February 28,2025 issue recommended excellent stock list

A.O. Smith is a specialized water technology company and the leading manufacturer of water heaters in North America. Beyond the established North American water heater market, opportunities for growth exist through expansion into international markets and the development of water treatment products. The company's stock price has been declining since the guidance for 2024 was reduced in October, primarily due to disappointing sales in China, which represented 21% of total sales in 2023. However, we anticipate a sales rebound of approximately 4% in 2025, driven by increased demand for water heaters in North America and a recovery in the Chinese market. We expect another robust year for boilers and water treatment products in North America in 2025. We project that the company’s operating margin will approach 20% in the coming years as the housing market in China recovers, increased scale enhances water treatment profit margins, and margins for water heaters and boilers in North America remain relatively stable.

Following the successful development of a COVID-19 vaccine in November 2020, the hotel industry, along with the broader REIT sector, experienced a rally as investor confidence grew, with expectations of a return to pre-pandemic business levels. However, the emergence of the delta and omicron variants led to a decline in hotel stock prices, even as the rest of the sector continued to perform well. Many hotel companies have struggled to generate positive corporate cash flows since the onset of the pandemic; the rise in virus cases has hindered the industry's recovery and prolonged the period of negative cash flows. We believe the current environment presents a buying opportunity for investors to acquire Park Hotels & Resorts at a price below our fair value estimate. We assess that the company's balance sheet is robust enough to withstand ongoing disruptions in the hotel industry for the foreseeable future. Although numerous businesses have delayed their plans to fully return employees to the office, which subsequently postpones the recovery of hotel demand driven by business travel, we do not expect the current disruptions to significantly impact the long-term demand for Park's portfolio of high-quality hotels. Additionally, Park's management has demonstrated effective management of hotel net operating income during the pandemic, exceeding our expectations, which gives us confidence in their ability to navigate the current challenges facing the hotel industry. We anticipate that Park will recover from the pandemic, experiencing several years of strong growth, and will return to its 2019 peak levels by the end of 2024.

Kilroy Realty, which lacks a moat, presents a compelling investment opportunity due to its high-quality office portfolio, especially following the recent selloff of office REITs. While we acknowledge the uncertainty surrounding the future of office spaces and anticipate a challenging environment for office owners in the near to medium term, we believe the recent selloff has been excessive. The current implied valuation of Kilroy’s shares appears disconnected from the prevailing private market valuations of its office portfolio. Long-term investors may find this stock attractive, as it is trading significantly below our fair value estimate of $59 per share. Kilroy’s office portfolio is considered one of the best among publicly traded REITs, with an average age of just 11 years, compared to 30 years for its peers. Additionally, it performs well on various metrics, including rent spread and sustainability. The company is well-positioned to capitalize on the flight-to-quality trend, which is gaining momentum as employers seek to encourage employees to return to the office. However, there are risks to consider in our investment thesis. The recovery in physical office occupancy levels has been slow. According to Kastle Systems' weekly work barometer, average occupancy in office buildings is still around 50% of pre-pandemic levels, based on the latest data. Another risk factor is Kilroy’s geographic concentration in California and its significant exposure to the technology and life sciences sectors.

No-moat Realty Income is currently trading at a significant discount to our $75 fair value estimate. We believe the decline in share price since August 2022 is primarily due to rising interest rates. Our analysis indicates that Realty Income is the most interest-rate sensitive REIT we cover, exhibiting the highest negative correlation with interest rates. The company has branded itself as "The Monthly Dividend Company," attracting many investors during periods of low interest rates. However, these investors may shift their focus to risk-free Treasuries as interest rates increase. Moreover, Realty Income sets its annual rent escalators relatively low, which means it depends on executing billions of dollars in acquisitions each year to drive overall growth. The rise in interest rates has narrowed the spread between the company's acquisition cap rates and the weighted average cost of capital used to finance those acquisitions, potentially hindering growth. Despite this, Realty Income has increased its acquisition volume in recent years and continues to acquire properties at a positive spread over its cost of capital. In 2023, the company completed $9.5 billion in acquisitions at an average cap rate of 7.1%, significantly higher than the average interest rate of around 5% on the debt issued for these transactions. Additionally, the $9.3 billion acquisition of Spirit Realty, finalized in January 2024, is expected to enhance shareholder value. We are optimistic that management will continue to identify opportunities that boost funds from operations, supporting ongoing dividend growth for shareholders. We view the recent selloff driven by rising interest rates as an attractive entry point for investors, especially if the Federal Reserve signals any rate cuts in 2024.

