With the pace of inflation on the way down and interest rates set to follow, this year is expected to favour investors who can sniff out a good deal early. Professional stock pickers the Herald has spoken to in the past month believe some companies are under-valued on our share
Pro Stock Picks 2024: Ryman, Sky TV are in as tech and health named trends to watch
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Forsyth Barr senior equity analyst Aaron Ibbotson said his firm was picking under-valued NZX-listed companies that could execute improved earnings this year, such as retirement village operator Ryman Healthcare.
“We believe Ryman to be the most attractive mid to large-cap opportunity in New Zealand over the coming 12 months,” Ibbotson told the Herald.
“Poor care funding, lack of staff and falling house prices and turnover has presented Ryman and the sector with severe headwinds over the last 24 months, but these have all turned positive over the last six months.”
Add to that, Ryman’s valuation, which Ibbotson said was at a record low compared to its peers and trading below book value.
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Craigs Investment Partners saw the same upside emerging but were backing a different horse in Summerset.
“It too will benefit from an eventual move lower in interest rates, as well as a more stable housing market,” Craigs’ head of private wealth research Hamish Don said about the stock.
“Summerset is a leading player in our retirement sector and its operational performance has been excellent.”
The company was Nikko Asset Management’s biggest overweight position in the new year - it planned to hold it long-term.
“Summerset has the largest landbank and development programme of the listed retirement village operators in New Zealand.
“[It] has set itself apart from others in the sector and is market leading from an operational performance and financial management point of view.”
Property featured in four out of five firms’ picks, with Hamilton Hindin Greene favouring private hospital owner Vital Healthcare Property Trust.
“With interest rates looking to be at or near highs, we expect the interest rate headwind to subside in 2024. This should help the listed property sector as a whole,” investment adviser Jeremy Sullivan said.
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“We believe Vital is well placed with long-term leases in defensive areas.”
There were a couple of shared favourites in Sky Network Television and Contact Energy.
The latter was a play on the renewable energy investment trend that’s seeing new solar farm developments announced almost every week.
“Contact Energy has a major development programme underway - replacing thermal generation with renewable generation,” a Nikko spokeswoman said.
“This will result in strong earnings and dividend growth over coming years as high-cost thermal generation is replaced with low-cost renewable generation.”
For Craigs, Contact was a defensive decision. Power was an essential service, so its finances were likely to be fine in a weaker economy, Don said.
Sky was where the value game came in - both Craigs and Nikko expected a turnaround in its share price over time, helped by an expected higher dividend payout.
“Nikko are fans of Sky Television due to its material upside to our internal valuation.
“Key sports content secured over the medium term, a strong balance sheet, and near-term targets provided by the company should lead to doubling of the dividend in three years.”
Sky entered into takeover talks in 2023, but the discussions were canned before the mystery bidder was ever revealed.
A potential sale is what’s attracted Salt Funds to Tower Insurance.
The insurer is undergoing a strategic review, which may include a sale and de-listing from the New Zealand Stock Exchange (NZX).
It’s what Salt’s managing director Matt Goodson called “major one-off upside” for a stock that was “very cheap”.
Tower reported a net loss of $1.2 million in the last financial year due to Cyclone Gabrielle and the Auckland floods. However, it collected 19 per cent more in insurance premiums, which Goodson said was exceeding its inflated claims costs.
Another cheap find was Freightways, owner of NZ Couriers, he said.
“[It’s] well off highs due to domestic economic pressure; now very cheap.”
He noted there was a risk its earnings were downgraded again, however, he believed that was already priced in.
In another case of low expectations, Forsyth Barr thought infant formula maker the a2 Milk Company was well positioned for solid earnings growth from here.
“After three tough years we believe market expectations are sufficiently low for ATM,” Ibbotson said.
His assessment was based on its brand awareness being high among consumers, with its social media following bigger than its competitors.
A challenge for a2 to date was a declining birth rate in its major market China, and while Ibbotson expected this to continue in 2024, he said data showed some greenshoots appearing.
One of the best performing stocks of 2023, Infratil, is a popular pick again this year following the valuation of its Australian data centres soaring.
The infrastructure investment company which owns One NZ (formerly Vodafone) bought a 48 per cent stake in Canberra Data Centres for A$392m ($421m) in 2016 - in October it was independently valued at A$3.64 billion.
Its share price rose about 18 per cent last year.
“Their portfolio companies are well run by high quality management with clear strategies for value creation,” Nikko’s spokeswoman said.
Nikko’s other infrastructure pick was major telco Spark.
“Spark are a dominant incumbent in most of the segments they operate and as a result tend to deliver reliable earnings.”
Out of all the picks, only one was a small-cap.
Forsyth Barr said AFT Pharmaceuticals, the creator of Maxigesic painkillers, was one to watch, as this year could mark an inflection point in its earnings.
