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Iluka joins VMWare, Kellogg, Richemont in Global Best Ideas list

Lex Hall  |  04 Sep 2019Text size  Decrease  Increase  |  
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Aussie zircon miner Iluka Resources has regained a place in Morningstar’s Global Best Ideas list alongside software company VMWare, Corn Flakes maker Kellogg Co, and Swiss luxury brand stable Richemont.

Iluka Resources (ASX: ILU) is a leading global mineral sands miners. Its portfolio includes operations in Australia, Sierra Leone and Sri Lanka. The company also holds a “life of mine” royalty over iron ore produced from specific tenements of BHP’s Mining Area C.

Iluka is also the world’s largest producer of zircon, a tough mineral that is used in tiles and ceramics. At the current share price of about $7.70, Iluka is undervalued, trading at an approximate 27 per cent discount to the $10.50 fair value estimate set by Morningstar analyst Mathew Hodge.

The near-term outlook for zircon demand is soft, but Hodge says this is cyclical and that the market is overestimating the effect this will have on Iluka.

“Encouragingly, Iluka says downstream customer zircon inventories are low,” Hodge says. “So, when purchasing sentiment and underlying demand improves, this should flow through to end demand for zircon volumes and ultimately prices.”

The BHP iron ore royalty is another key advantage, says Hodge. “Iron ore production is set to almost triple from 2018 levels by 2025. This royalty is a much lower-risk earnings stream and accounts for about $3.30 of our fair value estimate.”

Iluka posted a solid first-half 2019 result. Net profit after tax rose 13 per cent versus a year ago to $137 million. It has an “exemplary” stewardship rating and will on Wednesday pay a 5c fully franked dividend yield.

VMWare’s ‘massive’ software footprint

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VMware (VMW), a majority-owned subsidiary of Dell, is an industry leader in virtual machines for data centre servers and computer desktops.

It operates in the three segments of licences, maintenance, and professional services and its position as the commonality between public clouds, private clouds and on-premises ecosystems puts it in an enviable position.

“We expect VMware's massive footprint across the networking environment to benefit by the gained technologies, and we are maintaining our US$194 fair value estimate,” says Morningstar analyst Mark Cash.

“Coupled with VMWare planting a flag that it’ll be the way to deploy and use applications across any networking environment, we expect this software giant to repeat double-digit topline growth and eclipse $10 billion in revenue for fiscal 2020.”

Kellogg Co’s healthy moves

Kellogg Co (K), the owner of household cereal and snack brands such as Corn Flakes and Pringles, is trading at a 20 per cent discount to Morningstar’s fair value estimate of US$78.

“We think investors should snap up shares of wide-moat Kellogg,” says Morningstar analyst Erin Lash, “a rare bargain at present in the packaged food aisle.”

Cash argues the market is wrong to criticise Kellogg’s 2017 move away from direct-store distribution warehouse delivery. It may have failed to reignite sales up to this point, but for Cash the move has laid the groundwork to realise topline gains.

Cash says Kellogg’s decision to expand beyond cereal is a shrewd move and will boost sales. Changing packaging formats to include more on-the-go offerings is also wise, while recent acquisitions such as niche start-up RXBAR and its protein bars will help Kellogg respond more nimbly to new trends in health and wellness.

Cie Financiere Richemont shines

Cartier, Van Cleef and Arpels, Panerai: just some of the luxury jewellery and watch brands owned by Swiss holding company Cie Financiere Richemont (CFR).

Richemont’s exceptionally strong portfolio of long-product-cycle brand names accord it wide-moat status, and it is trading at an attractive discount to fair value, says Morningstar analyst Jelena Sokolova.

“Shares are up more than 30 per cent since the start of 2019 and we believe the margin of error for investing has shrunk significantly,” says Sokolova.

“Our valuation is based on high-single-digit mid-term revenue growth and margin expansion to 17-18 per cent versus a 13.9 per cent margin in fiscal year 2019.”

China and India also represent more growth potential for luxury brands, Sokolova says.

“India represents an emerging opportunity for luxury brands (with a population of 1.3 billion, growing numbers of high-net-worth individuals, and supportive economic policies) and is currently negligible in terms of sales.  

“And we expect Chinese luxury demand to grow at a healthy 5.5 to 6.5 per cent pace over the next decade.”

The full Global Best Ideas list for September can be found here.


is senior editor for Morningstar Australia

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