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Global stocks

Hongkong Land’s Long-Term Vision Is Maintained After a Century

Over more than a century, it assiduously assembled, maintained and upgraded these assets and turned them into a portfolio consisting of the most desirable office addresses and retail locations in the city. The HK portfolio accounts for nearly 65% of the company’s earnings, all of which stable rental incomes.

HKL is the second-largest office landlord in Hong Kong behind Swire Properties, but one with the most centrally located assets. It is the clear beneficiary of rising demand in the HK office sector, prior to a weakened market in 2020. Driven by strong demand from Chinese corporates establishing presence in the city, corporates are particularly attracted to the high-grade office spaces offered by HKL. Beyond the attraction of modern grade-A office spaces, these assets offer sizable floor plates, unrivalled visibility and prestige, due to their storied histories and locations.

Fundamentally, existing office space and new supply in HK is below that of world financial centers. The small CBD with tight supply was a key driver of the decentralization trend. While office demand weakened in 2020 due to the social unrest and coronavirus pandemic, HKL’s assets maintained near full occupancy, attributable to its selection of blue-chip tenants and lease management. We expect the company’s portfolio in the city to fare well in coming years, underpinned by demand from Chinese corporates and the city’s status as a world financial center.

The company holds investment properties in Singapore, Jakarta, and Beijing. It also currently has development projects in Singapore and China. Given Hong Kong’s current high asset value, acquisitions in recent years include large commercial projects and development projects in several cities across the Asia-Pacific. However, the company’s focus in Hong Kong is clear. During the downturn in 1982, the company disposed most of its overseas assets in a bid to shore up its balance sheet and hold on to its core portfolio in Hong Kong.

Fair Value and Profit Drivers

Our fair value estimate for Hongkong Land is USD 7.20, implying a price/book ratio of 0.5 times, a forward P/E of 20 times, and enterprise value/EBITDA of 22 times. Our valuation is based on a cost of equity of 8.5% and a weighted average cost of capital of 6.9%. Over the next five years, we expect average return on invested capital to average 9%.

As Hongkong Land is a property investor first and foremost, and its development projects in Singapore, China and elsewhere are more opportunistic, we believe the long-term growth is driven by rental growth of its core portfolio in Hong Kong, and to a lesser degree in Singapore. For the Hong Kong office portfolio, we assume spot rental of HKD 110 per square foot per month, compared with an average rental of HKD 120 per square foot per month in 2020. With lease expiry at 4.6 years, we assume 20% annual lease expiry over the next five years. As such, we project blended net rental declines by 1.5% annually over the next two years, before a recovery thereafter.

Average net rent for its retail portfolio was HKD 164 per square foot per month in 2020, due to rental subsidies offered. Excluding the subsidies, rental was HKD 212 per square foot per month. Our spot rental in 2021 factors in a decline of 10%. With lease expiry declining to 1.9 years as retailers are unwilling to commit to longer leases, we expect blended rental to fall 8% in 2021. We assume near full occupancy as most luxury brands’ flagship stores are located in Hongkong Land’s properties in Central. As such, we do not expect any impact from a consolidation of luxury stores to be a negative impact. Further, fitouts for flagship stores are high.

Hongkong Land Holdings Ltd

Hongkong Land is a property investor mainly holding prime commercial assets in Hong Kong and Singapore. The company is the second-largest office landlord in Hong Kong with a portfolio of centrally located assets totalling 4.1 million square feet of office space along with 0.6 million square feet of retail space. It also holds 1.6 million square feet of prime office space in Singapore. Rental income accounts for about 75% of the operating profit, with most coming from Hong Kong. Property development projects in Singapore and China contribute the rest. The company was founded in 1889 and is dual-listed on the London Stock Exchange, with a secondary listing on the Singapore Exchange. It is 50%-owned by Jardine Matheson Holdings.

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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Dividend Stocks Shares

Coca-Cola Amatil Ltd– Uncertainties Remain

While we expect cost control, plans to launch smaller package sizes at higher prices per litre, and an increasing line up of non-carbonated drinks, we forecast volume declines in soft drinks and a negative mix shift from reduced on-the-go sales to drive a double-digit decline in EPS in 2020. Nonetheless, we’re encouraged by the firm’s continued market share gains, and expect earnings growth to rebound in 2021 and beyond. On top of this organic outlook, Amatil has received a non-binding offer to take over the company from fellow bottler CCEP at an attractive price. Uncertainty remains, but we think there is a strong change the deal progresses.

