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Dividend Stocks Expert Insights Shares

Woolworths Screens as Overvalued

operating supermarkets and discount department stores. Market capitalization is around AUD 50 billion, with annual sales of over AUD 50 billion. The fair value estimate for narrow-moat Woolworths is AUD 24. The board declared a fully franked dividend of AUD 1.08 for the full fiscal year 2021, equating to a payout ratio of 69%.

Woolworths has a narrow economic moat, characterized by an extensive supermarket store network, serviced by an efficient supply chain operation coupled with significant buying power. It operates in the very competitive supermarket and discount department store segments of the retail sector. Intense competition has taken its toll on margins. Management has reset prices lower to drive foot traffic and increase basket sizes. Volume growth is vital for maximizing supply chain efficiencies.

Australian food sales of over AUD 40 billion represented about 15% of total Australian retail sales in fiscal 2021. The percentage increases substantially if sales are strictly comparable. 

Financial Strength

Woolworths is in a strong financial position with solid gearing metrics. At the end of fiscal 2021, the balance sheet was conservatively geared and EBITDA covered interest expenses 7 times. After the AUD 2 billion share buyback, Woolworth’s investment-grade credit rating is expected to be the same. Woolworths generates large cash flow with significant negative working capital. Cash flow comfortably finances capital expenditure. The balance sheet is robust, and acquisitions are generally bolt-on and funded with cash or existing debt facilities.

Woolworths is well positioned to withstand cyclically weak consumer spending. Woolworths is a defensive stock, with food retailing generating most of group revenue and profit, a solid balance sheet, and a narrow moat surrounding its economic profits. Woolworths last traded price was 40.99 AUD, whereas its fair value is 24 AUD, which makes it an overvalued stock. As per the analysts, the group’s operating earnings will shrink by about a quarter in fiscal 2022 with the demerger of Endeavour.

Bull Says

  • Woolworths’ dominant position in the supermarket sector is entrenched and, coupled with first-class management, suggests that it can maintain leadership in the sector.
  • Woolworths’ operating leverage could lead to a rebound in operating margins, driving cash generation that funds expansion and acquisitions while allowing capital-management initiatives.
  • The refurbishing of the existing supermarket fleet and rollout of revised store formats, with significantly improved service, convenience and product offerings could increase store productivity and lead to higher sales growth.

Company Profile

Woolworths is Australia’s largest retailer. Operations include supermarkets in Australia and New Zealand, and the Big W discount department stores. The Australian food division constitutes the majority of group EBIT, followed by New Zealand supermarkets, while Big W is a minor contributor.

(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.

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Global stocks Shares

Coty’s Turnaround Is Progressing Faster than Expected

besting $1.0 billion estimate, as sales in the long-troubled mass beauty segment rebounded from the pandemic faster than expected. The strength was driven by Cover Girl, the cornerstone of the segment, which experienced its first full quarter of market share gains in five years, on the heels of the brand’s relaunch, supported by a new lineup of clean ingredient products and a robust marketing campaign. 

While Coty’s net debt/adjusted EBITDA remains quite high at 5.3 times at the end of June, the firm closed its fiscal year with $2.3 billion in liquidity, which should be sufficient to meet its needs over the next year ($240 million in capital expenditures, $100 million in preferred dividends, and $25 million in debt maturities).

CEO Sue Nabi laid out her turnaround strategy last year, which calls for Coty to increase its exposure to high growth markets where it had been historically underexposed. But the firm has been able to improve quickly the trends, in the face of a global pandemic, nonetheless. 

Company’s Future Outlook

For fiscal 2021, Coty’s adjusted operating margin was 8.8% compared with 6.9% in fiscal 2019, given positive mix shifts to more profitable channels (e-commerce and prestige) and categories (skincare), lower obsolescence charges, temporarily reduced marketing expenses, and over $330 million in permanent fixed cost reductions. Coty’s fiscal 2022 guidance also exceeds forecast, calling for low-teen organic sales growth, and $900 million in adjusted EBITDA, compared with estimates of 9% growth and $800 million in adjusted EBITDA. Although material increase in Coty’s intrinsic value is anticipated, its fair value is still under review, in order to revisit the long term forecast and the implications of its planned IPO of a stake in its Brazilian beauty business.

