Research Notes

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Research Notes

Praying for rain and ACCC approval

Elders
3:27pm
May 26, 2025
While ELD’s 1H25 result was up strongly, it was weaker than expected. 1H25 was a period of two different quarters. The 1Q25 benefited from a return to normal conditions, however the 2Q25 was impacted by the cyclones and drought. Outlook comments were cautiously optimistic. We have revised our forecasts. Focus is now on a successful ACCC outcome on 29 May regarding ELD’s acquisition of Delta Agribusiness. We retain an Add rating with a new PT of A$8.55.

International Spotlight

Cisco Systems, Inc.
3:27pm
May 26, 2025
Cisco Systems, Inc. (CSCO) is a leading multinational technology conglomerate headquartered in San Jose, California. The company has established itself as a dominant force in the digital communications landscape since its founding in 1984.

International Spotlight

Chipotle Mexican Grill
3:27pm
May 26, 2025
Chipotle Mexican Grill is the largest fast-casual restaurant chain in the US with total system sales of US$9.9bn in 2023. Chipotle’s store network is mainly company-owned and not franchised (apart from the Middle East). Chipotle sells burritos, burrito bowls, quesadillas, tacos, and salads made using fresh, high-quality ingredients, with a selling proposition built around competitive prices, high-quality food sourcing, speed of service, and convenience. It had a footprint of nearly 3,440 stores at the end of 2023, heavily indexed to the United States, although it maintains a small presence in Canada, the UK, France, and Germany.

International Spotlight

Palo Alto Networks, Inc.
3:27pm
May 26, 2025

Just the start

ALS Limited
3:27pm
May 25, 2025
The shares have been strong to start CY25 (+17% vs XJO +2%). Notwithstanding, the market is yet to give ALQ full credit for an upcycle in Commodities post the trading update that 4Q sample volumes were up +9-10% YoY (FY26 Commodities consensus revenue is +8%). In our view, there are still some lingering doubts as to whether this growth is sustainable. Our industry feedback gives us confidence that this was not a one-off. The cadence of IMD tool volumes (+1% in March to +4-5% in May) as well as the delays for turnaround times in Australia almost unequivocally implies that conditions are improving. Our regression analysis, based on our raisings data, suggests that ALQ’s Commodities revenue may be up +16% in FY26 and +24% in FY27 without considering any pricing/mix benefits. If ALQ delivers this growth across FY26-27, we estimate EPS growth would be +25-30% in each year, translating into FY27 EPS of >$1, noting that ALQ trades on 24-25x PE in an upcycle. We factor in some conservatism and forecast revenue growth of +10% in FY26 and +12% in FY27 which sees EPS growth of +18% in each year. Our price target moves to $20.50 (from $17.50).

Always looking for growth opportunities

Wesfarmers
3:27pm
May 23, 2025
WES’s annual strategy briefing day provided insights into the growth opportunities available for each business division and the strategy going forward. No trading update was provided for the retail divisions but updated guidance was given for the Lithium business. Regarding consumer behaviour, management said there’s largely been a continuation of trends seen in February with lower income households doing it tough and those that own homes continuing to spend. We decrease FY25-27F group underlying EBIT by between 0-1% due to a reduction in WesCEF forecasts to reflect updated Lithium guidance. Our earnings forecasts for the other divisions remain unchanged. Given management only provided guidance for the Lithium business, we take this to indicate they are comfortable with consensus forecasts for the remaining divisions. We therefore see less risk of disappointment at the upcoming FY25 result and increase our target price to $75.80 (from $72.05). With a 12-month forecast TSR of -5%, we retain our Hold rating.

Here we go again and what will be left?

Nufarm
3:27pm
May 22, 2025
NUF’s 1H25 result materially missed consensus estimates with Seed Technologies in particular disappointing. Gearing was well above its targets at 4.5x. Outlook comments were cautious given Omega-3 revenue targets are no longer achievable and this business will likely incur another large write-down in the 2H25. There are also tariff risks and weather uncertainty. We have made material revisions to our forecasts. NUF will now likely report a full year loss. Given the state of its balance sheet and future capital requirements, Seed Technologies is now effectively up for sale in full or in parts. In our view, NUF is in the too hard basket until we know what this company consists of moving forward and it gets its leverage ratios down to more acceptable levels.

