Category: Dividend Stocks

Companies return profits to shareholders through two main channels, capital gains and income. A high dividend yield indicates that a company is returning a large amount of cash to shareholders relative to the value of the company. This allows investors to maximize their income received relative to their investment amount. The gross dividend is calculated from the net dividend amount paid to shareholders plus the value of any attached franking credits associated with those dividends. A fully franked dividend will have franking credits equal to 30% of the gross dividend value, which can, therefore, represent a significant source of additional value.

Categories
Dividend Stocks

Magellan Financial Group posted strong result; Announced bonus issue and share buyback

Investment Thesis

  • Principal Investments could grow to become a meaningful contributor to group performance over the medium-to-long term. 
  • MFG no longer trades at a significant premium to its peer-group post the recent de-rating. 
  • Acquisitions could pave growth runways, helping to ease the Company’s fund capacity constraints.
  • Average base management fee (bps) per annum (excluding performance fee) continues to be stable but there are risks to the downside from pressures on fees (which is an industry trend not specific to MFG alone).
  • Continued strong investment performances, especially in the global and infrastructure funds.
  • Growing levels of funds under management.  
  • New strategies could significantly increase the addressable market and help sustain earnings growth. 

Key Risk

  • Decline in fund performance.
  • Risk of potential funds outflow – both retail and institutional (loss of a large mandate).
  • Execution risk with the acquisitions.
  • Significant key man risk around Hamish Douglass and key management or investment management personnel.
  • New strategies fail to add meaningful earnings to the group. 

1H22 results summary :Compared to pcp: 

  • Adjusted revenue increased +15% to $384.1m, driven by a +13% increase in total management and service fee revenue amid +12% increase in average FUM to $112.7bn and +116% increase in other revenue (includes distribution income of $8.6m, realised capital gains of $8.1m and net FX gain of $2.1m), partially offset by -8% decline in performance fees. 
  •  Adjusted expenses increased +24% to $65.3m with Funds Management business’s cost to income ratio (excluding performance fees) increasing +60bps to 17.4% (excluding earnings contribution from SJP, increased +280bps to 19.6%) and management anticipating Funds Management segment expenses for FY22 to be $125-130m. 
  • Adjusted NPAT of $248.1m increased +16%, and excluding the earnings contribution for the period from the St James’s Place mandate, adjusted NPAT was $212.5m, broadly in line with pcp. 
  •  Strong balance sheet with no debt and total investment assets of $1,016.7m (up +13%) including cash position of $291.5m. 

Capital management

  • Declared a 75% franked interim dividend of 110.1cps, up +13% over pcp and confirmed the dividend policy of 90-95% payout of the profit after tax of the Funds Management business. 
  •  Announced intention to progress with a 1-for-8 bonus issue of options to shareholders and issuance of 10 million unlisted options to staff, both at exercise price of $35 per option and 5-year term (exercisable at any time until expiry). 
  • Taking into consideration the implementation of an on-market share buy-back (subject to various factors including market conditions).  

Company Profile

Magellan Financial Group Ltd (MFG) is a specialist funds management business. MFG’s core subsidiary, Magellan Asset Management Ltd, manages ~$53.6bn of funds under management across its global equities and global listed infrastructure strategies for retail, high net worth and institutional investors. 

(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
Dividend Stocks

Bank Of America Corp Revenue Growth Outpaced Expense Growth

Investment Thesis:

  • Attractive valuation versus Analysts price target. 
  • Leveraged to the improving economic conditions and activity in the U.S. 
  • Efficiency gains at the expense line exceeds market expectations. 
  • Significant leverage to the yield curve steepening in the U.S.
  • Cost out program to support earnings over the long-term. 
  • Revenue growth driven by consumer and business. 
  • Credit quality is very strong, with further reserve releases possible.  
  • Capital position is well above requirement level and management’s desired buffer, which opens up capital management initiatives.  

Key Risks:

  • Further decline in net interest margins from low yields and U.S. Fed interest rate cuts.
  • Intense competition to loan growth.
  • Subdued economic growth. 
  • Funding pressures for deposits and wholesale funding. 
  • Political and regulatory changes affecting the banking legislation.
  • Credit risk with potential default of mortgages, personal and business loans and credit cards.
  • Efficiency gains disappoint relative to market expectations.