We are highlighting wide-moat Microsoft as one of our top technology stocks, as shares appear attractive relative to our fair value estimate of $490 per share. We believe the stock is well-positioned for 2025, following relatively stagnant performance over the past 12 months. Our long-term thesis focuses on the expansion of hybrid cloud environments, the growth of artificial intelligence, and Azure. The company continues to leverage its on-premises dominance, allowing clients to transition to the cloud at their own pace. Our growth assumptions are centered around Azure, the migration to Microsoft 365 E5, and traction with the Power Platform for long-term value creation. With its leadership in the public cloud through Azure, partnership with OpenAI, and unmatched distribution capabilities, we believe Microsoft is currently a leader in AI and will maintain this position in the coming years. We anticipate a catalyst in accelerating Azure revenue in the second half of fiscal 2025, which we think investors will welcome after capacity constraints limited growth, impressive as it was, over the last several quarters. Given early demand signals, strong AI revenue traction, and the significant success of similar Azure investments over a decade ago, we believe the current wave of capital expenditure investments will benefit both the company and its investors. Microsoft’s ability to maintain margins despite increasing Azure investments, challenges from the Activision acquisition, and accounting changes for server depreciation is commendable. We believe this bodes well for margins as Azure capacity comes online, which should alleviate these pressures and drive multiyear margin expansion.

We believe that the current environment of elevated credit costs and reduced demand for corporate travel due to the pandemic, along with concerns about Sabre's financial health and the impact of artificial intelligence, presents a compelling opportunity to invest in a company with network advantages, efficient scale, and switching cost benefits at an attractive margin of safety. Sabre's global distribution system encounters manageable competitive risks from the new distribution capability protocol and direct connections, which face significant aggregation and processing challenges to compete effectively with Sabre and its peers. In 2024, American Airlines reported weaker sales as a result of its decision to reduce emphasis on GDS platforms. However, American is now returning to GDS networks to recover lost corporate business. Additionally, investments in cloud platforms, new distribution capabilities, and sales opportunities in ancillary services, hotel IT, and airline IT further solidify Sabre's customer base, enhancing its competitive advantages. We estimate that over half of Sabre's pre-pandemic sales were linked to business travel, which is recovering more slowly than leisure travel. While we acknowledge that some corporate travel may be permanently replaced by video conferencing and sustainability efforts, we anticipate a gradual rebound in business trips over the next few years as economic growth continues. We believe that in-person interactions will remain a key differentiator in customer retention and acquisition compared to video calls. Sabre has also strengthened its debt profile. As of early 2022, it had $3.8 billion in debt maturing in 2024-25, but it has since eliminated major debt maturities until 2027 through successful tender offers and refinancing. We believe that Sabre's cash reserves, free cash flow generation, and the gradual recovery in platform demand position the company well to manage its maturing debt. Furthermore, we think that mass-market artificial intelligence search products are likely to direct users toward suppliers and operators that possess the necessary information and networks, ensuring that bookings continue to occur through Sabre's platform. Sabre is also actively investing in its own artificial intelligence capabilities, which further enhances its competitive edge.

We believe Eversource is undervalued and should not be overlooked by investors. While the company may miss out on much of the data center growth potential due to its Northeast service territory, it has numerous investment opportunities that can sustain earnings growth of 6% annually at least through 2028. We feel the market is overlooking this growth potential. Eversource has largely reduced its offshore wind exposure and will generate all its earnings from its rate-regulated utilities by 2025. We believe the company can mitigate regulatory challenges in Connecticut by pursuing projects in Massachusetts, where the regulatory environment is more favorable. Additionally, a positive shift in Connecticut's regulatory landscape could provide further earnings and valuation upside.

