Equity Strategy
24 April 2024
Oversold Opportunities
Global Macro Concerns Weigh on the ASX

The ASX 300 has pulled back this month in response to an upward shift in US interest rate expectations amidst stronger-than-expected growth, renewed signs of sticky inflation, and geopolitical tensions in the Middle East. 

While the overall market drawdown to date has been relatively insignificant in a historical context with the ASX 300 currently down ~3% from its all-time highs, attractive investment opportunities have emerged in certain companies that have arguably become oversold despite still strong underlying fundamentals. 

The largest pullbacks have been among the growth-orientated and interest-rate sensitive sectors where the valuation impact of higher bond yields has been the strongest, including healthcare, communication services, real estate, and tech. Meanwhile, unsurprisingly in this risk-off backdrop, small caps have underperformed large caps. 

Figure 1: Growth and rate sensitive companies have experienced the largest drawdowns

Where are the Opportunities from the Pullback?

To identify attractive investment opportunities, we have screened the ASX 300 for companies that fulfil the following criteria: 

  • Material share price drawdown.
  • Valuation multiple has de-rated materially from recent highs, and/or is on a discount to its 5-year average.
  • No significant downgrades to consensus earnings. 
  • No adverse changes to underlying fundamentals. 
  • Earnings growth expected over the medium-term.

While there are a range of companies trading at attractive valuations outlined in Figure 2, the three standout buying opportunities in our view are Aristocrat Leisure, Breville, and Collins Foods, which are the focus of this report. 

Figure 2: ASX screen of opportunities
Name Ticker Share price drawdown from 2024 peak 12 mth fwd PE EPS growth
Current vs 2024 peak % vs 5 yr avg** FY24 FY25/FY26 (CAGR) 90 day EPS revisions (12 mth fwd)
Large Caps (ASX 50)
Xero* XRO -13% 74.1 -14% -68% 432% 51% 12.6%
Aristocrat Leisure* ALL -12% 17.9 -13% -16% 8% 10% 3.4%
Resmed* RMD -9% 21.0 -8% -37% 21% 12% 9.7%
Mid Caps (ASX Mid Cap 50)
CAR Group CAR -9% 33.2 -6% 13% 14% 15% 5.5%
TechnologyOne TNE -5% 41.1 -5% 1% 13% 16% 3.9%
Small Caps (ex ASX 100)
Healthco Healthcare
and Wellness Reit*
HCW -22% 15.0 -22% -29% 14% 6% -0.4%
Collins Foods CKF -20% 15.5 -21% -24% 17% 19% 4.0%
Light & Wonder LNW -16% 21.9 -16% -55% 110% 33% 15.0%
Breville Group* BRG -12% 28.1 -11% -7% 6% 13% -0.4%
Pinnacle Investment Management Group PNI -10% 22.8 -5% -8% -1% 20% 5.3%
Netwealth Group* NWL -9% 46.5 -11% -3% 28% 22% 9.9%
Lovisa Holdings LOV -8% 32.9 -12% 11% 23% 25% 8.6%
Nick Scali NCK -9% 13.0 -9% 0% -17% 6% 16.0%
Webjet* WEB -9% 20.5 0% -51% 72% 21% 8.6%
Universal Store Holdings UNI -7% 13.0 0% -1% 17% 13% 11.8%

Data as of 22/04/2024 market close. * Focus Portfolio holding. **3yr avg for WEB, HCW, UNI.
Source: Refinitiv, Wilsons Advisory.


Buy Aristocrat (ALL) – “You Gotta Know When to Hold ‘em”

Figure 3: ALL is trading at a material discount to its historical average

The correction in Aristocrat’s (ALL) share price has been driven by a combination of:

  • Investor day update – ALL held a management roundtable in March
    where the business reiterated its guidance for NPATA growth in FY24 and reaffirmed expectations of continued market share growth, however, the company also conveyed a slight softening in slot machine demand in the US market this year. 
  • Technical factors – the recent secondary listing of ALL’s peer, Light & Wonder (LNW), onto the ASX may have driven some switching of institutional capital from ALL to LNW. 

