Rudi’s View: Bega Cheese, Computershare, NextDC, Playside Studios, Treasury Wine And Qantas

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In this week's Weekly Insights:

-Inflation & House Prices
-Conviction Calls
-Research To Download

By Rudi Filapek-Vandyck, Editor

Inflation & House Prices

One of the more eye-catching forecasts made recently is that persistent inflation in Australia will prevent local house prices from experiencing a true crash a la Spain, Ireland or the US post-GFC.

After all, building a new property is still becoming more expensive, just ask any builder, and ultimately existing homes cannot be cheaper than building a new one – if it happens, it won't last. Not in a country like Australia.

The forecast was made by UBS where economists and analysts have collaborated on a deep-dive analysis of Australian housing markets.

While Australia might be poised to avoid worst-case scenarios, UBS's prediction is house prices will still drop by a record -13% peak-to-trough with serious follow-on impact on related activities.

Overall sales of houses are projected to fall by -25%. Home loan values are expected to drop by -40% and housing credit growth is anticipated to slow to 4% year-on-year by late 2023; the latter would also be a record low for Australia.

The good news, UBS suggests, is that, adjusted for inflation, the fall in house prices amounts to -20%.

And while the cost of building a new house has already risen by some 20% since this time last year, the odds remain in favour of further cost increases, not only because of international dynamics, but also because of extremely tight labour markets locally and the government soon allowing for increased immigration numbers entering the country.

Vacancy rates already are tight and rents on the rise.

As is typical in a sharply opinion-divided 2022, UBS's report has already been countered by a more dire outlook from Goldman Sachs where forecasters believe Australian properties are due for a -18% fall in price, beating Canada's -13% and only preceded by New Zealand where property prices are forecast to fall by -21%.

For all the self-serving talk that Australia "shall be right, mate" while economies in Europe, the UK, China and the US might be facing various versions of what is commonly known as "economic recession", even the more moderate projections by UBS add a genuine question mark to what "escaping recession" might actually mean for Australia, and for its share market.

UBS, believe it or not, is "relatively constructive" – a view largely based on the mantra that history shall repeat and this means policy makers will intervene to support housing when necessary.

The economics desk at the firm has for a while now upheld belief the RBA can talk and act tough this year, but by mid-2023 rate cuts will start to come through, changing overall dynamics for building and housing, and for the local economy in general.

Notes UBS: in the last 30 and more years, the RBA has always stopped hiking before CPI peaked locally in year-on-year terms. The RBA historically also started loosening despite headline CPI still above 2-3%, with exception of the covid-period in 2020.

Hence, while this year's rate hikes are likely to cast a shadow over the outlook for the next, say, 6-9 months in Australia, UBS's messaging is one of: don't be too bearish about it. Chances are but realistic that markets are preparing for too dire scenarios that may never actually eventuate (or for a brief period only).

Cue: share prices for Adairs ((ADH)), CSR ((CSR)), JB Hi-Fi ((JBH)), Mirvac Group ((MGR)), and Stockland ((SGP)), to name but a few.

Following through on its own forecasts, UBS is counting on a rapid and sharp recovery in overall building activity, after a more subdued remainder of 2022 and 2023. This scenario is built on the forecast of four RBA rate cuts of -25bp each in the second half of next year and the opening half of 2024.

The underlying suggestion made is that even if inflation proves stickier than currently anticipated, this would force the RBA to push the cash rate higher into restrictive territory, but it will also shorten the odds for monetary loosening within the following year.

By the way, UBS concurs with Goldman Sachs: New Zealand will be feeling more pain. UBS thinks house prices there are due for a -20% fall with sales collapsing -40%.

Conviction Calls

This week's line-up of Conviction Calls is possibly the largest ever. Feel free to save, print, compare, analyse, or use in any way that suits best.

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"We are passionate about software" repeat Jules Cooper and Josh Goodwill with every sector update for stockbroker Shaw and Partners.

The duo has recently become enthusiastic about Playside Studios ((PLY)), Australia's largest independent game developer. This sounds like a big medal to carry, until one realises total market cap is still less than $300m. It's a minnow, and we don't use the term as a form of insult.

Playside Studios might be en route to breaking even in 2024, and that would be a positive milestone. Shaw lauds the company's "record game launch pipeline" in the short term.

Shaw's initiation of coverage occurred last week, with a maiden Buy rating (of course) and 90c price target.

So enthusiastic are the two software aficionados, the stock has been added to Shaw's Top Picks for the ASX-listed sector, joining Gentrack Group ((GTK)), Elmo Software ((ELO)), ReadyTech Holdings ((RDY)) and Mach7 Technologies ((M7T)).

Equally noteworthy: Shaw's Top Three of August reporting season highlights (as far as software companies are concerned) refers to ReadyTech, Elmo Software, and Mach7 Technologies. Pretty much a confirmation of the team's favouritism.

The only three software companies covered and not rated Buy are Nitro Software ((NTO)) and PushPay Holdings ((PPH)) -both under take-over interest- rated Hold, and Iress ((IRE)) on Sell. Shaw doesn't like Iress, and hasn't for a long while.

