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Commodities Trading Ideas & Charts

Murphy Using Windfall from High Oil Prices to Accelerate Deleveraging

spinning off its retail gas and refinery businesses. Historically, the company’s capital efficiency was skewed to the weaker end of the peer group range, even after this transformation, but management has since narrowed the gap by downsizing the portfolio and shifting capital toward higher-margin projects.

The firm is a top-five producer in the Gulf of Mexico, and the region accounts for almost half of its production. It signed a joint-venture agreement with Petrobras in late 2018, giving it an 80% stake in the combined assets of the two companies. Murphy has a number of expansion projects lined up there that should offset legacy declines and enable it to hold production flat in the next few years. There is regulatory risk, though: U.S. President Joe Biden has pledged to halt offshore oil and gas permitting activity (to demonstrate his climate credentials). 

 Like other shale producers, the firm has made considerable progress cutting costs and boosting productivity since the post-2014 downturn. However, while the firm still has over 1,400 drillable locations in inventory, fewer than 350 of them are in the prolific Karnes County area. When this portion is exhausted, well performance, and thus returns, could deteriorate. 

Financial Strength

The COVID-19-related collapse in crude prices during 2020 has taken its toll on most upstream oil firms, and Murphy has seen its leverage ratios tick higher as well. At the end of the last reporting period, debt/capital was 40% and net debt /EBITDA was 2.37 times. The firm currently holds about $2.8 billion of debt, and has roughly $1.7 billion in liquidity ($200 million cash and about $1.5 billion undrawn bank credit). The term structure of the firm’s debt is reasonably well spread out, and only about 20% of the outstanding notes come due before 2024 (the firm has maturities totaling $500 million in 2022). Murphy is likely to generate free cash flows of at least $100 million-$150 million in 2021 and 2022, based on strip prices, and its potential for generating free cash should increase further in 2023 (when some of the firm’s longer-term investments in the Gulf of Mexico start producing oil and contributing to cash flows). So the firm should have no issues covering the 2022 notes with cash, but if the operating environment deteriorates, management could always try to refinance the 2022 notes or lean on the revolver.

Bulls Say

  • The joint venture with Petrobras is accretive to Murphy’s production and generates cash flows that can be redeployed in the Eagle Ford and offshore.
  • The Karnes County portion of Murphy’s Eagle Ford acreage offers economics that are as good as or better than any other U.S. shale.
  • Murphy’s diversified portfolio gives it access to oil and natural gas markets in several regions, insulating it to a degree from commodity price fluctuations or regulatory risks.

Company Profile

Murphy Oil is an independent exploration and production company developing unconventional resources in the United States and Canada. At the end of 2020, the company reported net proven reserves of 715 million barrels of oil equivalent. Consolidated production averaged 174.5 thousand barrels of oil equivalent per day in 2020, at a ratio of 66% oil and natural gas liquids and 34% natural gas.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks Shares

Positive effect on Amcor stock as the company’s net income and free cash flow increase

  • Flattering exposure to the growth of both emerging and developed markets.
  • A well-defined strategy for increasing shareholder value.
  • Acquisitions that are bolt-ons provide an opportunity to supplement organic growth.
  • A strong balance sheet.
  • Leveraged against a falling AUD/USD
  • Advantages from the recently finished Bemis acquisition will begin to flow.
  • Capital management initiatives include a $500 million share buyback currently underway.

Key Risks

The following are the key challenges to the investment thesis:

  • Management fails to realise the proposed synergies in the Bemis transaction.
  • Increasing competition causing margin erosion and potential balance-sheet stress (e.g. reduced earnings leading to potential debt covenant breaches).
  • Cost constraints on inputs that the company is unable to pass on to customers (even though the Company does pass through input costs).
  • Global economic growth has slowed.
  • Value-destroying acquisition.
  • The risk of emerging markets.
  • Unfavorable movements in the AUD/USD.