Key Investment Considerations

  • Coca-Cola Amatil is facing declining carbonated beverage consumption and heightened bottled water competition in its core Australian market, which will likely limit the firm’s near-term pricing power. Despite challenges in mainstream soft drinks, Amatil’s distribution deals with third parties, growth opportunities in emerging markets, and launches of smaller package sizes should drive positive annual revenue gains.
  • Amatil aims to pay out more than 80% of its annual earnings in dividends, and we forecast a low-single-digit growth pace. We expect dividends will remain unfranked until 2021, after which we see franking at 50%.
  • Coca-Cola Amatil’s long-standing relationship with The Coca-Cola Company (TCCC) and a solid distribution network and retailer relationships in Australia, New Zealand, Fiji, Indonesia, and Papua New Guinea, afford the beverage bottler sustainable brand intangible assets and a cost advantage versus its competitors and potential upstarts. However, health-led headwinds in developed markets will likely drive further pressure on Amatil’s carbonated beverage portfolio.
  • The Coca-Cola Company’s nearly 31% ownership in Coca-Cola Amatil solidifies the relationship between the parent company and bottler, and an upcoming shift to incidence-based pricing should further align the firms’ goals.
  • Indonesia is a major long-run growth opportunity for Amatil, given the country’s continued economic development and relatively low rate of packaged beverage consumption.
  • Amatil has opportunities to increase its asset utilisation through additional distribution partnerships, such as recent deals struck with Monster Energy, Molson Coors, and Restaurant Brands.
  • Developments such as container return schemes in NSW and other Australian states, and potential sugary beverage taxes, serve as a price increase for consumers, and likely accelerate the decline of CSD volumes in Australia.
  • Pricing has been dented by both competitors and customers; Amatil has driven costs out of its production system, but a continued inability to pass through raw material inflation to consumers presents a long-term challenge.
  • The Coca-Cola Company owns the rights to Amatil’s major brands, and could negatively alter the pricing consideration for beverage concentrate purchasing.

 (Source: Morningstar)

Disclaimer

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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Dividend Stocks

Cochlear Ltd- outlook

As such, we expect growth in this market to fade over the next 10 years.To combat this pressure, Cochlear is actively trying to grow the adult developed market for cochlear implants, which we estimate to be approximately 40% of current annual units. However, the cost of growing awareness and reimbursement support results in minimal operating leverage and the company has specifically guided to flat margins post the initial recovery from the pandemic.

Key Investment Consideration

  • Increasing investment is required to achieve top-line growth resulting in no operating leverage. OThe annuity-like revenue from sound processor upgrades and accessories to growing implant recipient base is set to increase from 30% in fiscal 2020 to approximately 50% of revenue by 2030.
  • Despite forecasting an 11.2% revenue improvement in fiscal 2021 off a depressed base year, we do not anticipate Cochlear to resume paying dividends until fiscal 2022 when it is expected to become free cash flow positive again.
  • There are signs Cochlear is looking to expand beyond the hearing market with the investment in Nyxoah, a company focused on development of a hypoglossal nerve stimulation therapy for the treatment of obstructive sleep apnoea, a large under penetrated market.
  • The annuity-like revenue from sound processor upgrades is an increasingly important component of the revenue stream.
  • Cochlear earns ROICs well ahead of the cost of capital even in our bear case scenario, which is testament to the
  • high quality of the company.
  • Growth in the cochlear implant market is becoming more costly to achieve and the lack of operating leverage limits the potential upside to earnings going forward.
  • The arrival of lost-cost competitor, Nurotron, could disrupt markets other than China should it seek to expand and this could trigger price deflation for incumbents.
  • The COVID-19 crisis could cause a significant outright loss of adult potential cochlear implant recipients as they avoid hospitals and cancel rather than defer elective surgeries. The referral and assessment process takes between nine and 12 months and as such, the impacts will take some time to be visible in the financial results.

