The following article has not been sponsored by any parties. The author, Luke Laretive, is our resident finance expert.
While Australia’s hospitality and travel industries continue to be devastated by border closures and lockdowns, the ASX, buoyed by a miraculous NASDAQ bounce back, has rallied harder than a supercar.
Now, three years after COVID-19 caused an en masse BASE jump, the ASX is once again navigating troubled waters after an unlikely, tech-driven post-pandemic boom.
Suffice to say, you don’t want to be throwing money away right now. So rather than trust your mate’s brother’s cousin (or your Uber driver who assures you ‘there’s still momentum’), DMARGE, each month throughout 2023, will be bringing you the top three ASX stock picks of Luke Laretive, CEO of Seneca Financial Solutions – and his analysis on each one.
This article is of a general nature only and does not consider your objectives, financial situation or needs.
You should consider the appropriateness of the information in light of your objectives, financial situation and needs before acting on it and obtain copies of any relevant disclosure documents. Seneca Financial Solutions does not warrant the accuracy or reliability of the information in this report.
Luke Laretive, Seneca Financial Solutions, its Directors and its associated entities may have or had interests in the companies mentioned. They may have or have had a relationship with or may provide or have provided investment banking, capital markets and/or other financial services to those companies mentioned.
Luke provides clients with a weekly note, which you can access here.
In this best ASX shares story…
- November 2023
- October 2023
- September 2023
- August 2023
- July 2023
- June 2023
- May 2023
All figures in Australian dollars (1 AUD = 0.64 USD at time of publishing)
Reliance Worldwide Corporation Ltd (ASX: RWC) $3.72 per share, $2.95bn market cap
Reliance operates through well-established plumbing appliance brands such as SharkBite (push-to-connect), John Guest and HoldRite. While Reliance is exposed to residential and commercial customers, products are positioned for essential repairs in the more resilient ‘repair and remodel’ markets as opposed to new builds. The company continues to innovate with new generation products that are well placed for adoption.
Margins came under pressure from rising copper and plastic prices, both of which have since trended lower, and combined with product price increases, Reliance is well placed to deliver robust margins. US building materials (JHX) and plumbing appliance (REH) peers have reported strong trading updates indicating that depressed sentiment might be overplayed in the sector. 13x P/E seems too low given the track record and steady growth opportunity for RWC.
In short: one of a number of undervalued small/mid-caps.
Imdex Limited (ASX: IMD) $1.68 per share, $855m market cap
Imdex has spent the last decade developing the best suite of exploration drilling technology (think gyros, sensors) including buying the number 2 player Devico earlier in 2023 to consolidate its market leading position. Imdex has leverage to a higher gold price due to the consequent uptick in exploration/development activity, as well as battery metals such as copper, nickel, and lithium. Orebody knowledge will be essential to efficiently extract the metals needed for the world to decarbonise, with Imdex positioned at the forefront.
On a forecast P/E of ~14x, IMD has a low valuation relative to history (5-year average 19x) and the 1Q24 trading update highlighted a return to growth after a subdued period for exploration. CEO Paul House purchasing shares on market on two separate occasions recently signals that insiders think the share price has been oversold from the $2.50 highs set earlier in 2023.
In short: sell picks and shovels to the miners in a gold rush.
James Bay Minerals Ltd (ASX: JBY) $0.33 per share, $19m market cap
JBY had a strong ASX debut, trading above its 20c IPO price. James Bay Minerals has highly prospective lithium properties in Quebec, Canada, along strike from proven discoveries by Patriot Battery Metals (ASX: PMT) and Winsome Resources (ASX: WR1).
Since listing, JBY has delivered in line with our expectations and more, identifying large, outcropping pegmatites and LIBS machines detecting the presence of spodumene. Having recently increased its tenure at the flagship La Grande project by 70% to 302km2 for an incremental cost of just $45k, management continues to demonstrate their operational capability. Drilling is a possibility in 1H 2024, and it wouldn’t take much to move the dial given the valuations attributable to other ASX-listed companies with good drill hits.