Highlights of key FY21 results

  • EBIT increased by 8% to $1,621 million, with margins enhancing by +60 basis points to 12.6 percent. 
  • GAAP net income of $939 million, a +53 percent increase, translates to GAAP EPS of 60.2 cents, a +58 percent increase (or adjusted EPS of 74.4 cents, a +16 percent increase on a CC basis, above guidance range).
  • Adjusted FCF of $1.1bn, flat -9.9 percent over pcp (albeit at the upper end of guidance range), effected by rising capex on organic growth projects, lower working capital benefit, and adverse tax payment timing compared to pcp.
  • Return on average funds employed of 15.4 percent, an increase of +140 basis points over the pcp. 
  • The Board declared a final dividend of 11.75 cents per share, bringing the full-year dividend to 47 cents per share, and repurchased $350 million (2% ) of outstanding shares.

Company Description 

Amcor Limited (AMC) is an international integrated packaging company offering packing and related services. Amcor primarily produces a wide range of packaging products which include corrugated boxes, cartons, aluminum and steel cans, flexible plastic packaging, PET plastic bottles and jars, and multi-wall sacks. The company has operations in Australasia, North America, Latin America, Europe and Asia.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

P&G Cleans Up in Fiscal 2021, but Inflationary and Competive Headwinds Could Stall Its Trajectory

                   

 However, this performance is not solely a by-product of the pandemic, which has seen consumers place an outsize emphasis on cleaning and disinfecting. Rather, we attribute these marks to the strategic course P&G embarked on more than seven years ago (rightsizing its category and geographic reach by shedding more than 100 brands to ensure resources were being effectively allocated to the highest-return opportunities, while maintaining a stringent focus on costs). As a part of this playbook, P&G also adopted a more holistic approach to brand investing across its business .

But even as its top line appears healthy, P&G is facing unrelenting commodity cost inflation that management has qualitatively pegged as some of the most significant in some time. However, we think the degree of inflation combined with P&G’s innovation mandate (rooted in consumer-valued new fare) should make such increases more palatable. Further,  P&G is now involved in leaning into brand spending to illustrate the value its products offer consumers as opposed to turning off the spigot to preserve profits in this uncertain climate. This aligns with our forecast for P&G to direct around 3% and 10%-11% of sales long term to research and development and marketing, respectively, relative to the 2.7% and 10.5% expended on average the past five years.

Financial Strength

P&G maintains solid financial health. The firm continues to throw off a significant amount of cash, with free cash flow amounting to around $15 billion in fiscal 2021 .We expect P&G will remain committed to returning excess cash to shareholders and will increase its dividend, to an average payout ratio north of 60%. For the year 2020 the firms revenue stood at 70.950 USD million while its EBIT was 16,143 USD million. On the other hand the firms EV/EBIDTA was 18.2 while its P/E ratio was 23.4 for the year 2020.

 We believe P&G is also open to bolting on select brands and businesses to its mix over time. The firms acquired Germany-based narrow-moat Merck’s consumer healthcare brands for $4 billion in April 2018. In our view, this deal stood to replace the scale and technological know-how lost following the dissolution of its joint venture partnership with no-moat Teva at the end of fiscal 2018. As such, we don’t think it signals a reversal in the firm’s strategy to operate with a leaner brand mix. Rather, at just 1%-2% of sales, we believe this addition aligned with management’s rhetoric that it intends to selectively bolster its reach in attractive categories (consumer health growing midsingle digits) and geographies. Beyond this deal, P&G has failed to assert itself as a consolidator in the global household and personal-care arena.

Bulls Say

  • To the extent that retailers and consumers continue to find favour with leading branded operators, P&G’s sales trajectory may outpace our expectations.
  • Additional opportunities to narrow its product mix could enable P&G to more effectively direct its brand spending to the highest-return areas.
  • As P&G reaches the end of its second $10 billion cost reduction effort, further savings (probably related to reducing overhead and bolstering the yield on its manufacturing footprint and marketing investments) could manifest if efficiency is as engrained in its culture as management suggests.

