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. This month we add BHP Billiton back to the list, and remove Corporate Travel Management after a strong run following results.
We add BHP Billiton (BHP) back to the list in March
Higher commodity prices, robust profitability, further valuation upside potential and rising shareholder returns all support our High Conviction call on BHP. The company also recently outlined that data rooms for all of its US onshore oil & gas assets would be open by the end of March, with the bids expected in the June quarter and assessed in the September quarter. We see this as the strongest positive catalyst for BHP in 2018. We also believe strong leverage to cyclical growth positions BHP well into a multi-year recovery for commodities.
We remove Corporate Travel Management (CTD) from our list.
While we believe CTD can continue to deliver strong double-digit EPS growth over coming years, the stock has put on 27% following its recent result, and has now exceeded our 12-month price target of $24.50. Beyond the strong result, share price catalysts include further accretive acquisitions with opportunities currently being evaluated in both North America and Europe.
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.
ResMed develops, manufactures and markets medical products for the treatment and management of respiratory disorders globally.
Key reasons to buy ResMed
- Recent 2Q results were solid across the board, with patient volumes improving, strong device sales continuing and the mask annuity stream taking market share.
- ResMed continues to cement its leadership position in healthcare informatics, with the high-margin Brightree SaaS model performing to expectations (low to mid teen growth), 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.
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.
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.
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.
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.
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).
Access my short video presentation
This is contributed from the Morgans Blog; click here for my short video presentation summarising this month’s changes:
Read next: Reporting season: 7 key themes and our best ideas
There was a lot to like about the February reporting season. By our estimates, over 30% of large caps beat the market's expectations, and unlike previous seasons, estimates held firm rather than falling away into results. Downgrades and significant misses were largely a non-event and overall management commentary reflected the most buoyant conditions we've seen for a while.
We recently picked apart seven key themes we identified around large cap outperformance, offshore earnings growth, industrials earnings momentum (up slightly), capital management (up), and the resource cycle (maturing). We also list the key buy ideas among oversold stocks, cyclical exposures, stocks with notably high quality results, and a few that are just simply flying under the radar. You can read this summary here.