11 Australian stock picks for 2023
Global equity markets face challenging headwinds in 2023, but there are opportunities for investors according to Morningstar's latest Australia and New Zealand Market Outlook.
Mentioned: FINEOS Corp Holdings PLC (FCL), AGL Energy Ltd (AGL), Ansell Ltd (ANN), AUB Group Ltd (AUB), Bega Cheese Ltd (BGA), Beach Energy Ltd (BPT), Kogan.com Ltd (KGN), Mirvac Group (MGR), Seven Group Holdings Ltd (SVW), Southern Cross Media Group Ltd (SXL)
After a turbulent 2022, markets will continue to be tested in 2023 as rising interest rates weigh on households, and global geopolitical tensions persist.
In the face of these headwinds, Morningstar's head of equities research, Peter Warnes, says sector diversity and a bias toward lower-risk and moatier stocks should apply.
"Currently, we see the best value in energy, real estate, financial services, and
telecommunications sectors," Warnes says in the latest Australia and New Zealand Market Outlook report.
The report, available to Morningstar Investor subscribers, identifies dozens of ASX-listed companies as undervalued, with strong ratings across a wide range of sectors.
The RBA has raised the cash rate at the fastest pace in three decades, taking it from 0.1% to 3.1% since May. Warnes says the delayed impact of these successive rate hikes will hit household spending next year, and further hikes are likely.
"The interest rate tightening cycle has a way to go and the lag effect of eight consecutive monthly hikes in 2022 will have a meaningful impact on household consumption through 2023, starting in the post-festive period," he says.
Projections of weaker economic growth in 2023 will also have "meaningful implications" for households and corporate earnings, Warnes says.
"Further rate hikes are likely in 2023 as inflation remains elevated through the March
quarter. The RBA is likely to then pause and stay on the side lines until 2024, when with economic activity at a low ebb, cuts could be initiated."
Warnes says global equity markets could bottom two to three months after the central banks' tightening cycle ends.
"But it does not mean a V-shaped reversal as 2023 will be challenging on many fronts, not just economic," he says, pointing to global geopolitical tensions and the Russia-Ukraine war.
Top stock picks for 2023
Morningstar senior equities analyst Adrian Atkins says about 44% of Australian and New Zealand stocks covered by Morningstar are either 4- or 5-star rated, a historically high proportion.
"Most sectors of the Australian and New Zealand market are now fairly valued or undervalued on average," he says.
He says a large number of stocks in the technology, real estate, industrials, and communications sectors are undervalued after major share price falls in 2022, triggered by sharply higher interest rates and growing fears of an economic slowdown.
"Despite rallying strongly in 2022, many stocks in the energy sector remain attractive, a testament to how cheap they were in 2021," Atkins says.
Here are Morningstar analysts' top picks across eleven sectors for 2023.
Basic Materials - Newcrest Mining
No-moat gold miner Newcrest Mining (NCM) remains the better-value pick among Australian-listed miners, according to Morningstar equities analyst Jon Mills.
"We think this reflects market concerns about the outlook for gold as the world recovers from the COVID-19-induced downturn," Mills says.
"We think Newcrest is likely to overcome recent production challenges at Lihir, and both
Lihir and Cadia remain better-than-average gold mines, helping Newcrest remain in the bottom decile of the gold industry cost curve."
Morningstar has a 5-star rating on Newcrest, with a fair value estimate of $31.00.
Communication Services - Southern Cross Media Group
An advertising recovery for Southern Cross Media's (SXL) radio and regional television units is underway, Morningstar senior equity analyst Brian Han says.
"Southern Cross Media is our top pick in the media sector, trading at a substantial discount to our AUD 3.10 fair value estimate," Hans says.
"As the clear market leader in the key radio segment (over 80% of group earnings), we expect no-moat Southern Cross to continue to enjoy profit growth as revenue recovers, on a cost base that has been restructured."
Southern Cross Media has an uncertainty rating of 'high'.
Consumer Cyclical - Kogan.com
Morningstar equity analyst Angus Hewitt says the current weakness in no-moat online retailer Kogan's (KGN) share price is due to a material moderation in sales growth and earnings declining from boomtime levels, as well as the temporary suspension of dividends.
