near-term headwinds, we believe SVR is on a path to return to double digit underlying earnings growth in FY25-26F. Expanding on our last note (Mar-24), we incorporate forecasts for UPBT growth of ~11-13% in FY25-26F. SVR is currently trading on a FY25F P/E of ~7.0x, and a discount to book value & NTA (FY25 P/BV of 0.6x). Our DCF-based price target of $1.40/s & ~10% forecast yield represents a ~% TSR, supporting our Add rating.

RECELL Go time

Avita Medical
3:27pm
May 31, 2024
AVH has received FDA approval for its automated product, RECELL Go, for use in burns and full thickness skin defects. This approval marks a significant milestone for the company, with management expecting this device to increase adoption of the technology amongst clinicians. We have made no changes to our forecasts and recommendation. Add maintained.

Powering to 40 on a positive cost surprise

Xero
3:27pm
May 23, 2024
Management hit their aspirational rule of 40 years ahead of our expectations. This was largely due to stronger than expected cost control. FY24 revenue was inline while EBITDA, NPAT and FCF and well above expectations, on lower costs. Management had guided to expenses (OPEX plus D&A) at ~75% of revenue in FY24, but it came $50m lower than planned, at ~73%. Some of the FY24 cost savings were timing related, due to slower than anticipated staff hires, however the result was a decent beat and good, with & without, the cost slippage. Having now firmly established the base, spend is expected to lift in FY25 and cost guidance is for ~73% expense ratio, on higher revenue. We upgrade our forecasts and lift our Target Price to $140. Hold retained.

Timing is everything

The Reject Shop
3:27pm
May 23, 2024
The timing of store openings and closures has meant that total sales growth in 2H24 has fallen short of expectations. With no mitigating reduction in the operating cost base, this flows through to group EBIT, which has been guided to $4.0-5.5m, some $2.3-3.8m lower than consensus expectations. LFL sales have held up well and well above peers in the retail sector, with good growth in both price and volume of essential items and positive signs from the new general merchandising strategy. 2H24 LFLs to date are +3.3% and total sales +4.1%. We have lowered our estimates for FY24 in line with the guidance given (just a month out from the year-end), with a modest flowthrough to FY25. Lower earnings and lower peer company multiples take our target price down from $5.40 to $4.65. This keeps us on an ADD rating, conscious of TRS’s single-digit FY26F P/E, 6.5% FY26F dividend yield and $2.16 per share cash backing. With this note, lead coverage of TRS transfers to Emily Porter.

SaaS+ should make 15-20% the new black

Technology One
3:27pm
May 22, 2024
TNE’s 1H24 result and FY24 guidance were in line with expectations. ARR keeps compounding and should easily exceed $500m ARR within the next 12 months. TNE’s progressive introduction of SaaS+ is, in our view, a step change which productises implementations with a view to fast tracking time-to-value for customers. Implementation is a massive pain point for ERP implementations and TNE is uniquely placed to soften the blow. SaaS+ (Implementation as a Service) is great for customers, unique to TNE’s business model and is value accretive. Using SaaS+ to remove the implementation bottleneck so should also mean TNE can sell more software solutions than historically. All going to plan, TNE’s medium term profit growth rate should accelerate from 10-15% to ~15-20%. We upgrade our recommendation to an ADD with a $20.50 target price.

Time to hang up

Telstra Group
3:27pm
May 21, 2024
Telstra (TLS) announced another round of organizational changes aimed at cost reductions. They reaffirmed FY24 guidance and provided early FY25 guidance. We reduce our EPS forecasts by 5-11%, downgrade our Target Price from $4 to $3 and downgrade our recommendation from Hold to Reduce.

1H24 earnings: Undisputed

Aristocrat Leisure
3:27pm
May 17, 2024
Aristocrat Leisure (ALL) delivered an impressive 1H24 result surpassing both our and market expectations. NPATA in the first half was $764m and up 16% yoy. This was 13% above our forecast, 10% above consensus and up 13% on a constant currency basis. Operating profit (EBITA) was up 15% to $1,027m, 12% higher than our estimate. North America revenue (excluding LATAM) achieved 6% growth, ~4% above forecast. ALL’s digital gaming division, Pixel United, delivered impressive 17% growth in profit, 6% above our forecasts. EPSA was up 19% to 118.5c, 12% above our estimate. DPS was up 20% to 36.0c. A $350m extension to ongoing buy-back program was also announced. Consequently, our estimates of EPSA on a fully diluted basis increase by 9% in both FY24 and FY25. We upgrade ALL from a Hold to Add recommendation with a 12-month target price of $50. We forecast FCF and dividend yield of 5% and 2% respectively for FY24.

News & Insights

Investment Watch is a flagship product that brings together our analysts' view of economic and investment strategy themes, sector outlooks and best stock ideas for our clients.

