The constant swirl of macro noise will likely lead to more market gyrations over the next few months. Despite the overall sense of cautiousness, any severe swings will be trading opportunities for companies with sound fundamentals in an otherwise subdued economic backdrop.
The pace of earnings growth across the market remains uneven and we urge investors not to be complacent with market stalwarts. We highlight a number of ex-100 exposures which we think will provide the highest risk-adjusted return over the next 12 months.
This month we make two changes to our ex100 stock picks. This month we add Evolution Mining (EVN) and we take profits in Megaport (+15%). The stock price for Megaport (MP1) has rallied strongly and now exceeds our share price target, but we remain positive on the story and see further upside potential from expansion in North America and Europe over time.
Here are our nine ex100 stock picks for October:
Ardent Leisure (AAD)
Ardent Leisure Group is an operator of leisure and entertainment assets across Australia, New Zealand and the United States.
Reasons to buy Ardent Leisure
- The Health Clubs divestment is a clear positive and positions the group well to fund an accelerated Main Event centre rollout for several years (from 27 to 200 centres). Importantly, the DRP should now be removed which will allow profit growth to flow through to EPS more directly.
- AAD has made a series of positive announcements which should set the group up well to deliver strong earnings growth over the medium to long term.
- Marinas sale is imminent, and we think this will be achieved well over the book value of the asset which should help fund the ongoing rollout of Main Event centres.
We retain our Add recommendation. Morgans clients can login to view our detailed research and share price target for Ardent Leisure (AAD).
Bellamy's Australia (BAL)
Bellamy's Australia is a Tasmanian-based organic food business, specialising in premium baby food and formula.
Reasons to buy Bellamy's Australia
- BAL has a strong brand, well regarded management team and plenty of market share to win in big markets, particularly China. It also warrants corporate appeal.
- BAL is focused on building a business that can become a world leader in organic infant nutrition. With increased organic ingredients, a new manufacturing agreement to produce far greater volumes, strong demand for its products and a full year of price rises, we think BAL is capable of delivering at least 59% NPAT growth in FY17.
- Trading on an FY17F PEG of only 0.4x, we believe BAL is attractively priced for its growth profile.
We retain our Add recommendation. Morgans clients can login to view our detailed research and share price target for Bellamy's Australia (BAL).
Catapult Sports (CAT)
Catapult is an athlete analytics company that engineers wearable technology for elite sports.
Reasons to buy Catapult Sports
- After the XO Sports merger CAT will be the dominant supplier of wearable devices and video-based athlete performance systems to more than 50% of the world's leading sporting clubs and leagues.
- CAT will be substantially cash flow positive and be considerably more profitable than it was as a standalone entity.
- We expect Catapult will maintain its strong pipeline of new club and league-wide subscriptions over the next two years.
We retain our Add recommendation. Morgans clients can login to view our detailed research and share price target for Catapult Sports (CAT).
Corporate Travel Management (CTD)
Corporate Travel Management provides innovative and cost effective solutions to the corporate travel market globally.
Reasons to buy Corporate Travel Management
- We expect strong double-digit earnings growth for the next few years underpinned by new client wins, increasing international market share, accretive acquisitions and improved margins as more work is done online and CTD leverage their buying power.
- CTD has new revenue streams in B2B and C2C. Taking a medium-term view, we see Flybuys Travel as a material growth opportunity for CTD and there is an even bigger opportunity to replicate this model globally and monetise the data it collates.
- We rate CTD's management team highly. CTD warrants a premium PE multiple for its growth profile and technological advantage and this is why it is achieving record clients wins year in and year out.
We retain our Add recommendation for CTD. Morgans clients can login to view our detailed research and share price target for Corporate Travel Management (CTD).
Evolution Mining (EVN)
Evolution is a gold mining and exploration company based in Australia. It owns and operates four gold and silver mines in Queensland and Western Australia and is developing a fifth gold-silver-copper project in Queensland.
Reasons to buy Evolution Mining
- A major gold miner with production targets above 830koz for 2016/17 from a portfolio of producing mines.
- An All In Sustaining Cost (AISC) projected of A$900-960/oz for 2016/17, generating strong operating profit.
- In our view the potential upside of the Ernest Henry gold streaming deal has yet to be fully incorporated into analyst models or recognised by investors.
We retain our Add recommendation for EVN. Morgans clients can login to view our detailed research and share price target for Evolution Mining (EVN).
GBST is a provider of fund administration and financial markets systems growing in popularity with major institutions.
Reasons to buy GBST
- Recent regulatory changes in the UK have increased the likelihood of GBST winning new clients for its Composer range of fund manager products in the near term.
- The merger of one of GBST's major clients with another major pension fund manager offers significant earnings upside potential over the next 12-18 months.
- Despite heavy investment in new product development, the company generates high levels of free cash flow.
We retain our Add recommendation. Morgans clients can login to view our detailed research and share price target for GBST (GBT).
Impedimed has technology which measures small changes in fluid, muscle and fat levels within the body. This technology has application across a number of diseases and health conditions including cancer and heart failure.
Reasons to buy Impedimed
- We forecast 50 additional cancer centres adopting the technology by year end.
- We anticipate further updates on the heart failure program where the product is expected to be commercialised by June 2017.
- IPD's consumer based product is to be launched in December 2016.
We retain our Add recommendation. Morgans clients can login to view our detailed research and share price target for Impedimed (IPD).
Kina Securities (KSL)
Kina Securities Limited is a diversified financial services provider in PNG offering its customers end-to-end financial solutions. Kina group has two operating divisions, Kina Bank and Kina Wealth Management.
Reasons to buy Kina
- We see risk to the upside with the stock trading on only 8.1x FY16F and offering a 9.1% dividend yield. Management has continued to deliver, and with another strong result in FY17 likely, we see no reason why this stock should not re-rate over the near term.
- Loan growth has continued to recover post the Maybank acquisition and synergies appear on track.
- The management team has been bolstered since listing and has continued to make good progress on growing sales in a difficult economic environment.
We retain our Add recommendation. Morgans clients can login to view our detailed research and share price target for Kina (KSL).
PWR Holdings (PWH)
PWR designs and produces cooling solutions for the high performance automotive industry and has an established track record in servicing elite motorsports, including Formula One, NASCAR and V8 Supercars.
Reasons to buy PWR Holdings
- PWH is a world leading automotive cooling business that delivers technically advanced solutions to elite motorsports customers.
- PWH's strong reputation in motorsports has led to exceptionally strong growth (40% revenue CAGR over FY13-15) as customers seek out performance, which is often measured in milliseconds.
- Key growth opportunities include capturing a greater share of customer spend on cooling solutions, partnering with OEMs on high performance/low production run vehicles, increased presence and entry into adjacent markets, increased penetration in the US automotive aftermarket segment and opportunities in emerging technologies (Tesla, Google etc).
We retain our Add recommendation. Morgans clients can login to view our detailed research and share price target for PWR Holdings (PWH).
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.