Jabin Hallihan, Morgans
Macquarie Group (MQG)
This global diversified financial group appears to be tracking well so far in fiscal year 2019. We feel earnings risk is most likely to the upside in the near term. MQG shares have fallen recently, making our $130.72 valuation more attractive. We retain our add rating for MQG. The shares closed at $110.13 on October 25.
Senex Energy (SXY)
Remains one of our key sector picks. It holds corporate appeal given its demonstrated scalable gas reserves linked to east coast infrastructure. These gas reserves could ultimately overtake SXY’s Roma North and Cooper Basin operations as the company’s most valuable. Should this happen, expect sizeable consensus upgrades along the way. We retain our add rating for SXY.
At its core, we believe Brambles is a strong business with dominant global market positions, high barriers to entry and relatively defensive characteristics. However, in the short term, we believe the operating environment remains challenging, particularly in the US. In our view, ongoing cost pressures are likely to limit earnings growth for this logistics company. But, we view the company’s valuation as fair and, therefore, retain our hold rating.
We downgrade earnings per share between 4 per cent and 6 per cent for fiscal year 2019/20 on forecasts of lower sales and margins. But we continue to like the CGF story longer term. We note fiscal year 2019 growth guidance for net profit before tax of between 8 per cent and 12 per cent. This is impressive compared to most other financial stocks. However, we believe this investment management firm is fairly valued given pressures currently facing the business.
ASX Limited (ASX)
The ASX remains a quality franchise. But with large near term investments planned, we think the ASX is likely to deliver low to mid single digit earnings per share growth over the next few years. That makes it difficult for us to justify the company’s recent fiscal year 2019 price/earnings multiple above 25 times, so we retain a reduce call.
On August 22, the company announced the acquisition of Quadrant Energy for $US2.15 billion, plus potential contingent payments related to the Bedout Basin. We like the addition of Quadrant assets, but it means committing STO’s repaired balance sheet, while also seeking to support its share of Papua New Guinea expansion and possibly an acceleration of development and output at the Gladstone LNG upstream project. In our view, the combined capital expenditure burden, in addition to the load already on STO’s balance sheet, may stretch capital resources. We retain a reduce rating.
Justin Klimas, Wilsons
Monadelphous Group (MND)
The outlook for this engineering contractor is positive, as the company is well placed to benefit from favourable market conditions in the resources and energy sectors. Major project approvals involving iron ore in Western Australia and coal in Queensland will act as catalysts for the share price. We expect increasing opportunities in base metals, lithium and infrastructure projects to provide further upside.
This global packaging company’s recent trading update confirming earnings guidance highlight that the headwinds experienced in financial year 2018 are temporary. We believe the acquisition of US based rival Bemis will generate long term value for AMC shareholders.
This data centre operator has made an unconditional on-market takeover offer for Asia Pacific Data Centre Group (the landlord of one of their data centres) for $2 a share. This transaction will resolve a long dispute between tenant and landlord. We see merit in NXT’s longer term strategy to own data centres. Rent cost savings should be achieved from the acquisition.
Domino’s Pizza Enterprises (DMP)
We believe the company will need to focus more on franchisee profitability to ensure sustainable outlets over the long term. However, this is likely to have a negative impact on margins.
Silver Chef (SIV)
This hospitality equipment financier has commenced discussions with potential subordinated lenders for much needed capital. The outcome of these discussions will paint a picture about the company’s financial health going forward. We’re concerned about the company’s bargaining position and dwindling positive catalysts.
Julia Lee, Bell Direct
ANZ Bank (ANZ)
The shares are the most oversold that we’ve seen since 2016 and are due for a bounce. Recently trading on a dividend yield of 6.3 per cent, or 9 per cent on a fully franked basis, the shares are looking relatively cheap. While the banks face many headwinds, including slowing mortgage growth and rising regulatory and compliance costs, the market, in our view, has over-reacted to these factors. With ANZ due to go ex-dividend in November, this stock should be well supported to the end of the year.
Vocus Group (VOC)
Markets love a recovery story and this company is obliging. This is a transitional year and new management is setting the stage for earnings growth over the next three to five years. Also, the tilt back to growing interest in defensive sectors should see the telecom sector outperform during the next 12 months. One of the most highly leveraged plays in the telecom space is Vocus.
QBE Insurance Group (QBE)
QBE’s strategy to maintain operations in all key insurance markets means its diversification strategy helps to manage risk. The tailwind of rising US interest rates should boost earnings from its investment portfolio. QBE is a hold here and should hover around $11. The shares closed at $11.17 on October 25.
CYBG PLC (CYB)
While earnings uncertainty has hit the stock due to a potential Brexit, the market is overlooking the recent merger with Virgin Money. With synergies yet to be extracted, this is one to hold in the bottom drawer over the next few years. Synergies and growth from the Virgin Money merger should start to factor into this banking stock’s valuations and opportunities.
Nick Scali (NCK)
A softer housing market has hit this furniture retailer. With a housing recovery between 18 months to 24 months away, we believe much better value can be found elsewhere. Also, the value added from retail companies is generated via the rollout of stores while sales are expanding. The softness in housing related products means the old strategy of expanding through store rollouts will need to be put on hold, or, in our view, the company could see an increase in risk measures. Perpetual (PPT)
With the growing popularity of passive funds together with added volatility in markets, Perpetual, in our view, needs to change or shrink. With a new CEO and CFO, this diversified financial services company needs to adapt quickly to a rapidly changing and competitive environment. Weaker markets make change more difficult due to the costs involved and rising costs are unpopular in a softer growth environment.
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