 (Source: Morningstar)

Disclaimer

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

Cromwell PropertyLtd – Cromwell FVE Unchanged

We see that as appropriate given gearing was an aggressive 42% as at June 30, 2020. There were some acquisitions on behalf of funds management clients, but these should generate fee revenue for Cromwell without stretching the balance sheet unduly.

We’re now more confident Cromwell’s lease to Qantas is not in jeopardy. We estimate the lease generates rent of AUD 20-35 million per year, which is only a tiny part of Qantas’ approximate AUD 12 billion 2020 cost base. Morningstar views Qantas as able to pay its bills. Furthermore, Qantas itself appears to view the lease as rocksolid because in September 2020 the airline advertised office space at its Mascot headquarters on a sub-lease basis. This suggests to us that Qantas is locked into the lease, and Cromwell will continue to collect rent at least until the lease’s 2032 expiry.

Qantas alone counts for about 15% of Cromwell’s gross rental income. Another 41% comes from federal, NSW, or Queensland government tenants. The landlord code of conduct has been extended generally until the new year, depending on the state. However we don’t view the code of conduct as onerous for Cromwell given SME tenants only represent about 9% of income.

We wouldn’t be surprised to see ARA’s proportional takeover offer price increased given solid performance in Cromwell’s portfolio and a strong market recovery sine the offer was first made. While the offer was only for 29% of each investor’s securities, when combined with ARA’s existing stake, and takeover creep provisions which allow ARA to buy securities on market at certain times, ARA may eventually gain control of Cromwell. The offer price offers no control premium, which is a further reason why we think investors should reject it.

 (Source: Morningstar)

Disclaimer

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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Dividend Stocks Shares Technical Picks

Domino’s Pizza Enterprises- Outlook

The stock suits investors seeking exposure to the food and beverage sector. Australia can still increase its store base by around 40% over the next decade. European growth is much more substantial, with potential to substantially increase the existing store base to around 2,850 outlets during the next decade. In its capacity as a master franchisee, Domino’s capital requirements are limited, which means that royalty payments should continue to be paid as dividends.

Key Considerations

  • Domino’s was an early adopter of digital. By migrating orders online, the company has been able to save costs, establish a customer database, and up-sell to customers.
  • Japan and Europe are underpenetrated markets. Replicating its success in Australia abroad presents a significant growth opportunity.
  • Short-term drivers can materially affect year-to-year earnings, including currency movements, raw material input costs, and changes to foreign government policies related to sales taxes and wages.
  • Domino’s is a highly visible brand based on a successful U.S. business model. Across Domino’s three regions, sales have increase at a CAGR of 14% over the past four years. We expect annual growth rates to continue in the low teens over the next five years.
  • The pizza market in Europe is highly fragmented, presenting significant opportunity for Domino’s to take market share with an attractive value proposition, increased convenience to the customer, and a differentiated product offering.
  • The company’s large network size has positive implications for discounted supplier arrangements.
  • There is a high level of competition, stemming from independent pizza stores and other quick-service restaurants.
  • The company might evaluate its target markets in new countries incorrectly, given the geographical distance and cultural variances.
  • The low-price business model may still be affected by slowing retail and discretionary spending.

 (Source: Morningstar)

Disclaimer

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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Dividend Stocks Shares

Costa Group Holdings – Expansion to Drive Costa’s Earnings Growth

The Australian fresh produce industry enjoys some protection from imports, with strict biosecurity restrictions and Australia’s relative geographic isolation. But the local market is highly fragmented, and competing product lines are largely commoditised. Further, Costa’s concentrated customer base prevents the establishment of an economic moat because the balance of bargaining power lies with its powerful customers, notably the dominant supermarket chains.

Key Investment Considerations

  • Costa Group’s earnings are highly exposed to the major Australian supermarkets, which constitutes around 70% of produce revenue.
  • Fluctuations in weather and climate can lead to volatility in pricing and yield.
  • International berry expansion to China is running according to Costa’s original five-year plan and appears set for significant growth.
  • Costa’s strong market share in key categories mitigates its high customer concentration risk.
  • International berry expansion to China is running according to Costa’s original five-year plan, and appears set for significant growth.
  • Costa is well-positioned to capitalise on high growth in emergent product categories, such as blackberries.
  • Costa Group’s earnings are highly exposed to the major Australian supermarkets, which constitute the majority of revenue.
  • Severe weather conditions can lead to undesirable volatility in both pricing and yield.
  • Access to water is also imperative to Costa’s business, and restrictions or termination of water rights due to events such as drought would adversely affect Costa’s ability to maintain its crops.