In short: at a market cap of under $20m, JBY continues to offer significant upside.
PEXA Group Ltd (ASX: PXA) $11.40 per share, $2.057bn market cap
PEXA is the monopoly property technology business nobody is talking about. PEXA handles 88% of all property transactions in Australia via its electronic conveyancing platform so gets more than its fair share of the $280 million per year industry. PEXA has an even higher 99% share of all refinancings, which are booming thanks to the fixed rate mortgage cliff, where low fixed rate mortgages are rolling off and being refinanced at higher variable rates.
Down 33% from its $17.13 IPO price in 2021, negative property market sentiment and soft volumes have been driving the share price. However, at current levels, PXA shares are being ascribed minimal value for its UK expansion opportunity on only 25x FY25e P/E. The UK market represents a $720 million opportunity, ~2.5x the size of Australia’s market. PEXA is attempting to gain significant share in the UK by leveraging its existing technology platform, in a jurisdiction with similar legal and financial processes, that currently operates a paper-based conveyancing system.
In short: a ‘buy the dip’ opportunity in a high-quality company with potential for earnings upgrades.
Pilbara Minerals Ltd (ASX: PLS) $4.10 per share, $12.29bn market cap
We wrote up PLS as a buy in May this year, and the share price ran to a high of $5.37 in August before falling back to our original buy price of $4.10. Operationally, PLS continues to excel, printing a full year NPAT of $2.4 billion and a net cash balance that swelled to $3.3 billion, representing 25.5% of PLS’s market cap.
With Liontown Resources (ASX: LTR) under takeover offer from Albermarle (and possibly Gina Rinehart’s Hancock Prospecting) valuing the lithium developer at $6.6 billion, despite plenty of execution risk still ahead of it. We see Pilbara Minerals as comparatively undervalued with a world-class asset that continues to deliver production growth and strong cash flow, even at lower lithium prices.
In short: temporary lithium price weakness means PLS is back in the buy zone.
Aristocrat Leisure Limited (ASX: ALL) $41.62 per share, $26.7bn market cap
Aristocrat is one of the world’s leading land-based and digital gaming technology companies. ALL is riding the wave of on-premise pokie machines, which have recovered since COVID19, and the booming demand for digital/mobile gaming. The acquisition of NeoGames in the US expands Aristocrat’s presence in the iGaming market, which represents a rapid growth opportunity, with NeoGames boasting healthy 31% EBITDA margins and 34% CY19-22 EBITDA CAGR.
Despite delivering an EPS compound annual growth rate of 13% over the last 5 years driven by a market leading R&D budget, Aristocrat trades at an undemanding multiple of 19x forward P/E, a lower-than-average premium to the market’s 15x P/E. Gambling flows have historically proven resilient to recessions and the benefit of a lower AUD vs the USD means earnings growth is underestimated by the market.
In short: Growth at a reasonable price.
Resmed CDI (ASX: RMD) $24.72 per share, $36.3bn market cap
RMD shares are down 27% since its recent results, amidst a muted outlook based on depressed margins and the rise of Novo Nordisk’s blockbuster weight loss drug Ozempic causing concerns of a shrinking sleep apnea addressable market. We don’t think a pill that has to be taken daily, forever, is going to be a sleep apnea company killer.
After all, sleep apnea remains a significantly underpenetrated market (in which RMD is still winning share from competitors) with a variety of underlying causes and affected demographics.
Coupled with gross margin recovery from more favourable product mix (lower margin upfront machines to higher margin masks and consumables) as well as the usual cocktail of freight and componentry costs normalising, and you have a RMD shares on just 22x forward P/E, levels not seen since 2017. The stock is back trading at 2020 prices, despite earnings being 70% higher now than they were back then.
In short: overplayed headwinds provide an opportunity to buy a quality global growth business at more than reasonable prices.
APA Group (APA) $8.76 per share, $11.0bn market cap
APA has increased its dividend like clockwork over the last 20+ years thanks to stable, inflation-linked revenues derived from gas pipeline assets.
