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5 stocks trading at attractive valuations

Glenn Freeman  |  28 Nov 2018Text size  Decrease  Increase  |  
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This eclectic mix of companies spanning the energy, automotive, oil and gas, telco and manufacturing sectors are each trading substantially below Morningstar's fair value estimate.

Though three of them hold narrow moats of competitive advantage, according to Morningstar analysts, the first in this list doesn't.

A lot to like about Viva

Viva Energy Group Limited (ASX: VEA) tops this list because of its price-to-fair value ratio of 64.

Morningstar senior equity analyst Mark Taylor says "there is a lot to like" about the fuel retailer. He believes the company's intrinsic worth is closer to $3 a share, versus its last closing price of $1.95.

Viva is the second-largest refined fuel supplier in Australia, with an almost 30 per cent market share, second only to Caltex.

Earlier this month, Taylor assessed the potential effect of an earnings guidance downgrade by the fuel company's management – in response to weaker-than-expected regional refiner margins, along with lost refinery production due to electricity supply disruption. Though he noted the downgrade was "very disappointing", he made no change and says his "midcycle assumptions stand".

Viva is the second-largest refined transport fuel supplier, providing almost 25 per cent of this refined product nationally.

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On the downside, Taylor highlights several key concerns, including heightened competition from oil and gas majors Chevron and Mobil and now Shell, having ended its Viva partnership earlier in the year. Electric vehicles are also a potential headwind, although longer-term.


The loss of Telstra's CFO is an unwelcome distraction but little more, says Morningstar's Han

Shareholder darling still holds promise

Household name and Australian stock investor darling, Telstra Corporation Limited (ASX: TLS) has a price-to-fair value ratio of 67, ranking roughly equal with Woodside Petroleum Limited (ASX: WPL) and Automotive Holdings Group (ASX: AHG) by the same metric.

Telstra's last closing price of $2.94 a share compares favourably with Morningstar's $4.40 FVE.

Morningstar senior equity analyst Brian Han left his analysis unchanged in a research note issued on 8 November, considering the "abrupt" resignation of Telstra CFO Robyn Denholm little more than an "unfortunate distraction" for the narrow-moat rated group. Denholm jumped ship to high-profile electric vehicle manufacturer, Elon Musk's Tesla, at the start of the month.

Conceding that changing economics of the NBN roll-out could reduce Telstra's EBITDA by as much as $3 billion annually, Han recognises the importance of "plugging the earnings hole". This highlights the importance of Telstra's extensive program of cost-cutting and pursuit of new growth opportunities.

This competition also extends to the mobile space, given the August announcement of the TPG Telecom - Vodafone merger.

Han believes the move will consolidate the profit pool among local telcos – rather than the far less palatable prospect of a fourth mobile player in Australia.

Oil price slide not overly material

As Australia's largest dedicated oil and gas company, Woodside is materially impacted by recent oil price declines, which have occurred in response to Iranian sanction waivers, record Saudi output and rising trade tensions.

However, even considering a potential decline of the company's fair value, it will likely remain a four-star stock trading at a considerable discount to its intrinsic value, according to Morningstar analysis.

Woodside's last closing price of $31.79 places it at a considerable discount to the $46.50 fair value set earlier in the month.

The company's operations encompass liquid natural gas, natural gas, condensate and crude oil, says Morningstar's Taylor.

"However, LNG interests in the North West Shelf Joint Venture and Pluto offshore Western Australia are the mainstay, and the low-cost advantage of these assets form the foundation for Woodside."

He says future development is both the largest risk and opportunity faced by Woodside – constituting around 25 per cent of his intrinsic value estimate for the firm. "Woodside is well suited to the development challenge. With extensive experience, it remains a stand-out energy investment at the right price. Gas is the fastest growing primary energy market behind coal, and the seaborne-traded LNG portion of that gas market grows faster still."

Opportunity in troubled automotive sector

Automotive Holdings Group (ASX: AHG) still tracks as around 32 per cent undervalued, according to Morningstar analysis, despite a forecast dip in car sales linked to falling property prices and falling household expenditure.

Equity analyst Daniel Ragonese says the company, which operates an automotive network selling passenger cars and commercial trucks, still offers value in the medium term.
"Despite our lower valuation, we believe the stock has been oversold and is offering an attractive yield and considerable upside at the current share price," Ragonese says.

AHG's last closing price was $1.77, against Morningstar's $2.60 FVE.

Despite the anticipation of further deterioration in household wealth in line with protracted property price declines, "we continue to see upside in Automotive shares at current levels," Ragonese says.

Plastic packaging giant

Pact Group Holdings Ltd (ASX: PGH) trades at a price-to-fair value ratio of 69, not far below the previous three stocks.

The largest rigid plastic packaging manufacturer in Australia and New Zealand, it has considerable exposure to oil prices, given its largest business relies on resin – a petrochemicals product.

Pact recently issued a material downgrade of its earnings outlook for fiscal 2019, following three months of elevated oil price volatility.

However, Morningstar equity analyst Grant Slade has left his fair value estimate unchanged.
He also cites ongoing confidence in the company's cost-out initiatives. Instead, he sees the more recent "aggressive share price sell-off" as opening investor opportunities, given Pact shares now trade at a 34 per cent discount to his $4.90 fair value estimate.

He also likes the group's recent acquisitions, which have boosted to 20 per cent the contribution of revenue from contract manufacturing, "making it a more integrated partner of its customers rather than simply a supplier of commoditised blown and/or moulded thermoplastics".

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is senior editor for Morningstar Australia

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