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Commodities Trading Ideas & Charts

Woodside Petroleum delivered strong FY21 results

Investment Thesis

  • Since our Buy recommendation in our last report, WPL’s share price has appreciated 43.1% – We acknowledge our positive view on oil and gas prices across 2022, and the quality of WPL and BHP’s assets but recommend investors take profits and downgrade our recommendation as we yield on the side of caution, before we see how the WPL/BHP’s combined entity trades and its first year of audited financials.   
  • Quality assets (NWS, Pluto, Australia Oil, Browse, Wheatstone) with superior free cash flow breakeven price relative to peers. 
  • On-going focus on cost reduction and positioning of the business for a lower oil price environment.
  • Improving oil and gas prices, which should see earnings improve. 
  • Increasing LNG demand, with WPL well positioned to fulfill this. 
  • Solid balance sheet position.
  • Strong free cash flow generation.
  • Potential exploration success in Myanmar, Senegal, Gabon. However, we have not factored any success into our forecasts + valuation.
  • Whilst the change in CEO could result in some uncertainty around future strategy, it could also be an opportunity to refresh the strategy with a “fresh” set of eyes. The Board has reiterated that current growth plans will be retained. 

Key Risks 

  • Supply and demand imbalance in global oil/gas markets.
  • Lower oil / LNG prices.
  • Not meeting cost-out targets (e.g. reducing breakeven oil cash price).
  • Production disruptions.

FY21 Result Highlights

  • Operating revenue of $6,962m, up +93%, driven by annual sales volume 111.6MMboe at realised price of $60.30 per boe, up +86%.
  • NPAT of $1,983m, up +149%. Underlying NPAT of $1,620m, up +262%. Unit production cost of $5.30 per boe.
  • Operating cash flow of $3,792m, up +105%.
  • Free cash flow of $851m.
  • At FY21-end, WPL had cash on hand of $3,025m and liquidity of $6,125m. Net debt at year-end was $3,772m and gearing of 21.9% (at the lower end of targeted 15-35% gearing).

Company Profile 

Woodside Petroleum Ltd (WPL) explores for and produces natural gas, liquefied natural gas, crude oil, condensate, naptha and liquid petroleum gas. WPL owns producing assets in the North-West Shelf (NWS) project, Pluto LNG and Australian Oil. WPL is currently developing Browse, Sunrise, Wheatstone, Grassy Point and Kitimat LNG. WPL is currently undertaking exploration activities in Myanmar, Senegal, Morocco, Gabon, Ireland, NZ and Peru.

(Source: BanyanTree)

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

Marriott’s Strong Brand Intangible Asset Positioned Well for a Travel Rebound

Online stock exchange team

Business Strategy and Outlook:

While COVID-19 is still materially impacting near-term travel demand in many regions of the world, we expect Marriott to expand room and revenue share in the hotel industry over the next decade, driven by a favorable next-generation traveler position supported by renovated and newer brands, as well as its industry-leading loyalty program. Additionally, we believe the acquisition of Starwood (closed in September 2016) has strengthened Marriott’s long-term brand advantage, as Starwood’s global luxury portfolio complemented Marriott’s dominant upper-scale position in North America.

Marriott’s intangible brand asset and switching cost advantages are set to strengthen. Marriott has added several new brands since 2007, renovated a meaningful percentage of core Marriott and Courtyard hotels in the past few years, and expanded technology integration and loyalty-member presence; these actions have led to share gains and a strong positioning with millennial travelers. Starwood’s loyalty member presence and iconic brands should further strengthen Marriott’s advantages. With 97% of the combined rooms managed or franchised, Marriott has an attractive recurring-fee business model with high returns on invested capital and significant switching costs for property owners. Managed and franchised hotels have low fixed costs and capital requirements, along with contracts lasting 20 years that have meaningful cancelation costs for owners.

Financial Strength:

Marriott’s financial health remains in good shape, despite COVID-19 challenges. Marriott entered 2020 with debt/adjusted EBITDA of 3.1 times, as its asset-light business model allows the company to operate with low fixed costs and stable unit growth, but reduced demand due to COVID-19 caused the ratio to end the year at 9.1 times. During 2020, Marriott did not sit still; rather, it took action to increase its liquidity profile, including suspending dividends and share repurchases, deferring discretionary capital expenditures, raising debt, and receiving credit card fees from partners up front. As travel demand recovered in 2021, so too did Marriott’s debt leverage, with debt/adjusted EBITDA ending the year at 4.5 times. If demand once again plummeted, we think Marriott has enough liquidity to operate at zero revenue into 2023.

