Aussie stocks ripe for picking in 2019

Thinking about investing in the stock market in 2019? Our experts have named the shares to watch — from sustainability-focused funds, property and pharmaceutical companies to oil and gas explorers and miners.

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• 2018: A year of high finance drama

The Advertiser’spanel of experts have named their shares to watch in 2019. The choice ranges from sustainability-focused funds, property and pharmaceutical companies to oil and gas explorers and miners.

Steven Weinmann.

Westpac Banking Corporation (WBC)

2018 has not been a great year for anyone in the banking sector. Post royal commission we see significant changes and clarifications to banking rules in this country. The Big Four banks, including Westpac, will be able to quickly adapt to the new rules. Further positives for Westpac is its strong capital position which we believe will lead to a return of capital in the form of special dividends post royal commission.

Telstra (TLS)

We continue to believe that Telstra will benefit as technology advances and 5G mobile networks will allow them to recapture margins lost to the NBN. Telstra has been able to maintain market share as the NBN is being rolled out which in our view is vital to Telstra maintaining its strong margins.

Cedar Woods Properties (CWP)

Cedar Woods is a diversified property developer with a very impressive 25-year track record as a listed company. Locally they are developing projects at Glenside and Port Adelaide. CWP is trading close to book value, has a strong balance sheet, and record order book which will support and grow the already impressive 6.4 per cent fully franked dividend yield.

Platinum Asset Management (PTM)

We see independent Fund Managers such as Platinum as being beneficiaries of the banking royal commission, separating those managing the funds from those advising on them. Platinum is well managed and has a conservative balance sheet. Platinum’s business model allows them to pay out most of their profits as dividends to shareholders.

Healthcare, pharma stocks made the panel picks.

Paradigm Biopharmaceuticals (PAR)

Paradigm had a great finish to 2018 completing a successful phase 2b trial of its drug iPPS in osteoarthritis. The share price appreciated considerably leading up to the result. 2019 could be even bigger for Paradigm as they progress the journey to iPPS to market. Key events we are looking for in 2019 are the progression towards a phase 3 trial which could be assisted with the help of a multi-billion dollar licensing deal.

DAVID ROBINSON, MORGAN STANLEY

Morgan Stanley’s David Robinson.

After a surge of interest in Sustainable Investing this year, we think 2019 will be characterised by a focus on authenticity.

BetaShares Global Sustainability Leaders Exchange Traded Fund (ETHI)

Includes 100 large global stocks from developed markets, excluding Australia, that have been identified as “Climate Leaders” and pass a screen that excludes companies with direct or significant exposure to the fossil fuel industry or that engage in other activities that are inconsistent with responsible investment considerations. It is unhedged. ETHI has attracted over A$250 million since inception and has tight bid-ask spreads. Based on ETHI’s investment selection process, we categorise its impact approach as Restriction Screening. Morgan Stanley expect there to be “Tight Alignment” with this approach and it is our preferred product for broad market exposure for investors seeking sustainable investing solutions.

BetaShares Australian Sustainability Leaders Exchange Traded Fund (FAIR)

It is a broad exposure to Australia and excludes companies with direct or significant exposure to the fossil fuel industry or engaged in other activities deemed inconsistent with responsible investment considerations. The Fund also preferences “Sustainability Leaders” or companies with at least 20 per cent of their revenues from sustainable activities like renewable energy, energy efficiency and recycling. Based on FAIR’s investment selection process, we categorise its impact approach as Restriction Screening. We expect there to be “Tight Alignment” with this approach.

Boral Limited (BLD)

BLD offers attractive leverage to the emerging boom in Infrastructure (RHSB) spending, which we believe will boost volumes and provide a more favourable backdrop for materials pricing. BLD also offers attractive exposure to US construction markets, which we expect to demonstrate continued improvement towards mid-cycle levels. Attractive valuation allows for potential earnings slippage — while we acknowledge that the FY19 outlook must be viewed as carrying some risk, we believe this is well represented in the current share price. At current levels, BLD is trading at an FY19e Price-Earnings of 11.6x and at a discount to Morgan Stanley’s current A$8.00 price target.

Mining stocks were a popular pick.

