Investment success over the long-term means finding great companies that are trading at attractive valuations.

When buying shares, it is more than just buying a name on a screen. Rather, they’re buying partial ownership in companies. As such, we think it’s important to understand a company’s fundamentals before purchasing its shares.

This approach can help you no matter what your goal or selection criteria is, by helping you look beyond potential noise caused by short-term factors and hype, and find quality shares to invest in long-term.

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It boils down to four basics:

  1. Having an intimate knowledge of the company’s sustainable competitive advantages or moat
  2. Determining what its shares are worth
  3. Understanding the inherent risk in the business as represented by the uncertainty rating
  4. Only buying the stock when there’s a significant margin of safety in doing so

For more information listen to our 3-part series on finding great shares on our podcast Investing Compass.

There have been large moves in some share prices during earningsn season and as a result, we’ve made quite a few changes to our best ideas list. Overall, with the market at record highs, we are no longer are awash with cheap options. The market is close to fairly valued with the median price / fair value for our coverage at 0.96, a modest 4% discount. We’re still seeing larger-cap stocks more richly priced. 

Top shares in each ASX sector

Here’s our top picks for each sector.

  • Basic materials: IGO Ltd (IGO)
  • Communications: TPG Telecom (TPG)
  • Consumer cyclical: Siteminder (SDR)
  • Consumer defensive: Endeavour Group (EDV)
  • Energy: Woodside (WDS)
  • Financial services: AUB Group (AUB)
  • Healthcare: Nanosonics (NAN)
  • Industrials: Aurizon Holdings (AZJ)
  • Real estate: Lendlease (LLC)
  • Technology: Audinate (AD8)
  • Utilities: APA Group (APA)

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IGO Ltd - Basic Materials

  • Star rating: ★★★★
  • Fair Value: $8.30
  • Uncertainty: High
  • Economic moat: Narrow

We recently initiated coverage of IGO with a fair value estimate of $8.30 per share. IGO is a mining and exploration company based in Western Australia. Its primary asset is a minority stake in the Greenbushes lithium mine. IGO also has an interest in downstream processing through a 49% stake in the Kwinana lithium hydroxide refinery. Outside of lithium, IGO owns and operates the Nova nickel-copper-cobalt and Forrestania nickel mines.

IGO trades at a significant discount to our fair value estimate. We think the market takes a different view on the outlook for lithium prices, the key valuation driver for IGO. As lithium prices reached all-time highs in 2022 of around USD 80,000 per metric ton, new, higher-cost supply brought the market to balance, sending prices plummeting over 80% in 2023. Prices remain soft, averaging roughly USD 14,000 per metric ton in the June quarter of 2024.
We forecast a recovery. We expect lithium prices to remain above our long-term forecast for the marginal cost of production, estimated to be USD 20,000 per metric ton, through the rest of the decade.

We determine a narrow moat for IGO, underpinned by the cost-advantaged Greenbushes mine. Greenbushes is the highest-quality hard rock lithium operation in the world. The mine produces spodumene concentrate, the feedstock for the battery compound lithium hydroxide. We estimate the mine sits at the bottom of the hard rock lithium cost curve.

TPG Telecom - Communications 

  • Star rating: ★★★★★
  • Fair Value: $6.60
  • Uncertainty: Medium 
  • Economic moat: Narrow  

TPG Telecom is grappling with structural changes in the Australian telecommunications market. Rollout of the national broadband network, or NBN, and take-up of high-traffic products such as video streaming, will increase the demand for broadband and backhaul capacity. However, the NBN will also force TPG Telecom to become a reseller, hitting its consumer broadband margins.

TPG Telecom's price-leader strategy still sees the company delivering solid subscriber and market share performance. Product bundling has also become a key driver, with all players using broadband as a lead-in product and cross-selling voice, mobile, pay-TV, and digital streaming services.

The 2020 merger with Vodafone Australia (the third-ranked mobile player in the country) is one way TPG Telecom is trying to limit the impact of the NBN. Mobile offers a critical strategic path to future-proof the group in the face of an onslaught from the NBN. The government entity is already wreaking havoc on the narrow-moat-rated group's retail fixed-line broadband and could even potentially affect the lucrative enterprise segment.

