Four ASX100 stocks to buy in March

Morgans Financial Limited

Australian shares have generally followed the pattern of global equities, following a wave of Trump-induced optimism. While we have confidence in a cyclical turnaround over the medium term, we need to see signs of better earnings momentum before getting more comfortable with a much broader-based rally. In this environment, investors should concentrate on stock selection over sector exposure.

Some updates to our High Conviction selection process

We update our approach to the high conviction list, incorporating some additional qualitative and quantitative constraints to rank and measure stocks consistently across our coverage universe. We take a scorecard approach evaluating the stock candidate's earnings and dividend profile, industry structure and susceptibility to earnings risk with a minimum score required to be considered for inclusion.

This month we add Oil Search (OSH), and we remove Westpac (WBC) and ALS Limited (ALQ). Westpac remains our most preferred bank, but it is now trading past our 12-month target price, and we see limited capital upside over the next 12 months. We remove ALS as it may take time for the market to adjust to the departure of its long-running CEO. We also await further clarity on the appointment of a successor within the Life Sciences Division.

Here are our four ASX100 high conviction stock picks this month:

Oil Search (OSH)

Oil Search engages in the business of oil and gas exploration. OSH's main asset is its 29% interest in the 6.9MTPA PNG LNG project, a world-scale liquefied natural gas (LNG) development operated by ExxonMobil.

Key reasons to buy Oil Search

  • The recent Muruk discovery could be a game changer, and could even become the preferred development option for train three at PNG LNG. Drill testing its extent continues.
  • Recent 50% growth in 1P reserves underpins PNG LNG's ability to sustain production above nameplate over the long term, while also helping to underpin the next leg of growth.
  • We see OSH as ideally positioned for near-term upside as it progressively de-risks its growth profile and expands its upside case through appraisal and exploration.

We retain our Add recommendation. Morgans clients can login to view our detailed research and share price target for Oil Search (OSH).

South32 (S32)

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. On our estimates, this gives S32 a Free-Cash-Flow (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 a 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 expect S32's earnings will remain supported by firming base metal prices even as the manganese rally ends.

We retain our Add recommendation. Morgans clients can login to view our detailed research and share price target for South32 (S32).

Orora (ORA)

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 2-year EPS CAGR of 11%) with potential upside from acquisitions.

We retain our Add recommendation. Morgans clients can login to view our detailed research and share price target for Orora (ORA).

ResMed (RMD)

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 continues to cement its leadership position in healthcare informatics, with the high-margin Brightree SaaS model performing to expectations, supporting device/masks growth and Gross Margin gains.
  • 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 to view our detailed research and share price target for ResMed (RMD).

More information

Morgans clients can access the full list of high conviction stocks (including our five 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.

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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