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Commodities Trading Ideas & Charts

Alumina Ltd’s (ASX: AWC) Commodity Price Change

Alumina is effectively a forwarding office for AWAC profits. Its profits stem from its equity share in AWAC, less local head office and interest expenses. While AWAC enjoys a low operating cost position relative to its competitors, the cost curve is relatively flat, and competitive pressures exist via supply from China. Alumina was the result of a demerger of WMC’s aluminum assets in 2003. AWAC has substantial global bauxite reserves and alumina refining operations, many of which are in the lowest quartile of the cost curve.

Key Investment Consideration

We expect aluminum Ltd’s (ASX: AWC) demand to grow considerably in the future, with global consumption benefiting from transport’s electrification. Supply in China that is managed by state-owned enterprises will prove sticky, with little capacity being cut even if aluminums prices decrease considerably. Alumina’s production has declined over the past five years as it closed capacity in a bid to reduce costs. With no major expansions planned, the company will continue to operate in maintenance mode.

Financial strength

At end 2020, AWAC (Alcoa World Alumina and Chemicals) had USD 361 million in net cash, marginally improved on 2019’s USD 340 million. And at end June 2021, Alumina had just position of USD 5.7 million in net debt, also marginally improved. Historically, AWAC reinvested heavily in its operations at the expense of dividend growth. We expect the company to remain largely in maintenance mode, with no major projects planned over the foreseeable future. Therefore, AWAC should pay out most if not all of its operating cash flows in the form of a dividend to Alumina Ltd. and Alcoa. This will help to maintain Alumina Ltd’s strong financial health. We expect AWAC to remain unleveraged and Alumina to remain modestly leveraged at worst.

Bull Says

  • Alumina is a beneficiary of continued global economic growth and increased demand for aluminum via electrification of transport.
  • AWAC is a low-cost alumina producer. It has improved its position on the cost curve relative to peers through expansion of low-cost refineries and closure of high cost operations.
  • The amended AWAC agreement ensures that Alumina will be able to maximize value for shareholders and makes it a more attractive acquisition target.

Company Profile

Alumina Ltd. (ASX: AWC) is a forwarding office for Alcoa World Alumina and Chemicals’ distributions. Its profit is a 40% equity share of AWAC profit, less head office and interest expenses. Its cash flow consists of AWAC distributions. AWAC investments include substantial global bauxite reserves and alumina refining operations. Declining capital and operating costs and a lack of supply discipline from China are likely to result in competitive pressures, but Alumina’s position in the lowest quartile of the industry cost curve is defensive.

 (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.

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Commodities Trading Ideas & Charts

Williams’ Deepwater Whale Project One of Several High-Return Growth Opportunities

 The 2018 consolidation of William Partners strengthened Williams’ financial position and lowered its cost of capital. With nearly half of its earnings and cash flow coming from rate-regulated gas pipelines, Williams increasingly looks more like a utility than an energy company. Williams delivered steady performance through turbulent energy markets the last two years, relying on its largely fee-based, long-term contracted revenue and strategically well-positioned assets.

Most of Williams’ growth investment will be directed toward Transco expansions and projects to reduce carbon emissions. Transco capacity will reach 20 bcf/d by 2023 from 10 bcf/d in 2014 and continue to grow as natural gas demand in the eastern U.S. grows. With more than 100 bcf/d in interconnects and regulatory hurdles for competing projects, Transco faces no major competitive threats.

Williams’ other businesses are demonstrating their favorable competitive positions with steady results through volatile energy markets. The Northeast gathering and processing business has a captive customer base in low-cost producing regions. The Northwest pipeline benefits from steady demand from utilities and supply from producers in the Western U.S. Williams is growing and improving the competitive position of its other assets through upstream partnerships.

Financial Strength

Williams has strengthened its balance sheet and dividend coverage in recent years. Its improved credit profile and long-term, fixed-fee contract structures gives Williams financial flexibility to pursue growth investment opportunities, grow the dividend, keep the balance sheet strong, and possibly repurchase shares starting in 2022. 

Williams has raised its dividend to $1.64 in 2021 from $1.20 in 2017 while strengthening its balance sheet. The 2018 consolidation of Williams Partners and elimination of incentive distribution rights resulted in a shadow dividend cut of about 17% for former Williams Partners unitholders.

