MoneyTalks: Morningstar reckons this ASX stock could be a half-price bargain

Money Talks is Stockhead’s regular recap of the ASX stocks and sectors that fund managers and analysts are watching and think could be a bargain for investors.

Today, we hear from three analysts at Morningstar – Adam Fleck, Gareth James and Angus Hewitt.

Last week Morningstar released its Best Stock Ideas for January which highlights ASX stocks trading below their fair values.

The trio each cover an ASX stock Morningstar assesses to be trading below fair value. One analyst’s pick is currently trading close to 50 per cent his target.

Stockhead spoke with each of them about why their ASX stock is below fair value and what will be catalysts for improvement.

A2 MILK (ASX:A2M)

This ASX stock is less of a bargain than it was back in 2015 – if you had a crystal ball.

A2 listed at $1 per share and rocketed to become the ASX’s largest dairy stock. The key catalyst was global demand for its products, particularly in China.

At $10.73 it is still a multi-bagger but well off highs seen earlier this year.

“From our perspective the long run growth story… I don’t think has changed. There’s still a really strong brand name, premium pricing, opportunities within the Chinese market,” Morningstar’s Adam Fleck said.

However, Fleck admits the company has had some challenges this year with disruptions in the daigou market – particularly corporate daigou.

“When Melbourne locked down, one of its largest [daigou] customers wasn’t able to operate and A2 couldn’t get a lot of its products into China,” he explained.

A2 has managed some penetration onto online platforms such as Alibaba. But levels are insufficient to offset daigou problems, particularly since it had to heavily discount its products to be competitive.

A2 Milk is also spending money in an attempt to get the daigou channel back up and running again.

“All that is leading to lower revenue growth than A2 expected and some margin hit in the near term,” Fleck said.

“They’re going to hit their margin a bit, sacrifice revenue and profitability in the near term to get back on track which I think they’re going to do and get back to a good growth trajectory.

“But the market of course is still very focused on that near term outlook.”

Morningstar’s Fair Value Assessment for A2 Milk is $15.20 – making the current price a discount of around 25 per cent.

A2 Milk (ASX:A2M) share price chart

G8 EDUCATION (ASX:GEM)

This company is in childcare – one of the worst affected sectors during the market crash in March last year.

“There were a lot of concerns back then about the childcare sector in Australia and a lot of concerns that they might not even survive – that we’d see a lot of bankruptcies,” Gareth James told Stockhead.

However while investors feared a worst case scenario, this did not eventuate.

“The federal government came out and invested a range of support packages for the sector and the economy has rebounded since them,” James said.

“So the situation for G8 has improved and we’ve seen a rebound in the share price from under 50 cents to over $1 now so they’ve more than doubled from their lows.

“But we think it is still worth more than that and eventually investors will see the profit rebound come through for the company and that the shares will be worth more [then].”

Morningstar’s Fair Value Assessment for G8 is $2.20 – making the current price a discount of approximately 46 per cent.

G8 Education (ASX:GEM) ASX share price chart

INVOCARE (ASX:IVC)

When COVID-19 hit you would’ve be forgiven for thinking an ASX funeral stock was a safe haven.

But in Australia, this wasn’t the case. Not just because of Australia’s low number of COVID-19 deaths but also because of an unusually low level of flu deaths thanks to social distancing measures. Restrictions of funeral numbers didn’t help either – but it did make the ASX funeral stock a bargain, according to Morningstar’s Angus Hewitt.

Hewitt thinks these are just short term issues.

“At current prices, InvoCare presents compelling value compared with our fair value estimate,” he told Stockhead.

“Death is one of few certainties in life. While death rates can fluctuate from year to year, they are very consistent over the long run.

“Mortality rates are a function of the population size, average age, and average life expectancy.

“The death care industry demand is underpinned by Australia’s ageing population, and we expect the number of deaths to grow at an average CAGR of around 2% per year for the next decade, accelerating beyond 2030.”

And Hewitt expects InvoCare will dominate the industry for years to come.

“We estimate InvoCare already enjoys a revenue share of over a third in Australia as the largest provider of funeral, cemetery, and crematorium services,” he declared.

“The company boasts well-known, highly respected brands and cost advantages over the long tail of smaller players in the highly fragmented death care industry, underpinning our wide economic moat rating.”

Morningstar’s Fair Value Assessment for Invocare is $15.30 – making the current price a discount of 24 per cent.

Invocare (ASX:IVC) share price chart

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.