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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.

Categories
Global stocks Shares

Orora Limited (ASX: ORA)

  • Exposure to the growth of both developed and emerging economies.
  • Headwinds in the near term should be factored into the price.
  • Following a recent strategic assessment, the strategy has been revised.
  • Bolt-on acquisitions (and the synergies that come with them) can help complement organic growth.
  • Leveraged against the AUD/USD and is now declining.
  • Corporate activities that could occur.
  • Management of capital (current on-market share buyback plus potential for additional initiatives).

Key Risks

  • Margin loss due to competitive forces.
  • Cost pressures in the supply chain that the company is unable to pass on to customers.
  • Economic conditions in the United States, emerging markets, and Australia are deteriorating.
  • Risk associated with emerging markets.
  • Adverse Movements in AUD/USD exchange rates 
  • OCC prices are decreasing.

FY21 group result highlights

Group revenue was slightly down (-0.8 percent) to $3.5 billion (up +7.8% in constant currency), operating earnings (EBIT) were up +11.6 percent to $249.1 million (up +17.3 percent in CC), underlying NPAT was up +23.7 percent to $156.7 million, EPS was up +29 percent to 16.9 cents (also driven by the on-market share buyback), and the full year dividend of 14cps up +16.7% on pcp. 2) Balance sheet. The impact of the on-market share buyback boosted leverage from 0.9x to 1.5x. Leverage, on the other hand, is still far below management’s goal range of 2 – 2.5x.

Company Description 

Orora Limited (ORA) provides packaging products and services. Orora is a global packaging manufacturer, distributor and visual communication solutions company The Company offers fibres, and glass and beverage can be packaged materials in Australia and Asia and packaging distribution services in North America and Australia.   

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
Shares Small Cap

HT&E Limited (ASX: HT1)

  • Additional cost savings, notably a large reduction in corporate overhead expenditures.
  • The ATO and HT1 are anticipated to reach an agreement in the near future.
  • Changes in media ownership rules could lead to more corporate activity. Upside to the valuation of Soprano (25% interest) 
  • Initiatives for capital management that are still in progress.
  • A solid financial statement.

Key Risks

  • Decline in advertising dollars (radio and outdoor), particularly if Australia’s retail industry is under stress.
  • The structure of radio is being disrupted.
  • Increased tender competition from large players.
  • With worldwide expansion, there is a danger of poor execution.
  • The tax liabilities of the Australian Taxation Office materialize at a higher level than expected by the market.
  • Hong Kong could detract from the group’s performance (Corona virus or protests escalate).
  • Lockdowns relating to Covid-19 are being reintroduced around the country.

1H CY21 group results 

HT1 had a great first half of the year, owing to a solid market recovery. Core revenue increased by 18.2 percent to $109.9 million, underlying EBITDA increased by 55.9% to $30.4 million, underlying EBIT increased by 139.5 percent to $23.7 million, and NPAT increased by 352.8 percent to $16.3 million. On a like-for-like basis, group sales increased by 21%, owing to higher consumer confidence and advertising spend in Australia and Hong Kong. Higher cost of sales (ongoing investment in digital audio capability) and the resumption of marketing and certain discretionary spending that were deferred to the pandemic in the pcp drove up operating costs (up +9% vs pcp, or up +12% on a similar basis). The Board reinstated the dividend and announced a fully franked interim dividend of 3.5cps vs. zero in the PCP due to strengthening market circumstances.

Company Description  

HT&E Limited (HT1) is a media and entertainment company with operations in Australia, New Zealand and Hong Kong. The Company operates the following key segments: (1) Australian Radio Network (ARN) – metropolitan radio networks including KIIS Network, The Edge96.One and Mix106.3 Canberra; (2) Hong KongOutdoor (Cody) – Billboard, transit and other outdoor advertising in Hong Kong, with over 300 outdoor advertising panels and in-bus multimedia advertising across 1,200 buses; and (3) Digital Investments – digital assets including iHeartRadio, Emotive and Conversant Media.   

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

Record Profit for Newcrest Mining Sees it in Strong Financial Shape for New Developments

The improvement was principally driven by commodity prices, with the realised gold and copper prices up 17% and 42%, respectively. Production guidance for fiscal 2022 of about 1.9 million ounces of gold and 125,000 to 130,000 tonnes of copper was basically as we expected but cost guidance is a bit higher but not sufficiently to warrant a fair value estimate change and thus we retain its share fair value estimate at AUD 29.50 per share 

Newcrest is in very strong financial shape post the record profit. We also think the company has a decent suite of development projects with life extensions likely at Cadia and Lihir, and development of Havieron and Red Chris looking likely. Newcrest remains one of our better value picks among generally overvalued miners. Gold could get also a second wind from an investor flight to safety given the threat posed by the COVID-19 delta variant.