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Stockbroker Morgans has used the August market updates to remove each of Reliance Worldwide ((RWC)), Eagers Automotive ((APE)) and Challenger ((CGF)) from its extensive list of Best Ideas among ASX-listed companies.

Only one sole addition was made: Domino's Pizza ((DMP)).

Morgans' full list now consists of 31 stocks, in alphabetical order:

-Acrow Formwork and Construction Service  ((ACF))
-AGL Energy ((AGL))
-Aristocrat Leisure ((ALL))
-BHP Group ((BHP))
-Corporate Travel Management ((CTD))
-Dalrymple Bay Infrastructure ((DBI))
-Dexus Industria REIT ((DXI))
-Domino's Pizza
-GQG Partners ((GQG))
-Healius ((HLS))
-HomeCo Daily Needs REIT ((HDN))
-IDP Education ((IEL))
-Incitec Pivot ((IPL))
-Jumbo Interactive ((JIN))
-Karoon Energy ((KAR))
-Lovisa Holdings ((LOV))
-Mach7 Technologies
-Macquarie Group ((MQG))
-NextDC ((NXT))
-Nufarm ((NUF))
-Pro Medicus ((PME))
-QBE Insurance Group ((QBE))
-ResMed ((RMD))
-Santos ((STO))
-Seek ((SEK))
-South32 ((S32))
-Technology One ((TNE))
-Transurban Group ((TCL))
-Treasury Wine Estates ((TWE))
-Webjet ((WEB))
-Wesfarmers ((WES))

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The local Conviction List at Goldman Sachs is equally as diverse, but with only 11 stocks:

-Charter Hall Social Infrastructure REIT ((CQE))
-Elders ((ELD))
-HealthCo Healthcare & Wellness REIT ((HCW))
-Iluka Resources ((ILU))
-Lifestyle Communities ((LIC))
-NextDC
-Omni Bridgeway ((OBL))
-Qantas Airways ((QAN))
-REA Group ((REA))
-Westpac Banking ((WBC))
-Woolworths Group ((WOW))

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The list of Best Stock Ideas at UBS has been extended with Aristocrat Leisure ((ALL)), Telstra ((TLS)) and Worley ((WOR)), and reduced by removing James Hardie ((JHX)) and Stockland ((SGP)) as the in-house stockpickers fear both are set to remain hostage to a tough-looking macro-environment.

TPG Telecom ((TPG)) was equally removed as the telco's financial report in August was deemed "poor".

UBS runs a parallel list of Least Preferred stocks and here Adbri ((ABC)), Charter Hall Long WALE ((CLW)) and Insurance Australia Group ((IAG)) are no longer included.

With exception of Adbri, these share prices have not performed as maybe had been feared, but clearly, UBS's conviction in further downside has reduced for all three.

Retain their inclusion on the Least Preferred list are:

-Bega Cheese ((BGA))
-Endeavour Group ((EDV))
-Harvey Norman ((HVN))
-InvoCare ((IVC))
-Lifestyle Communities
-Magellan Financial Group ((MFG))
-Macquarie Group

Bega Cheese, Endeavour Group and Lifestyle Communities are fresh additions.

Post the aforementioned changes, UBS's Best Stock Ideas now comprises of the following ideas:

-Amcor ((AMC))
-ANZ Bank ((ANZ))
-Aristocrat Leisure
-BHP Group
-Computershare ((CPU))
-IDP Education ((IEL))
-IGO ((IGO))
-Metcash ((MTS))
-NextDC
-Origin Energy ((ORG))
-Qantas Airways
-QBE Insurance ((QBE))
-Santos ((STO))
-Seven Group Holdings ((SVW))
-Steadfast Group ((SDF))
-Telstra
-Transurban ((TCL))
-Treasury Wine Estates ((TWE))
-Wesfarmers
-Worley

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Referring back to the August results, stockbroker Morgans strong message to investors is that rewards shall be yours if you decide to invest in "quality", which in the broker's view includes mid-to-small cap stocks caught up in macro volatility.

Morgans best ideas from the recent reporting season include BHP Group, Santos, Domino's Pizza, Wesfarmers, Treasury Wine Estates, ResMed, Seek, Corporate Travel Management, NextDC, Home Consortium ((HMC)), IDP Education, and Lovisa Holdings.

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August reports have equally shaken up sector rankings at Credit Suisse where diversified financials in particular have been in focus.

Despite a downgrade to Neutral, Computershare remains most favourite among the diversifieds, beating all of Challenger, Link Administration ((LNK)) and the ASX ((ASX)).

Hub24 ((HUB)) is the most preferred local platform operator and when it comes to asset managers, Perpetual ((PPT)) sits on top.

All platform operators are Overweight-rated, so investors owning Netwealth Group ((NWL)) or Insignia Financial ((IFL)) don't have to feel bad about their choice.

While asset managers on average are trading at a sizable discount of circa -30% relative to the ASX200, Credit Suisse views this as "fair", also given outflows are expected to persist into 2023.