Bulls Say:

  • Marriott is positioned to benefit from the increasing presence of the next-generation traveler through emerging lifestyle brands Autograph, Tribute, Moxy, Aloft, and Element. 
  • Marriott stands to benefit from worker flexibility driving higher long-term travel demand. Our constructive stance is formed by higher income occupations being the most likely industries to continue to work from remote locations. 
  • Marriott has a high exposure to recurring managed and franchised fees (97% of total 2019 units), which have high switching costs and generate strong ROICs.

Company Profile:

Marriott operates nearly 1.5 million rooms across roughly 30 brands. Luxury represents 10% of total rooms, while full service, limited service, and time-shares are 43%, 46%, and 2% of all units, respectively. Marriott, Courtyard, and Sheraton are the largest brands, while Autograph, Tribute, Moxy, Aloft, and Element are newer lifestyle brands. Managed and franchised represent 97% of total rooms. North America makes up two thirds of total rooms. Managed, franchise, and incentive fees represent the vast majority of revenue and profitability for the company.

(Source: Morningstar)

General Advice Warning

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

Categories
Global stocks Shares

Meat Shortages Are Lifting Selling Prices and Margins for Tyson, but Should Prove Temporary

Stock market information

Business Strategy and Outlook:

Several secular trends are affecting Tyson’s long-term growth prospects. While U.S. consumers (81% of fiscal 2021 sales) are limiting their consumption of red and processed meat (71% of Tyson’s sales), they are consuming more chicken (29%). International demand for meat has been strong, and although Tyson’s overseas sales mix is just 12%, it is likely to increase over time, as this is an area of acquisition focus. Also, in order to feed the world sustainably, alternative proteins should play a key role. Tyson is actively investing in lab-grown and plant-based meats and should participate in this growth (albeit to a small degree). The beef segment has been a bright spot in Tyson’s portfolio in recent years, as strong international demand, coupled with a drought-induced beef shortage in Australia, has increased the segment’s operating margins to 10% over the past five years from 2% prior to 2017. Conversely, the chicken segment has suffered from executional missteps that have resulted in structurally higher costs relative to competitors.

About 80% of Tyson’s products are undifferentiated (commoditized), so it is difficult for them to command price premiums and higher returns. Although Tyson is the largest U.S. producer of beef and chicken, we do not believe this affords it a scale-based cost advantage, as its segment margins tend to be in line with or even below those of its smaller peers. The absence of a competitive edge, in the form of either a brand intangible asset or a cost advantage, leads us to our no-moat rating.

Financial Strength:

Tyson’s financial health is viewed as solid and there aren’t any issues to suggest that it will be unable to meet its financial obligations. While Tyson generates healthy cash flow and is committed to retaining its investment-grade credit rating, the business is inherently cyclical, with many factors outside of its control. But management has made changes to improve the predictability of earnings. Chicken pricing contracts, which now link costs and prices, and a greater mix of prepared foods (from 10% in 2014 to the current 19%) both serve as stabilizers. In terms of leverage, net debt/adjusted EBITDA stood at a rather low 1.2 times at the end of fiscal 2021, below Tyson’s typical range of 2-3 times. At the end of December, Tyson held $3.0 billion cash and had full availability of its $2.25 billion revolving credit agreement. Together, this should be sufficient to meet the firm’s needs over the next year, namely about $2 billion in capital expenditures, nearly $700 million in dividends, and $1.1 billion in debt maturities.

Bulls Say:

  • China’s significant protein shortage resulting from African swine fever should boost near-term protein demand, while the country’s continued moderate increase in per capita consumption of proteins should drive long-term growth. 
  • While investor angst over chicken price-fixing litigation has weighed on shares, Tyson’s recently announced settlements materially reduce this overhang. 
  • In the current inflationary environment, Tyson’s cost pass-through model limits potential profit margin pressure.