Newcrest remains busy on the exploration and development front. Approval of the next panel cave at Cadia was expected and we continue to think Newcrest is likely to mine there for multiple decades. New project activity remains focused primarily on exploration, development and feasibility studies at Havieron and Red Chris. The recent, and expected, extension to the Telfer open pit will provide an important bridge to production from Havieron, as well as allow Newcrest to continue to explore further potential for life extensions at Telfer itself. We continue to be encouraged by the exploration results at Red Chris with Newcrest focused on growing the higher-grade zone. Like with Cadia’s development, the high-grade zones help to underpin the initial large-scale underground mining effort and infrastructure expenditure, and subsequently open up the broader lower-grade mineralisation for profitable mining.

On the other hand, the tailwind from increased gold and copper prices in fiscal 2021 more than offset a 4% reduction in gold production. EBITDA increased 29% to USD 2.4 billion. Likewise, net operating cash flow after tax was strong, rising 56% to USD 2.3 billion. Newcrest has about USD 240 million net cash and the strong financial position was reflected in a more than doubling of the final dividend to USD 40 cents fully franked. The full year payout of USD 55 cents fully franked more than doubled last year’s USD 25 cent fully franked total.

The increasing shareholder returns are an appropriate use of funds given the windfall cash flows from higher gold and copper prices. We expect net operating cash flows to likely more than cover Newcrest’s likely capital expenditure requirements for the next few years. However, we expect future dividends to decline from the fiscal 2021 payout to average nearly USD 40 cents a share to fiscal 2026. The forecast reflects our expectation for earnings to fall with forecast declines in gold and copper prices from 2021’s elevated levels. We expect dividends to remain a secondary consideration for Newcrest, with the primary focus on value creation through efficient operation of the mines, exploration and developments.

Company profile

Newcrest is an Australia-based gold and, to a lesser extent, copper miner. Operations are predominantly in Australia and Papua New Guinea, with a smaller mine in Canada. Cash costs are below the industry average, underpinned by improvements at Lihir and Cadia. Newcrest is one of the larger global gold producers but accounts for less than 3% of total supply. Gold mining is relatively fragmented.

(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
Dividend Stocks

Continued Spending on the Home Improves Profitability at Wide-Moat Home Depot

 to deliver more than $140 billion in revenue in 2021. It continues to benefit from a healthy level of housing turnover along with improvements in its merchandising and distribution network. The firm earns a wide economic moat rating because of its economies of scale and brand equity. While Home Depot has produced strong historical returns as a result of its scale, operational excellence and concise merchandising remain key tenets underlying our margin expansion forecast. Its flexible distribution network will help elevate the firm’s brand intangible asset, with faster time to delivery improving the do-it-yourself experience and market delivery centers catering to the pro business. 

Home Depot should continue to capture top-line growth beyond 2021, bolstered by aging housing stock and rising home prices, even when lapping robust COVID-19 demand. Other internal catalysts for top-line growth could come from the firm’s efficient supply chain, improved merchandising technology, and penetration of adjacent customer product segments (most recently bolstered by the acquisition of HD Supply). Expansion of newer (like textiles from the Company Store acquisition) and existing (such as appliances) categories could also drive demand.

The commitment to better merchandising and an efficient supply chain has led the firm to achieve operating margins and adjusted returns on invested capital, including goodwill, of 13.8% and 30%, respectively, in 2020. Additionally, Home Depot’s focus on cross-selling products in both its DIY and its maintenance, repair, and operations channel should support stable pricing and volatility in the sales base, helping achieve further operating margin lift, with the metric reaching above 15% sustainably over the next decade.

Bulls Say

  • Home Depot’s focus on distribution and merchandising should improve productivity and increase domestic share in a stable housing market, increasing sales and margins.
  • The company has returned $56 billion to its shareholders through dividends and share buybacks over the past five years–more than 15% of its market cap. It has consistently increased its dividend and used excess cash to repurchase shares.
  • The addressable pro market is around $55 billion, and Interline and HD Supply make up around 10% share, leaving meaningful upside up for grabs.

Financial Strength

Home Depot raised $5 billion in long-term debt in March 2020 to ensure it could weather COVID-19 without disruption, and raised another roughly $3 billion in the fourth quarter of 2020 to help facilitate the acquisition of HD Supply. This led Home Depot to end 2020 with a total long-term debt load of more than $35 billion and a debt/capital ratio of 0.92.Strong free cash flow to equity that has averaged about 10% of sales over the past five years supports higher leverage, and we expect the company will stay within its targeted adjusted debt/EBITDAR metric of 2 times over the long term. The balance sheet’s $25 billion in net property, plant, and equipment provides an asset base to secure more debt if necessary. 

Company Profile

Home Depot is the world’s largest home improvement specialty retailer, operating nearly 2,300 warehouse-format stores offering more than 30,000 products in store and 1 million products online in the United States, Canada, and Mexico. Its stores offer numerous building materials, home improvement products, lawn and garden products, and decor products and provide various services, including home improvement installation services and tool and equipment rentals. The acquisition of distributor Interline Brands in 2015 allowed Home Depot to enter the maintenance, repair, and operations business, which has been expanded through the tie-up with HD Supply. 

(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.