In August 2023, TPG received a highly conditional AUD 6.3 billion offer from Vocus for its fixed-line fibre assets that service corporate, government, and wholesale telecom customers. Following due diligence, however, the parties were unable to "reach alignment on the operating model and commercial terms," and talks were terminated in November 2023. However, management is still committed to liberating the value of its infrastructure assets and there remains "ongoing strong interest from potential strategic and financial investors in the company’s fixed infrastructure assets."

Siteminder - Consumer Cyclical 

  • Star rating: ★★★★★
  • Fair Value: $10
  • Uncertainty: High 
  • Economic moat: Narrow 

SiteMinder’s software lets hotels and other accommodation providers accept and manage bookings from several internal and external channels at once. By driving better room utilization, rates and profitability for clients it has become a mission critical supplier to over 40,000 accommodation businesses worldwide.

As is the case with many other software-as-a-service companies, SiteMinder’s products benefit from switching costs. These mostly arise from its mission-critical nature and the risks related to switching vendors. The process of switching could lead to downtime in important channels of demand, or these channels not working as well as they had before. There are also direct costs in the form of money and time to setting up a new channel manager.

But switching costs aren’t the whole story as Siteminder’s relative size is also a source of competitive advantage.

This is because building the infrastructure to connect demand channels and property management systems entails large upfront investments for each compatible demand channel, as well as additional costs for maintenance and updates. Bigger players can spread these costs over a larger revenue base and avoid sacrificing sales and marketing spend.

As Siteminder is at least twice the size of its closest competitors, Van Keulen thinks it is in a strong position to gain share from sub-scale players as the industry consolidates. The growing number of integrations already offered by existing providers as a rising barrier to entry for new competitors.

Endeavour Group - Consumer Defensive 

  • Star rating: ★★★★
  • Fair Value: $6.10
  • Uncertainty: Low 
  • Economic moat: Wide 

Endeavour is Australia's pre-eminent omnichannel liquor retailer, operating the largest network of brick-and-mortar stores throughout the country, with more than 1,600 liquor outlets across the well-known Dan Murphy's and BWS brands. Endeavour also has substantial interests in hotels and electronic gaming machines, operating more than 12,000 gaming machines across its portfolio of more than 300 hotels, pubs, and clubs.

Endeavour Group has a wide economic moat in its core liquor retailing segment emanating from a scale-based cost advantage. Endeavour's hotels business also benefits from intangible assets that support economic profit generation for the segment.

Endeavour’s dominant scale allows it to fractionalize distribution, administration, and marketing costs in a way that smaller competitors cannot. Stemming from its domineering market position and significant scale advantages, we estimate Endeavour to have a material, maintainable operating margin advantage over all its competitors.

Woodside - Energy

  • Star rating: ★★★★★
  • Fair Value: $45.00 
  • Uncertainty: Medium 
  • Economic moat: None 

As Australia's premier oil player, Woodside Petroleum's operations encompass liquid natural gas, natural gas, condensate and crude oil. However, LNG interests in the North West Shelf Joint Venture, or NWS/JV, and Pluto offshore Western Australia are the mainstay, and the low-cost advantage of these assets form the foundation for Woodside. Future LNG development, particularly relating to the Pluto project, encompasses a large percentage of this company's intrinsic value.

Woodside is unique among Australian energy companies in that it has successfully managed the development of LNG projects for more than 25 years—unparalleled domestic experience at a complicated and expensive task. Adding to Woodside's competitive advantages are the long-term 20-year off-take agreements with the who's who of Asia's blue chip energy utilities, such as Tokyo Electric, Kansai Electric, Chubu Electric, and Osaka Gas. These help ensure sufficient project financing during development and should bring stability to Woodside's cash flows once projects are complete.

Woodside's development pipeline is deep, enabling it to leverage the tried and trusted project-delivery platform as a template for other world-class gas accumulations off the north-west coast of Australia. Woodside is well suited to the development challenge. With extensive experience, it remains a stand-out energy investment at the right price. Gas is the fastest growing primary energy market behind coal, and the seaborne-traded LNG portion of that gas market grows faster still. China is building several import terminals, and so demand is likely to pick up, helping to move LNG pricing toward oil parity on an energy-equivalent basis.

