We delve into five bottom drawer stocks - CSL (CSL), Macquarie (MQG), Worley (WOR), NextDC (NXT), and Netwealth (NWL) - the investing themes they align with and the reasons we believe they should be held over the long-term.
Investing Theme: Healthcare Innovation
Long term investment opportunities exist in the healthcare sector. Factors such as technological advancements, changing demographics, and increasing global health needs contribute to the growth potential of healthcare stocks. As populations age and life expectancies increase, the demand for healthcare products and services continues to rise.
Breakthroughs in biotechnology, precision medicine, and digital health are reshaping the industry. Companies operating in the healthcare sector, such as CSL, are
well-positioned to benefit from these trends. Healthcare stocks present an attractive proposition for long-term investors seeking sustainable growth.
CSL (CSL) – reinvesting for growth
1. Plasma Recovery
As the world recovers from the COVID-19 pandemic, CSL's core plasma business, Behring, is well-positioned to benefit from the rebound in plasma demand. Plasma-derived therapies, such as immunoglobulins, are crucial for treating various medical conditions. The disruption caused by the pandemic temporarily affected plasma collection, leading to supply shortages. We expect costs to fall over time as collection centres ramp up supply, improving core plasma margins.
2. Pipeline of New Products
CSL's robust pipeline of new products presents an exciting growth opportunity. As these new products progress through clinical trials and receive regulatory approvals they have the potential to drive future earnings growth and strengthen CSL's market position.
3. Steady Reinvestment
CSL's commitment to reinvesting in innovation ensures a sustainable competitive advantage. The company consistently allocates a significant portion of its resources to research and development activities. This reinvestment allows CSL to stay at the forefront of medical advancements and maintain the aforementioned strong pipeline of innovative products. A key reason the company has been able to compound earnings over the long-term.
All these factors combined are expected to support earnings growth over the next 5 years. The 5 year earnings growth CAGR for CSL is 17%, while there is earnings upside potential from expected product launches over the coming years. At a current 12 month forward PE multiple of ~28x, CSL looks very attractive on a long-term basis.
Investing Theme: Energy Transition
The energy transition presents significant long-term investment opportunities as the world shifts towards cleaner and more sustainable energy sources.
According to the International Energy Agency (IEA), around US$2.8 trillion will be invested in energy in 2023. More than US$1.7 trillion will be allocated to clean energy, including renewable power, nuclear, grids, storage, low-emission fuels, efficiency improvements, and end-use renewables and electrification. The remainder, slightly over US$1 trillion, will go to unabated fossil fuel supply and power, of which around 15% is to coal and the rest to oil and gas. For every US$ 1 spent on fossil fuels, US$1.7 is now spent on clean energy. Five years ago, this ratio was 1:1.
This staggering figure underscores the immense scale of investment needed to transition to a low-carbon economy. As governments, businesses, and societies increasingly prioritise sustainable energy solutions, the energy transition presents substantial earnings growth potential for long-term investors.
Macquarie (MQG) – First Mover Advantage on Green Infrastructure
MQG’s long-term investment potential lies in its active investment in renewable energy projects and clean technology. MQG is one of the largest infrastructure managers globally and is now the manager of 153 infrastructure assets across the world with deep sector expertise across all asset classes, including roads, airports, rail, ports, telecommunications, utilities, green energy, and digital infrastructure.
Green energy is an area of differentiation between MQG and its peers, with MQG having a first-mover advantage in the space. MQG acquired Green Investment Group (GIG) in 2017 and has grown to become one of the world’s largest green investors with 14 GW of green energy assets and a development pipeline of 97 GW in over 25 markets. In our opinion, MQG is well-positioned to take advantage of this opportunity and is one of the few ASX stocks exposed to this macro trend.
We believe the market will pay a high multiple for MQG's asset management business, and may pay even higher for green infrastructure within that.
