Should you buy these 5 High Conviction Stocks - TCL, RWC, WBC, AFG, VHT?

Stocks’ Details

Transurban Group

Partnerships with government aided Overall Growth: Transurban Group (ASX: TCL) ended FY 2018 with toll revenues amounting to $2.2 billion implying the YoY growth of 8%. The favorable momentum in the toll revenues was witnessed because of the toll price escalation as well as an increase in the traffic. The company has been putting a lot of priority on the partnerships with government, and it is also in the process of undertaking major development projects so that the efficient transport routes can be created, and the level of congestion gets reduced.


TCL’s key Metrics (Source: Company Reports)

Transurban Group’s management has reflected positive views in regard to the acquisition of WestConnex. As per the management, this acquisition is aligned with the strategy of Transurban. They also stated that WestConnex would be able to provide innovative as well as effective urban road infrastructure. Transurban Group can benefit by leveraging the capabilities to increase the motorway networks as well as by a rise in the traffic volumes. Apart from this, fresh and new business opportunities in the company’s target markets can arise and the group can benefit from utilizing the technology as well as services so that new projects can be developed. On the other hand, evolving regulatory environment, change in government policies as well as lower traffic volumes are some of the factors that could act as headwinds in the company’s growth prospects. A technical tool, Exponential Moving Average or EMA, has been applied on the daily chart of Transurban Group. The default values have been considered. As per the observation, the stock price has crossed the EMA and is moving upwards which reflects the bullish momentum. Fundamentally, the group is trading at low levels given the 52-week scenario and has strong financial aspects. Therefore, we maintain our “Buy” rating on the stock at the current market price of A$11.370.

Reliance Worldwide Corporation Limited

Impressive FY18 Numbers: Reliance Worldwide Corporation Limited (ASX: RWC) is a mid-cap company with the market capitalization of circa $3.91 Bn as of November 08, 2018. The company posted stellar FY18 results with total revenue coming in 28% higher at $769.4 Mn compared to FY17. It was mainly driven by double-digit growth in the core SharkBite PTC fittings and accessories, first full year contribution from Holdrite and the inclusion of one month of John Guest sales. Adjusted EBITDA grew by 25% to $150.9 Mn in FY18 against the prior year. Adjusted NPAT came in at $78.6 Mn in FY18, exhibiting Y-o-Y growth of 20%. Additionally, the company confirmed that it is on track to deliver FY19 EBITDA of between $280 Mn and $290 Mn. The result will be driven by continued low double-digit growth in sales revenue from RWC’s core operations; high single-digit sales growth in the recently acquired John Guest business; and expected synergies of $10 Mn in FY19 from John Guest, excluding one?off integration costs, with synergies rising to a run-rate of $20 Mn at FY19. Further, the balance sheet remains healthy with cash and cash equivalent of $274.3 Mn and net leverage ratio of 1.57x as at 30 June 2018.


FY18 Financial Metrics (Source: Company Reports)

Meanwhile, the stock has generated YTD return of 31.55% and traded at reasonable PE multiple of 40.22x, which is lower than some peers. Based on the recent acquisition and healthy financials, we give a “Buy” recommendation on the stock at the current market price of $5.010.

Westpac Banking Corporation

Difficult Year Amidst Regulatory pressure: The top management of Westpac Banking Corporation (ASX: WBC) stated that FY 2018 has been a difficult year for the bank. The operating conditions like increased compliance, regulatory as well as funding costs & elevated competitive pressures impacted the banks' performance. Moreover, Westpac’s provisions with regard to the customer refunds as well as related costs coupled with the legal costs amounted to $281 million after tax. The management of the bank also stated that while the momentum in the earnings was not much strong, the bank still enjoys strengthened balance sheet in all the dimensions of capital, liquidity as well as asset quality. The bank has also witnessed significant progress with respect to the digital transformation program as well as on service-led strategy.

 
WBC’s Expenses (Source: Company Reports)

The primary factors which acted as headwinds in the performance of WBC are customer remediation, weaker credit growth, regulatory actions as well as elevated cost of the funds.

