Nine top 100 stocks to buy in May

About the author:

Author name:

By Fiona Buchanan

Job title:

Co-Head of Research, Senior Analyst

Date posted:

05 May 2014, 8:39 AM

Sectors Covered:

Property, AREITS

Our high conviction picks are companies we believe will outperform the market based on short to medium-term catalysts.

This month we add Telstra (TLS) and we remove SEEK (SEK).

We have removed SEEK due to the global shake-out in technology and online media stocks; a trend that will make it difficult for SEEK to outperform the market. SEEK has been a star performer globally and we continue to like the stock for long-term investors seeking exposure to growth in employment advertising and education.

Here are our nine top 100 stocks for May:

Telstra (TLS)

Telstra is Australia's largest telecommunications company.

Reasons to buy Telstra

• This is a shorter term tactical call (sector allocation). As we head into May, which is traditionally a weaker period for equity markets, defensive stocks should outperform.
• We think TLS is the best positioned telco for the upcoming NBN review and believe the collaborative approach Telstra and the Government have may see TLS exit the negotiations (in mid 2014) in a better position than they entered.
• As the settlements complete on TLS's recent divestments we think the company will look to undertake smaller Asian-centric acquisitions which will help its growth profile.

We upgrade our recommendation to Add for TLS with a share price target of A$5.73ps.

Brambles (BXB)

Brambles is a supply-chain logistics company operating in more than 50 countries, primarily through the CHEP and IFCO brands.

Reasons to buy Brambles

• Long-term international growth opportunities from new products and emerging markets.
• It is leveraged to an economic recovery in the US and Europe (~80% of earnings). With organic growth forecast in those key markets we expect earnings growth to accelerate from mid-single digit to low double-digit.
• Its PE multiple (~19x FY15 at present) is marginally above the historical average of 18x, but well below previous peaks of 25x plus and we think BXB is entering a PE re-rating cycle.

We retain our Add recommendation for BXB with a share price target of A$10.32ps.

Oil Search (OSH)

Oil Search is an early mover into the commercialisation of Papua New Guinea's rich oil and gas potential.

Reasons to buy Oil Search

• After several years of exploration success, OSH is now on the cusp of converting its PNG LNG development into substantial cash flow returns. First sales from Train 1 are expected in July - a major milestone.
• It's clear that further discoveries can underwrite significant expansions (via additional trains) however the market is undervaluing this potential.
• We think that recent share price weakness is overdone and see now as an opportune time to gain exposure to OSH's imminent cash flows.

We retain our Add recommendation for OSH with a share price target of A$9.49ps.

Stockland Group (SGP)

Stockland Group is Australia's largest developer given its huge landbanks.

Reasons to buy Stockland Group

• Around a third of earnings are derived from residential development. Given the improving macro environment, we believe SGP is well placed to benefit in the medium term.
• The balance of the investment portfolio is good quality (office, retain, logistics, retirement), and although medium term rental and office conditions are challenging, the earnings visibility is good given contracted rents. SGP's strategy is to reduce its office exposure over time.
• SGP offers investors an attractive FY14 distribution yield of 6.4% (vs the sector average of 6.0%).
• We note SGP recently acquired a 20.0% stake in Australand (ALZ). We don't expect to see any meaningful synergies to eventuate in the near term, with management indicating the transaction will be broadly neutral to EPS.

We retain our Hold recommendation for SGP with a share price target of A$3.60ps.

Suncorp Group (SUN)

Suncorp Group is a diversified financials company offering general insurance, life insurance and retail and business banking.

Reasons to buy Suncorp Group

• We expect SUN can pay a ~20cps special dividend in August 2014, with the prospect for additional special dividends in FY15/16, given SUN's ~$1.1bn of excess capital and potential to free up more capital if SUN Bank achieves advanced accreditation under Basel III.
• SUN's diversity via the Bank (residential cycle improving) and Life Insurance (potential to rebound from sector structural issues) can add to the group growth profile over the medium-term.
• SUN expects to deliver $225m of cost benefits in FY15.

We retain our Add recommendation for SUN with a share price target of A$13.59ps.

Transurban Group (TCL)

Transurban Group develops, operates and maintains toll roads in Australia and the USA.

Reasons to buy Transurban Group

• We expect TCL to generate double-digit EBITDA growth over the next three years driven by traffic growth, CPI/CPI+ toll increases, ongoing cost control and contribution from growth projects.
• We expect this traffic and earnings growth to translate into double-digit growth in distribution per share.
• Confidence in this growth outlook can be gained from the management incentive plan, which rewards management for growing free cashflow per share at 12-15% per annum CAGR across FY14-16.

We retain our Add recommendation for TCL with a revised share price target of A$7.29ps (previously $7.63).

Crown (CWN)

Crown offers investors exposure to significant growth opportunities in the Australian casino space as well as overseas in Macau and potentially Sri Lanka.

Reasons to buy Crown

• An attractive increasing earnings profile, and we expect further upside from the company's investment in Melco Crown by way of dividends.
• We expect CWN to be successful in gaining a strong market share in the VIP gaming market in Sydney once Crown Sydney is built.

We retain our Add recommendation for CWN with a share price target of A$18.19ps.

Flight Centre (FLT)

Flight Centre is one of the world's largest travel agency groups.

Reasons to buy Flight Centre

• With expectations of a strong 1H14 result and possible earnings upgrade, we believe that FLT's share price will outperform this reporting season as the market rewards stocks that can report solid earnings growth.
• We believe that FLT is well positioned to report double digit earnings growth over the next few years. The diversity and strength of its business model allows it to deliver strong profit growth year in, year out.

We retain our Add recommendation for FLT with a share price target to A$56.55ps.

Sydney Airport (SYD)

Sydney Airport provides infrastructure and aeronautical and commercial operations at Sydney Airport.

Reasons to buy Sydney Airport

• Low risk exposure to global trends in aviation travel, particularly the potential growth opportunity from Chinese traffic.
• Strong competitive position, with the airport being an origin destination airport located 8km from the Sydney CBD.
• Attractive distribution yield with growth in distributions over time.

We retain our Add recommendation for SYD and upgrade our share price target to A$4.32ps (previously $4.29).

More information

Our Research Team has also compiled a list of six small to mid-cap high conviction stock picks to buy this month.

Morgans clients can access detailed reports on all our high conviction stock picks. If you would like more information, please contact your nearest Morgans office.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.