We believe a focus on green infrastructure and the energy transition should lead to a rerate in MQG, supporting earnings growth as we are seeing a seismic shift in capex spend towards green projects over the next decade.
Worley (WOR) – Supporting the Next Energy Capex Cycle
Currently, 40% of WOR's contracts (revenue and backlog) are from sustainability projects. However, WOR’s pipeline of sustainability projects is close to 70%, reflecting management's shift towards clean energy.
WOR currently has a 5 year earnings growth CAGR of 9% based on consensus estimates. We see upside potential from higher revenue growth and margin expansion over the next 5 years. The wave of capex over the next decade could lead to a long-term earnings growth CAGR in the double digits.
There are a few different ways WOR earnings should benefit from the energy transition.
- Higher volume of contracts – with the higher volume of work for WOR and its competitors, WOR should secure more contracts, leading to higher revenue.
- Lower risk, lower impairments – with more work to tender for, WOR can be selective on projects. WOR can therefore take on lower risk projects and use contracts that pass more risk to the client (variable cost etc).
- Higher prices, higher margins – WOR should be able to lift its prices as the number of tendered projects increases. Plus, renewables focussed projects are typically higher margin than traditional energy projects..
Therefore, we expect higher revenue at better margin for WOR as it becomes a key player in sustainability projects over the next 5 years.
Investing Theme: Cloud Computing Demand to Grow Exponentially
We expect to see a surge in demand for data centres over the next decade due to the following:
- The exponential growth in internet/data usage is contributing to the surge in data centre demand. With the proliferation of online services, social media platforms, e-commerce, and streaming content, the consumption of data-intensive applications is escalating. Data centres play a pivotal role in ensuring seamless user experiences and uninterrupted service availability by handling the storage and processing of the immense data load.
- The rise of edge computing also contributes to the demand for data centres.
Edge computing involves processing data closer to the source of generation, reducing latency, and enabling real-time decision-making. Data centres are crucial for aggregating, processing, and analysing the massive amounts of data collected at the network edge. - Artificial intelligence (AI) is another future driver of data centre demand.
AI algorithms rely on extensive datasets for training, testing, and continuous learning. Data centres provide the storage capacity and computational power necessary to handle these large datasets and perform the complex calculations and analyses required by AI models.
NextDC (NXT) – Clear Skies and Cloud Profits
NXT's long-term investment potential stems from its role in supporting digital transformation. The demand for data storage and processing continues to surge as businesses adopt cloud computing, artificial intelligence, and other digital technologies.
NXT's state-of-the-art data centres offer secure and reliable infrastructure to meet these growing needs. NXT is positioned as a key player in the data centre market by providing a foundation for digital innovation. Our expectation is that the transition to cloud will be a long term (decades) process. In this scenario, NXT should continue to win new contracts, and increase utilisation. This would lead to a substantial lift in earnings over the long term.
NXT’s infrastructure supports the development and deployment of AI-driven applications.
As businesses increasingly rely on AI technologies, NXT stands to benefit from the continued digital transformation trend. We see an acceleration in customer contracts and therefore a brought forward in revenue due to the exponential growth of AI. This could provide an upside surprise to consensus over the next 5 years.
Investing Theme: Disruption
Disruption is a prominent investing theme as industries undergo transformative changes. Netwealth Group Limited (NWL) is at the forefront of disrupting the investment industry through its specialty investment platform. The Specialist Platform Providers (SPPs), including NWL, are taking market share with platforms 2-3 years ahead of incumbents and we think this technology gap will continue over the medium-term.
NWL - Disrupting Incumbents
NWL should be able to attract strong net inflows over the medium-term. The company has been one of the fastest growing investment platforms over the past 5 years as NWL takes market share from incumbent platforms like Insignia (rebranded IOOF), BT, and AMP. Before the Hayne Banking Royal Commission, many advisers used the platform of their respective companies.
