The ASX 200 index recently corrected over 10% from its year high on the 29th August. Investors can take advantage of this volatility to add to companies that remain well positioned in their perspective industries and are supported by robust balance sheets. Cognisant that volatility could remain elevated, it is important to retain a strong cash balance to provide ongoing ballast and future capital to deploy when buying opportunities emerge. Here are five stocks that look attractive to us on this basis right now.
Alcoa’s third quarter earnings release revealed slightly lower alumina production from the AWAC joint venture (40% owned by AWC) in part due to contractual disputes in WA, offset by higher realised pricing.
While alumina spot pricing remains elevated due to US sanctions on Rusal and production curtailment at the Alunorte refinery, the share price is not factoring this market to be sustained and AWC is in a strong position to continue to distribute these excess profits to shareholders.
In the medium term, China is expected to increase the proportion of imported bauxite refined into alumina from around 30% now to more than 50% by 2025 and should lift its imported alumina utilisation to more than 10%. We expect low quality Chinese domestic bauxite to be substituted by high quality imported ore over time, in a pattern akin to that of high grade iron ore imports for steel production.
Brambles reported first quarter constant currency revenue growth of 6% and reaffirmed FY19 guidance. Encouragingly, management confirmed that two-thirds of cost increases in the quarter were recovered through pricing initiatives. CHEP EMEA remains a standout generating 8% revenue growth over the quarter.
Importantly, pricing conditions in the US are gaining traction, helping offset inflationary pressures in lumber and transport. We retain an overweight position in Brambles given its strong industry position and expectation of margin improvement over the forecast period.
Cleanaway Waste Management reiterated its FY19 earnings guidance at its Annual General Meeting. Cleanaway also confirmed that the TOX integration was progressing in line with expectations. Valuation metrics look more attractive given recent share price weakness, with Cleanaway trading on a c.9.5 times EV/EBITDA multiple.
We like Cleanaway based on its high level of earnings visibility and growth optionality across each of its operating businesses.
Event Hospitality and Entertainment
We have added to our position in Event following its announcement of the sale of its German Cinema business to Vue International for up to A$358m. The sale price consists of upfront consideration of A$210m, and variable consideration of up to A$148m based on “German market admissions for CY19.”
The sale of its German Cinema business is encouraging on three levels.
- First, it reduces exposure to Cinema earnings that are both volatile and under structural threat.
- Second, the sale materially improves Event’s balance sheet optionality, moving to a net cash position.
- And third, EVT is in a stronger position to expand its hotel & property portfolio in Australia, which has provided solid momentum to its earnings base.
The consumer staples sector looks attractive, with industry supermarket trends supportive of easing deflationary pressures in fresh food. Both Coles and Woolworths should be beneficiaries of an improving pricing environment. Our investment thesis for Woolworths is further supported by the potential divestments of its Hotel and Petrol Station interests, providing further support for capital management initiatives.