Research Notes

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Research Notes

Valuation contingent on development upside

Dexus Industria REIT
3:27pm
April 9, 2025
Industrial real estate continues to benefit from the record market rental growth of recent years, as existing leases expire and revert to higher market rents, driving further growth in net property income. Whilst less pronounced than the office sector, construction cost increases remain a headwind to future supply and a continued support for current rents. In the case of DXI and its development pipeline, this creates a potential risk should demand soften. DXI trades at a P/NTA discount of 23%, a P/FFO (FY26) multiple of 13.8x and a dividend yield of 6.5%. As with most A-REITs, prospects for the security price to converge with NTA remains. However, we see little catalyst for this to occur for DXI in the short to medium term, as the development risks at Jandakot and earnings dilution from any potential sale of BTP would weigh on the security price. On this basis, we downgrade to a Hold recommendation at $2.60/unit target price.

Double digit comp sales growth continues

Guzman y Gomez
3:27pm
April 8, 2025
GYG’s 3Q25 was another strong period of top line growth with comp sales starting the quarter at ~12% and exiting at ~10%. The slight deceleration was, in our view, driven by comps strengthening in the pcp. We make slight revisions to our forecasts reflecting lower comp sales growth given we had previously expected comp sales growth to continue accelerating through the 3Q25. GYG reiterated its FY25 guidance for NPAT to exceed its prospectus forecasts. Despite GYG trading on steep multiples, we are attracted to its strong and long-dated earnings growth profile which will, in our view, reward investors over the long term. At the current share price, we see GYG delivering a 5-year IRR of ~16%. ADD maintained.

1H25 result preview

Bank of Queensland
3:27pm
April 8, 2025
While the combination of dividend yield and upside potential justifies accumulating BOQ ahead of its 1H25 result, we are cautious of a savage market reaction if it delivers below expectations (eg. Bendigo’s 1H25 result in Feb albeit BOQ is trading on lower multiples than BEN was). Hence, we retain a HOLD ahead of the result.

3Q25 pre reporting

Regis Resources
3:27pm
April 7, 2025
RRL delivered another quarter of solid production and cash generation adding A$138m cash. Total gold production for 3Q was 89.7koz, 58.1koz from Duketon and 31.6koz from Tropicana, a beat on our forecast of 86.8koz. A$300m of debt was extinguished during the quarter, RRL is now debt free. Total cash and bullion as of 31 March 2025 was A$367m.

March trading activity

Aust Securities Exchange
3:27pm
April 7, 2025
ASX has recently released its monthly trading activity report for March 2025. It was a better month for cash market volumes overall on the ASX, with the average daily value well up on the pcp. Strong futures volumes were also a call-out in March, however it was a softer month for capital markets activity. Our FY25-FY26 normalised EPS forecasts are largely unchanged at this juncture. However, we incorporate the two remaining tranches of ASX’s partnership program as significant items (FY26 and FY28) into our numbers. Our price target (A$67.20) and Hold recommendation remain unchanged.

Time to flex those gains

Viva Leisure
3:27pm
April 7, 2025
Viva Leisure (VVA) is a health/fitness company that owns and operates gyms in Australia, franchises the Plus Fitness brand in several markets, owns minority stakes in Boutique Fitness Studios and World Gym Australia, and offers technology and payments services to gym operators in Australia. Management’s change in focus at the 1H25 result to optimise its existing corporate gym network will, in our view, be the catalyst for eventual improved share price performance given it will underpin organic EPS growth, better FCF generation and improved profitability (margins and returns on capital). We initiate coverage with an ADD rating and A$1.75 price target.

A little overloaded

Amotiv
3:27pm
April 6, 2025
AOV downgraded FY25 guidance to a ‘marginal’ EBITA decline (from growth) and pointed to group US sales exposure (i.e. tariff impacted) of ~8%. Post the muted 1H25 result update, 2H25 growth expectations were already relatively subdued. The FY25 EPSA downgrade is ~5% (or ~10% for 2H25). AOV’s sell-off (~17%) in part reflects negative sentiment following continued lackluster updates and has been exacerbated by US tariff exposure further softening the FY26 outlook. While FY25 represents a slightly down year (FY25F EPSA -1.2% yoy), we view strong value at current levels (~9x FY26F PE) given the robust cash generation (~10% FCF yield) and relatively defensive core business. Add maintained.

New capital secures future as key catalysts approach

Imricor Medical Systems
3:27pm
April 4, 2025
IMR is now well funded following a successful A$70m capital raising and is set to achieve a number of value adding catalysts. We are focused on the first ventricular tachycardia procedure, additional sales in Europe (and Middle East) and FDA approval for atrial flutter later in the year. Each catalyst has the potential to re-rate the share price. After adjusting our model for the capital raising and increasing the number of procedures per site from FY27 our DCF valuation has increased to A$2.28 (was $2.18). IMR is a key pick and we maintain our speculative buy recommendation.

