There are a handful of very promising S&P/ASX 200 Index (ASX: XJO) shares to look at, according to the fund manager L1 Capital.
In its recent monthly update for the listed investment company (LIC) L1 Long Short Fund Ltd (ASX: LSF), the fund manager said it's optimistic about the prospect of China reopening in 2023 and the portfolio is positioned to benefit from any progress on that front.
However, it's also cautious about the outlook for the share market because of the "lagged impact of significant interest rate increases, deteriorating leading economic indicators, increasing pressure on corporate earnings into 2023 and tail risk from geopolitical tensions".
With that in mind, L1 is currently maintaining a conservative portfolio. Here are three of the names that L1 likes:
Sandfire Resources Ltd (ASX: SFR)
The Sandfire share price performed strongly in November, rising by 45% thanks to the copper price going up by 11% along with expectations there is going to be a Chinese reopening.
L1 noted that China accounts for more than 50% of global copper demand, so its economic recovery is "critical to support copper prices".
The fund manager noted that Sandfire did a capital raising for $200 million to strengthen its balance sheet as it completes the capital-intensive task of developing the Motheo copper mine in Botswana. Explaining its optimistic view, the fund manager stated:
We continue to see compelling valuation upside in Sandfire with the commencement of Motheo production in FY24 set to deliver a step-change in profits and cash flow for the company.
Boral Limited (ASX: BLD)
L1 describes Boral as one of the largest building and construction materials companies in Australia.
The fund manager notes that the ASX 200 share's net profit after tax (NPAT) has been impacted by rising input costs and significant wet weather delays. However, the fund manager spies a turnaround for the company. L1 said:
Under new leadership, and in a normalised trading environment, we believe Boral has the potential to more than double earnings over the medium-term from current levels.
Qantas Airways Limited (ASX: QAN)
The Qantas share price rose by 7% in November with the airline upgrading its earnings expectations again. It increased the guidance by $150 million to a range of $1.35 billion to $1.45 billion, with a reduction of net debt by $900 million to between $2.3 billion to $2.5 billion by 31 December 2021.
The airline also noted that it is considering more shareholder returns with its low level of net debt.
L1 explained its optimistic case for the ASX 200 share:
We continue to view Qantas as having emerged from the pandemic even stronger than before, given its $1b cost-out program, improved market position and the massive pent-up demand for leisure travel, which we expect will persist despite macroeconomic headwinds. If Qantas management can achieve its FY24 targets, there is potential to deliver close to $1 of earnings per share, with Qantas currently trading on only around 6x price/earnings (P/E) ratio on that basis. We believe there is significant share price upside through earnings growth and a P/E re-rating as the company's earnings mix shifts towards more predictable domestic earnings and loyalty business.
