Eight top 100 stocks to buy in October
About the author:
- Author name:
- By Fiona Buchanan
- Job title:
- Director of Research, Senior Analyst
- Date posted:
- 03 October 2014, 8:51 AM
- Sectors Covered:
Our high conviction picks are companies we believe will outperform the market based on short to medium-term catalysts.
Only two changes this month - removing Telstra (TLS) and adding Oil Search (OSH).
Fundamentally Telstra remains very healthy with surplus capital and an immaterial earnings exposure to a weakening $US. However we think currency, which is likely to lead lower still, is the key short term driver for the marginal buyer and therefore the share price. With this in mind we think the repatriation of offshore investment funds will maintain selling pressure on Telstra so, in the short term, we remove it from our High Conviction buys.
Here are our eight top 100 stocks for October:
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 (~20.8x 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$10.04ps.
Challenger Limited (CGF)
Challenger (CGF) specialises in retirement income products and holds the dominant market share of annuities in Australia.
Reasons to buy Challenger
- CGF recorded 28% sales growth last financial year and annuities have strong tailwinds - with an ageing population and the potential for positive regulatory reform and policy settings the outlook for sales remains strong over the medium-term.
- CGF's funds management division is one of the fastest growing managers, growing at +27% in FY14 and with significant existing capacity.
- CGF successfully raised $250m recently which solidifies its capital base for growth. The stock trades on a relatively undemanding valuation of 11x FY15 PE.
We retain our Add recommendation for CGF with a share price target of A$7.76ps.
CSL Limited (CSL)
CSL is a leading global human blood plasma company which generates approximately US$5.0bn in sales globally.
Reasons to buy CSL Limited
- CSL has delivered average eps growth of 21% for the last six years and our forecasts suggest mid teen growth for the next three years.
- To fund its continued growth CSL spends over 5% (or A$0.5bn) of revenue on R&D, with most promising targets in the Haemophilia space.
- Although the current share price is higher than our fundamental price target, CSL offers investors with a medium term view attractive capital growth prospects.
Oil Search (OSH)
Oil Search (OSH) is an Exploration & Production company with over 18-20 mmboe production expected this year and significant production growth expected in FY15.
Reasons to buy Oil Search
- The share price has pulled back recently on macro commodity price concerns, resulting in an opportunity to buy a quality oil and gas stock with growth potential and a strong production base.
- The strategy review is expected to finalise in 4QCY14, which will finalise dividend payout and capital management policies as well as planned investment in growth.
- Near term appraisal work in PNG may lead to additional LNG project growth potential, which may lead to de-risking and value upside.
We retain our Add recommendation for OSH with a share price target of A$10.34.
Origin Energy (ORG)
Origin (ORG) is the leading Australian integrated energy company, with diverse operations across the energy supply chain.
Reasons to buy Origin
- Recent outlook statements for FY15 and beyond are for stabilisation and growth in the Energy Markets.
- Expectations of a more clear dividend policy of at least 60% payout post APLNG start-up, and a decision to issue a European hybrid rather than raise equity this year to fund its acquisition of the Poseidon offshore WA gas discovery.
- A diverse gas portfolio secured ahead of the start-up of the LNG projects on the East Coast, which may benefit margins beyond the LNG start-ups in 2015/2016.
Seek Limited (SEK)
Seek (SEK) is the leading provider of online employment services in Australia, China, Southeast Asia and Latin America and is rapidly expanding into online education.
Reasons to buy Seek
- The Australian recruitment cycle is at or near to all-time lows in churn rates and recently volumes have begun to rebound.
- Year to date job ad growth is higher than we have assumed in our forecasts.
- Seek's offshore operations will deliver strong growth as the benefits of the Jobstreet acquisition become available. The company is achieving this while simultaneously de-leveraging its balance sheet.
We retain our Add recommendation for SEK with a share price target of A$19.76ps.
Stockland Group (SGP)
Stockland Group is Australia's largest developer given its significant 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 6.1%.
Our share price target for SGP is A$4.30.
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 10-13% per annum CAGR across FY14-17.
We retain our Add recommendation for TCL with a share price target of A$8.06ps.
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.
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