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Top 3 ASX Stocks to Watch in July 2020

We examine why a2 Milk, Altium and Qantas remain well liked by some of Australia’s top investment banks.

A2M, QAN, ALU Source: Bloomberg

Global equities prove resilient

Though uncertainty around the economic outlook remains elevated, global stocks continue to trade higher, with the Nasdaq Composite, for example, making fresh all-time highs in recent days.

More locally, with the ASX 200 benchmark flirting with the 6,000 point level, we examine three ASX-listed stocks that analysts from some of Australia's top investment banks see upside potential from. In no particular order, below we examine the following stocks:

  1. A2 Milk (A2M)
  2. Qantas Airlines (QAN)
  3. Altium (ALU)

A2 Milk share price: margins a focal point

Citibank currently has a price target of $21.50 per share and a Buy rating on a2 Milk (A2M) – suggesting upside potential of around 16% from current price levels.

Overall, a2 Milk has seen its share price perform strongly year-to-date – rising ~30% in that period – with the company reporting that demand for its core products had surged during the early portions of H2 FY20.

Indeed, as Citi analysts put it: ‘a2 is well placed to deliver a strong 2H20 performance, as it indirectly benefits from coronavirus related impacts, including Chinese consumers stockpiling essential items such as infant formula.’

Citi is currently forecasting a2 Milk's FY20 revenue will hit NZ$1,772 million, against earnings (EBITDA) of NZ$590 million.

Qantas share price: an inevitable bounce-back?

Though uncertainty looms over Qantas (QAN) – as well as the entire aviation industry – many analysts remain constructive on the airline’s prospects – with analysts from Morgan Stanley (MS) this week reiterating their Overweight rating and price target of $5.30 per share on the stock.

Interestingly, while Qantas has come under moderate selling pressure in recent days – following the announcement of a highly dilutive $1.9 billion cap raise – MS analysts nonetheless appear optimistic about the airline’s long-term prospects, saying:

‘We expect QAN will return to profitability in FY22, and we have raised our underlying earnings forecast by A$500m to reflect an incremental ~A$1bn in cost out (partially offset by a slower recovery in international travel).’

Even so, in the wake of the above noted capital raise, Morgan Stanley argued that the airline’s improved liquidity position and its ‘increased variabilisation of the cost base provide an added buffer against any demand volatility through the recovery phase.’

Morgan Stanley is currently forecasting that Qantas will report FY20 revenues of $13,772 million (-23% YoY), against earnings (EBIT) of $266 million.

Altium share price: FY20 fundamentals in focus

Morgan Stanley currently has a price target of $40.00 per share and an Overweight rating on Altium (ALU), implying some potential upside from current price levels.

A market darling, the PCB design software and high-powered tools company has seen its share price gently decline in the last month – last trading at $32.41 per share. This comes after ALU told the market it expected its FY20 revenue to come in lower as a result of a volume over value price strategy adopted by the company in response to Covid-19. That downgrade represents the fourth in the current calendar year.

While MS analysts appear aware of the short-term risks Altium may be subject to, ‘long-term we remain positive on structural trends [such as the internet of things] and market leadership driving growth,’ the investment bank said.

MS is currently forecasting Altium's FY20 revenue will come in at US$196 million, against earnings (EBITDA) of US$76 million.

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