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CSL (ASX:CSL) - Behring continues to do the heavy lifting

CSL Ltd. FY24 results were broadly in line, with double-digit underlying top and bottom line growth and strong OCF. Strong plasma collections drove Behring sales (+15%), while Seqirus was soft (+4%) on reduced immunisation rates, albeit above market, and Vifor grew modestly given follow-on products in some EU markets.

We retain our Add rating.

James Hardie (ASX:JHX) - 2QFY25 softness as the market awaits rate cuts

JHX has reiterated its FY25 guidance, while forecasting ‘particularly challenging’ conditions for 2QFY25, resulting in 2Q guidance falling c.13%short of consensus (and our) adjusted net income expectations. This weak 2Qinvariably places additional weight on 2H25, which includes a seasonally weaker December period. With management reiterating FY25 adjusted net income guidance of U$630-700m, we set our forecast at the lower end of the range, acknowledging that lower interest rates will be a positive, when they occur.

We retain our Add rating.

HealthCo REIT(ASX:HCW) - Asset sales, capital management remain on agenda

The FY24 result saw portfolio metrics remain stable (cash collection 100%; occupancy 99%; and WALE +12 years). NTA $1.64. Asset recycling has been a focus during FY24 and management has flagged it will continue to look at asset sales in FY25, although no further detail around the quantum of divestments at this stage.

We retain our Add rating.

Challenger (ASX:CGF) - Continuing to see good earnings momentum

CGF’s FY24 normalised NPAT (A$417m) was in-line with consensus and +14% on the pcp. Overall, we saw this as a positive FY24 result highlighted by a strong improvement in Life business margins/returns, good group cost control and an upward step change in CGF’s capital position.

We retain our Add rating.

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As reporting season kicks off, investors and analysts alike turn their attention to a critical period of corporate transparency. As ASX-listed companies disclose their earnings, our analysts identify key tactical calls around August results, where stock price reactions are flagged to surprise or disappoint.

To help you navigate this reporting season, our team of analysts have handpicked a list of key stocks in the Bank and Fund Manager space that are worth keeping an eye on.

Banks

Insight from Nathan Lead – Senior Analyst

Bank stocks have outpaced broader market performance recently. However, the high share prices do not seem fully supported by projected Return on Equity (ROE) and Dividend per Share (DPS) growth, which are expected to remain relatively flat over the coming years.

The recent share price performance has largely been driven by an increase in key valuation multiples (Price-to-Earnings (P/E) and Price-to-Book Value (PBV)); CBA’s multiples are especially elevated, trading well above historical norms and peers at about 23x P/E and 3x PBV. Meanwhile, cash dividend yields have compressed significantly, making banks less attractive as an income investment; CBA stands out again given its yield has compressed to about 3.4%. Major domestic banks also appear overvalued compared to global peers, based on the relationship between PBV and Return on Equity.; once again CBA’s valuation appears particularly stretched.

In summary, while bank stocks have performed well, their elevated prices may not be justified by future financial prospects and seem high relative to both domestic and international standards.

Commonwealth Bank of Australia

ASX: CBA | REDUCE | 14 August 2024

The REDUCE rating we apply to CBA is not a recommendation for complete divestment; rather, it is a directive to reduce overweight positions. Given current valuations and earnings outlook, it is difficult to foresee substantial returns from investments in CBA over the next 3-5 years. Loan growth is expected to strengthen, and the decline in Net Interest Margin (NIM) may moderate. However, cost pressures are anticipated from increased amortisation and staff expenses and upward normalisation of credit impairment charges.

Asset quality remains resilient, with low write-offs and limited provisioning growth potentially seeing credit impairment expenses being lower than consensus estimates.

For 2H24, we project pre-provision operating profit and Cash EPS to be 3% lower than 1H24, and the DPS remain flat on pcp at $2.40 per share with an increasing payout ratio.

Capital management will be a focus, with CBA undertaking only minimal share buyback activity ($130 million in 2H24) to distribute excess capital.

Key results to watch:

Loan Growth and NIM: Loan growth is expected to strengthen, while the decline in Net Interest Margin (NIM) is anticipated to moderate.

Cost Growth: An increase in costs is projected, primarily due to higher amortisation and staff expenses.

Asset Quality: Asset quality is likely to remain resilient, with low write-offs and minimal provisioning growth, potentially surpassing consensus expectations.

Capital Management: Watch for how CBA plans to distribute excess capital, given it spent only $130 million on share buybacks in 2H24.

Judo Capital aka Judo Bank

There’s more positive outlook on the small-cap JDO, which specialise in SME-focused business lending. As its ROE improves with earnings growth, we anticipate so too should its Price-to-Book Value. The company is reinvesting its earnings rather than paying dividends, which should result in high single-digit to low double-digit compound annual Book Value per share growth. Although JDO is a higher risk investment proposition than the major banks given it is a challenger bank, it offers the potential for higher returns. JDO presents a compelling opportunity if it meets its at-scale targets, potentially becoming Australia's fastest-growing, most efficient, and profitable bank. Current prices suggest a potential internal rate of return (IRR) of approximately 13% per annum over the next five years. For FY24, the projected profit before tax (PBT) is $107-112 million with gross loans of $10.5-10.7 billion. FY25 PBT is expected to rise to $123-129 million, reflecting about 15% growth.

