Category: Shares

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.

Investment Thesis:

• Brambles serve as a market leader in its own segment, thereby making high barriers to entry for new participants. 
• Conversion of white-wood users as well as the palletisation of emerging markets would offer a huge opportunity.
• The share price of Brambles would be supported by on-going on-market share buyback.
• Management of cost margins amidst cost pressures through strategic business efficiencies
• Strong management team  
• Increase in volume in the US Pallet business and improving outlook for margin.   
• Prominent position of Brambles is ensured by its scale, existing customer base and balance sheet 

Key Risks:

• Margin erosion due to competitive pressures and inflation in prices, particularly in the North American market. 
• The operations of the company are intensively driven by capital. 
• Loss of large contracts may significantly reduce revenue and earnings.
• Lesser use of pallets may result from low consumption of FMCG products which may arise from weak economic conditions.
• Whitewood prices remain volatile.
• Large amount of currency and political risk exposure to the company. 
• Widespread lockdowns to be repeated in key regions.

Key Highlights:

• Level of support for the share price is offered by an attractive valuation of BXB and the current on-market shares buyback (currently ~74% of A$2.4bn complete). 
• Revenue of $5,209.8m was up 7% which was driven by 4% price growth and 3% volume. 
• The revenue by segment are; CHEP Asia Pacific contributed 10% to the total revenue, CHEP Americas contributed 50% and that contributed by CHEP EMEA is 40%. 
• Profit of $879.3m was up +8% driven by pricing, surcharge income, cost efficiencies and return on supply chain investments, partially offset by input-cost inflation, and other increases in costs driven by changes in network dynamics and demand patterns which are affected by both Covid-19 and Brexit. 
• Profit split by segment are as follows; CHEP Asia-Pacific contributes 15% to the total profit, CHEP Americas contributes 39% whereas HEP EMEA contributes 46%.
• Profit after tax from continuing operations of $535.0m, up 5% driven by operating profit growth partially offset by 15% uplift in tax costs
• Final dividend of US10.5cps has been declared, which brings total dividends to US20.5cps, equating to payout ratio of 54%, in line with pcp and consistent with BXB’s dividend policy (of between 45% to 60%). 
• Continued strong investment-grade credit ratings by agencies (Standard & Poor’s BBB+ and Moody’s Baa1).
• BXB’s financial ratios remain well within <2.0x financial policy and Net Debt / EBITDA is ~1.6x.

Company Profile:

Brambles Limited (ASX: BXB) is a supply-chain logistics company operating in more than 60 countries, primarily through the CHEP brands. Its headquarters are located in Sydney. Their largest operations are in North America and Western Europe. The company’s main segments are: pallets, reusable produce crate (RPCs) and containers. It provides services to customers in the fast-moving consumer goods industries space and also operates specialist container logistics businesses serving the automotive, aerospace, and oil and gas sectors. It employs more than 14,500 people and owns more than 550 million pallets, crates and containers through a network of more than 850 service centres.

(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.

Investment Thesis :

• Leading market positions with strategic locations in areas with strong population growth.
• Positively correlated with population growth throughout time.
• Increasing digitalization to save costs and improve the supply chain’s efficiency.
• For the core Australian Food segment, key leading indicators (such as basket size / goods per basket) are improving.
• Customer metrics and transaction growth are both improving. 
• The momentum of BIG W is expected to continue.
• Capital management post Endeavour deal.

Key Risks:

• The Food & Petrol business is seeing more margin pressure.
•  Changing consumer preferences and purchasing trends, as well as increased retail competition.
• Deterioration in balance sheet as a result of lower earnings.
• Unfavourable fluctuation in AUD/USD (international sourcing).

Key highlights of FY 2021: 

Following the demerger of Endeavour Drinks, Woolworths Ltd (WOW) posted solid FY21 results and a $2 billion off-market buy-back. Relative to pcp:

•  During the year Woolworth reported sales of $67,278 million were up 5.7 percent (online sales of $5,602 million were up 58.1 percent).
• The  revenue of Woolworth  is from following segment (1)  Australian Food (2) ) New Zealand Food (3) ) New Zealand Food (4)  Discontinued operations.
• In the year 2021 , 80%of  sales revenue of Woolworths (continuing operation )was from Australia amounting to $44,441m , 12% of sales revenue was from  new zealand zone amounting to $6,652,8% of revenue from BIG W amounting to $4,583 and  sales from discontinued operation “Endeavour Drinks” amounted $10167.
• During the year, the firms EBIT was $3,663m, up by 13.7% EBIT from continuing operations  was $2,764m, up by 11.1% driven by a 9% increase from Australian Food and an increase of over 300% from BIG W.
• Group EBIT margin was 5%, up by 28bps.
• Cost of doing business increased 16bps due to higher CODB in NZ and higher contribution from Big, which operates on a higher CODB.
• NPAT of $1,972m, up by 22.9%.
• The Board declared a final dividend of 55cps which brings FY21 dividend to 108cps, up by 14.9%. Shareholders on the record date of 3 September 2021 are eligible for the final dividend of $0.55

$2bn off-market buy-back: WOW announced $2bn capital return via an off-market buy-back. The Buy-Back will be handled through a tender process. . Eligible Shareholders who choose to participate can offer to sell some or all of their Shares to WOW at:  (1) a discount to the Market Price of 10% to 14% (inclusive) at 1% intervals; or (2) the Buy-Back Price established by WOW after the tender process is completed (as a Final Price Offer). (1) a discount to the Market Price of 10% to 14% (inclusive) at 1% intervals; or (2) the Buy-Back Price (1) a discount to the Market Price of 10% to 14% (inclusive) at 1% intervals; or (2) the Buy-Back Price, established by WOW. The Buy-Back Price will be determined as the lowest price at which WOW can buy back the targeted amount of capital.

The buyback period begins on September 13 and ends on October 15, 2021. On October 21, 2021, the Buy-Back Price will be paid to successful Eligible Shareholders.

Shareholders benefits from buyback: The Buy-Back Price paid for each share purchased back will be $4.31, with the remaining being a fully franked dividend. The Buy-Back Price may be lower than the price at which one might sell their shares on ASX, but  after-tax return may be greater because of personal tax status and the tax treatment of the Capital Component, dividend Component, and franking credits.

Company Profile:

Woolworths Limited (WOW) is an Australian retailer that operates supermarkets, speciality and discount department shops, as well as liquor and electronics stores. Woolworths also produces processed foods, exports and wholesales food, and sells gasoline. The corporation also owns and runs hotels that feature pubs, restaurants, lodging, and gambling.

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.