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Commodities Trading Ideas & Charts

Mineral Resources Ltd (ASX: MIN) Continue To Be Expensive, But There Are Still Pockets Of Value To Be Found.

 Revenue, profit, and market capitalization all grew significantly, but are expected to rely more heavily on lithium production going forward. Management has significantly improved disclosure, earnings streams have been materially diversified and the investment strategy has consistently generated high returns on invested capital. We expect a well-supplied lithium market in the longer term, coupled with weaker demand growth for steel, particularly from China, to drive lower prices and reduce the pool of available contracting work. Despite this, we think Mineral Resources can drive EPS growth on volume.

Key Investment Considerations

Management has significantly improved disclosure, earnings streams have been materially diversified and the investment strategy has consistently generated high returns on invested capital. We think the business model is demonstrably sustainable, centering on Mining Services around Australian bulk commodities. Mineral Resources will selectively own and develop its own mining operations, though with the aim of subsequent sell-down while retaining core processing and screening rights.

Financial Strength

Mineral Resources is in strong financial health. Albemarle’s acquisition of a 60% stake in Wodgina lithium instantly expunged net debt in first-half fiscal 2020.From a net debt position of AUD 872 million at end June 2019. Lithium project construction expenditure was at the core of the cash drain. The current circumstance is a return to the usual territory for Mineral Resources, which operated in a position of little to no net debt for at least the eight years to fiscal 2018; a sensible position for a company operating in the volatile mining services space. Mineral Resources had faced the key question of what it should do with its cash, with a shrinking pool of growth and investment opportunities in a lower iron ore price environment. 

Bull Says

  • Mineral Resources grew strongly since listing in 2006. The chairman and managing director have been with the business for over a decade and have meaningful shareholdings.
  • Australian iron ore is mainly purchased by Chinese steel producers, meaning Mineral Resources offers leveraged exposure to Chinese economic growth.
  • Mineral Resources has a recurring base of revenue and earnings from processing infrastructure.
  • Mineral Resources’ balance sheet is very strong with net cash. This has opened up the opportunity for lithium investments selling into highly receptive markets.

Company Profile

Mineral Resources Ltd. (ASX: MIN) listed on the ASX in 2006 following the merger of three mining services businesses. The subsidiary companies were previously owned by managing director Chris Ellison, who remains a large shareholder despite selling down. Operations include iron ore and lithium mining, iron ore crushing and screening services for third parties, and engineering and construction for mining companies. Mining and contracting activity is focused in Western Australia.

 (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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Property

ALE Property Group(LEP)

Mortgage, investment, real estate and property concept. Dollar money and house keys
  • Triple net leases to ALH.
  • High quality property portfolio with positive fundamentals and supportive demographics.
  • Potential upside as LEP’s assets have significant land value (95 hectares) and LEP continues to explore development opportunities with ALH.
  • Long term leases with average lease term of >8 years (and positive lease terms).
  • 100% occupancy rate as all properties are leased to ALH.
  • Solid distribution yield.
  • Potential rental growth from upcoming rental reviews in 2018.
  • Demand for pub property investment remains strong

Key Risks

We see the following key risks to investment thesis:

  • Interest rate levels may rise or deterioration in credit/capital markets and thus reduced profitability and distributions
  • Any slowdown in demand and net absorption for retail space.
  • Any deterioration in property fundamentals especially delays with developments, declining asset values, bankruptcies and rising vacancies.
  • Declines in property valuations.
  • Rental rates post reviews may be unfavorable.
  • Weakness in rental demand – Slow wage growth and on the back of rising costs of living.
  • LEP is exposed to single tenant risk from ALH via any default on rental payments. ALH is part of Endeavour Group, which is likely to be demerged in CY20. Whilst default remains unlikely, single tenant risk is higher than previous levels.
  • Adverse regulatory changes on liquor or gaming licenses could impact the profitability of tenants (lockout laws repeals may not be as effective as desired).
  • Distribution has been less than distributable profit, and management has had to finance the difference using cash reserves and undrawn debt facilities. However, net gearing is at historically low levels.
  • REITs as bond proxy stocks are impacted by expected cash rate hikes.

Property portfolio highlights

(1) divestment of non-core assets. LEP divested $72.86m of non-core assets, at a yield of 4.4% and 24.2% premium to book value. Proceeds were used to reduce net debt and partially restructure LEP’s interest rate swap book. LEP’s asset at Tudor Inn, Cheltenham Victoria and Royal Exchange Hotel, Toowong Queensland are currently for sale by tender and auction respectively. 

