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5 stocks trading at steep discounts

Glenn Freeman  |  02 Jul 2019Text size  Decrease  Increase  |  
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Fun parks, fungicides and pay TV feature in this list of stocks that track as undervalued relative to Morningstar analysts' fair value estimates.

Sky Network Television (ASX: SKT) is currently the most undervalued among the stocks covered by Morningstar, its $1.12 share price as at 10am on 2 July placing it at a 54 per cent discount to the $2.40 fair value estimate set by senior equity analyst Brian Han.

"Sky Network Television enjoys a high-margin, highly cash-generative business model, reflective of its status as the monopoly pay-television operator in New Zealand.

"Its strong financial position and a stranglehold on key content have erected a competitive barrier that others have found difficult to breach," Han says.

He expects Sky's fiscal 2019 earnings will align with his expectations – which matches management projections of between NZ$ 230 million and NZ$ 235 million.

Han is also comfortable with his dividend forecasts, expecting a full-year payout of 11 New Zealand cents a share for fiscal 2019.

The positive outlook is not without its headwinds – much hinges on Sky's relatively new CEO, Martin Stewart, and the pay television operator's retention of key content such as its rights to SANZAAR rugby.

'We maintain our faith'

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Entertainment company Ardent Leisure (ASX: ALG) is also trading significantly lower than Morningstar's intrinsic value assessment. Its latest price of $1.08 a share is 46 per cent below Han's $2 fair value estimate.

Though the group has faced some high-profile challenges – the Dreamworld theme park tragedy in 2016 in particular, along with problems in its Main Event division in the US – Han believes management is improving performance as a result.

"Investor frustration with the progress of the theme park recovery and Main Event’s uncertain growth trajectory are palpable. However, we maintain our faith," Han says.

Though consumers are still wary of Ardent's theme parks in Australia, he notes management is maximising revenue from those patrons who are returning. Theme park profit yield has grown 16 per cent in the first-half, despite 6 per cent lower attendance.

In the US, Han says margin growth remains challenging, "but foundations are being established to reposition the business with more insight-driven initiatives and more judicious location-scouting for new venues."

No opportunity without uncertainty

A major producer of crop-protection products such as herbicides, fungicides, and pesticides, Nufarm (ASX: NUF) sells into all major global markets and holds leading positions in each of its core products in Australia.

Australia's prolonged drought continues to disrupt local operations and supply to European markets, which Morningstar senior equity analyst Mark Taylor cites as a key reason for its share price slide.

"The stress is heightened by Nufarm’s notoriously seasonal cash flows, which leave less room for error. But without uncertainty there is seldom opportunity," Taylor says.

"When else can you buy a premier China-leveraged stock at the right price than when under stress?"

He expects the negatives will unwind, and believes the "perfect storm conspiring against Nufarm's near-term operating cash flows represents opportunity rather than disaster."

The ongoing litigation over the safety of glyphosate – the main herbicide ingredient of Nufarm's Roundup weed-killer product – is a major corporate risk to the business.

"Were glyphosate to be completely pulled from sale, it would represent around 12 per cent of Nufarm’s revenue, but a far smaller share of earnings as glyphosate sales are low margin – less than 5 per cent of earnings and our fair value estimate.

"And that’s before the potential to swap out some sales for alternative molecules," Taylor says.

Woodford fallout largely immaterial

Narrow-moat financial services administration business, Link Administration Holdings (ASK: LNK) is currently trading at a 40 per cent discount to Morningstar's fair value estimate.

The company was involved in the suspension of UK fund manager Woodford, but Morningstar equity analyst Gareth James says it is not materially affected, maintaining his $8.90 fair value estimate.

"We also think it’s highly unlikely that Link's Australian superannuation business will be affected by the Woodford issues, considering the differences in jurisdiction, regulators, and business attributes," James says.

The stock was trading at $5.30 at the market open on 2 July.

Though there is the potential of the UK financial regulator fining or even banning Link, James believe the affect would not be significant.

Comparable exposure to some similar issues in 2012 and 2017 – which appear to have been even more serious – caused only minimal financial losses for Link.

"These situations appear to have been more serious than the Woodford issue, and a similar financial impact from Woodford would be small relative to Link’s market capitalisation of around $3 billion," James says.

Packaging all wrapped up

Rounding out this list is narrow-moat plastic packaging manufacturer Pact Group (ASX: PGH) – which is currently 36 per cent undervalued relative to Morningstar's fair value estimate.
Morningstar analyst Grant Slade recently noted the company's appointment of a new CEO, Sanjay Dayal – who previously served as chief executive of BlueScope Steel's APAC offshore building products business.

"His technical grounding should see him well equipped to lead the vital rationalisation of the Australasian manufacturing footprint which offers a path to margin recovery," Slade said.

He views the firm's acquisitions in Asia with some caution – having acquired beverage closures and rigid bottle manufacturing assets from packaging business Reynolds Group in February 2018 – as "skewed to the downside for margins".

More broadly, Slade highlights the group's leading market share in the Australian rigid packaging market.

"This strategy has simultaneously delivered a sustainable cost advantage to the enlarged Pact group. With a dearth of future acquisition opportunities domestically, Pact has begun to diversify, both geographically and into adjacent activities," he says.

Contract manufacturing now accounts for some 20 per cent of group revenue – through the non-food fast-moving consumer goods segment, including health and wellness segments.

"These businesses bring Pact closer to its customer base, making it a more integrated partner of its customers rather than simply a supplier of commoditised blown and/or moulded thermoplastics," Slade says.

is senior editor for Morningstar Australia

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