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Pendal breaks into global best ideas list

Lex Hall  |  02 Aug 2018Text size  Decrease  Increase  |  
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Australian asset manager Pendal Group has joined California cloud-computing company ServiceNow and Italian electricity provider Enel as new entrants in Morningstar's list of Global Best Equity Best Ideas.

Pendal (ASX: PDL) is currently trading at $9, a 22 per cent discount to its fair value estimate of $11. It is one of Australia's largest active fund managers, with $99 billion in funds under management across various asset classes, including Australian and global equities, fixed-interest, and property.

Morningstar assigns the company a four-star, narrow-moat rating. "It is our preferred asset manager at current prices," says Morningstar analyst John Likos, whose recommendation is included in the Global Best Equity Ideas list for August.

Pendal has a solid investment performance record and is tipped to benefit from compulsory superannuation contributions and an ageing population in Australia.

"Furthermore, it displays greater diversification across revenue sources, geography, and investment classes relative to its peers domestically," Likos says.

"The share price has come under pressure because of the sale of Westpac's remaining 10 per cent ownership stake in the group, valued at about $380 million. This is a near-term negative driver that we believe should be seized upon by investors who should be reassured by reasons already mentioned, as well as a strong balance sheet, attractive return on equity, and a healthy dividend yield."

ServiceNow a cloud computing force

Among American entrants to the Global Best Equity Ideas list is Californian cloud-computing company ServiceNow.

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Late last month Morningstar upgraded ServiceNow's moat rating to wide, meaning it has a sustainable competitive advantage. It is currently trading at US$177.94, a 24 per cent discount to its fair value estimate of US$221.

"We have greater conviction in ServiceNow's ability to profit from customer switching costs, given the firm's robust retention metrics," Morningstar says.

"Given our medium uncertainty rating, we see the shares as undervalued today and still see upside for ServiceNow's long-term growth story around major enterprises modernising their IT infrastructure."

cloud computing ServiceNow

Cloud-computing company ServiceNow has a positive outlook, says Morningstar

ServiceNow has created a software-as-a-service IT service management, or ITSM, product, a cloud ticketing tool designed to track internal IT issues. And the firm has entered the IT operations management, IT business management, human resources, customer service management, and security verticals.

Morningstar cites ServiceNow's strong metrics for its positive long-term outlook. It has renewal rates of 98 per cent, and higher gross margin subscription revenue continues to climb relative to services revenue, with subscription revenue of 93 per cent.

"We model a 26.5 per cent compound annual growth rate over the next five years, largely driven by ITSM and ITOM."

Enel a valuation power play

Among European stocks to make the Global Best Ideas list is Italian multinational manufacturer and electricity and gas provider Enel. It is trading at 4.59 euros, a 24 per cent discount to its fair value estimate of 5.70 euros.

"This is a value-driven call," Morningstar says. "The share price has been under pressure since the formation of the Italian populist government. There are market concerns over Italian stocks and bonds ahead of the 2019 budget to be unveiled this fall.

"We think concerns are overdue and overshadow solid fundamentals of Enel. There is no particular measure in the coalition manifesto against Utilities."

Enel is the cheapest utility in Morningstar's coverage in terms of 2018e P/E, despite boasting 10 per cent average annual EPS growth through 2022, which is the second-highest growth rate.

The company has dividend growth of 10 per cent per year, which Morningstar expects to continue through 2022 based on organic free cash flow.

A prominent removal from Morningstar's Global Best Equity Best Ideas list is multinational semiconductor maker Qualcomm. "The primary catalyst we saw for the firm was the pending acquisition of NXP Semiconductors," Morningstar says.

"However, the ongoing trade tensions between the US and China led to the termination of the NXP deal and Qualcomm enacting a $30 billion share-repurchase program. The shares rose in response, and we no longer see an appropriate margin of safety in Qualcomm."

 

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Lex Hall is a Morningstar content editor, based in Sydney.

© 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 '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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