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4 undervalued picks for a hot market

Lewis Jackson  |  18 Nov 2021Text size  Decrease  Increase  |  
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After 18 months of steady growth, share markets look rich. US and Australian markets are both 6% overvalued on average, according to Morningstar.

For investors looking for options amid the froth, we’ve screened the Morningstar coverage universe for four Australian names trading in undervalued territory. They range from energy to financial services and our analysts believe they come with the potential for considerable upside.

CIMIC

2021 has been a difficult year for Australia's largest civil engineering company. CIMIC (ASX: CIM) has been buffeted by a slowdown in demand for mining services, issues with construction projects and a messy exit from its Middle East business. The share price is down 23% from January highs.

But Morningstar senior equity analyst Mark Taylor says troubles in the share market shouldn’t distract investors from the firm’s success winning new contracts. He notes that CIMIC has a $33 billion pipeline of projects locally and abroad, and recently won an $800 million contract for the Warringah Freeway upgrade. Taylor says the firm is also well positioned to take advantage of the infrastructure splurge by state and federal governments.

All that new work means additional revenue. And as Covid continues to unwind and delayed contracts are awarded, rising revenue should help the share price Taylor says.

“Cimic says the pipeline of relevant future tenders to be bid on is more than $450 billion. For context, at beginning 2018 Cimic said the pipeline was $285 billion.”

There’s additional upside from Cimic’s major shareholding in infrastructure service provider Ventia, Taylor adds. Ventia is due to float on the ASX on 19 November at $1.70, materially below Taylor’s pre-IPO fair value estimate of $2.80. Should that gap close, Cimic’s share could be worth several hundred million, says Taylor.

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CIMIC closed Thursday at $19.12, a 43% discount to the fair value of $33.50.

Beach Energy

The global surge in energy prices has benefited Beach Energy. Longer-term upside lies in the fuller exploitation of the energy producer’s reserves and even the possibility of a takeover, says Taylor.

Shares in Australia’s largest domestic oil producer jumped over 36% through September and October as the price of crude oil and natural gas surged in Europe and Asia. Shares have come down since then, although still trade well below the Morningstar fair value of $2.70.

Taylor’s valuation rests on Beach (ASX: BPT) getting more oil and gas out of the ground and into production. That remains a high stakes endeavour and investors should be prepared for downside risk.

“Beach is a higher-risk investment proposition and is not for conservative investors. Its appeal stems from the potential for conversion of large contingent resources into reserves and economical production,” he says.

There’s a possibility Beach becomes the latest target in the merger and acquisition wave sweeping Australia’s oil and gas sector, says Taylor. Santos and Oil Search agreed to a merger in September, a month after Woodside agreed to buy BHP’s oil and gas assets.

Kerry Stokes’ Seven Group already has a 30% stake in Beach Energy.

The stock closed Thursday at $1.24, a 54% discount to the fair value of $2.70.

Magellan Financial Group

Investors willing to take a long-term view have a bargain on their hands as Magellan Financial Group (ASX: MFG) enters five-star territory after a run of poor performance, says Morningstar equity analyst Shaun Ler.

The share price has plunged more than 30% since July as investments in Chinese technology companies Alibaba and Tencent soured amid a regulatory crackdown. The fund manager lost almost $2 billion in net outflows across its funds in quarters two and three as a result.

But Ler thinks markets are being too harsh. He predicts that outflows will reverse from FY 2025 as new products like Magellan FuturePay lure back investors.

“We believe this pessimism is overdone," says Morningstar equity analyst Shaun Ler.
"At current prices, it's like you're buying a Ferrari at Honda prices.”

The stock closed Thursday at $34.88, a 31% discount to the fair value of $50.50.

Platinum Asset Management

Magellan isn’t the only fund manager looking undervalued. Platinum Asset Management (ASX: PTM) is trading in the five-star range even after a 41% share price slump since June, but Ler thinks the undervalued stocks in its fund’s portfolios offer considerable upside.

The fund manager’s performance has struggled as bouts of underperformance in its flagship funds have sent investors elsewhere. Fewer funds under management translates into lower revenue from fees.

But Ler is confident the manager can exceed it’s 3-year average return of 9% in part thanks to a stable of undervalued stocks. The top ten holdings of flagship funds Platinum International and Platinum Asia are on average between 8% and 16% undervalued.

“The greater the undervaluation, the greater the potential for price appreciation (and vice versa). And not to forget is that most of its other strategies, for example, Healthcare and International Brands continue to outperform over a trailing one-year period,” says Ler.

The stock closed Thursday at $2.85, a 33% discount to the fair value of $4.25.

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

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