This traditional nexus broke down after the royal commission as many advisers migrated to self-licensed and independent business models. The proportion of advisers with their own AFSL or are majority independent increased from 45% of the market to 76% since the Royal Commission.
The main beneficiaries of this trend have been specialist platform providers such as Netwealth, HUB24 (HUB), and Praemium (PPS) which have been taking market share over this period. This increased market share has led to higher FUA and growth in the annuity-style revenue that NWL generates from FUA.
Nevertheless, these specialist platform providers are still lightweights compared with the big institutional incumbents. NWL has a market share of 6.7%, compared to Insignia, BT, AMP, and CBA (Colonial) which have 20.2%, 16.6%, 14%, and 13.6% respectively. We believe there is further market penetration to go, which should continue to drive FUA and earnings growth over the medium-term.
| Company Name | Ticker | Focus Portfolio Weight | Sector | Beta | Share Price | Market Cap (a$b) |
Forecast Multiples | EPS CAGR % | EBITDA CAGR % | Dividend Yield % | |
| 12mth fwd PE | 12mth fwd EV/EBITDA | (FY0-FY5) | (FY0-FY5) | 12mth fwd | |||||||
| 5 stocks for the next 5 years | |||||||||||
| CSL | CSL | 8.5% | Healthcare | 0.41 | 258.82 | 124.8 | 27.7 | 19.1 | 15% | 16% | 1.6% |
| Macquarie | MQG | 5.0% | Financials | 1.51 | 183.02 | 71.0 | 15.6 | 26.1 | 3% | 0% | 3.8% |
| Worley | WOR | 2.0% | Industrials | 1.96 | 16.97 | 8.9 | 22.3 | 11.6 | 9% | 13% | 3.0% |
| NextDC | NXT | 2.0% | Information Technology | 0.31 | 12.87 | 6.6 | na | 34.6 | 51% | 21% | 0.0% |
| Netwealth | NWL | 2.0% | Financials | 0.89 | 13.98 | 3.4 | 38.7 | 25.4 | 21% | 20% | 2.2% |
| Other attractive long-term buys | |||||||||||
| ResMed | RMD | 3.5% | Healthcare | 0.23 | 32.6 | 47.6 | 29.5 | 21.6 | 11% | 13% | 0.9% |
| Goodman | GMG | 3.0% | Real Estate | 1.18 | 20.73 | 39.2 | 19.9 | 18.9 | 10% | 10% | 1.5% |
| James Hardie Industries | JHX | 3.0% | Materials | 1.46 | 40.19 | 17.7 | 21.4 | 13.8 | 6% | 5% | 0.0% |
| APA | APA | 3.0% | Utilities | 0.45 | 9.87 | 11.7 | 30.1 | 11.9 | 11% | 4% | 5.9% |
| Aristocrat Leisure | ALL | 3.0% | Consumer Discretionary | 1.2 | 39.39 | 25.8 | 18.9 | 11.8 | 12% | 7% | 1.8% |
| Lottery Corporation | TLC | 3.0% | Consumer Discretionary | 0.68 | 5.15 | 11.5 | 27.9 | 15.9 | 7% | 6% | 3.5% |
| Telix Pharmaceuticals | TLX | 2.0% | Healthcare | 2.37 | 11.73 | 3.7 | 43.4 | 29.2 | 48% | 49% | 0.0% |
| IDP Education | IEL | 2.0% | Consumer Discretionary | 1.88 | 22.69 | 6.3 | 33.6 | 19.9 | 23% | 20% | 2.1% |
| Xero | XRO | 2.0% | Information Technology | 1.22 | 124.41 | 18.8 | 118.6 | 40.5 | 66% | 24% | 0.0% |
Data as at 18/7/2023. Source: Refinitiv, Wilsons.
Written by
Rob Crookston, Equity Strategist
Rob is an experienced research analyst with a background in both equity strategy and macroeconomics. He has a strong knowledge of equity strategy, asset allocation, and financial and econometric modelling.
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