Research Notes

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Research Notes

Model update: ACCC approval of Citywide acquisition

Cleanaway Waste Management
3:27pm
May 20, 2025
We update our model for inclusion of the Citywide Waste acquisition following ACCC approval of the acquisition that was first announced in June 2024. We view the acquisition as partly defensive (protects the future earnings of CWY’s landfill) and partly growth-oriented (planned expansion of acquired transfer station capacity). While we see little earnings accretion in the short term due to the incremental funding costs and reduced asset earnings during the period of transfer station redevelopment the acquisition returns are delivered over a long period. 12 month target price +3 cps to $2.98/sh. ADD retained, with 12 month potential TSR of c.12% (incl. cash yield of c.2%) and a 5-year potential IRR of c.11% pa.

Bulletproof through the cycle lows

New Hope Group
3:27pm
May 20, 2025
3Q earnings missed our forecasts modestly on lower prices and slightly lower volumes. We like the strong protection offered by Bengalla’s market leading cost structure and NHC’s large net cash position. We think that physical coal markets have bottomed and that NHC offers the safest exposure to accumulate ahead of the next coal price cycle. NHC remains too cheap, but does suit patient/ value investors, particularly as catalysts through the coming shoulder season for thermal coal look limited.

Oropesa, Spain, is the tin flagship

Elementos
3:27pm
May 19, 2025
Strong demand growth is anticipated for tin with the move to electrification, and with supply constraints enhanced by the geopolitical situation, and the appropriate environmental, social and governance (ESG) focus on mining and processing. The definitive feasibility study (DFS), released after meeting the relevant regulatory approvals, confirms a robust project, with a US$156M capital cost and an all-in sustaining cost of US$15,000/t Sn, with a projected long-term US$30,000/t tin price – the current tin price is US$32,574/t (May 2025). Primary applications required to deliver the DFS were submitted in line with the understandings reached with various arms of Administration. There remains a risk that the conditions of the final approvals may be unacceptable to Elementos. We value ELT shares at A$0.50ps, with a Target Price of A$0.30ps, both for the first time, based on the current bid for Atlantic Tin (75% of the Achmmach tin deposit). We move from Not Rated to Speculative Buy.

Upgrade cycle

Monadelphous Group
3:27pm
May 16, 2025
Following today’s contract awards ($180m with ~$60m E&C) we’ve become increasingly confident that MND will achieve >$1bn in E&C revenue in FY26 (vs consensus $946m). This, coupled with more oil & gas construction work, which tends to attract a higher margin due to technical complexities, leaves MND well poised to deliver better than expected earnings in FY26 (MorgansF NPAT +5% vs consensus). It’s too early to forecast FY27 with precision, though the medium-term outlook is rosy given the strong iron ore pipeline out to 2030, which may keep the upgrade cycle continuing for some time. We leave our FY25 forecasts unchanged but increase our FY26-27 NPAT by +4-5% as we incorporate additional E&C revenue as well as incremental earnings from the recent acquisition of High Energy Service. Our price target increases to $19.50 (from $17.50).

Glass market remains subdued

Orora
3:27pm
May 16, 2025
ORA hosted an investor day which included a trading and strategy update as well as a tour of its Dandenong Cans manufacturing facility. Overall, the trading update was softer (approx. -3% at the FY25 EBIT line) than our expectations and management’s guidance provided in February. We adjust FY25/26/27F EBIT by -3%/-4%/-1%. Our target price decreases to $2.03 (from $2.32 previously) on the back of the changes to earnings forecasts and a lower FY26F PE valuation multiple of 15x (from 16.5x previously) due to the weaker-than-expected trading update and the ongoing soft operating outlook (particularly in the glass businesses). Hold rating maintained. We prefer Amcor (AMC) (Add rating, $16.00 TP) in the Packaging sector.