The flip side was an improved credit profile, higher dividend coverage, and ability to invest in growth without issuing equity. Williams remains engaged in litigation with Energy Transfer over its $1.5 billion payment due to Energy Transfer for its alleged breach of the merger agreement. Williams is seeking damages from Energy Transfer as well and to date has not reserved anything for the $1.5 billion potential payment.

Bulls Say’s 

  • A large, well-positioned network allows Williams to invest in high-return growth projects with minimal regulatory hurdles.
  • After several years of structural and financial moves, Williams is positioned to maintain steady dividend growth for the foreseeable future.
  • Williams is leveraged to U.S. LNG exports via agreements with LNG terminals as a key supplier of gas.

Company Profile 

Williams is a midstream energy company that owns and operates the large Transco and Northwest pipeline systems and associated natural gas gathering, processing, and storage assets. In August 2018, the firm acquired the remaining 26% ownership of its limited partner, Williams Partners.

(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.

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Funds Funds

Zurich Australian Property Securities Fund

Our Opinion

Our rating is based on the following key drivers:

Experienced Portfolio Managers (PMs)

The Fund is led by Carlos Cocaro and Damien Barrack of Renaissance Property Securities Pty Ltd. The two principals have worked together for over 18 years, specialising in ASX listed property securities and have a combined total of over 45 years of experience in analysing and investing in listed property securities. Whilst one may criticize the size of the investment team, in our view, the size of the team and credentials are appropriate considering the small universe (relative to other investment classes).

Disciplined investment process

The Fund uses a rigorous investment process with the Managers employing an active, value-based investment style, characterised by incorporating bottom-up investment research into individual securities, with a particular focus on analysing and forecasting the present and potential future income generation of each underlying property investment.

Solid absolute performance but relative underperformance

Although past performance is not an indicator for future performance, it is an indicator of whether the Fund’s strategy has worked in the past. Although the Fund has performed well on an absolute basis, the Fund has now underperformed relative to its benchmark by up to 3.5% p.a. (3 years performance numbers) and a marginal -0.65%, since inception; This is surprising considering, the Fund’s active risks is minimised, with low tracking error and the PMs being very benchmark aware. Indeed, with the idea that the Managers are very benchmark aware and the Funds beta close to 1.0, over the longer term, investors are by and large taking a view of the S&P/ASX300 Property Trusts Accumulation Index (rather than whether a passive or active manager is best).

Downside Risks

Deterioration in Australian economy especially the property market (deterioration of property prices and fundamentals).

The Portfolio Manager/analysts miss-calculate their bottom-up valuation.

Softening in bond yields negatively impacting pricing.

Key-person risk in Mr. Cocaro and Mr. Barrack.

Our Opinion…

  •  investment classes).

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.

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Global stocks Shares

Cushman & Wakefield (NYSE: CWK) Reports Solid Q2 Results and Announces CEO Succession by John Forrester

Fee revenue has fully recovered to beyond prepandemic levels, as the company reported second-quarter fee revenue of $1.6 billion, a 34% increase year over year and a 3% increase from the second quarter of 2019. Adjusted EBITDA also came in strong for the current quarter at $220 million, 26% higher than the second quarter of 2019. 

Adjusted EBITDA margin calculated on a fee-revenue basis was 13.5%, significantly higher than the 10.2% reported in 2020 and 11.1% in 2019. The adjusted EBITDA growth and margin expansion reflect the impact of strong brokerage activity and permanent cost reduction actions, which management believes amounted to around $30 million in the current quarter and will reach $125 million in annualized permanent cost savings.

The company announced that John Forrester, who is the current global president, will succeed Brett White as the new CEO of the company effective Jan. 1, 2022. White will remain executive chairman after the transition and continue to lead strategy, mergers and acquisitions, and succession planning, alongside Forrester. 

The brokerage segment of the company displayed excellent recovery in the current quarter compared with the second quarter of 2020, when the pandemic suppressed business around the world. Capital markets revenue more than doubled in the current quarter on a year-over-year basis and was 17% higher than the second quarter of 2019. Leasing revenue was 67% higher in the current quarter compared with last year, but it remains 9% below 2019 levels.

Management Anticipates Revenue Growth

The valuation and other segment remains a bright spot for the company as fee revenue came in 16% higher in the quarter on a year-over year basis. The property, facility, and project management segment, which has been resilient throughout the pandemic, reported a 7% year-over-year increase in fee revenue. Management anticipates revenue growth in midteens for the full year as brokerage revenue growth is expected to be up more than 30% and the nonbrokerage segment is expected to grow in midsingle digits. Management said it expects adjusted EBITDA margins for the full year to be well above 2020 levels and will approach 2019 levels, which equates to an adjusted EBITDA range of $660 million-$710 million for full-year 2021.