Another horse in the race

Tasmea
3:27pm
April 3, 2025
TEA is acquiring Kalgoorlie based Flanco Group for $27m upfront consideration (2.6x EBIT based on expected maintainable EBIT of $10.2m). There are also additional annual earn-out payments up to $27m and uncapped overperformance payments. Using the base case of $10.2m EBIT in the first year and +15% growth per annum thereafter (in line with other TEA subsidiary targets), we assume the total consideration is $43m or 4.2x EBIT. This is consistent with recent acquisitions. Adjusting our forecasts to include Flanco, FY25 (2 months) EBIT and EPS each increase by +2%. In FY26, the first full year of ownership, EBIT increases by +11% and EPS by +8%. Based on continued earnings growth, supported by a conservative balance sheet and constructive industry tailwinds, we retain our ADD rating, increasing our 12-month target price to $3.80 (previously $3.65).

Another couple of positives

Findi
3:27pm
April 2, 2025
FND has updated the market on: 1) the impact of a change in the Indian interchange fee level; 2) the redeeming of its Compulsory Convertible Debentures (CCDs); and 3) a capital raising (A$40m institutional placement and A$5m SPP). The interchange fee changes and redemption of the CCDs are earnings positive, adding ~+A$14m to NPAT from FY27. We lift our FND FY26F/FY27F NPAT forecasts by +A$2m/+A$10m. Some of the upgrades for the interchange fee change and CCD restructure are offset by higher normal interest expense, tied to Brown Label ATM capex spend. Our target price rises to A$8.35 (from A$7.95). FND management are executing well on the company’s overall build out and with significant upside potential existing to our price target, we maintain our ADD call.

News & Insights

From Houthi attacks on Suez Canal shipping to Trump’s Operation Rough Rider and Iran’s nuclear facility strikes, explore how these events shape oil prices.

At the beginning of the week, I was asked to write something about Iran. When I started looking at what had been happening , I realised that what we were talking about begins with an action by a proxy of Iran back in November 2023. How  that was initially handled with the Biden regime, and how then it was dealt with  deftly by Trump this year,   in turn led to  the need for an attack on Iran's nuclear facility.

Winston Churchill noted in his first volume of his history of the Second World War that it was important to understand that the United States is primarily a naval power. Indeed, the US remains the world dominant naval power. As such, two major strategic concerns remain for the US : the control of the Suez Canal and the Panama Canal .

To the US The idea that another country might block access to either of these must be intolerable. Yet what began happening, beginning on the 19th November 2023, was that , Houthi rebels that controlled a the northern part of a small country in southwestern Arabia, began to act. These Houthi rebels were acting as a proxy for Iran. They were funded by Iran, and armed with Ship-killing rockets, by Iran.

By February 2024, they had attacked 40 ships which had been attempting to sail northwards towards the Suez Canal. By March 2024, 200 ships had been diverted away from the Suez Canal and forced to make the longer and more expensive voyage around the Cape of Good Hope of South Africa. At this point, I think The Economist magazine said that this was the most severe Suez crisis since the 1950s.

The U.S. did respond. On the 18th December 2023, the U.S. had announced an international maritime force to break the Houthi blockade. On the 10th January, the UN National Security Council adopted a resolution demanding a cessation of Houthi attacks on merchant vessels.

As of the 2nd January 2024, the Houthis had already recorded 931 American and British airstrikes against sites in Yemen. Then Trump came to power. To Trump, the idea of the proxy of Iran blockading the Suez Canal could not be tolerated.

From the 15th March 2025, Trump began "Operatation  Rough Rider". This was named for the cavalry commanded by the then-future President Theodore Roosevelt, who charged up San Juan Hill in Cuba during the Spanish-American War of 1898. The U.S. then hit the Houthis with over a thousand airstrikes. So they were bombing at ten times the rate they previously had been. The result of that was that by the 6th March 2025, Trump announced that the Houthis, these proxies of Iran, had capitulated as part of a ceasefire brokered by Oman. This directly led to the main game.

It was obvious that the decision to do the unthinkable, and block the Suez Canal, had come from Iran.
What other unthinkable things was Iran considering?

It is obvious that Trump now believed that the next unthinkable thing that Iran was considering was nuclear weapons. As Iran's other proxies collapsed, Iran's air defence collapsed. In turn, this gave Trump the room to act, and he took it. He launched a bombing raid which severely disabled Iran's nuclear capacity. Some say it completely destroyed it.

Iran retaliated by launching 14 rockets at the American base in Qatar, warning the Americans this was going to happen, and this had no other effect than allowing Iran to announce a glorious victory by themselves over the Americans. Iran had thought the unthinkable and had achieved what was, to them, as a result, an unthinkable reverse.

The ceasefire that has followed has been interpreted by markets as a relief from major risk. Now, the major effect of this on markets has been a dramatic rocketing in the oil price, followed by a fall in the oil price. So I thought I’d look at the fundamentals of the oil price, from running two of my models of the Brent price, using current fundamentals.

Now, the simplest model that I’ve got explains 63% of monthly variation of the Brent oil price. And it’s based on two things. One is the level of stocks in the U.S., which are published every week by the Energy Information Administration .  Those stocks are  down a bit in the most recent months because this is the summer driving season where oil stocks are being drawn down to provide higher demand for gasoline. So that’s a positive thing. And the other thing that I’ve been talking about this year is that I think  we’re going to see a steady fall in the U.S. dollar, and that’s going to generate the beginning of a recovery in commodities prices. So if I also put the U.S. dollar index into this model, it gives me an equilibrium model now of $78.96. And that’s about $US12  higher than the oil price was this morning.