1H25 earnings: A rare slip at the top

Aristocrat Leisure
3:27pm
May 16, 2025
Aristocrat Leisure’s (ALL) 1H25 result had the potential to be a messy one, following the Plarium divestment and limited visibility on the nascent Interactive unit. What we did not foresee was a ~5% shortfall in the core land-based division vs MorgansF and consensus expectations, caused by softer leased FPD and adverse mix in North America. ALL has a proven record of delivering on result day; however, with the shares trading at more than twice its closest peer multiple, even a modest earnings dip is severely punished by the market. Shares were down as much as 15% intraday but have steadily recovered since. Despite the miss, we see no structural change in market dynamics and regard the weakness as a short-term timing and mix issue. Importantly, management reiterated its qualitative guidance of constant currency NPATA growth in FY25 (MorgansF:~4%). Following the result, our FY26-27F EPSA estimates reduce by 6-7 %. We reiterate our Add rating and our 12-month target price reduces to $71 (previously $74).

Not the leverage it once had to a big crop

GrainCorp
3:27pm
May 15, 2025
GNC’s 1H25 result beat consensus estimates. Whilst GNC benefitted from a big crop (third largest on record), its earnings leverage was less than in recent years due to below average grain trading margins and lower crush margins. A large core cash position allowed GNC to reward shareholders with an attractive interim dividend and an upsized share buyback. A stronger than expected 1H25 has seen GNC upgrade its FY25 EBITDA and NPAT guidance by 3.4% and 3.2% at the new mid-point. The outlook for the FY26 winter crop is mixed with positive conditions in the north but the south is dry. We maintain a Hold rating with a new price target of A$8.20 (previously A$8.04).

North America is looking more promising

Xero
3:27pm
May 15, 2025
XRO’s result and outlook commentary were largely inline with expectations. For us, the highlights of the result was improved sales traction and tight cost management, which are supportive of accelerated investment in growth. We upgrade our Target Price to A$215 and our rating to an Add (from Hold).

2025 Investor Day: FCF inflection point in sight

Alliance Aviation Services
3:27pm
May 15, 2025
For some time now, the market has been hesitant to rerate AQZ due to poor cashflow generation and rising debt levels as it has heavily invested in its business. AQZ’s inaugural Investor Day highlighted that leverage will peak in FY25 and is expected to reduce materially in FY26, with its net debt target well below our previous forecast and consensus. The targets imply AQZ will return to generating strong positive FCF in the range of A$65-115m driven by the sale of surplus E190 engines. Importantly, we see this level of FCF being sustainable into FY27 given AQZ will have completed its multi-year fleet expansion. Updated FY25 NPBT guidance, at the midpoint, was ~11% below previous expectations. Whilst this wasn’t a surprise given we were always expecting there to be some impact from Tropical Cyclone Alfred, the quantum of the downgrade was more than we were expecting. As AQZ’s fleet expansion draws to a close over the next 12 months, we think a strong rerating in its share price is highly likely. There are striking similarities to when AQZ’s share price increased ~400% over 2017-19 (declining leverage and improved FCF). AQZ is trading on a FY26 P/E and EV/EBITDA of 6.8x and 3.5x, which compares to pre-COVID (prior to its fleet expansion) of 13-15x and 5-6x.

Fine Tuning Gonneville

Chalice Mining
3:27pm
May 15, 2025
CHN has announced additional enhancements to the metallurgical processing of its 100%-owned, 17Moz 3PGE Gonneville deposit. The latest test work builds on February’s breakthrough, demonstrating improved recoveries for all contained metals from Year 5 onward, and incremental gains in palladium, nickel, and copper recoveries specifically in Year 5. New data also indicates the potential to produce a saleable iron byproduct, further enhancing the project’s economic viability. We maintain our SPECULATIVE BUY rating and lift our target price to A$2.90ps (previously A$2.80ps), underpinned by improved metallurgical recoveries and continued leverage to palladium prices.

News & Insights

On 7 July the AFR published a list of 37 Economists who had answered a poll on when the RBA would next cut rates. 32 of them thought that the RBA would cut on 8 July. Only 5 of them did not believe the RBA would cut, Michael Knox being one of them.

On 7 July the AFR published a list of 37 Economists who had answered a poll on when the RBA would next cut rates. 32 of them thought that the RBA would cut on 8 July. Only 5 of them did not believe the RBA would cut on 8 July. I was one of them. The RBA did not cut.

