5 worst stocks of 2018 could stage comeback
Ainsworth Game Technology was among several stocks that suffered double-digit declines this year, but they could rebound in 2019, say Morningstar analysts.
Mentioned: Ainsworth Game Technology Ltd (AGI), Challenger Ltd (CGF), Medibank Pvt Ltd (MPL), Pact Group Holdings Ltd (PGH)
Ainsworth Game Technology was among several stocks that suffered double-digit declines this year, but they could rebound in 2019, say Morningstar analysts.
We've used Morningstar's Stock Screener to identify stocks that experienced declines of more than 20 per cent in 2018 – but also possess an analyst rating of four (accumulate) or five (buy) stars.
This means they're meaningfully undervalued and likely or highly likely to appreciate beyond a fair risk-adjusted return over several years.
Ainsworth Game Technology (ASX: AGI)
Opening price Jan 2: $2.16
Closing Price Nov 30: $0.77
Percentage decline: 64.35
Morningstar Fair Value: $1.20
Ainsworth has indicated revenue and profit before tax in Australia are likely to be materially lower in the first half of fiscal 2019 compared to the same time last year. While a portion of this is attributed to a 10 per cent decline in industry demand – reflecting a slightly longer replacement cycle, which Morningstar believes will normalise – the firm blamed a continuation of highly competitive conditions. Accordingly, we expect Australian revenue to decline almost 20 per cent in fiscal 2019.
At the current share price, the market is pricing in no growth in any of Ainsworth's key regions, a harsh assumption in our view. We maintain slot machines sales are highly cyclical, and following Ainsworth's four consecutive years of underperformance, we continue to expect its performance will recover, albeit more modestly than we had forecast. (Daniel Ragonese)
Pact Group Holdings (ASX: PGH)
Opening price Jan 2: $5.78
Closing Price Nov 30: $3.43
Percentage decline: 40.65
Morningstar Fair Value: $4.90
Following three months of elevated oil price volatility, Pact Group materially downgraded its fiscal 2019 EBITDA guidance to $245 million from a prior range of $270 million to $285 million. The market seems to be attributing little, if any, expectation of recovery in operating margins. As such, value has emerged in Pact shares that now trade at a 34 per cent discount to our $4.90 fair value estimate.
We continue, however, to highlight the importance of the previously announced $50 million in cost savings to drive margins higher. The program announced in August, will rationalise the Australian rigids network and support our expectation of operating margins improving toward 11 per cent in fiscal 2028, up from 8.7 per cent in fiscal 2018. (Grant Slade)
Challenger Ltd (ASX: CGF)
Opening price Jan 2: $13.99
Closing Price Nov 30: $9.52
Percentage decline: 31.95
Morningstar Fair Value: $12.60
Falling Australian eastern state property prices; tightening interest rates in the US relative to Australia; and potential delay of CIPR legislation by the Australian Government are short-term concerns that have weighed on investor sentiment. Despite these genuine concerns, we believe the longer-term trend to a larger portfolio allocation to annuities has begun and will support strong earnings growth over the longer term. (Chanaka Gunasekera)
Automotive Holdings Group (ASX: AHG)
Opening price Jan 2: $3.66
Closing Price Nov 30: $1.63
Percentage decline: 55.46
Morningstar Fair Value: $2.60
With further deterioration in the Australian residential property market, and the consequential negative wealth effect, the health of the automotive market will likely worsen before it improves. Meanwhile, the recent unfavourable regulatory reform will continue to weigh on margins.
We continue to see upside in Automotive shares at current levels. New vehicle sales are cyclical, and we continue to believe sales will revert to normalised levels as the property market stabilises. We expect earnings to start recovering from fiscal 2021 onwards, which incorporates improving volumes, along with higher margins through both operating leverage (as the company resumes consolidating the fragmented market) along with higher vehicle pricing as the industry adjusts to recover the forgone finance and insurance commission. (Daniel Ragonese)
Medibank Private (ASX: MPL)
Opening price Jan 2: $3.29
Closing Price Nov 30: $2.42
Percentage decline: 26.44
Morningstar Fair Value: $2.95
Private health insurer, Medibank Private surprised with disappointing news its lucrative contract providing health services to the Australian Department of Defence will not be renewed when the current contract expires June 30, 2019 - which was flagged to the industry earlier this year and resulted in a 5 per cent FVE re-rating by Morningstar. Political and regulatory decisions - as ever - also weighed on the company, including negative sentiment around private health insurance premium increases across the segment.
Despite the setback, we are positive on the long-term outlook for Medibank, but the potential change in government in 2019 could crimp short-term earnings growth with current Labor party policy calling for a 2 per cent cap on premium rate increases for two years. (David Ellis)