Key highlights:

BAC’s FY21 results beat consensus on both top and bottom line, as revenue growth outpaced expense growth YoY to deliver positive operating leverage, which combined with the benefit from share repurchases delivered EPS of $3.57 (vs estimate of $3.44), equating to ROE of 12.2% (up +544bps over pcp) and ROTCE of 17% (up +752bps over pcp). Asset quality continued to improve, and shareholder returns remained strong. Maintain Buy – improvement in NII (loan growth + interest rate hikes) combined with management’s outlook of flat costs growth should drive operating leverage, with long term margin expansion coming from investment in technology leading to competitive and cost advantages. 

  • FY22 outlook – robust YoY growth expected in NII. Robust YoY NII growth (1Q to be up about “a couple of hundred million” QoQ and grow each subsequent quarter) driven by high-single-digit YoY loan growth and aided by interest rate increases (+100bps parallel shift in the interest rate yield curve is estimated to benefit net interest income by $6.5bn), particularly if short-term rates rise more and sooner than expected given higher balance sheet sensitivity to short end interest-rate (~2x compared to 3Q15, middle of last rate cycle). Flat expenses compared to pcp. Effective tax rate of 10-12%. 
  • Strong asset quality with loss rate at historical lows. Asset quality improved significantly with net charge-offs continuously declining through FY21 to historic low of $362m (down -59% over pcp) resulting in a historically low net charge-off ratio of 15bps (down -23bps over pcp), which combined with improving macroeconomic conditions, led to provision for credit loss benefit of $489m (down by $542m over pcp), reflecting a net reserve release of $851m.
  • Changes to NSF fees and overdraft fees – $750m headwind in FY22. Management announced elimination of NSF (non-sufficient funds) fees and -71.4% YoY reduction in overdraft charge per occurrence to $10 in FY22, which is expected to see -75% YoY decline in fees to ~$250m in FY22.
  • Strong shareholder returns with $7.5bn in share repurchases equating to $25.1bn for the year and $1.7bn in dividends equating to $6.6bn for the year.

Company Description: 

Bank of America (BAC) is one of the largest banks in the U.S., serving consumers, small and middle-market businesses, and large corporations with a full range of banking, investing, asset management, and other financial and risk management products and services.

(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
Dividend Stocks

Brambles reported 1H22 results reflecting group revenue of US$ 2,766.4m, up +8%

Investment Thesis:

  • High quality company with a history of earnings and dividend growth.
  • Massive opportunity to convert white-wood users as well as the palletisation of emerging markets.
  • On-going on-market share buyback should support its share price.
  • Strong management team with proven ability to maintain cost margins amidst cost pressures through strategic business efficiencies.
  • Volume growth in the US Pallet business and improving outlook for margin.
  • BXB’s scale, existing customer base and balance sheet will ensure it remains a market leader in the mid-to-long term.
  • M&A activity

Key Risks:

  • Competitive pressures and cost inflation leading to margin erosion, particularly in the North American market. 
  • Operations are very capital intensive. 
  • Any further loss of large contracts significantly reducing revenue and earnings.
  • Weak economic conditions will lead to less consumption of FMCG, and hence less use of pallets.
  • Volatile whitewood prices.
  • Exposed to a wide range of currency and political risks. 
  • Reintroduction of widespread lockdowns in key regions.

Key Highlights 1H22 Results:

  • Group revenue of US$2,766.4m, +8% YoY in constant currency terms with contribution from all three reporting segments. Key components of top line growth: price realisation across all regions to recover inflation and cost-to-serve pressures contributed +8%; new contract wins contributed +2%; and like-for-like volume growth was down -2% due to the strong Covid-19 related demand in the previous corresponding period and pallet availability constraints during this year.
  • Underlying profit of US$481.2m was up +4%. Key components of group profit drivers over the half: impact of US$85m due to inflation across the group; US$93m impact from fuel and transport inflation across the group; US$35m impact from higher losses / lower returns (primarily in the U.S.); and US$24m costs associated with the transformation program.
  • Underlying EPS of US21.3cps was driven by higher operating earnings and benefit from the share buy-back programme. The Company declared an interim dividend of US10.75cps (or AUD15.06cps), representing a payout ratio of 50% (within target range of 45-60%).
  • Free cash flows after dividends over the half deteriorated by US$311.7m to an outflow of US$147.9m due to: (i) US$115m impact from the reversal of FY21 timing benefits comprising the US$80m of pallet purchases deferred from the prior year and US$35m relating to the timing of FY21 tax payments; (ii) capital expenditure jumped significantly due to lumber inflation of $270m and US$80m of additional pallet purchases (which were deferred from the prior year.
  • BXB’s financial ratios remain well within <2.0x financial policy, with net debt / EBITDA at 1.37x vs 1.18x in pcp.