(2) Valuation uplift. 36 properties (44% of the portfolio) were independently valued, and Directors’ valuations were undertaken for the remaining 44 properties (56%), and resulted in an uplift of $89.71m, or 7.45%, since December 2020, to total value of $1,294.261m (on 4.59% adopted passing yield versus 4.94% in December 2020).

Company Description  

ALE Property Group (LEP) is the owner of Australia’s largest portfolio of freehold pub properties. Established in November 2003, ALE owns a portfolio of 86 pub properties across Australia, with a value of ~$1,172.1m (average value of $12.6m on weighted average cap rate of 5.09%). All the properties are leased to Australian Leisure and Hospitality Group Limited (ALH). ALH is Australia’s largest pub operator with ~330 licensed venues, ~550 liquor outlets and ~1,900 short stay rooms.

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

Zurich Investments Australia Property

The strategy is managed by Renaissance Asset Management while its distribution and marketing functions are provided by Zurich Investments. Co-founders Carlos Cocaro and Damien Barrack established Renaissance in 2003, however, their history of working together dates back to the late 1990s. The experienced duo often express contrarian views on the property stocks and sub-sectors in their investment universe, however, they continue to impress with the depth of research and insights that back up their opinion.

Relentless value-focus and considered risk-taking

Renaissance is value-focused, and this translates into sizable departures from index weightings or investing off-benchmark. The portfolio actively tilts toward sectors and companies that look the cheapest, which means it can have significant small-cap exposures at times. All research and valuation estimates are internally driven and modelled. The portfolio managers meet with companies every six months and inspect key property assets about every three years, or at other times if required.

The pair’s views on a trust’s strategy, asset management, and capital management skills are then captured in five-year earnings forecasts for each security. Careful analysis of the property sector is another key input into valuations and overall portfolio positioning. From a risk perspective, stocks must have a minimum interest cover of at least 2 times and/or a debt/asset ratio of less than 40% to be considered. 

Portfolio construction is determined by a value-ranking model with three yardsticks–twoyear distribution yields, five-year internal rates of return, and price/net asset value–with a definite leaning toward the first two measures. Dipping into off-benchmark stocks means liquidity can be scarce, but the team handles this through patience, buying into weakness and selling into strength.

Out-of-favour names and off-index small caps create differentiated portfolio

The value mindset results in a very different portfolio from the highly concentrated S&P/ASX 300 A-REIT Index at times. A chunky overweight in cheaper small caps since 2007 was curtailed in 2017 as they saw pricey-looking smaller names offering less opportunity, while valuation extremes in some large-cap stocks offered potential. This fund is not shy about participating in IPOs or soon after, as was illustrated by a number of IPO investments in 2016. 

Value remains the prime consideration for investment, illustrated by Renaissance’s investment into Propertylink after the stock underperformed following its IPO. Renaissance is overweight malls (as at 31 May 2021), particularly flagship operators such as Scentre Group, Vicinity, and Carindale shopping centre; the team feels that, while there is a cyclical and structural slowdown in retail, retail flagships will hold up better than their current market value implies. 

The team liked the office space from 2016 onward but viewed many of the stocks as expensive, but it did well from holding a relatively cheap Investa Office. In 2019, Renaissance expanded its underweight to Goodman Group, which it view as overpriced and with high operational leverage that could hurt in a downturn. Throughout 2020, the portfolio was overweight large caps because of better value but rotated into higher-yielding small-cap names at the beginning of 2021.

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

Taiwan Semiconductor Manufacturing Co.( TSMC)

JAPÓN BOLSA:KMA06. TOKIO (JAPÓN), 03/01/2018.- Un grupo de mujeres usan kimono durante la ceremonia de apertura de la Bolsa de Tokio de Japan Exchange Group, Inc. de la primera sesión comercial de Año Nuevo en 2018 en la Bolsa de Tokio, en Tokio, (Japón) hoy, jueves 4 de enero de 2018. EFE/KIMIMASA MAYAMA
  • Market leading position and room for further consolidation. TSMC’s significant expenditure on R&D should help it maintain this leadership position.
  • TSMC is leading the race in developing the new age of semiconductor chips such as Logic Technology, with thinner wafers being developed every year.
  • High barriers to entry – significant level of capital and know-how required to start a semiconductor business.
  • Independent and pure-play focus on manufacturing without marketing or branding of product eliminates conflict of interest with customers.