Company Profile

Since its founding in 1837, Procter & Gamble has become one of the world’s largest consumer product manufacturers, generating more than $75 billion in annual sales. It operates with a line up of leading brands, including 21 that generate more than $1 billion each in annual global sales, such as Tide laundry detergent, Charmin toilet paper, Pantene shampoo, and Pampers diapers. P&G sold its last remaining food brand, Pringles, to Kellogg in calendar 2012. Sales outside its home turf represent around 55% of the firm’s consolidated total, with around one third coming from emerging markets.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks Shares

Cleanaway’s Asset Acquisition of Suez in F.Y.22

Close-up LED charts and summary info for making stock trading graph

 It is clear about Cleanaway’s growth into materials recovery which features more favorable economics than waste collection. Under its “Footprint 2025” capital allocation strategy, the group will continue to focus investment in materials recovery and waste-to-energy, or WTE. 

Since fiscal 2016, Cleanaway has invested in excess of AUD 100 million in Greenfield materials recovery, waste treatment, and WTE projects. The recent purchase of the materials recovery assets of SKM Recycling represents a further step toward Cleanaway’s goal of moving further into the industry’s midstream.

Further diversifying Cleanaway away from waste collection is the acquisition of Toxfree in late fiscal 2018, skewing Cleanaway’s earnings stream away from collections, the most competitive segment of the waste management value chain.

Financial Strength

Cleanaway has made further progress on its proposed AUD 501 million acquisition of key Australian post-collection assets from Suez, securing new debt facilities which will allow the deal to be fully debt funded. Therefore, balance sheet flexibility post deal completion exists should further acquisition opportunities arise. Cleanaway’s liquidity position is more than ample to secure the business’ operations without external financing through the medium-term. With minimal debt maturities over the fiscal 2021-24 period, Cleanaway’s sources of cash—those being cash at bank, undrawn debt and operating cash flow–are more than sufficient to fund Cleanaway’s ongoing operations. Cleanaway’s earnings exhibit little volatility through the economic cycle. As a result, its conservatively positioned balance sheet provides ample flexibility for further capital allocation to materials recovery and waste disposal assets —whether bolt-on or Greenfield–under Cleanaway’s Footprint 2025 strategy. 

Bull Says

  • Cleanaway is benefiting from industry consolidation.
  • Municipal waste contracts provide relatively stable cash flows through the economic cycle.
  • Capital allocation improved markedly under outgoing CEO Vik Bansal’s guidance.

Company Profile

Cleanaway Waste Management (ASX: CWY) is Australia’s largest waste management business with a national footprint spanning collection, midstream waste processing, treatment and valorization, and downstream waste disposal. Cleanaway is active in municipal and commercial and industrial, or C&I, waste stream segments and in nonhazardous and hazardous liquid waste and medical waste streams following the acquisition of Toxfree in fiscal 2018. While Cleanaway is allocating greater capital to midstream waste processing and treatment, earnings remain skewed toward waste collection. Cleanaway is particularly strong in C&I and municipal waste collection with strong market share in all large Australian metro waste collection markets.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Commodities Trading Ideas & Charts

Stronger iron ore and copper prices, contributed to the strong earnings results for BHP.

Investment Thesis 

  • BHP is trading at fair market value but with an attractive dividend yield, according to our blended valuation (consisting of DCF, PE multiple, and EV/EBITDA multiple).
  • Commodity prices, particularly iron ore prices, have fallen as a result of lower Chinese demand.
  • In the absence of growth opportunities, focus on returning excess free cash flow to shareholders (hence the solid dividend yield).
  • Quality assets with a low cost structure and a dominant market position.
  • China’s growth rate outperforms market expectations.
  • In the medium to long term, management favours oil and copper.
  • A strong balance sheet position.
  • Continued emphasis on productivity gains.

