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These 2 ASX shares look modestly undervalued

Nicholas Grove   |  01 Mar 2017Text size  Decrease  Increase  |  

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Despite delivering lacklustre numbers in the recent earnings season, several companies within the worst-performing sectors of the ASX may still represent good value to the right investor.


In short, the recently concluded Australian earnings season for the half year ended 31 December 2016 was not only good, it was "very good," according to CommSec chief economist Craig James.

Remarkably, James points out, all but eight of the 142 companies within the ASX 200 that reported results produced a profit for the six months to December. That is, around 94 per cent of companies made money.

Excluding BHP Billiton (ASX: BHP)--the inclusion of which would distort the overall picture of the earnings season, given the mining giant swung from a large loss to a large profit--aggregate profits lifted by 36 per cent and average earnings per share rose by 19 per cent, James says in a recent note.

Sixty-nine per cent of companies increased profit over the year--above the long-term average near 60 per cent.

Overall, 88 per cent of half-year reporting companies elected to pay a dividend, he says, while aggregate dividends rose by 6.7 per cent over the year.

There were two key positive influences on overall earnings during the period. Firstly, commodity prices--especially iron ore, coal and oil--have risen contrary to expectations, James says, while the record-breaking home-building boom has "lifted a lot of boats".

All up, the earnings results confirm that corporate Australia is in "good shape," he says.

Breaking the results down across industry sectors, the standout best performers were Steel, Diversified Metal & Mining, Gold, and Diversified REITS.

The worst-performing sectors included Broadcasting and Asset Management (active fund managers).

However, those investors with more of a long-term focus may discover some value among the poor performers within the latter two sectors.

1) Platinum Asset Management

Narrow-moat-rated fund manager Platinum Asset Management (ASX: PTM) delivered a weak half-year earnings result, with net profit down 20 per cent on the previous corresponding period to $95.4 million.

However, Morningstar senior equities analyst David Ellis said the weak result was as expected, and he is maintaining his positive view on Platinum's long-term outlook, which he says is underpinned by "favourable long-term thematics".

"Platinum is attractively priced, and while there are short-term pressures, we expect earnings to recover given its strong brand and long-term investment performance track record," he says.

"We believe international equities will be a growing part of individual retirement savings strategies in Australia as we expect Australia's growing investable asset pool over time will not be large enough to meet the increasing flow of mandated superannuation fund contributions."

Ellis says Platinum, as an international fund manager, also offers investors the opportunity to gain exposure to a wider range of industries than that available on the Australian market.

Also, he says long-term-focused investors receive an attractive yield, supported by a business with minimal capital expenditures and a very strong balance sheet.

2) Nine Entertainment 

Last month, free-to-air television broadcaster Nine Entertainment (ASX: NEC) delivered what Morningstar senior equities analyst Brian Han describes as a "comforting" first-half result.

While underlying net profit may have fallen 4 per cent to $75 million, Han said this was a relatively resilient outcome given the "revenue-sucking impact" of the Rio Olympics broadcast on free-to-air competitor Seven, and the weak metropolitan television advertising market.

Han says Nine Entertainment has a strong balance sheet and is highly cash--generative. This allows it to invest in marquee television content and engage in capital management initiatives--a luxury that is beyond most of its peers in the traditional media industry.

However, the stock, while currently attractive, is not without its risks. Chief among these is the structural challenge posed by digital delivery alternatives to traditional television, such as smartphones and personal devices.

"Digitisation and rapidly evolving ways of distributing media content are giving rise to bewildering choices, splintering the consumption patterns of viewers," Han says.

"Consequently, free-to-air television's traditional strength of aggregating mass audience is waning, forcing advertisers to follow eyeballs elsewhere.

"While the networks trumpet their declining viewers as still the biggest mass audience available in a fragmenting world, such an argument is unlikely to hold in the longer term."

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Nicholas Grove is a senior content editor at Morningstar.

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