Aussie equities ‘now undervalued’

Headshot of Stuart McKinnon
Stuart McKinnonThe West Australian
Woodside Energy’s Pluto LNG Plant near Karratha. Woodside has been identified by Morningstar as being undervalued.
Camera IconWoodside Energy’s Pluto LNG Plant near Karratha. Woodside has been identified by Morningstar as being undervalued. Credit: Supplied/Woodside/RegionalHUB

Australian equities are the cheapest they have been in two years, with all 11 sectors of the market now undervalued, according to a respected research house.

Morningstar said its index of Australian shares had slumped 14 per cent in the second quarter of 2022 as investors stressed about surging inflation, rising interest rates and the threat of recession.

While conceding the combination of falling real wages and the expected sharp increase in mortgage rates was likely to affect economic growth, the investment management and research house noted unemployment remained near 50-year lows and interest rates were rising because the economy was strong.

Morningstar said said the recent market sell-off meant Australian equities were the cheapest they had been since May 2020 based on its fair value estimates, which did not factor in a speculated looming recession.

Morningstar’s equity strategist Gareth James said about 75 per cent of the companies in the group’s coverage were trading below fair value.

“Many Australian listed firms have negligible exposure to, or benefit from, rising inflation and interest rates, and we recommend investors look through short-term macroeconomic risks and instead focus on intrinsic values based on likely long-term economic variables,” he said.

Morningstar said the technology and consumer cyclical sectors had been hardest hit, falling by 66 per cent and 57 per cent respectively from their peaks and were now 43 per cent and 12 per cent undervalued.

In the technology sector, the research house identified software companies Wisetech Global and Fineos as significantly undervalued as well as donor management company Pushpay.

Among the consumer cyclical sector, Morningstar said online retailer Kogan was trading at a material discount to its fair valuation while department store Myer and funeral director Invocare also screened cheaply.

It was more cautious on the miners, but said Australia’s biggest gold producer Newcrest was one of the cheapest given upside from development projects underway including Havieron, Red Chris and Wafi-Golpu and likely improvements at its Lihir operations.

Morningstar also noted gold could exhibit some countercyclical attributes relative to other asset classes such as bonds or equities.

It also identified construction materials business Boral as significantly undervalued, forecasting a strong pipeline of projects creating demand for its construction materials over the medium term and noting the company had a cost advantage over competitors because of the superior location of its quarry assets.

In energy, Morningstar sees Beach Energy, Santos and Woodside Energy as 40 per cent, 27 per cent and 20 per cent undervalued respectively. It cited extremely healthy prices for oil and gas, whereby earnings could generally be expected to more than double in calendar 2022.

Among the industrials, it said Brambles was trading at a sizeable discount to its valuation, Seven Group was at a near 30 per cent discount to its $23.40 fair value and Aurizon Holdings was relatively cheap and offered a generous dividend yield of 5.5 per cent, mostly franked.

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