DPS update: TY-25/26 guidance higher than forecast

Dalrymple Bay Infrastructure
3:27pm
May 22, 2025
DBI’s DPS guidance released this week beat expectations. We have upgraded our FY25-27F DPS by 1-2%. No material change to earnings forecast. ADD retained, with 12 month price target of $4.35/sh. Potential 12 month TSR of c.12%, including cash yield of 6% at current prices.

Tungsten strategic mineral

EQ Resources
3:27pm
May 22, 2025
EQ Resources is the largest non-Chinese producer of tungsten, with annual capacity above 240,000 metric tonne units (mtu) of tungsten in concentrate from Barruecopardo, Spain, and Mt Carbine, Queensland. Both mines have the resource base to support the doubling of current output, with upgrades to the process plant in Spain in progress. Tungsten is a strategic metal for advanced industrial and military applications, with China supplying over 85%. In August 2023 China imposed restrictions on tungsten exports, and in February 2025 imposed stricter controls on a range of critical minerals including tungsten. This has resulted in a strong rise in the price, and a move amongst Western users to ensure security of supply. EQR reported that cash declined marginally to A$1.9M at 31 March 2025 (A$2.0M previously) with low production and sales from Mt Carbine, affected by the 2024/25 wet season. EQR has raised A$19.4M with a placement at A3.5cps. Major shareholder Oaktree Capital subscribed A$8.75M. A strong tungsten price and tightening supply should support cashflow generation from both operations which will support share price appreciation.

Upgraded FY25 FFO guidance

Dexus Industria REIT
3:27pm
May 22, 2025
Dexus Industria REIT (DXI) has upgraded its FY25 FFO guidance +2% to 18.1c per share (previously 17.8c), above both MorgansF and VA consensus of 17.9c. The company says the increase in guidance has been primarily driven by lower net finance costs and higher income from Jandakot Airport operations. Additionally, distribution guidance for FY25 remains unchanged at 16.4c. Following the announcement, we have an incremental increase in net property income flowing from the development pipeline and lowered 2H25 interest costs. DXI trades at a P/NTA discount of 17%, a P/FFO (FY25) multiple of 15.3x and a distribution yield of 6%. We retain a Hold rating with a revised $2.65 per security price target.

News & Insights

In our International Reporting Season Review, we provide an overview of the March 2025 quarterly results season for companies in the Americas, Europe and Asia.

Positive earnings surprise

In our International Reporting Season Review, we provide an overview of the March 2025 quarterly results season for companies in the Americas, Europe and Asia. For all the volatility in markets caused by US trade policy, the results were positive. For all the 187 high profile and blue-chip companies in our International Watchlist, the median EPS beat vs consensus was 3.2%, nearly twice that recorded in the December quarter (1.8%). 37% of companies exceeded consensus EPS expectations by more than 5% and only 9% missed by more than 5%. Communication Services was the most positive sector, led by Magnificent 7 companies Alphabet and Meta Platforms. The median EPS beat in that sector was 13%. Consumer Discretionary was the biggest disappointment (though only a mild one) with EPS falling 0.6% short of analyst estimates on a median basis.

Alphabet and Meta among the best performers

Across our Watchlist, some of the best performing stocks in terms of EPS beats were Alphabet, Boeing, Uniqlo-owner Fast Retailing, Meta Platforms, Newmont and The Walt Disney Company. Notable misses came from insurance broker Aon, BP, PepsiCo, Starbucks, Tesla and UnitedHealth. The latter saw by far the worst share price performance over reporting season, its earnings weakness compounded by the resignation of its CEO and the launch of a fraud investigation by the Department of Justice. British luxury fashion label Burberry had the best performing share price as it gains traction in its turnaround plan.