Electricity demand growth in Evergy's service territories in Kansas and Missouri has been unexpectedly robust. Year-to-date, residential demand has increased by 2.2%, and new industrial demand from companies like Google, Meta, and Panasonic is expected to sustain total demand growth above 2% for at least the next three years. This heightened demand is likely to create additional growth investment opportunities. Improvements in regulatory ratesetting in Kansas, along with anticipated rate increases in Missouri, should enhance earned returns. We project a 6% annual earnings growth at least through 2028. As of late October, Evergy's dividend yield stands at 4.3%, making it one of the highest among U.S. utilities. We anticipate another dividend increase in the fourth quarter. Evergy's price-to-earnings (P/E) ratio of 16 as of late October represents a 15% discount compared to the median P/E for the U.S. utilities sector.

Tencent's business is characterized by enduring competitive advantages, a proven track record of success, and a strong financial position. WeChat, with its extensive user base of 1.3 billion in China, still presents significant opportunities for enhanced advertising monetization, especially through its additional services like video accounts and WeChat search. With anticipated growth and margin improvements in its gaming, financial technology, and cloud segments, Tencent is well-positioned to achieve a comfortable mid-teens compound annual growth rate in earnings over the next five years. Importantly, the company's valuation remains highly attractive. Furthermore, Tencent shows a strong commitment to returning value to shareholders, distributing approximately 80% of its earnings. This is accomplished through a mix of around 30% in dividends and 50% in share buybacks, highlighting Tencent's focus on shareholder value.

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We consider Yum China to be a long-term beneficiary of demographic changes in China. There is considerable potential for increased fast-food penetration, primarily fueled by enduring trends such as longer working hours for urban consumers, a significant rise in disposable income, and decreasing family sizes. We believe that investors are undervaluing the company's long-term growth potential and the opportunities for margin improvement as Yum China progressively transitions towards a greater focus on franchising in the long run.

Macao is experiencing a robust recovery from COVID-19 disruptions. As of the fourth quarter of 2024, the industry's gross gaming revenue has rebounded to 79.6% of 2019 levels, despite a decline in junket VIP income due to regulatory changes. We believe that Sands China's emphasis on the mass market, combined with its largest room inventory in Macao and a strong track record in nongaming activities, positions it as the primary beneficiary of the ongoing demand recovery in the region. Furthermore, with the adverse effects of renovation disruptions expected to conclude in the first half of 2025, we anticipate that the company will experience a reacceleration in sales growth and margin expansion starting in 2025.

Geely is one of China’s leading automakers, having sold nearly 1.7 million cars in 2023. We maintain a positive outlook on Geely as its new-energy vehicle (NEV) initiatives continue to progress. The NEV-focused brand Galaxy has successfully gained traction since its launch in 2023, while the premium brand Zeekr is steadily increasing its delivery rates. With strong vehicle sales year to date, management has raised its 2024 full-year vehicle volume guidance to 2 million units, reflecting a 21% year-over-year growth. The company anticipates a 70% year-over-year expansion in NEV sales. With a robust model lineup from Galaxy and Zeekr, we believe Geely is well-positioned to further enhance NEV penetration, which is favorable for its transition to electrification. The increase in sales volume and declining battery costs could help mitigate pricing pressures amid industry competition. We believe investors may be underestimating the long-term earnings potential of the company’s diverse new energy brands. Near-term catalysts include strong monthly sales momentum from Galaxy and Zeekr, as well as a recovery in profitability.

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Budweiser APAC is the leading beer brewer by sales value in China, holding approximately 40% of the premium segment market share. The company benefits from a comprehensive nationwide distribution network and a diverse portfolio of international premium beer brands, supported by the substantial resources of its parent company, Anheuser-Busch InBev. Budweiser APAC has also shown proficiency in digitalizing its channel management, which we believe gives it a competitive advantage over its peers and is crucial for seizing premiumization opportunities as volume growth stabilizes. We anticipate that the long-term premiumization trend in China's beer market will persist, despite current sluggish consumer sentiment, due to a favorable competitive environment and the shared objectives of major brewers in pursuing long-term price growth.

Near-term macroeconomic headwinds have negatively impacted baijiu (clear liquor) demand and the sector’s profitability, resulting in slower year-over-year sales growth across all segments in recent quarters. We anticipate that sluggish baijiu sales will continue into 2025; however, demand for Moutai remains relatively strong. Moutai's unique cultural significance, unparalleled brand image, and exceptional product quality position it well to navigate the current challenges facing baijiu sales. These characteristics also enable it to capitalize on China's beverage premiumization trend in the mid- to long term. Furthermore, Moutai's commitment to increasing its regular dividend payout ratio to 75% from 51.9% over the past six years, through 2024-26, sends a positive signal to the market, which is likely to enhance shareholder returns and boost investor confidence. Our estimated dividend per share for 2025 is CNY 57.44, reflecting the 75% payout ratio.