Company Profile:

Tyson Foods is the largest U.S. producer of processed chicken and beef. It’s also a large producer of processed pork and protein-based products under the brands Jimmy Dean, Hillshire Farm, Ball Park, Sara Lee, Aidells, State Fair, and Raised & Rooted, to name a few. Tyson sells 81% of its products through various U.S. channels, including retailers (47% in fiscal 2021), food service (32%), and other packaged food and industrial companies (10%). In addition, 11% of the company’s revenue comes from exports to Canada, Mexico, Brazil, Europe, China, and Japan.

(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 reported strong FY21 results with underlying profit up by 230%

Investment Thesis:

  • Leveraged to the oil price.
  • High quality assets which offer a number of core assets within its portfolio (no single asset risk).  
  • On-going focus on cost reduction and positioning of the business for a lower oil price environment.
  • Strong balance sheet position. 
  • High quality management team who are able to operate assets and extract synergistic value from the recent merger with Oil Search.

Key Risks:

  • Supply and demand imbalance in global oil/gas markets.
  • Lower oil / LNG prices.
  • Not meeting cost-out targets (e.g. reducing breakeven oil cash price).
  • Production disruptions (not meeting GLNG ramp up targets).
  • Strategic investors sell down their stake or block any potential M&A activity.

Key highlights:

  • Management highlighted lower unit costs, our focus on safe, low-cost and efficient operations delivered a free cash flow breakeven of $21 per barrel in 2021. 
  • EBITDAX was up 48% to $2.8bn driven by higher oil prices and lower unit costs. Underlying profit was up 230% to a record $946m.
  • Production was up +3% to of 92.1mmboe. Sales volume of 107.1mmboe, down -3%
  • Product sales revenue of US$4.71bn, up +39%
  • Record free cash flow of US$1.5bn and underlying profit of US$946m, driven by higher oil and LNG prices vs pcp due to a recovery in global energy demand and supply constraints across the industry due to lower capital investment through the pandemic
  • Reported NPAT of US$658m includes losses on commodity hedging and costs associated with acquisitions and one-off tax adjustments and is significantly higher relative to the pcp due to impairments included in FY20
  • Reported NPAT of US$658m includes losses on commodity hedging and costs associated with acquisitions and one-off tax adjustments and is significantly higher relative to the pcp due to impairments included in FY20

Company Description: 

Santos Limited (STO) explores for and produces natural gas, liquefied natural gas, crude oil, condensate, naptha and liquid petroleum gas. STO conducts major onshore and offshore petroleum exploration and production activities in Australia, Papua New Guinea, Indonesia, Vietnam. The company also transports crude oil by pipeline.  

(Source: Banyantree)

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

Microsoft remains well positioned to strengthen its market leadership in cloud computing

Businesswoman pointing at diagram in her hands when explaining marketing trends to her team during online meeting

Investment Thesis:

  • Cloud products are growing at attractive growth rates as the Company continues to innovate. 
  • Exposure to the fast growing online gaming segment. 
  • New product release and updates to existing suite of products.
  • Solid free cash flow generation and strong balance sheet. 
  • Strong management team.  

Key Risks:

  • Competitive & macro pressures in key markets – if the growth rate for Azure slows the market would view this as a negative in our view.   
  • New product releases or updates fail to resonate with customers leading to product switching to competitors. 
  • U.S. trade war with China escalates, given MSFT uses parts from China.  
  • Value destructive acquisition(s). 
  • Adverse movements in currency (USD). 
  • Intellectual property theft and piracy.
  • There is significant optimism priced into MSFT’s share price (the stock is well owned by investors), and as such any disappointment on growth or strategic misstep could see the stock disproportionately de-rate lower.

Key highlights:

  • Driven by rising digital shift by enterprises, MSFT’s cloud growth continued to exceed management’s expectations (Intelligent cloud revenues came in at $18.3bn in 2Q22, up +26% YoY
  • Management also announced an extension of infrastructure to the 5G network edge. As the demand for cloud infrastructure services continues to surge in the post Covid-19 era, benefiting from organisations upgrading their legacy IT infrastructure and migrating to cloud-based workloads
  • Well positioned to strengthen its market leadership in cloud computing (as of FY21 MSFT’s cloud revenues grew at a higher rate than top player AMZN, with a 3-year average of +70% compared to +39.8% for AMZN), aided by growth in on-premise amid its large enterprise partner ecosystem
  • Public-cloud infrastructure, in-turn driving the overall margin expansion for the Company (large fixed costs should continue to get better diluted with the rapid increase in revenues, driving segment’s operating income at a higher rate than revenue). 
  • Management announced the acquisition of Activision Blizzard for $68.7bn. The acquisition remains the last piece in the puzzle for MSFT to exert dominance in Metaverse, with the Company now owning the hardware, cloud services and content to dominate gaming industry.

