9 high conviction stocks in April

Andrew Tang

Stock investors have enjoyed an extended bull market since March 2009. It was particularly enjoyable during 2017, when the ASX 200 Accumulation Index rose by 11.8% over the year. Such an impressive return is quite extraordinary for an aging bull market going on nine years in 2018. The music seemed to stop abruptly when the S&P 500 plunged 10.2% over 13 days from late January through early February. Our market fared much better given we had missed most of the US January rally.

Although equities have recovered somewhat since, the episode is a reminder that expensive equity, bond and bond-proxy prices are at risk from the end of ultra-low cash and bond yields. The bout of volatility does present some opportunities and we added some names that we think will outperform on a risk-adjusted basis over the year.

Four changes to our list this month

We add Suncorp Group (SUN), Cleanaway Waste Management (CWY) and CML Group (CGR) to our list in April.

This month we remove ResMed (RMD) following a strong 52% return since inclusion. While we maintain a positive view of the company's strategy, RMD has exceeded our price target and think it prudent to book in profit ahead of a typically volatile quarter for the company (RMD reports Q3 results on April 27).

Nine high conviction stocks in April

Our high conviction stocks are those that we think offer the highest risk-adjusted returns over a 12-month timeframe, supported by a higher-than-average level of confidence. They are typically our preferred sector exposures.

Here are our nine high conviction stock picks this month:

Suncorp Group (SUN)

Suncorp is a financial services conglomerate offering banking, general insurance, life insurance, super and investment products.

Key reasons to buy Suncorp Group

  • SUN has very strong reinsurance protections this half. SUN typically allows for A$340m of natural hazard per half, but given the way its reinsurance is working in 2H18 it could see close to approximately A$700-$800m of larger claims and still be on budget.
  • We think SUN can comfortably get back to its long run target of 12% underlying insurance margin in FY19. This is driven by non-recurrence of some costs in FY19, benefits of SUN's business improvement program (+ approximately A$130m in FY19) and roll through of recent rate increases.
  • The sale of SUN's life business is also a small catalyst in our view. A sale is largely earnings neutral, but will enable capacity for buybacks. It also improves SUN's ROE by 1% and SUN's RoNTA by 4%.

We retain our Add recommendation.

Cleanaway Waste Management (CWY)

Cleanaway is a provider of waste management services in Australia, with operations in both solid and liquid waste.

Key reasons to buy Cleanaway

  • New management has worked to improve the cost base, capital intensity, revenue generation and the balance sheet over recent years.
  • Going forward, we expect relatively defensive and solid earnings growth driven by organic sources, announced contract wins and the acquisition of Toxfree (including cost-out synergies).
  • With the growing importance of sustainability in household, business and government decision-making, we expect waste management to become an increasingly valuable sector with CWY the Australian leader.

We retain our Add recommendation.

Oil Search (OSH)

Oil Search is a major oil and gas developer/producer. OSH's key asset is its 29% interest in the world-class PNG LNG Project/Development, operated by ExxonMobil.

Key reasons to buy Oil Search

  • OSH confirmed our long-term belief at the result that a 3-train expansion of its PNG LNG operations was now the new base case to which the respective joint ventures are working. This entails a 2-train operation supported by the Elk-Antelope reserve base, and a third new train supported by P'nyang (referred to formally as PNG LNG T3).
  • We see a further upside scenario from Muruk potentially displacing P'nyang.
  • We still hold the view that OSH is ideally placed to benefit from a global-scale organic growth profile, which could be further enhanced by additional exploration and appraisal.

We retain our Add recommendation.

Westpac Bank (WBC)

Westpac is Australia's oldest banking and financial services group, with operations throughout Australia and New Zealand.

Key reasons to buy Westpac

  • WBC has a relatively low risk profile in terms of loan book positioning and low reliance on treasury and markets income.
  • The bank stands to benefit most from re-pricing of investor home loans.
  • We expect WBC to comfortably meet APRA's 'unquestionably strong' capital benchmark through undiscounted dividend reinvestment plans.

