Money Talks: 3 ASX stocks trading well below their fair value
Money Talks is Stockhead’s regular recap of the ASX stocks and sectors that fund managers and analysts are watching.
Today, we hear from three analysts at Morningstar – Brian Han, Matthew Hodge and Mark Taylor.
Earlier this week Morningstar released its Best Stock Ideas for November which highlights ASX stocks trading below their fair values.
The trio each cover an ASX stock Morningstar assesses to be trading over 50 per cent below fair value.
Stockhead spoke with them about why their stock is below fair value and what will be catalysts for improvement.
This company runs radio stations including the Triple M network.
It is reliant on advertising revenues – an easy target for firms looking to cut costs amidst COVID-19.
While the stock has not recovered since it crashed in March, Morningstar reckons it’s fair value is 38 cents. This would make the current discount 53 per cent – although it is currently undergoing a share consolidation.
Morningstar’s Brian Han didn’t find it difficult to see why it had fallen, naming three reasons.
“I think it’s sort of fallen off the radar a bit from the institutional funds. I think people are still worried about its balance sheet given the weak advertising environment,” he said.
“And I think people are worried that radio in general will be badly disrupted by digital technology.”
But Han thinks the demise has been greatly exaggerated noting all three concerns could easily be refuted.
“The balance sheet has been fixed, the capital raising back in April and the recent update shows the leverage is below covenant levels,” he explained.
“Once you accept the balance sheet is OK and this thing’s not going to go out the backdoor you look at the upside.
“When I look at the upside – advertising markets are improving in the sense that instead of monthly revenues going down 40 to 50 per cent from March to June-July, it’s potentially down only 10-20 per cent in recent months and it’s still improving. So that’s a good sign for Southern Cross’ business.
“And then longer term I think this concern about radio being disrupted by digital technology. Over the last decade or two radio has proven to be quite resilient to digital disruption.
“The share of radio advertising and the total advertising market – radio’s share has consistently stayed at that 8 per cent level over 10 years despite all that digital advertising growing.”
This coal stock has the most extreme discount of all the stocks on Morningstar’s list. Morningstar estimates WHC is below fair value by 67 per cent.
Matthew Hodge says this business has been through several up and down cycles almost in sync with the thermal coal price.
“At the moment the thermal coal price is not doing well and there’s a few reasons for it,” he explained.
“You’ve had COVID which impacted demand, the gas price which is presently low, and so is the oil price. They’ve been headwinds to demand for coal.
“If you look at price where it is relevant to the cost curve, there are very few mines exporting coal that are making money.”
But Hodge thinks current prices are unsustainable as supply comes out of the market and thinks Whitehaven will improve.
“The market is particularly concerned about the short term earnings outlook and there’s no doubt the short term earnings outlook is poor,” he said.
“Whitehaven does have some debt, which is why the share price is where it is, but it has reasonable assets as well. It’s a company that’s been through cycles and it’s better placed than it was in the last downturn – which was in 2015.”
Mark Taylor covers the petroleum giant which, similar to Whitehaven, has lagged thanks to weak commodity prices.
Morningstar’s assessed fair value is $44.60 – and this ASX stock is trading at a 61 per cent discount to that.
“Fundamentally it’s a function of our oil price expectations versus the market,” Taylor explained.
“If you plug [US]$40 per barrel into our model you come up with a number not dissimilar to the share price.”
“But if you put $60 per barrel in you get higher you get our fair value assessment. And $60 is the level we see necessary for shale producers in the US, who are the swing producers globally, to be incentivised to produce the oil that’s going to be required to meet demand once COVID-19 settles down.”
Morningstar is forecasting the market will come “back into balance” in 2021-2022. But it won’t simply be a case of sitting and waiting for Woodside.
“On top of that [oil price assumption] we also have expansions assumed in our model,” said Taylor.
“The most important model of that is assuming the construction of a second LNG [processing] train at Pluto which is worth $7.50 per share of our fair valuation – not huge but without that you chop $7.50 or so off.
“And we also have a lump sum in there for undeveloped reserves and resources.”
Taylor named the Sunrise and Shwe Yee Htun gas fields off the coast of East Timor and Myanmar respectively as promising prospects.
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead.
Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.