Company Description: 

Brambles Limited is a supply-chain logistics company operating in more than 60 countries, primarily through the CHEP brands. Headquartered in Sydney, its largest operations are in North America and Western Europe. The company’s main segments are: pallets, reusable produce crate (RPCs) and containers. It services customers in the fast-moving consumer goods industries 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.

Categories
Dividend Stocks

Another Solid Medibank Result Despite Ongoing Noise Around Claim Costs

Business Strategy and Outlook

Medibank is Australia’s largest private health insurer operating under the Medibank and ahm brands. The dual brand strategy has successfully allowed the group to offer differentiated pricing and messaging to grow members and profits. Despite the “free” universal public system in Australia, around 45% of Australia’s population have private hospital cover due to taxation benefits and penalties, shorter wait times, and a choice of doctor and hospital. We expect government policy settings, which promote the take up and retention of private health insurance products, to remain in place. With an ageing population, higher demand for more intense healthcare will further pressure the public health system.

Despite larger players generating respectable return on equity on mid-single-digit profit margins, smaller providers have less capacity to absorb the expected claims inflation. This could eventually lead to industry consolidation, or at the least a pull-back in marketing expenses and policyholder acquisition costs. Medibank’s Other Health Services division provides in-home healthcare services such as nursing, rehabilitation, and health coaching for corporates. Medibank health also includes the sales of travel, life, and pet insurance, where Medibank is not the underwriter but is paid a commission.

Financial Strength

Medibank’s first-half fiscal 2022 profit slipped 2.7% to AUD 220 million but was in line with our broadly unchanged earnings forecasts. In a debt-free position Medibank is in sound financial health. It is forecasted that Medibank can fund for long-term organic growth from cash flows, while maintaining the current 75% to 85% target dividend payout range. As at Dec. 31, 2021, Medibank held AUD 1.95 billion in capital, equating to 13% of annual premiums, the top end of the firm’s 11%-13% target range. Given low claims volatility in health insurance the insurer could carry some debt, but given a large acquisition is not expected, we believe the conservative balance sheet is likely to remain a feature of Medibank. Investment assets of AUD 2.8 billion were allocated 18% to cash, 61% to fixed income, and 21% to equities, property and other assets as at Dec. 31, 2021.

Bulls Say’s

  • Industry growth is tied to a steadily increasing population, ageing demographics and the rise in healthcare spending. Governments will continue to incentivise participation in private health insurance to share the burden of escalating healthcare costs. 
  • Premium growth is generally tied to the increasing cost of healthcare. 
  • The symbiotic relationship with the private hospital operators and buyer power over general practitioners is a key strength of Medibank’s business model. The majority of private hospital income is paid by the insurers.

Company Profile 

Previously owned by the Australian government, Medibank is the largest health insurer in Australia. Its two brands, Medibank Private and ahm, cover over 4.8 million people. Medibank and Australia’s fourth-largest health fund NIB Holdings are the only listed health insurers. In addition to private health insurance, the firm provides life, pet, and travel insurance, as well as health insurance for overseas students and temporary overseas workers. The Medibank Health division provides healthcare services to businesses, governments, and communities across Australia and New Zealand.

(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

Cummins Have An Exposure To End Markets That Have Attractive Tailwinds

Business Strategy and Outlook

It is held Cummins will continue to be the top supplier of truck engines and components, despite increasing emissions regulation from government authorities. For over a century, the company has been the pre-eminent manufacturer of diesel engines, which has led to its place as one of the best heavy- and medium-duty engine brands. Cummins’ strong brand is underpinned by its high-performing and extremely durable engines. Customers also value Cummins’ ability to enhance the value of their trucks, leading to product differentiation. 