ALL's pullback offers a rare opportunity to add exposure to a high-quality global leader, with a long runway for double digit earnings growth, on a ‘mid to high-teens’ price to earnings (PE) multiple. 

Our investment thesis for ALL remains intact, noting: 

1. Gaming is a resilient category – notwithstanding softening slots revenues, we note gaming industry revenue growth still remains positive and cyclical slowdowns in the category have historically been relatively minor. For context, US gaming expenditures only fell ~2% in 2008-9 at the height of the GFC. As such, player/casino demand for slot machines is typically relatively resilient through the cycle.

Figure 4: US gaming industry revenue growth remains positive

    2. Share gains support growth in softer industry conditions – ALL’s ability to consistently grow above system, driven by its unparalleled development & design (D&D) spend, can offset any weakness in industry growth. In March ALL highlighted it is the only supplier still generating ‘meaningful growth’ in its installed base, and that it is still seeing ‘solid demand’ for outright machine sales while its competitors are experiencing declining unit sales.

    Therefore, ALL is well placed to deliver solid revenue/earnings growth even if industry revenues decline, which provides confidence in its ability to achieve/beat consensus revenue growth of ~5% in FY24.

    Figure 5: Aristocrat continues to gain market share…
    Figure 6: …driven by its market-leading development & design (D&D) spend

    3. NeoGames approval paves the way for accelerated growth in iGaming – Last week ALL received final regulatory approvals on its acquisition of NeoGames, which provides its Anaxi segment with the necessary tech stack to provide an integrated online real money gaming (RMG) solution to online casinos. As RMG is a nascent industry undergoing rapid growth, this segment represents the largest opportunity for ALL. 

    Early evidence demonstrates that ALL’s land-based titles are resonating well online and we are confident in ALL’s ability to become a market leader in this category given: a) its strong existing customer relationships, b) its best in class games portfolio (driven by market-leading D&D), and c) its track-record of leveraging its IP into new verticals as evidenced by the success of its mobile gaming segment Pixel United.

    Consensus estimates seemingly underappreciate the size of the online RMG opportunity, when considering:

    • Pixel United provides an interesting case study on ALL’s revenue growth potential in new verticals.
    • The online RMG market represents a larger opportunity for Anaxi than the mobile gaming market is for Pixel United (current estimated TAM of ~US$96bn vs ~US$77bn respectively).
    • Pixel United grew its revenue to A$2.4bn in FY20 (after seven years of ALL management). 
    • Consensus forecasts point to Anaxi segment revenue of $982m in FY30 (after its first seven years).

    Therefore, consensus estimates are conservative when assessing Anaxi’s long-term potential, which appears ripe for consensus upgrades over the coming years if ALL is able to replicate the success of Pixel United. Given ALL's proven ability to succeed in new verticals, we assess meaningful upside risks to medium and long-term consensus EPS estimates for ALL. 

    Figure 7: Double digit RMG industry growth underpins strong consensus growth forecasts for Anaxi to FY30
    Figure 8: There is meaningful upside risk to consensus earnings forecasts for Anaxi

    ALL is held in the Focus Portfolio at 3.5% (no change)

    Upcoming catalysts:

    • LNW Q1 result 8 May 2024 (peer read through)
    • ALL half year result 16 May 2024
    • ALL investor day 26 June 2024 

    Buy Breville (BRG) – Opportunity Brewing

    Figure 9: BRG’s valuation has fallen back below its 5-year average

    Breville’s (BRG) valuation de-rate has been driven by macro developments rather than anything company specific, providing an attractive entry point to gain exposure to this high-quality global growth name, particularly considering:

    1. Retailer re-stocking provides upside risk to earnings – recent corporate access from our research team provides a positive read-through for BRG’s customer (retailer) inventory levels. After facing the headwind of de-stocking over the last ~18 months, recent commentary from retailers and industry channel checks both imply a stable sell-in/sell-out relationship. This backdrop creates upside risk of an emerging customer restocking cycle over the near-term which would be supportive of BRG’s top line and hence earnings growth in FY25. 