APA’s recent acquisition of Alinta Energy’s Pilbara energy generation and transmission assets has caused the company to raise equity at the discounted price of $8.50. At this price, shares trade on a dividend yield of over 6.5% based on management forecasts for FY24, for the first time since 2012.
In short: dividend hungry investors should consider APA rather than other names on similar yields with little growth.
James Bay Minerals (ASX: JBY) $0.20 per share at IPO price, listing 7th September with $12m market cap
James Bay Minerals holds one of the largest lithium exploration tenures in James Bay Quebec at 224km2. With projects in close proximity to Patriot Battery Metals’ (ASX: PMT) Corvette and Winsome Resources’ (ASX: WR1) Cancet deposits, JBY is well placed to benefit from being located in a tier 1 jurisdiction – low-cost hydropower, political support and access to skilled people.
While early-stage, JBY is attractively priced relative to other early-stage peers in the vicinity. Given the nature of IPO early performance, we are comfortable with JBY’s clean, tight capital structure with no dilutive options and high insider ownership.
Should JBY confirm the presence of lithium bearing spodumene, which we expect could occur within a few months of listing, James Bay Minerals offers sufficient upside to offset the high-risk nature of greenfields exploration companies.
In short: high-risk, high-potential speculative exploration in the hottest lithium mining jurisdiction on the planet.
CSL Ltd (ASX: CSL) $269.32 per share, $130bn market cap
CSL shares have fallen from over $300 to today’s sub-$270 share price on the back of disappointing guidance for +13-18% NPATA growth, which surprised the market and caused analysts to cut their price targets by 3-7%. We think this is an overreaction and an opportunity for investors. Residual impacts of covid on plasma collections and donor fees are reversing and margins have the potential to surprise to the upside now that expectations have been managed.
CSL’s outstanding track record of dividend growth from $0.11 per share in 2004 to $3.38 per share in 2023 means it trades at a premium to the broader market, and deservedly so. Lately, that premium has shrunk and shares trade on a forward P/E of 28x. CSL has demonstrated strong returns on capital over its history and we expect new high margin products such as HEMGENIX, garadacimab, and CSL11 to be no different and contribute to earnings growth.
In short: a bargain under $270.
Allkem Ltd (ASX: AKE) $14.90 per share, $9.5bn market cap
Allkem provides attractive exposure across the lithium supply chain, from Argentinian brine, to hard rock in WA and the red hot James Bay region of Quebec, Canada, to downstream refining assets. The recently announced merger of equals with Livent Corp (NYSE: LTHM) makes sense from a synergies perspective (overlapping operations in Argentina and Canada) and creates a global lithium powerhouse.
The market is completely discounting Allkem’s brine assets. We think these are of equal value to its hard-rock operations and believe that in time, the market will change its tune. Among producing ASX lithium companies (IGO, PLS, LTR, CXO, MIN, and AKE), AKE’s brine resource makes it the cheapest on an EV/Resource basis, and the stock is pricing in the lowest implied long-term lithium price, highlighting its undervaluation.
In short: the best large cap exposure to lithium brine assets.
Corum Group Limited (ASX: COO) $4.50 per share, $27m market cap
Corum is a software and payments platform company that services the pharmacy sector in Australia. It assists pharmacy owners to order products to stock shelves, manage inventory and pay suppliers (the major drug, healthcare and pharmaceutical companies).
Corum in the first half made $2.1m EBITDA of FY23 and reported $5.2m in cash on hand. At a $27m market cap this is an interesting opportunity in and of itself. However, add in a successful court case outcome against competitor Fred IT awarding Corum $8.1m (subject to appeal), and proceeds from last week’s sale of Corum’s loss-making Pharmacy Software Business for $6.25m, and you’ve got a deep value proposition. If you make the assumption that the Fred appeal is unsuccessful, Corum is trading on an EV/EBITDA multiple of just 1.5x this year… not bad for a profitable, defensive, healthcare technology company doing double-digit growth.