We retain our Add recommendation.

Link Administration (LNK)

Link is the largest provider of superannuation fund administration services to funds in the Australian super system and a leading provider of shareholder management and analytics and share registry services.

Key reasons to buy Link

  • We are attracted to its significant levels of recurring revenue (>70%) backed by 3-5 year contracts in a relatively defensive industry (funds administration and registry services).
  • We believe the market's view on LNK's core Fund Administration business being ex-growth is too bearish. We think it will at least grow at inflation levels from here. Moreover, the synergy target from the CAS acquisition of £25m would appear to be conservative.
  • Trading on a 16x FY19F PE (first full year of CAS acquisition), we think LNK is inexpensive for a stock of its quality.

We retain our Add recommendation.

BHP Billiton (BHP)

BHP is the world's largest diversified resources company, with a large portfolio of diversified mining and energy interests.

Key reasons to buy BHP Billiton

  • On recent selling pressure we step up our Add rating conviction, with the global diversified miner benefitting from a supportive commodity pricing environment.
  • Stronger certainty of earnings and lower capital expenditure commitments have resulted in BHP stepping up shareholder returns in recent periods, a trend that is set to accelerate with BHP preparing to divest its US onshore oil & gas business.
  • BHP asserts itself as an attractive sector exposure, with group EBITDA margin stable at an impressive 52%, balance sheet gearing down below 20%, and the prospect for excess cash flow being returned to shareholders.

We retain our Add recommendation.

Senex Energy (SXY)

Senex is an oil and gas company focused on operating and developing energy sources in Australia's Cooper, Eromanga and Surat Basins.

Key reasons to buy Senex

  • SXY is ideally positioned to make a material impact on the east coast gas market with two gas projects expected to transform earnings over the next few years.
  • SXY has advised it has finalised the design of sales gas processing facilities for WSGP and should have the plant online by late 2018. We expect sales revenue to start following the commissioning of this facility.
  • SXY is leveraged to rising oil prices through its existing oil production and longer term through its oil-linked WSGP gas sales agreement with GLNG.

We retain our Add recommendation.

PWR Holdings (PWH)

PWR designs and produces cooling solutions for the high performance automotive industry and has an established track record in servicing motorsports, including Formula One, NASCAR and V8 Supercars.

Key reasons to buy PWR Holdings

  • PWH is a world leading automotive cooling business that delivers technically advanced solutions to elite motorsports customers (eg. Formula 1, NASCAR)
  • FY17 was a year of currency headwinds and higher investment costs and with that now largely out of the way, FY18-20 are set to be much stronger years.
  • Key growth opportunities include: 1) capturing a greater share of customer spend on cooling solutions; 2) partnering with OEMs on high performance/low production run vehicles; 3) increased presence and entry into adjacent markets; 4) increased penetration in the US automotive aftermarket segment; and 5) opportunities in emerging technologies (Tesla, Google etc).

We retain our Add recommendation.

CML Group (CGR)

CGR provides small business financing solutions, primarily debtor finance (invoice factoring) and equipment finance to small-medium enterprises (SME) in Australia.

Key reasons to buy CML Group

  • CGR is the second largest non-bank provider of debtor finance in Australia.
  • The group is well capitalised to continue to deliver organic growth via its increased scale and improving market share.
  • In our view, CGR has the potential to outperform earnings expectations over the next two years, in part via executing on its recent acquisition (meaningful potential cost synergies). This is coupled with a relatively undemanding valuation of approximately 10x FY19 PE.

We retain our Add recommendation.

More information

Morgans clients can access the full list of high conviction stocks by viewing our latest High Conviction Stocks research report. If you would like more information, please contact your adviser or nearest Morgans office.


Comments

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Medium tiger

Alan CTHGPRO

Thanks. I've been most impressed by the baby of the group CGR. Its management continues to execute on its plans and there genuinely appears some decent upside from here. (disclosure held)

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