Company Profile 

Cushman & Wakefield is the third largest commercial real estate services firm in the world with a global headquarters in Chicago. The firm provides various real estate-related services to owners, occupiers and investors. These include brokerage services for leasing and capital markets sales, as well as advisory services such valuation, project management, and facilities management.

(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.

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Funds Funds

Perpetual Smaller Companies Fund

Our Opinion

Highly competent PM

The PM, Jack Collopy has extensive experience and track record as an analyst and fund manager, with 21 years industry experience and 19 years with Perpetual. Mr. Collopy is supported by the wider Perpetual team of analysts, including deputy PM of the Fund Alex Patten. 

Constant rotation/changes at the PM level are a disappointment

 The constant rotation/changes at the PM or co-PM level in the last three years, for the Fund is a disappointment – we note that Mr. Collopy had transition to oversee other Perpetual strategies, leaving then co-PM Mr. Nathan Hughes to oversee the Fund. Mr. Hughes has since transitioned to become PM of Perpetual’s Ethical SRI Fund as of April 2019 (taking over from Mr. Collopy for that Fund). The Fund is now managed by Mr. Collopy with Alex Patten as deputy PM, who we think highly of, and have strong credentials and long investment experience. However, a period of stability at the PM level would give us more comfort before upgrading our recommendation.

Well-resourced investment team

Whilst the team managing the Fund is on the smaller end (relative to peers), the PMs of the Fund is able to tap into the expertise of the wider Perpetual investment team. The investment team is headed by Paul Skamvougeras, Head of Equities, and comprises a large and experienced team of Portfolio Managers (5), head of proprietary research (1), Deputy Portfolio Managers (3), Analysts (6) and the Responsible Investments team (2). Each Portfolio Manager is supported by the team of analysts and back-up procedures are shared throughout the large team. Jack Collopy is the Portfolio Manager of the Perpetual Smaller Companies Fund, with Alex Patten the Deputy Portfolio Manager. As such, ultimate investment responsibility rests with them. Mr. Collopy and Mr. Patten report directly to Paul Skamvougeras.

Solid investment process backed by bottom-up research 

The investment process is a bottom-up selection approach focused on quality and valuation, driven by research and engagement with management, which we think is particularly valuable in valuing smaller companies.

Downside Risks

Australian economic conditions deteriorate. 

The Portfolio Manager/analysts miss-calculate their bottom-up valuation.

Departure of key PM Jack Collopy or Deputy PM Alex Patten.

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.

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IPO Watch

True Balance plans to break even by the end of the year and list by 2024.

True Balance is seeing a lot of interest in its small loans, which has resulted in a 3x increase in revenue for the platform

True Balance’s revenue rose by 3X, and by November-December this calendar year, the company expects to be EBITDA favorable and break-even, he said. True Balance India is a completely owned subsidiary of Korea’s Balancehero Co Ltd, which owns and runs the ‘True Balance’ lending platform.

True Balance is an RBI-approved online service that arranges loans through True Credits, an RBI-licensed NBFC. Balancehero was launched in Korea in 2014 by Cheolwon ‘Charlie’ Lee and introduced the True Balance app in India in 2016 to help consumers handle their mobile recharge, bill payments, and balance check more conveniently. True Credits acquired their licence from the RBI in 2019, after which True Balance began financing.

Lee said the company is ready to listing in India and overseas when questioned about IPO ambitions. In 2021, the company is planning to treble its sales, which was USD 10 million in 2020. True Balance, which employs over 200 people, the majority of whom are located in India, is also trying to expand its workforce.

Lee found that the company has grown by 30 to 50 percent month over month, with the goal of concentrating on non-online payment and non-credit score customers.

Company profile

Develop a culture within the organisation that supports freedom of expression, fair opportunity for progress, open channels of communication, and complete transparency, all of which are guided by our 5 Core Values. Employees are at the centre of every decision, and this is what propels forwards.

Employees at Balancehero India are exposed to a neo-South Korean culture with simpler organisational structures, open office spaces, and a vibrant atmosphere that encourages everyone to contribute to the company’s ultimate goals. As a way of showing thanks where it is due, keep employees engaged and motivated through feedback and monthly prizes.

