3 undervalued ASX stocks that fund managers are buying
Joshua Peach | Morningstar Australia
A well-known dairy brand, a real estate group and a financial solutions provider are among the notable ASX stocks picked up by Australian fund managers in recent months.
We’ve again sifted through the recent portfolio movements of Morningstar-rated funds to discover notable buys by reputable management teams.
In compiling the list, we target ‘new-money’ or ‘high-conviction’ stock purchases, bought by funds with a Morningstar rating of either gold, silver, bronze or neutral.
High-conviction purchases reflect a meaningful addition in relation to the portfolio’s size. New-money buys are where a manager purchases a stock that did not exist in the fund’s portfolio in the prior period. View the full criteria here.
Due to portfolio disclosure lags, purchases may have been made weeks or months before the listed disclosure date. Investors should always assess for themselves the attractiveness of any stock mentioned, as well as their individual risk capacity and investing goals.
The purchases detailed below were all disclosed between April 1 and May 31, 2023. All the stocks listed this month also carry a 4- or 5-star rating, meaning Morningstar analysts deem them ‘undervalued’ based on their respective fair value estimates.
Bega Cheese (BGA)
- Star rating: ★★★★★
- Fair value estimate: $5.20
- Uncertainty rating: Medium
- Economic moat: None
A notable new-money buy made in the last two months, shares in Bega Cheese have continued to trend downward over the last year.
Shares in the dairy product manufacturer sank further back in February, when the company revealed a weaker-than-expected first-half report, alongside rising farmgate milk prices.
Despite the plunge however, Morningstar has held firm on its $5.20 fair value estimate, and recently re-classified Bega Cheese as a 5-star stock.
While Bega’s recent half-year report was weaker than expected, Morningstar equity analyst Angus Hewitt says the dimmer fiscal 2023 outlook for the company wasn’t enough to warrant a change in the stock’s fair value estimate.
“The second-half outlook is much stronger, which is set to benefit from the full year impact of higher branded prices and some relief on costs,” he says.
“We expect this to flow into improved profitability from fiscal 2024.”
Shares in Bega Cheese last traded at a 40% discount to Morningstar’s fair value estimate of $5.20 per share.
Computershare (CPU)
- Star rating: ★★★★
- Fair value estimate: $25.00
- Uncertainty rating: Medium
- Economic moat: Wide
Reclassified by Morningstar as a 4-star stock earlier this year, financial services solution provider Computershare was recently upgraded to wide-moat status, following its transfer to analyst Shaun Ler.
Companies granted a wide moat by Morningstar are expected to retain competitive advantages over their competition for at least the next 20 years.
Ler notes the company’s switching costs advantages, huge market share that supports scale advantages, and interest earned on client cash as evidence for the wide-moat rating.
Shares in the company have sunk more than 11% since the start of the year, but Ler maintains the long-term outlook for the company is strong.
“Computershare's core share registry and related services businesses benefit from high switching costs on the part of its customers,” he says.
“EPS [earnings per share] growth averaged in the low single digits since fiscal 2008, notwithstanding its exposure to market cycles.
"We expect this trend to persist over the long term so long as there are no major system failures or acquisition missteps.”
Computershare is trading at a 8% discount to Morningstar’s fair value estimate of $25.00.
Charter Hall Group (CHC)
- Star rating: ★★★★★
- Fair value estimate: $16.20
- Uncertainty rating: Medium
- Economic moat: Narrow
One of the highest-conviction purchases highlighted in this months’ scan was in real estate group Charter Hall.
Shares in the property fund manager and developer have shed more than 28% since posting 52-week highs in February.
Despite the sector-wide selloff, which has been spurred on by higher interest rates and concerns surrounding office real estate values, Morningstar property analyst Alexander Prineas says Charter Hall Group still has meaningful growth ahead of it.
“Despite an expected drop in performance fees after massive fees collected from 2019 to 2022, we expect growing assets under management to underpin base fee revenue and intermittent performance fees.”
“Its funds are overweight the office sector which has its share of near-term challenges; however, Charter Hall's office assets typically have long leases to strong tenants that should carry it through current weak conditions,” he says.
Shares in Charter Hall Group are trading at a 32% discount to Morningstar’s fair value estimate of $16.20.
First published on the Firstlinks Newsletter. A free subscription for nabtrade clients is available here.
Joshua Peach is a reporter for Morningstar Australia. Analysis as at 29 June 2023. This information has been provided by Firstlinks, a publication of Morningstar Australasia (ABN: 95 090 665 544, AFSL 240892), for WealthHub Securities Ltd ABN 83 089 718 249 AFSL No. 230704 (WealthHub Securities, we), a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 (NAB). Whilst all reasonable care has been taken by WealthHub Securities in reviewing this material, this content does not represent the view or opinions of WealthHub Securities. Any statements as to past performance do not represent future performance. Any advice contained in the Information has been prepared by WealthHub Securities without taking into account your objectives, financial situation or needs. Before acting on any such advice, we recommend that you consider whether it is appropriate for your circumstances.