Analyst Outlook Stock Picks for FY22 Livewire
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ANALYST OUTLOOK & STOCK PICKS FOR FY22. June 2021 ANALYST OUTLOOK & STOCK PICKS FOR FY22 CONTENTS Listed Investment Companies Hayden Nicholson, ETF/LIC Specialist 3 Agricultural & FMCG Jonathan Snape, Senior Industrials Analyst 4 To learn more about the stocks Technology Chris Savage, Industrials Analyst 5 mentioned in this report, speak to your adviser or refer to the Client Access Discretionary Retail & Professional Services Sam Haddad, Research Analyst – Emerging Growth 6 Research Library. Hamish Murray, Industrials Analyst 7 Please note that Speculative securities Industrials may not be suitable for retail clients James Filius, Analyst 8 (refer to final page of this report). Alex McLean, Analyst 9 Engineering & Construction Steven Anastasiou, Research Analyst 10 Healthcare John Hester, Analyst - Healthcare 11 Tanushree Jain, Healthcare Analyst 12 Elyse Shapiro, Healthcare Analyst 13 Resources & Precious Metals David Coates, Senior Resources Analyst 14 Energy Stuart Howe, Senior Analyst (Resources & Energy) 15 Joseph House, Resources Analyst Strategic Minerals Stuart Howe, Senior Analyst (Resources & Energy) 16 Disclaimer & Disclosures 17 2 ANALYST OUTLOOK & STOCK PICKS FOR FY22 LISTED INVESTMENT COMPANIES WAM Alternative Assets (WMA) MFF Capital Investments (MFF) Ellerston Asian Investments WMA currently invests in a diverse MFF’s primary focus is to invest in Limited (EAI) range of alternative asset classes, large listed international companies Asia has attracted significant fund including but not limited to: (1) where the Investment Manager flows, however historic US-China Hayden Nicholson private equity, (2) real assets, (3) real has identified attractive business relations have undermined the ETF/LIC Specialist estate and (4) cash. Wilson Asset characteristics at a discount to their expansion of this capital allocation. The Management, by way of appointment assessed intrinsic values. We believe new Biden Administration and the Fed’s as the Investment Manager of the there is a potential for share price avoidance to address tapering targets The S&P/ASX 200 Index recovered and Fund in October 2020, has also appreciation given strong reported for quantitative easing may be set to then exceeded its pre-pandemic high in agreed to adhere to a ‘Premium profit reserves, franking credits benefit Emerging Markets. Positive the space of approximately 15 months, Target’, an uncommon objective in the and supportive guidance from the prospects for China’s growth trajectory notwithstanding a 36.5% drawdown 22 Australian LIC market which would Company’s Directors to revise the are supported by tailwinds such as: days into March last year. Using pre-tax see shareholders empowered to vote dividend policy from a 3cps 6 monthly (1) an increase in the administration NTA growth as a gauge for underlying on wind-up if shares fail to trade above fully franked dividend to 5cps within of vaccinations, (2) a focus on carbon investment portfolio performance, the pre-tax NTA at least 3 times over the next two years. An overhang does neutrality with the production of Domestic Equity, International Equity the next 5 years. With yields remaining exist from in-the-money options, electric vehicles and renewables and Alternative Strategy Managers all depressed, alternative assets, like however the low cost base embedded infrastructure and; (3) an improvement on average added substantial value over fixed income securities, exhibit a within the portfolio makes the turnover in living standards with increased their respective benchmarks during similar low correlation to equities of investments with reasonable risk- domestic consumption and services. the last 12 months. While the market with strong annuity-style returns. adjusted returns undesirable. MFF EAI provides access to a benchmark average discount to underlying asset Leveraged to Australia’s comparative has historically outperformed its agnostic, concentrated portfolio of value has materially contracted since advantage, the substantial allocation benchmark MSCI World Index (in AUD) high growth companies across the Asia the onset of the pandemic, we anticipate to agricultural assets and water by 3.7% p.a. over the last 10 years, and region with a proprietary integrated income dependency, sector consolidation, entitlements may be the driver of we believe this injection of liquidity will Environmental, Social, and Corporate shareholder activism and recent strong future returns amid further supply- facilitate further long-term growth. Governance approach through the performance of actively managed alpha chain disruptions and price increases. investment process. generating solutions to drive further contraction and realisation of value. 