Making the most of uncertainty

About the author:

Andrew Tang
Author name:
By Andrew Tang
Job title:
Analyst - Equity Strategy
Date posted:
18 June 2018, 10:59 AM
Sectors Covered:
Equity Strategy and Quant

The Australian market has been struggling for direction, weighed down by elevated valuations and a lack of earnings momentum. Investors need to think more tactically for alpha in a market lacking conviction.

On track for 6,200

The outlook for the economy is to pick up in the near term and for the current expansion (which now dates back to the early 1990's) to continue for the next few years. But there are some questions over how much of the ongoing economic growth will flow through into share prices. Overall economic growth is still supportive for equities, and we currently expect the ASX200 to edge higher to 6200 (approximately 3% upside to current levels) by year-end. The outlook, particularly this late in a sustained business cycle, is becoming more vulnerable to various risks, notably higher bond yields and geopolitical risks.

Making the most of uncertainty

Earnings momentum has slowed considerably since reporting season. Cautious trading and elevated valuations will test investors' tolerance for bad news. Without meaningful upside to earnings growth, the market is likely to remain constrained given a further PE re-rating is, in our view, unlikely. 

Upside in the near term will come from stock-specific exposures. Our team of Research Analysts have identified 11 buying opportunities for nimble investors in this historically weaker period for markets ahead of the all-important August reporting season. We highlight three of those opportunities below:

QBE Insurance Group (QBE)

QBE presents a trading opportunity leading into the upcoming result on the 16th of August. They have had a relatively incident free 1H18 in terms of weather, and management have set reasonable baseline 1H18 expectations (in comparison to previous years). Additionally, management have made it a priority to reduce the company's debt this half. Should management "beat" at the result, we expect the stock will likely re-rate to a price over $10 per share.

CML Group (CGR)

Over April and May, CGR has confirmed the refinancing of its expensive bond facilities and that the recent TDF acquisition is performing well. As a reminder, TDF was delivering approximately A$4m EBIT under TGA's management and we think there is meaningful upside to come through over FY19/20. In the core business (Debtor Finance), CGR has been focussed on driving direct client acquisition (through online marketing) and they seem confident this will be the biggest channel within 12 months. We think CGR will outperform their initial FY19 guidance of A$19.5m EBITDA (Morgans forecast A$21.5m). CGR management is conservative, but they will have the capacity to finance approximately $2bn in receivables that deliver approximately $55m in revenue and $27m in EBITDA. We expect CGR to earn approximately 5cps earnings per share in FY19 but see upside risk to this, so you are buying a well-managed industrial growth name on <12x FY19 PE and yield of approximately 5% fully franked. We think a PE of 13x-14x is more realistic given the strong operating leverage and growth profile. Note that CML group is also one of our high conviction stock picks this month.

Link Administration (LNK)

LNK is trading towards the bottom of its IPO trading range, down 15% since the start of the year. In our view, the company has been oversold on the back of regulatory fears. LNK compares favourably with other diversified financials companies as they are the only one to have placed definitive numbers in the market with respect to the impact of regulatory changes. Additionally, given the fact 70% of the company's earnings remain unaffected by regulatory impacts, we believe LNK stands above comparable companies. A quality business trading on 15x FY19F numbers. We are happy to buy LNK when it is offering double-digit growth.

More information

Morgans clients can access the detailed Australia Strategy research note (including all 11 buying opportunities). If you would like more information, please contact your adviser or nearest Morgans office.

Disclaimer(s): Morgans Corporate Limited was a Joint Lead Manager for the placement of shares in CML Group Limited and received fees in this regard.

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.

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