Category: Shares

Business Strategy and Outlook

Incitec Pivot aims to expand its business around its strong global market share in explosives. This provides an increasingly stable earnings stream relative to volatile earnings from its fertiliser business. Competitive advantages include a duopoly Australian explosives business and global explosives operations. Incitec Pivot is also a dominant player in the Australian domestic fertilizer market and enjoys a degree of domestic fertiliser pricing power from its dominant market share in eastern states, but it is too small to influence global prices.

Explosives earnings are leveraged to mining volumes as much as price and should benefit from long-term global growth in demand for minerals and metals. Additionally, mining strip ratios are expected to increase over time, with more explosives required to mine the same amount of ore. Incitec Pivot is consequently focused on ensuring all new projects meet strict financial criteria. There will likely be an oversupply of ammonium nitrate in Western Australia to 2020 and in Eastern Australia to 2021. 

Financial Strength

IncitecPivot raised AUD 645 million in new equity at AUD 2.00 per share in the second half of fiscal 2020. In conjunction with positive free cash flows, net debt fell to AUD 1.3 billion at end September, down 45% from AUD 1.9 billion at end March 2020. As at end March 2021, net debt worsened slightly to AUD 1.48 billion, for comparatively modest leverage ND/(ND+E) of 22%, but somewhat elevated net debt/EBITDA just over 2.0. It is pleasing therefore that management has expressed an investment bias to capital-light and faster cash returning projects aligned to the strategy.The equity capital raised in fiscal 2020 increased the company’s liquidity and supports a continued investment-grade credit rating.

Our fiscal 2021 EPS forecast is little changed at AUD 0.10 with full-year results to be released on Nov. 15. The global explosives provider deliberately brought down its Waggaman ammonia plant in late August 2021 in anticipation of Hurricane Ida, with an NPAT impact of USD 21 million. Post-hurricane inspections did not identify any material damage to the Waggaman plant. Incitec Pivot ended March 2021 with net debt of AUD 1.48 billion, for comparatively modest leverage ND/(ND+E) of 22%, but somewhat elevated net debt/EBITDA just over 2.0.

Bulls Say’s

• 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.

Company Profile 

Incitec Pivot is a leading global explosives company with operations in Australia, Asia, and the Americas. We estimate its share of the global commercial explosives market at about 15%. Explosives contributes 80% of EBIT. Incitec Pivot is also a major Australian fertiliser producer and distributor and is the only Australian manufacturer of ammonium phosphates and urea. Ammonium phosphates are sold in the domestic market and exported.

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.

Investment Thesis 

We rate IVC as a Neutral for the following reasons:

• Trades in-line with our blended valuation (DCF / PE-multiple). IVC is currently trading on a 12-mth blended forward PE-multiple of 36.4x and 1.7% dividend yield. 
• IVC continues to be impacted by Covid-19 and associated lockdown/containment measures.
• Potential for increased death rates.
• Continued cost control from strategic review and operational efficiency.
• IVC benefits from demographics and long-term population growth.
• IVC holds leading market positions in its core markets.
• IVC has strong cash flow conversion and generation.
• High barrier to entry with quality assets and business model that is difficult to replicate.  
• Increased competition from budget operators in Australia.

Key Risks

We see the following key risks to our investment thesis:

• Continued reduction in death rate compared to expectations/forecasted trend.
• Increased competition especially around pricing.
• Protect and Grow 2020 does not yield incremental returns as anticipated.
• Underperformance of funds under management.

1H21 Results Highlights 

Relative to the pcp: 

• Statutory Revenue of $260.9m, up +13%. 
• Operating Revenue of $257.3m, up +13%. 
• Operating EBITDA of $63.6m, was up +31% with IVC returning to positive operating leverage. 
• Operating EBIT of $39.4m, was up +46%. 
• Reported Profit After Tax of $44m, compared to a Reported Loss After Tax of $18m in the pcp. Operating EPS of 14.4cps, was up +57%. 
• IVC retained a strong balance sheet with cash of $131.2m and net debt of $124.7m. Capital management metrics improved with leverage ratio of 1.1x, strong cashflow conversion of 102% and ROCE of 10.4%, up 1.8 points on FY20.
• The Board declared an interim fully franked dividend of 9.5cps, up 73% over the pcp and equates to a dividend payout ratio of 66%, within IVC’s preferred dividend payout range.

