Eight top 100 stocks to buy in October
About the author:
- Author name:
- By Andrew Tang
- Job title:
- Analyst - Equity Strategy
- Date posted:
- 06 October 2015, 12:40 PM
- Sectors Covered:
- Equity Strategy and Quant
Negative earnings momentum and increasing short interest suggest to us that some downside risk remains in the short term. We make no changes to our ASX100 high conviction list this month and reiterate our confidence in our current stock selections.
Top stocks to buy in October
Our high conviction picks are companies we think offer the highest risk-adjusted returns over a 12-month timeframe, supported by a higher-than-average level of confidence. They are typically our preferred sector exposures.
Here are our eight top 100 stocks for October:
Amcor Limited (AMC)
Amcor Limited (AMC) is a global packaging company offering a range of packaging related products mainly servicing defensive sectors such as food, beverages, healthcare, personal and homecare and tobacco.
Reasons to buy Amcor Limited
- High quality, defensive business with exposure to higher growth emerging markets. Given its defensive characteristics, we think the stock should be well supported in the current volatile environment.
- Reports earnings in USD. With our expectations of a fall in the AUD/USD is therefore positive when calculating our AUD-based valuation. We expect the AUD/USD to average 73c in FY16 and see upside to our numbers if it continues to depreciate further.
- AMC is always a potential capital management candidate given its strong FCF generation. AMC is around 80% of the way through implementing a US$500m buyback, which should provide support for the share price in the short term. We see potential for further capital management opportunities down the track.
We retain our Add recommendation for AMC with a share price target of A$14.69ps.
ANZ Banking Group (ANZ)
ANZ Banking Group (ANZ) is among the top 20 banks in the world, operating in 33 countries and has the largest exposure to Asia of the major Aussie banks.
Reasons to buy ANZ Banking Group
- With further interest rate cuts looking likely in Australia, we think the domestic banks should continue to perform well.
- We think ANZ offers the best value of the major banks (on a PER and yield basis), and should deliver ROE expansion as it gains economies of scale in its Asian operations.
- ANZ has the largest currency exposure and has leverage to Asian lending where growth should comfortably exceed the anaemic growth in domestic lending.
We retain our Add recommendation for ANZ with a share price target of A$34.59ps.
BHP Billiton (BHP)
BHP is the world's largest diversified resources company, with a large portfolio of highly diversified mining and energy interests across several key commodity markets and regions.
Reasons to buy BHP Billiton
- While broader market volatility has rattled sentiment in the resource sector, aided by the sudden devaluation of the Chinese renminbi and lacklustre Chinese manufacturing data, we believe BHP's business remains well supported by its diversified portfolio of high-margin assets, demonstrated focus on improving capital efficiency, and strong balance sheet.
- We expect BHP's portfolio of predominantly high margin business segments will underpin its progressive dividend. The speed with which BHP has reacted to slowing Chinese growth by shifting its focus to maximising capital efficiency has greatly enhanced the big miner's adaptability and resilience in what has become a weak commodity price environment.
- BHP has flagged its interest in M&A in copper and oil markets (two of our preferred long-term commodity exposures) and offers a superior combination of commodity and market exposures within resources, enhancing the company's ability to defend its strong margins.
We retain our Add recommendation for BHP with a share price target of A$30.50.
Challenger Limited (CGF)
Challenger is an investment management firm managing more than $59.8 billion in assets. CGF focuses on providing Australians with financial security in retirement. Challenger operates two core investment businesses. Life division and Funds Management division.
Reasons to buy Challenger
- We see CGF as likely to offer mid-to-high single digit EPS growth over the medium term. As the market gains further confidence in CGF's ability to maintain recent growth, we see a further re-rating closer towards a market PE level.
- We expect CGF will benefit from a highly volatile equities market through its growing annuities platform as retirees will look to alternative asset classes to provide security of income.
- The successful relaunch of the Care annuity and new platform distribution partnerships should help drive further sales growth.
We retain our Add recommendation for CGF with a share price target of A$7.90ps.
Qantas (QAN)
Qantas (QAN) is the largest airline in Australia providing domestic and international passenger services via its Qantas and Jetstar brands, as well as possessing the largest loyalty program in Australia in Qantas Loyalty.
Reasons to buy Qantas
- The capacity growth outlook is the most favourable for some time in both the domestic and international markets, providing the opportunity for QAN to increase revenue via increased load factors and ticket prices.
- Lower oil prices and a A$2bn internal cost-out program are providing a materials earnings benefit, with QAN likely to return to near record levels of profitability in FY16.
- News flow is a key share price driver of airline stocks and the next 6-12 months is likely to remain positive with monthly operating statistics and the 1H FY16 result reinforcing the strong operating conditions.
We retain our Add recommendation for QAN with a share price target of A$4.65ps.
Ramsay Healthcare (RHC)
Ramsay Healthcare (RHC) is Australia's largest private hospital operator and more recently has expanded its operations into the UK, France and parts of Asia (around 25% of revenue is now generated overseas).
Reasons to buy Ramsay Healthcare
- RHC is benefiting from an aging population which uses more medical services.
- RHC consistently delivers above market earnings and dividends growth (last 17 years averaging 16.8% and 16.6% pa, respectively), and for the next three years is forecast to grow at c13% per annum.
- RHC is expected to benefit from further public hospital outsourcing opportunities.
We retain our Add recommendation for RHC with a share price target of A$73.11ps.
Resmed (RMD)
Resmed (RMD) is a world leader in the development, manufacturing and marketing of medical products to treat sleep apnoea.
Reasons to buy Resmed
- While recent results from the SERVE-HF clinical trial are disappointing, we believe it is ring-fenced from the broader business as the device used in the trial represents <2% of total devices sold and the trial was not targeting the core patient segment; we estimate the total earnings impact at <3%.
- The core respiratory and sleep-disorder breathing market remains intact, underpinned by a large and growing customer base, with favourable trends in obesity, ageing, cardiovascular diseases and increasing diagnosis rates; RMD controls c40% of this market.
- It remains relatively early days in a new platform cycle, with the rollout of new products the most concentrated vs the last four major product platform launches over 15 years. The 4QFY15 result exceeded market expectations with double digit growth in the Americas (+53%), despite a competitor's launch, and return of growth in masks (+6%).
We retain our Add recommendation for RMD with a share price target of A$8.91ps.
Sydney Airport (SYD)
Sydney Airport (SYD) is the 100% owner of a long-term leasehold of Kingsford Smith Airport, Australia's busiest airport.
Reasons to buy Sydney Airport
- SYD provides exposure to Australia's premier aeronautical infrastructure asset and prime retail space leveraged to Asian travel growth, as well as commercial property and airport car parking.
- Interest costs are expected to fall materially, as out-of-the-money interest rate swaps expire and are replaced at far lower interest rates.
- The combination of solid earnings growth and falling interest costs should generate strong distribution growth and potential for capital management initiatives.
We retain our Add recommendation for SYD with a share price target of A$6.10ps.
More information
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