Company Description: 

Microsoft Corp (MSFT) develops, manufactures, licences, sells and supports software products. Microsoft offers operating system software, server application software, business and consumer applications software, software development tool and Intranet / Internet software. The Company has three main segments: (1) Productivity and Business Processes; (2) Intelligent Cloud; and (3) More Personal Computing.

(Source: Banyantree)

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

BorgWarner Positioned for Growth From Globally Ubiquitous Clean Air Regulations

price of btc is going to breakout

Business Strategy and Outlook

BorgWarner is well positioned to capitalize on industry trends arising from global clean air legislation, consumers’ demand for fuel economy, and the popularity of sport utility and crossover vehicles around the world. The company benefits from its ability to continuously innovate, a global manufacturing footprint, highly integrated long-term customer ties, high customer switching costs, and moderate pricing power from new technologies. BorgWarner is well positioned for the trends in the auto sector that will result in revenue growth in excess of the growth in global automobile demand. 

Turbochargers, one of BorgWarner’s products for which it commands an industry-leading market share and accounted for 24% of 2020 revenue, are a cost-effective way for OEMs to improve engine efficiency. Fuel-injection technology from the Delphi acquisition also improves efficiency. Combined, both technologies increase fuel economy, lowering tailpipe emissions. Dual-clutch transmissions, which contain eight or more gears, compared with older technology automatic transmissions equipped with four gears, can generate 5%-15% in fuel savings. Torque transfer devices enable all-wheel drive and four-wheel drive for globally popular sport utility and crossover vehicles.

Financial Strength

BorgWarner maintains a solid balance sheet and liquidity that, relative to many other parts suppliers, makes for strong financial health. Despite being acquisitive, the company has pursued a conservative capital strategy as total debt/total capital has averaged less than 15% over the past 10 years. Total adjusted debt/EBITDAR, which takes into consideration operating leases and rent expense, averaged less than 1 times over the same period. However, we think the company could have taken more advantage of the benefits of financial leverage without incurring the pitfalls of excessive debt.

The company refinanced a $251 million senior note that was due in September 2020. BorgWarner maintains a $2.0 billion multicurrency revolver that matures in March 2025. The company’s unsecured commercial paper program allows up to an aggregate $2.0 billion in principal amount outstanding. Total combined drawn borrowing between the revolver and commercial paper program is not permitted to exceed $2.0 billion. With the completed all-stock deal to acquire Delphi Technologies, trailing 12-month pro forma debt/EBITDA was 3.0 times. However, excluding the dramatic COVID-19 impacted second quarter and using the trailing 12-months EBITDA ending with the first quarter, BorgWarner proforma debt/EBITDA was 1.7 times, a relatively healthy result.

Bulls Say’s

  • Global clean air legislation enables BorgWarner’s top-line growth to exceed worldwide growth in demand for light vehicles. 
  • The popularity of sport utility and crossover vehicles around the globe supports growth in BorgWarner’s torque transfer technologies. 
  • Volkswagen, Ford, and Hyundai are BorgWarner’s three largest customers and, on average, make up about one third of revenue.

Company Profile 

BorgWarner is a Tier I auto-parts supplier with four operating segments. The air management group makes turbochargers, e-boosters, e-turbos, timing systems, emissions systems, thermal systems, gasoline ignition technology, powertrain sensors, cabin heaters, battery heaters, and battery charging. The e-propulsion and drivetrain group produces e-motors, power electronics, control modules, software, automatic transmission components, and torque management products. The two remaining operating segments are the eponymous fuel injector and aftermarket groups. The company’s largest customers are Ford and Volkswagen at 13% and 11% of 2020 revenue, respectively. Geographically, Europe accounted for 35% of 2020 revenue, while Asia was 34% and North America was 30%.