CNOOC serves as the upstream division of China National Offshore Oil, the third state-owned oil company in China. Consequently, it represents the most direct investment opportunity for those looking to engage with China's energy security policy and its long-term objectives to enhance oil supply. The absence of downstream operations has allowed the company to sidestep a significant legacy labor force. Additionally, none of CNOOC's sales are subject to government price controls. We believe CNOOC is currently undervalued due to its cost efficiency. Our projections indicate that CNOOC will maintain an average all-in cost of approximately USD 30 per barrel over our explicit five-year forecast period, reflecting the company's strong track record in cost management. Therefore, we anticipate that the firm will continue to be profitable in the long term, even under our midcycle Brent oil price forecast of USD 60 per barrel.

Sumitomo Mitsui Trust Group has underperformed compared to other major Japanese banks, possibly due to its perceived lower exposure to the benefits of rising yen interest rates. Nevertheless, the sale of equity holdings is expected to generate more capital for SMTG than for its peers, facilitating increased dividend growth and share buybacks.

United Overseas Bank seems to have greater potential for enhancing shareholder returns, including buybacks, than we had previously anticipated. Although it has less potential for growth in wealth management compared to some of its competitors, we believe its net interest margin will remain robust even if interest rates decrease.

We believe the market has a differing perspective on the outlook for lithium prices, which is the key valuation driver for IGO. In our view, lithium prices are approaching a cyclical bottom, presenting an attractive entry point for investors. Currently, lithium is trading significantly below our estimate of the marginal cost of production, and we anticipate a price recovery as end-market demand increases and higher-cost supply is phased out. IGO's main asset is its minority stake in Greenbushes, recognized as one of the highest-quality and lowest-cost hard rock lithium mines globally. This asset provides IGO with a narrow economic moat. We project that lithium demand will nearly triple by 2030 compared to 2023 levels, primarily fueled by electric vehicle sales. To accommodate this growth, IGO intends to expand Greenbushes' capacity by approximately two-thirds by the end of the decade.

Shares in no-moat TPG Telecom are currently undervalued. The benefits of a more rational mobile market are becoming evident. In a three-player mobile network landscape, each player is increasingly focused on achieving returns on their substantial capital investments, particularly in the rollout of 5G. We anticipate that rational competitive behavior will persist, likely supported by ongoing growth in fixed wireless services. The completion of the AUD 5.3 billion sale of the corporate telecom unit will enhance the advantages of being a mobile-centric entity, while the proceeds from the sale will alleviate any remaining market concerns regarding TPG’s balance sheet. The positive effects of cost-cutting and business simplification initiatives are already starting to materialize, coinciding with a moderation in the current capital expenditure pressures associated with 5G and IT modernization. The presence of major shareholders whose holdings have recently come out of escrow following the Vodafone merger may be causing some investor unease. However, these concerns are adequately reflected in the current share price, especially considering the long-term growth prospects for the telecom industry as it transitions to 5G.

Domino's Pizza Enterprises is a high-quality company with substantial growth potential. We project a 20% compound annual growth rate in earnings over the next five years, driven by the global expansion of its store network. While Domino's sales growth has experienced volatility, the share price often reflects short-term trading conditions rather than its long-term prospects. The near-term outlook remains uncertain and depends on enhancing store economics. Nevertheless, we believe the market is undervaluing Domino's significant long-term growth potential. We anticipate the network will reach approximately 5,800 stores by fiscal 2034, up from around 3,800 as of June 2024, which is below management's long-term target of 7,100 stores.

Negative sentiment surrounding short-term challenges, management changes, and structural shifts in the automotive industry has led to an underappreciation of the fundamental strength and resilience of Bapcor’s automotive-parts business. A decline in discretionary spending is impacting retail in the short term, and the new management team will need to demonstrate its capabilities. Additionally, the rise of electric vehicles presents a long-term challenge for the trade business. Nevertheless, we believe that the current pessimism overlooks the inherent resilience in automotive spare parts, and Bapcor is well-positioned to navigate the gradual technological transition successfully.