    2. Brand health to pay dividends in FY25 – the benefit of management’s decision to avoid aggressively discounting should be realised over the near to medium-term, with brand health and hence pricing power / margins maintained in a tough consumer environment.

    BRG is well placed for a return to strong top line growth in FY25 given;
    a) sustained new product development investment, b) medium-term central bank rate cuts should improve consumer sentiment, and c) direct country launches are being worked on actively (e.g. China, India). 

    3. Upgrade potential – Noting BRG’s tendency to beat/meet the top end of its guidance, there is meaningful earnings upgrade potential over the next 12-18 months. Wilsons Advisory equity research forecasts earnings before interest and taxes (EBIT) growth of ~13% in FY25 (vs consensus of ~9%) and has a 12-month price target of $31.30, offering ~24% upside to the current share price. 

    Figure 10: Under CEO Jim Clayton BRG has been a perennial EPS upgrader

    BRG is held in the Focus Portfolio at 2% (no change)

    Upcoming catalyst:

    • BRG full year result - 19 August 2024

    Buy Collins Foods (CKF) – In the Bargain Bucket

    Figure 11: CKF’s valuation has de-rated well below its historical range

    The pullback in the Collins Foods (CKF) share price has been driven by market concerns that:

    • Same store sales growth could deteriorate due to cost of living pressures as households save money by eating less fast food.
    • Discounting by fast food competitors could force KFC to compete harder on price to attract customers, possibly dampening its margin recovery. 

    These concerns appear overdone and CKF’s share price underperformance has been excessive, in our view. Our investment thesis remains intact, given: 

    1. Conservative margin guidance provides comfort in consensus earnings – after significant margin improvements in CKF’s 1H24 result, management hosed down expectations for 2H24 margins in its full year guidance commentary, seemingly accommodating for increased investment in price/promotions. Therefore, while there is a modest downside risk of softer same store sales in 2H24, CKF has already included a meaningful buffer in its margin guidance which provides a degree of confidence in consensus earnings expectations.  

    2. Easing input costs will provide a tailwind to margins – CKF is set to benefit from falling input costs, which should support the improvement in its margins towards historical levels. In this vein, the Department of Agriculture, Fisheries and Forestry forecasts a continued downward trend in poultry meat prices over the medium-term reflecting falling feed grain prices. Given CKF purchases raw materials (poultry, canola oil, potatoes, wheat etc.) under 1-3-year contracts, lower input costs will likely be supportive of margins through FY25/26. This is a key part of our investment thesis for CKF.

    3. Discount valuation offers growth at a reasonable price – CKF’s current forward PE of 15.5x is attractive considering consensus expectations for average EPS growth of ~19% p.a. in FY25/FY26. Strong EPS growth coupled with a potential multiple re-rate leaves CKF well placed to outperform. Our equity research team has a 12-month price target of $13.41, offering ~35% upside to the current share price. 

    Figure 12: Key raw materials / ingredients costs are easing
    Figure 13: Consensus margin expectations are relatively conservative through FY26

    CKF is held in the Focus Portfolio at 3% (no change)

    Upcoming catalysts:

    • YUM! Brands Q1 result (KFC network read through) - 1 May 2024
    • CKF full year result - 23 June 2024
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    Written by

    Greg Burke, Analyst

    Greg is an experienced analyst in the Investment Strategy team. He is the lead portfolio manager of the Wilsons Advisory Australian Equity Focus Portfolio and is responsible for the ongoing management of the Global Equity Opportunities List.

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