A few weeks ago, I asked what might be next for some of the ASX’s highest flying shares. Today I’m going to look at the other end of the league table and bring you our analysts’ thoughts on the ASX 200’s worst 1-year performers.

We’ll look at why the company (or sector) has performed so poorly. We’ll also ask if these shares have become oversold against our analysts’ estimate of fair value. For an explanation of Morningstar Star Ratings and terms like Fair Value, Moat and Uncertainty Rating, please see the foot of this article.

Fletcher Building ★★★

Fletcher Building (ASX: FBU) earnings are tied to construction activity in New Zealand and Australia. The company operates across six segments: building products; distribution; concrete; Australia; residential and development and construction. In fiscal 2023, its pre-tax earnings were split roughly as follows: 25% building products; 17% residential and development; 16% distribution; 18% concrete; 21% Australia; and 3% construction.

Fletcher shares are down by around 38% over the last year. Muted building activity, especially in New Zealand, has led to two earnings forecast downgrades. This has led to further concerns over the company’s debt load. By the end of fiscal 2024, Morningstar’s Johannes Faul thinks Fletcher will finish fiscal 2024 with 2.3 times more net debt (debt minus cash) than the earnings it can be expected to generate each year. Given that Fletcher operates in cyclical businesses, this looks stretched. However, Faul does not expect Fletcher to breach its debt covenants. The firm has also negotiated new and more generous loan terms with its lenders.

Faul revised his view on Fletcher’s fundamentals and outlook in May 2024. He cut his near-term earnings forecast and assumptions for Fletcher’s operating margins, given high recurring costs. He also downgraded its Capital Allocation Rating to Poor from Standard and reduced his fair value estimate for Fletcher by 52% to $2.70 per share. At a current price of $2.85 per share, the shares still don't look especially cheap.

Iluka Resources ★★★★

Iluka Resources (ASX: ILU) is a global mineral sands miner. Its major mines are Jacinth-Ambrosia in South Australia and Cataby in Western Australia. Jacinth-Ambrosia is a relatively low cost operation but its reserve life is less than a decade. Like many of its peers, Iluka is facing a declining grade profile at its mines but a constrained outlook for supply should support prices.

In addition to mineral sands, Iluka is building a rare-earth refinery at Eneabba which will utilize its existing monazite stockpile as initial feedstock. The refinery will also be able to process feedstock from third parties and some of Iluka’s other projects. Iluka also retains a 20% equity holding in wide moat Deterra Royalties, which was spun out in 2020. This gives Iluka continued exposure to high-quality cash flows from Deterra’s high-returning, long-life Mining Area C royalty. As most of Iluka’s revenue is generated by selling commodities, they are a price taker as opposed to a price maker. Its core mineral sands operations do not have enough of a cost advantage to give Iluka a moat.

Iluka shares have fallen by around 38% over the past twelve months. This was mostly due to lower earnings as weaker profits, higher inventory and a large one-off tax payment took their toll on earnings versus last year. Weakness in the Chinese property sector has also subdued sentiment towards Iluka shares and demand for its products. Morningstar’s mining analyst Jon Mills assigns Iluka a fair value of $9.50 per share with an uncertainty rating of High because his valuation is driven mostly by assumptions for commodity prices. At a current price of around $7.10, the shares look cheap.

Corporate Travel Management ★★★★

As its name suggests, Corporate Travel Management (ASX: CTD) organises business travel on behalf of its client companies. Since the group’s founding in 1994, acquisitions have been management’s primary way to grow market share. The group is now the fifth-largest player in the global corporate travel management space. Despite this, its pre-Covid transaction volumes of around $12 billion still represents a minuscule share of a market Morningstar’s Brian Han estimates is worth around USD 1 trillion per year.

Corporate Travel Management’s large size relative to most of its competitors means it can negotiate better deals with providers. However, Han does not think the company has an economic moat. The firm is an intermediary between travel providers and client firms, both of which have elements of bargaining power over Corporate Travel Management. He also doubts whether Corporate Travel has any competitive differentiations that can be maintained over the next decade.

Corporate Travel Management shares have fallen by over 35% in the past year. Over half of this occurred in a single day in February 2024 after management downgraded their earnings forecast. This was largely due to a contract to organise logistics for asylum seekers in the UK delivering far lower profits than expected. Sentiment has also been affected by concerns over the impact of a slowing economy and high airfares.

Han thinks Corporate Travel Management is worth $20 per share. This assumes revenue growth of 10% per year for the next three years as the industry recovers from Covid-related headwinds. He also expects the firm to make further market share gains and record better profit margins as its relatively high fixed costs fall as a percentage of sales. Han assigns Corporate Travel Management an Uncertainty rating of High due to intense competition, the bargaining power of its larger customers and the potential for business travel to be disrupted by anything from geopolitical events to the rise of video conferencing.

Sonic Healthcare ★★★★

Sonic (ASX: SHL) is the leading private pathology operator in Australia, Germany, Switzerland, and the UK, which together contributed roughly 70% of pathology revenue in pre-pandemic fiscal 2019. In Australia, Sonic earned pathology revenue of $1.5 billion in fiscal 2019 versus Healius’ $1.1 billion, making it a third larger than its closest competitor.

Sonic shares are down around 30% over the past twelve months, having fallen with those of other pathology providers. In addition to a slower than expected recovery in doctor referrals, investors appear to be concerned that rising costs and the disappearance of highly profitable covid testing will hit profit margins. Morningstar’s Shane Ponraj feels these fears are overblown and thinks pathology margins can recover through increased pricing, stabilising costs and, in cases like Sonic, scale benefits.

Scale matters in pathology labs, which operate a hub-and-spoke model where collection centers near medical facilities feed samples through to large centralised labs for processing. Ponraj thinks that Sonic enjoys considerable cost advantages due to its relative scale in each of its pathology markets and has awarded the firm a narrow moat rating.

Ponraj thinks Sonic is worth $32 per share. This factors in 4% group revenue growth in a typical year and a midcycle operating margin of 14%, resulting in earnings per share growth of roughly 5% over his forecast period. He thinks Sonic’s core Australian pathology business can grow at 5% per year, helped by population growth, market share gains and a shift to more complex tests that command higher prices.

Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.