Equity Strategy
11 October 2023
Opportunities Amidst the Volatility
Australian Shares Hit by Rising Bond Yields

Australian shares have been under pressure in recent months, largely due to ongoing strength in global bond yields. 

US 10-year treasury yields have risen to post-GFC (global financial crisis) highs of ~4.8% (~4.5% for Australian 10-year yields), which has weighed on the valuation of risk assets. 

Unsurprisingly, the interest-rate-sensitive growth and long-duration sectors, including Information Technology, Healthcare, Real Estate, and Utilities/Infrastructure, have underperformed in this environment. 

Cyclicals (e.g. Consumer Goods, Banks, Media) have generally outperformed defensives (e.g. Consumer Staples), reflecting both the ongoing resilience in the domestic and global economy and the market’s positioning, which generally reflected expectations of a more abrupt slowdown than has occurred. 

The resources sector has been a mixed bag. The large cap miners have performed relatively well amidst a resilient iron ore price, while the energy sector has broadly outperformed in response to tightness in the oil market and robust demand for thermal coal. On the other hand, the lithium sector has sold off on concerns of weakening demand, while gold miners have underperformed amidst falling spot prices in response to rising real yields (albeit tensions in the Middle East have seen gold recover somewhat).

Figure 1: The recent retracement in Australian shares has erased this year’s gains
Figure 2: The ‘higher-for-longer’ narrative has favoured cyclicals over defensives and growth sectors

Stay the Course: the Medium-term Outlook Remains Constructive

The medium-term macro outlook for Australian equities remains constructive, in spite of the recent surge in yields. Over the coming year, decelerating inflation, peaking interest rates and an increasingly sluggish but not recessionary economic and earnings cycle should see bond yields ease in our view, which we expect to provide a valuation tailwind that supports Australian equities. 

At a stock-specific level, this pullback has created attractive buying opportunities in select shares that have been oversold in spite of their strong fundamental outlooks. There are now a range of high quality, cash generative businesses with strong growth outlooks that are trading at discounts to their intrinsic value, in our view. 

Screening the ASX for Oversold Opportunities

To unearth genuinely oversold companies, a screen has been applied across the ASX 300 in accordance with the following principles: 

  • No significant deterioration in fundamentals – investment thesis remains intact. 
  • Valuation has become ‘cheap’ relative to history, comps, or growth outlook. 
  • No significant increase to medium-term risks.
  • No significant (i.e. >10%) downgrades to 12-month forward earnings per share (EPS) in the past 3 months (excluding resources).
Figure 3: Wilsons’ screen of opportunities
Name Ticker Stock Performance  Valuation - 12 mth fwd PE EPS growth ISG Comment
% total return since market peak % from 52 week high Current Discount vs 5 yr average De-rate from 12 mth high 12 mth fwd EPS revisions - last 3 mths* 3 yr EPS CAGR 
De-rated Growth 
IDP Education IEL -12% -34% 30.9 -41% -32% 1.6% 19% The valuations of these growth companies have de-rated in response to rising bond yields (and certain stock specific factors), while earnings growth expectations have remained broadly positive (with a mix of upgrades and minor downgrades) and well above-market earnings growth expectations. Over the medium-term, we expect the stabilisation in bond yields to provide a tailwind to growth company valuations, while a softer economic backdrop is likely to create a scarcity of growth in the market which will favour companies like exposed to structural tailwinds that can grow their earnings through the economic cycle. 
Lovisa Holdings LOV -14% -33% 21.8 -25% -36% -2.4% 25%
WiseTech Global WTC -27% -30% 67.6 -16% -21% -7.3% 25%
Corporate Travel Management CTD -23% -27% 14.3 -54% -43% -0.2% 28%
Flight Centre Travel Group FLT -17% -18% 17.7 -67% -38% 7.0% 61%
Collins Foods CKF -8% -12% 17.6 -12% -15% 8.5% 16%
Oversold Healthcare
Resmed RMD -31% -37% 19.9 -41% -43% -1.6% 12% Resmed has been materially oversold (in our view) on fears that CPAP (continuous positive airway pressure) devices, which are used to treat obstructive sleep apnoea (OSA), could be disrupted by expanded access to weight loss drugs (i.e. GLP-1 receptor agonists).
CSL CSL -5% -19% 26 -27% -25% -0.2% 22% A rare consensus 'downgrade' to earnings expectations prior to CSL's FY23 result, specifically regarding the pace of Behring's gross margin recovery post-covid, has been the main driver of CSL's recent run of underperformance. At a 12 month forward PE of ~26x, CSL trades at a marked discount to its 5 year average of ~36x, which is attractive against a 3 year EPS CAGR of >20%. In addition to continued plasma collection volume growth and the gradual recovery of Behring's gross margins, there is significant earnings and valuation upside in CSL's development pipeline (i.e. CSL112, HemGenix, garadacimab) with clinical trial / regulatory updates providing catalysts over the medium-term.
Out of Favour 'Bond Sensitives' 
Rural Funds Group RFF -10% -33% 15.8 -5% -29% 0.6% 6% Long duration defensives including infrastructure and real estate have been out of favor in this market pullback, which is consistent with the historic inverse relationship between the valuations of ‘bond proxies' and bond yields. We expect these companies to outperform over the medium-term as the relative appeal of defensive and steadily growing earnings streams becomes stronger amidst a slowing economy.
APA Group APA -20% -30% 29 -17% -23% -2.4% 11%
Transurban Group TCL -14% -18% 73.1 -51% -12% 1.4% 22%**
Beaten Down 'Battery Metals'
Allkem AKE -30% -37% 7.6 -81% -35% -5.9% 13% Lithium miners and explorers continue to exhibit significant volatility on cyclical concerns. Most importantly, the structural outlook for lithium remains strong, with compounding supply deficits still likely as the energy transition progresses. This should support attractive long-term lithium prices and, by extension, significant cash generation from lithium producers. This pullback therefore creates an attractive buying opportunity in AKE and MIN.
Mineral Resources MIN -18% -39% 11.6 16% -18% -21.4% 18%
South32 S32 -12% -31% 9.7 -12% -10% -19.6% 13% South 32 has underperformed due to softer base metal spot prices (i.e. aluminium, copper) reflective of cyclical headwinds, particularly in China. Nontheless, the long-term outlook for South 32's increasingly 'future facing' portfolio remains strong in our view with the energy transition (i.e. solar, electric vehicles) poised to drive structural growth in demand , which could underpin structural deficits that pushes the underlying commodity prices higher. The potential for stimulus in China could also provide some cyclical support to base metals in the near-term. 