The company’s strategy focuses on delivering a comprehensive solution for original equipment manufacturers. It is likely Cummins will continue to gain market share, as it captures a larger share of vehicle content. This is largely due to increasing emissions regulation, which allows Cummins to sell more of its emissions solutions, namely its aftertreatment systems that convert pollutants into harmless emissions. Additionally, Cummins stands to benefit from the electrification of powertrains in the industry. The company has made progress in the school and transit bus markets. Long term, it is alleged the truck market to also increase electrification. The pressure to manufacture more environmentally friendly products is forcing truck OEMs to evaluate whether it’s economically viable to continue producing their own engines and components or to partner with a market leader like Cummins. It is seen this play out recently, through the increase in partnership announcements for medium-duty engines with truck OEMs. It is anticipated some OEMs will opt to shift investment away from engine and component development, leaving it to Cummins. 

Cummins has exposure to end markets that have attractive tailwinds. In trucking, it is likely new truck orders will be strong in the near term, largely due to strong demand for consumer goods. In good times, truck operators replace aging trucks and opt to expand their fleet to meet strong demand. Longer term, it is projected Cummins will continue to invest in BEVs and fuel cells to power future truck models. It is foreseen a zero-emission world is inevitable, but it is held Cummins can use returns from its diesel business to drive investments.

Financial Strength

Cummins maintains a sound balance sheet. In 2021, total outstanding debt stood at $3.6 billion, but the firm had $2.6 billion of cash on the balance sheet. In 2020, the company issued $2 billion of long-term debt at attractively low rates, some of which was used to pay down its commercial paper obligations. Cummins’ strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth and returns cash to shareholders. In terms of liquidity, it is projected the company can meet its near-term debt obligations given its strong cash balance. It is also found comfort in Cummins’ ability to tap into available lines of credit to meet any short-term needs. Cummins has access to $3.2 billion in credit facilities.Cummins can also generate solid free cash flow throughout the economic cycle. It is held the company can generate over $2 billion in free cash flow in analysts midcycle year, supporting its ability to return nearly all of its free cash flow to shareholders through dividends and share repurchases. Additionally, It is alleged management is determined to improve its distribution business following its transformation efforts in recent years. It is foreseen Cummins can improve the profitability of the business through efficiency gains, pushing EBITDA margins higher in the near term. These actions further support its ability to return cash to shareholders. In Analysts’ view, Cummins enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say’s

  • Strong freight demand in the truck market should lead to more new truck orders, substantially boosting Cummins’ revenue growth. 
  • Cummins will benefit from increasing emission regulation, pushing customers to buy emissions solutions, such as aftertreatment systems that turn engine pollutants into harmless emissions. 
  • Increasing emission standards could push peers to rethink whether it’s economically viable to continue manufacturing engines and components, benefiting Cummins.

Company Profile 

Cummins is the top manufacturer of diesel engines used in commercial trucks, off-highway equipment, and railroad locomotives, in addition to standby and prime power generators. The company also sells powertrain components, which include filtration products, transmissions, turbochargers, aftertreatment systems, and fuel systems. Cummins is in the unique position of competing with its primary customers, heavy-duty truck manufacturers, who make and aggressively market their own engines. Despite robust competition across all its segments and increasing government regulation of diesel emissions, Cummins has maintained its leadership position in the industry. 

(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

Uniti Capitalizing In Its Niche (Fiber)

Business Strategy and Outlook

With its lease renegotiation with Windstream (which makes up about 60% of Uniti revenue and over 80% of EBITDA) now finalized, Uniti is on much more stable financial footing and can continue on the path it was on prior to the Windstream uncertainty, maintaining itself with reliable returns and cash flow from Windstream while diversifying its business and adding more indefeasible rights of use agreements on its fiber, which carry long-term certainty and virtually no operating costs.