Company Profile

Coty is a global beauty company that sells fragrances (56% of fiscal 2020 revenue), color cosmetics (31%), and skin/body care (13%). The firm licenses brands such as Calvin Klein, Hugo Boss, Gucci, Burberry, and Davidoff for its prestige portfolio. Coty’s most popular color cosmetic brands are Cover Girl, Max Factor, Rimmel, Sally Hansen, and Kylie. Coty also holds a 40% stake in a salon and retail hair care business, including brands Wella, Clairol, OPI, and ghd. Francois Coty founded the firm in 1904 and it remained private until its 2013 IPO. It had focused on prestige fragrances and nail salon brands until the 2016 acquisition of Procter & Gamble’s beauty care business. This nearly doubled the firm’s revenue base, and launched it into mass channel cosmetics and professional hair care.

(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.

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Global stocks Sectors

Perpetual Ltd. Asset under Management increases by 246% over pcp to $98.3 bn

Investment Thesis:

  • PPT is a business having vast diversification, with earnings obtained from trustee services, financial advice and funds management.
  • PPT has a chance to increase FUM (Funds Under Management) through its Global Share Fund, which has a strong performance track record over 1, 3 and 5-years and significant capacity. 
  • PPT maintains FUM in Australian equities, which is of maximum amount. This equates to levelled earnings growth unless PPT can attract FUM into international equities, credit and multi-asset strategies (and other incubated funds).
  • Inflow of funds from retail and institutional investors are expected to be high especially from positive compulsory superannuation trend and Perpetual Private. 
  • Perpetual Private’s high potential to ramp up growth in funds under management and funds under advice.
  • Process of cost improvements in Perpetual Private and Corporate Trust.

Key Risks:

  • Probability of any significant underperformance across funds.
  • Key man risk surrounding key management or investment management personnel.
  • Probability of change in regulation (superannuation) with major interest on retirement income (annuities) than creation of wealth.
  • The average base management fee (bps) annually (excluding performance fee) continues to be stable at ~70bps but there are risks caused due to drawbacks from pressures on fees.
  • The provision of financial advice and Perpetual Private adjoins more regulation and compliance costs.
  • Industry funds, which are building in-house capabilities (~15-20% of total PPT funds under management), have good exposure.

Key Highlights:

  • The operating revenue increased +31% and underlying profit after tax was up +26% post the acquisition of Trillium and Barrow Hanley.
  • Statutory NPAT decreased -9% because of the significant one-off costs.
  • PPT’s assets under management increased by +246% over pcp (previous corresponding period) to $98.3bn, wherein significant amount of funds outperformed their respective benchmarks over the year.
  • Fully franked final ordinary dividend of A$0.96 per share was declared, thereby amounting the total FY21 dividend to A$1.80 per share, which is up +16% over pcp.
  • Perpetual Asset Management Australia delivered total revenue of A$165.7m, which was down -5% over pcp.
  • Perpetual Asset Management International (new international division comprising the Trillium and Barrow Hanley businesses), had total revenue of A$139.2m and underlying profit before tax was A$40.7m.
  • Perpetual Private delivered total revenue of $183.8m, relatively unchanged over pcp and underlying profit before tax of A$35m.
  • Perpetual Corporate Trust delivered total revenue of $134.9m, up +7% over pcp and underlying profit before tax of A$63.8m, which was +9% higher over pcp.

Company Profile:

Perpetual Ltd (PPT) is an ASX-listed independent wealth manager with three core divisions in Perpetual Investments (one of Australia’s largest investment managers); Perpetual Private (one of Australia’s premier high net worth advice business); and Perpetual Corporate Trust (which provides trustee services). PPT looks after ~$98.3 billion in funds under management, ~$17.0 billion in funds under advice and ~$922.8 billion in funds under administration (as on 30 June 2021).

(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.

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Shares Small Cap

SkyCity’s Business to Sit on the Sidelines Amid Travel Restrictions

buoyed by the recovery from current coronavirus-induced lows and solid performance from its core assets in Auckland and Adelaide. SkyCity’s Auckland and Adelaide properties underpin the firm’s narrow economic moat. SkyCity is the monopoly operator in both jurisdictions, with long-dated licences (exclusive licence for Auckland expires in 2048, and Adelaide licence expires in 2085 with exclusivity guaranteed until 2035). The quality of these assets, particularly SkyCity Auckland, has helped build the firm’s VIP gaming business.

