Risk appetite is making a comeback with our share market rallying on reports that US and Chinese trade officials will be resuming talks in October to break the trade deadlock.
Those looking for buying opportunities might be interested in two S&P/ASX 200 (Index:^AXJO) (ASX:XJO) stocks that top brokers think could easily trigger a share price re-rating by divesting assets.
Spinning-off unwanted parts of the business is a good way to win favour with the market. History has shown that these stocks tend out outperform the broader market over the medium to longer-term.
You only need to look at the Wesfarmers Ltd (ASX: WES) share price and Coles Group Ltd (ASX: COL) share price for inspiration. Both stocks are trading at or near 52-week highs since Wesfarmers cut the apron strings of the supermarket chain.
Splitting for explosive growth
The same re-rating could happen for the embattled Incitec Pivot Ltd (ASX: IPL) share price, according to Credit Suisse.
The IPL share price has been hammered from a recent profit downgrade but Credit Suisse doesn’t think it will be hard for management to get back into investors’ good books.
“The portfolio opportunity seems straight forward. Divest the volatile and structurally weaker Australian fertiliser business and focus capital into well positioned explosives businesses in duopoly market structures,” said the broker.
“Throw a tightening supply and demand picture over the top and a customer base looking increasingly for value adding and consequent earnings growth from low capital expenditure opportunities.”
Credit Suisse has an “outperform” recommendation on the stock with a $3.73 price target.
Cutting a bad connection
Another stock that can close its valuation discount through asset sales is Vocus Group Ltd (ASX: VOC).
That is the view of Morgan Stanley, which is hypothesising that the sale of Vocus’ retail business could prove to be a positive share price catalyst for the stock.
Selling off that division will allow management to focus on the better performing Networks business and de-risk the group’s turnaround strategy.
The broker estimates that Vocus’ earnings per share (EPS) compound annual growth rate (CAGR) could hit 28% without the retail division compared to 13% if the two businesses were kept together.
What’s more, proceeds from the sale will help Vocus pay down debt.
“A potential sale of Retail (subject to an acceptable price) could reduce the discount to our SoTP [sum of the parts] valuation by providing a clearer value on Networks and NZ,” said the broker, which has an “overweight” rating on Vocus with a price target of $3.70 a share.
“We estimate VOC is trading on a 11-26% discount to our SoTP valuation (FY20-21E). We valuethe Retail business at A$207-416m (A$0.33-0.66/share).”
Breaking up isn’t always hard to do.
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The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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