Rudi’s View: Ampol, CSL, Temple & Webster And WiseTech Global

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In this week's Weekly Insights:

-Growing Risk Is The Message
-CSL: Back To $335, And Beyond
-Conviction Calls

By Rudi Filapek-Vandyck, Editor FNArena

Growing Risk Is The Message

It's never easy to predict what exactly will spook financial markets, or when it might happen, but as the end of April approaches it looks like the US Fed's messaging about an accelerated tightening process has finally been taken seriously.

And the same goes for the Chinese economy as Beijing's zero-covid policy keeps important hubs in lockdown.

The Australian share market is one of the best performers around the globe in 2022, thanks to a large index exposure to commodity producers enjoying super cycle-like conditions.

Up until last Friday, one could have sworn the ASX200 is firmly en route to setting a new all-time high, but the general mood has suddenly made a big switch.

Those who swear by seasonal patterns are about to eat their own words, I believe. Traditionally, April is among the most profitable months of most calendar years but I already had an inkling that strong rally in March has pulled forward the gains that otherwise were destined to be enjoyed in April.

Strap yourself in. It's going to get hairy, yet again.

For weeks I have been cautioning readers of Weekly Insights it is time to dial back on the overall risk taking. That same message still applies. Inflation is sticking around at too high a level for too long and the Federal Reserve in the US needs to step on the accelerator. Economic growth is decelerating.

How long before we see the impacts on corporate profitability and growth?

In terms of portfolio exposures, we're entering a time when solid, robust business models on reasonable valuations become attractive again. Think Amcor ((AMC)) and Woolworths ((WOW)), but also CSL ((CSL)), Goodman Group ((GMG)) and Telstra ((TLS)).

A few quotes from recent writings that suddenly look a lot more savvy and prescient:

"I believe price action for the Australian share market is not representative of the risks that lay ahead". (This has pretty much been my opening statement in the presentations I gave to members of AIA and ASA recently).

Last week I asked the question: "Are we witnessing a glaring disconnect between unbridled share market optimism and deteriorating market fundamentals?"

In the week prior I wrote: "The outlook for equities in the months ahead looks more uncertain than is currently suggested by daily price action, so I'd definitely not be afraid to carry a healthy dose of cash, which can also be put to work when market volatility offers up opportunities."

Heed the message.

More to read:

–https://www.fnarena.com/index.php/2022/04/21/rudis-view-family-zone-healthia-mineral-resources-readytech-and-xero/

–https://www.fnarena.com/index.php/2022/04/13/rudis-view-peters-portfolio-reviewed/

–https://www.fnarena.com/index.php/2022/04/07/rudis-view-real-market-support-is-invisible/

–https://www.fnarena.com/index.php/2022/03/24/rudis-view-preparing-for-august/

–https://www.fnarena.com/index.php/2022/03/17/rudis-view-double-your-protection/

–https://www.fnarena.com/index.php/2022/03/10/rudis-view-risk-is-tangible-and-on-the-rise/

CSL: Back To $335, And Beyond

Throughout CSL's firm multi-year uptrend that ultimately took its share price to $335 in 2020, Morgan Stanley was one of the laggards when calculating a valuation and setting price targets for Australia's number one biotech company.

Whereas others were not afraid to put forward price targets well beyond $300, Morgan Stanley's comparative valuation has mostly remained around $280.

Its target only crossed the $300 level in 2022 and now sits at $310 as part of an in-depth research effort that should be of interest to today's investors and shareholders for a variety of reasons.

First up, and in-line with that fresh price target (nearly 15% above Friday's closing share price), it is Morgan Stanley's view that the time to become more positive on CSL's future is now.

Plasma collection data have returned to pre-pandemic volumes and industry indications are the recovery is well and truly gaining traction.

Margin pressure too should peak either in the second half of this year, or the first half of next year, which means FY22 can become the company's springboard to a much stronger period ahead.

And then there's the acquisition of Vifor which, the broker calculates, should add between 8%-10% to CSL's earnings per share growth from FY23 onwards.

On this basis, and assuming CSL shares continue trading on a forward-looking Price Earnings ratio of 35x, it looks feasible those shares will revisit their all-time peak of 2020 in the year ahead (circa $328, suggests the broker). But CSL management has a track record for delivering positive surprises, as it did in the past with Seqirus.

So why not take a look into a potential repeat with positive outcome once Vifor is part of the group?

Morgan Stanley's bull case scenarios consider faster growth in selling Vifor products (with CSL adding larger distribution capabilities), the adoption of specific Vifor products into Patient Blood Management (PBM) by CSL or even successful add-ons coming out of Vifor's product pipeline.