We believe the market has a short-sighted perspective on IDP Education, influenced by recent declines in volumes and regulatory uncertainties. While we acknowledge that the short-term outlook appears weak, forecasting a decline in IDP’s earnings for fiscal 2025, we anticipate that the company will continue to capture market share as the industry favors quality operators like IDP. We see significant long-term value, as the caps on foreign students are temporary and address short-term cyclical issues. The pricing outlook is also positive in the near term, with IDP negotiating better terms and universities planning to increase tuition fees due to an undersupply. We expect IDP to benefit from the long-term macroeconomic factors that support the international education sector.

Endeavour shares are currently trading at an attractive valuation with a fully franked yield. We believe the market is underestimating the company's defensive long-term earnings outlook, especially as consumers reduce nonessential spending. However, fiscal stimulus is expected to enhance household budgets in fiscal 2025. We project that underlying Australian liquor retail sales will increase in the mid-single digits following minimal growth in fiscal 2024. In the long term, liquor demand remains resilient, supported by inflation and population growth. We anticipate that the ongoing trend of premiumization will offset declines in per capita liquor consumption. As the largest liquor retailer in Australia, with well-known brands like Dan Murphy’s and BWS, Endeavour is positioned to see its liquor sales grow in line with market trends. Additionally, we believe that concerns regarding regulatory risks associated with the group's gaming operations are overstated and already reflected in the current share price.

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Narrow-moat-rated ST Engineering is a prominent global independent provider of aircraft maintenance, repair, and overhaul (MRO) services, as well as Singapore's primary defense contractor. We anticipate that ST Engineering's earnings will grow at a compound annual rate of 13% from 2024 to 2027, driven by the expansion of its MRO capacity, increasing demand for passenger-to-freight conversion, and savings in costs and interest expenses. The company maintains a stable annual dividend of SGD 0.16 per share while continuing to prioritize bolt-on acquisitions.

We favor Wharf REIC due to its premier retail properties, Harbour City and Times Square, which are the largest retail assets in their respective regions. We anticipate that the company will gain from the resurgence of tourism in Hong Kong. Additionally, Wharf REIC stands to benefit from the trend of luxury retail consolidation, as luxury brands are downsizing their presence in other parts of the city while increasing their space in prime shopping destinations like Harbour City.

China Overseas Land & Investment (COLI), with its significant presence in higher-tier cities in China, is well-positioned to capitalize on the ongoing recovery in homebuyer sentiment. We believe that the demand for residential properties in wealthier cities will remain resilient, resulting in stronger sales growth for COLI. Furthermore, we anticipate that high average selling prices, combined with effective cost control measures, will allow COLI to continue outperforming most of its peers in terms of profit margins. We feel that investors are undervaluing COLI's long-term growth potential and margin improvement capabilities, as the company continues to actively acquire land in key cities across China.

GlobalWafers is well-positioned to capitalize on the upcoming cycle as non-AI semiconductor demand rebounds.

We maintain our outlook that the supply and demand for multilayer ceramic capacitors (MLCCs) will remain strong and tighten, driven by the recovery in smartphone production and increased content in automotive applications. While we consider all passive component suppliers in our coverage to be undervalued, we believe that shares of narrow-moat Taiyo Yuden present the best opportunity for accumulation. Although we recognize the risks posed by the Russia-Ukraine conflict and the ongoing chip shortage, we anticipate sustained robust demand for high-end MLCCs in the long term. There will be a need for smaller sizes and larger capacities for MLCCs used in smartphones, while automotive MLCCs will require larger capacities, higher reliability, and greater breakdown voltage. We believe Taiyo Yuden will be well-positioned to benefit from this trend.

We favor Sony due to its strategic emphasis on acquiring and utilizing appealing content to create recurring-revenue streams that facilitate long-term monetization from customers, particularly in gaming, streaming music, and movies. The company maintains a disciplined approach in its consumer electronics sector to safeguard profitability and cash flow through careful inventory management. Overall, Sony's business portfolio is significantly less susceptible to economic fluctuations, allowing it to generate robust earnings growth even in uncertain conditions. The company is targeting double-digit operating income growth as part of its three-year midterm plan.

