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5 Aussie large-caps trading at a discount

Glenn Freeman  |  10 Apr 2018Text size  Decrease  Increase  |  
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Retaining its place in Morningstar's best stock ideas for the month of April, global hospital group Ramsay Health Care (ASX: RHC) is regarded as holding a narrow moat of competitive advantage.

"The scale of Ramsay’s operations in the Australian context underpins, in our opinion, a sustainable competitive advantage that drives both cost advantage and a reasonable level of pricing power in negotiations with private health insurers," says Morningstar equity analyst, Chris Kallos.

"We believe government policies designed to support private health insurance membership, combined with current inefficiencies of the public hospital system, protect private hospitals from major funding related disruptions."

Kallos believes the company's move into community pharmacy is "complementary to acute treatment settings and extends the company’s reach into chronic disease management; this is a growing area, given the ageing demographic".

Ramsay's latest closing price of $63.12 is more than 20 per cent below his FVE.

Also holding its position in the latest Best Stock Ideas list, Bapcor (ASX: BAP) is a narrow-moat automotive spare parts distributor, currently trading almost 20 per cent below Morningstar's fair value estimate.

At this share price, Morningstar analyst Daniel Ragonese believes there is "an opportunity to invest in a company with a strong growth trajectory, resilience to economic cyclicality, and a dominant competitive position in its core markets".

He points to the company's resilience to economic downturns, with customers more likely to repair vehicles rather than replace them in more difficult financial times.

Its economic moat is underpinned by the strong customer reach--with more than 30,000 auto workshop clients, a product range that exceeds 500,000 items, and 30 per cent market share.

"Bapcor is well positioned to continue executing its organic network expansion, stealing share from the smaller players and fortifying its competitive position," Ragonese says.

Within the financial space, Morningstar senior equity analyst David Ellis describes Macquarie Group (ASX: MQG) as "an attractive growth stock, internationally focused and characterised by high quality management".

Ongoing growth in global infrastructure and energy sectors are the primary drivers of Morningstar's above-consensus earnings forecasts--underpinned by expected average earnings-per share growth of 9 per cent.

"Macquarie's earnings upgrade cycle continues, providing attractive upside for investors. The investment case for Macquarie is based on strong future earnings growth, high return on equity, and an attractive dividend stream based on an investor friendly 70 per cent payout," Ellis says.

Invocare (ASX: IVC) and Australian Pharmaceutical Industries (ASX: API) round out this list. Holding a wide moat, Invocare is a funeral services business with a 35 per cent market share in Australia.

The resilience of demand for Invocare services is a key attraction for Morningstar, with the national death rate of 2 per cent marginally above the long-term average, and tipped to reach 3 per cent, over the next 15-plus years, according to Australian Bureau of Statistics projections.

"Given Invocare’s wide economic moat, and dominant market position, we believe the company is best placed to capitalise on this tailwind," Ragonese says.

With a recent closing price of $12.70 a share, Invocare is priced considerably below Morningstar's FVE of $16.50.

A leading pharmaceutical wholesaler, Australian Pharmaceutical Industries is the third-largest nationally, with around 26 per cent market share.

Morningstar's Chris Kallos says the company is "unique in the Australian context, given the degree of vertical integration and targeting of the mass-market health and beauty segment".

He notes Morningstar's view that pharmaceutical distribution and wholesaling is a relatively mature industry, but is encouraged by the company's expansion into the health and beauty segment. "This is generating scale benefits and forging an attractive franchise model for community pharmacies seeking a stronger retail-facing business," Kallos says.

With a FVE of $2 per share, the company's last closing price at publication was $1.54.

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Glenn Freeman is a senior editor at Morningstar.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

 

is senior editor for Morningstar Australia

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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