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Investor Spotlight: Hedging bets in an uncertain macro-environment

2023 has been a year of financial turbulence, with inflation, interest rates, and economic fluctuations taking center stage. How are these factors impacting investors and companies?

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Article writtten by Danielle Ecuyer

This week's Investor Spotlight will focus on investing in the energy theme, which remains in focus as the oil price rises back to US$90 per barrel, as well as the opportunities and challenges for the transition to net-zero emissions.

Navigating market uncertainties in 2023

What a year 2023 is turning out to be in markets. The overarching narrative has and continues to be inflation, interest rates, and economic slowdowns, or not?

The pandemic effects on companies and economies have only become clear through the passage of time, and the impacts have, on balance, been far more pronounced than most experts, if not all experts' forecasts.

This, of course, has translated into a more challenging operating environment for companies and equally for investors.

Technological disruption and emerging risks

Overlay the rate of technological disruption across sectors, namely AI and GLP-1 drugs, otherwise known as the weight loss drugs; the traditionally safe-haven stocks have been challenged.

There are also multiple new uncertainties for investors, including the impact of extreme weather events on supply chains, as well as rising geopolitics between the Western alliance and BRIC countries.

Playing the energy sector through Santos

Santos is a 50-year-old gas and oil producer with a market capitalisation of $25 billion and is Australia’s second-largest energy company.

The story is far from clear-cut.

Santos has been a disappointment to investors over the last two years, including an earnings miss; FY23 results fell by -37%.

Santos weekly chart

Source: TradingView

However, much of the negative news seems to be already factored into the share price, and analysts assess the valuation as inexpensive compared to its industry peers and historical metrics.

For Santos, the primary challenges lie in achieving a delicate equilibrium.

CEO's strategy and recent divestment

CEO Mr Gallagher recently articulated, “Our objective is to strike an optimal balance between disciplined and phased major project expenditures, delivering returns to shareholders, and investing in innovative energy solutions to address customer demand.” He also acknowledged the persistently challenging macroeconomic environment, as highlighted by the AFR.

The recent divestment of 2.6% of PNG LNG to Kumul for US$576 million, along with US$160 million in project finance debt, and an option for Kumul to acquire an additional 2.4%, has been viewed as a positive development, eliminating a lingering overhang on the stock.

According to FNArena, the average stock price target stands at $9.47, indicating a potential 22% upside from current levels. Refinitiv's mean price target is $8.82, accompanied by 3 Strong Buys, 11 Buys, and 2 Holds.

Refinitiv's analyst assessment chart

Source: Refinitiv

The stock is trading on a prospective multiple of 10.4x FY24 earnings and a 3.8% dividend yield notes FNArena.

FNArena's forecast chart

Source: FNArena

A conglomerate in the sweet spot for mining investment, infrastructure, and energy

Seven Group is riding the wave of spending in the mining and civil engineering sectors via their industrial equipment businesses, WesTrac Australia and Coates Hire.

Seven Group weekly chart

Source: IG

Diverse investments and strategic holdings

The company holds a 70% stake in Boral, a supplier to various sectors, and a 30% investment in Beach Petroleum. Additionally, WesTrac boasts exclusive authorised Caterpillar and Bucyrus distribution and maintenance dealerships in WA, NSW, and the ACT.

Seven Group's FY23 results exceeded expectations, as reported by Goldman Sachs, and the company provided a positive outlook for FY24, defying the prevailing trend during the reporting season.

Robust performance and growth potential

Both the WesTrac and Coates businesses are demonstrating robust performance with a favourable outlook. The company's strong balance sheet and substantial cash flow generation create opportunities for mergers and acquisitions. Seven Group is currently trading at a prospective 14.2x FY24 earnings and offers a 1.8% dividend yield, based on upgraded earnings forecasts from FNArena. The average price target stands at $30.55, representing an 8% upside potential.

FNArena's forecast chart

Source: FNArena

The Refinitiv mean target price is $30.24 with 1 Strong Buy, 5 Buys, and 3 Holds.

Refinitiv analyst assessment chart

Source: Refinitiv

Uranium: A narrative or more?

Investing in uranium stocks hinges on the belief that nuclear energy will play a role in the clean energy solution. While this is not the place for debating the narrative, for those who subscribe to this belief, here are a couple of investment options.

Brokerage firms favour Paladin Energy, which is in the process of reactivating its Langer Heinrich mine in Namibia. Production is expected to resume in the March quarter of 2024.

This low-cost mine holds the potential to rank among the top ten uranium mines worldwide, operating in a secure jurisdiction, as noted by Bell Potter.

FNArena's forecast chart

Source: FNArena

The average price target at FNArena is $1.12, offering 23% upside and the earnings are not expected to be more meaningful until FY25. Refinitiv has a mean target of $1.03 and 3 Strong Buys, 3 Buys and 1 Sell.

If stock selection is too high risk, then one of the other preferred uranium plays is through Betashares Global Uranium ETF (URNM), which offers global uranium exposure.

Refinitiv analyst assessment chart

Source: Refinitiv

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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