Key Risks

We see the following key risks to our investment thesis: 

  • Poor implementation of corporate strategy.
  • If the coronavirus is not contained, it will have a long-term impact on demand.
  • Global macroeconomic conditions have deteriorated.
  • The global iron ore/oil supply and demand equation has deteriorated.
  • Price declines in commodities.
  • Production halt or unplanned site shutdown
  • AUD/USD fluctuation

Investment in the Jansen Stage 1 potash project:-

BHP has approved US$5.7 billion in capital expenditures for the Jansen Stage. 1. Potash exposure, according to management, provides increased leverage to key global megatrends such as growing population, alternative chosen, emissions reductions, and improved environmental stewardship. BHP expects Jansen S1 to generate 4.35 million tonnes of potash per year, with first ore expected in CY27 (construction to take six years, followed by a two-year ramp up). “At consensus prices, the go-forward investment in Jansen S1 is anticipated to produce an internal rate of return of 12 to 14 percent, a payback period of seven years from first production, and an underlying EBITDA margin of 70 percent,” management stated. Surprisingly, BHP evaluated the carrying value of its current potash asset base and recognised a pre-tax impairment charge of US$1.3 billion (or US$2.1 billion).

Company Description  

BHP Group Limited (BHP) is a diversified global mining company, with dual listing on the London Stock Exchange and Australia Stock Exchange. The company’s principal business lines are mineral exploration and production, including coal, iron ore, gold, titanium, ferroalloys, nickel and copper concentrate. The company also has petroleum exploration, production and refining.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Property

Lendlease Group, FY22 will be the cyclical low point for both development production and profitability.

Investment Thesis 

  • Engineering and Support The business sale process is currently underway, removing one downside risk to the stock. 
  • The business sale process is currently underway, removing one downside risk to the stock.  However, as development progresses through FY23, gearing is expected to rise to 20%.
  • Robust development outlook, with demand for both commercial and residential, particularly with a high level of apartment pre-sales; 
  • The outlook for new infrastructure projects to be tendered in Australia over the next two years remains favourable.
  • A new management team will almost certainly bring a new perspective and strategy.
  • In a difficult trading environment, the proposed cost out programme of $160 million should be supported by earnings.
  • Valuation appears to be undemanding.  

Key Risks

Our investment thesis is vulnerable to the following key risks:

  • Additional provisions for existing problem projects.
  • New projects are overpriced in terms of risk.
  • Dividends should be reduced. 
  • Interest rates have risen unexpectedly.
  • The number of apartments that have gone into default has increased.
  • Any delays or execution issues in development and construction that affect margin.
  • Any net outflows from the company’s investment management division.

What sparked our interest

  • LLC will hold a Strategy Update on August 30th, but management has already announced some details, including $160 million in cost out, which equates to 17.4 percent of FY21 earnings.
  • A difficult FY22 is ahead, with the outlook shocking the market.
  • LLC will now book profits on development projects as they are delivered (rather than upfront), shifting the profit profile to the back end.
  • LLC is still aiming for $8 billion in development output by FY24, with a ROIC of 10-13 percent. LLC will see a significant increase in earnings if timing targets are met and macroeconomic conditions remain “normal.”

Company Description  

Lend Lease Corporation (LLC) is a global property developer with three key segments in (1) Development: involves development of communities, inner city mixed use developments, apartments, retirement, retail, commercial assets and social infrastructure (with earnings derived from development margins, development management fees received from external co-investors and origination fees for infrastructure PPPs) (2) Construction: involves project management, design, and construction service, predominately in infrastructure, defence, mixed use, commercial and residential sectors (with earnings derived from project and construction management fees and construction margin); and (3) Investments: involves wholesale investment management platform, LLC’s interests in property and infrastructure co-investments, Retirement and US military housing (with earnings derived from funds management fees as well as capital growth and yield from co-investments and returns from LLC’s retirement portfolio and US military housing business). LLC operates predominately in Australia, but also in the UK and US and with a smaller contribution to earnings derived from the Asia Pacific.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Funds Funds

A prudent and strong investment strategy that produced absolute returns

Philosophy of the Fund

The Fund’s investment philosophy is based on identifying long-term fundamental value picks that are both listed and unlisted. RARE believes that significant opportunities emerge during economic cycles as markets misprice infrastructure assets in the short term. In the RARE Emerging Markets Strategy, an accumulation index comprised of the FTSE EM Gov Bond Index USD plus 5.0 percent per year is used as a benchmark.