AUB Group - Financial Services

  • Star rating: ★★★★
  • Fair Value: $35.00 
  • Uncertainty: Medium
  • Economic moat: Narrow

AUB Group operates the second-largest general insurance broker network in Australia and New Zealand. AUB Group brokers derive revenue from commissions paid by insurers, based on gross written premiums. AUB Group owns or has equity stakes in each broking business within the network. Around half of group profit is delivered by the Australian and New Zealand broker network, around 30% from Tysers in the United Kingdom, and the remainder from underwriting agencies.

We assign AUB Group a narrow moat based on switching costs. As AUB’s revenue is dependent on brokers remaining in the network and the annual premiums each broker in the network writes, retention of the end customer is crucial. There are two aspects to AUB’s switching cost advantage. First, the switching cost between the customer and broker, and secondly the broker remaining within the AUB network.

First, the tangible benefits for clients to switch to an alternative broker are uncertain; and there are tangible risks and/or costs in moving from a broker who understands the specific business need (and can align those to a broad range of insurance offering), versus one who does not. AUB’s client retention rate is high, exceeding 90%, impressively strong given normal SME attrition.

Nanosonics - Healthcare

  • Star rating: ★★★★
  • Fair Value: $4
  • Uncertainty: High 
  • Economic moat: Narrow

We maintain our $4 fair value estimate and earnings estimates for narrow-moat Nanosonics. The shares trade at a 27% discount to our fair value estimate, as our view that recent earnings headwinds will be largely temporary differs from the market's view. Recent profitability has been negatively affected by hospital capital budget constraints, abnormally low ultrasound procedural volume, and Nanosonics investing in its next major product, Coris, ahead of its expected launch in fiscal 2025.

Coris aims to automate flexible endoscope cleaning. We assume first launches will be in Australia and Europe in fiscal 2025. Nanosonics remains on track after filing for regulatory approval in May. The firm also published positive results from a clinical study in June, demonstrating that Coris outperforms manual cleaning in biofilm removal in endoscopes. We expect the uptake of Coris to mirror Trophon and forecast annual sales to grow to $100 million by fiscal 2033.

We award Nanosonics a narrow moat and think the combination of its patent intangible assets and switching costs will help deliver maintainable excess returns. The company earns an increasing proportion of its revenue from consumables used in the installed base of over 27,000 Trophon devices. The consumables revenue stream is both higher-margin and makes up the majority of group revenue. Importantly, non-Nanosonics consumables are not compatible with the Trophon device as the patent protection of the consumables, which runs to 2029, includes the design of how the consumable bottle fits into the device. Thus, despite the device patent only extending to 2025, we see the installed base as supportive of the consumables revenue stream being largely unaffected in the next 10 years.

Aurizon - Industrials 

  • Star rating: ★★★★
  • Fair Value: $ 4.70 
  • Uncertainty: Medium 
  • Economic moat: Narrow 

Aurizon is a narrow-moat business operating in efficiently scaled markets. Its rail operations hold significant cost advantages over other forms of bulk commodity transportation, though the industry is highly cyclical. Coal prices have recovered but downward pressure is likely to remain on haulage rates and volumes due to intense competition.

The coal-haulage market is highly concentrated, with few competitors and a few large customers. Aurizon holds major positions in the domestic coal-haulage market (70% market share in Queensland and 30% in New South Wales). Commercial contracts, which are typically five to 12 years in length, underpin defensive revenue with customer commitment to take-or-pay (around 60%), pass-through of rail network access fees, and annual consumer price index increases. These contracts have helped insulate the firm from volatility in coal demand and supply factors to date.

Aurizon's non-coal bulk-haulage operations are typically low-margin and extremely variable, with customers based in the volatile agricultural, manufacturing and mining sectors. While a relatively large operation, the contribution to group earnings is small. Aurizon's iron ore customers are typically higher-cost juniors. The long-term outlook remains challenging for these firms, despite recent iron ore strength, as low-cost majors continue to bring on new supply, despite China slowing. Aurizon's earnings from iron ore haulage could disappear over the medium term.

