Eight best large cap ideas in January
About the author:
- Author name:
- By Andrew Tang
- Job title:
- Analyst - Equity Strategy
- Date posted:
- 06 January 2020, 2:20 PM
- Sectors Covered:
- Equity Strategy and Quant
Our best ideas are those that we think offer the highest risk-adjusted returns over a 12-month timeframe supported by a higher-than-average level of confidence. They are our most preferred sector exposures.
Here are our eight best large-cap ideas for January 2020:
Telstra Corporation (TLS)
Our view on TLS is predicated on improving market sentiment. The merger or not of TPM and Vodafone is the key catalyst for this and perversely we view either outcome as a positive in the short term. Either they merge and the market becomes more rational or they don't merge and TPM is unable, at least for a while, to build a competing mobile network as they've told the high court of Australia they will not.
Click here to see our latest research on Telstra Corporation (TLS).
Treasury Wine Estates (TWE)
Treasury Wine Estates is a great example of a company leveraging the premium status of its brand portfolio to generate strong results in China. TWE remains our key pick in the sector due to the strong earnings visibility and long runway of earnings growth its growing Luxury inventory balance affords. While the stock has performed strongly, we believe it remains attractively priced.
Click here to see our latest research on Treasury Wine Estates (TWE).
Woodside Petroleum (WPL)
WPL boasts the largest and most sustainable dividend profile in our Oil and Gas coverage universe (sustainable yield +5% fully franked). It also has the strongest balance sheet amongst its large-cap peers, in a solid position to support new growth while maintaining yield.
Click here to see our latest research on Woodside Petroleum (WPL).
WBC is our preferred major bank. It has a relatively low risk profile regarding loan book positioning and low reliance on treasury and markets income. WBC reported a CET1 capital ratio of 10.6%, above APRA's 'unquestionably strong' benchmark. Strong capital position and sound asset quality support dividend. While the timing and quantum of a potential civil penalty for WBC is highly uncertain, at this stage we suspect the penalty will not exceed $2bn; from this perspective the sell-off looks overdone.
Click here to see our latest research on Westpac (WBC).
Sonic Healthcare (SHL)
Defensive earnings, with growing underlying momentum and a fairly benign regulatory backdrop. Strong B/S capacity (cA$1bn headroom) fuelling a pipeline of future acquisitions/JVs. Undemanding valuation and an attractive 2.9% yield.
Click here to see our latest research on Sonic Healthcare (SHL).
TCL offers investors pure play toll road exposure via dominant ownership of toll road networks in Melbourne, Sydney, Brisbane, Virginia (USA), and Montreal (Canada). Traffic growth and mix is a fundamental value driver, influenced by population and employment growth, urban development, and congestion. About 50% of revenues are sourced from roads with contracted toll escalation of at least 4% pa, delivering strong pricing power in the current low CPI environment. TCL has very high EBITDA margins (close to 80%), low sustaining capex requirements, and an average remaining concession life of ~29 years. New debt raised for refinancing or capex funding purposes is benefitting from the very low interest rates at present. Capital invested in acquisitions and growth projects should deliver incremental cashflow to support growth. Continuation of the lower-for-longer economic environment (likely given RBA rhetoric) is likely to see continued share price support, with a cash yield in the low-4% range (partly franked) and mid-single digit DPS growth.
Click here to see our latest research on Transurban (TCL).
Earnings should be relatively predictable going forward given regulated revenue certainty on the below rail network and the largely contracted nature of the coal haulage business. While earnings growth beyond FY20 may be limited, we think AZJ is attractive for its asset value, cash generation, low correlation of earnings to the domestic economy, ~5% cash dividend yield (70% franked), and ongoing buyback.
Click here to see our latest research on Aurizon (AZJ).
APA Group (APA)
We view APA as best-of-breed among the ASX-listed energy infrastructure stocks. Based on FY20 DPS guidance and the current share price, forward cash yield is mid-4% plus ~35% franking. We believe APA is capable of growing the DPS by mid-single digit CAGR across FY20-FY24F, even with the ramp-up in tax paid. Entry into the USA market via acquisition that would need to be funded by a capital raising is likely.
Click here to see our latest research on APA Group (APA).
Morgans clients can access the detailed Australian Strategy Morgans best ideas research report which also includes our small & mid cap best ideas. If you would like more information, please contact your adviser or nearest Morgans office.
Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.
Disclosure of interest: Morgans may from time to time hold an interest in any security referred to in this report and may, as principal or agent, sell such interests. Morgans may previously have acted as manager or co-manager of a public offering of any such securities. Morgans affiliates may provide or have provided banking services or corporate finance to the companies referred to in the report. The knowledge of affiliates concerning such services may not be reflected in this report. Morgans advises that it may earn brokerage, commissions, fees or other benefits and advantages, direct or indirect, in connection with the making of a recommendation or a dealing by a client in these securities. Some or all of Morgans Authorised Representatives may be remunerated wholly or partly by way of commission.