Souce: Economictimes

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.

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Global stocks

Novartis AG(NOVN)

  • Recent and upcoming divestments will streamline the business and provide increased focus to deliver shareholder returns. 
  • Recent product launches indicate solid sales momentum, with near-term product pipeline potentially providing further upside.  
  • Selective bolt-on acquisitions to supplement organic growth. 
  • Operating efficiency focuses to further support earnings growth.
  • As the new management team improves Company culture, investors are less likely to ascribe a discount to the stock based on legacy issues.  

Key Risks

We see the following key risks to investment thesis:

  • Recently launched products fail to deliver sales growth as expected by the market.
  • New product pipeline fails to yield “blockbuster” products or delays in bringing key products to market.
  • R&D programs do not yield new long-term ideas.
  • Increased competition (pricing pressure & innovative products) from new entrants or existing players.  
  • Value destructive M&A.
  • Regulatory / litigation risks.

Management’s outlook

Assuming a continuation of the return to normal global healthcare systems including prescription dynamics particularly oncology in 2H21, and that no Gilenya and Sandostatin LAR generics enter in FY21 in the US, management anticipates (in cc); (1) FY21 net sales to grow low to mid-single digit, with Innovative Medicines to grow mid-single digit and Sandoz to decline low to mid-single digit, and core operating income to grow mid-single digit (ahead of sales), with Innovative Medicines growing mid to high-single digit, ahead of sales, and Sandoz declining low to mid-teens. (2) 2H21 net sales growth to accelerate from 3% in 1H21 to mid-single digit, as the Company continues to return to normal prescribing behaviors, as well as further Sandoz stabilization, and core operating income growth to be high-single digit, driven by higher sales and ongoing productivity programs partly offset by increased investments in growth drivers and pipeline.

Company Description  

Novartis AG (NOVN) is an innovative healthcare company headquartered in Basel, Switzerland, with approximately 125,000 employees. In 2017, the Group reported net sales of US$49.1bn, while R&D throughout the Group amounted to approximately US$9.0bn. The Company sells its products in approximately 155 countries. The group has two segments which it reports on: (1) Innovative Medicines (Oncology / Pharmaceutical), and (2) Sandoz generics division.    

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.

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Technology Stocks

Grainger recovered its stronger sales growth but margin constraints have emerged in 2021.

investment stockbroker risk analysis using multiple devices. Financial analysis using phone app and laptop. Market trading profit.

The growing prevalence of e-commerce has intensified the competitive environment because of more price transparency and increased access to a wider array of vendors, including Amazon Business, which has entered the mix. 

As consumer preference began to shift to online and electronic purchasing platforms, Grainger invested heavily in improving its e-commerce capabilities and restructuring its distribution network. It is the now the 11th-largest e-retailer in North America; it shrank its U.S. branch network from 423 in 2010 to 287 in 2020 and added distribution centers in the U.S. to support the growing amount of direct-to-customer shipments. 

To address this problem, Grainger rolled out a more competitive pricing model. Lower prices hurt gross profit margins, but volume gains, especially among higher-margin spot buys and midsize accounts, have offset price reductions and helped the company meet its 12%-13% operating margin goal by 2019 (12.1% adjusted operating margin in 2019). Grainger continues to expand its endless assortment strategy, but we’re skeptical of the margin expansion opportunity for this business, given strong competition in the space from the likes of Amazon Business and others. 

Financial Strength

As of the second quarter of 2021, Grainger had $2.4 billion of debt outstanding, which net of $547 million of cash represents a leverage ratio of less than 1.1 times our 2021 EBITDA estimate. Grainger’s outstanding debt consists of $500 million of 1.85% senior notes due in 2025, $1 billion of 4.6% senior notes due in 2045, $400 million of 3.75% senior notes due in 2046, and $400 million of 4.2% senior notes due in 2047. Grainger has a proven ability to generate free cash flow throughout the cycle. Indeed, it has generated positive free cash flow every year since 2000, and its free cash flow generation tends to spike during downturns because of reduced working capital requirements. Given the firm’s reasonable use of leverage and consistent free cash flow generation, we believe Grainger’s financial health is satisfactory.