In short: an under-the-radar microcap opportunity
All figures in Australian dollars (1 AUD = 0.67 USD at the time of publishing)
IGO Ltd (ASX: IGO) $15.60 per share, $11.8bn market cap
IGO is a battery metals mining company focused on lithium, nickel, copper, and cobalt. IGO’s flagship asset is its 25% stake in the Greenbushes lithium mine in Western Australia. Greenbushes is the largest, highest grade hard rock lithium deposit globally. A reserve grade of 2.0% Li2O is significantly higher than peer projects which tend to be graded around 1.0-1.3% Li2O.
As the world scrambles to supply lithium to meet EV demand, IGO is benefitting from buoyant lithium prices, enabling capital investment into lithium downstream processing and nickel mine life extensions to be funded internally from free cash flow. Because of its grade and scale, Greenbushes produces lithium at a low unit cost which should prove more resilient than peers across the cycle.
In short: IGO has a stake in the best lithium mine in the world but is being priced in line with mediocre peers.
CSR Limited (ASX: CSR) $5.30 per share, $2.5bn market cap
CSR manufactures and distributes building products in Australia and New Zealand such as plasterboard, bricks and aerated concrete. Although cyclical, the business has historically generated a return on equity of ~15%. As the market looks through the interest rate hike cycle and sees new housing starts data is more resilient than expected, we expect building materials companies to outperform.
CSR trades on a forward P/E of 13x, below the ASX building material peer group average of 18x. This valuation discrepancy is exacerbated when you consider CSR owns property to the tune of ~$1.5bn. A fully franked dividend yield of 5.8% represents good value for investors. CSR’s strong balance sheet underpins the prospects of further capital returns going forwards.
In short: macro fears have CSR shares trading too cheap.
GQG Partners Inc (ASX: GQG) $1.41 per share, $4.2bn market cap
GQG is a global fund manager that has been oversold on the back of weaker market conditions. Despite challenging conditions, GQG has been able to generate net strong inflows with total funds under management increasing +12% to US$98.5bn calendar year-to-date. Selective bets on oversold US technology companies have strengthened fund performance and pricing is on the low end of the market, creating scope for further inflows, earning more high-margin revenue.
GQG trades on a forecast P/E of 10.3x and a dividend yield of 9.2%. Shares only have to trade sideways for us to enjoy a solid return from the dividend yield alone, however, GQG has scope to re-rate higher than (lower quality) fund manager peers who have suffered outflows.
In short: fund managers provide leverage to an uptick in market sentiment and GQG is best in class.
Australian Finance Group (AFG) $1.74 per share, $469m market cap
Australian Finance Group engages in the mortgage broking business in Australia. AFG is the #1 mortgage aggregator in Australia – an attractive market position. Its second business segment is AFG Home Loans, where it offers customers both AFG-originated loans as well as white labelling other lenders’ products. This enables AFG to sell high-margin home loans through its own platform and capture margin uplift.
AFG’s earnings have been depressed after major banks offered cashbacks to fiercely compete for new customers. These cashback offers are being withdrawn from the market so AFG should be well-poised to regain market share. The sell-off in the share price affords investors an opportunity to buy AFG shares on a forecast 7.4% dividend yield, fully franked.
In short: Analyst estimates are too bearish and AFG has been discarded as a low-quality non-bank lender which does not capture the value of the aggregation business.
Collins Foods Ltd (CKF) $8.48 per share, $995m market cap
Collins Foods, the operator/franchise owner of KFC, Taco Bell and Sizzler stores, has been hit by cost inflation in food input and labour prices and this saw shares drop from $10.50 a year ago to $8.48 today.
Despite the financial squeeze being felt in the household sector, quick-service restaurants typically perform well due to the low cost, time, and effort nature of fast food. KFC’s strong brand and differentiated market position have historically held the business in good stead through challenging economic environments. Recent high-frequency consumer data from Macquarie supported this, with total spending in restaurants and cafés remaining strong and fast-food spending remaining relatively stable.
