The ASX’s behemoths – the stocks of the S&P/ASX 20 – are usually considered fairly well valued, given that they are crawled all over by analysts and owned by all the big institutional investors. But here are three members of the large-cap elite that I think look to be good-value buying right now.
1. Aristocrat Leisure (ALL, $40.75)
Market capitalisation: $26.5 billion
12-months total return: 24.8%
Three-year total return: 13% a year
Estimated FY25 yield: 1.9%, fully franked (grossed-up, 2.7%)
Estimated FY25 price/earnings ratio: 17.4 times earnings
Analysts’ consensus price target: $46.90 (Stock Doctor/Refinitiv, 11 analysts)
Gaming industry giant Aristocrat Leisure designs and develops electronic gaming equipment and platforms for casino and mobile gaming use. The company is best known for its poker machines in the US, where it has a 30% market share. That business, Aristocrat Gaming, is the biggest revenue generator, producing just under 58% of revenue, but the company has two other revenue generators: its Pixel United mobile games arm, and its Anaxi online real-money gaming business, which Aristocrat terms “interactive digital entertainment.”
Aristocrat bought Anaxi in 2022, to start its online arm. In 2023, the company made a significant acquisition to boost this arm, with the $1.8 billlion takeover of NASDAQ-listed Israeli iGaming company NeoGames, which will take Aristocrat further into the high-growth online gaming market. The NeoGames deal is expected to be completed in early 2024.
NeoGames opens-up sports betting, lottery, platform provision and games aggregation, and is potentially a fully-fledged igaming distribution network, with the backing of Aristocrat’s strong brand and customer relationships – it is a major step in accelerating the company’s online growth plans.
Savvy investors have picked up on this major pivot, which is why Aristocrat shares rose 34% in 2023. Its FY23 (year to September) underlying profit of about $1.3 billion represented an increase of 21% in reported terms, and 13% in constant-currency terms. The full-year fully franked dividend of 64 cents was a 23% lift from the 52 cents paid a year earlier. As NeoGames is absorbed and starts to contribute, Aristocrat’s business is changing for the better – it is much more diversified and the reliance on poker machines is lessening. ALL is one of Australia’s global leaders, in its field, and analysts think there’s plenty of growth to come.
2. Telstra (TLS, $3.98)
Market capitalisation: $45.9 billion
12-months total return: 1.2%
Three-year total return: 13.1% a year
Estimated FY25 dividend yield: 4.8% fully franked (grossed-up, 6.8%)
Estimated FY25 price/earnings ratio: 20.1 times earnings
Analysts’ consensus price target: $4.48 (Stock Doctor/Refinitiv, 15 analysts)
Telstra is Australia’s largest full service telecommunications company and the incumbent operator. It provides fixed line and mobile telecommunications services to consumers, businesses, enterprise and governments across Australia and Asia. In addition to its extensive Australian infrastructure Telstra is also one of the largest operators of submarine cables in Asia and owns about 30% of Pay TV business Foxtel.
The Mobile division remains the engine room of Telstra’s growth. In FY23, mobile revenue rose 8.3% to $10.3 billion, and was the largest single contributor to Telstra’s total revenue of $23.2 billion, which rose 5.4% for the year. The telco giant’s net profit jumped 13.1%, to $2.1 billion.
Telstra has the largest 5G network in Australia, covering more than 85% of the Australian population and available in more than 450 towns and cities across Australia. The network strength is a long-term key driver of Telstra shares, as it attracts more subscribers.
In August, Telstra shelved plans to sell a stake in its physical infrastructure unit, called InfraCo, a standalone unit that operates the company’s fixed-line assets, including data centres, fibre, satellite ground stations, and subsea cables. It had previously sold (in 2021) a 49% stake in its mobile tower infrastructure subsidiary for $2.8 billion to a consortium of the Australian Government Future Fund, Commonwealth Superannuation Corporation and Sunsuper, with the deal price valuing the towers business at the time at $5.9 billion.