We are optimistic about Grab Holdings due to its leading market position in Southeast Asia's ride-hailing sector. The ride-hailing segment has reached a pivotal moment and is now cash-flow positive, marking a notable improvement compared to last year. Furthermore, its delivery business is achieving higher operating margins, and Grab has already updated its long-term margin expectations for this segment. We see several new long-term growth drivers, including its advertising business, which remains underutilized.

Shares in no-moat TPG Telecom are currently undervalued. The benefits of a more rational mobile market are becoming evident. In a three-player mobile network landscape, each player is increasingly focused on achieving returns on their substantial capital investments, particularly in the rollout of 5G. We anticipate that rational competitive behavior will persist, likely supported by ongoing growth in fixed wireless services. The completion of the AUD 5.3 billion sale of the corporate telecom unit will enhance the advantages of being a mobile-centric entity, while the proceeds from the sale will alleviate any remaining market concerns regarding TPG’s balance sheet. The positive effects of cost-cutting and business simplification initiatives are already starting to materialize, coinciding with a moderation in the current capital expenditure pressures associated with 5G and IT modernization. The presence of major shareholders whose holdings have recently come out of escrow following the Vodafone merger may be causing some investor unease. However, these concerns are adequately reflected in the current share price, especially considering the long-term growth prospects for the telecom industry as it transitions to 5G.

Woodside shares have declined approximately 30% since mid-2023, significantly underperforming the broader market. Although oil prices have also dropped by more than a third from their previous levels, this reaction appears unjustified. The shares are currently the most undervalued relative to our fair value estimate since the end of the COVID-19 bear market. While some believe that the era of hydrocarbons is coming to an end, demand for oil and gas continues to grow. Predictions of an imminent peak followed by a rapid decline in demand are likely to be premature. Substantial investment in hydrocarbons is necessary in most demand scenarios to compensate for naturally declining supply. Our valuation of Woodside is based on two key assumptions: a hydrocarbon production growth of 15% to 225 million barrels of oil equivalent (mmboe) and a Brent crude price of USD 60 per barrel. We anticipate a marginally negative five-year EBITDA compound annual growth rate (CAGR) of 2.0%, resulting in an EBITDA of USD 8.1 billion by 2028, considering our midcycle Brent price is 20% below current levels.

We consider ASX to be a natural monopoly that provides essential infrastructure for Australia’s capital markets. Although the regulatory environment is becoming increasingly challenging, we believe the business is well safeguarded by its significant economic moat, which is supported by network effects and intangible assets. Additionally, we view the energy transition as an often-overlooked tailwind. We anticipate that it will drive demand for resources, in which Australia possesses strong natural advantages, leading to new listings and sustained revenue from trading and clearing activities.

Ramsay is experiencing robust patient revenue growth; however, group profitability is being affected by inflationary pressures, reduced government support, and increased investment in digital initiatives. Despite these challenges, we anticipate long-term margin expansion as Ramsay reduces its reliance on agency staff, normalizes case mix and volumes for nonsurgical services, improves capacity utilization, and realizes efficiencies from digital investments. Notably, labor shortages are beginning to ease, and Ramsay is actively investing in recruitment and training efforts. The company has also negotiated higher reimbursement rates to address cost inflation and has strengthened its balance sheet by divesting its stake in Ramsay Sime Darby. For further details, please refer to our Ramsay Stock Pitch published in December 2023.

Aurizon shares present an attractive yield, supported by high-quality rail infrastructure and haulage operations. Significant downside is already reflected in the share price, and our analysis indicates that the risks for investors are tilted towards the upside. Haulage volumes are gradually recovering after an extended period of wet weather. Earnings are expected to benefit from Consumer Price Index-linked tariffs, along with recent developments and acquisitions. We believe that environmental concerns are exaggerated, creating an opportunity for investors to acquire a higher-than-average-quality company at a discount. Aurizon primarily transports coking coal from globally competitive mines, and a commercially viable alternative to coking coal for steel production remains distant.

Brambles, the world's largest supplier of reusable wooden pallets, typically leads the markets in which it operates. This leadership is attributed to its scale and first-mover advantage, which limit competition and create a cost advantage, resulting in our wide moat rating. A significant portion of the company's earnings comes from large beverage and food companies, which we view as defensive, thereby reducing Brambles' correlation to the economic cycle. Consequently, we project steady revenue growth at a compound annual rate of 6% over the next decade. Additionally, earnings are expected to benefit from improvements in operating margins, driven by the company's efficiency initiatives in pallet repairs and transportation, as well as the integration of new digital technology.