Investment Watch is a quarterly publication produced by Morgans that delves into key insights for equity and economic strategy. This latest publication will cover;

  • Asset Allocation – not the time to play defence
  • Economic Strategy – averting a world recession
  • Equity Strategy – attention turns to August
  • Resources & Energy – domestic gas coming to the boil
  • Banks – befuddling
  • Updated Morgans Best Ideas

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Preview

We think the investment landscape remains favourable. The US economic fundamentals are strong with no significant downside risks to growth in the near-term. European leading indicators suggest a turning point is near and China’s cyclical recovery is still gaining momentum after bottoming earlier in the year.

Meanwhile, the Australian economy continues to defy expectations of a sharper slowdown. In our view, this is not the time to play defence and continue to expect growth assets such as equities and property to do well. This quarter, we look at tactical opportunities in private credit, global equities and across the Australian equity market (resources, agriculture, travel and technology).

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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.

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.

Additions: This month we add Elders.

July best ideas

Elders (ELD)

Small cap | Food/Ag

ELD is one of Australia’s leading agribusinesses. It has an iconic brand, 185 years of history and a national distribution network throughout Australia. With the outlook for FY25 looking more positive and many growth projects in place to drive strong earnings growth over the next few years, ELD is a key pick for us. It is also trading on undemanding multiples and offers an attractive dividend yield.

Technology One (TNE)

Small cap | Technology

TNE is an Enterprise Resource Planning (aka Accounting) company. It’s one of the highest quality companies on the ASX with an impressive ROE, nearly $200m of net cash and a 30-year history of growing its earnings by ~15% and its dividend ~10% per annum. As a result of its impeccable track record TNE trades on high PE. With earnings growth looking likely to accelerate towards 20% pa, we think TNE’s trading multiple is likely to expand from here.

ALS Limited

Small cap | Industrials

ALQ is the dominant global leader in geochemistry testing (>50% market share), which is highly cash generative and has little chance of being competed away. Looking forward, ALQ looks poised to benefit from margin recovery in Life Sciences, as well as a cyclical volume recovery in Commodities (exploration). Timing around the latter is less certain, though our analysis suggests this may not be too far away (3-12 months). All the while, gold and copper prices - the key lead indicators for exploration - are gathering pace.

Clearview Wealth

Small cap | Financial Services

CVW is a challenger brand in the Australian retail life insurance market (market size = ~A$10bn of in-force premiums). CVW sees its key points of differentiation as its: 1) reliable/trusted brand; 2) operational excellence (in product development, underwriting and claims management); and 3) diversified distributing network. CVW's significant multiyear Business Transformation Program has, in our view, shown clear signs of driving improved growth and profitability in recent years. We expect further benefits to flow from this program in the near term, and we see CVW's FY26 key business targets as achievable. With a robust balance sheet, and with our expectations for ~21% EPS CAGR over the next three years, we see CVW's current ~11x FY25F PE multiple as undemanding.

GUD Holdings

Large cap | Consumer Discretionary

GUD is a high-quality business with an entrenched market position in its core operations and deep growth opportunities in new markets. We view GUD’s investment case as compelling, a robust earnings base of predominantly non-discretionary products, structural industry tailwinds supporting organic growth and ongoing accretive M&A optionality. We view the ~12x multiple as undemanding given the resilient earnings and long-duration growth outlook for the business ahead.

Stanmore Resources

Small cap | Metals & Mining

SMR’s assets offer long-life cashflow leverage at solid margins to the resilient outlook for steelmaking coal prices. We’re strong believers that physical coal markets will see future cycles of “super-pricing” well above consensus expectations, supporting further periods of elevated cash flows and shareholder returns. We like SMR’s ability to pay sustainable dividends and its inventory of organic growth options into the medium term, with meaningful synergies, and which look under-recognised by the market. We see SMR as the default ASX-listed producer for pure met coal exposure. We maintain an Add and see compelling value with SMR trading at less than 0.8x P/NPV.


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

      
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There are many reasons to invest in equities. Historically, they have offered higher capital returns than many other asset classes. Furthermore, they provide liquidity and diversification and allow investors to participate in the growth of high performing businesses and sectors.

There are many reasons to invest in equities. Historically, they have offered higher capital returns than many other asset classes. Furthermore, they provide liquidity and diversification and allow investors to participate in the growth of high performing businesses and sectors. Not to be overlooked, however, is their capacity to provide an income stream through regular dividends. In the Month Ahead for July, we highlight a selection of Australian equities that offer superior forecast dividend yields and may be suitable investments for those seeking income.

Happy New Financial Year!

BHP Group (BHP)

BHP Group (ASX: BHP) is the largest diversified mining company in the world. BHP has extensive iron ore, copper, nickel and coal operations, and will soon add potash to its portfolio once its massive Jansen project comes online in late 2026. Besides nickel, which has proven volatile, the rest of BHP’s basket of market exposures share the similar characteristic of typically boasting bumper margins throughout the cycle. Over the last decade BHP has shifted its corporate strategy toward streamlining its business, protecting its balance sheet, slowing its pace of investment and maximising shareholder returns. Despite an impressive shareholder performance over recent years, BHP’s dividend yield has remained above market.

