The market is poised to end the week on a backfoot. But the pullback is giving brokers the opportunity to upgrade some ASX stocks to “buy”.
The S&P/ASX 200 Index (Index:^AXJO) slumped 0.7% in after lunch trade and will finish the week with a 1% loss if it closes at current levels.
While experts are divided on whether the burst in volatility marks the start of a highly anticipated market correction, top brokers are seeing value in two stocks.
Floating to the top
The Santos Ltd (ASX: STO) share price is one with UBS upgrading its recommendation on the stock to “buy” from “neutral”.
The news isn’t helping the stock today though as the slump in the overnight oil price dragged on the sector.
But Santos can still be a profitable play even as the Brent crude price dropped under US$40 a barrel. UBS believes management can achieve its target of being free cash flow (FCF) breakeven at under US$25 a barrel this calendar year.
This will help Santos lower gearing to 27% from 34% by FY22 – just in time for its next major growth phase.
But this isn’t the only reason to buy the stock. The broker believes the market is underappreciating a number of its assets.
The 1.7 million tonnes a year (mtpa) Moomba Carbon Capture and Storage (CCS) project is one. Moomba could benefit Santos in two ways.
“We anticipate [the] federal govenment will likely legislate a process for CCS to be eligible for Australian Carbon Credit Units (ACCUs) offsetting >50% of the lifecycle cost,” said UBS.
“Our analysis expects that reinjecting 1.7mtpa of CO2 into depleted Cooper basin reservoirs could lift oil production by 2.7mmbbl pa.”
The broker’s price target on Santos is $6.50 a share.
Spoonful of sugar
Meanwhile, Credit Suisse upped its rating today on the Sigma Healthcare Ltd (ASX: SIG) share price to “outperform” from “neutral”.
The broker turned bullish on the drug supplier and pharmacy retail chain as it believes the stock is cheap and can deliver double-digit earnings growth.
“We forecast SIG achieving EBITDA CAGR of 21% between FY20-FY23F driven by cost outs, full ramp-up of Chemist Warehouse FMCG contract and continued above market growth in retail,” said Credit Suisse.
“The stock trades on 17x 12-mth forward CS EPS, below its two- and 5-year averages.”
Cash conversion set to improve
Sigma reported its first half results this week, which was inline with the broker’s expectations, although its cash conversion of 49% may have disappointed investors.
But Credit Suisse believes this will improve once the volatility from the COVID-19 impact subsides.
The broker’s 12-month price target on the stock is $0.70 a share.
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