 (Source: Morningstar)

Disclaimer

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

Dexus- Solid Balance Sheet

The majority is in the Sydney CBD or fringe (54% by book value), as well as substantial CBD exposure in Melbourne (18%) and Brisbane (13%), and minor other holdings around Australia. The group has a sizable industrial property portfolio (14% of income), and small retail and healthcare property interests. Funds management and property management accounts for about 8% of income, with funds management the group’s fastest growth engine. The group targets a gearing of 30 40%, so financial risk is moderate considering that revenue is underpinned by long leases with fixed or CPI uplifts. Its funds management business is sticky given lock-ups and switching costs (exit penalties, and tax/transaction costs).

Key Investments

  • Rental income is underpinned by high-quality assets, relatively long leases, and fixed or CPI-linked escalations. Developments and the funds-management platform can add to growth.
  • Very low government bond yields increase the relative attractiveness of Dexus’ yield, but the share price would likely retrace sharply to any unexpected jump in bond yields, or further negative earnings surprises.
  • Office supply is increasing and Dexus has material lease expiries in fiscal 2021 and 2022 (especially in Melbourne, 25% in fiscal 2021). The group will likely offer substantial lease incentives to attract tenants.
  • Dexus owns a high-grade office property portfolio and a solid industrial portfolio, and it will likely benefit from an ongoing demand for quality property from the likes of pension funds, sovereign wealth funds and other offshore investors.
  • Population growth boosts the value of Dexus’ assets with high-quality sites achieving more rent bargaining power, and some low quality sites potentially switching to higher value uses. OLower interest rates could weigh on capitalisation rates, offsetting pressure on rent collections.
  • Capitalisation rates are historically low and likely to rise. Even if government bond yields remain low compared with history, property is not a risk-free asset and should be priced with appropriate risk premiums. OProperty may be considered a bond proxy, but it is not a bond. The poor performance of retail property is a reminder that property can be disrupted by technology, as is now occuring with the work-from-home trend undermining office rents.
  • Office and industrial property have benefited from several years of tight supply and rents have increased dramatically. COVID-19 is likely to cause that to unwind.

 (Source: Morningstar)

Disclaimer

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

Facebook merits a wide moat rating based on network effects

Facebook is the largest social network in the world, attracting more than 2.5 billion monthly active users. Mogharabi believes that the growth in users and user engagement, along with the valuable data that they generate, makes Facebook attractive to advertisers over both the short and long term. Mogharabi also highlights Facebook’s continued innovation that helps the business increase its user base and engagement. This innovation has taken the shape of additional features and apps to keep users engaged within the Facebook ecosystem. With more Facebook user interaction among friends and family members, sharing of videos and pictures, and the continuing expansion of the social graph, we believe the firm compiles more data, which Facebook and its advertising clients then use to launch online advertising campaigns targeting specific users.

Mogharabi also sees further economic tailwinds for the company as it is expected to benefit from an increased allocation of marketing and advertising dollars toward online advertising—more specifically to social network and video ads where Facebook is especially well positioned. The firm is also taking more steps to monetize its app portfolio while utilizing AI and virtual and augmented reality to drive further user engagement. This overall strength is driven by an ever-expanding social graph that helps the firm compile more data, which is used by Facebook and its advertising clients to launch targeted online advertising campaigns.

We believe Facebook merits a wide moat rating based on network effects around its massive user base and intangible assets consisting of a vast collection of data that users have shared on its various sites and apps. Facebook is a textbook example of how network effects can form an economic moat. It is worth noting that all the firm’s applications become more valuable to its users as people both join the networks and use these services. These network effects serve to both create barriers to success for new social network upstarts (as demonstrated by the firm’s success against Snap) as well as barriers to exit for existing users who might leave behind friends, contacts, pictures, memories, and more by departing to alternative platforms.