The market was expecting a similar deal for InfraCo to further unlock shareholder value, and raise money, but it now appears that Telstra is keen to hang on to the business, for at least the medium term. Some in the market may think this has removed short-term appeal for Telstra; others believe InfraCo’s value is not properly recognised in the Telstra share price. a money-raising offload to either private investors or sovereign wealth funds. It probably would have been better for shareholders if Telstra had done a similar deal with super fund investors or sovereign wealth funds – but it is still possible, and if you buy the shares, you’re buying that possibility.
In the meantime, Telstra says it is seeing “strong customer demand for our infrastructure … shaped by the shift to the cloud and rapid AI adoption driving data centre and edge requirements, along with needs for domestic fibre and undersea cable.” In particular, InfraCo provides the infrastructure backbone for generative AI (think Chat GPT and similar tools) in Australia.
Telstra is a market leader, with a strong competitive advantage, recurring earnings, solid dividends, capable management, and it is positioned to be resilient in tough economic times. It is a defensive stock, but arguably, the completion of the NBN, introduction of 5G, and remote working have restored its pricing power, enabling earnings growth. There is also an attractive fully franked dividend yield on offer, augmenting the ‘total return’ prospect.
3. CSL (CSL, $284.00)
Market capitalisation: $138.1 billion
12-months total return: –0.3%
Three-year total return: 3.5% a year
Estimated FY25 dividend yield: 1.6%, 5.5% franked (grossed-up, 1.7%)
Estimated FY25 price/earnings ratio: 26.8 times earnings
Analysts’ consensus price target: $319.82 (Stock Doctor/Refinitiv, 17 analysts)
No surprises here: I wanted to see CSL in my Christmas stocking, and it is definitely a large-cap I would buy right now. CSL is a true global leader, the world’s largest maker of plasma-based therapies, a global leader in treatments for immunodeficiency and bleeding diseases such as haemophilia, and one of the world’s biggest suppliers of flu vaccines.
It is organised into three businesses:
CSL Behring is a global biotech leader with a broad range of biotherapies for rare and serious diseases including bleeding disorders, immunodeficiencies, hereditary angioedema, neurological disorders and Alpha 1 Antitrypsin Deficiency. CSL Behring manufactures its therapies from plasma collected by CSL Plasma, which operates one of the world’s largest and most sophisticated plasma collection networks, with more than 300 plasma collection centres in the US, Europe and China. CSL Behring sells its therapies in more than 100 countries.
CSL Seqirus: one of the world’s largest influenza vaccine companies, and producer of antivenoms. CSL Seqirus operates state-of-the-art manufacturing facilities in three different continents and a globally integrated supply chain for the timely supply of influenza vaccine to customers around the world.
CSL Vifor is a global leader in iron deficiency and nephrology and is committed to launching the next generation of therapies to truly address the full spectrum of kidney disease, with a focus on dialysis and rare disease.
Each of these businesses is globally competitive, if not market leader, meaning that CSL’s revenue and profit streams are diversified and defensive. But, CSL also has growth prospects, with a huge R&D pipeline (it spends $1.2 billion a year on R&D) that leverages the company’s expertise in plasma protein technology, recombinant technology, cell and gene therapy and vaccines technology to develop and deliver innovative medicines that address unmet medical needs or enhance current treatments in six main therapeutic areas: immunology, haematology, respiratory, cardiovascular and metabolic, transplant and vaccines.
CSL has compelling long-term tailwinds and is a very well-managed company. It is steadily growing its dividend stream; and it usually under-promises and over-delivers when it comes to profit. It should be a core holding of an Australian share portfolio.
To be fair, CSL has been trading sideways for several years; and the market still has plenty of queries about the Vifor integration. But analysts are quite positive on the stock’s prospects of pushing higher from current levels. UBS is the most optimistic, with a price target of $340.
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