If I strengthen that model by adding the U.S. CPI, because, you know, the cost of production cost of oil raises over time, that increases the power of the model . And that lifts the equilibrium price very considerably to $97 a barrel, which is $30 a barrel higher than it currently is. So I regard that as my medium-term model, and the first one is my short-term model.

What’s really interesting is that the U.S. dollar  has continued to fall.  That puts further upward pressure  on the oil price. So in spite of this crisis having been solved, I think we’re going to see more upward price action on the oil price by the end of the year.

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The US economy is growing strongly at 2.34% in Q2 2025 but is expected to slow to 1.4% in 2025, with falling interest rates and a weaker US dollar likely to boost commodity prices, benefiting Australian markets. Michael Knox discusses.

We think the US economy is currently experiencing solid growth, with data from the Chicago Fed  National Activity Index indicating an annual growth rate of just above  2%. This aligns with projections from other parts of the Federal Reserve System, such as the New York Fed. The New York Fed’s weekly Nowcast, updated every Friday, estimates that for the second quarter of 2025, the US economy is growing at an annualised rate of 2.34%, surpassing the 2% mark. This robust growth is consistent with our model’s view that the US economy is now performing strongly. However, we anticipate a slowdown in the second half of 2025.

On 18 June the Fed released its Summary of Economic Projections  with the Federal Reserve’s  forecasting US GDP growth to drop to 1.4% in 2025, down from their March estimate of 1.7%. Looking further ahead, growth is expected to pick up slightly to 1.6% in 2026 and 1.8% in 2027, aligning with the long-term trend growth rate of around 1.8%. We believe this recovery trend could be even  higher,  driven by reduced regulation under the second Trump administration and aggressive tax write-offs for companies building factories in the US, allowing 100% write-offs for equipment and buildings in the first year. This policy should foster stronger systemic growth.

Economic Projections of the Federal Reserve

The Fed expects that as the economy slows,  unemployment is projected to rise to 4.5% from the current level of 4.2%. Inflation, measured by the Consumer Price Index (CPI), is running at 3.5% this year, approximately 50 basis points higher than the Personal Consumption Expenditures (PCE) index of 3.0%, with 1.6% of this  inflation  attributed to tariffs. The Fed expects PCE Inflation  to ease to 2.4% in 2026 and 2.1% in 2027. The Federal Reserve anticipates cutting the effective  federal funds rate, currently at 433 basis points (according to the New York Fed), by 50 basis points by the end of 2025, followed by an additional 25 basis points in each of the next two years. This aligns with our own Fed Funds rate  model’s current equilibrium federal funds rate of  3.85% . The Fed Outlook  supports our scenario of a slowing US economy and rate cuts in the second half of 2025 and beyond. A falling US dollar is then expected to exert upward pressure on commodity prices, benefiting Australian Equity markets.

Taking questions during the Press Conference after releasing the Fed statement  ,Federal Reserve Chair Jay Powell,   addressed the certainty and uncertainty surrounding the inflationary effects of tariffs. Initially, at the start of 2025, the inflationary impact of tariff policies was unclear, but three months of favourable inflation data have provided this clarity, indicating that the inflationary effects are less severe than anticipated. Powell noted that the Feds own uncertainty on the inflationary effects of  tariffs  peaked in April 2025, and the Federal Reserve now has a clearer understanding that  the inflation effects, are lower than initially expected.

The Fed view  supports our own scenario of a slowing US economy in the second half of 2025, allowing for Fed rate cuts  . This in turn should then lead to  a falling US dollar, which we in turn  expect to drive rising commodity prices.

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The Your Wealth publication is our half yearly scrutiny into current affairs for wealth management. Our latest Issue 29 is out now.

The second half of 2025 will be an interesting time for everyone. Geopolitical uncertainty prevails. How will all of this impact the Australian investor and in particular, their wealth and retirement savings? Whether you are an accumulator, saving for short- and long-term goals, or a retiree, hoping for a comfortable retirement, the ability to manage this uncertainty will be key.

When we published the previous Your Wealth – First Half 2025, the Division 296 Bill (Div296) was also facing uncertainty. The Bill was eventually blocked in the Senate prior to the Federal Election. The Labor Party succeeded in winning so it’s Ground Hog Day for Div296. The Government doesn’t have the numbers in the Senate to pass the Bill without support from other parties. The Greens are the likely negotiating party but will undoubtably have their own agenda. Regardless, there is a high probability this legislation will be passed once Parliament resumes.

Our message to our clients is to wait until we know more details and to not act in haste.

In addition to our Feature Article which provides further insights on Div296, this edition also Spotlights the Aged Care changes due this year, with the start date pushed back to 1 November.

We hope readers enjoy this edition of Your Wealth.


Morgans clients receive exclusive insights such as access to our latest Your Wealth publication. Contact us today to begin your journey with Morgans.

      
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