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5 top stock upgrades of FY18

Glenn Freeman  |  03 Oct 2018Text size  Decrease  Increase  |  
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These companies spanning financial services, healthcare, property and entertainment each saw double-digit improvements in their fair value estimates following their full-year results.

Flexigroup

Australia's big banks have had a tough time of late but other parts of the financial services sector have fared a little better. Flexigroup (ASX: FXL) is a financial product provider targeting the low- to medium-value and high-volume purchases by consumers and small-to-medium enterprises. Its operations include credit card businesses in Australia and New Zealand.

The no-moat company's fiscal 2018 underlying net profit after tax of $88.2 million was at the top end of its guidance and better than Morningstar's forecast of $85.6 million.

In response, Morningstar equity analyst Chanaka Gunasekera increased his FVE for Flexigroup by 40 per cent, to $2.65 a share, from $1.90. At 11am Sydney time, Flexigroup was trading at $1.90.

"The company's strong earnings update, including its stronger balance sheet, has alleviated concerns around the recent surprise departure of Symon Brewis-Weston as CEO," Gunasekera said.

"We expect most of the company's segments to support stronger earnings growth in fiscal 2019, including its Australian and New Zealand card business."

Qantas

In aviation, Australia's flagship airline carrier, Qantas (ASX: QAN), capped off a "stellar result" in fiscal 2018, delivery underlying profit before tax of $1.6 billion – up 15 per cent year-on-year.

qantas aviation fair value

Qantas has returned about $3bn of surplus capital to shareholders since 2015

"The key earnings drivers were strong ticket revenue across Qantas Domestic, Qantas International, and Jetstar, which each increased revenue by between 5 and 8 per cent," said Morningstar equity analyst Daniel Ragonese.

"The balance sheet is also strengthening, which has allowed the company to return around $3 billion of surplus capital to shareholders since October 2015, through a combination of dividends, share buybacks, and capital returns."

In response to the full-year results presented on 23 August, Ragonese boosted his FVE by 20 per cent to $5 a share. At 11am Sydney time, Qantas was trading at $5.66.

"Despite some near-term fuel pressure, we have lifted our average EBIT margin forecast to 10 per cent on average during the next five years, from our prior expectation of around 9 per cent," Ragonese said.

"Our revenue assumptions are broadly unchanged, and we forecast that revenue should continue growing at a low- to mid-single-digits." 

Ryman Healthcare

In the healthcare sector, New Zealand-headquartered narrow moat Ryman Healthcare (ASX: RYM-NZ) received a 20 per cent increase to its Morningstar FVE, to NZ$13.60 from NZ$11.30. At 11am Sydney time, Ryman was trading at NZ$13.52.

Ryman is a well-known provider of retirement-care facilities in New Zealand, and has also added facilities in Melbourne, Australia in the last couple of years.  

The FVE upgrade follows "a revisit of industry drivers for the broader Australian and New Zealand retirement living and aged care sectors," said Morningstar equity analyst Tony Sherlock.

He recently outlined three key reasons for his more upbeat assessment of the company's long-term growth prospects. These include its faster-than-anticipated delivery of aged care facility upgrades and new beds in Melbourne; improved projected sales of retirement living units; and increased average sale prices.

Goodman Group

Industrial property developer and property funds management company Goodman Group (ASX: GMG) last month beat its earnings guidance, reporting full-year operating profit of $845.9 million, up 9 per cent on FY17.

Sherlock applauded the result and cited Goodman's long-term approach as key to its industrial development success.

"They're in great sites. They're getting strong rental growth, and building and selling and getting high prices, which are buoying their earnings and they think that's going to continue for a while longer," Sherlock said in mid-August.

"Having land in strategically important sites is really working for them. These take time but once they're built everyone wants them, and it's very hard for rivals to replicate what they're doing."

He increased his FVE to $10.20, from $8.90 due to the improved outlook for funds under management and development management. At 11am Sydney time, Goodman was trading at $10.25.

Nine Entertainment Co

In the increasingly competitive entertainment segment, Nine Entertainment Co (ASX: NEC) received a FVE upgrade in August, in response its mooted Fairfax acquisition and a quality fiscal 2018 result.

Morningstar equity analyst Brian Han lifted his FVE by 13 per cent, to $1.70 per share – however, the company remains overvalued. Its shares were trading at $2.20 at 11am, a 23 per cent premium to Han's FVE.

 

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Glenn Freeman is senior editor, Morningstar Australia

© 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 '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. The article is current as at date of publication.

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