"We anticipate profit margins will expand in fiscal 2023, as marketing expenses as a percentage of gross sales are scaled back and top-line growth reignites once sales rebase at maintainable, albeit lower, post-pandemic levels," Hewitt says.
"As an online pure play, Kogan is poised to benefit more than omnichannel retailers from the shift to e-commerce."
5-star Kogan has a fair value estimate of $10.70 and an uncertainty rating of 'very high'.
Consumer Defensive - Bega Cheese
Morningstar equity analyst Johannes Faul says shares in dairy and food company Bega Cheese (BGA) are good value despite input cost pressure, with the spiking cost of milk weighing on its near-term earnings.
"We expect profitability relief beyond fiscal 2024 to be twofold: moderating input costs as stronger prices encourage a return of milk supply, and price increases."
Bega Cheese holds a 4-star rating has a fair value estimate of $5.20.
Energy - Beach Energy
Senior equity analyst Mark Taylor says Morningstar forecasts strong earnings per share growth for oil and gas producer Beach Energy (BPT), although the market may be penalising it too much for having a lesser field life compared to Woodside and Santos.
"While some life discount is warranted, we think the current level is too harsh," Taylor says.
"Beach's comparatively high proportion of domestic gas production blunts the impact from anticipated decline from export commodity prices," he adds.
Taylor says Morningstar's $3.00 fair value estimate is about 80% above the current share price for a 5-star rating.
Financial Services - AUB Group
Narrow-moat insurance broker AUB Group (AUB) is expected to deliver substantial earnings growth over the next five years, according to Morningstar senior equity analyst Nathan Zaia and equity analyst Shaun Ler.
"We expect AUB Group to benefit from rising insurance premiums, insurance brokers continuing to take share from the direct channel, and increased ownership interests in brokers within the network."
4-star rates AUB Group has a fair value estimate of $28.00.
Healthcare - Ansell
Shares in narrow-moat Ansell (ANN), which supplies personal protective equipment, are undervalued as Morningstar expects margin pressures will largely abate, according to equity analyst Shane Ponraj.
"We expect longer lead times due to supply chain constraints will normalise, and pricing for undifferentiated single-use exam gloves to stabilise lower to around pre-pandemic levels by fiscal 2024."
4-star Ansell has a fair value estimate of $32.00.
Industrials - Seven Group Holdings
The share price of no-moat Seven Group (SVW), a large industrial equipment and investment firm, has been hit by sharp price declines in its 73% interest in building materials group Boral, Morningstar equity analyst Trevor Huynh says.
"We still view Seven Group's share price weakness as an opportunity. We think exposure to healthy government expenditure plans should favourably insulate Seven Group from the impact of rising interest rates on economic activity," Huynh says.
"An ageing mining fleet should drive WesTrac sales, and Australia’s large infrastructure and construction pipeline should be to the benefit of Coates hire’s prospects."
Seven Group has a fair value estimate of $23.40 and is 4-star-rated.
Real Estate - Mirvac Group
Morningstar equity analyst Alex Prineas says property developer Mirvac's (MGR) residential development business is one of Australia's best at a time when weaker rivals are exiting the sector.
"Higher interest rates should continue to pressure house prices, but Australia appears headed for a dwelling shortage, which should moderate the damage to earnings."
4-star Mirvac has a fair value estimate of $3.10.
Technology - Fineos
The market is underestimating the revenue upside for software provider Fineos (FCL) from the adoption of cloud software by insurers and the increased stickiness of its insurer customers, Morningstar equity analysts Roy van Keulen and Shaun Ler say.
"Fineos is in a good position to win new business supported by longstanding customer relationships. Fineos is unprofitable but reinvests to solidify switching costs with its sticky customer base, to help new business wins, and to maintain its lead over would-be competitors."
Shares in 5-star rated Fineos are trading at a significant discount to Morningstar's $3.75 fair value estimate.
Utilities - AGL Energy
Morningstar’s Adrian Atkins says operating conditions are improving for narrow-moat AGL Energy (AGL) and its share price should improve from here.
Atkins says AGL's cost of producing power remains low thanks to cheap, long-term coal supplies, while wholesale gas and electricity prices have increased materially in the past year. The main risk for the stock is government policy, he adds.
4-star AGL has an uncertainty rating of 'high' and a fair value estimate of $12.80.