Dexus boasts a high-quality office portfolio, enhanced by the growing trend toward hybrid working. The majority of its office towers are classified as premium or A grade, predominantly situated in the central business districts of major Australian capital cities, with a notable concentration in Sydney. As the demand for quality real estate persists, well-located, high-grade buildings like those in Dexus' portfolio are expected to remain in high demand. Additionally, the industrial portfolio is currently undervalued in terms of rental rates, positioning Dexus to implement significant price increases upon the expiration of current leases. We anticipate that the funds-management segment will continue to attract investor inflows, supported by its scale, management expertise, and strong track record. Currently, Dexus is trading significantly below its net tangible assets of AUD 8.97 per security and offers a fiscal 2025 distribution yield of 5%, providing a solid margin of safety for investors as they await recovery.

We consider SiteMinder to be a well-positioned industry leader with a substantial and highly attainable market opportunity. We anticipate that the hotel industry will consolidate around larger software providers, such as SiteMinder, which can distribute significant fixed technological and regulatory costs across a broader customer base. In our opinion, economic downturns will further expedite this trend. Additionally, we expect that SiteMinder's new platform products will raise switching costs and foster network effects, leading to considerably higher terminal margins.

Narrow-moat APA Group is a high-quality company offering an attractive yield. We anticipate strong near-term revenue growth, driven by elevated inflation that enhances Consumer Price Index-linked tariffs and the completion of ongoing developments. APA is well-positioned to benefit from the transition to renewable energy, with continued investments in wind and solar farms. Additionally, the group's core gas transmission networks are expected to gain from the increasing use of gas to support intermittent renewable power supply. Furthermore, APA plans to assist remote mines in Western Australia in replacing diesel generators with a combination of solar panels, batteries, and gas turbines, which will help lower carbon emissions and operating costs for these mines.

Kering, the second-largest luxury group by revenue, is currently trading at 16 times consensus earnings, which we consider to be near trough levels, indicating a potential 90% upside to our fair value estimate. While the momentum of Kering's flagship brand, Gucci, is slowing, the brand's strong recognition, substantial marketing resources, control over over 90% of its distribution, and access to top managerial and creative talent position Gucci to sustain its pricing and desirability over the long term.

Prudential is a long-term savings and insurance company primarily operating in Asian markets. The company's share price is currently depressed due to uncertainties surrounding its earnings and dividends, which have been exacerbated by divestments and a rapid turnover of chief executives. We believe that the strategic plan in place will yield financial benefits, allowing the company to reinstate its dividend.

We have recently upgraded Philips' moat to wide, recognizing its leadership in imaging and image-guided therapies. The company's track record has been inconsistent, with several self-inflicted setbacks damaging its reputation and investor confidence. However, we believe that resolving the sleep care issues, concentrating on its high-performing segments, and the introduction of a new management team can help shift the narrative. Our valuation indicates a discount compared to larger competitors on a multiple basis, which we find justified due to their stronger competitive positions and Philips' broader range of potential outcomes. The company has significant work ahead to regain investor trust, but even with an increased margin of safety, we view the shares as undervalued at current levels. A focus on profitability is crucial. The company's operating margins have been severely impacted by the sleep care challenges, significant component sourcing issues, and margin compression in imaging. Currently, Philips significantly trails its imaging peers in profitability, but we anticipate that the company will begin to narrow this gap, though it may not fully close it.

We believe the market has not fully recognized Roche's robust drug portfolio and its industry-leading diagnostics, which together create sustainable competitive advantages. The challenges posed by declining COVID diagnostic revenue and competition from generics and biosimilars for older drugs are diminishing as we approach 2025, allowing the strength of the firm's portfolio of leading drugs to come to the forefront. We also see the firm's research and development spending becoming more efficient, and recent acquisitions in obesity and immunology appear to have significant multi-billion-dollar sales potential. As a leader in biotech and diagnostics, this Swiss healthcare giant is uniquely positioned to advance global healthcare towards a safer, more personalized, and cost-effective model. The synergy between its diagnostics and drug development teams provides Roche with a distinctive in-house perspective on personalized medicine. Furthermore, Roche's biologics represent three-quarters of its pharmaceutical sales; while biosimilar competitors have encountered development challenges, Roche's innovative pipeline may render these products less relevant upon their launch.