Tariffs were the main talking point (of course)

The timing of President Trump’s ‘Liberation Day’ on 2 April, just before the March quarter results started rolling in, guaranteed that US tariffs would be the main talking point throughout reporting season. Most companies took the line that higher tariffs presented a material risk to global growth and inflation. The rapidly shifting sands of US trade policy mean the impact of tariffs is highly uncertain. This didn’t stop many companies from trying to estimate the impact on their profits. This ranged from the very precise ($850m said RTX) to the extremely vague (‘a few hundred million dollars’ hazarded Abbott Laboratories). The rehabilitation of AI as a systemic driver of long-term value was a key theme of reporting season, with many companies reporting what Palantir Technologies described as an ‘unstoppable whirlwind of demand’ and others indicating an increase in planned AI investment. The deterioration in consumer confidence was another key talking point, though most companies could only express concern about a possible future softening in demand rather than any actual evidence of a hit to sales.

Our International Focus List continues to outperform

In this report, we also report on the performance of the Morgans International Focus List, which is now up 25.3% since inception last year, outperforming the benchmark S&P 500 by 20.4%.


Morgans clients receive exclusive insights such as access to our latest International Reporting Season article.

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The U.S. and China, through negotiations led by the Chinese Deputy Premier and U.S. Treasury Secretary Scott Bessent, agreed to a 90-day tariff reduction from over 125% to 30% and 10% respectively

US and Chinese actions had led to an unintended embargo of trade between the world’s two largest economies.

In recent days there has been discussion of the temporary “cease fire” in the tariff war between the US and China.

The situation was that both countries had levied tariffs on each other more than 125%. This had led to a mutual embargo of trade between the two world is two largest economies. Then as a result of negotiation between the Deputy Premier of China and US Treasury Secretary Scott Bessent both China and the US agreed to a 90 day pause in “hostilities” where both sides agreed to reduce the US tariff on the China to 30 percent and the Chinese tariff on the US to 10%.

Some suggested that this meant that “China had won” others suggested that the “US had won.” To us this really suggests that both parties were playing in a different game. The was a game in which both sides had won.

To understand why this is the case we must understand a little of the theory of this type of competition. Economists usually use discuss competition in terms of markets where millions of people are involved. In such a case we find a solution by finding the intersection of supply and demand which model the exchange between vast numbers of people.

But here we are ware talking of a competition where only two parties are involved.

When exceedingly small numbers like this are involved, we find the solution to the competition by what is called “Game Theory.”

In this game there are only two players. One is called China, and the other is called the US. Game theory teaches us that are there three different types of games. The first is a zero-sum game. In this game there two sides are competing over a fixed amount of product. Again, this is called " A zero sum game “. Either one party gets a bigger share of the total sum at stake and the other side gets less. This zero-sum game is how most of the Media views the competition between the US and China.

A second form is a decreasing sum game. An example of this is a war. Some of the total amount that is fought over is destroyed in the process. Usually both sides will wind up worse than when they started.

Then there is a third form. This form is called an ‘increasing sum game.’ This is where both sides cooperate so that the total sum in the game grows because of this cooperation. We think that what happened in the US and China negotiation was an increasing sum game.

As Scott Bessent said at the Saudi Investment Forum in Riyadh soon after the agreement was signed, “both sides came with a clear agenda with shared interests and great mutual respect.”

He said, “after the weekend, we now have a mechanism to avoid escalation like we had before. We both agreed to bring the tariff levels down by 115% which I think is very productive because where we were with 145% and 125% was an unintended embargo. That is not healthy for the two largest economies in the world.”

He went on, “when President Trump began the tariff program, we had a plan, we had a process. What we did not have with the Chinese was a mechanism. The Vice Premier and I now call this the ‘Geneva mechanism’”.

Both sides cooperated to make both sides better off. Bessent added “what we do not want, and both sides agreed, is a generalised decoupling between the two largest economies in the world. What we want is the US to decouple in strategic industries, medicine, semiconductors, other strategic areas. As to other countries; we have had very productive discussions with Japan, South Korea, Indonesia, Taiwan, Thailand. Europe may have collective action problems with the French wanting one thing and the Italians wanting a different thing. but I am confident that with Europe, we will arrive at a satisfactory conclusion.

We have a very good framework. I think we can proceed from here.”