(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

Charter Hall Social Infrastructure REIT trades on 5.8% premium to its current NTA, quality portfolio retains strong property

Investment Thesis 

  • Trading at a slight premium to NTA which does not capture the full value of CQE, in our view.
  • Solid dividend yield.
  • Quality assets with strong property fundamentals such as 100% occupancy and WALE of 14.6 years.
  • Majority of leases are triple-net leases.
  • CQE is a play on (1) population growth; (2) increasing awareness of early childhood education; (3) increasing the number of families with both parents working and hence demand for childcare services. CQE has increased its portfolio weighting towards social infrastructure assets.
  • CQE’s tenants possess strong financials 
  • Strong history of delivering continuing shareholder return and dividends.
  • Solid balance sheet position.
  • Strong tailwinds for childcare assets and social infrastructure assets.

Key Risks

  • Regulatory risks.
  • Deteriorating property fundamentals.
  • Concentrated tenancy risk, especially around Goodstart Early Learning.
  • Sentiment towards REITs as bond proxy stocks impacted by expected cash rate hikes.
  • Broader reintroduction of stringent lockdowns across Australia due to Covid-19. 

Performance of Property portfolio

  • Statutory profit of $207.7m, up $150.4m relative to the PCP. Operating earnings of $30.8m, was up +5.8% and equates to 8.5cpu, up +6.3%. 
  • Distribution of 8.4cpu, was up +12.0% on PCP.
  • CQE’s gross assets of $1.9bn, is up +28.2% since Jun-21. NTA of $3.78 per unit is up +16.3% since June 2021.
  • CQE retained a strong balance sheet with gearing of 30.0% (and look-through gearing of 30.8%), investment capacity of $200m, and no debt maturity until January 2025.
  • CQE retained a long WALE of 14.6 years, 100% occupancy with lease expiries within the next five years equating to a minimal 3.9% of portfolio income. 75% of CQE’s leases are now on fixed rent reviews resulting in a forecast WARR of 3.0%.
  • CQE acquired 24 assets for $192.7m with an average yield of 4.5% and average WALE of 13.4 years.

Company Profile 

Charter Hall Social Infrastructure REIT (formerly Charterhall Education Trust) (ASX: CQE) is an ASX listed Real Estate Investment Trust (REIT). It is the largest Australian property trust investing in early learning properties within Australia and New Zealand but recently widen its mandate to also invest in social infrastructure properties.

(Source: BanyanTree)

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

Mastercard Inc is Expanding in payments – represents a $255 trillion opportunity

Investment Thesis:

  • Leveraged to the structural growth story of electronics payments globally.
  • Difficult to replicate technology platform which provides an element of high barrier to entry to new entrants.
  • Largely defensive earnings and strong market position (second largest payments network globally). 
  • Expansion into new markets / segments provides upside potential
  • Value accretive acquisitions. Management aims for all acquisitions to be value-accretive by the third year of the transaction.
  • Capital management initiatives 

Key Risks:

  • Adverse currency movements and regulatory changes (data privacy / protection, governments’ intervention/protection policies). 
  • Security and technology risks (including cyber-attacks). 
  • Increased competition, potentially from new forms of payment systems. 
  • Value destructive acquisition(s). 
  • Macroeconomic conditions globally deteriorate, impacting consumer spending and business activity, especially given the coronavirus outbreak.
  • Significant change at the senior management level.
  • Company fails to meet market/investor expectations leading to analysts’ earnings downgrade – the stock is likely to come under selling pressure. 
  • Outstanding litigation risk.

Key highlights:

  • MA’s FY21 results came in above consensus estimates with revenue of $18.9bn (up +23%) vs estimate of $18.8bn and EPS of $8.76 (up +38%) vs estimate of $8.43 amid a spending rebound, with management forecasting YoY growth in FY22 as cross-border travel continues to improve. 
  • MA’s fundamentals remain strong with highly defensible and recurring revenue streams, high incremental margins and superior Free Cash Flow (FCF) generation, and remains well positioned to capture management’s targeted $255 trillion in new payment flows. The impact of potential sanctions on Russia and broader valuation declines of tech stocks amid monetary policy tightening weigh on investor sentiment.
  • Secular growth should remain strong from ongoing global shifts toward card-based and electronic payments with MA’s innovations and acquisitions to strengthen Buy Now Pay Later (BNPL), crypto currency and account-to-account payments providing further boost.
  • Management sees significant opportunity by expanding in payments and has upgraded its total addressable market size estimate to $255 trillion, up +8.5% over prior estimate driven by driving growth in person to merchant payments through new wins across the globe, capturing new payment flows, including commercial, B2B accounts payable, bill pay and cross-border remittances, and leaning into payment innovation in areas like instalments, contactless acceptance and crypto currencies.
Graphical user interface Description automatically generated with medium confidence

