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Aveo, G8 Education, Ramsay among Morningstar's best stock picks

Emma Rapaport  |  04 Jul 2018Text size  Decrease  Increase  |  
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Ideas bubble

Morningstar's "Best Stock Ideas" list includes high-quality Australian and New Zealand companies which are currently trading at a discount to their assessed fair values.

Among the list are financial heavyweights QBE Insurance and Westpac Banking Corporation, accounting software firm MYOB Group and funeral home operator InvoCare.

The full list can be found via Prem Icon Best Stock Ideas. Here, we highlight three companies that made the cut.

Changing demographics underpin strong return for Aveo Group

It's been a rough year for shareholders in property and investment group Aveo (ASX: AOG), whose shares have trended lower following a wave of negative media attention over residential contract disputes in June 2017. Morningstar equity analyst Tony Sherlock concedes the company's reputation suffered but argues that the current share price reflects a market overreaction.

"Accusations raised by the media focused on legacy resident freehold contracts in villages that Aveo acquired in August 2016 and have no bearing on the remaining villages where residents stay under leasehold contracts," Sherlock says.

"The long-term fundamentals of Aveo’s business are ostensibly unchanged, and around 60% of Aveo’s annual earnings are unaffected, representing accrued earnings on resident deferred fee contracts entered into roughly 10 years prior."

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Sherlock believes says the company is well positioned to benefit from the ageing Australian population, which is driving demand for retirement living units and serviced apartments. Compared with 2017, the number of Australians turning 75 will be up 14% in 2019 and up 49% in 2022, Sherlock notes.

He also says Aveo is tackling head-on the near-term risk of potential slower sales rates for units being turned over or newly developed units by significantly increasing buying protection on its standard leasehold contracts.

Aveo shares are trading at a discount to Morningstar's fair value estimate of $2.80, opening yesterday at $2.42. 

Prem Icon Read the full report.

Growing female workforce to boost G8 Education

A short-term glut of childcare centres in Australia has forced a slump in the share price of listed-childcare provider G8 Education (ASX: GEM). However, Morningstar equities analyst Gareth James believes that current share price reflects a market overreaction and that supply challenges are a cyclical rather than a structural problem.

James argues that population growth and growing female workforce participation underpin demand for child care, an essential service, and expects the introduction this month of a federal child care subsidy to boost demand.

"Although G8 is experiencing weakening occupancy rates currently, and its lack of an economic moat means the company is vulnerable to competitive pressures, we expect the demand tailwind to boost occupancy rates over the next two years," James says.

G8 Education shares are trading well below Morningstar's $4 fair value estimate, opening yesterday at $2.32.

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Ramsay Health Care hurting, but better days ahead

Shares in global hospital group Ramsay Health Care (ASX: RHC) dropped to fresh lows on Monday following a mixed two years for the company. The retirement of long-serving and highly regarded chief executive Chris Rex in February 2017 was followed by weaker-than-expected performance in its French hospital assets and concerns around declining private health insurance participation rates.

Morningstar equities analyst Chris Kallos says that while there could be more downside for investors to come, long-term the company should make a full recovery.

"The scale of Ramsay’s operations in the Australian context underpins, in our opinion, a sustainable competitive advantage that drives both cost advantage and a reasonable level of pricing power in negotiations with private health insurers," Kallos says.

"Government policies designed to support private health insurance membership, combined with current inefficiencies of the public hospital system, protect private hospitals from major funding related disruptions."

Kallos believes Ramsay’s move into community pharmacy complements its acute treatment settings and extends the company’s reach into chronic disease management. "This is a growing area, given the ageing demographic," he says.

Shares in Ramsay Health Care are trading at a discount to Morningstar's fair value estimate of $82.00, opening yesterday at $53.20.

Prem Icon Read the full report.

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Emma Rapaport is a reporter for 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 the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

© 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 'regulated financial advice' under New Zealand law has 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. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. 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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