Recent data suggest that the global economy is strengthening. This should provide support for growth assets, although on current elevated valuations there is little room for
earnings disappointment. Ahead of what is a traditionally weaker period (May-June) for markets, we make just the one change (adding Westpac) and will look for an opportunity to add to the list on a pullback.
Our high conviction stocks are those that 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 five ASX100 and three ex-ASX100 high conviction stock picks this month:
Westpac Bank (WBC)
Westpac is Australia's oldest banking and financial services group, with operations throughout Australia and New Zealand.
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 Bank (WBC).
Oil Search (OSH)
Oil Search engages in the business of oil and gas exploration. OSH's main asset is its 29% interest in the 6.9MTPA PNG LNG project, a world-scale liquefied natural gas (LNG) development operated by ExxonMobil.
Key reasons to buy Oil Search
- The recent Muruk discovery could be a game changer, and could even become the preferred development option for train 3 at PNG LNG. Drill testing its extent continues.
- Recent 50% growth in 1P reserves underpins PNG LNG's ability to sustain production above nameplate over the long term, while also helping to underpin the next leg of growth.
- We see OSH as ideally positioned for near-term upside as it progressively de-risks its growth profile and expands its upside case through appraisal and exploration.
We retain our Add recommendation. Morgans clients can login to view our detailed research and share price target for Oil Search (OSH).
Orora manufactures and distributes fibre and beverage packaging primarily in Australia and North America.
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 market appetite for earnings certainty, we think the stock should receive good 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 2-year EPS CAGR of 11%) with potential upside from acquisitions.
We retain our Add recommendation. Morgans clients can login to view our detailed research and share price target for Orora (ORA).
ResMed is a global company involved in the development, manufacturing and marketing of medical products for the treatment and management of respiratory disorders.
Key reasons to buy ResMed
- We estimate a solid 10.9% earnings CAGR through FY19, with valuation undemanding (21x forward; in line with long-term average).
- A new mask product cycle is underway with positive patient/physician/provider feedback and management are confident category growth will accelerate.
- ResMed continues to cement its leadership position in healthcare informatics, with the high-margin Brightree SaaS model performing to expectations, supporting device/masks growth and Gross Margin gains.
- ResMed is a key beneficiary of a weaker AUD, with 95% of revenue derived from offshore and c80% of R&D expenses AUD dominated.
We retain our Add recommendation. Morgans clients can login to view our detailed research and share price target for ResMed (RMD).
Macquarie Atlas Road (MQA)
Macquarie Atlas Roads invests in infrastructure assets located across the globe primarily in France and the US. The fund operates and manages a portfolio of toll road assets, bridges and tunnels.
Key reasons to buy Macquarie Atlas Roads
- MQA offers good valuation support and strong potential distribution growth into FY19. Quarterly traffic and toll revenue data releases are the key catalysts for the stock to achieve our price target.
- APRR cashflows are driven by growing toll revenues, cost containment, likely decline in interest costs across FY17-18, and corporate tax rate cuts legislated for FY20.
- We expect first cash distribution from Dulles Greenway in FY19 as the road exits lender distribution lock-up.
We retain our Add recommendation. Morgans clients can login to view our detailed research and share price target for Macquarie Atlas Roads (MQA).
Bapcor supplies replacement parts and consumables used in the service and repair of vehicles. BAP operates over 120 Auto Parts stores across Australia.
Key reasons to buy Bapcor
- BAP's 1H17 result and upgraded guidance to the base business provided us with even more confidence in BAP's growth profile, management execution and its consistent ability to outperform targets.
- We were reassured by the flow-through of material synergies from the ANA acquisition and the strong performance of recent acquisitions. Importantly, we believe that further synergies will materialise from the Hellaby's acquisition in FY18/19.
- We see two clear upcoming catalysts for the stock: 1) divestment of the non-core Hellaby's businesses (+cA$100m to be released); and 2) articulation of potential synergies from the Hellaby's acquisition (which we expect could be meaningful).
- We forecast 37% EPS growth in FY17, followed by a further 20% in FY18. We believe this growth business with defensive characteristics offers an attractive investment opportunity.
We retain our Add recommendation. Morgans clients can login to view our detailed research and share price target for Bapcor (BAP).
SpeedCast is a global network and satellite communications service provider offering managed networks services in over 90 countries.
Key reasons to buy Speedcast
- Post the recent Harris Caprock acquisition, SDA looks attractively priced with solid double-digit earnings growth prospects.
- SDA reports in USD which translates to a higher valuation as the USD strengthens in response to a re-inflationary environment.
- With c45% revenue now exposed to the energy sector, we see significant upside if energy prices trend higher from current levels.
We retain our Add recommendation. Morgans clients can login to view our detailed research and share price target for SpeedCast (SDA).
Beacon Lighting (BLX)
Beacon Lighting Group engages in the sale of lighting, ceiling fans and light globes. The business services the middle to upper residential lighting market and has a network of 96 stores and four commercial sales offices.
Key reasons to buy Beacon Lighting
- Trading conditions have improved post Masters' exit from the market with like-for-like sales growth positive 2H17-to-date. BLX will now cycle soft LFL sales growth over the remainder of CY17 (essentially flat) which, in addition to taking share from Masters' exit, should make for a solid year of sales growth.
- We expect BLX will open a record number of stores in 2H17 (including acquisitions) which could step up further in FY18, a year when the group will still benefit from the Masters' exit. A further tailwind is likely from BLX's investment in offshore channels.
- BLX's 1H17 result gave us confidence that trading conditions have turned positive which, combined with a step-up in the new store rollout, should underpin a strong 12-18 months of growth. We see the FY18F PE of 16.8x as reasonable, with outperformance to be driven by a potential upgrade cycle over the next 12 months.
We retain our Add recommendation. Morgans clients can login to view our detailed research and share price target for Beacon Lighting (BLX).
Morgans clients can access the full list of high conviction stocks 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.