Broker Watch

Morgan Stanley says this is the ASX stock to watch if M&A activity surges in 2024

Tue 26 Mar 24, 10:53am (AEST)
M&A unsplash
Source: Unsplash

Key Points

  • Most of the major banks will be fighting margin pressures and increased R&D costs to stay ahead on earnings
  • Morgan Stanley is directing most of its attention towards capital market activity.
  • Its two favoured plays on the ASX eye global activity and increased CGM revenues - but neither of them are the ASX itself.

There is no question that Australian investors love their financial sector investments. And why wouldn’t they? Chunky dividend yield, healthy share price appreciation (in most cases), and in the case of the Big Four, dominant market shares. But there is also no question that valuations at most of the major names are difficult to reconcile. For instance, depending on the measure you look at, Commonwealth Bank (ASX: CBA) is one of the world’s most expensive publicly traded banks. 

That’s why Morgan Stanley’s sell-side team is focusing its attention elsewhere. They say that 2024 will likely see a huge rebound in M&A activity here in Australia and around the world. And we’ve already seen some evidence of that - Altium, Boral, Costa Group, and CSR to name a few.

In this wire, we’ll look at their views on the M&A landscape - and the companies which are best and worst suited should this base case become reality.

A banner year for M&A?

Morgan Stanley’s global equities team recently took a look at the key issues which will likely affect stocks this year - and the big takeaway is the return of M&A activity in a big way. 2023 was, cyclically and structurally, one of the slowest years for takeover and privatisation activity in decades. 

MS Global M&A
Source: Morgan Stanley

And although Australia’s market may comparatively lag global volumes, deal announcements could rise by as much as 50% by year’s end.

“We see an "M&A drought" ending in Europe and Australia, while Japan continues a structural shift towards greater corporate activity,” analysts led by Andrei Stadnik wrote.

What factors are Morgan Stanley looking at?

To inform this view, Morgan Stanley eye a range of leading indicators which could suggest the M&A rebound is for real:

  • Every major global equity market index is up year on year (ex Hang Seng)

  • VIX is 43% lower and FX volatility is 32-43% lower year-on-year

  • Lending conditions are improving with spreads moving lower, high yield issuance is up 91% year-on-year, liquidity is improving and corporate cash levels are higher

  • While interest rates remain elevated, greater clarity on a Fed pause or potential rate cuts should drive activity higher

  • Deal announcements have already inflectioned, up 36% year-on-year; we expect announcements to continue accelerating and completions to follow; and

  • CEO confidence and business conditions are improving. Our global view is that two years of extraordinarily weak M&A activity should drive up activity levels off a low base as CEO confidence builds.

Meanwhile, in Australia…

These next two charts are a great example of why Australian M&A is due for a rebound specifically. Australian M&A activity had fallen last year to a percentage of market capitalisation levels comparable to that of the US. But with rate cuts on the horizon and the corporate maturity wall less scary than feared (at least for now), the case is there for more capital raising and takeover offers. 

MS Australia M&A
Source: Morgan Stanley

Which companies benefit?

OVERWEIGHT: Macquarie Group (ASX: MQG) – “We forecast 27% NPAT growth in FY25E or 10% ahead of consensus on strong operating leverage, as we think consensus is missing the operating leverage from a revenue recovery. We raise our price target to $225.00, but it would rise a further ~16% if FY25E NPAT were to rise by 10% and target P/E rise by 1x.”

UNDERWEIGHT: ASX (ASX: ASX) – “We remain UW on the ASX as we think the stock is too expensive given our expectation of broadly flat earnings growth over the next three years, plus the additional execution and regulatory risk around the CHESS replacement and additional future tech development. ASX has also recently re-rated from 22x to 26x FY25E P/E versus global peers which are on 21x.”

THE WILD CARD: ComputerShare (ASX: CPU) – “If margin balances recover to record levels and/or if CPU successfully deploys its balance sheet to buy EBITDA growth. We expect flat EBITDA growth in FY25E, but management [expects] profit growth of around 7%, with growth mostly coming from lower interest expenses. In FY25E, our base case bakes in a US$50 million fall in margin income, partially offset by US$15 million of EBIT ex-margin income recovery from a capital markets rebound.”

*Note: Morgan Stanley has no rating on ComputerShare because it has recently acquired the European Public Equity Employee Share Plan Business of Morgan Stanley. Morgan Stanley continues to offer its wealth management and financial education services to transferring clients’ US participants should they seek financial advice and guidance.

Written By

Hans Lee

Senior Editor

Hans is one of the Senior Editors at Livewire Markets and Market Index. He created Signal or Noise and leads the team's coverage of the global economy and fixed income markets.

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