Key Risks

We identify the following key risks to investment thesis:

  • Moderating global economic growth, especially in the U.S. and China.
  • Trade tensions between the U.S. and China.
  • Operational risks such as suboptimal manufacturing quality of products e.g. Fab14B photo incident.
  • Softening smartphone sales and production. There may be a time-lag before the layout of 5G and AI materialize into sales for TSMC, e.g. regulatory restrictions.
  • Increasing commodity prices and difficulty for TSMC to improve margins. 
  • Unfavorable exchange rate movements between NT$ and currencies used in transactions (however, TSMC utilizes hedging strategies to manage this risk).

Management Outlook:

Forecasting strong demand for industry-leading 5nm and 7nm technologies, driven by all four growth platforms (smartphone, HPC, IoT and Automotive-related applications), anticipating 3Q21 revenue of US$14.6-14.9bn, and gross profit margin of 49.5-51.5% and operating profit margin of 38.5-40.5% (based on the exchange rate assumption of 1 US dollar to 27.9 NT dollars). Mr. C. C. Wei (CEO) noted, “For FY21, we now forecast the overall semiconductor market excluding memory to grow about 17%, while foundry industry growth is forecast to be about 20%, and remain confident we can outperform the foundry revenue growth and grow above 20% in 2021 in US$…we now expect our long-term revenue CAGR from 2020 to 2025 to be near the high end of our 10-15% CAGR range in US$…however, in the near term, we continue to observe both short-term imbalances in the supply chain driven by the need to ensure supply security as well as a structural increase in long-term demand, and while the short-term imbalance may or may not persist, we expect our capacity to remain tied throughout the year and into 2022, fuelled by strong demand for our industry-leading advanced and special technologies.”

Company Description  

Taiwan Semiconductor Manufacturing Company Limited (TSMC), together with its subsidiaries, engages in manufacturing, selling, packaging, testing, and computer-aided design of integrated circuits and other semiconductor devices. Based in Taiwan, the company manufactures masks and electronic spare parts; researches, develops, designs, manufactures, sells, packages, and tests colour filters; and offers customer and engineering support services. TSMC is the largest semiconductor manufacturing foundry in the world.

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

Wide-Moat MercadoLibre Continued to Ride latin America’s E-Commerce Wave in Q2

Mercado Libre reported 94% revenue growth in the quarter, well above the 66% Factset consensus estimate. This result was impressive considering it faced unfavorable currency movement (currency-neutral revenue rose 103%) and last year’s 61% growth at the beginning of the pandemic.

 In its commerce business, the firm recorded gross merchandise value and items sold growth of 39% (46% currency-neutral) and 37%, respectively, above our full-year estimates of 35% growth for both. In fintech, total payment volume soared 72% against our 53% full-year forecast. Thus, while the comparisons will get more difficult in upcoming quarters, we now think the firm is likely to eclipse our 58% revenue forecast for the year.

Indeed, its operating expenses increased 79% from last year on ongoing investments in fulfillment and delivery speed, marketing, customer acquisition, and loyalty. Even so, MercadoLibre recorded a second-quarter operating margin of 9.8%, well above our full-year 3.6% estimate.

Company Profile 

Founded in 1999, MercadoLibre’s commerce segment (representing 64% of net revenue in 2020) includes online marketplaces in more than a dozen Latin American countries, display and paid search advertising capabilities (MercadoClics), online store management services (MercadoShops), and third-party logistics solutions (MercadoEnvios). Its fintech segment includes an online/offline payment-processing platform (MercadoPago), mobile wallet platform, credit solutions for buyers/sellers, and asset management offerings (Mercado Fondo). The company derives more than 95% of its revenue from Brazil, Argentina, and Mexico.

(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
Technology Stocks

Jacobs Engineering Group Inc. (NYSE: J) after Strong Fiscal Q3 Raises FVE. To $141

Checking Stock market data information graph on screen

he fair value increase reflects the firm’s outperformance, an improved near-term outlook, and time value of money, partially offset by the implementation of a probability weighted change in the U.S. statutory tax rate in our model.

Jacobs’ net revenue was up 10.6% from the prior-year period. Critical mission solutions increased its revenue 0.6% year over year. People & places solutions net revenue grew 1.4%. Lastly, PA Consulting delivered stellar 36% year-over year revenue growth. The firm’s adjusted operating margin expanded by 170 basis points from the prior-year period, with improvement across all business lines.

Management increased its outlook for full-year fiscal 2021 and now expects adjusted EBITDA in the range of $1,210- $1,275 million (up from $1,200-$1,270 million) and adjusted EPS in the range of $6.15-$6.35 (up from $6.00-$6.30). Furthermore, management is optimistic that the company can deliver double-digit adjusted EBITDA growth over the medium term. 

