Research Notes

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Research Notes

Continued progress across the bulk of the portfolio

Frontier Digital Ventures
3:27pm
March 1, 2024
FDV’s FY23 NPAT of -A$8.59m (FY22 -A$10.2m) came in better than Morgans expectations (-A$10.5m), whilst statutory revenue (~A$68m, +15% on the pcp) was in-line with Morgans forecasts. While FDV Associate businesses continue to face economic headwinds, this result showed a continued improving earnings trajectory across FDV’s consolidated portfolio, in our view. We lift our FDV FY23F/FY24F EPS by >10% respectively mainly on improved group EBITDA margin assumptions. Our PT is largely unchanged at A$0.79 (previously A$0.77). We continue to be attracted to FDV’s long-term growth profile and the earnings potential of the assembled portfolio. ADD maintained. We lift our FDV FY23F/FY24F EPS by >10% respectively mainly on improved group EBITDA margin assumptions. Our PT is largely unchanged at A$0.79 (previously A$0.77).

Major step forward in cardiac ablation

Imricor Medical Systems
3:27pm
March 1, 2024
Imricor Medical Systems (IMR) develops medical devices for the treatment of irregular heartbeats, which are safer, quicker and more effective than current treatment methods. Current approval (in Europe) for atrial flutter is being expanded into other indications (atrial fibrillation and ventricular tachycardia), which will significantly increase the market potential. According to management and our literature searches, the estimated total addressable market (TAM) is >US$8bn. IMR’s recent capital raising enables it to fund additional clinical studies, reactivate sites in Europe and commercially launch in the Middle East and Australia. We initiate coverage on IMR with a DCF based valuation and target price of A$0.96 and a Speculative Buy recommendation.

DPS guidance far above growing free cash flows

Atlas Arteria
3:27pm
February 29, 2024
The 2H23 result was broadly as expected. No material change to EBITDA forecasts. The new free cashflow incentive signals that cashflow will remain below FY24 DPS guidance for years to come. We estimate the shortfall can be supplemented by surplus cash and another capital release, but DPS growth may not be on the horizon for at least this decade. Cash yield at current prices is c.7.3%. We estimate an intrinsic value of ALX at $4.99/sh based on DCF, or $5.63/sh if the spice of uncertain IFM takeover potential is added. HOLD retained.

Positioned well for continued growth into 2H

Airtasker
3:27pm
February 29, 2024
Airtasker’s (ART) 1H24 result (whilst largely pre-released) was a solid performance in what has been a challenging consumer environment (booked tasks -~5% on pcp). Positives include the group seeing revenue growth (+~7% on pcp to ~A$23m) on an improved take-rate and the business achieving positive free cash flow in the period. We make minor adjustments to our estimates over FY24-FY26 (details below). Our price target remains unchanged at A$0.54. We maintain an Add recommendation.

First step to 10Mlb uranium per year

Deep Yellow
3:27pm
February 29, 2024
Deep Yellow’s portfolio contains an attributable resource base of 420Mlb of U3O8, to support the aspirational goal of production of +10Mlb per year of U3O8, from the stable jurisdictions of Namibia and Australia, with Tumas, in Namibia, the more advanced, and the fully-permitted Mulga Rock, Western Australia. A final investment decision (FID) for Tumas is anticipated in the September 2024 Quarter for this US$360M development with production projected up to 3.6 Mlbpy of uranium yellow cake (U3O8), at a projected All-in sustaining cost (AISC) of US$38.80/lb U3O8 after a vanadium by-product credit of sub-US$3.00/lb U3O8. The DYL management team has successful experience in developing and operating uranium production, in particular at nearby Langer Heinrich, operated by Paladin Energy (ASX:PDN – 75%), and which provides a template for Tumas.

1H beat- "the worst is past us"

Ramsay Health Care
3:27pm
February 29, 2024
1HFY24 results were above expectations, driven by mid-to-high single digit admissions growth across key geographies, tariff and indexation gains, as well as lower tax and minority interest. Earnings improved in Australia and UK, with a turnaround in Elysium, but were offset by ongoing inflationary pressures in the EU. While wage pressures have “stablised”, digital/data investments and higher funding costs remain a drag on full margin recovery, but growing volumes and numerous productivity initiatives portend an improving earnings profile. We adjust FY24-26 earnings modestly, with our price target increasing to A$60.76. Add.

Services drag on an otherwise decent result

ImexHS
3:27pm
February 29, 2024
IME released its FY23 result, which was in-line with our topline expectations, although EBITDA came in lower than expectations with the services division creating a margin drag across the business. FY24 looks to be a more positive year with an enhanced software value proposition expected to accelerate software market traction in LATAM, whilst the services division focuses on generating margin expansion through a review of its customer profile and profitability. Expecting a turnaround here. We have made a number of changes to our forecasts and currently sit at the bottom end of the updated consensus range. Our target prices reduces marginally to A$1.50 p/s (from A$1.80 p/s) and retain a Speculative Buy recommendation.

1H24 result: Building for the long-term

NTAW Holdings
3:27pm
February 29, 2024
We revise our coverage approach for NTD, continuing to monitor and provide updates (we will cease providing a rating, valuation, and forecasts). Our previous forecasts, target price and recommendation should no longer be relied upon for investment decisions. For 1H24, NTD reported: Sales down -10.5% on the pcp (-7.5% hoh); EBITDA up 25.5% (-15% hoh); and NPATA up +64% (-65% hoh). NTD is undertaking a meaningful business transformation (brand rationalisation; business reorganisation; and warehouse consolidation); in order to reposition and refocus the business for the long term. However, given the significant operating leverage in the business, this disruption has created short-term earnings volatility. Despite improving margins through the half, the lower revenue outcome resulted in lower underlying EBITDA of A$19.7m (+25.5% pcp; -15% hoh) and underlying NPATA of A$2.3m (+64% pcp; -65% hoh). NTD closed 1H24 with net debt of A$63.1m and leverage (net debt / annualised 1H24 EBITDA) of 1.6x (excl. leases) and ~3.5x (incl. leases). Operating cash flow A$9.9m (-A$1.4m pcp) and inventory was +2% on Jun-23 (closing at A$132.7m).

Lonsec to the fore

Generation Development Group
3:27pm
February 29, 2024
GDG’s 1H24 Group underlying NPAT (A$4.9m, +67% on the pcp) was +2% above both MorgansE and consensus (A$4.8m).  While the 1H24 Investment Bond business result was a bit below our expectations, this was overshadowed by a stand-out performance from Lonsec. We lift our GDG FY24F/FY25F EPS by ~4%-8% driven mainly by higher Investment Bond sales forecasts and improved Lonsec earnings. Our target price rises to A$2.30 (from A$2.01). We continue to believe GDG is well positioned to execute a compound earnings growth story over time. ADD maintained.

Correction to earnings forecasts

Adrad Holdings
3:27pm
February 29, 2024
We issue this report to correct our earnings forecasts for FY24-26, which previously did not properly adjust for the impact of AASB16 on underlying EBITDA. These adjustments see FY24-26F underlying EBITDA rise by between 28-30% and underlying NPAT increase by 42-50%. Despite these changes, our base assumptions for FY24 remain unchanged. We continue to forecast FY24 revenue growth of 6% and underlying EBITDA to be up 7%. This is compared to management’s guidance for FY24 revenue and pro forma EBITDA growth of between 5-8%. Our equally-blended (SOTP, PE, DCF) target price lifts to $1.45 (from $1.30) and we maintain our Add rating.

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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