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6 newly undervalued Australian stocks

Lewis Jackson  |  27 May 2022Text size  Decrease  Increase  |  
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The tide is ebbing from equity markets around the globe and leaving high quality stocks trading below Morningstar fair value.

Despite dodging the worst of the global equity selloff, the Australian share market is down 5.4% year to date. Sectors like healthcare and real estate are down 12% and 17.5%, respectively. The indiscriminate retreat in risk sentiment is creating opportunities for long-term investors.

We’ve screened the Morningstar database for six high quality stocks trading at meaningful discounts to fair value. Each company has an economic moat, meaning Morningstar analysts believe it possesses a ten-to-twenty-year competitive advantage. Our screen only includes companies with a low or medium uncertainty rating, which means our analysts have conviction in their forecasts due to the characteristics of the company.

ANZ (ANZ)

ANZ joins Westpac as the second major bank trading at a discount to fair value after steadily declining 6% since reporting half-yearly results earlier this month.

The bank reported a first-half profit of $3.1 billion on 4 May, down 5% from the previous quarter.

While “no belter”, results exceeded expectations, says Morningstar banking analyst Nathan Zaia, who raised fair value by 3% to $31.

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His bull thesis is two part: A rising cash rate will boost margins at the bank while its new home lending platform should help retake market share in the all-important home loan market.

“We see no reason to change our view following the results,” he says.

Shares closed on Friday at $25.68, a 17% discount to fair value.

Carsales.com (CAR)

Australia’s largest online vehicle classifieds is down 24% this year amid the selloff in technology stocks.

Investors willing to look past the volatility will find a growing business generating big cash flows, says equity strategist Gareth James.

Carsales.com should snag an outsized share of the local car advertising market as it migrates away from television and print, he says. Advertisers like platform’s active users and the ability to target advertising based on the type of car people are searching for.

James says the business is offsetting the supply chain disruptions forcing car manufacturers to shut plants and delay car deliveries by profiting off the surge in used car transactions.

James raised fair value by 5% to $22 in February after a strong first half result. Shares closed on Friday at $19.50, a 11% discount.

Fisher & Paykel (FPH)

World leader in respiratory devices Fisher & Paykel is undervalued for the first time since 2017.

Shares are declining as Fisher’s pandemic-induced sales boom eases faster than expected. The firm earns about two thirds of revenue from hospital sales, where its products have 70% market share across the 120 countries it operates. Two years plus into the pandemic and hospital are well stocked with equipment, says Morningstar equity analyst Shane Ponraj.

“While sales normalised faster than we expected…we had anticipated sales to eventually decline to the current run rate and leave our long-term estimates broadly unchanged,” he says.

Longer term Ponraj still expects the firm to grow revenue at 12% annually and maintain a margin of 32%.

Shares closed at $18 on Friday, an 18% discount to fair value.

Charter Hall Group (CHC)

After riding the post-pandemic boom in asset prices and enthusiasm over reopening, Charter Hall shares are down more than a third as investors flee the real estate sector amid rising rates.

Charter Hall is a property fund manager and developer with a portfolio spread across offices, retail and industrial. Higher interest rates weigh on property values and reduce investor interest. A slower economy means less traffic and income across Charter Hall’s real estate portfolio.

Morningstar equity analyst Alexander Prineas believes Charter Hall’s “astounding run” of performance since the pandemic will normalise as interest rates do but he is not predicting a calamity.

“We don’t factor in terrible news for Charter Hall given its solid competitive position, capable management, and sizable development pipeline,” says Prineas.

Shares closed on Friday at $13.25, a 13% discount to fair value.

Resmed (RMD)

Supply chain issues are holding Resmed back from snatching up market share from troubled rival Phillips, but Morningstar equity analyst Shane Ponraj argues supply snags will soon lift and sales resume.

A massive product recall at competitor Phillips has left Resmed the only major player servicing the hundreds of millions who suffer from sleep apnea globally.

Shares slumped in late April after Resmed reported device sales fell in the three months to March due to semiconductor shortages. Ponraj believes those sales have been deferred rather than lost.

“Management guided for sequential quarter-on-quarter revenue growth in fiscal 2023, consistent with our unchanged view that supply constraints will alleviate in the medium term,” he says.

Shares closed on Friday at $28.52, a 19% discount to fair value.

James Hardie (JHX)

Markets are overreacting to how higher interest rates could slowdown US residential construction and damage James Hardie’s building materials business, say Morningstar equity analyst Mitchell Hawker.

James Hardie benefited from the surge in residential construction and renovation around the world as house prices soared during the pandemic. While rising rates will slow real estate activity, James Hardie should continue to benefit from a US housing market that is aging and undersupplied, says Hawker. The company earns roughly 80% of earnings in the US.

“We think periods of investor concern around the broader economy can provide an opportunity for long-term investors to purchase a solid business protected by a wide economic moat,” he says.

Shares closed on Friday at $35.95, a 18% discount to fair value.

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

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