Investment Procedure

The investment team conducts fundamental analysis and valuation in order to identify ‘pure infrastructure’ assets with monopolistic characteristics, long contractual duration, and relatively stable cash flows. In particular, the investments must meet three key requirements:

  • The asset must be a hard-physical asset; 
  • The asset must provide a valuable service to society; and 
  • The asset should have strong foundations in place to ensure equity holders are adequately rewarded.

With these characteristics in mind, RARE uses the ‘RARE EM 150’ as the proprietary investment universe for their Emerging Market Strategy. Included in this list are companies in the MSCI Emerging Markets or Frontier Emerging Markets Index, as well as companies that are listed in other markets but produce a majority of their operating earnings from activities related to emerging markets. Of the 150 securities, 40% of these companies are considered Core and consistently covered, while the remaining 60% are watch listed and updated at least once a year. On a quarterly basis, the composition of the ‘RARE EM 150’ is reviewed by the Investment Leadership Team.

Sector exposure limits are also placed, with a clear preference towards regulated utilities and transport. The Fund notes this is due to their relatively stable performance, and typically lower risk nature in comparison to user-pay assets.

Source: RARE Infrastructure

Fund Positioning 

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

Tenet Continues to be More Efficient and Profitable

Closeup of a stock market broker working with graphs on digital tablet at office. Rear view of stock agent reading bad report and graph. Back view of multiethnic businessman analyzing fall sales.

the wake of an acquisition strategy that left it with operating inefficiencies and a debt-heavy balance sheet. Led by initiatives endorsed by its largest shareholder, Glenview Capital Management (15% stake as of March), Tenet has replaced top leadership, refreshed the board, improved governance practices, pruned its portfolio of assets, and undergone a restructuring effort. 

Operationally, Tenet has focused on flattening layers of management, improving operating efficiencies both inside and outside its healthcare facilities, and increasing focus on service quality. All these factors appear to be positively influencing returns on invested capital at Tenet, which began exceeding its weighted average cost of capital in 2017 by our calculations for the first time since the Vanguard Group acquisition in 2013.

Despite all of these positives, the company still operates with substantial debt on its balance sheet and is currently rated in the broad single B category by the major credit rating agencies on an unsecured basis. 

Financial Strength

It is expected Tenet to at least meet its net leverage goal of 5.0 times by the end of 2021, which would be a positive development in the odyssey that has been Tenet’s credit story since the Vanguard acquisition in 2013. At the end of June, the firm held $2.2 billion in cash, which included aid from the government and new borrowings. While Tenet will need to pay back Medicare advances and payroll tax deferrals, it looks to be in good shape to do so, even after paying $1.1 billion for the recent acquisition of the SCD ambulatory surgery center assets in late 2020. Tenet recently agreed to sell five Miami-area hospitals for $1.1 billion. The company also aims to spin off its revenue cycle management business, Conifer, in the near future, which could be a source of funds to meet its debt obligations as well.

Bull Says

  • With a new management team in place since late 2017, Tenet has become a more efficient and more profitable organization, suggesting that the team is making progress operationally.
  • As the top provider of ambulatory care services in the U.S., Tenet should be able to continue benefiting from the ongoing shift of procedures to outpatient facilities from acute-care hospitals, which could boost growth and margins.
  • Tenet continues to focus on improving its balance sheet and could meet its deleveraging goal on a sustainable basis in 2021.