*Earnings revisions are based on changes to consensus EPS estimates, except for APA, RFF, and TCL, which are based on DPS . **The TCL EPS CAGR is 2 years (FY24-26). Data is accurate as of 9/10/2023. Market peak refers to 27/7/2023. Source: Refinitiv, Wilsons. 


De-rated Growth

The Focus Portfolio is overweight structural growth. 

This market correction has created a number of attractive opportunities in structural growth companies. Looking through the immediate headwinds of elevated yields (i.e., a disproportionate valuation impact on companies with long-dated cash flows), the medium-term outlook for growth companies is strong, given:

  • Valuations have become increasingly attractive with earnings multiples having de-rated in response to higher yields. In the medium term, bond yields are likely to stabilize or decline in our view, which should be supportive of growth company valuations. 
  • Softer economic growth will create a scarcity of earnings growth in the market, favouring companies exposed to structural tailwinds that can grow their earnings irrespective of the economic setting. This backdrop could drive a re-rate in the valuations of growth relative to cyclicals. 
  • The underlying fundamentals of the growth companies held in the Focus Portfolio remain strong. They are all high-quality companies poised to deliver above-market earnings growth through the cycle. 
Figure 4: Growth typically outperforms when bond yields are stable or falling

Back to School - IDP Education

Short sighted pessimism creates attractive long-term buying 

IDP Education’s (IEL) recent run of underperformance has been exacerbated by the diplomatic spat between the Indian and Canadian Governments, which are two of the company’s most important source/destination markets. This is an issue we expect to be resolved given the economic and geopolitical importance of the bilateral relationship. 

In addition, earlier this year Canada announced that it would allow four competitors to enter the Student-Direct-Stream (SDS) component of student visas. In response, consensus forecasts for FY24 language testing revenues were downgraded by ~15%, implying significant (~30%+) share loss, which appears highly conservative compared to precedents (e.g., IEL lost ~10% share when the UK opened to competitors), leaving room for potential upgrades.

The Asian middle class will drive structural growth in the coming decades

IEL is poised to grow its earnings at a double-digit rate over the long-term as it benefits from the strong demographic tailwinds in its largest source markets, including India, China and other developing countries. 

India’s population aged under 25 years currently exceeds 500 million, and the country’s middle class is growing rapidly. The middle class is expected to reach more than 1 billion by 2050, up from ~430 million currently, which will create a growing pool of individuals with the financial capacity to study. 

These demographic tailwinds, combined with the popularity of studying overseas, capacity-related issues at Indian universities, and aspirations to reside in western countries, should drive strong placement growth over the coming decades. 

Figure 5: Millions of new Indian students will graduate from university in the coming decades
Figure 6: IEL’s valuation is attractive vs comps (and history)


Oversold Healthcare

The Focus Portfolio is overweight Healthcare. 

Healthcare is the epitome of quality growth on the ASX, with our top picks being Resmed (RMD) and CSL (CSL). 