Diversification has come primarily via acquisitions and fiber network construction, which spawned the firm’s fiber infrastructure segment, where Uniti leases dark and lit fiber and small cells to wireless carriers and other enterprises. While it is generally skeptical about the economics of such businesses, it is in view Uniti as better positioned than many competitors because it focuses on second- and third-tier cities, where it is not supported competition is quite as intense. For example, Crown Castle explicitly says its footprint covers only the largest U.S. cities. In addition, the major cable providers in the United States are absent over much of Uniti’s footprint. It is alleged fiber use to continue growing substantially given constantly increasing data consumption across wired and wireless networks, and it is likely Uniti can capitalize in its niche.

It is also seen Uniti’s original leasing business, where it has engaged in sale-leaseback transactions to buy other companies’ fiber and immediately lease it back at attractive rates, but it is unconvincing it can materially grow beyond Windstream. It is not foreseen Uniti adds much value beyond providing capital, so it is held virtually any firm with access to cheap financing can compete. As such, it is anticipated suitors will compete on price, and finding sizable deals at attractive rates will be difficult.

Financial Strength

Uniti is a highly leveraged company, with net debt of 5.8 times adjusted EBITDA at the end of 2021 and a debt/capital ratio of over 100%. The resolution of the Windstream lease renegotiation significantly improves Uniti’s financial position and makes it unlikely to be in near-term danger of bankruptcy, but it still has substantial risk, especially if stress in the financial markets results from a global economic downturn. In addition, effects from the Windstream lease amendment remove flexibility Uniti needed to execute its diversification and expansion strategy. Uniti cut its quarterly dividend from $0.60 to $0.05 in March 2019 and has since raised it to $0.15. It is likely to raise it only marginally, which it needs to do to continue qualifying as a real estate investment trust. With the reduced dividend level, it is held the firm can make the required interest and principal payments on its debt while maintaining a debt/EBITDA ratio of about 6.0. The firm has no significant debt maturities until 2023, when more than $1 billion, or about 20% of its total debt, comes due. Beyond survival, it is likely Uniti’s weak financial position inhibits its ability to operate as it had planned. It was already highly leveraged, and it is anticipated it intended to rely on equity issuance to fund expansion and diversification. If its stock remains depressed relative to prior years, which is justified if it loses a significant portion of Windstream revenue, it is likely it will lack currency needed to buy additional assets.

Bulls Say’s

  • Uniti’s renegotiation of its Windstream lease gives the ability to add new leases to existing fiber, which can be very lucrative, as it requires little new spending.
  • Uniti’s sale-leaseback transactions provide nearly 100% margins, require no spending or upkeep on Uniti’s part, and lock in high-return revenue streams for 15 years or longer.
  • There is less competition to provide fiber exists in the second- and third-tier cities where Uniti operates, and Uniti’s network will be in demand to facilitate evergrowing data transport needs.

Company Profile

Uniti is a REIT with about 130,000 route miles of fiber in the U.S., primarily in the Southeast. Uniti reports its business in two segments: leasing and fiber. Leasing currently makes up about two thirds of total revenue and consists mostly of Uniti’s master lease agreement with Windstream. Uniti was spun out of Windstream in 2015 with a substantial portion of Windstream’s network assets, and it immediately leased the entire portfolio back for Windstream’s exclusive use. Other leasing revenue stems from sale-leaseback transactions with other fiber holders. Uniti generates fiber revenue by leasing dark and lit fiber to wireless carriers and other enterprises. (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

SUL reported strong 1H22 results reflecting sales of $1,705.1m

Portrait of handsome man smiling and listening to female manager while discussing contract in meeting, copy space

Investment Thesis 

  • Trading below our valuation and on attractive trading multiples and dividend yield. 
  • Strong tailwinds/fundamentals in SUL’s four core segments. For instance, sales for vehicle aftermarket continue to remain strong (with increase in second hand vehicle sales (Supercheap); travellers seeking social distancing and hence moving away from public transport (Supercheap); with Covid lockdown measures in forced, more people are spending their holidays domestically (BCF; macpac), utilising their vehicles (Supercheap); growing awareness of fit and healthy lifestyles (rebel).
  • Solid capital position.
  • Strong brands in BCF, macppac, rebel and Supercheap with solid industry positions in largely oligopolies and solid store network.
  • Transitioning to an omni-channel business. Whilst previously the business has been modelled on like-to-like store numbers, management now thinks of business metrics based on club members and has been able to grow the active club membership much faster than store numbers (store numbers in last 5 years have grown +2% CAGR vs active club members at +10% CAGR), providing it with an opportunity to expand customer base and therefore revenue base without significant capex for investment in stores (most of the customers are omni channel). Management continues to push towards expanding its online sales (Covid-19 added to this tailwind), with online sales penetration of ~13-15% of total sales currently and expected to reach 20-25% over the next 5 years.
  • Attractive loyalty members program, with over 8 million members. 

