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3 Aussie stocks in the accumulate zone

Glenn Freeman  |  16 Jan 2018Text size  Decrease  Increase  |  
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These companies are trading at a discount to their fair value estimate--one by as much as 20 per cent--and so carry accumulate ratings, according to Morningstar analysts.

Oil and gas company Woodside Petroleum (ASX: WPL) saw a substantial increase in its FVE in December, upgraded to $40 a share from $35.50 a share.

"We think no-moat Woodside is 20 per cent undervalued, and rate it the best value of the three largest Australian names; the others are Santos and Oil Search," says Mark Taylor, Morningstar senior equity analyst covering the energy sector.

"We don't think the market sufficiently credits Woodside's ability to complete a capital-efficient second Pluto LNG train, nor its ability to increase North West Shelf Joint Venture life to greater than 20 years, and unfairly so. In our opinion, the stars increasingly point to development of new resources.

Though not without business risks--the scale of Browse Basin infrastructure development, for one--"our base case, however, assumes Browse will go ahead", Taylor says.

This upgrade comes in a rising oil price environment, with Brent crude hitting three-year highs of US$70 a barrel last week, with some industry commentators pointing to the risk of equating higher oil prices with rising oil company share prices.

While the rising price certainly helps, Morningstar's assessment runs much deeper than this, "largely accounted for "by our increasing the worth of other prospects excluding Browse gas, which is instead captured in assumed life extension and expansion".

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"We think we previously understated the value in these assets, and that we were too bearish on future demand," Taylor says.

Narrow moat company Coca-Cola Amatil (ASX: CCL) is also rated accumulate, with a FVE of $9.40--it was trading at $8.13 as at 15 January 2018.

Despite having pointed out various "near-term challenges" for the Australian beverages division last November, Morningstar regional director of research, Adam Fleck, highlights "long-term growth drivers within the company’s portfolio, including its alcohol and coffee segment, non-carbonated beverages, and Indonesia".

He believes the current price of around $8 a share is "overly bearish" in assuming Australian revenue declines of 4 per cent over the long-term.

"Instead, we expect rising non-carbonated volumes to lead to fixed-cost leverage, mitigating the negative impact of falling carbonated sales, while technology and marketing investments, including the AUD 40 million pulled into fiscal 2018, help to stabilise margins," Fleck says.

Another narrow-moat company, Domino's Pizza (ASX: DMP) is also significantly undervalued against FVE, trading at a 9 per cent discount to our unchanged fair value estimate of $53, according to Morningstar equity analyst, Johannes Faul.

He points to strong anticipated sales growth in Domino's key growth region of Europe, and ongoing strength in Australia and New Zealand and Japan.

"We forecast the European business to be as large as the Australia and New Zealand segment in terms of EBITDA by fiscal 2022, both regions accounting for 40 per cent of group EBITDA then," Faul says.

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Glenn Freeman is Morningstar's senior editor.

© 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 'regulated financial advice' under New Zealand law has 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. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. 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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