Throughout reporting season we will highlight companies we are happy to buy.
Following our assessment of recent results and announcements, here are our three top picks for today (Monday 13 August):
Commonwealth Bank (CBA) – cost reduction now a target
CBA has reported FY18 cash NPAT (including discontinued operations) of $9,412m, approximately 1.7% lower than our forecast. The miss on our numbers was largely the result of one-off expenses and discontinued operations. CBA has declared a final fully franked dividend of $2.31 per share, 1 cent per share better than we expected. We retain a positive view on the major banks sector for the following reasons:
- We believe dividend yields are robust
- We expect cost reduction to become a key sector theme
- We expect the reduction in the regulatory risk premium for the sector seen since mid-June to continue over the next 12 months.
While our preferred major bank exposures are Westpac and NAB, we retain an Add recommendation for CBA.
BHP Billiton (BHP) – digging into possible return options
After announcing the US$10.8bn sale of its US onshore oil & gas business, BHP flagged its intention to return all net proceeds to shareholders. BHP outlined that the timing and manner of the distribution would soon be determined by the board. We have now factored in a share buyback utilising a portion of the net proceeds, which has seen us increase our valuation-derived share price target. The remainder we assume is distributed via special dividend. It is our hope that BHP does not elect to smooth returns over a longer period.
While cost inflation presents a hurdle, we still see additional upside on offer. We retain our Add recommendation for BHP.
REA Group (REA) – depth popularity rising
REA Group remains on track to deliver another year of strong growth in FY19 following recent success in increasing Premiere All and Highlight All subscribers. The increase in contracted customers (and thus paid depth listings) will insulate the company from residential property market weakness in FY19. US and Asian operations continue to improve, albeit at a slower pace than the core Australian business.
We have upgraded our forecasts, valuation and share price target. We upgrade our recommendation from Hold to Add.
Morgans clients can login to view our detailed reports and share price targets for Commonwealth Bank (CBA), BHP Billiton (BHP) and REA Group (REA). Alternatively, please contact your nearest Morgans office for access.
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.