3 undervalued Aussie stocks

Vince Pezzullo

Today, markets are now thinking about risk rather than what’s on the upside. They’re asking, “what multiple am I paying and what am I going to get from that multiple?”. One way to protect the downside, is to make money on the buy. So, if you get a reasonable multiple, you tend to have a reasonably well protected position. And while the hunting ground may look lean at the moment, there are opportunities if you look closely enough. Below, we share 3 key Aussie holdings we believe are mispriced.

Westpac (ASX: WBC)

You don’t buy a rain coat when it’s raining outside, you buy when it’s a drought. With banks, you buy when it’s a royal commission.

Now, there's always going to be things that are wrong, no system is flawless. So, there's always going to be issues in a royal commission from the banks. But watch what they're doing, not what they're saying. The banks are selling every asset that's not nailed down. So, they're going to look like, pretty much banks by the end of this, and not wealth managers et cetera. Which is great because it puts a focus on banking.

This has implications. When they are just focused on banking, any move to digitising the business, and banking in particular, could realise significant cost savings.

Now, no banks are talking about it because there’s an element where there’ll be a readjustment to the cost base. A cost base where half is made up of its staff. So, you got to think about, when they do move to this aggressively, that there are costs embedded in the business that they can remove and as the banks become less complex, in the number of operations they have, there should be unleashed some cost savings there. So, we still like Westpac in particular.

Star Entertainment Group (ASX: SGR)

The style was interesting last week, with the equity raising. We didn't expect that at all. We know the partners were a bit miffed by the structure, in that they weren't getting a lot of upside to the gaming operations, which is the better part of the business. Instead they’re getting it in Queens Wharf and they're getting it from VIP revenue.

Now with this raising and the realignment of interests, they'll get some returns out of the gaming floor. So, there are large plans to redevelop. They’ve built their first six-star hotel in the Gold Coast, The Darling, which opened about two weeks ago. So, there’s still quite a lot to start and you can see there's growth coming in the next few years.

While we’re a bit disturbed by the dilution of equity, we believe the projects on the horizon and the alignment of bringing players down into Australia means we’re going to get paid for that.

Medibank (ASX: MPL)

We still like what Craig Drummond and the team are doing, where they're being very methodical about the way they manage their costs. They've made a few steps in the last 12 to 18 months, to in-house some rehabilitation capabilities so that rather than doing it a hospital, you do it at home. That's material savings. Additionally, trying to arbitrage the costs that hospitals are charging verses what they know they can deliver. By doing that they change behaviour and more importantly, they bring price transparency to the cost of direct healthcare.

The thing you have to think about though is obviously the government risk. With the opposition, there are lots of firm views. Now our view is there's only so much you can do with private healthcare. You remove the rebate and pretty much the private system will collapse. Everyone will basically go back to the public system. You definitely need to have it, and people do value it. Our opinion is that private health does need to change. Rather than being just an insurance company it needs to become a service provider to its members. Because it’s not actually an insurance business, it's a community rated system. So private health needs to be able to buy services on behalf of its members and offer it to them way cheaper.

Now we don't feel that the private insurers have done enough of that. Medibank most importantly is the only one that's going down that direction. And we think that gives them an opportunity to differentiate from the pack.

The article above is an extract from our recent investment update to the Morgan’s network, where we also discussed the company’s 1H18 results, and a stock view on Shire.

Perpetual Equity Investment Company offers investors access to a portfolio of predominantly high quality Australian and global listed securities. Find out more


Vince Pezzullo

Vince is Deputy Head of Equities and Portfolio Manager for Australian Share, Geared Australian Shares, Direct Equity Alpha and Perpetual Equity Investment Company (ASX: PIC).

Expertise

ASX:WBC ASX:MPL ASX:SGR ASX:PIC

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