Key results to watch:

Growth and Efficiency: If the company meets its ambitious targets, it could become the fastest-growing, most efficient, and most profitable bank in Australia.

Stock Valuation: Achieving its at-scale targets could make the stock worth around $2.50 per share, thanks to increased book value per share and a higher price-to-book ratio.

Investment Potential: Purchasing the stock at current prices could offer an estimated annual return of about 13% over the next five years.

Fund Managers | Platforms

Insights from Scott Murdoch – Senior Analyst

GQG Partners

ASX: GQG | ADD | 16 August 2024

Whilst current market conditions are volatile, we expect a positive reaction to GQG’s results. Key investment highlights include a potentially significant performance fee boost, notable operating leverage in the half, and impressive funds under management (FUM) growth of 29%, which supports a strong outlook. Additionally, diversification through the Private Capital Solutions business adds value long-term. Key financial expectations are for management fees up 49% compared to the previous period, and operating profit to increase by 65% including our performance fee expectations (57% excluding performance fees).

Key Results to watch:

Performance fee kicker: We think GQG can report above market expectations, with a kicker from performance fees.

Operating Leverage: Margin improvement is expected on the back of strong revenue growth.

Strong FUM growth: Funds under management grew by 29% in the last half, setting up a solid outlook.

Diversification: Expansion through the new Private Capital Solutions segment to provide diversification.

Want to unlock more investment insights? Our Reporting Season Playbook previews the upcoming results for the period to June 2024 of 155 stocks under coverage. In the report, we call out positive and negative surprise candidates and present an overview of the macroeconomic backdrop.

Become a Morgans client to download the 2024 Playbook.

Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Begin your journey with Morgans today to view the exclusive coverage.

This is a featured article from Stockhead's Investor Guide on Health and BioTech FY25. To read the full publication visit here.

Historically, the ASX healthcare sector has delivered strong performance for investors. The S&P/ASX 200 Health Care index outperformed the benchmark S&P/ASX 200 index in seven of the past 10 years, delivering a CAGR of 11.9% compared to 8.1%. As inflation rose, the ASX healthcare sector struggled, but come October 2023 signs of improving investor sentiment emerged.

Looking forward, the outlook feels very positive. Inflation has been sticky and interest rates higher for longer than forecast. However, as rates come down and economic conditions improve, money is expected to continue to flow into the stock market and the emerging healthcare space.

Strong backing for life sciences and biotech

The Australian life sciences ecosystem is worth more than $8 billion in annual revenue and is projected to grow at 3% annually from 2021-2026. Australia’s medical and biotechnology sector has benefited from a multimillion-dollar windfall of government funding and substantial tax breaks for companies investing in R&D. Globally, the sector is projected to be worth around US$3.44 trillion by 2030, and the Federal Government is ensuring Australia will well and truly be at the party.

Milestones and strong sales pushing some stocks higher

As of June 2024 there were 147 companies with a market capitalisation of $236 billion or more on the ASX, according to Bioshares. The top 10 health stocks represent 94% of the total and include blood products giant CSL (ASX:CSL), Cochlear (ASX:COH) and Resmed (ASX:RMD).

As macroeconomic and geopolitical factors continue to impact equity markets, companies hitting major milestones – such as receiving regulatory approval, achieving positive clinical results or securing material sales orders – are performing well.

Those in hot spaces, such as radiopharmaceuticals, are also performing strongly, while solid sales momentum, approaching profitability and leading-edge technologies also tend to move a share price higher.

The lucrative rare diseases market is also getting plenty of attention as investors come to understand the benefits of an orphan drug designation (ODD). In the US perks include increased access to the US FDA, new drug application fee waivers, a potentially faster route to market and seven additional years of exclusivity once a drug is approved.

In most cases, shares are being positively re-rated

After an extended period of under-performance, 2024 has seen several companies refresh management teams and boards or change or refocus strategy in an attempt to revitalise investor interest. In most cases shares are being positively re-rated.

On the M&A front, domestic and international activity has increased. Many larger pharmaceutical and medical device companies with strong post-Covid balance sheets are looking to bolster their portfolios, meaning M&A activity will likely continue throughout 2024.

AI emerging as a major healthcare theme

Artificial intelligence (AI) is also emerging as a theme for healthcare. The Albanese government is investing $30 million in improving access to health services and maintaining Australia’s world class health system.

Healthcare has historically lagged in technology adoption, but the healthcare system’s inherent constraints offer a compelling case for a significant role for AI in the sector’s future. Labour shortages and budgetary pressures are changing current practices, with software being introduced to optimise workflow, enhance scheduling, coordinate care and fortify data security. Also, drug development will likely benefit through shorter development times and improved patient selection, resulting in reduced costs and increasing the number of drugs in the pipeline.

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