Category: Property

Reputation, experience, and capability are paramount when tendering for work, and Monadelphous developed a strong track record for successful project management, execution, and delivery. Its core skills, knowledge, and ability are in recurring maintenance contract work. The company’s work-in-hand was in steady decline after the 2015 peak in Australia’s LNG construction boom but we think fiscal 2020 is an earnings nadir and new and/or expansion projects from the iron ore, coal, and liquefied natural gas, or LNG, sectors will now drive earnings growth.

Key Investment Considerations

• Monadelphous must continuously deliver high-quality financial and operational performance on major engineering and maintenance projects to maintain margins and reputation.

• Monadelphous will only achieve earnings growth if global economic conditions support buoyant investment in domestic mining and energy projects.

• Monadelphous has a healthy balance sheet, solid cash flow, and experienced senior management.

• Monadelphous has established an excellent reputation for execution and delivery of structural, mechanical, and electrical work on completed projects, positioning the firm well for future business from large mining and energy companies.

• The company can leverage the skills, knowledge, and experience gained working on smaller projects into contract wins on larger projects, particularly in the energy, power, and water sectors.

• Monadelphous has reduced risk relative to peers by partially diversifying into water, power, and marine infrastructure construction and maintenance, which may eventually limit the negative impact on earnings of the downturn in mining and energy work.

• Monadelphous is ultimately dependent on the commodities and energy investment cycle and global demand. Any major slowdown in economic conditions in China will significantly affect the company’s earnings profile.

• Monadelphous has steadily decreased staff numbers. Inefficiencies and a fall in productivity are possible as fewer employees are utilised on major projects.

• Monadelphous’ growth is strongly dependent on key customers, resulting in concentration risk, which is mitigated through multiple contracts across various projects and commodities in numerous locations. However, project deferments by a major client or problems with project execution could significantly affect future profitability.

 (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.

Vicinity’s assets are high quality but have exposure to tourism and luxury consumption, leaving earnings vulnerable to coronavirus shutdowns and economic thrift. Some assets have redevelopment potential, including the addition of apartments, hotels and offices. Vicinity’s AUD 14 billion of directly and indirectly owned malls are skewed to larger shopping centres. By official classifications, it has about 22% in super-regional, 29% in regional, 16% in CBD, 19% in subregional, 12% in outlets, and 1% in neighbourhood centres.

Key Investment Consideration

• Vicinity Centres is more sensitive to the economic cycle than most other retail REITs due to its exposure to tourism, CBD, and luxury spending.

• About half of Vicinity Centres’ portfolio is in Victoria, and about 16% in CBDs, mainly Melbourne, Sydney, and Brisbane. So far, these areas have been the most affected by the coronavirus. The remaining portfolio is diversified around Australia.

• Exposure to food, beverage, entertainment, and service based tenants increased since 2015. These categories are less prone to e-commerce competition but vulnerable to thrift, border closures, the absence of CBD workers, and social distancing.

• Vicinity is arguably the REIT most exposed to an economic and health recovery. Should a effective treatment for COVID-19 be developed, Vicinity would likely outperform other REITs as conditions normalise. OVicinity has the strongest balance sheet of the large and high-end mall operators listed in Australia, so the risk of another dilutive equity raising is low.

• Vicinity has substantial development opportunities, including the Bankstown and Box Hill town centres, Chatswood Chase upgrade, and apartment developments at The Glen.

• Even if regulations on distancing and borders return to normal, consumers have already begun to form new habits, including working from home, shopping online, and thrifty shopping habits.

• Vicinity has about a fourth of its leases up for negotiation in fiscal 2021, meaning it is more exposed to the economic downturn than rival REITs.

• Vicinity is much more exposed to border closures and work-from-home trends due to its substantial reliance on tourism and luxury spending, and CBD office workers.

 (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.

It should also get an incremental rental boost from planned upgrades and along with profits from divestments, we expect it to maintain and gradually grow its distributions. There continues to be significant investor demand for warehouse properties. The trust has sensibly not acquired properties at today’s inflated prices. But its strong balance sheet provides it with the flexibility to do so if better opportunities arise.

Key Updates

• BWP’s defensive and growing distributions are likely to be attractive to investors in the low interest rate environment.
• The firm’s more than 20-year history in investing in warehouse properties has created significant value for security holders and provides it with the foundation to benefit from Wesfarmers focusing future investments in Bunnings.
• Although it has not been acquiring properties at current elevated prices, BWP’s strong balance sheet provides it with the flexibility to acquire properties if opportunities arise.

Company Profile

BWP Trust is an Australian REIT focused on owing warehouse/bulky goods retailing properties with relatively large sites and high visibility and access to arterial roads. The portfolio of properties it owns are diversified across most Australian states and are on long-term leases to Australia’s dominant home improvement chain: Bunnings Group. Bunnings is a wholly owned subsidiary of Wesfarmers Ltd. Wesfarmers is a wide-moat, top 10 ASX listed company by market capitalisation. BWP Trust is also externally managed by a wholly owned subsidiary of Wesfarmers and Wesfarmers also owns 24.8% of the units in the trust.

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.

Distribution growth could also be hurt by normalisation of interest rates. The Reserve Bank of Australia and major global central banks plan to keep overnight cash rates low for another couple of years but rising inflation and runaway property prices could trigger an earlier move. Long-term bond yields have already started rising. Australian government 10-year bond yields increased from 0.8% in October last year to 1.6% currently. Regardless of timing, with official interest rates not far above zero and significantly below inflation, the next move is likely to be

up. Rising interest rates should push up the cost of borrowing for all firms, reducing profitability. They should also cause a de-rating of income stocks. But it’s not all bad. Most of BWP’s rents are linked to CPI growth.

BWP’s environmental social and governance, or ESG, risks primarily relate to the environmental impact of its buildings and general corporate governance risks, but we consider these risks to be very low. Therefore, we don’t incorporate ESG risks into our base- or bear-case scenarios, nor do we expect material value destruction from ESG issues to undermine the economic moat. The key risk facing the trust is Bunnings vacating properties for bigger and better sites nearby. But these properties can likely be sold or redeveloped without losing much value. In densely populated areas, the properties could actually have upside potential from redevelopment

Financial Strength

The trust is in a strong financial position. At Dec. 31, 2020, the trust had very low gearing (debt/total assets) of 17.8%, at the bottom of its target gearing range of 20% to 30%. Interest cover (earnings before interest/interest expense) of 8.8 times is also considered conservative. It also has a high investment-grade issuer credit rating of “A3 Stable” from Moody’s Investors Service and “A- Stable” from Standard & Poor’s. Combined with its defensive recurring rental income stream, we believe the trust’s strong balance sheet and investment-grade credit ratings provide it with the flexibility to take advantage of investment opportunities if they present themselves. Average debt duration is relatively short at 2.7 years. But we believe refinancing risk is low given conservative gearing, ample liquidity and defensive earnings.

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.