Positives and Negatives That Could Impact Westpac’s Future: The management of Westpac Banking Corporation stated that the outlook for the broader Australian economy is positive. However, some economic headwinds are likely to be encountered by the bank in 2019. They also stated that consumer confidence might get impacted amid flat wages growth as well as negative momentum in the housing market. On the other hand, the growth in the employment levels is expected to be robust as the investments in the public as well as private infrastructure are expected to witness an uptrend. A technical indicator named Moving Average Convergence Divergence or MACD has been applied on the daily chart of Westpac Banking Corporation and, for the purposes, the default values have been considered. As per the observation, the MACD line has crossed the signal line and is moving upwards which represents a bullish momentum. Fundamentally, the group has been resilient and is expected to witness growth going forward while it trades at a cheap level compared to other major banks. Thus, we maintain our “Buy” rating on the stock at the current market price of A$27.680.
 

Australian Finance Group Ltd

Healthy Cash Flow: Australian Finance Group Ltd (ASX: AFG) is a small-cap company with the market capitalization of circa $297.52 Mn as of November 08, 2018. The company has delivered decent FY18 performance wherein underlying NPAT increased by 7% to $28.1 Mn over the prior year while normalized RoE stood at 33%, exhibiting 200 bps higher than the previous year which was at 31%. On the cash flow front, operating cash flow has increased by 23% to $32.49 Mn in FY18 over the prior year while free cash flow (FCF) grew by 23.8% to 32.31 Mn during the same period against the prior year. This was mainly attributable to the growth in a profit driven environment by the success of AFG Home Loans and a positive working capital movement compared to the prior period. Further, AFG continued to generate material levels of cash on the back of loan book which reached $145.4 Bn as at 30 June 2018. Moreover, the company finished FY18 with cash and cash equivalent of $88.71 Mn, notwithstanding that over the course of FY18, AFG paid investors $47.69 Mn in cash dividends, and made a strategic investment of around $12.13 Mn into Thinktank Group Pty Ltd. In our view, the company will continue to generate consistent growth in future despite challenging regulatory and economic conditions on the back of healthy cash flow, strong core business, strategic opportunities, capital-light business model and diversified earnings in adjacent business areas in a low-risk manner.


Improving RoE and NPAT (Source: Company Reports)

Meanwhile, the share price has fallen 7.05% in the past three months as at November 07, 2018 and traded at reasonable PE multiple of 8.94x with beta of 1.0x as on 5-Year (monthly basis), signalling undervalued position at the current juncture. Hence, we maintain our “Buy” recommendation on the stock at the current market price of $1.440, considering decent financials and robust outlook ahead.

Volpara Health Technologies Limited

Assuming All Positive factors have been discounted at Current Level: Volpara Health Technologies Limited (ASX: VHT) has successfully raised capital of A$20 Mn which would be utilized to expand the sales team in the United States and NZ research and development teams. At the end of the second quarter of 2019, the company enjoys a healthy cash position with a cash reserve of NZ$20.21 Mn. The company saw an EBIT loss of 9.1 Mn in FY18 from the previous year which was at $9.8 Mn, showing de-growth of 8% on Y-o-Y basis. However, the net loss dropped from NZ$9.5 Mn to NZ$8.8 Mn, a decrease of 8%, which may be because of an increase in revenues while keeping a stable, controlled cost base. As at 30 June 2018, VHT’s Annual Recurring Revenues (ARR) of ~NZ$3.6 Mn and Total Contract Value (TCV) signed in FY18 of ~NZ$11.2 Mn, depict an increase of 223% and 173%, respectively over FY17. No dividends have been paid or declared for payment during the financial year. The current ratio and quick ratio stood at 2.38x and 2.37x, respectively in FY18 while debt-to-equity ratio came in at 0.08x. Meanwhile, the stock has delivered stellar performance generating YTD return of 104.32% and still looks good on the chart. We assume that the positive factors have already been discounted in the price presenting a limited upside in the stock at the current juncture. We, therefore, suggest investors that they should keep a close “Watch” on the stock at the current price of $ 1.45 and wait for another opportunity to enter at a lower price point.


Stock Price Comparative Chart (Source: Thomson Reuters)
 

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