We anticipate a compound annual growth rate of 10% for Veolia's earnings per share and dividend from 2023 to 2028. This projection represents the second-highest EPS growth and the highest dividend growth within our coverage. The expected earnings growth will be fueled by efficiencies, including the remaining synergies from the Suez integration, as well as growth investments. Recently, we upgraded our economic moat rating from none to narrow. We believe the market is underestimating the company's competitive advantages and the reduction in its cyclicality resulting from its transformation, which contributes to the significant undervaluation of its shares.

We believe Fineos possesses investment merits that are typically not found in profitless technology companies. The market appears to underestimate the revenue potential stemming from the adoption of cloud software by insurers, as well as the increasing loyalty of Fineos' insurer customers. Fineos is well-positioned to secure new business, bolstered by long-standing customer relationships and referrals. Although the company is not yet profitable, it reinvests to strengthen switching costs with its loyal customer base, acquire new business, and maintain its competitive edge. We anticipate share gains through increased product offerings per client, the addition of new clients, and expansions into new regions and adjacent markets. Additionally, there are opportunities for cost efficiencies arising from client transitions to the cloud, the automation of manual processes, and hiring in emerging economies. We expect Fineos to be able to self-fund its future growth.

NXP Semiconductors, which possesses a wide economic moat, is among our top selections in the analog and mixed-signal chip sector. The stock is currently trading at an appealing discount to our fair value estimate of $300, offering long-term investors a solid margin of safety. We recognize that soft manufacturing activity, particularly in Europe, may impact the near-term performance of chipmakers with exposure to the automotive and industrial sectors. Nevertheless, as conditions improve, we expect NXP and its peers to benefit from a cyclical recovery in the medium term. We do not foresee any structural decline in demand within its core end markets. We are particularly impressed by NXP’s significant exposure to the automotive sector, which accounts for nearly 50% of its revenue. The company is well-diversified in automotive, boasting a robust product portfolio that includes processors, microcontrollers, and analog components. We believe NXP will capture its fair share of the growing electrification and safety automotive markets, including radar and battery management systems. Overall, NXP’s automotive business is well-positioned to benefit from the secular trends of increasing chip content per vehicle, and we feel the market is overly focused on a short-term demand slowdown.

Narrow-moat Infineon Technologies is among our top picks in the technology sector. Our EUR 43 fair value estimate provides an attractive margin of safety for long-term, patient investors. We remain optimistic about the long-term secular tailwinds in the automotive market, as Infineon is poised to benefit from increased chip content per vehicle, particularly in electric vehicles (EVs). Additionally, we appreciate Infineon’s green industrial power business and its involvement in renewable energy. However, we do observe some warning signs in the broader EV market, including excess inventory, competitive pricing among original equipment manufacturers, and potentially slower growth than anticipated. Despite Infineon’s leadership in power semiconductors for EVs, we expect chip content per vehicle to continue rising over time. We believe that these near-term risks are already reflected in current market prices, and we see potential rewards for investors willing to endure the current cyclical downturn in the semiconductor sector. In the long term, we are not overly concerned about the expansion of trailing-edge chip manufacturing capacity in China, as domestic chipmakers may attempt to displace companies like Infineon. We believe that Infineon’s diverse product portfolio and high customer switching costs will help the company maintain its relevance in the Chinese market and likely in most other global markets as well. Furthermore, we are not particularly worried about Infineon's significant expansion plans in the silicon carbide (SiC) semiconductor market. Even if overcapacity occurs, we anticipate that Infineon will emerge as a leader in automotive and industrial SiC applications, capable of efficiently utilizing its facilities.

RWE's transition from a coal-heavy company to a leader in renewable energy showcases a strong strategy and execution that remain undervalued in the market, even with a clear exit from coal following its agreement with the German government. The acquisition of ConEd's clean energy business positioned RWE as the fourth-largest renewable energy player in the US, a highly attractive market following the implementation of the Inflation Reduction Act. RWE enjoys significant exposure to European power prices and clean spark spreads, attributed to its substantial share of liberalized renewable capacity and combined-cycle gas turbine plants. Furthermore, the company typically gains from commodity price volatility through its trading operations.