Long story short: such bullish scenarios can potentially add 33% in additional growth -on top of the base case growth that is now assumed- to CSL's EPS growth by FY25. On the current PE of 35x this would take CSL's share price -all else remaining equal- to $519 (forecast EPS US$11.10).

However, assuming CSL's forward PE normalises to circa 30x, a more realistic scenario, maybe, is a share price of $444.70, suggests the report. Note this is not a forecast per se. The report explicitly states not all the elements necessary to see the broker's bull scenario materialise might fall into place.

Maybe the safest message to take home is that better times seem on the horizon for CSL. Some 26 months after the shares peaked on maximum covid panic and uncertainty, that's not a bad position to be in.

Conviction Calls

Strategists at Morgan Stanley believe global financial markets are entering a phase of above trend inflation, which should soon start falling, while the pace of economic growth is slowing too.

Under such a scenario, argue the strategists, investors are best off with exposure to Consumer Staples, Healthcare, Utilities, and REITs.

In the same vein, Australia remains the broker's preferred equity market, with an emphasis on high yielding exposures. Morgan Stanley highlights both Telstra and Spark New Zealand ((SPK)), as well as the Vanguard Australian Shares High Yield ETF ((VHY)).

Elsewhere, Morgan Stanley analysts have used an in-depth report on global eCommerce companies to highlight the potential for Temple & Webster ((TPW)) in Australia.

The broker believes the savage de-rating for the shares in 2022 looks well-overdone given the company's potential for continued strong growth in sales, additional market share expansion and higher profits and cash flows.

Its price target of $14 compares with a last share price of $6. The arrival of covid will only further accelerate the shift towards online retailing, states the report, with this process in general still only in its infancy in Australia.

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Portfolio managers at T Rowe Price are pretty much singing from the same hymn sheet as Morgan Stanley these days.

Most preferred equities exposure: Australia, because corporate profit forecasts for the ASX are still rising.

Globally, however, the asset manager is now positioned Underweight equities "given moderating growth and earnings outlook amid an active Fed and inflation concerns".

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Analysts at Jarden wish to emphasise the point that investors in Australia are too eager to sell everything with a 'tech' label attached to it, arguing it's like throwing out the baby with the bathwater as not all technology companies on the ASX are loss-making with shaky looking balance sheets.

Instead, plenty of tech companies are currently net cash, including Elmo Software ((ELO)), Nitro Software ((NTO)), IDP Education ((IEL)), Bravura Solutions ((BVS)), Altium ((ALU)), WiseTech Global ((WTC)) and Pointsbet Holdings ((PBH)).

Others are generating positive free cash flow, including WiseTech Global, Altium, REA Group ((REA)), Domain Holdings Australia ((DHG)), Carsales ((CAR)), Seek ((SEK)), ReadyTech Holdings ((RDY)), IDP Education, and Bravura Solutions.

The latter companies, argues the broker, also have large addressable markets that should secure growth for years into the future.

For investors with a preference for free cash flow generation, Jarden's favourite top three consists of WiseTech Global, IDP Education, and ReadyTech Holdings.

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In a report that was put together before Ramsay Health Care ((RHC)) became the latest target for private equity and a local pension fund, UBS strategists tried to identify who could be next on the ASX.

UBS believes companies that stand out through strong free cash flows and low balance sheet gearing could be "interesting" from a purely quantitative and financial view of point.

Its data analysis points towards Ainsworth Game Technology ((AGI)), GrainCorp ((GNC)), BlueScope Steel ((BSL)), Cimic Group ((CIM)), and Platinum Asset Management ((PTM)). among others.

Investors should note Cimic is about to be privatised by its major shareholder, while the mentioning of Platinum certainly looks interesting given Perpetual's ((PPT)) failed attempt to acquire Pendal Group ((PDL)), at least thus far.

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Wilsons' Model Portfolio has removed Block ((SQ2)) and increased exposure to local banks through buying additional shares in National Australia Bank ((NAB)) and ANZ Bank ((ANZ)).

Its latest strategy update centres around finding companies on below-market PE multiples that should have at least three years of positive earnings growth.

Among those identified are Amcor, Ampol ((ALD)), James Hardie ((JHX)), Washington H Soul Pattinson & Co ((SOL)), insurers and banks, commodity producers such as Allkem ((AKE)) and Mineral Resources ((MIN)), industrial companies such as Seven Group Holdings ((SVW)), Brambles ((BXB)) and Aurizon Holdings ((AZJ)), and utilities and laggards in the REITs sector.

(This story was written on Monday 25th April, 2022. It was published on the day in the form of an email to paying subscribers, and again on Thursday as a story on the website).

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via the direct messaging system on the website).

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