So today I will talk about how I came to that decision. First, lets look at our model of official interest rates. Back in January 2015 I went to a presentation in San Franciso by Stan Fishcer . Stan was a celebrated economist who at that time was Ben Bernanke's deputy at the Federal Reserve. Stan gave a talk about how the Fed thought about interest rates.

Stan presented a model of R*. This is the real short rate of the Fed Funds Rate at which monetary policy is at equilibrium. Unemployment was shown as a most important variable. So was inflationary expectations.

This then logically lead to a model where the nominal level of the Fed funds rate was driven by Inflation, Inflationary expectations and unemployment. Unemployment was important because of its effect on future inflation. The lower the level of unemployment the higher the level of future inflation and the higher the level of the Fed funds rate. I tried the model and it worked. It worked not just for the Fed funds rate. It also worked in Australia for Australian cash rate.

Recently though I have found that while the model has continued to work to work for the Fed funds rate It has been not quite as good in modelling that Australian Cash Rate. I found the answer to this in a model of Australian inflation published by the RBA. The model showed Australian Inflation was not just caused by low unemployment, It was also caused by high import price rises. Import price inflation was more important in Australia because imports were a higher level of Australian GDP than was the case in the US.

This was important in Australia than in the US because Australian import price inflation was close to zero for the 2 years up to the end of 2024. Import prices rose sharply in the first quarter of 2025. What would happen in the second quarter of 2025 and how would it effect inflation I could not tell. The only thing I could do is wait for the Q2 inflation numbers to come out for Australia.

I thought that for this reason and other reasons the RBA would also wait for the Q2 inflation numbers to come out. There were other reasons as well. The Quarterly CPI was a more reliable measure of the CPI and was a better measure of services inflation than the monthly CPI. The result was that RBA did not move and voiced a preference for quarterly measure of inflation over monthly version.

Lets look again at R* or the real level of the Cash rate for Australia .When we look at the average real Cash rate since January 2000 we find an average number of 0.85%. At an inflation target of 2.5 % this suggests this suggest an equilibrium Cash rate of 3.35%

Model of the Australian Cash Rate


What will happen next? We think that the after the RBA meeting of 11 and 12 August the RBA will cut the Cash rate to 3.6%

We think that after the RBA meeting of 8 and 9 December the RBA will cut the Cash rate to 3.35%

Unless Quarterly inflation falls below 2.5% , the Cash rate will remain at 3.35% .

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Investment Watch is a quarterly publication for insights in equity and economic strategy. Recent months have been marked by sharp swings in market sentiment, driven by shifting global trade dynamics, geopolitical tensions, and policy uncertainty.

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

This publication covers

Economics - 'The challenge of Australian productivity' and 'Iran, from the Suez blockade to the 12 day war'
Asset Allocation
- 'Prioritise portfolio resilience amidst the prevailing uncertainty'
Equity Strategy
- 'Rethinking sector preferences and portfolio balance'
Fixed Interest
- 'Market volatility analysis: Low beta investment opportunities'
Banks
- 'Outperformance driving the broader market index'
Industrials
- 'New opportunities will arise'
Resources and Energy
- 'Getting paid to wait in the majors'
Technology
- 'Buy the dips'
Consumer discretionary
- 'Support remains in place'
Telco
- 'A cautious eye on competitive intensity'
Travel
- 'Demand trends still solid'
Property
- 'An improving Cycle'

Recent months have been marked by sharp swings in market sentiment, driven by shifting global trade dynamics, geopolitical tensions, and policy uncertainty. The rapid pace of US policy announcements, coupled with reversals, has made it difficult for investors to form strong convictions or accurately assess the impact on growth and earnings. While trade tariffs are still a concern, recent progress in US bilateral negotiations and signs of greater policy stability have reduced immediate headline risks.

We expect that more stable policies, potential tax cuts, and continued innovation - particularly in AI - will support a gradual pickup in investment activity. In this environment, we recommend prioritising portfolio resilience. This means maintaining diversification, focusing on quality, and being prepared to adjust exposures as new risks or opportunities emerge. This quarter, we update our outlook for interest rates and also explore the implications of the conflict in the Middle East on portfolios. As usual, we provide an outlook for the key sectors of the Australian market and where we see the best tactical opportunities.


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

      
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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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