Category: Philosophy
An investment philosophy is a coherent way of thinking about markets, how they work to put into practice. It’s a set of core beliefs that you can go back in order to generate new strategies to make it work. The investment philosophy of Investor Desk begins from the perspective that our clients are seeking a relationship which focuses on their short- and long-term goals via the provision of a strategic wealth management plan, coupled with a transparent, flexible and nimble investment solution. Investor Desk embraces a holistic view of a client’s business and personal circumstances and seeks to meet their goals and objectives through best of breed technology and financial products, delivered via a client centric relationshipand service. In the absence of a well-considered strategic wealth management plan, we believe there is less capacity to define an appropriate level of portfolio risk. We believe that asset allocation, and genuine portfolio diversifications are the key drivers of portfolio risk, and that high transparency and liquidity are important for navigating volatile market conditions.
Growth is driven by mineral commodities volumes and quarrying. Fertilisers are a cyclical business, and despite a strong domestic market position, earnings are volatile and subject to competition from imports. Demand for fertilisers could, however, increase to meet growing food requirement from Asia. The balance sheet was somewhat stretched, but cash flow is increasing since the Louisiana ammonia plant ramped up in 2017.
Key Points
• Incitec Pivot offers growth prospects linked to demand for mineral commodities. Earnings from explosives are expected to grow based on an organic growth strategy.
• Fertiliser earnings are volatile and driven by international market pricing. The impact on group earnings diminishes as the explosives business grows but continues to weigh on overall returns.
• The key risk for Incitec Pivot is that a weak global economic environment could lead to lower mining volumes and/or a collapse in fertiliser prices.
• Investors enjoy bumper dividends at peak cycle times.
• Continued growth of the explosives business will reduce earnings volatility.
• Over the longer term, explosives earnings are favourably leveraged to mining volumes rather than prices, and mine strip ratios are expected to increase over time.
• Fertiliser prices are volatile, leading to earnings volatility. Incitec Pivot has no pricing power in this market.
• Incitec Pivot built the Louisiana ammonia plant at at time when demand is likely to fall.
The main downside risks are related to excessive falls in fertiliser and explosives prices that inevitably occur from time to time. Since the Dyno Nobel acquisition, there is more currency risk, but Incitec Pivot has an active hedging program, including the use of U.S.-dollar-denominated debt. Explosives earnings are also subject to mining sector demand and a slowdown in resources volumes will hurt earnings. As the firm manufactures hazardous chemicals, leakages are a potential risk, and unplanned plant shutdowns can mean lost earnings. Earnings volatility will reduce as the proportion of earnings from explosives increases, but we regardless have a high uncertainty rating on Incitec Pivot.
(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.
Reported EBITDA rose 6% to AUD 662 million. Adjusted EBITDA rose 7% to AUD 627 million, tracking slightly ahead of our full-year forecast mainly because of higher-than expected electricity demand. More people working from home benefited volumes and saw the firm earn AUD 21 million above its regulatory cap. This will be returned to customers via lower tariffs mainly in fiscal 2022. As AusNet is regulated, there is no lasting impact on our longer-term earnings forecasts or valuation from demand fluctuations.
Electricity distribution performed well, with revenue up 4% to AUD 502 million and adjusted EBITDA up 11% to AUD 288 million. The strong result benefited from tariff increases and stronger residential demand, but the outlook isn’t as rosy. This asset undergoes a regulatory reset in early 2021, which will likely reduce allowed returns on equity to under 5% for the next five years, from over 7% currently. We forecast average annual revenue growth of just 1% over the next five years, despite ongoing reinvestment and growth in regulated asset base. Gas distribution also benefited from tariff increases and stronger residential demand, helping revenue increase 4% to AUD 149 million and adjusted EBITDA increase 8% to AUD 117 million. The next regulatory reset for the gas network is in early 2023. Overall, we expect revenue to grow at about 3% for the next two fiscal years, before resetting about 5% lower from 2023.
EBITDA in the electricity transmission network rose 1% to AUD 181 million. We forecast revenue grows 1% per year for a couple of years, before falling a few per cent in fiscal 2023 following the next regulatory reset in 2022. The main growth opportunity for AusNet is transmission connections to new wind and solar farms and between states. Some will be unregulated, some regulated. All will be capitalintensive, but we think the firm can fund without an equity raising.
(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.
