The key investment themes that defined the last three years are unlikely to define 2017. Until 2016, investors bought equities for yield and bonds for capital gains. We shift away from 'lower-for-longer' trades and enter 2017 with the view that we are entering a new phase in markets, which is less to do with central bank (in)action and more to do with fiscal stimulus and reflating global growth. We see 2017 as a transitional year, the anticipated US policies to reflate the economy will likely flow on to global growth and commodity prices which bodes well for most sectors of the Australian economy. Here are our five ASX100 high conviction stock picks this month:
This month we add South32 (S32) and remove Sydney Airport (SYD) from our high conviction list. The Notice of Intention (NOI) issued by the Federal government for the second Sydney airport unexpectedly puts all the risks and funding obligations onto SYD. While the tailwind from increasing passenger numbers continues to play out, we think the NOI will overshadow the positive news until the uncertainty is removed.
South32 Limited is a diversified metals and mining company with a portfolio of quality assets producing alumina, aluminium, coal, manganese, nickel, silver, lead and zinc.
Key reasons to buy South32
- We like S32 for its exceptional cash flow generation, with free cash flow set to almost double in FY17 to over US$1bn giving it an FCF yield of ~11%. S32 holds a key strategic edge at this point in the cycle.
- S32 has a diversified income stream from a mature 'low surprise' asset base and solid balance sheet that is sitting in net cash, positioning the company well to exploit the next cycle.
- S32 remains one of our preferred sector exposures, with the power of its cash flow generation overcoming a less-than-ideal combination of market exposures.
We retain our Add recommendation. Morgans clients can login (VIEW LINK) to view our detailed research and share price target for South32 (S32).
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
- Relatively low risk profile in terms of loan book positioning and low reliance on treasury and markets income.
- Westpac stands to benefit most from re-pricing of investor home loans.
- Relatively low risk of dividend cut as a result of strong regulatory capital position and good organic capital generation capacity.
We retain our Add recommendation. Morgans clients can login (VIEW LINK) to view our detailed research and share price target for Westpac Bank (WBC).
Orora manufactures and distributes fibre and beverage packaging primarily in Australia and North America.
Key reasons to buy Orora
- Since demerging from Amcor (AMC) in December 2013, ORA has experienced strong double-digit earnings growth in both the Australasian and North American divisions.
- We estimate ORA derives around 60% of its revenue from highly defensive sectors such as food and beverage. Given market appetite for earnings certainty, we think the stock should receive good support.
- ORA has made a number of growth investments over the last two years that should set it up for solid earnings growth over the medium term (forecast 3-year EPS CAGR of 7%) with potential upside from acquisitions.
We retain our Add recommendation. Morgans clients can login (VIEW LINK) to view our detailed research and share price target for Orora (ORA).
ALS Limited (ALQ)
ALS is one of the world's largest and most diversified analytical testing service providers.
Key reasons to buy ALS Limited
- Numerous leading indicators on exploration spend, metres drilled and junior capital raises all imply that the outlook for ALQ's minerals business should materially improve in FY18/FY19.
- On our forecasts ALQ is a trading at an FY18F PE of 20x, which is a 15% discount to international peers and, in our view, ALQ offers stronger leverage to ongoing improvements in minerals exploration.
- The next catalyst for ALQ over the coming months is potential acquisitions in Life Sciences.
We retain our Add recommendation. Morgans clients can login (VIEW LINK) to view our detailed research and share price target for ALS Limited (ALQ).
ResMed is a global company involved in the development, manufacturing and marketing of medical products for the treatment and management of respiratory disorders.
Key reasons to buy ResMed
- We estimate a solid 10.9% earnings CAGR through FY19, with valuation undemanding (21x forward; in line with long-term average).
- A new mask product cycle is underway with positive patient/physician/provider feedback and management are confident category growth will accelerate.
- ResMed is a key beneficiary of a weaker AUD, with 95% of revenue derived from offshore and c80% of R&D expenses AUD dominated.
We retain our Add recommendation. Morgans clients can login (VIEW LINK) to view our detailed research and share price target for ResMed (RMD).
Morgans clients can access the full list of high conviction stocks (including our seven small to mid-cap high conviction picks) by viewing our latest High Conviction Stocks research report. If you would like more information, please contact your adviser or nearest Morgans office. (VIEW LINK)
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.