Reporting season is over and it’s time to move on. The All Ordinaries Index has corrected some 220 points from its peak of 5,692 on 1 August and value investors who patiently stood aside during the buoyant market conditions of August will now be looking for ideas to add to the portfolio if the correction extends. The odds favour this because equity index volatility fell to historic lows last month so is very unlikely to fall further. Five large-cap names are on our shortlist to add to the StocksInValue model portfolio this month if the market gives us better entry prices.
We recently reviewed ANZ Banking Group in Dividend Detective, our sister column in the Wealth section, on 23 August. Value investors know three things determine a company’s worth: profitability, risk and capital management. ANZ’s worth is trending higher on all three fronts and the June quarter trading update revealed demonstrable progress. Profitability is improving as costs are reduced and the business mix is reweighted to Australia from Asia, the risks to those earnings are falling as large corporate loans are run off in favour of mortgages and capital strength is growing due to the institutional loan runoff and the sensible cut to the interim dividend payout ratio. Whereas the other three major banks are settled businesses and straight plays on the banking cycle, ANZ has something ‘extra’: the benefits of its turnaround currently underway. We think the stock is worth $29.50.
ANZ was unpopular and under-owned by institutional investors for nine years due to the unsuccessful Asian expansion strategy now gradually being unwound. As the stock returns to favour, institutional investors are switching from Commonwealth Bank, the previous sector favourite, so CBA is increasingly cheap. We are getting more interested because at $70.90 the stock is not only below $71.50, where CBA raised over $5 billion in new equity a year ago, but a nine per cent discount to our $77.50 valuation. This is enough of a margin of safety for a high-quality, well-capitalised, well-regulated bank in a slow-growth banking industry with good general loan quality. Below $68 the stock would be compelling.
CSL sold off last month because the 2017 earnings guidance disappointed, the subscale influenza vaccines business is still losing money and enthusiasm for US-style corporations which take on more debt to buy back shares is waning. A buying opportunity could be in the making for one of the market’s best long-term creators of shareholder value. CSL still has a prospective pipeline of drugs and plasma treatments under development. We think the shares are worth $106.50 and would be interested below $100.
We admire the management of SEEK for its record of successful innovation and its confidence to invest for long-term returns rather than massage current earnings higher to temporarily please the sharemarket. The core Australian employment business was again strong in 2016, with higher revenues, volumes and yield, and this unit supports group earnings while earlier-stage operations in Asia and Brazil ramp up. In time, Seek’s investment in Zhaopin will be seen as a masterstroke because it leverages Seek to the migration from print employment advertising to online in one of the world’s largest labour markets. We have a $16 valuation and like the stock below $15.
QBE Insurance Group’s interim result disappointed due to a surprise surge in Australian CTP claims and dependence on claims reserve releases. But this left the stock with no expectation in the share price. We see potential for trade back to $11, our valuation, as QBE remediates its domestic portfolios, benefits from higher commercial premium rates, accelerates cost efficiencies, increases returns on its investment portfolio and migrates towards a credit rating upgrade due to capital strength.
Originally published  in The Australian on Tuesday 6th September.
David Walker is a Senior Analyst at Clime Asset Management.