Company’s Future Outlook

We believe the company is poised to capitalize on multiple favorable secular drivers, including infrastructure modernization, space exploration, intelligence analytics, energy transition, supply chain investments (particularly in the semiconductor and life sciences end markets), and the 5G build out. We also think Jacobs is well-positioned to benefit from a likely infrastructure plan in the U.S., given the firm’s strong position in areas such as water and transportation infrastructure.

Company Profile

Jacobs Engineering Group Inc. (NYSE: J) is a global provider of engineering, design, procurement, construction, and maintenance services as well as cyber engineering and security solutions. The firm serves industrial, commercial, and government clients in a wide variety of sectors including water, transportation, healthcare, technology, and chemicals. Jacobs Engineering employs approximately 55,000 workers. The company generated $13.6 billion in revenue and $970 million in adjusted operating income in fiscal 2020.

 (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
Property

Rental stress is expected to worsen as lockdowns continue.

Elderly woman holding a small house in her hands

In the six months to June, the number of renters spending more than two-fifths (41%) of their income on rent had increased by 8 percentage points to 68 percent, with tenants in both capitals and regions failing to keep up with rising rents. A renter is considered to be in rental stress if they spend 30% or more of their income on rent the poll of 1500 families also indicated that more than three-quarters of Queensland renters (77%) and more than seven-tenths of NSW renters (72%) are now stressed.

Due to lower incomes, a greater proportion of women (75%) failed to make their rent payment, compared to only 60% of males. Women make only 86 percent of men’s typical salaries, according to the Australian Bureau of Statistics, and employed women aged 20 to 74 are nearly three times more likely than males to work part-time.

In the year to July, median rents for houses and apartments had risen by 7.5 percent across the country, the largest annual increase since 2008. Those who owned a home were less stressed than those who rented. Only two out of every five people (42%) spent more than 30% of their discretionary income on mortgage payments. 

Mortgage stress has been reduced thanks to resurgence in economic activity, extremely low interest rates, and the delay of loan repayments by some homeowners. According to a new Core Logic analysis, repaying a mortgage is now cheaper than paying rent on 36.3 percent of Australian residences, up from 33.9 percent in February last year before COVID-19.

 (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

Energy Transfer LP (NYSE: ET) on Track for Blockbuster 2021, but Capital Allocation Is a Risk

Management reaffirmed its full-year $12.9 billion to $13.3 billion adjusted EBITDA guidance, and our estimate remains at the high end of that range. This includes the $2.4 billion EBITDA benefit from the mid-February winter storm. Energy Transfer’s limited partner unit’s trade at a 50% discount to our fair value estimate as of Aug. 3, making it one of the cheapest companies in the energy sector.

Earnings growth in the natural gas liquids and refined products segment continues to lead the way, making that segment the largest earnings contributor on a run-rate basis. This is in line with our expectations as volumes ramp up from favorable market conditions and new projects online. Second-quarter earnings in Energy Transfer’s other segments rebounded from last year when energy market shit a bottom at the height of the COVID pandemic. Capital allocation remains a key variable after Energy Transfer achieved investment-grade credit ratings with $5.2 billion of debt reduction this year. 

Company’s Future Outlook

We expect little growth in these segments going forward due to unfavorable reconstructing prices and lack of organic investment potential. Management reaffirmed their plan for $500 million to $700 million annual growth investment in 2022 and 2023, in line with our estimate. We think Energy Transfer is inclined to make more acquisitions like its $7 billion Enable deal that should close by year-end. Management has discussed midstream consolidation and downstream investments. We believe unit buybacks would be the most value-accretive use of capital. The board maintained its $0.61 annualized distribution, as we expected.

Company Profile

Energy Transfer LP (NYSE: ET)  owns a large platform of crude oil, natural gas, and natural gas liquid assets primarily in Texas and the U.S. midcontinent region. Its pipeline network transports about 22 trillion British thermal unit per day of natural gas and 4.3 million barrels per day of crude oil. It also has gathering and processing facilities, one of the largest fractionation facilities in the U.S., and fuel distribution. Energy Transfer also owns the Lake Charles gas liquefaction facility. It combined its publicly traded limited and general partnerships in October 2018.

(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

Santos and Oil Search Agree Merger Terms

Well-timed East Australian coal seam gas purchases and subsequent partial sell-downs bolstered the balance sheet and set the scene for liquid natural gas, or LNG, exports. Santos is now one of Australia’s largest coal seam gas producers and continues to prove additional reserves. It is the country’s largest domestic gas supplier.

