The Fed put rate cut expectations to rest on Thursday, with Powell saying that “participants don’t see rate cuts this year. They just don’t.”
Powell’s comments triggered a sharp reversal for the S&P 500, from +0.9% before the press conference to a -1.65% close. We’re seeing that weakness flow through for the ASX 200, currently down 0.90%.
Morgan Stanley expects continued volatility for stocks under its Technology, Media & Telecom (TMT) coverage universe as “interest rates are not done rising and economic growth is slowing.”
“At this point of the cycle, investors should focus on high-quality names, with positive FCF, strong balance sheets,executing to plan, with a clear path for profit growth and value creation.”
The investment bank published over 30 reports and 1,000 pages of research during the recent February reporting season and today highlights what it considers to be its 10 most thought provoking ideas.
“We think Wisetech’s pricing power/revenue growth is underestimated … “CargoWise” has contributed to a major lift in profits for one of the world’s largest global freight forwarders, DSV.”
Cargowise has enabled customers to lower costs and improve efficiency, which should “underpin rising use by existing and new customers for the software … and supports our above-consensus forecasts.”
The strength has been reflected in Wisetech’s share price performance – up around 30% year-to-date and currently 3% off all-time highs.
“We think the market is missing the potential for a meaningful uplift in SEEK Asia over the next two to three years. Our base case has EBITDA rising from A$80-90m in FY23e, up to A$170m in FY26e.”
To add some perspective, Seek posted $509m in EBITDA for FY22.
“We see multiple ways Telstra could unlock extra value for shareholders from the InfraCo portfolio … one of these is the possible securitisation of InfraCo’s 25 years worth of NBN receipts.”
“REA/DHG are now set for healthy price increases for FY24e, leaving the key debate .. When and how will ad listings recover? Consensus is looking for a V-shaped recovery .. we think it will be more U-shaped.”
REA notes that January National residential new listings were down 9% year-on-year, with Sydney listings decreasing 16% and Melbourne down 15%.
In a more recent update from CoreLogic, for the four weeks to 5 March 2023, the volume of new listings was down 15.4% year-on-year and 12.7% lower than the previous five-year average.
“What does Xero have to do to get a re-rating from current 7x EV/sales to peers on 12x?”
Morgan Stanley views the recent layoffs as incrementally positive and now the market is waiting to see what kind of growth rates the company can muster up in FY24-25.
“To secure a re-rating from here, Xero needs to maintain high teens/20% revenue growth .. and progressively lift FCF margins,” the analysts said.
“As global OEMs deliver more supply to Australia, we expect a period of catch-up, with new car sales positive in 2023-24 .. We think the market underestimates Carsales’ AU pricing power.”
Australia contributed approximately 58% to Group EBITDA in the first half of FY23. Since 2019, new car sales have only increased 2% while vehicle inventory has declined 6%.
There was also the view that the move to acquire 70% of Webmotors in Brazil as 5% earnings per share accretive by FY25, to underpin a three year earnings compound average growth rate of around 15%.
“Our top pick [in the advertising market] in this group is NEC, helped by our analysis that shows NEC is winning market share in the free-to-air TV and broadcaster video on demand (BVOD), which adds more operating leverage when the ad market eventually recovers.”
Morgan Stanley expects the BVOD ad market to remain positive during the current downturn but unable to offset the falls in the TV ad market.
“Our analysis shows NSW is much less exposed to the current downturn in advertising vs. previous cyclical calls.”
Morgan Stanley notes that News Corp’s revenue today are more digital and subscription based, making it less vulnerable to the ebb and flow of the ad cycle.
“Have PEXA shares been oversold? Yes, we think so.”
PEXA made its ASX debut on 1 July, 2021 at an offer price of $17.13 per share. The stock is currently down 28.5% from its offer price and down -26.6% in the past twelve months.
The performance of Pexa’s Australian business for the first-half of FY23 was stronger-than-expected, according to Morgan Stanley. But the stock has slumped around 6% since the result compared to peers such as REA Group and Domain, which are up between 7-9%.
“We think it is due to the continuing operating losses in the UK start-up business, and higher ongoing investment. If you value the UK asset at zero, the rest of PXA is trading on 15x FY23e EV/EBITDA vs. real estate-linked peers REA on 25x and DHG 19x.”
“We understand the common "bear thesis"...its growth rates have slowed, it isa capital-heavy business, with a long development pipeline, higher interest rates crimp future returns and the shares trade on 29x FY24e EBITDA multiple.”
Despite the long list of bearish reasons, NextDC shares are up 9.7% year-to-date. Instead, Morgan Stanley opts for a more positive view, with expectations that the company will continue to add to its data centre development pipeline and a step-up in earnings growth rates for FY24-25.
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