Rudi’s View: CBA, GQG, Pilbara Minerals, Sonic Healthcare, Webjet & Xero

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By Rudi Filapek-Vandyck, Editor FNArena

M&A Is Back (With A Vengeance)

Even the more casual observer would have noticed the high number of announcements regarding acquisitions and mergers this year, with troubled AI (?) company Appen ((APX)) the latest target on the ASX.

Analysts at Morgan Stanley believe it's only the beginning of what might well turn into a genuine tsunami in the months and weeks ahead.

The simplest explanation for the rapid pick-up in overall M&A activity is it has been very quiet for quite a while in this regard, as rising bond yields, central banks tightening and concerns of economic recession kept most corporate boardrooms in defensive mode. But now most of these scary headwinds are dissipating, companies are ready to explore buying growth again.

What adds to Morgan Stanley's confidence is overall activity has been so far below-trend, a simple reversal back to the 2014-22 average already implies a significant number of deals needing to be concluded. A 50% rise in M&A globally is easily on the agenda, the broker surmises.

The statistical 'undershoot' in recent years is estimated between -US$4-11trn. On the analysts' own data, corporates currently hold in excess of US$5trn in cash, while private markets have US$2.5trn of dry powder, on top of the observation that markets are once again open for new equity raisings.

Sectors identified as most ready for action include healthcare, staples, technology, and real estate. Europe, it looks like, will be the key epicentre of the global M&A revival.

However, judging from year-to-date activity in Australia, investors locally need not fear the fresh bonanza in corporate M&A might bypass the ASX. Already, more than 20 companies locally have attracted M&A interest, and many more are likely to follow.

The list below of M&A announcements is no doubt incomplete:

-A2B Australia ((A2B))
-Adbri ((ABC))
-Altium ((ALU))
-Alumina Ltd ((AWC))
-Ansarada Group ((AND))
-APM Human Services International ((APM))
-Appen ((APX))
-Azure Minerals ((AZS))
-Boart Longyear ((BLY))
-Boral ((BLD))
-CSR ((CSR))
-Genex Power ((GNX))
-Link Group ((LNK))
-Newmark Property REIT ((NPR))
-Origin Energy ((ORG))
-OreCorp ((ORE))
-Pacific Smiles ((PSQ))
-Pact Group ((PGH))
-Perpetual ((PPT))
-Probiotec ((PBP))
-Qantm Intellectual Property ((QIP))
-Southern Cross Media ((SXL))
-Superloop ((SLC))
-Task Group Holdings ((TSK))
-Virgin Money UK ((VUK))
-Volpara Health ((VHT))

One fund manager for whom all of the above is nothing but music in the ears is Tamim Asset Management; last year the manager decided to refocus the small cap portfolio towards potential M&A targets, and that switch in strategy has been handsomely rewarded already.

Stocks held in portfolio when news broke of a corporate approach include Link Administration, Pacific Smiles, Probiotec, Qantm Intellectual Property, Superloop, Task Group Holdings, and Volpara Health. Stocks held and explicitly nominated for that next announcement include Ainsworth Game Technology ((AGI)), Bravura Solutions ((BVS)) and Praemium ((PPS)).

Conviction Calls

Post February reporting season, analysts at Morgan Stanley have started to nominate their Key Picks in the mid and small cap space on the basis of reported results and anticipated outlook.

The two first nominations made are Accent Group ((AX1)) and SG Fleet ((SGF)).

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Market strategists at Wilsons believe Australian tech stocks should remain an important part of an investor's portfolio, but after stellar performances in many instances, it is also time to become more selective.

Strong earnings growth remains the key, the strategists argue, as meaty-looking PE ratios shrink naturally with high growth numbers being achieved.

Wilsons provides the example of Xero ((XRO)), whose forward-looking PE ratio stood at no less than 200x five years ago. Today, the PE has shrunk to 83x; still high, but a lot lower than what it was. (The numbers quoted are different from FNArena's, but that's not the issue here).

Most importantly, highlight the strategists, the share price has grown over that period from $50 to $130 for an annualised return of circa 21%.

Core message: there are serious failings in focusing on the PE only when strong growth, combined with upward revisions to future forecasts, can propel the share price a lot higher.

Wilsons suggests tech stocks are well-placed to continue outperforming the broader market over the medium-term, but investors will need to do their homework on valuations relative to the growth achieved, also: how much of the future is already priced in? Factors that could lead to higher earnings growth should equally be considered, as well as the overall financial health of the companies involved.

Wilsons' two Top Picks are Xero and Netwealth Group ((NWL)).

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Guardians of the Core Model Portfolio at stockbroker Morgans have added additional exposure to Sonic Healthcare ((SHL)) and Washingon H Soul Pattinson ((SOL)).

The Growth Model Portfolio has increased weightings for ResMed ((RMD)) and NextDC ((NXT)).

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Remarkable: portfolio positioning and selection of most preferred stocks at Barrenjoey has not changed one iota over the February reporting season.

Barrenjoey market strategist Damien Boey is concerned there's too much momentum-chasing going on in the share market with Australian equities driven mainly by safe-haven rotation away from China.

The preference lays with large-caps, quality and value rather than growth or momentum.

