2 stocks for the next 12 months: Morgan Stanley

A new note from Morgan Stanley's analyst team of James Bayles, Joseph Michael and Chenny Wang has expanded on its list of six key picks from the August 2023 reporting season which they believe can outperform over the next 12 months, adding two additional stocks. 

The original key picks (in order) are:

• Lovisa (ASX: LOV)

• IPH (ASX: IPH)

• Life360 (ASX: 360)

• Propel (ASX: PFP)

• Dicker Data (ASX: DDR)

• Eagers Automotive (ASX: APE)

1. The Reject Shop (ASX: TRS) 

While being a leader in discount retail might suggest it offers defensiveness, that's not the attraction for the analyst team. They do note that The Reject Shop has been underperforming in a niche area that has been hugely profitable in overseas markets. Bayles, Joseph and Wang focus on evidence of improved cost discipline and better comparable sales growth in a softer consumer environment. They note the new management team at The Reject Shop feels that the comparable sales are sustainable. 

"If that is the case, we expect delivery of consensus earnings (A$15.8m EBIT in FY24) and scope for margin expansion over time," said Bayles, Joseph and Wang.

So what’s the catalyst for their upbeat view? Sustained comparable sales growth implies earnings upside, with improved store economics, and ultimately the potential for further store roll-out. They note that the next data points to demonstrate this will be the AGM update (18 October), and Xmas trading. 

The Reject Shop 12-month price chart (Source: Market Index)

There are some risks to this performance. There could be gross margin headwinds from a softer A$ and the strong traction in consumables implies. They believe this could be potentially offset via stronger general merchandise sales. The analysts note they'll be keeping their eye on the discounting strategies of The Reject Shop's competitors in key categories. 

They have a share price target of $6.40 on The Reject Shop. 

2. TUAS Ltd (ASX: TUA) 

Originally formed from the TPG Singapore assets and spun out following the 2020 merger between TPG Telecom (TPG Australia) and Vodafone Hutchison Australia in June 2020, the Singapore mobile business, TPG Telecom Pte Ltd (TPG Singapore), Morgan Stanley's analyst team call out the journey to a full-service telecommunications company in Singapore. 

They like the mobile subscriber momentum with TUAS currently having around 10% share of that market. They also see potential in the launch of TUAS' broadband offering in 1H24. They also like the strong EBITDA margins of 36% supporting this growth. As Bayles, Michael and Wang note:

"TUAS is using the same strategy (as TPG in Australia) of aggressive pricing, vertical integration and cost control to disrupt incumbents, under the leadership of founder David Teoh (who owns 36% of the issued shares)," the analysts said. 

Tuas 12-month price chart (Source: Market Index)

They also think that TUAS can self-fund growth plans with net cash of S$40m+ and that the company is approaching a free cash flow break-even point in FY24.  

They have a share price target of $2.40 on TUAS. 

This article was originally published for Livewire Markets on Thursday, 5 October 2023.