Company Description  

InvoCare Ltd (IVC) is the largest private funeral, cemetery and cremation operator in the Asia Pacific Region. It has leading market positions in countries like Australia, New Zealand, and Singapore.

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.

Investment Thesis

• Based on our valuation, ANN’s share price trades at a >10% discount to our DCF valuation.  
• ANN is a quality business with global manufacturing capabilities.
• We believe our 5-yr forward earnings estimates are on the conservative side and capture the moderating growth likely to be seen from the elevated levels experienced in FY21. 
• FX translation should be positive for the Company.
• Raw material cost pressures can be shared with customers and suppliers.
• ANN has a strong balance sheet position with flexibility to return cash to shareholders or borrowing capacity for acquisitions

Key Risks

We see the following key risks to our investment thesis:

• Product recall.
• Trade wars escalate, leading to higher tariffs. 
• Increase in competitive pressures.
• Adverse movements in AUD/USD.
• Emerging or developed market growth disappoints. 
• Any worst or better prices for raw materials.

FY21 key trading metrics 

• Sales of $2,027m, up +25.6% (+22.5% in CC) with Healthcare organic growth of +34.8% and Industrial organic growth of +7.1%. 
• EBIT of $338m, up +56.0% (+51.4% in CC) with margin improving +330bps to 16.7%, driven by higher production volumes, pricing/mix benefit and SG&A operating leverage, partly offset by elevated labour and freight costs combined with increase in inventory provisions 
• Profit Attributable to ANN shareholders of $246.7m, up +57.5% (+48.5% in CC) and EPS of 192.2cps (EPS would have been 193.9cps, without Cloud Computing accounting policy change), up +59.9% (+50.8% I CC). 
• Operating Cash Flow of $49.2m (down -74.3% over pcp) representing cash conversion of 60.9%, negatively impacted due to greater investment in working capital to support top line growth along with pricing impact as well as higher capex to increase capacity in a number of higher demanded products. Capex increased +36.5% over pcp to $82.7m, however, remained below management’s $95-105m guidance due to temporary delays to shipments and installation as a result of COVID-19, with management expecting FY22 capex spend to be $80-100m. 
• ROCE saw significant improvement (up +590bps to 19.8% pre-tax and up +550bps to 16.8% post tax), predominantly due to strong EBIT growth.

Company Description  

Ansell Ltd (ANN) operates two global business units: (1) Ansell’s Industrial segment manufactures and markets multi-use protection solutions specific for hand, foot, and body protection, for a wide-range of industries such as automotive, chemical, metal fabrication; (2) Ansell’s Healthcare segment (Medical + Single Use) offers a full range of surgical and examination gloves covering all applications, as well as healthcare safety devices and active infection protection products. The segment also manufactures and markets single use hand protection. Ansell recently sold its sold its Sexual Wellness Global Business Unit group.

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.

Long distances between major cities in Australasia means flying is a preferred mode of travel. Despite a rival airport scheduled to open in 2026, we expect Sydney Airport to remain the favoured terminal for business and long-haul leisure travellers for the next decade. This is due to existing infrastructure which is costly to replicate, and proximity to the CBD, affluent suburbs and tourist areas, and connections to roads and public transport. 

Revenue is about evenly sourced from aeronautical and other operations. Aeronautical fees are mostly on a per-passenger basis, with base charges negotiated with airlines every five years. Retail is the largest non-aeronautical contributor, accounting for about 23% of pre-COVID-19 revenue. Duty-free and luxury shopping has threats, given the ability for e-commerce sites to offer lower prices than duty-free, and ESG risks given the reliance on tobacco and alcohol sales. However, in the long run, risks materialising in any particular sub-category should be offset by passenger growth boosting defensive categories such as food, car-rental, parking, souvenirs, and holiday items

Regulators have no power to intervene other than to recommend more regulation. Rather than pushing for more onerous regulation, government and regulators could foster more competition via the new Western Sydney Airport, though we believe this will take more than a decade. 

Catering to the growing middle-class in neighbouring countries remains a growth opportunity. Population and passenger growth should aid Sydney Airport as it can increasingly allocate slots away from domestic and toward international flights. International flights account for about 40% of passengers, but about 70% of passenger revenue.