Key Risks

  • Rising competitive pressures.
  • Any issues with supply chain, especially as a result of the impact of Covid-19 on logistics, which affects earnings.
  • Rising cost pressures eroding margins (e.g., more brand or marketing investment required due to competitive pressures).
  • Disappointing earnings update or failing to achieve growth rates expected by the market could see the stock price significantly re-rate lower.

1H22 Results Highlights

Relative to the pcp: 

  • Sales of $1,705.1m was down -4.0% vs 1H21 but up +18.1% vs 1H20. 
  • Segment EBITDA of $329.4m was down -21.2% vs 1H21 but up +27.0% vs 1H20. 
  •  As a result of supply chain disruption, SUL’s gross margin of 46.7% was 100 bps below pcp but 170 bps above 1H20, driven by improved sourcing, pricing and tailoring the range of inventory, offset by higher freight and transport costs, growth in home delivery sales and some normalisation of promotional activity in 2Q22. 
  •  Normalised NPAT of $112.8m was down -35.8% vs 1H21 but up +60.9% vs 1H20 (Normalised EPS of 49.9 cents). 
  •  SUL was able to expand its store network, completing 15 new store openings and 28 refurbishments and relocations. 
  •  SUL maintains a conservative balance sheet with no bank debt and $94m cash balance. 
  • The Board declared a fully franked interim dividend of 27.0cps and reaffirmed its dividend policy to pay out total annual dividends of between 55% and 65% of underlying NPAT.

Company Profile

Super Retail Group (SUL) is one of Australasia’s Top 10 retailers. SUL comprises four core segments. (1) BCF: Australia’s largest outdoor retailer focused on selling Boating, Camping and Fishing products. (2) macpac:retailer of apparel and equipment with their own designs focused on outdoor adventurers. (3) rebel:retailer of branded sporting and leisure goods and equipment for casual and serious fitness enthusiast. (4) Supercheap Auto: specialty retail business which specialises in automotive parts and accessories.

(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
Dividend Stocks

Challenger Ltd fully franked interim dividend of 11.5cps up by 21%

Investment Thesis

  • CGF is trading on fair valuation, with a 2-yr forward PE-multiple of 14.3x and price-to-book value of 1.0x. 
  • Exposure to an attractive retirement income market, with strong long-term growth tailwinds.
  • Near-term challenges are likely to be priced in at current valuations, in our view, with investor expectations reset lower. 
  • Solid capital position.
  • Further cost initiatives leading to reduction in the already low cost-to-income ratio.
  • Two complementary businesses both with leading market positions.

Key Risks 

  • Weaker than expected annuity sales growth within its Life (annuity) segment.
  • Structural and reputational detriments from the Royal Commission lasting longer than anticipated. 
  • Any increase in competition from major Australian banks in annuities.
  • Weaker than expected net inflows for the Funds Management segment (possibly from lower interest levels from financial planners/advisers/investors).
  • Weaker than expected performance of boutique funds within its Funds Management segment.
  • Lower investment yields.
  • Uncertainty over capital requirements of deferred lifetime annuities.

Fund Management

  • EBIT increased +28% to $45m driven by +26.4% increase in FUM-based fee income with average FUM up +26% and a steady FUM-based margin of 16.7bps, partially offset by -50% decline in performance fees and +15% increase in expenses. Funds Management ROE increased +600bps to 33.8%.
  • FUM increased by +20% to $109bn, with net flows reaching $900m, reflecting a strong contribution from retail clients, with momentum continuing into the start of 2H22 with the business securing a GBP1bn UK fixed income mandate.
  • Investment performance remained strong with 92%, 96% and 94% of FUM outperforming the benchmark over 3 years, 5 years and since inception, respectively.