3 ANALYST OUTLOOK & STOCK PICKS FOR FY22 AGRICULTURAL & FMCG Elders (ELD) Bega Cheese (BGA) The a2Milk Company (A2M) ELD is a leading supplier of fertiliser, Bega Cheese (BGA) is engaged in: The a2 Milk Company (A2M) is in the Jonathan Snape agricultural chemicals and animal (1) the processing, manufacturing, business of producing, marketing and Senior Industrials Analyst health products to rural and regional distribution and marketing of dairy and selling branded dairy and infant milk Australia, with strong agency positions associated products to both Australian formula (IMF) products in Australia, in livestock, wool and real estate. and international markets: and (2) New Zealand, China, US and UK. A2M the processing and manufacturing of branded milk contains only A2 Protein Investments in the Agricultural & The recent share price of ELD has benefited from rainfall and strong spreads and condiments for consumer rather than both A1 and A2 proteins FMCG sector should be considered cattle prices . However, we continue markets. which are found in Regular Cows’ Milk. high risk and come with volatility. to see upside to consensus FY21-22e The acquisition of Lion Dairy & Drinks While not without near term risks as For this reason we tend to focus earnings reflecting the annualised (LDD) and the targeted synergy base supply chains stabilise, at its core on stocks where we see either: a benefit of the AIRR acquisition (and is expected to drive a material step we see A2M as a business that, once structural uplift in ROIC through synergy realisation), a normalisation change in returns for BGA over the MVM is consolidated, has baseline the cycle, cyclical growth stories, or in the summer crop (sales flow in next three years. In addition, we see revenue of ~NZ$1.4-1.5Bn and EBITDA counter-seasonal crop exposures. 1H21e), gains from integrating three BGA benefiting from an improved of ~NZ$300m, with a pathway to generic portfolios across the combined competitive position at the farmgate being a ~NZ$1.7Bn revenue business ELD + AIRR business (and from in FY22e on the back of recent generating ~NZ$445m in EBITDA on migrating independents onto the AIRR operational issues at competitors and its existing China offline distribution platform); and continued business the material outperformance of SMP footprint (with a materially higher investment (which traditionally has relative to other dairy ingredients in portion of direct China sales than in the averaged ~$40m pa at 3-5x EBIT). recent months. In the medium term past). We do not see FY21e earnings as Buy, Price Target $13.75 we see the potential for additional LDD reflective of the returns the business synergies to be realised as seasonal can generate in the medium term, milk flows are better utilised. but acknowledge the high level of risk Buy, Price Target $7.35 involved in timing the inflection point at which destocking activity concludes. Buy, Price Target A$8.50 4 ANALYST OUTLOOK & STOCK PICKS FOR FY22 TECHNOLOGY Chris Savage Industrials Analyst Nitro Software (NTO) Life360 (360) Adacel Technologies (ADA) Nitro is a global document productivity Life360 provides a market leading Adacel is a leading global provider of software company that enables digital app for families – called Life360 simulation and control systems for We continue to be positive on the transformation in organisations – with features that range from the civil aviation and defence sectors. around the world through a suite communications to driving safety and The company has already upgraded technology sector in Australia as, in of products built to enable digital location sharing. The company is its FY21 guidance once – it now an environment of low interest rates workflows. The company has had a likely to be a major beneficiary of the forecasts PBT b/w $7.0-7.3m – and and low growth, we believe there strong start to the calendar year with widespread rollout of COVID vaccines we believe it will at least achieve the are a number of good quality stocks annual recurring revenue (ARR) at 31 – particularly in its home market of guidance if not exceed it. Adacel has in the sector with reasonable to March 2021 up 66% compared to 31 the USA – as the return to normality net cash of several million dollars and strong growth outlooks. What we are March 2020 and the CEO saying there and outdoor life will see demand for recommenced a share buyback at the cognisant of, however, is the threat is “accelerating sales momentum” its app increase. This was evident in start of the year (and has been quite of inflation and a return to some sort in the business. We believe there is the Appendix 4C release in late April active). The company has already paid of normality post the widespread a reasonable chance the company and we expect this trend to continue an interim dividend of 2.75c this year will upgrade its 2021 guidance at or over the remainder of the year and and we expect another reasonable rollout of the COVID vaccines which around the release of the 1H result into next. The stock is not cheap on dividend at year end. The stock looks may result in a sector rotation out of in August and our forecasts already an EV/Revenue multiple of c.5x in 2022 value on an FY22 PE ratio of around technology and into more value or reflect this. The stock is not cheap on but, like Nitro, looks reasonable value 13x.