3 more stocks for your watchlist
Morningstar analysts consider these names to be trading at meaningful discounts following the market rout.
Mentioned: Ainsworth Game Technology Ltd (AGI), ARB Corp Ltd (ARB), AVITA Medical Inc (AVH), BWP Trust (BWP), Brambles Ltd (BXB), Ramsay Health Care Ltd (RHC), Scentre Group (SCG), Southern Cross Media Group Ltd (SXL), Vicinity Centres (VCX)
COVID-19 has driven stores and theatres to close, restaurants to turn into takeout joints, and businesses to establish work-from-home procedures.
As the pandemic continues to threaten economic growth, our analysts are re-evaluating the companies they cover. In doing so, they’re uncovering many opportunities.
We’ve shared some of their ideas before of quality companies that should survive the downturn. From our perspective, great companies are those that have carved out solid (and in some cases growing) competitive advantages that will allow them to thrive for years to come—in Morningstar parlance, they’ve built economic moats. Such companies are typically led by adept managers who have a record of allocating capital in ways that add value.
To find stocks to fit the bill, we screened for stocks with economic moats, fair value certainty, positive stewardship ratings—trading at a decent discount to analysts fair value estimates.
Since delivering you the list last week, no new stocks have been added. BWP Trust (BWP), Ramsay Health Care (RHC), ARB Corp (ARB) and Brambles Ltd (BXB) were removed because they currently trade within a range analysts consider fairly valued at three-stars. Scentre Group (SCG) and Vicinity Centres (VCX) were also removed because their fair value uncertainty levels were raised to high or very high.
Today we bring you three stocks that are trading well below their fair values at five stars. They were not included in prior lists as they did not meet the criteria.
Given the ongoing uncertainty in the market, these stocks may certainly fall further. Nevertheless, these names are trading at appealing entry points, given our long-term outlook for each.
Note: This is a snapshot of how these stocks stand at Tuesday 7 April. Given the current market volatility, the valuations could jump around. See the individual stock pages for full analysis.
Avita Medical Ltd (AVH)
Nicolette Quinn, equity analyst, 6 April 2020
No-moat Avita published third-quarter sales of an estimated 600 Recell units, taking the year-to-date total to approximately 1,600 units, and confirmed the ongoing adoption of the product in treating burns in the U.S. market. As burn treatment is acute and not elective, it cannot be deferred and the shorter hospital length of stay offered using Recell, as opposed to a skin graft, should underpin its use. However, we do expect the roll-out to additional locations to slow due to travel restrictions on Avita’s sales and training teams.
In addition, as clinical trials across the U.S. have been deprioritised and are experiencing delays, we push out our anticipated launch dates for other Recell indications out by a year
As adult burn wounds occur in both the home and workplace, it is not possible to draw any conclusions on incidence rate expected under the lockdown. The Recell unit is assembled by the company in its California facilities, and although Avita does not anticipate any supply chain disruption, it has moved to hold more localised inventories across the U.S. to ensure continuity.
See Quinn's full analysis, forecast and fair value recommendation for Avita Medical here (Premium)
Southern Cross Media Group Ltd (SXL)
Brian Han, equity analyst, 7 April 2020
We cut our fair value estimate on Southern Cross Media by 68 per cent. Of the reduction, $0.75 per share stems from the $169 million equity raising which balloons the share base by almost three and a half times to $2.6 billion, from $769 million. The rest reflects downgrades to our underlying forecasts.
The likely 30 per cent-plus slump in group revenue in the current June-quarter and the upcoming September-quarter is a clear sign of things to come, as marketing budgets are slashed while most advertising clients fight for corporate survival.
There appears to be some panic evident in both the amount of equity capital raised and the 46 per cent discount the issue price has been struck relative to the last traded stock price. Then again, management can hardly be blamed for getting in front of the capital raising well, ahead of a likely flurry of emergency funding calls to come in the market. Panic-buying of toilet paper and panic-raising of equity capital—sometimes it is hard to distinguish!
With the balance sheet restored to weather the current malaise, we see significant value in shares of no moat-rated Southern Cross, relative to our revised intrinsic assessment. While anything is possible in this environment, we view that as unlikely, especially given the falling rate of COVID-19 infection as a result of the recent lockdown measures.
See Han's full analysis, forecast and fair value recommendation for Southern Cross here (Premium)
Ainsworth Game Technology Ltd (AGI)
Mathew Hodge, director of equity research, 1 April 2020
As a result of the current market rout, narrow moat Aristocrat Leisure now trades at a meaningful discount to our unchanged fair value estimate, and narrow moat Ainsworth trades at an even deeper discount to our intact fair value estimate. We expect the impact of COVID-19 to weigh on the firms' near-term earnings as customers reduce capital expenditure to protect balance sheets amid shutdowns of nonessential public venues--including clubs and casinos. But our fair value estimates are intact as we expect the impact to be short term.
Aristocrat and Ainsworth face a material decline in outright machine sales, as well as ordinarily recurring revenue from leased machines because of the closure of venues limits. We also expect the near-term situation to be challenging for its smaller Australian competitor Ainsworth.
See Hodge's full analysis, forecast and fair value recommendation for Ainsworth Game Technology here (Premium)