      
BHP coverage report
      

Dalrymple Bay Infrastructure (DBI)

Dalrymple Bay Infrastructure (ASX: DBI). DBI owns a fully contracted coal export terminal in central Qld. It has strong revenue and cost risk mitigants, CPI-linked base revenues boosted by incremental revenues from commissioned sustaining capex projects, very high EBITDA margins, and an investment grade credit profile. Investors comfortable with the coal-related exposure also benefit from the ESG discount imputed into the stock price.

      
DBI coverage report
      

Ventia Services Group (VNT)

Ventia Services Group (ASX: VNT) delivers essential services predominantly to government (c.75% of revenue), with an average contract tenure of c.5-7 years and direct inflation passthrough (95% of revenue) in most contracts. The industry grows at 6-7% pa, with VNT growing 7-10% through industry growth and contract expansion, whilst margins should remain stable. The stock continues to deliver a strong dividend yield, which we expect to continue growing at mid-single digits, whilst trading on an undemanding low double-digit PER.

      
VNT coverage report
      

Eagers Automotive (APE)

Eagers Automotive Limited (ASX: APE) is the leading automotive retail group in Australia and New Zealand, operating for over 100 years and representing a diverse portfolio of OEM (original equipment manufacturer) brands. While current industry dynamics in the auto sector (margin pressure; cost of living impacts) are expected to persist in the near-term, we view the scale operators (such as APE) as best placed to navigate this challenging dynamic. Longer-term, we are positive on APE’s various strategic initiatives and expect it can continue to scale; and sustain a structurally higher return on sales through the cycle.

      
APE research report
      

GQG Partners (GQG)

GQG Partners (ASX: GQG) is global asset management boutique, managing ~US$150bn in funds across four primary equity strategies. We like GQG given its highly effective distribution, scalable strategies, and strong long-term investment performance. We view the earnings tailwind from strong funds under management growth (a combination of investment performance and net fund inflows) will continue and we think GQG will continue to re-rate along with this to a higher earnings multiple in time.

      
GQG research report
      

HomeCo Daily Needs REIT (HDN)

HomeCo Daily Needs REIT (ASX: HDN) has a +$4.5bn real estate portfolio focused on daily needs retail (Large Format Retail; Neighbourhood; and Health Services) across +50 properties with the top five tenants being Woolworths, Coles, JB Hi-Fi, Bunnings and Spotlight. Most of leases are fixed. The portfolio has resilient cashflows, with the majority of tenants being national. Sites are in strategic locations with strong population growth. HDN offers an attractive distribution yield, with a +$600m development pipeline providing further growth.

      
HDN research report
      

IPH Limited (IPH)

IPH Limited (ASX: IPH) is a prominent IP services group with market leading shares in Australia, Singapore and Canada. A defensive business, IPH has strong cash flow generation (with high conversion to EBITDA) and a long-track record of paying dividends to shareholders. We like IPH and consider the return to organic growth (albeit subdued) as a key near-term catalyst for the group. Longer-term, we expect IPH to continue to prosecute its consolidation and network expansion strategy offshore.

      
IPH research report
      

Suncorp (SUN)

Suncorp (ASX: SUN) is well positioned to benefit from continued strong price increases going through the home and motor insurance market in Australia, we expect these price increases to be supportive of SUN’s margins expanding further over the next couple of years. Additionally SUN’s recent divestment of its bank was done at an excellent price and will allow the company to focus completely on its strongest business, general insurance, where it is a market leader.  Finally, post the bank sale, SUN now has >A$4bn of excess capital to return to shareholders, which will occur most likely via the way of a share consolidation and a small special dividend.

      
SUN research report
      

Super Retail Group (SUL)

Super Retail Group (ASX: SUL) is a large discretionary retailer comprising four well-known brands which span several categories, including: Supercheap Auto; rebel Sport; Boating, Camping and Fishing (BCF), and Macpac. We like SUL given its market leading scale (>740 stores), deep data capabilities, strong loyalty base and diversified portfolio of brands. SUL has a very strong net cash balance sheet, and we expect it is positioned for further capital management initiatives in the near-term (i.e. potential special dividends).

      
SUL research report
      

Woodside Energy (WDS)

Woodside Energy (ASX: WDS) is the largest ASX-listed oil and gas producer, and in the top 10 globally. While its share price has come under pressure, Woodside’s fundamentals have benefited from resilient oil/LNG prices, steady group production, progress on delivering its key growth projects, a robust level of profitability, and clear focus on its dividend profile. Woodside’s dividend payout ratio has averaged 80% of earnings for the last +5 years, which is impressive given the last 2 years have been a capex-heavy phase as its progressed construction of the Scarborough, Pluto Train 2, and Sangomar projects. With gearing remaining low and cash flow set to grow post the current investment phase, we see Woodside as likely to remain an attractive yield play.

      
WDS research report
      

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