Sims Metal Management Limited (SGM)

With underlying prices and volumes improving and longer term structural opportunities presenting, we believe SGM presents a rare opportunity where tactical and structural drivers have aligned. Volatile markets and an opaque industry mean that scrap metal recycler SGM is often viewed as a trading stock. The favourable short and long term dynamics are not reflected in the current SGM share price, in Morgan Stanley’s view. The FY19e Price-Earnings of 10.5x represents a 46 per cent discount to the ASX Industrials ex Financials, a substantial discount to the 5 year average of 12 per cent. Morgan Stanley initiated coverage of SGM with a A$15.00 price target.

Vanguard FTSE Emerging Markets Exchange Traded Fund (VGE)

For our international selection for 2019 we prefer Emerging Markets over Developed Markets for their superior growth trend, a beneficiary of China stimulus, expected weakness in the US Dollar, relatively looser financial conditions, and more attractive valuations. VGE has the broadest exposure to emerging market equities (holding over 400 companies including small and mid-caps) with the lowest management fee in this space. It has lower stock concentration (Top 10 stocks account for less than 20 per cent of the total exchange traded fund versus peers) and less exposure to the technology sector, resulting in lower standard deviation. In addition, VGE has slightly higher allocation to countries where Morgan Stanley Emerging Market Strategists are Overweight (for example, China, India, Thailand).

TIM HASELUM, CATAPULT WEALTH

Catapult Wealth‘s Timothy Haselum.

CSL Limited (CSL)

CSL has continued to produce solid results, and off the back of the recent price drop is looking quite attractive. With its non-discretionary lifesaving products, as well as global exposure, CSL is a quality diversified company with the potential to hold strong during times of uncertainty. You can do without a lot of discretionary spending when times get lean, but demand for CSL’s product should be quite stable.

Sydney Airport (SYD)

Sydney has the potential to benefit from the dual effects of a lower Austrian dollar making Australia more appealing for international tourism, and low fuel prices supporting cheaper fares. SYD makes for an attractive holding when these factors are combined with long dated leases on terminal and airport retail space, and growth potential from its new development projects. 

Origin Energy Ltd (ORG)

While the energy sector certainly faces challenges and oil prices have been falling, Origin has used asset sales to reduce debt, and improve cashflow. The Market has largely re-based its earnings expectations and the APLNG project is providing attractive value. At the current share price ORG looks to be good value, with dividends expected to be reinstated at some point in the medium term.

BHP Billiton (BHP)

BHP’s corporate governance has shown close alignment with shareholder interests, with BHP

shareholders benefiting from the recently completed buyback, as well as the special dividend due in late January. Looking forward shareholders can continue to benefit from BHP’s globally diversified assets, competitive cost structure, and strong market position.

NextDC Limited (NXT)

NXT’s cashflow is relatively defensive, with 3+ year contracts and low client turnover resulting from upfront relocation costs. It has strong growth potential as Australia is still in the early stages of cloud technology adoption, and the rollout of faster and cheaper internet. NXT has a high quality collection of sites, and will benefit from a high barrier to entry created by the capital intensive nature of the sector.

DAVID DALL, SHAW AND PARTNERS

Shaw and Partners’ David Dall.

Woodside Petroleum (WPL)

Recently we reviewed our earnings forecasts for WPL touching on key business drivers for 2019. When adopting an oil price forecast of US$70/barrel in 2019, WPL presents very low earnings multiples and a high dividend yield, which should provide valuation support in a volatile oil market. An increasing topic of debate is the status of franking credits. WPL has a very high franking account which could be distributed to shareholders given their balance sheet strength. We expect WPL finished 2018 in a very strong financial position. We retain a buy rating, with a price target of $43.70 per share.

Fortescue Metals Group (FMG)

FMG looks interesting for 2019 relative to many of their metals and mining peers. Given some recent supportive catalysts, including a strengthening iron ore price, the divergence between FMG’s share price and the underlying commodity price should close further. In addition, the on-market share buyback program of up to $500 million should place some favourable tension to the bid-offer price spread. The shares look cheap and our target price remains over $5.

Woodside's Pluto offshore gas platform, Pluto LNG Project, WA.

Macquarie Group (MQG)

MQG’s revenue continues its steady upward progression. The last three half yearly periods has seen revenue growth of 5 per cent, 2 per cent and most recently 6 per cent. Notwithstanding these growth rates, MQG’s revenue continues to be highly correlated with the health of the financial markets. MQG upgraded its guidance for FY19 to 15 per cent profit growth including the benefit flowing from the settlement of the Quadrant sale. Guidance is typically conservative and MQG has not missed guidance since 2012.