Company Profile

Tenet Healthcare Corporation (NYSE: THC) is a Dallas-based healthcare provider organization operating a collection of hospitals (65 at the end of 2020) and over 550 outpatient facilities, including ambulatory surgery centers, urgent care centers, freestanding imaging centers, freestanding emergency rooms/micro-hospitals, and physician practices across the United States. Tenet enjoys the number-one ambulatory surgical center position nationwide, as well.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Commodities Trading Ideas & Charts

Spark Directors Recommend Takeover Offer

Graphic of investment stock market data analysis business

Australian regulated electricity distribution networks, and 15% of a major electricity transmission network. Citi Power and Powercor are two of five electricity distributors in Victoria, while SA Power Networks is the sole electricity distributor in South Australia. Trans Grid is the major electricity transmitter in New South Wales. 

The Victorian networks contribute just under half of EBITDA, with 40% from South Australia and the remainder coming from Trans Grid. Regulated tariffs account for 80%-90% of group revenue, with unregulated and semi regulated services accounting for the balance. Semi regulated services include public lighting and meter reading. Unregulated services include services on other owners’ networks, asset rentals, and facilities access. These operations are generally higher-margin and more volatile. 

Spark is a solid company, with investments in Australian electricity distribution networks generating highly secure cash flow under a transparent regulatory regime. This is a major headwind for earnings. Capital expenditure on upgrading and expanding networks adds to the regulated asset base and helps revenue growth in the long term. EBITDA margins were solid at 71% in 2020. The main determinant of margins is the favorability of regulatory decisions.

Financial Strength

Spark Infrastructure is in sound financial health. Spark carries a high debt load, as do other regulated utilities. This should be manageable because of highly secure revenue, except in a severe credit crisis. Credit metrics are likely to deteriorate because of regulatory pressure on returns but should, on balance, remain reasonable. Leverage, measured as net debt/regulated asset base, was 72% for VPN and 74% for SAPN in December 2020. This is above some peers; however, this metric understates these assets’ financial strength, given material unregulated revenue streams. Trans Grid is more heavily geared, with net debt/regulated and contracted asset base of 81%. 

Bull Says

  • Revenue is highly secure between regulatory resets, underpinned by regulated tariffs and defensive volume.
  • Lower interest rates and cost-saving programs are helping offset lower returns.
  • core assets have a debt-funding cost advantage because of a halo effect from majority owner Cheung Kong Infrastructure.

Company Profile

Spark Infrastructure Group (ASX: SKI) owns 49% interests in three electricity distribution companies: Powercor, servicing western suburbs of Melbourne; Citi Power, servicing Melbourne’s inner suburbs and central business district; and SA Power Networks, servicing South Australia. Powercor and Citi Power are collectively known as Victoria Power Networks. It also owns 15% of Trans Grid, the main electricity transmission network in New South Wales. The assets are heavily regulated, falling under the purview of the Australian Energy Regulator.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Fixed Income Fixed Income

Good addition for diversification especially for investors looking to gain ESG exposure

taking into account a variety of environmental, social, and governance (ESG) issues. The Fund seeks to provide such a total return approach, offering duration exposure at suitable points in the cycle, as well as defensive positioning in a soaring rate environment, and invests solely in domestic assets, avoiding the importation of global risks (e.g. currency) and offering a different risk profile.

Philosophy of Investing

Bond markets, diverge from fundamental fair value due to a variety of factors such as central bank/government activity, fund flows, and investor positioning. Top down analysis is critical for identifying opportunities to exploit resulting inefficiencies in fixed income markets, while individual stock selection plays a secondary role in adding value for high grade bond markets such as Australia.

Investment Process

The diagram below best summarises Altus’ investment process. The Scenario – based forecasting and building a case for the Best Case, Central Case, and Worst Case is, the most important component of the investment process. By creating a well-thought-out and researched narrative for each case, the investment team is able to answer important questions and describe the macroeconomic landscape. . Generally agree with their current position in each case and the analysis that supports it. Not necessarily agree with their point of view, we do value the analysis and the manner in which the narrative was presented.

Source: Altius Asset Management 

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.