Barrenjoey's Bucket List of preferred exposures consists of:

-Aristocrat Leisure ((ALL))
-Beach Energy ((BPT))
-Brambles ((BXB))
-CSL ((CSL))
-Incitec Pivot ((IPL))
-Insurance Australia Group ((IAG))
-Ebos Group ((EBO))
-Lynas Rare Earths ((LYC))
-Medibank Private ((MPL))
-Mineral Resources ((MIN))
-nib Holdings ((NHF))
-Northern Star ((NST))
-Pilbara Minerals ((PLS))
-Steadfast Group ((SDF))
-Perseus Mining ((PRU))
-Qantas Airways ((QAN))
-QBE Insurance ((QBE))
-Rio Tinto ((RIO))
-Sandfire Resources ((SFR))
-Santos ((STO))
-South32 ((S32))
-Stanmore Resources ((SMR))
-TechnologyOne ((TNE))
-Telstra ((TLS))
-Viva Energy Group ((VEA))

In general terms, the Barrenjoey strategist believes markets are too sanguine about correlations and risks for the year ahead, running hard on positive expectations and thus opening up vulnerability when alternative scenarios unfold.

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While Ord Minnett might be white-labeling Morningstar research, the retail stockbroker still employs a number of in-house analysts, as well as in-house market strategists.

The latter allows the broker to select and publish its own Conviction List, which currently includes:

-Alliance Aviation Services ((AQZ))
-Cosol ((COS))
-EQT Holdings ((EQT))
-GQG Partners ((GQG))
-Lindsay Australia ((LAU))
-Ramelius Resources ((RMS))
-Regis Healthcare ((REG))
-Select Harvests ((SHV))
-SRG Global ((SRG))
-Supply Network ((SNL))
-Waypoint REIT ((WPR))
-Webjet ((WEB))

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Canaccord Genuity's Model Portfolio has added Scentre Group ((SCG)) and Stockland ((SGP)) while also removing Amcor ((AMC)) and The Lottery Corp ((TLC)).

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Post the February results season, UBS's list of Most Preferred ASX-listed exposures has added Reliance Worldwide ((RWC)), Coles Group ((COL)), Universal Stores ((UNI)), and Rio Tinto with all fresh inclusions believed to have delivered solid earnings beats, with signs of cost control, the broker explains.

UBS strategists are worried falling inflation is not by default a positive during a time when top-line growth is decelerating for large chunks of the Australian economy.

All in all, taking into account the fresh updates and insights from February, UBS strategists have upgraded Industrials to Portfolio Overweight, where the sector joins Infrastructure & Utilities, Insurance and Technology.

Consumer Discretionary has been upgraded to Neutral, while Mining has been downgraded to Neutral. Both sit now alongside Consumer Staples and Energy.

Healthcare has been downgraded to Underweight, joining Banks and Real Estate.

The list of Most Preferred exposures has lost BHP Group ((BHP)), Qantas, Seven Group ((SVW)) and Woolworths Group ((WOW)).

The rest of the list now consists of:

-AGL Energy ((AGL))
-Orica ((ORI))
-Origin Energy
-AUB Group ((AUB))
-Computershare ((CPU))
-nib Holdings
-QBE Insurance
-CSL
-Harvey Norman ((HVN))
-Seek ((SEK))
-Telstra
-Transurban ((TCL))
-Webjet
-WiseTech Global ((WTC)
-Worley ((WOR))
-Xero

Plus the above mentioned new additions.

UBS also has a list of Least Preferred exposures, from which CSR (take-over pending) and Westpac ((WBC)) have been removed, while Bega Cheese ((BGA)) and CommBank ((CBA)) have been freshly added.

The remaining inclusions are:

-ASX ((ASX))
-Bank of Queensland ((BOQ))
-Cochlear ((COH))
-Domain Holdings Australia ((DHG))
-Super Retail ((SUL))
-Vicinity Centres ((VCX))

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Strategists at Wilson also work with a list of Most Preferred Equities on the ASX. That list has been enlarged with Breville Group ((BRG)), Goodman Group ((GMG)), and Collins Foods ((CFK)).

Were already included in the selection: IDP Education ((IEL)) and Worley ((WOR)).

Have been removed: Steadfast Group, Sandfire Resources, and Amcor though all three remain in Wilsons' Australian Equities Focus Portfolio.

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Small cap analysts at Goldman Sachs have picked Life360 ((360)) and Macquarie Technology ((MAQ)) as their two favourites.

Regarding Life360, the analysts expressed their conviction that stock's re-rating has only just begun.

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Small Cap specialists at UBS have equally used the February results season to sharpen their focus, leading to the following selection of Key Picks:

-GrainCorp ((GNC))
-GUD Holdings ((GUD))
-Imdex ((IMD))
-Kelsian Group ((KLS))
-NextDC
-Ridley Corp ((RIC))
-Siteminder ((SDR))
-Webjet

From a macro perspective, UBS notes small cap 'growth' outperformed 'value' throughout the season and forward PEs generally for small caps have re-rated by circa 4 percentage points to an average of 21x.

On the flipside, more earnings forecasts for small caps were downgraded than have been upgraded.

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

P.S. I – All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to My Alerts (top bar of the website) and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website. 

P.S. II – If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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