Sweetened Proposal for Sydney Airport Looks Like Enough; FVE Up to AUD 8.25, Shares Fairly Priced:

Sydney Aviation Alliance has sweetened its pitch for Sydney Airport, now proposing a deal at AUD 8.75 per share. While the new price is only 3.5% higher than the previously rejected AUD 8.45, this time Sydney Airport granted due diligence and said it would support a binding offer at that price. A conclusion is unlikely until 2022 given it will require 4 weeks of due diligence, a binding bid from the consortium, a shareholder vote, and regulatory investigations. A lot could happen between now and then; however, the most likely outcome is a takeover proceeding at the proposed price.

We raise our fair value estimate to AUD 8.25, ascribing a 75% probability a deal proceeds at AUD 8.75, and a 25% weighting to our underlying valuation in the absence of a bid, which is unchanged at AUD 6.70. 

We understand the need for due diligence given the hefty price tag, however, we think it unlikely the due diligence process will uncover anything to disrupt the offer. Sydney Airport is well run, and its assets and books have been scrutinised closely by many parties, and its now public listing. It also has a huge debt load that attracted close scrutiny from creditors in 2020, as well as air safety and security bodies scrutinising its physical assets.

A more likely disruptor is economic or coronavirus news. We maintain our view that regulatory authorities are unlikely to throw up insurmountable concerns about aviation safety, national security, foreign investment, or competition. Competition is the most likely hurdle, if any, given consortium member stakes in other airports.

Bulls Say

• Sydney Airport’s convenience to the business district and coastal suburbs of Australia’s largest city makes it near impossible to replicate. Rising incomes in nearby nations, and Australia’s growing population bodes well for long-term passenger numbers.
• A light regulatory regime is unlikely to become significantly more onerous.
• Sydney Airport has spare landing slots, plus the ability to reallocate slots away from domestic and toward more lucrative long-haul international flights, as passenger traffic grows.

Financial Strength

Financial Strength Sydney Airport’s financial health is fair, with relatively defensive income offset by high debt.Net debt/EBITDA was a high 14 times in fiscal 2021, up from 7.2 in 2019.Management acknowledged the high debt and took appropriate actions to reduce leverage, including cancelling distributions in 2020, delaying capital expenditure, securing additional bank facilities, and raising AUD 2 billion in equity in the September quarter of 2020. We expect calendar 2021 to be the low point for EBITDA, with 2022 forecast to be significantly higher due to fewer and less strict lockdowns. 

Company Profile

Sydney Airport has a lease to operate the facility until 2097. As Australia’s busiest airport, it connects close to 100 international and domestic destinations, and handled more than 40 million passenger movements annually until COVID-19 border restrictions in 2020. Regulation is light, with airports setting charges and terms with airlines, and the regulator monitoring the aeronautical and car park operations to ensure reasonable pricing and service. Retail and property operations are free from regulatory oversight, though political and commercial pressure limits Sydney Airport from overly flexing its pricing muscle, particularly as the government owns the rival Western Sydney Airport, set to open in 2026.

(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.

Investment Thesis:

• Scrap volumes have been improved  
• Scrap prices across key regions have been improved
• Significant earnings could be obtained from cloud recycling over the long run
• Investment in improving scrap quality should improve SGM’s competitive position
• Undemanding valuation relative to its own historical average and ASX200 Industrials Index
• Earnings could be supported by self-help initiatives 
• Return on Capital (ROC) of >10% in comparison to 8.6% in FY19 is targeted by the management
• On-market share buyback of $150m

Key Risks:

• Global economy facing substantial downside  
• Escalation of trade war between China and the U.S.  
• Key areas experiencing weaker scrap prices
• Decrease in volumes
• Changes in regulatory affairs – especially China’s anti-pollution policies. 
• Group margins impacted by cost pressures

Key Highlights:

• Strong FY21 results by Sims Ltd., which were ahead of market estimates 
• Revenue of $5,916.3m, which is up +20.5%
• Underlying EBIT of $386.6m, which was a significant turnaround from -$57.9m in FY20, affected by volume growth, margin expansion year on year, and material improvement in market prices
• Achievement of fixed cost savings of $75m 
• Final dividend declaration of 30.0cps, 50% franked, which brings FY21 total dividends to 42.0cps reflects a significant improvement from 6.0cps in FY20 but at a lower payout ratio 
• SGM entered a JV with 50% ownership interest (at a $4.8m cost) with acquisition of assets from JED renewable landfill gas to energy facility near Orlando, Florida.
• The ongoing or announced stimulus spending, particularly in the USA and China, would increase demand for steel-intensive infrastructure spending and drive additional retail consumption. Additional retail consumption will thereby increase post-consumption scrap. These drivers are positive for both ferrous and non-ferrous metal recycling.
• Company will conduct a $150m on-market share buyback

