Five ASX100 stocks to buy in September

About the author:

Author name:

By Andrew Tang

Job title:

Analyst - Equity Strategy

Date posted:

06 September 2016, 7:48 AM

Sectors Covered:

Equity Strategy and Quant

Reflections on reporting season

The equity market ran strongly into the FY16 reporting season, up 8.7% to August from the shock 'Brexit' decision. In our reporting season preview last month we noted the importance of improved company earnings to justify the higher valuations. While on the whole there were fewer disappointing results compared with previous years, they were coming off subdued expectations. Overall guidance for FY17 remains on the soft side with few pockets of genuine growth. We think it's likely that earnings season has just done enough to hold up valuations at elevated levels against a supportive interest rate environment. However, we do caution that confidence can be easily shaken as investors switch their focus back to global issues.

Our high conviction stocks represent companies that we think can grow against a lacklustre economic backdrop. In September we add Healthscope (HSO) to our high conviction list.

Here are our five ASX100 high conviction stock picks this month:

Healthscope (HSO)

Healthscope is an Australian company that operates private hospitals, medical centres and international pathology services.

Key reasons to buy Healthscope

• The core domestic hospital division (>80% of profit) should continue to benefit from strong admissions growth, optimisation of case mix, labour and procurement savings as well as capacity expansion programs.
• The brownfield pipelines remains on track and on budget, with 10 projects under construction and expected to deliver a 16% uplift in beds by the end of FY19. These low-risk, high-return projects translate into a favourable earnings outlook, with a three-year CAGR of c12%.
• Sector fundamentals remain unwavering, including an ageing and growing population, increased prevalence of chronic disease, and innovative medical technologies, all supporting growing utilisation rates beyond the control of constant government and insurer rhetoric.

We retain our Add recommendation. Morgans clients can login to view our detailed research and share price target for Healthscope (HSO).

BHP Billiton (BHP)

BHP is the world's largest diversified resources company, with a large portfolio of mining and energy interests.

Key reasons to buy BHP

• BHP is well supported by its diversified portfolio of hihg-margin assets, demonstrated focus on improving capital efficiency and its strong balance sheet.
• BHP offers a superior combination of commodity and market exposures within resources, enhancing the company's ability to defend its strong margins.
• The current bout of risk off has created an opportunity to add BHP to portfolios at a low point in its recent trading range. The company has robust cash flow and a capable balance sheet, while a key driver for recovering earnings will be the oil price.

We retain our Add recommendation. Morgans clients can login to view our detailed research and share price target for BHP Billiton (BHP).

Orora (ORA)

Orora Limited (ORA) is focused on fibre packaging and beverage packaging in Australia and packaging distribution in North America. ORA has 83 distribution sites across seven countries.

Key reasons to buy Orora

• Since demerging from Amcor (AMC) in December 2013, ORA has experienced strong double-digit earnings growth in both the Australasian and North American divisions.
• We estimate ORA derives around 60% of its revenue from highly defensive sectors such as food and beverage. Given the volatile market, we think the stock should receive support.
• ORA has made a number of growth investments over the last two years that should set it up for solid earnings growth over the medium term (forecast 3-year EPS CAGR of 12%).

We retain our Add recommendation. Morgans clients can login to view our detailed research and share price target for Orora (ORA).

Sydney Airport (SYD)

Sydney Airport is the 100% owner of Kingsford Smith Airport, Australia’s busiest airport.

Key reasons to buy Sydney Airport

• SYD provides exposure to a premier infrastructure asset and prime retail space leveraged to Asian travel growth, as well as commercial property and parking.
• We expect interest costs to fall materially, as out-of-the-money interest rate swaps expire and are replaced at lower interest rates.
• The combination of solid earnings growth and falling interest costs should generate strong distribution growth and potential for capital management initiatives, although over the near term, the potential development of the second airport at Badgerys Creek will be a key capital allocation decision.

We retain our Add recommendation. Morgans clients can login to view our detailed research and share price target for Sydney Airport (SYD).

Westpac (WBC)

Westpac (WBC) is Australia’s oldest banking and financial services group, with branches and operations throughout Australia, New Zealand and the near pacific region.

Key reasons to buy Westpac

• Relatively low risk profile in terms of loan book positioning and low reliance on treasury and markets income.
• Westpac stands to benefit most from re-pricing of investor home loans.
• Relatively low risk of dividend cut as a result of strong regulatory capital position and good organic capital generation capacity.

We retain our Add recommendation. Morgans clients can login to view our detailed research and share price target for Westpac (WBC).

More information

Morgans clients can access the full list of high conviction stocks (including our eight small to mid-cap high conviction picks) by viewing our latest High Conviction Stocks research report. If you would like more information, please contact your adviser or 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.