Coal seam gas purchases increased reserves, and partial sell-downs generated cash profits, putting Santos on solid ground to improve performance. Group proven and probable, or 2P, reserves doubled to 1,400 mmboe, primarily East Australian coal seam gas. Coal seam gas has grown to represent more than 40% of group 2P reserves, despite partial equity sell-downs. A degree of confidence can be drawn from project partners. U.S. energy supermajor ExxonMobil, the world’s largest publicly traded oil and gas company, is 42% owner and the operator of the PNG LNG project.

The Gladstone LNG project was built and is operated by GLNG Operations, a joint venture of owners Santos (30%), Petronas (27.5%), Total (27.5%), and Kogas (15%). Petronas is Malaysia’s national oil and gas company and the world’s second-largest LNG exporter. The company increasingly enjoys export pricing on its gas. In addition to Santos’ Gladstone LNG, several other third-party east-coast LNG projects conspire to drive domestic gas prices higher. As the largest domestic gas supplier, Santos can expect significant bang for its buck, with limited additional capital or operating cost required to capture enhanced prices.

Financial Strength

Santos has moderate leverage (ND/ND+E) of 28% and maintenance of strong net operating cash flow is reassuring. Santos’ debt covenants have adequate headroom and are not under threat at current oil prices. The weighted average term to maturity is around 5.5 years. Capital expenditure of USD 4.0 billion, beginning 2022 on the Dorado oil project and the Barossa to Darwin LNG upgrade. But this is excellent near-term bang-for-buck expenditure, increasing group production by 65% to 125mmboe by 2026. Capital efficient development and fast up-front cash flows from Dorado’s oil should combine to ensure Santos’ leverage ratios continue to decline from current levels despite outgoings.

Bull’s Say

  • Santos is a beneficiary of continued global economic growth and increased demand for energy. Aside from coal, gas has been the fastest-growing primary energy segment globally. The traded gas segment is expanding faster still.
  • Santos is in a strong position, with 0.9 billion barrels of oil equivalent proven and probable reserves, predominantly gas, conveniently located on the doorstep of key Asian markets.
  • Gas has about half the carbon intensity of coal, and stands to gain market share in the generation segment and elsewhere as carbon taxes are rolled out.

Company Profile

Santos was founded in 1954. The company’s name is an acronym for South Australia Northern Territory Oil Search. The first Cooper Basin gas discovery came in 1963, with initial supplies in 1969. Santos became a major enterprise, though over-reliance on the Cooper Basin, along with the Moomba field’s inexorable decline, saw it struggle to maintain relevance in the first decade of the 21st century. However, the stage has been set for a renaissance via conversion of coal seam gas into LNG in Queensland and conventional gas to LNG in PNG.

(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
Property

Commonwealth Bank of Australia (ASX: CBA) share price lifts amid soaring property prices

Property investment, savings money for buy new home concepts. A man hand holding coin over small residence house, stack of coins and money bag with blurred real estate. A sustainable investment.

The booming Australian housing market is one of the factors supporting the CBA share price (and those of its competitors).

“Record low mortgage rates and the likelihood of interest rates remaining low for an extended period of time are fueling demand,” says Tim Lawless, research director at CoreLogic.

The rise in home prices has resulted in a significant increase in the mortgage balances held by Australian banks.

According to BankingDay, “lenders’ mortgage balances increased by 0.7 percent in June, compared to the previous month – the greatest level of monthly growth since 2010.”

According to APRA’s most recent monthly ADI statistics, Commonwealth Bank, National Australia Bank Ltd. (ASX: NAB), and Westpac Banking Corp. (ASX: WBC) all outperformed the market in June, with mortgage balance growth of 0.9 percent.

In the long run, the lenders’ mortgage amount increased by 5.3 percent in the year to June 30, the quickest annual rate in three years.

The share price of CBA has likely risen in comparison to its major competitors over the last year, as CommBank has managed to grow its mortgage balance faster. The book of CommBank increased by 6.7 percent, compared to 1.6 percent for NAB and 2.3 percent for Westpac.

CBA’s stock price has risen 46 percent in the last year, greatly surpassing the S&P/ASX 200 Index’s increase of 26 percent (ASX: XJO). The CBA share price has continued to rise year to date, up 22 percent so far in 2021.

Company Profile 

The Commonwealth Bank was founded under the Commonwealth Bank Act in 1911 and commenced operations in 1912, empowered to conduct both savings and general banking business. Today, we’ve grown to a business with more than 800,000 shareholders and 52,000 people working in the Commonwealth Bank Group. We offer a full range of financial services to help all Australians build and manage their finances.

(Source: Fact Set)

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.