The recovery from 2020’s “massive period of turbulence” hasn’t lifted all boats, and there are still plenty of bargains to be had if you know where to look.
Gareth James, Morningstar’s Sydney-based equity research strategist, expects Link Group, for instance, to bounce back from “a tough few years” of regulatory changes and the loss of several mandates, with investors still underestimating the resilience of its business providing tech and admin services to big super funds.
“We think in the long-term Link is going to be a winner in the superannuation administration space, because we think its customers – the major industry super funds – will ultimately dominate the superannuation industry,” James told the research house’s annual Australian investment conference for advisers last week (June 2-3).
“The other aspect that’s in the media at the moment is the fact that Link has a 44 per cent shareholding in PEXA, which has basically got a monopoly in the conveyancing space in Australia and is probably going to list in the next couple of months or so. We don’t think that value is fully reflected in Link’s share price currently.”
Link is currently trading at $5.09, with Morningstar saying the stock is “materially undervalued” compared to its $7.70 fair value estimate. Link’s main rival is Computershare, the largest provider of registry services in the world, which poses a “material threat”.
Brian Han, Morningstar senior equity analyst, named TPG, one of only three vertically integrated telcos in Australia with strong market positions in broadband, mobile and corporate telecommunications, as his top pick, with the stock currently trading at $5.20.
“The reason it’s trading at such a big discount to our $7.40 fair value estimate is because the NBN and covid have punched a big hole in its earning space,” Han said at the conference.
“The competition across the industry over the past two to three years has been relentless, and probably the worst that we’ve seen for a long, long time.”
But he believes that the worst of the damage from the NBN is over, while covid-related earnings hits are temporary. And while TPG was still reeling from the shock departure of David Teoh, the chief executive, in 2020 – with Han conceding that the loss of Teoh’s “entrepreneurial spirit” would hurt the group – it would likely benefit the industry in the long term.
“David Teoh made his name and his fortune by being the most aggressive discounter in all the businesses that he ran. So, perversely, his departure from the industry may, actually, ease competitive intensity further and improve the return for the whole industry going forward,” Han said.
Another stock in the spotlight is Southern Cross Media, which is “very undervalued” despite dominating the commercial radio industry with an advertising share of 30 per cent in metro areas and 45 per cent in regional areas. While a massive drop in advertising revenue forced the group into a dilutive capital raise – and the recovery in radio advertising yet to match that of television – Han believes that Southern Cross will come back bigger and better.
“Radio has always been a late-cycle recovery story, and we think it will come back and the leverage for Southern Cross will be even greater this time because it now has a much lower cost base compared to the pre-covid period,” Han said.