Morningstar's monthly Best Stock Ideas highlights high-quality Australian and New Zealand companies, which are currently trading at discounts to our assessed fair values. The ideas, chosen from our coverage of nearly 200 companies, are intended to have broad application in a variety of equity strategies, but individuals should consider their personal investment goals and positioning before investing. We provide brief descriptions of each best idea in this report and encourage investors to read our most recent stock reports for a more detailed appraisal.

This month we have 14 companies in our Australia and New Zealand Best Stock list, with three additions and three removals. 

See Morningstar’s Global Equity Best Ideas for the full list of stock ideas chosen by our global equity research team.

Added: Brambles

As the world’s largest supplier of reusable wooden pallets, Brambles (ASX:BXB) generally has the largest or dominant share of pooled pallets in its main geographies. We believe this reflects cost advantages from its scale, underpinning our wide moat rating. Earnings mostly come from large beverage and food companies, which we consider defensive, dampening Brambles’ correlation to the economic cycle. We forecast steady revenue growth with a 6% CAGR for the next decade, reflecting market growth, market share growth, and penetration of new markets. Earnings are set to also benefit from operating margin growth from scale, efficiency projects in pallet repairs and transportation, and the integration of new digital technology.

Added: Dexus

Dexus’ (ASX:DXS) office portfolio is earning higher than market rents, which implies earnings downside as leases expire. But the average office lease length is 4.5 years, which offers time for the office market to recover. We think that’s likely, given city centres in Sydney and Melbourne are getting busier. We expect even more inner urban activity as major public transport projects are completed in the next few years, including Sydney Metro, Melbourne Metro Tunnel, and Brisbane Cross River rail, all of which should benefit Dexus’ locations. Meanwhile, Dexus’ industrial tenants are paying below-market rates, and Dexus can raise prices as leases expire. We also expect funds management earnings to grow. Dexus trades well below its net tangible assets of about AUD 10 per security, and an attractive fiscal 2024 distribution yield, which we think prices in some downside and compensates investors awaiting a recovery.

Added: Endeavour Group

Shares in wide-moat Endeavour (ASX:EDV) trade at a material discount to our fair value estimate and offer an attractive fully franked yield. We think the market underappreciates the defensive long-term earnings outlook, with consumers paring nonessential spending, but with fiscal stimulus from July 2024, we forecast Australian liquor retailing sales to return to mid-single-digit growth and expect longer-term growth to be underpinned by inflation and population growth with structural premiumisation to counterbalance declines in per capita liquor consumption. As Australia’s largest liquor retailer, with its eminent Dan Murphy’s and BWS branded chains, we expect Endeavour’s liquor sales to grow in line with the market. We believe concerns regarding regulatory risk are overdone. Our forecasts assume more stringent gaming restrictions curbing earnings growth in fiscal 2025, but thereafter, we see group profit increasing at an average rate of 6%.

Removed: A2 Milk

While still trading below our fair value estimate, shares in A2 Milk (ASX:A2M) are now in 3-star territory, and there are more compelling alternatives. Despite falling births in China and receding consumer preference for foreign brands, there is still much to like about a2 Milk. Offsetting the falling number of births in China, we anticipate continued premiumisation and for a2 Milk to capture further market share. A2’s share of Chinese-language-labelled infant formula is growing steadily, supported by solid brand health, underpinning its narrow moat.

Removed: Lendlease Group

Lendlease (ASX:LLC) has shifted to a new strategy that involves selling most of its international business and refocusing on Australia. The downside is some of the value in its long-term development and construction projects is likely relinquished, and this contributes to a 23% reduction in our valuation to AUD 10 per security. On the upside, we think the strategy offers the benefit of greater certainty, reduced risks, and potentially quicker recognition of value. We still believe Lendlease is significantly undervalued, and after investors have endured a long wait, we now see an array of catalysts to unlock value, including asset sales, a simplified business, and a proposed security buyback once certain milestones are met. However, we believe Dexus is more compelling, trading at a similar discount but with a narrow moat and medium fair value uncertainty, versus no moat and high uncertainty for Lend Lease.

Removed: Ventia Services

Shares in the urban services provider Ventia (ASX:VNT) have appreciated materially since its addition in April 2023. While we still view Ventia as undervalued, we now think there are more compelling opportunities in the sector. We add Brambles in its place, which trades at a larger discount to our fair value estimate and has a wide moat rating.