Company Description:

Mastercard Inc is a technology company in the global payments industry that connects consumers, financial institutions, merchants, governments, digital partners and businesses, enabling them to use electronic forms of payment instead of cash and cheques. The Company provides payment solutions and services through brands such as Mastercard, Maestro and Cirrus.

(Source: Banyantree)

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
Small Cap

Overseas Market, Pexa’s Next Frontier Of Growth

Business Strategy and Outlook

Pexa is the first electronic conveyancing, or e-conveyancing, platform for real estate in Australia. Real estate conveyancing has historically been a labour-intensive process which is vulnerable to errors, whereas digitisation has created efficiencies and reduced the likelihood of issues. Specifically, Pexa is an electronic lodgment network operator, or ELNO, which enables real estate owners to electronically update information about a property at the land title office, amongst other things. Pexa generates revenue by charging fees to facilitate real estate transactions over its network, meaning that the key drivers of its revenue are the number of transactions and the price per transaction.

With no competitors currently offering an equivalent e-conveyancing platform, Pexa has been able to establish a monopoly in the Australian e-conveyancing market. Pexa’s monopoly has been further supported by four out of six Australian states mandating the use e-conveyancing for real estate transactions. Despite attempts to increase competition within Australian e-conveyancing, Pexa–by virtue of being the first mover–is likely to remain the dominant e-conveyancing provider moving forward. ARNECC, or the Australian Registrars National Electronic Conveyancing Council, regulates ELNOs and are attempting to introduce greater competition through interoperability. Interoperability intends to open Pexa’s network to competing ELNOs, who are currently developing their own e-conveyancing platforms. However, ELNOs provide largely commoditised services and there is little incentive for customers to integrate with many different providers. First mover advantages are likely to result in Pexa remaining the dominant player in Australian e-conveyancing. 

Pexa’s dominant position in the Australian market means that overseas expansion represents the next frontier of growth. Replicating Pexa’s success overseas has the potential to be highly lucrative, however, this will involve numerous challenges and there is no guarantee of success. Pexa also has other revenue sources, such as data insights and venture capital. However, these are currently in infancy and are largely immaterial.

Financial Strength

Pexa is in reasonable financial shape and had AUD 220 million in net debt as at Dec. 31, 2021 which equates to a net debt/equity ratio of around 1.5. Debt will be drawn on a revolving basis, with covenants, interest costs and specific repayment dates yet to be disclosed. Pexa’s wide moat, high margins, and strong competitive position should mean adequate cash flows to maintain this level of financial leverage. It is likely Pexa’s Australian business to be a “cash cow” thanks to its wide economic moat, effective monopoly, low capital intensity, and relatively high margins. This should generate cash for sustainable dividends and enable deleveraging of the balance sheet.

Bulls Say’s

  • Pexa has a rare wide economic moat and a monopoly in the Australian e-conveyancing market. 
  • Pexa operates a capital-light business model and has strong margins, which should underpin sustainable fully franked dividends in the long term. 
  • Pexa may be able to leverage its Australian platform in overseas markets, such as the U.K., Canada, and New Zealand, offering significant growth and similar defensive revenue streams and high profit margins.

Company Profile 

Pexa is the first electronic conveyancing platform for real estate in Australia and derives revenue by charging fees to facilitate real estate transactions over its network. The emergence of electronic conveyancing creates a number of efficiencies and replaces the historical labour-intensive process which was vulnerable to errors. Having achieved dominance of the Australian electronic conveyancing market, Pexa is looking to expand overseas and replicate its success in international locations. The company was founded in 2010 by a group of Australian state governments with Australia’s “big four” banks beginning to transact on the platform shortly after. 

(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

Suncorp Group Ltd FY23 Plan, Dividend policy and Natural hazards & reinsurance

Two young women talking together with a tablet in the living room. They sit spaced apart to prevent the virus.

