Reporting Season road map: 21 February 2019

About the author:

Andrew Tang
Author name:
By Andrew Tang
Job title:
Analyst - Equity Strategy
Date posted:
21 February 2019, 12:30 PM
Sectors Covered:
Equity Strategy and Quant

Following our assessment of results and market announcements, here are our six top picks for today (Thursday 21 February 2019):

Corporate Travel Management (CTD) – Points for premium status

CTD's 1H19 result beat our forecast reporting 21% underlying EBITDA growth. While cashflow was weak, it was better than expected and importantly strong cashflow is forecast in the 2H19.

We note that CTD's cashflow was positive unlike the rest of the sector which reports a 1H outflow due to seasonal factors. While full year guidance was maintained, it looks conservative given the strength of the 1H19 result. Importantly, with the tech hubs now in place in the US and Asia, margins in these regions should start to scale. We have made minor upgrades to our forecasts and now sit slightly ahead of guidance.

We maintain an Add rating. The next catalyst from here is a sizeable acquisition. Morgans clients can login to view the share price target and detailed research note.

Lovisa (LOV) – Star spangled rollout

LOV's 1H19 result was in line with consensus forecasts. Strong cash generation continues (A$32m net cash), allowing for the interim dividend +38% on EPS +2%. Following a successful trial phase, LOV announced it will move into full rollout mode in US/France - providing a runway for material long-term footprint growth. In the initial phases, this US/France rollout will continue to come at a material up-front cost and opex deleverage will accelerate in 2H19 and persist into FY20.

But medium-long term, once scale builds in these markets, operating cost leverage will return, creating significant margin upside in addition to strong footprint growth. The above sets the scene for a pretty powerful, long-term growth profile.

As LOV remains a fashion-led retailer, we will continue to see bouts of SSS and GM volatility, however gaining exposure to a global rollout program is rare in the Australian retail sector.

We maintain our Add rating. Morgans clients can login to view the share price target and detailed research note.

Australian Finance Group (AFG) – Misconceived and mispriced

We continue to believe the significant reduction in AFG's share price post the release of Hayne's Royal Commission Final Report is not warranted and appears to be the result of misconceptions about Hayne's recommendations as they relate to AFG. In this report, we aim to clear up these misconceptions and discuss why we believe AFG can maintain its revenue even if Hayne's recommendations are taken up.

While our base case is that AFG will remain a viable business, to show the extent of the share price overreaction, we have looked at the value of AFG in the drastic scenario that it closes its doors to new business as of 1 July 2022.  

Add maintained. Morgans clients can login to view the share price target and detailed research note.

Sonic Healthcare (SHL) – 1H beat- tracking to plan

1HFY19 underlying results were above expectations, with strong organic growth driving OCF and solid cash conversion (101%). Encouragingly, profitability continues in the domestic lab business, underpinned by strong organic revenue growth, ongoing cost management and stable collection centre rents, with continued strength expected via automation/procurement.

US revenue outpaced the broader market on hospital JVs and stands to benefit from the Aurora acquisition, while Germany was flat, impacted by fee changes and inclement weather, both short term issues with long term drivers remaining intact.

Our FY19-21 underlying earnings increase modestly. Add maintained. Morgans clients can login to view the share price target and detailed research note.

A.P. Eagers (APE) – Firmly in control

APE's FY18 result was in line with our forecast with Auto PBT growth of 13.5% a standout against a difficult industry trading backdrop. Further cost-efficiencies are likely and the acquisition landscape looks favourable. APE appears to have a very good handle on its Finance income with the risk-based model change providing earnings opportunities rather than the risks which we believe the market is currently factoring in.

We are prepared to be patient (new car volumes may remain subdued), but think the progress APE has made in recent years on extracting cost efficiencies and restructuring underperforming businesses (without realising write-downs) is now flowing through nicely, providing downside protection.

Upgrade to Add recommendation.Morgans clients can login to view the share price target and detailed research note.

Data#3 (DTL) – Momentum is back and it's time to buy

DTL's 1H19 result was 4% ahead of our forecast with EPS and DPS up 125% yoy off an abnormally low 1H18. Product outstripped services from a revenue and profitability perspective. Traditionally DTL books ~34% if its full year PBT in the 1H so assuming a more normal seasonal skew in FY19 would see FY19 PBT of ~A$26m. We upgrade our forecast to A$24m (from A$23m). This reflect a stronger 2H but leaves room for error should elections &/or the service businesses drag on 2H19 earnings.

We upgrade our recommendation to an Add. Morgans clients can login to view the share price target and detailed research note.

More information

Morgans clients can access our further analysis in our latest reports published in the 'Research' section of the client website. 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.

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