Aurizon's Central Queensland Coal Network, or CQCN, provides essential transport infrastructure for the main metallurgical-coal-mining region in Australia. The CQCN is leased from the Queensland government until June 2109, with competitor access and access charges strictly regulated by the Queensland Competition Authority. Despite being highly regulated and needing large capital investment, the CQCN is a monopolistic rail system that provides Aurizon with highly predictable long-term revenue. Typically, regulated tariffs are the main source of Aurizon's revenue from the CQCN, with the access undertaking set every three to five years. However, until 2027 network tariffs are set under an agreement with customers.

Lendlease - Real Estate

  • Star rating: ★★★★★
  • Fair Value: $10.00 
  • Uncertainty: High 
  • Economic moat: None

Lendlease kicked off a major shift in strategy in 2024, with plans to exit its international development and construction businesses, and focus on Australia. The group is a diversified property developer, landlord, property manager, fund manager, and builder on a range of development projects, funds, and completed properties around the world. However, within a few years, its offshore interests will mainly be limited to owning and managing mature investment assets, not development or construction projects. This will involve completing work-in-progress, selling its Asian, European, and United States development projects that haven't already started, selling its offshore construction capabilities, and its retirement and US military housing businesses, and Australian communities development.

The shift will likely free up substantial capital which could be used to reduce debt, initiate a security buyback, and with any remaining capital it could reinvest to grow its pipeline of projects in Australia. Lendlease sold its risky engineering business in calendar 2020, though it retained liability for engineering/construction projects with several years to run. Lendlease found a buyer for its engineering services business after two years of marketing, and the price was respectable.

The group’s ongoing business comprises three segments: development, investments, and construction. We don’t expect much growth in construction earnings, that business is primarily to preserve scale and construction expertise in support of Lendlease’s development business, though construction margins in Australia have been better than the wafer thin margins it was earning on overseas construction projects. The domestic business is good, though a key uncertainty is whether Lendlease can source enough major projects in Australia.

Audinate - Technology 

  • Star rating: ★★★★
  • Fair Value: $23.00 
  • Uncertainty: High 
  • Economic moat: Narrow 

We expect Audinate’s strategy to primarily focus on accelerating the secular transition toward digital audio networking. Secondarily, we expect Audinate to focus on building out its nascent business for digital video networking.

Audinate’s Dante protocol has become the world’s most widely used protocol for digital audio networking and boasts a more-than 10 times lead over its nearest competitor, Ravenna, in terms of the number of products enabled with the protocol. Given Dante’s dominant market share, we see little remaining upside for Audinate from gaining incremental market share from direct competitors in digital audio networking.

However, we do expect Audinate to use its network effect, its existing customer relationships, and its scale on research and development to accelerate the AV industry’s transition toward digital audio networking. Specifically, we expect Audinate to continue creating new hardware solutions and reference designs that unlock new device use cases and to continue developing new software solutions for AV professionals. We estimate Audinate has around 10% market share in audio devices, which leaves Audinate with a large and highly winnable market opportunity, as the industry digitizes. Additionally, we expect Audinate to gain significant pricing power, especially in its software segment, as its network effects continue to strengthen.

APA Group - Utilities 

  • Star rating: ★★★★
  • Fair Value: $9.30 
  • Uncertainty: Medium
  • Economic moat: Narrow

APA Group is Australia's premier gas infrastructure company. Gas transmission and distribution is the core business, generating more than 80% of group EBITDA. Power generation—wind farms, solar farms and gas power stations—contribute about 11% and electricity transmission, asset management and investments contribute the balance. The investments division owns stakes in small energy infrastructure companies and the asset management division provides management, operating, and maintenance services to third parties and part-owned companies, leveraging APA’s skills base.

APA’s long-distance gas transmission pipelines and power generation assets typically operate under long-term, CPI-linked contracts with energy retailers, LNG exporters, and major industrial/mining companies. Returns are traditionally 100 to 200 basis points above regulatory returns to compensate for higher demand risk. Electricity transmission and gas distribution networks are regulated, with returns set by the Australian Energy Regulator to provide fair profits after covering reasonable costs.

APA Group's core strategy during the past decade has been to create an integrated east-coast gas transmission grid connecting multiple gas sources to multiple markets. This is now complete following numerous acquisitions and the firm is progressing a similar strategy in Western Australia, connecting to remote mine sites and towns. Expansion creates economies of scale and synergies from linking pipes together into a network with one manager. Further acquisitions of transmission pipelines are unlikely given competition concerns, but organic expansion is ongoing.

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