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More highlights from the August results season, according to Goldman Sachs (with the broker's forecasts more positive than market consensus, suggesting the rest of the market has yet to catch-up):

-Cochlear ((COH))
-Genworth Mortgage Insurance Australia ((GMA))
-Johns Lyng Group ((JLG))
-REA Group
-Reliance Worldwide
-ReadyTech Holdings

But there are equally stocks where the broker believes market expectations are currently too high (suggesting a negative catch-up is due):

-Bega Cheese
-CommBank ((CBA))
-Sonic Healthcare ((SHL))

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Citi's preferred exposures among A-REITs are Goodman Group ((GMG)) and Shopping Centres Australasia Property Group ((SCP)) -for their exposure to underlying income growth- and Mirvac Group.

The latter is considered owner of a quality portfolio that is currently not properly valued by the market.

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Technology sector analysts at JP Morgan are no different from their peers elsewhere; the August season has simply steeled their conviction even more there are multiple opportunities waiting to be scooped up by investors who are able to look through shorter-term volatility and general sector disliking.

Are currently carrying the highest rating of Overweight at JP Morgan:

-Altium ((ALU))
-Bravura Solutions ((BVS))
-Dicker Data ((DDR))
-Iress
-NextDC
-Superloop ((SLC))
-Tyro Payments ((TYR))
-WiseTech Global ((WTC))
-Xero ((XRO))

Extending the focus on gaming and media/internet operations, JP Morgan also carries Overweight ratings for:

-Aristocrat Leisure
-IDP Education
-News Corp ((NWS))
-Nine Entertainment ((NEC))
-Playside Studios
-REA Group
-Seek
-Star Entertainment Group ((SGR))
-The Lottery Corp ((TLC))

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From Wilsons' latest Focus List update:

"The risk still looks to the downside for earnings over the next 6 months as demand gets weaker, margins come under pressure as costs remain elevated, and the global economy starts to slow at a faster rate.

"As earnings become the focus of the second half of this year, we continue to shift our orientation towards quality earnings."

Wilsons added NextDC for this specific reason, while also removing Judo Bank ((JDO)) and trimming its holding in BHP Group. Exposure to ResMed has been increased.

And thus the Focus List is carrying the following stocks:

-Allkem ((AKE))
-ANZ Bank
-Aristocrat Leisure
-BHP Group
-Cleanaway Waste Management ((CWY))
-CSL ((CSL))
-Goodman Group
-HealthCo Healthcare & Wellness REIT
-Insurance Australia Group
-James Hardie
-Macquarie Group
-National Australia Bank ((NAB))
-NextDC
-News Corp
-Northern Star ((NST))
-OZ Minerals ((OZL))
-Pinnacle Investment Management ((PNI))
-Qantas Airways
-ResMed
-Seek
-Santos
-Tabcorp Holdings ((TAH))
-Telix Pharmaceuticals ((TLX))
-Telstra
-The Lottery Corp
-Westpac
-Woodside Energy ((WDS))
-Xero

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Technology analysts at Macquarie stand out as they foresee downward pressure on advertising, which defines their preferences inside the local TMT sector, which combines telcos, media and technology in the broadest interpretation.

Hence, Macquarie's sector pick is Carsales ((CAR)), alongside IDP Education and oOh!media ((OML)). Not keen is the broker on Seek and REA Group. Among telcos, Telstra is most preferred.

Macquarie's view is the ad cycle will turn in the first half of 2023, which is why the broker does not like any of the traditional media companies at this stage.

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Retail analysts at Jarden have created three buckets of companies to favour ahead of the predicted "spending cliff" in 2023:

-for exposure to consumers that can afford to keep spending; Universal Store Holdings ((UNI)), Accent Group ((AX1)) and Premier Investments ((PMV))

-for defensive business models with pricing power; Woolworths ((WOW)), Treasury Wine Estates, Costa Group ((CGC)) and Wesfarmers

-companies with a growing moat and return on invested capital ((ROIC)); Flight Centre ((FLT)), The Reject Shop ((TRS)), Wesfarmers, and Woolworths

Research To Download

Recent research updates by Research as a Service (RaaS):

-Pointerra ((3DP)); https://www.fnarena.com/downloadfile.php?p=w&n=E377C5EE-B5A9-3A30-F266FF1ADA01F996

-CV Check ((CV1)); https://www.fnarena.com/downloadfile.php?p=w&n=E37F0C36-FB2E-8F95-8C6E16C2C9C7374F

-Pureprofile ((PPL)); https://www.fnarena.com/downloadfile.php?p=w&n=E3848F0A-E31D-332F-FD174D7A6F28FB46

-Shekel Brainweigh ((SBW)); https://www.fnarena.com/downloadfile.php?p=w&n=E389E9D1-C46E-F20E-7E31EC68CB9DE37C

-X2M Connect ((X2M)); https://www.fnarena.com/downloadfile.php?p=w&n=E39100AC-0179-DDC1-A57A540ECAAA3281

(This story was written on Monday, 12 September, 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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