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2 more Aussie stocks join global best ideas

Lex Hall  |  04 Mar 2019Text size  Decrease  Increase  |  
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Plastics-packaging business Pact Group and outdoor advertiser oOh Media are the newest Australian names to forge a place in Morningstar’s list of  Global Equity Best Ideas.

Pact Group Holdings (ASX: PGH) is trading at a 31 per cent discount to its fair value estimate of $4.20. The company, led by Raphael Geminder, co-founder of former chairman of Visy Recycling, is not without problems, however: it suffered a weak first-half result; its balance sheet is stretched, and a capital raising is imminent. 

But Morningstar says this reality is fully priced in, arguing that free cash flow is set to improve materially from fiscal 2020, which helps offer a sufficient margin of safety.

“Pact shares offer significant upside potential following difficult trading conditions in the first half of fiscal 2019,” Morningstar says.

“Lost market share in Australian dairy, food, and beverage segments challenged the top line while the delay in the passing on of surging resin costs to customers saw margins temporarily compress.

“But margin recovery is in sight with a cost-out program to strip $50 million from the Australian manufacturing network and right of pass-through of resin costs in customer contracts to restore margins to approximately 10 per cent at midcycle, up from a disappointing 8.7 per cent in fiscal 2018.”

oOh boosts its market share

Out-of-home advertiser oOh Media (ASX: OML) – which is not moat-rated by Morningstar – is the largest company in its sector, holding 50 per cent market share. It was boosted by the acquisition of Adshel in September last year.

oOh Media is trading at a 23 per cent discount to its fair value estimate of $4.60.

In Morningstar’s reckoning, the company is strongly placed to benefit from the structural tailwinds behind the Australian and New Zealand outdoor advertising industry. The medium has steadily increased its share of the local ad market from 3.5 per cent in 2009 to 5.5 per cent in 2018.

"We expect this to reach 6.6 per cent in five years’ time, fuelled by a growing outdoor audience, improving measurability of that audience, and upside from inventory digitization in attracting new advertisers.”

WESCO: the new name in industrials

The latest American name to join Morningstar’s Global Best Ideas list is WESCO International, a provider of electrical, industrial, and communications maintenance, repair and operating and original equipment manufacturers product, construction materials, and advanced supply chain management and logistic services.

It replaces Anixter International as the top pick among industrial distributors and is trading at a 38 per cent discount to its fair value estimate of US$88.

Morningstar replaced Anixter over concerns about its recently disclosed cloud-based enterprise resource planning implementation. This system should ultimately boost efficiency and cut costs, but Morningstar is wary of the risk of disruption and earnings volatility. This transformation may also cause management to be less willing to return capital to shareholders in the interim.

“Wesco, which is a close peer of Anixter's, should benefit from many of the same growth drivers we see for Anixter, including data centre expansion; retrofit spending aimed at making buildings smarter, safer, and more energy-efficient; power-grid modernisation; and growing demand for outsourced supply chain management services as customers look to reduce operating costs,” Morningstar says.“Wesco's fundamentals are improving, and we think that trend can continue.”

is content editor for Morningstar Australia

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