Morningstar's top undervalued picks for the end of 2024
Morningstar's quarterly outlook shares a number of undervalued tips - but do you agree on the potential?
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Mentioned
As we race into the end of the year and the market surges to record highs, who doesn’t want a solid undervalued stock pick? Morningstar has again released its outlook for the quarter along with those stocks it believes are undervalued.
Across the sectors, it is seeing plenty of value in energy, along with consumer, healthcare, technology and communications sectors.
While Morningstar releases three picks per sector, for ease of investor research, I've narrowed it by which stock has the highest rating per sector and failing that, the best Price/Fair Value.
Company name | ASX code | Sector | Current share price | Morningstar's
fair value estimate | MI broker consensus tool |
|---|---|---|---|---|---|
Nufarm | NUF | Basic Materials | $3.76 | $7.70 | Hold |
Nine Entertainment | NEC | Communication Services | $1.25 | $2.70 | Buy |
Kogan | KGN | Consumer Cyclical | $4.78 | $10.70 | Sell |
IDP Education | IEL | Consumer Defensive | $13.00 | $23.00 | Buy |
Woodside Energy | WDS | Energy | $24.93 | $45.00 | Buy |
Insignia Financial | IFL | Financials | $3.03 | $3.60 | Sell |
Ramsay Healthcare | RHC | Healthcare | $42.58 | $62.00 | Hold |
Aurizon Holdings | AZJ | Industrials | $3.50 | $4.50 | Hold |
Dexus | DXS | Real Estate | $7.49 | $10.60 | Hold |
Fineos | FCL | Technology | $1.40 | $3.10 | Not covered |
APA Group | APA | Utilities | $7.63 | $9.30 | Buy |
Source: Morningstar, Market Index at 16 October 2024.
When you consider broker consensus, using Market Index's consensus tool, only four of these tips are ranked as a Buy, while two could be considered contrarian and sit as a Sell.
The contrarian picks
Kogan (ASX: KGN) and Insignia Financial (ASX: IFL) feature as top undervalued picks for Morningstar.
Source: Market Index, 17 October 2024
Kogan had a strong 2024, returning to profitability, but brokers are still wary.
Morningstar analysts Angus Hewitt, CFA and Johannes Faul, CFA believe the market is too focused on soft trading conditions.
"We expect revenue growth to reignite as consumers buy more online and fiscal stimulus boosts household incomes. We forecast solid gross sales growth from fiscal 2025, averaging 7% per year over the next decade," they said.
Source: Market Index, 17 October 2024
Insignia Financial (previously known as IOOF) is an interesting call from Morningstar.
After all, it was fined $10.7 million by APRA earlier this year for failing to put customer funds into default MySuper products and expects a significant increase in remediation costs for legacy quality of advice issues. It also underwent a significant transformation of its operating model and announced losses of $185 million in August this year.
Morningstar's analysts argue revenue will decline in the long term, but "at a manageable rate".
So, what are the positives here?
Analysts Nathan Zaia and Shaun Ler believe there is still room to remove costs and duplications for scale efficiencies. They also argue that the market underestimates Insignia's ability to stabilise its earnings.
"As administered funds increase, cost synergies are extracted, and operating margins stabilise, debt serviceability should improve, enabling greater shareholder distributions," they said.
"We think the odds of multiple expansions are good at current prices, particularly if outflows lessen, margins stabilise, and dividends are promptly reinstated."
Consensus 'Buys'
Morningstar's picks Nine Entertainment (ASX: NEC), IDP Education (ASX: IEL), Woodside Energy Group (ASX: WDS) and APA Group (ASX: APA) are also consensus 'Buys' on Market Index's Broker Consensus tool.
Source: Market Index, 17 October 2024
It's been a bloodbath for Nine this year with substantial job cuts and a profit hit on its ad business. CEO Mike Sneesby also stepped down at the end of September.
Morningstar believes the current prices adequately reflect the risks on the company's horizon such as the persistent advertising recession. However, they note that concerns are offset by the broadcast streaming offering, a subscription video-on-demand service and 60% ownership of Domain (ASX: DHG).
Source: Market Index, 17 October 2024
Tighter immigration and visa setting hit IDP Education over the year, and Morningstar expects this to continue.
Analysts Hewitt and Faul believe IDP Education will continue to take market share from other players and benefit from the long-term demand for higher education.
"It remains a high-quality operator, boasting superior average student visa approval rates, and is a part-owner of one of the world's most recognised and trusted certifiers of English proficiency," they said.
Source: Market Index, 17 October 2024
Morningstar believes the hard-hit energy sector offers a number of value opportunities, pointing to Woodside as an example.
It has a number of meaningful developments underway and analyst Mark Taylor sees plenty to like in the outlook.
"Woodside’s balance sheet is conservatively geared to support a strong 80% dividend payout ratio and healthy, fully franked yield, despite capital expenditures," he says.
Livewire's Ally Selby recently interviewed Woodside's CEO Meg O'Neill - you can watch the interview here.
Source: Market Index, 17 October 2024
Morningstar's Adrian Atkins expects APA Group to benefit from the transition to renewables.
"We expect ongoing investment in wind and solar farms while its core gas transmission networks benefit from growing gas use to back up intermittent renewable power supply," he said.
He also notes that APA is supporting remote mines in Western Australia to replace diesel generators with options like solar panels, batteries and gas turbines.
