ASX at the close

Advertisement

Angus Nicholson for Chris Weston, Chief Market Strategist at IG Markets

ASX Value Digger Report

The ASX is at an increasingly precarious point in valuation terms. Looking at its forward price-to-earnings ratio (page 2), it is now reaching levels that have often resulted in sharp corrections. However, if one looks at the forward EPS estimates (page 3) they are incredibly negative, possibly overly so. This is the predicament that the ASX finds itself in, either earnings estimates begin improve or prices collapse. Personally, I think this dispute largely boils down to commodity price forecasts and their weight in longer-term stock valuations for our commodities heavy index. The most “stretched” valuations are in commodity-related sectors, but there is a perfectly valid case to argue that commodity prices will be higher from their current levels in 12 months or more.

The future price-to-earnings (P/E) ratio can tell traders if the valuation of the ASX 200 is “expensive” or “cheap” relative to its long-run average. The current valuation levels in the ASX are at historical warning levels, and historical precedent tells us that these levels are often subject to a reversal. Current: 17.48

ScreenHunter_13175 May. 27 16.06

The forward earnings estimate reflects the market consensus for future earnings growth. On the positive side, forward EPS estimates have rarely dropped below 1 standard deviation, and, should we avoid a recession, EPS forecasts look set to improve throughout the year.

Advertisement
ScreenHunter_13176 May. 27 16.06

The lower Aussie dollar has clearly helped Consumer Discretionary and Healthcare’s solid 1-month returns.

ScreenHunter_13177 May. 27 16.07
Advertisement

In Forward P/E terms, Financials look the least over-valued according to their historical averages.

ScreenHunter_13178 May. 27 16.07

But in EV/EBITDA terms, Consumer Discretionary and Industrials have a noticeably lower valuation premium.

Advertisement
ScreenHunter_13179 May. 27 16.07

Top ASX value picks from our screens:

Monadelphous (MND) has had a tough time as a mining services engineering stock as mining capex has dived. But the worst of the commodities selloff increasingly looks to be behind us. Forward earnings estimates for the stock are still pretty dismal going out a number of years, but much of this has been factored into the price. The stock is still offering an over 8% dividend yield on 2016 estimates, and should the dismal capex forecasts out to 2018 show the even slightest improvement, the stock is primed to be a key beneficiary. Analyst View: 0 Buy/7 Hold/7 Sell

ScreenHunter_13180 May. 27 16.07
Advertisement

Western Areas (WSA), the embattled nickel miner, is struggling with spot nickel prices below its breakeven price and a poor near-term outlook for its key product. However, the stock largely has enough cash to survive the downcycle and should continue as a going concern. At the A$2.00 level, its valuation is so cheap, it is almost a binary bet on whether the stock goes bankrupt or not. If not, the February bottom of A$1.84 looks like the worst of the selloff and a steady improvement in the Nickel price and a lower Aussie dollar are both likely to help the stock edge higher in the future. Analyst View: 5 Buy/8 Hold/6 Sell.

ScreenHunter_13181 May. 27 16.07

Downer EDI’s (DOW) fortunes in the engineering and construction space already seem to be outperforming MND. The stock has a robust balance sheet with low gearing, and is increasingly trying to position itself into the oil and gas space now that its LNG-related work is winding down. The stock also offers a steady 5-6% projected dividend yield based on current earnings forecasts. If sentiment continues to pick up with regards to the E&C space, price growth and dividend payments are likely to lift the stock to healthy double-digit total returns. Analyst View: 2 Buy/7 Hold/2 Sell.

Advertisement
ScreenHunter_13182 May. 27 16.07

OZ Minerals (OZL) has one of the best looking earnings yield’s (EPS/Price) on the index, and against comparable global copper producers OZL is one of the cheapest looking stocks. Against local competitor, Syrah Resources, it has a much cheaper valuation. After a massive selloff in the copper price, the future for the metal is improving as demand for electric vehicles is set to steadily pick up. OZL is still pretty unloved, but its valuation is very compelling and copper price forecasts are steadily being re-rated as we speak, which would explain why its competitors are seeing such an uplift as well. Analyst View: 5 Buy/11 Hold/5 Sell.

ScreenHunter_13183 May. 27 16.07
Advertisement

Qantas (QAN) has suffered a massive correction from its lofty A$4.00 level as the oil price has rallied to seven-month highs and their ambitious revenue forecasts were lowered. But now it is beginning to show up on a range of valuation metrics. Its revenue from domestic travel is set to steadily grow as it continues to outmuscle Virgin in their duopoly. The current price is arguably pricing too much negativity around its international routes and high oil prices. It is trading at a significant discount to global competitors and current earnings are likely to see it provide a 7% or greater dividend yield over the next two years. Analyst View: 7 Buy/2 Hold/2 Sell.

ScreenHunter_13184 May. 27 16.08

To subscribe to IG’s ASX reports, email “subscribe” to insto.research.au [at] ig.com

Advertisement