Company Profile:

Sims Ltd (SGM) collects, sorts and processes scrap metal materials which are recycled for resale. SGM’s segments include ferrous recycling, non-ferrous recycling, secondary processing of non-ferrous metals and plastics, international trading of metal commodities and the merchandising of steel semi-fabricated products. 

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.

Investment Thesis

• Any stabilisation in the generic category (competition or pricing) will be considered as a positive.
• New product releases and a solid development pipeline are on the horizon.
• While generic brands are currently experiencing a difficult business environment, the long-term picture remains favourable, as consumers and regulators alike rely on a vibrant generics market to keep drug prices low.
• Positioning the product portfolio to include higher-margin items.
• Potential industry consolidation on lower growth outlook.
• Leveraged to a falling AUD/USD. 

Key Risk

• There is a lot of competition from new products.
• A decrease in demand.
• New product releases do not meet market expectations for growth.
• Changes in the law.
• Litigation.
•  Currency fluctuation that is unfavourable.

Key financial highlights of 21

• During the underlying period the firm reported revenues of $400.8m, declined by12% over the previous year, impacted by the Covid-19 pandemic and on-going challenges in the U.S. retail generic sector.
• The firm mainly has four divisions namely – Generic Products Division (GPD), Specialty Products Division (SPD), Metrics Contract Services (MCS) and Mayne Pharma International (MPI).
• During the year Generic Products Division (GPD) operating revenue was US$152.8m declined by 10% over pcp, Specialty Products Division (SPD) revenue increased by 1% over pcp to US$53.3m, Metrics Contract Services (MCS) revenues increased by 10% over pcp to US$61.3m and Mayne Pharma International (MPI) revenue were $42.8m up by 1% over pcp.

• All segments other than the Generic Products segment contributed to growth, with reported EBITDA of $66.1 million down by 18 % over pcp ( by 5 % in CC) and underlying EBITDA of $86.5 million (excluding NEXTSTELLIS set-up expenses) down by 10  % in cc.
•  The non-cash intangible asset impairments of the generic portfolio in 1H21 resulted in a net loss after tax of $208.4 million (vs $92.8 million in pcp).

• The Company achieved positive net operating cash flow of $58.9m (down by 48% over pcp) and free cash flow of $9.6m (down by 83% over pcp). Excluding the movement in working capital and tax, net operating cash flow was $61.7m, down by 5% over pcp.
• The Board scrapped the final dividend.
• Possess strong financial position with net debt fell by 4.4 % to $248.8 million, and the company is in compliance with all bank covenants, with a leverage ratio of 2.6x (covenant 3.75x) and an interest cover of 7.9x.

Significant opex reduction: Through supply chain optimization, reconfiguration of the dermatology sales force, and discontinuance of non-viable generic medicines, management continued to streamline operations and decrease spend, delivering an opex savings of 13 percent /$18 million over pcp in CC.

Management entered into four new supply agreements with leading pharma companies to launch up to 11 dermatology products across FY22 targeting addressable markets of $500m. 

NEXTSTELLIS successfully launched: The Company launched NEXTSTELLIS in June 2021 in the US and Australia and reached more than 60% of priority prescriber targets within 6 weeks of launch. Furthermore, over 37,000 NEXTSTELLIS samples have been provided to physician offices. Around  5,000 women are currently undergoing NEXTSTELLIS trials. The management is  seeking a 2% market share (by volume) of the CHC market with peak net sales potential of more than US$200 million per year.The CHC market is valued at US$3.5 billion, with more than 60 million prescriptions written each year.

Company Profile

Mayne Pharma Group (MYX) is a specialist pharmaceutical firm focusing on commercialising branded and generic medications using its drug delivery capabilities. Mayne Pharma works with over 100 clients throughout the world to provide contract development and manufacturing services. Mayne Pharma has a diverse portfolio of branded and generic medications in areas such as women’s health, oncology, dermatology, and cardiology.

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.