Mogharabi highlights the firm’s intangible assets as an economic moat source. These intangible assets are related to how much information the company has about its user base. Unlike any other online platform in the world, Facebook has accumulated data about everyone with a Facebook and/or an Instagram account. Facebook has its users’ demographic information. It knows what and who they like and dislike. It knows what topics and/or news events are of interest to them. With access to such data, Facebook is able to enhance the social network by offering even more relevant content to its users. This virtuous cycle further increases the value of its data asset, which only Facebook and its advertising partners can monetize.

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

Sony put an effort in building an ecosystem within its PlayStation business

With name recognition across the globe, a market cap above $130 billion, and a history of profitability, we understand how some readers may be surprised at our no-moat rating of the company. However, at the same time, we must observe the competitive landscape in which the company operates. Ito asserts that Sony does not have an economic moat as a large percentage of its products have very low switching costs, even though we identify economic moats in some parts of its business. In particular, we believe that consumer electronic products (25% of revenue) will be exposed to fierce competition with Asian manufacturers.

With many products in this part of the business being commoditized, and a replacement cycle of digital appliances being three to six years, it is generally difficult for consumer electronic companies to build up an economic moat that generates sustainable excess returns on capital.

At the same time, however, Ito positively evaluates Sony’s efforts in building an ecosystem within its PlayStation business. While PlayStation 4 accumulated shipments reached approximately 97 million units by the end of fiscal 2019, the number of PS Plus users exceeded 36 million. This not only gives Sony solid cash flows with which to improve the profitability of its gaming segment but also provides a hook for customers, leading them to again purchase a PlayStation console in the next generation.

Ito also notes strength in Sony’s sensor business that focuses on improving picture quality. As a result, Sony has increased its market share, owing to growing demand from handsets. This strength can be quantitatively illustrated in Sony’s dominance in the global market share for image sensors. Sony’s global market share in this space is estimated to be in excess of 50% with the second-largest player, Samsung, holding 18% of the global market share. Security and automotive (autonomous driving) fields are the next growth drivers for Sony’s image sensor business. A critical factor for both fields is high sensitivity under various difficult conditions, and so we believe Sony could leverage its strength to expand this business in the near term.

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

Cabot is the only natural gas producer to earn a narrow moat rating

Meats believes that the firm’s assets are ideally located in the northeast portion of the play fairway, which mainly yields dry gas with very little oil condensate or natural gas liquids content in the production stream. This geographic advantage not only allows the firm to keep costs low but also maintain very high daily production rates. These advantages have enabled the firm to be among the lowest-cost natural gas producers in the Appalachia region, and this competitive advantage enables it to consistently deliver very strong returns on invested capital. Meats do advise caution, however. The company has drilling opportunities in the Lower and Upper Marcellus. The opportunities in the Lower Marcellus are far more lucrative but are expected to last until the late 2020s. This means that the firm will eventually pivot to opportunities in the Upper Marcellus that are typically up to 30% less productive. Meats asserts that when the firm does pivot to the Upper Marcellus, it will be able to reuse existing roads and pad sites, and as there are no well configuration constraints in this undeveloped interval, it could enhance returns by drilling longer laterals. As a result, we expect well costs to decrease enough to offset the dip in flow rates, leaving potential returns unchanged.

Cabot is the only natural gas producer to earn a narrow moat rating. The main reason for this rating is the firm’s low operating and development costs in the Marcellus Shale, which puts Cabot at the lower end of the U.S. natural gas cost curve.

ESG is an important factor to consider when looking at exploration and production companies. This is due to the downside risk ESG factors possess for such companies due to reputational and regulatory risks. Meats does not think that these issues threaten the company’s economic moat due to the 5%-10% spread between projected returns and Cabot’s cost of capital that provides a comfortable margin of safety. The most significant ESG exposure for Cabot is greenhouse gas emissions. While greenhouse gas emissions are unavoidable for oil and natural gas producers, Cabot has taken steps to reduce greenhouse gas emissions intensity in 2020 while also reporting zero flaring in the year. It is also worth noting that while consumers get more skeptical of fossil fuels, much of this aversion is directed toward coal. Natural gas, on the other hand, is less carbon-intense than coal but does not have the intermittency issues that plague wind and solar generators.

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.