The Australian equity market has taken a tumble this month leaving companies in seriously undervalued territory.

The S&P/ASX 200 has fallen 0.4% since Monday this week and slipped 4% since the beginning on the month as fears of a global recession continue to grow strong amid RBA rate hikes and red-hot US inflation. This has left some companies Morningstar sees value in trading at prices well below their assigned fair value.

We used Morningstar’s recent star rating changes feature to find three companies who begun trading at a five-star price this month.

Humm Group Ltd

Buy now pay later company Humm (ASX:HUM) has recently begun trading at a five-star price, 42% under its fair value of $0.85. Morningstar equity analyst Shaun Ler believes the company has the necessary capabilities to increase its market share.

“We think Humm has the necessary capabilities in funding, data, and credit assessment and collection to gain its fair share in the market despite competition and regulatory risks,” he says.

The company’s fiscal 2022 NPAT (Net Profit After Tax) was $51 million, a 25% dip below net profits in fiscal 2021 yet remained above Morningstar forecasts. Ler believes there are multiple factors which impacted the company’s ability to deliver a larger NPAT which came as no surprise.

“Culprits were fee compression, as well as higher bad debt provisions and operating expenses. These were anticipated,” says Ler.

However, Ler was particularly interested in the company’s strategy regarding unprofitable business segments.

“Humm’s intended pivot away from unprofitable growth caught our attention,” he said.

Ler agrees with the companies approach in exiting unprofitable segments such as hummpro and bundll NZ to pursue more efficiencies like consolidating support functions. He describes this approach as sensible given the lack of external funding to support growth.

In addition, Ler sees the BNPL company using a cost cutting strategy to minimise downside risks relating to the growing costs of funding and credit stress.

InvoCare Ltd

Earlier this month wide moat InvoCare (ASX:IVC) began slipped into five-star territory, trading at a 33% discount to its fair value of $15.30. Morningstar equity analyst Angus Hewitt expects the company to remain the Australian market leader in the death care industry. He backs the company’s wide moat as InvoCare has strong relationships with respected brands and cost advantages.

“The company boasts a number of well-known, highly respected brands and costs advantages over the long tail of smaller players in the highly fragmented death care industry, underpinning our wide economic moat rating,” says Hewitt.

The company’s fiscal interim 2022 results revealed that underlying net profits at InvoCare jumped 31% from the previous corresponding period to $28 million in like with Morningstar’s forecast of $60 million full year net profit.

Funeral volumes at the company rose 8% from the corresponding period as mortality trends begin to normalise. Hewitt notes the understated flu season in 2020 and 2021 resulted in the number of deaths falling below trend in Australia. However, as death rates normalise, InvoCare will be able to lift funeral volumes.

“Lower mortality in the near term simply results in a deferral of the number of deaths into future periods,” he says.

“While death rates can fluctuate in the short term, they are consistent over the long run.

“We forecast the number of deaths in Australia to grow at an average CAGR (Compound Annual Growth Rate) of 2.7% per year for the next decade, underpinned by the combined effect of Australia growing an ageing population, particularly offset by gradually increasing life expectancy,” added Hewitt.

TPG Telecom Ltd

Australian telecommunication heavyweight TPG Telecom (ASX:TPG) moved into five-star territory last week, trading at an 32% discount to its assigned fair value of $7.40. Morningstar’s director of equity research Brian Han sees the undervalued company on track to recovery after 2022 first half EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) fell 1% year-on-year to $872 million.

“We believe second half is likely to be stronger and see no reasons to alter our earnings forecasts or $7.40 fair value estimate,” says Han.

He sees one of the drivers for a strong second half as the expected benefits of mobile growth resulting from the vibrant mobile market amid higher prices offered by Telstra and Optus. He also anticipates a margin uplift as a result of growth in the fixed wireless business and the realisations of synergies will underpin strong earnings.

Han believes the companies solid balance sheet is crucial in the ongoing unification of TPG and Vodafone while being able to deliver dividends to shareholders.

“[The solid balance sheet] provides a firm foundation to continue integrating the business of TPG Telecom and Vodafone, while growing the narrow-moat-rated groups dividends,” he says.