What we think we can see here is that the United States and China have cooperated to both become better off. This is what we call an increasing sum game.

They will continue their negotiation using that approach. This will do much to allay the concerns that so many had about the effect of these new tariffs.

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Treasury Secretary Scott Bessent’s adept negotiation of a US-China tariff deal and his method for assessing tariffs’ modest impact on inflation, using a 20.5% effective rate, position him as a formidable successor to Henry Morganthau’s legacy.

In the 1930s, the US Treasury Secretary Henry Morganthau was widely regarded as the finest Treasury Secretary since Alexander Hamilton. However, if the current Treasury Secretary Scott Bessent, continues to deliver results as he is doing now, he will provide formidable competition to Morganthau’s legacy.

The quality of Bessent’s work is exceptional, demonstrated by his ability to secure an agreement with China in just a few days in complex circumstances.

The concept of the "effective tariff rate" is a term that has gained traction recently. Although nominal tariff rates on individual goods in individual countries might be as high as 100% or 125%; the effective tariff rate, which reflects the actual tariffs the US imposes on imports from all countries, is thought to be only 20.5%. This figure comes from an online spreadsheet published by Fitch Ratings, since 24 April.

Finch Ratings Calculator Screenshot

This effective tariff rate of 20.5% can be used in assessing the impact of import tariffs on US inflation. To evaluate this, I used a method proposed by Scott Bessent during his Senate confirmation hearing. Bessent began by noting that imports account for only 16% of US goods and services that are consumed in the US Economy. In this case, a 10% revenue tariff would increase domestic prices by just 1.6%. With a core inflation rate of 2.8% in the US, this results in a headline inflation rate of 4.4%. Thus, the overall impact of such tariffs on the US economy is relatively modest.

A couple of weeks ago, Austan Goolsbee, the President of the Chicago Fed, noted that tariffs typically increase inflation, which might prompt the Fed to lift rates, but they also reduce economic output, which might prompt the Fed to rate cuts. Consequently, Goolsbee suggested that the Federal Reserve might opt to do nothing. This prediction was successful when the Open Market Committee of the Fed, with Goolsbee as a member, left the Fed Funds rate unchanged last week.

A 90-day agreement between the US and China, masterfully negotiated by Scott Bessent, has dramatically reduced tariffs between China and the US. China now only imposes a 10% import tariff on the US, while the US applies a 30% tariff on Chinese goods—10% as a revenue tariff and 20% to pressure China to curb the supply of fentanyl ingredients to third parties in Mexico or Canada. It is this fentanyl which fuels the US drug crisis. This is a priority for the Trump administration.

How Import Tariffs Affect US Inflation.

We can calculate how much inflation a tariff adds to the US economy in the same way as Scott Bessent by multiplying the effective tariff rate by the proportion that imports are of US GDP. Based on a 20.5% US effective tariff rate, I calculated that it adds 3.28% to the US headline Consumer Price Index (CPI). This results in a US headline inflation rate of 6.1% for the year ahead. In Australia, we can draw parallels to the 10% GST introduced 24 years ago, where price effects were transient and vanished after a year, avoiding sustained high inflation.

Before these negotiations, the US was levying a nominal tariff on China of 145%. Some items were not taxed, so meant that the effective tariff on China was 103%. Levying this tariff meant that the US faced a price effect of 3.28%, contributing to a 6.1% headline inflation rate.

If the nominal tariff rate dropped to 80%, the best-case scenario I considered previously, the price effect would fall to 2.4%, with a headline US inflation rate of 5.2%. With the US now charging China a 30% tariff, this adds only 2% to headline inflation, yielding a manageable 4.8% US inflation rate.

As Goolsbee indicated, the Fed might consider raising interest rates to counter inflation or cutting them to address reduced output, but ultimately, it is likely to maintain current rates, as it did last week. I anticipate the Fed will continue to hold interest rates steady but with an easing bias, potentially cutting rates in the second half of the year once the situation stabilises.

My current Fed Funds rate model suggests that, absent this year's tariff developments, the Fed would have cut rates by 50 basis points. This could be highly positive for the US economy.

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