“[This year] also offers catalysts in the form of solid first time US Maxigesic IV [intravenous] sales, and the launch of Maxigesic Rapid tablets in the US.”
Across the ditch
Forsyth Barr and Craigs Investment Partners expected the rising popularity and prospect of GLP-1 weight-loss drugs like Ozempic and Wegovy, which dominated market commentary last year, would not stick around.
For that reason, their single Australian Stock Exchange picks for the purpose of this article, were sleep apnea device company ResMed, and rare disease treatment company CSL Limited, respectively.
Ibbotson said ResMed’s share price was down more than 30 per cent in mid-January as investors assumed its earnings would be impacted by the boom in weight-loss drugs which may result in improved sleep.
“We believe these [earnings] risks to be significantly over-exaggerated,” he said.
“The sleep apnea market is so large and undiagnosed that multiple forms of treatment may not see any change in demand for RMD’s [products].”
ResMed’s recent second quarter financial result showed an increase in margins amid a moderation in sales growth, according to a JP Morgan analyst research note on the stock.
Don from Craigs agreed the sell-off in such stocks, like CSL, was overdone.
“[We] view CSL as a quality company with compelling growth prospects.”
The other stock-pickers, Salt Funds, Nikko and Hamilton Hindin Greene all chose technology as the trend to back in Australia.
Salt likes Telstra because of tailwinds in the mobile market, Nikko liked data centre developer NEXTDC and Hamilton chose WiseTech Global, which offered a technology solution to the freight industry.
“The logistics industry currently operates with a relatively low level of digitisation, but we see the process of digitisation as largely inevitable,” Sullivan said about WiseTech’s prospects.
“Recent uncertainties in global logistics further highlight the benefits of their product.”
Going global
Despite a brighter outlook for domestic markets, Ibbotson said he expected global markets to likely outperform again this year.
Both Forsyth Barr and Nikko analysts were eyeing streaming services for potential pay off in the United States.
Nikko liked Netflix with its 232 million paying subscribers, while Forsyth liked the Walt Disney Company with its 150 million Disney+ subscribers - 60 per cent the size of Netflix’s audience.
“Valuing Disney’s streaming business on half the value of Netflix would put the rest of Disney at below 10x PE (price to earnings ratio),” Ibbotson said.
The Disney+ platform made a US$2.7b ($4.4b) loss in 2023, but Forysth expected that to recover this year to reach at least break-even, with profitability to follow.
“This turnaround alone drives strong earnings growth for Disney.”
In contrast, Netflix executed 12 per cent year-on-year subscriber and revenue growth in the financial year just ended, with sales totalling US$33.7b after increasing prices and cracking down on account sharing.
Its management team expected to achieve double digit revenue growth again this financial year.
Nikko Asset Management’s global equity team in Edinburgh, Scotland, believed the content company was “on the cusp of a significant shift in their subscription model”, with an assumed 30 per cent of shared accounts to convert to its cheaper service with ads.
“If people trade down, this is a net positive for revenue,” its note on Netflix upon adding the stock to its holdings read.
Staying with the technology trend, Craigs opted for Amazon - a company it called “best-in-class”.
“Its retail business continues to win market share and Amazon Web Services (AWS) will benefit from ongoing advancements in artificial intelligence.”
Healthcare featured again too, with Hamilton Hindin Greene’s defensive pick Johnson & Johnson (J&J).
“The company maintains a diverse revenue base, a developing research pipeline, and exceptional cashflow generation that together create a wide economic moat,” HHG’s Sullivan said.
“Diverse healthcare segments help insulate J&J from downturns in the overall economy.”
He noted it had specialty drugs in its development pipeline too.
Salt Funds was backing a valuation play in the US with American Tower, a company that leased communication sites in America and beyond.
“Higher bond yields have impacted the share price, creating an opportunity,” Goodson said.
Disclaimer: The information in this article is of a general nature and not intended to be personalised financial advice. Pro Stock Picks is a revamp of the Herald’s Broker’s Picks game. The stock picking panel included Forsyth Barr, Craigs Investment Partners, Hamilton Hindin Greene, Nikko Asset Management and Salt Funds Management. The participants revealed their stock picks in January, ahead of the United States and domestic earnings seasons. We will revisit each firm’s picks mid-year and at the end of the year, to see how they performed.
The Pro Stock Picks panel included Forsyth Barr, Craigs Investment Partners, Hamilton Hindin Greene, Nikko Asset Management and Salt Funds Management.
The participants revealed their stock picks in January, ahead of the US and domestic earnings seasons.
Other firms ANZ Investments, Jarden, Milford Asset Management and Fisher Funds declined to be involved.
Get investment insights from the experts on Markets with Madison every Monday and Friday on the NZ Herald.
Madison Reidy is the host of the NZ Herald’s investment show Markets with Madison. She joined the Herald in 2022 after working in investment and has covered business and economics for television and radio broadcasters.