Bull Says

  • With a more sensible, transparent pricing model, Grainger should continue to gain share with existing customers and win higher-margin midsize accounts.
  • As a large distributor with national scale and inventory management services, Grainger is well positioned to take share from smaller regional and local distributors as customers consolidate their MRO spending.
  • Grainger operates a shareholder-friendly capital allocation strategy; it has increased its dividend for 49 consecutive years and has reduced its diluted average share count by over 40% over the last 20 years.

Company Profile

W.W. Grainger (NYSE: GWW) distributes 1.5 million of maintenance, repair, and operating products that are sourced from over 4,500 suppliers. The company serves approximately 5 million customers through its online and electronic purchasing platforms, vending machines, catalog distribution, and network of over 400 global branches. In recent years, Grainger has invested in its e-commerce capabilities and is the 11th-largest e-retailer in North America.

(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

NRG Energy Continues Its Move towards Consumer Services Business Model

The company remains on track to meet our full-year outlook, which includes an estimated $1 billion gross negative impact from winter storm Uri in mid-February, in line with management’s guidance. Our fair value estimate includes a $2 per share reduction to reflect storm losses partially offset by near-term cost-savings benefits and long-term benefits from changes in Texas energy markets that should favor NRG.

After closing the $3.625 billion Direct Energy deal in January and several moves to shrink its power generation fleet, NRG is on a path toward becoming primarily a retail energy services company rather than an independent power producer. It already ranks among the largest retail electricity and natural gas companies in the U.S. and plans to expand its customer base in areas outside its core Texas market. Although this strategic shift changes NRG’s fundamental value drivers, we still don’t think it can establish a long-term competitive advantage that would warrant an economic moat.

Management reaffirmed its $2.4 billion-$2.6 billion EBITDA guidance excluding storm impacts for 2021, in line with our estimate. Management has pulled back substantially on its debt reduction plan and now targets $255 million of debt reduction this year, down from its pre-storm plan to retire $1.05 billion of debt this year. share buybacks and dividend growth will become top capital allocation options in 2022 as NRG pushes back its timeline for achieving investmentgrade credit ratings.

Company Profile 

NRG Energy is one of the largest retail energy providers in the U.S., with 7 million customers, including its 2021 acquisition of Direct Energy. It also is one of the largest U.S. independent power producers, with 22 gigawatts of nuclear, coal, gas, and oil power generation capacity primarily in Texas. Since 2018, NRG has divested its 47% stake in NRG Yield, among other renewable energy and conventional generation investments. NRG exited Chapter 11 bankruptcy as a stand-alone entity in December 2003.

(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.

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Global stocks

Federal Realty Outperforms Our Expectations and Raises both 2021 and 2022 Guidance in Q2

 Re-leasing spreads continue to be strong despite the pandemic, seeing rents on leases signed during the quarter increase 7.5% with leases to new tenants up 10.2% over the prior rent. Second quarter rent collection improved to 94% compared with 90% in the first quarter and improved to 98% compared with 96% if rent abatement and rent deferral agreements are included. Improving rent collection drove same-store net operating income growth of 39.4% in the quarter, ahead of our 28.1% estimate in the second quarter. 

As a result, funds from operations came in at $1.41 for the quarter, above of our estimate of $1.25 in the quarter and well above the $0.77 figure reported in the second quarter of 2020 but still below the $1.60 level reported in the second quarter of 2019. The strong second-quarter results led to management significantly increasing its FFO guidance. Management raised its 2021 FFO guidance by $0.49 at the midpoint to a new range of $5.05-$5.15, which is slightly ahead of our current $5.02.

Additionally, management also raised their guidance for 2022 FFO by 25 cents at the midpoint to a new range of $5.30-$5.50. While the increase is encouraging, the updated range is still below our current $5.96 estimate for 2022. However, REITs rarely give FFO guidance for the next year this far out and, given the high level of uncertainty that still exists in retail, we suspect that management is being conservative with its 2022 estimates.

Company Profile 

Federal Realty Investment Trust is a shopping center-focused retail real estate investment trust that owns high-quality properties in eight of the largest metropolitan markets. Its portfolio includes an interest in 101 properties, which includes 23.4 million square feet of retail space and over 2,600 multifamily units. Federal’s retail portfolio includes grocery-anchored centers, superregional centers, power centers, and mixed-use urban centers. Federal Realty has focused on owning assets in highly desirable areas with significant growth, and as a result, the average population density and average median household income are higher for its portfolio than for any other retail REIT.

(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.