Company Profile 

Challenger Ltd (CGF) is an Australian-based investment management firm managing $78.4 billion in assets as of December 2018. CGF operates two core segments: (1) a fiduciary Funds Management division; and (2) APRA-regulated Life division. Challenger Life Company Ltd (Challenger Life) is Australia’s largest provider of annuities.

(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
Dividend Stocks Expert Insights

Omicron Boost to Healius’ Earnings Appears Short-Lived but Core Pathology Proves Resilient

Business Strategy and Outlook:

As demand for PCR testing surged during the omicron wave, higher positivity rates limited the ability of pathology providers to pool tests, causing significant delays and accelerating adoption of rapid antigen tests. While Healius is improving its turnaround times, management admitted that the sector wouldn’t be able to keep up again if a similar surge were to occur. Despite bolt-on acquisitions, revenue of AUD 200 million was flat on the prior corresponding period. This was largely driven by pandemic impacts including elective surgery restrictions and fewer medical centre referrals. Healius continues to increase its exposure to higher-margin modalities, and the company remains on track with its costout initiatives such as digitisation and network optimisation.

Despite Virtus deciding not to proceed with the acquisition of Adora, Healius is still classifying the business as a discontinued operation and suggested a sale to a different party is imminent.

Financial Strength:

Healius’ interim 2022 underlying EBIT rose 177% to AUD 376 million driven by operating leverage from elevated PCR testing. Healius declared a fully franked interim dividend of AUD 0.10 per share. Net debt/EBITDA was 0.4 at half-end, but it is expected that gearing to slightly increase following its Agilex acquisition. Segment EBIT margin also contracted roughly 200 basis points sequentially to a depressed 6% on higher locum staff costs due to radiologist shortages.

The smaller imaging segment, which contributed just 3% of group underlying EBIT, was weaker than expected. Despite bolt-on acquisitions, revenue of AUD 200 million was flat on the prior corresponding period. This was largely driven by pandemic impacts including elective surgery restrictions and fewer medical centre referrals. Segment EBIT margin also contracted roughly 200 basis points sequentially to a depressed 6% on higher locum staff costs due to radiologist shortages. This was despite support labour, excluding radiologists, reducing 4% on average per site.

Company Profile:

Healius is Australia’s second-largest pathology provider and third-largest diagnostic imaging provider. Pathology and imaging revenue is almost entirely earned via the public health Medicare system. Healius typically earns approximately 70% of revenue from pathology, 25% from diagnostic imaging and a small remainder from day hospitals.

(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

Orora Ltd strong momentum with ongoing share buyback and balance sheet flexibility

Investment Thesis

  • Trading on fair value relative to our valuation.
  • Exposure to both developed and emerging markets’ growth.
  • Near-term headwinds should be in the price.
  • Revised strategy following recent strategic review.
  • Bolt-on acquisitions (and associated synergies) provide opportunities to
  • supplement organic growth.
  • Leveraged to a falling AUD/USD.
  • Potential corporate activity.
  • Capital management (current on-market share buyback plus potential for
  • additional initiatives).

Key Risks

  • Competitive pressures leading to margin erosion.
  • Input cost pressures which the company is unable to pass on to customers.
  • Deterioration in economic conditions in US, EM and Australia.
  • Emerging markets risk.
  • Adverse movements in AUD/USD.
  • Declining OCC prices.

1H22 Results Highlights

  • Sales revenue increased +9.6% (+10.6% in CC).
  • Underlying EBIT increased +10.4% (+11.1% in CC) driven by significantly improved performance in the North America segment.
  • Operating cash flow increased +0.6% to $145.5m with cash conversion declining -400bps to 75%, with higher earnings offset by an increase in working capital.
  • Net debt increased +13% over 2H21 to ~$512m, primarily reflecting the impact of increased debt arising from the on-market share buyback and increased capex partially offset by stronger earnings. ORA’s current leverage of 1.6x is below management’s targeted level of 2-2.5x EBITDA.

Company Profile 

Orora Limited (ORA) provides packaging products and services. The Company offers fiber, glass and beverage can packaging materials in Australia and Asia and packaging distribution services in North America and Australia.

(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.