CKF has been rolling out self-service kiosks with promising sales and take-up rates which should increase the capital efficiency of the business. Trading on under 9x EV/EBITDA, CKF is near a 5-year valuation low, which we feel is unjustified.
In short: Collins Foods offers defensive growth at a reasonable price with upside potential from earnings exceeding expectations.
Sarytogan Graphite (SGA) $0.29 per share, $42m market cap
Sarytogan Graphite hosts the world’s highest grade and third-largest graphite deposit located in Kazakhstan. The resource sits at 209Mt @28.5% TGC. Relative to graphite peers, this resource is undervalued. Despite Kazakhstan’s profile as depicted in pop culture, this is a jurisdiction with good access to infrastructure (electricity, water, etc.), people and favourable tax rates.
Graphite is the major raw material in all EV battery types. Unlike bulk commodities like iron ore which require a large amount of upfront capex investment, graphite projects such as SGA’s should result in robust economics when the company moves through feasibility studies. To date, SGA has achieved a graphite concentration of 99.87% total graphite concentration through metallurgical test work. Should they achieve a breakthrough to battery grade standards of 99.95%, shares should re-rate higher.
In short: SGA sits on a large graphite resource, and while undervalued relative to peers for now, catalysts could see shares re-rate over the next 12-18 months.
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Pilbara Minerals (PLS) $4.10 per share, $12.29bn market cap
Pilbara Minerals owns the Pilgangoora asset in the Pilbara, Western Australia, accounting for an estimated ~8% of the global supply of lithium. PLS unit costs for hard rock lithium production increased 5% to $600-640/t. A realised spodumene price of ~$4,800/t implies sky-high margins. The PLS share price implies a lithium price of ~$1,600 long-term, substantially below current market pricing (which has already fallen since the turn of the calendar year).
A $2.7bn net cash balance allows flexibility to increase processing capacity from the current 580tpa to 1Mtpa and fund the associated capex from internal cash flows. A maiden 11cps fully franked dividend is the first step in shareholder returns that should increase over time.
In short: High lithium prices due to EV demand structural growth enables producers in tier 1 locations (PLS) a license to print money.
Bluescope Steel (BSL) $19.69 per share, $8.76bn market cap
Bluescope Steel is a value-add steel manufacturer that was spun out of BHP in 2002. A recent 50% upgrade to guidance is instructive for investors, guiding to $700-770m for the second half of FY23 on the back of improved steel spreads. The current share buyback reflects management’s views that the stock is undervalued, which seems like a reasonable view given BSL trades on ~3x trailing EV/EBITDA compared to its 10-year average of 4.7x.
Almost half of Bluescope’s steel production comes from high-margin, value-add metal coating and painted steel. As a result, BSL’s group margins are higher than US peers. Recent painted steel transactions (e.g. Precoat) showcase upside for BSL on a sum of the parts basis.
In short: Strategic assets at a low point in the construction cycle at a reasonable valuation.
Monash IVF Group (MVF) $1.20 per share, $465mn market cap
Monash IVF is a leader in the field of human fertility services, including IVF procedures. With ~20% market share in Australia, MVF is successfully expanding into Asian markets such as Singapore, Malaysia and Indonesia. MVF trades on an undemanding valuation of 9.8x forward EV/EBITDA versus competitor Virtus, which got acquired on a 12.4x multiple from private equity firm Capvest. Applying the same multiple to MVF would imply a $1.60 share price.
Why would private equity be interested in the sector? Earnings are defensive and independent of the economic cycle and high-value products (expensive procedures, price inelastic demand) mean high margins. MVF has achieved consistent EBITDA margins that have hovered between 22% to 27% over the last 11 half-year reporting periods. Adding fertility clinicians plus the resumption of elective healthcare procedures should provide nice earnings growth tailwinds.
In short: MVF has multiple upside levers with strategic interest in the sector, growth tailwinds and supported by a ~4% fully franked dividend yield.