In a busy week of results three companies that are trading below their fair value and have been assigned a narrow moat rating indicating our believe that they will sustain a competitive advantage for at least 10 years. 

Amcor (ASX: AMC)

 

Director of Equity Research Johannes Faul increased his fair value estimate for narrow-moat-rated Amcor by 9% to $17.50 per share. The upgrade is primarily driven by a weaker Australian dollar and a less severe cyclical earnings trough in fiscal 2024 than we previously expected.

At current prices, shares screen as undervalued. Faul believes the market is skeptical of a return to earnings growth in the second half of fiscal 2024. However, he believes Amcor has taken appropriate steps to cut costs and a stabilization of consumer demand is likely with inflationary pressure gradually subsiding.

Faul lifted his fiscal 2024 earnings estimate by 6% to $0.67, due to a less pessimistic outlook for consumer demand and Amcor’s cost-cutting initiatives. The very near-term outlook for packaging volumes remains challenging—across flexibles and rigids alike—with rising shelf prices still forcing shoppers to scale back their purchases of defensive products, and ongoing destocking by Amcor’s customer.

Further earnings headwinds in the first half of fiscal 2024 are rising energy and labor costs, the loss of earnings from its divested Russian assets, as well as higher interest expenses.
However, the outlook for earnings growth in the second half is brighter as many of these challenges will abate.

Bapcor (ASX: BAP)

 

Equity Analyst Angus Hewitt maintained his $8 fair value estimate for Bapcor. Underlying fiscal 2023 net profit after tax of $125 million was 5% lower than fiscal 2022 and about 7% below our prior forecast.

Better-than-expected top-line growth was offset by weaker margins, particularly in retail. The dichotomy between discretionary and nondiscretionary automotive expenditure has manifested in the results. Rising cost of living pressures weighed on retail profitability, while the trade and wholesale divisions proved resilient.

Hewitt lowered his fiscal 2024 underlying net profit after tax (“NPAT”) forecast by about 10% to $138 million. He anticipates the subdued retail environment, which is more exposed to discretionary purchases, will continue to weigh on profitability into fiscal 2024. Despite the weaker near-term outlook, the underlying dynamics in automotive spare parts are positive, and Hewitt made no material changes to his long-term forecasts. The shares are currently trading 15% below his fair value estimate of $8.

Hewitt expects rising cost of living pressures to have minimal impact on about 90% of Bapcor's earnings, which are tied to largely nondiscretionary vehicle maintenance. Maintenance can be delayed but not ignored. Spare-parts demand is linked to the overall vehicle pool.

Hewitt anticipates vehicle registrations to grow at low single digits over the next decade, marginally outpacing population growth. There are currently more than 20 million passenger vehicles in Australia, with an average age of about 11 years, and about 15 million older than 5 years—out of manufacturer warranty and squarely in Bapcor's target market. Bapcor can take more share from the long tail of smaller competitors by distributing a wider range of spare parts quicker, more reliably, and at a lower cost—competitive advantages that furnish the firm with a narrow economic moat.

Aurizon (ASX: AZJ)

 

Narrow-moat Aurizon Holdings endured a tough year, but Senior Equity Analyst Adrian Atkins expects a much better performance in fiscal 2024 and beyond.

Fiscal 2023 underlying EBITDA fell 3% to $1.43 billion, in line with Atkins’ expectations, as wet weather impacts offset the One Rail acquisition. Underlying net profit after tax fell 30% to $367 million on significant increases in depreciation and interest expense. Overall, he thinks it a solid result in difficult conditions.

Atkins made only minor changes to his forecasts and maintains his $4.70 fair value estimate. The stock screens as undervalued at current prices, trading on a fiscal 2024 P/E ratio of 15 and offering a dividend yield of 5% mostly franked.

Fiscal 2024 guidance is for earnings before interest, taxes, depreciation, and amortisation (“EBITDA”) of $1.59 billion to $1.68 billion, representing growth of 14% at the midpoint. Atkins’ forecast sits near the middle of guidance. All segments have a positive fiscal 2024 outlook, with the regulated rail track network benefiting from higher allowed returns, the coal haulage business benefiting from recovery of volumes, and CPI-linked tariffs, and the non-coal bulk haulage business benefiting from increased volumes, the full-year contribution of the One Rail acquisition, and cost synergies from the acquisition. Atkins thinks good earnings momentum will continue for the medium term, albeit at a slowing rate, and forecast an EBITDA compounded annual growth rate (“CAGR”) of 7.5% to fiscal 2028.