Resmed: weight loss drug concerns are overplayed

There is a great opportunity to buy Resmed (RMD) at a steep discount. The company has been materially oversold (in our view) on fears that its CPAP (continuous positive airway pressure) devices, which are used to treat obstructive sleep apnoea (OSA), could be disrupted by expanded access to weight loss drugs (i.e., GLP-1 receptor agonists). The notion that weight loss should improve OSA symptoms is intuitively appealing but incomplete. Wilsons Research has maintained its earnings forecasts and valuation for RMD, given:

  • CPAP is likely to remain the standard of care – CPAP’s great strengths are its ability to effectively treat and monitor OSA across the spectrum of symptomatic severity, and its low cost. Moreover, the medical channel treating OSA are focused on treatment adherence and compliance, which may make them reluctant to hand patients over to pharmacologic intervention alone. 
  • GLP-1 offers an incomplete solution at best (at a high cost) – Interventions other than CPAP (e.g., drugs, surgical intervention) show variable and incomplete benefits. Weight loss alone does not necessarily mean that anatomical, physiological and neurological drivers of a collapsible airway will resolve. In the case that GLP-1 drugs do halve OSA symptoms in a severe OSA patient (as Lily and its investigators are predicting in their retatrutide studies), that individual will still have residual OSA and still require CPAP. Even if GLP-1 pricing declines from today’s ~US$1,000/month to US$350/month, the drugs will remain expensive for partial efficacy. 
  • Sleep apnoea is still a deeply underpenetrated market – Diagnosis rates of obstructive sleep apnea in the US are estimated at less than 20%, and ~35% for moderate-severe patients. This means there is still a long runway for growth in CPAP treatment, even in the event that GLP-1 drugs reduce OSA diagnosis rates. 
  • Permanent market share gains from Philips are still on the horizon – RMD continues to operate as a quasi-monopoly player and remains well placed to experience durable market share gains, with Philips still sidelined from the CPAP market due to a product recall. RMD’s ability to maintain above-system growth should help insulate the business from potential sector headwinds resulting from weight loss drugs.
Figure 7: At just ~20x, ResMed’s PE is now pricing in little growth

Out of Favour ‘Bond Sensitives’

The Focus Portfolio is overweight defensive growth. 

Long-duration defensives including infrastructure and real estate have been out of favour in this market pullback, which is consistent with the historic inverse relationship between ‘bond proxy’ sectors and bond yields. 

Typically, as yields stabilize or fall, and as the economy slows (our base case), these sectors outperform as the relative appeal of defensive and generally steadily growing earnings streams becomes stronger and as the opportunity cost of capital (i.e., the expected return of bonds) falls. 


Growth in the Pipeline - APA Group (APA)

Recent concerns that have weighed on APA appear overdone:

  • Capital raise dilution – APA recently raised $750m (at a ~8% discount to close) to acquire Alinta's Pilbara Power Assets for an enterprise value of $1.77bn. We view the deal as positive as it furthers APA’s infrastructure diversification (into solar, battery storage, electricity transmission), although the immediate dilution of the raise has weighed on the stock, notwithstanding the deal being free cash flow per share accretive in the first full year of ownership. 
  • Regulatory intervention / stranded asset risk – The Victorian Government’s recent plan to ban gas connections for new homes from 2024 is a market issue that has brought concerns around ‘stranded asset risks’ to the forefront of investors’ minds. However, in this case we note the regulatory framework allows the recovery of sunk costs to be shared with customers (via higher tariffs). More broadly, and most importantly, the outlook for aggregate gas demand to 2040 still remains strong given the need for gas-fired electricity generation to become a much more significant part of the electricity mix as coal is phased out.  
  • Potential East Coast LNG Import Terminal – The possibility of an East Coast LNG Import Terminal (likely in Port Kembla NSW) being built over the next ~3-5 years could increase re-contracting risks for APA’s pipeline capacity on its East Coast Grid. Uncertainty remains around the likelihood and timing of a potential LNG import terminal, although medium-term analyst forecasts now appear conservative, having already been materially lowered for APA’s ‘ at-risk’ pipelines, thus reducing risks to consensus earnings in our view. 

APA remains an attractive long-term investment:

  • Pipeline infrastructure demand is resilient through the cycle, and APA's contract structure provides a high degree of revenue certainty. 
  • APA’s contracts with users are long-dated, and ~87% are take-or-pay (users pay for access irrespective of their usage) or regulated (based on a predetermined return on capital) in nature, which has underpinned uninterrupted dividend growth for 20 years.
  • Gas market dynamics remain attractive. The transition of the national electricity market away from coal is poised to support demand for gas and, by extension, pipeline infrastructure to transport gas to demand centres on both the East and West Coast.
Figure 8: APA’s dividend yield is now well above its long-run average


‘Beaten Down Battery Metals'

The Focus Portfolio is overweight energy transition metals.

Commodities (and miners) tied to the energy transition, including lithium, copper and aluminum, have generally been under pressure this year, largely on cyclical weakness in demand stemming from China. 

In spite of the short-term headwinds, the expected secular step up in demand driven by decarbonization remains intact, which is likely to lead to structural deficits that support higher long-term prices over the medium- to long-term for a number of these commodities. 

The recent pullback therefore creates an attractive long-term investment opportunity in our view. 

Our top lithium picks are Allkem (AKE) and Mineral Resources (MIN). 

Read Lithium - Fully Charged Opportunity

Our preferred base metals (aluminium, copper, nickel) exposure is South 32 (S32). 

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Written by

Rob Crookston, Equity Strategist

Rob is an experienced research analyst with a background in both equity strategy and macroeconomics. He has a strong knowledge of equity strategy, asset allocation, and financial and econometric modelling.

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