Investment Thesis:

  • Due to factors impacting both the achievement of the underlying ITR and cost to income targets, alongside the historically low interest rate environment, management believe it’s difficult to achieve a ROE target of 10% in FY21, however it seeks to maintain an ordinary dividend payout ratio of 60-80% of cash earnings.
  • SUN currently trades on a 2-yr forward PE-multiple of 15.1x and a fully franked yield of 5.0% – attractive. 
  • Share buyback of up to $250m should support its share price.
  • APRA allows advanced accreditation for SUN’s Bank resulting in capital relief.
  • Better than expected margin outcome in banking and general insurance (GI).
  • Positive industry changes from the Royal Commission recommendations. 
  • Continual strong credit quality for its Bank and Wealth segment whilst maintaining net interest margins.
  • Management can maintain an underlying insurance trading ratio of 12% consistently going forward and sustainable ROE of at least 10%.

Key Risks:

  • Greater than expected competition in lines of insurance affecting pricing, unit growth, and risk management.
  • Continuing elevated natural catastrophe occurrences such as the NSW bushfires, which will use up reinsurance and impact SUN’s earnings.
  • Not achieving key targets for FY21 such as the rollout of the Company’s technology and digital platforms.
  • Weaker than expected investment yields.
  • Lower net interest margins or higher provisions than expected.
  • Increased levels of claims.

Key highlights:

SUN saw Group NPAT decline -20.8% over pcp to $388m and cash earnings decline -29.1% over pcp to $361m primarily impacted by natural hazard claims costs of $695m ($205m more than expected) and investment market volatility, which saw the Group cut dividend by -11.5% over pcp to 23 Cash per share. GWP growth in Australia and NZ remained strong and the Group’s underlying ITR (excluding Covid-19 impacts) increased +60bps over 2H21 to 8.0% driven by the Consumer portfolio, with management continuing to guide towards the target of 10-12% in FY23.

Bank continued to make good progress on its strategic initiative, increasing lending by +2.2% over pcp and ending the half with a strong capital position.

  • Capital management:  (1) Completed a $250m on-market buyback, which is expected to improve EPS by +1.6%. (2) Maintained a strong capital position with CET1 at Group level of $492m (post buyback and final and special dividend payment), with both the GI Group and Bank CET1 ratios within their target operating ranges. (3) The Board declared a fully franked interim dividend of 23cps, equating to a pay-out ratio of 80% of cash earnings, at the top of the target pay-out range of 60-80%.
  • Insurance Australia:  PAT declined -55.8% over pcp to $114m, as strong top-line growth (GWP ex FSL up +5.1% over pcp to $4.5bn) and improved working claims performance was adversely impacted by adverse natural hazards experience (net incurred claims up +1.8% over pcp) and lower investment returns (down -98.7% over pcp to $4m). 
  • Banking & Wealth: (1) PAT rose +5.3% over pcp to $200m, driven by growth in loan balances (total lending up +2.2% over pcp driven by home lending partially offset by decline in business lending) and a net impairment release (release of $16m amid a $15m reduction in the Collective Provision due to the improvement in economic conditions), partly offset by a lower NIM (down -7bps over pcp to 1.97% due to reduced home lending margins from increased competition and movements in market rates, higher fixed rate home lending mix, partly offset by active management of customer deposits pricing) and increased expenses (up +1.1% over pcp leading to cost-to-income ratio increasing 110bps to 57.6%) to support strategic investment and volume growth. (2) Bank’s capital position remained strong with CET1 ratio of 9.91% (down -15bps over pcp), above the target operating range of 9-9.5%.  
  • NZ: PAT declined -34.9% over pcp to NZ$84m, primarily driven by a -22% decline in General Insurance PAT to NZ$78m as strong GWP growth (up +14% over pcp) was more than offset by adverse investment market impacts and elevated natural hazard experience (net incurred claims up +17.6% over pcp with natural hazard claims up +41.2% over pcp), and -79.3% over pcp decline in NZ Life Insurance PAT to NZ$6m.

Company Description:

Suncorp Group Ltd (SUN) provides general insurance, banking, life insurance, and superannuation products and related services to the retail, corporate, and commercial sectors in Australia and New Zealand. The company operates through Personal Insurance, Commercial Insurance, General Insurance New Zealand, and Banking segments.

(Source: Banyantree)

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