P2P Transport (P2P)

P2P is Australia’s largest and only vertically integrated fleet operator that provides taxis and UBER vehicles to professional drivers from eight depots across Victoria, NSW and Queensland. The company recently released a positive operational update covering its fleet, network and advertising initiatives. P2P has guided to 1,600 owned vehicles by June 30 up from 1,134 at the end of FY18 and 720 on listing in December 2017. All aspects of P2P’s business appear to be moving in the right direction. Utilisation has been improving consistently over the last six months — we expect further gains to be achieved — with further costs being taken out of the business.

Argonaut Resources (ARE)

In mid-January, junior explorer ARE with their Joint Venture partner are set to commence drilling at their long awaited Lake Torrens Project. Recent geophysical modelling has identified 28 gravity anomalies and the company expects to complete a 25-30 drillhole program over 18-24 months. There is plenty of speculative potential with such a large copper-gold drilling program and we expect investor interest in the stock to increase once drilling commences. Their proximity to BHP’s nearby high-grade copper hit at Oak Dam West will also likely draw investor attention.

HENRY MCQUINN, MORGANS UNLEY

Morgans Unley’s Henry McQuinn

Woodside Petroleum (WPL)

A leading ASX listed oil and gas producer and an ASX top 20 stock, it’s share price is down 24 per cent (at the end of Dec) from its 12 month high reached in early October. Its first class management team, balance sheet strength, and strong growth pipeline leave WPL well positioned to capitalise on the recent downturn in the oil price. WPL has shown far greater discipline with capital expenditure over the cycle than most of its peers.

On our forecasts (but acknowledging the uncertainty of oil price) we expect WPL to

deliver a gross yield in excess of 10 per cent in FY19. The sell-off in the oil price is overdone, in our view, and will likely recover over the next 12 months.

PWR Holdings (PWH)

PWH is the global leader in the manufacture of high performance cooling solutions for the automotive industry. It already counts Ferrari, Aston Martin, and Red Bull Racing as clients.

The company has a strong track record of revenue and profit growth, a clean balance sheet, and management with ‘skin in the game’ with founder and MD Kees Weel the largest shareholder. After a period of heavy investment to expand production capacity, the company has set the foundation for a period of accelerated revenue and profit growth. Opportunities

abound for battery cooling technology (often for electric vehicles), where PWH already

supplies Formula E racing teams and Google.

Sonic Healthcare (SHL)

SHL is an international medical diagnostics company offering laboratory medicine, pathology and radiology services to the medical community. Sonic has compounded earnings per share by around 11 per cent for the last 20 years through good management and capital allocation.

We view SHL as having a defensive earnings base with attractive industry fundamentals,

a strong balance sheet and an undemanding multiple. The recent acquisition of Aurora Diagnostics in the US will add significant scale to the US operations in a $16 billion highly fragmented market.

Lovisa (LOV)

LOV is a fast fashion jewellery retailer with a presence in a number of international markets. LOV’s business model is built on a quick store payback and has less ‘Amazon risk’ due to the high volume, low value product mix. The stock has halved from its 2018 high and is now trading on a P/E of 17.7X (FY19) with an estimated 16 per cent per annum earnings growth over the next three years. If the store rollout program in the US gains traction we believe the company will have huge reinvestment opportunities and will be able to compound earnings for many years.

Over the Wire (OTW)

OTW is a telecommunications and IT company that operates in data networks, voice, and

cloud. It is led by founders who maintain large shareholdings. OTW generates strong cashflow, has high returns on capital, has displayed strong organic growth, and has acquired new businesses that have added to the company’s earnings growth. The company recently acquired three businesses that should see its earning jump substantially next year. Often when companies make large acquisitions they destroy shareholder wealth. However, OTW’s management team reduce the risk by establishing a relationship with a company for a number of years before making the acquisition to ensure it thoroughly understand the businesses.

Each of the firms and advisers above may have long or short positions or other interests in these stocks. These stock tips don’t take into account individual financial situations. They are summaries only and readers should obtain copies of the full research reports and disclosures, and seek financial advice before investing.