SkyCity’s exposure to the volatile VIP gaming market is smaller than that of Australian rivals Crown Resorts and Star Entertainment. VIP revenue typically represents over 20% of Crown’s and Star’s sales, compared with SkyCity’s typical 10%-15%. While high rollers have no alternatives when in Auckland or Adelaide, SkyCity effectively competes as a destination casino on a global scale against locations such as The Star in Sydney and Crown Melbourne. This includes a NZD 750 million upgrade to SkyCity Auckland to be completed by the end of calendar 2024 and a AUD 330 million expansion for SkyCity Adelaide, a transformational project completed in fiscal 2021.

Financial Strength 

Despite near-term earnings weakness, SkyCity’s balance sheet remains robust, bolstered by a NZD 230 million capital raise completed at the end of fiscal 2020 and extensions to new and existing debt facilities. As expected, SkyCity declared a final dividend in the second half of fiscal 2021, following the June 30, 2021 covenant testing date. We expect SkyCity’s balance sheet to continue to improve over coming years as earnings recover, with net debt/EBITDA dropping below 1.0 in fiscal 2024 as expansionary projects roll off and earnings recover. 

Our fair value for SkyCity to NZD 3.80, from NZD 3.50, following the release of fiscal 2021 results. The raise on our fair value estimate is principally due to a more positive outlook on capital expenditure as SkyCity’s major expansion projects roll off and insurance payments are set to cover the majority of growth expenditure earmarked for the next three years. Despite New Zealand recently shifting back into stage 4 lockdown, SkyCity’s longdated and exclusive licences in Auckland and Adelaide create a regulatory barrier to entry, underpinning the firm’s narrow moat, and position the business well to participate in the recovery as restrictions ease. 

The payout ratio is well-supported by SkyCity’s balance sheet. The completion of the NZD 330 million Adelaide expansion in fiscal 2021 takes some pressure off cash flows, and of the further NZD 500 million in capital expenditure flagged for the NZICC project, around NZD 380 million will be funded by insurance payments to be received following the NZICC fire. The NZD 750 million NZICC/Horizon Hotel project (which helped secure licensed exclusivity at the core Auckland casino) has been delayed by a fire, with completion now expected in late calendar 2024.

Bulls Say’s 

  • Long-dated exclusive licences to operate the only casino in Auckland and Adelaide allow SkyCity to enjoy economic returns in a regulated environment.
  • We expect transformative capital expenditure at SkyCity’s Auckland and Adelaide casinos will lead to a sizable step-up in earnings.
  • SkyCity is well positioned to benefit from the emerging middle and upper class in China.

Company Profile 

SkyCity Entertainment operates a number of casino-hotel complexes across Australia and New Zealand. The flagship property is SkyCity Auckland, the holder and operator of an exclusive casino licence (expiring in 2048) in New Zealand’s most populous city. The company also owns smaller casinos in Hamilton and Queenstown. In Australia, the company operates SkyCity Adelaide (exclusive licence expiring in 2035).

(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.

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Shares Technology Stocks

Salesforce Margin Performance Bodes Well Long-Term; FVE up to $292

Online stock exchange team

Even as revenue growth is likely to dip below 20% for the first time at some point in the next several years, ongoing margin expansion should continue to compound earnings growth of more than 20% annually for much longer. Sales force’s fair value estimate increased to $292.

Sales Cloud represents the original sales force automation product, which streamlined process management for sales leads and opportunities, contact and account data, process tracking, approvals, and territory tracking. Service Cloud brought in customer service applications, and Marketing Cloud delivers marketing automation solutions.  Sales force Platform also offers customers a platform-as-a-service solution, complete with the App Exchange, as a way to rapidly create and distribute apps. 

Sales force is widely considered a leader in each of its served markets, which is attractive on its own, but the tight integration among the solutions and the natural fit they have with one another makes for a powerful value proposition. To that end, more than half of enterprise customers use multiple clouds. Further, customer retention has gradually improved over time and is better than 90.

Financial strength

Salesforce.com is a financially sound company. The last traded price of Salesforce was 260.85 USD while its FVE (Fair value Estimate) is 292.00 USD, which shows that Salesforce has potential to grow.

Revenue is growing rapidly, while margins are expanding. As of Jan. 31, Salesforce.com had $12.0 billion in cash and investments, offset by $2.7 billion in debt, resulting in a net cash position of $9.3 billion.  Further, Salesforce generated free cash flow margins in excess of 17% in each of the last four years, including 18% in fiscal 2021, which was negatively impacted by COVID-19. In terms of capital deployment, Salesforce makes acquisitions rather than pay a dividend or repurchase shares. 

Bull Says

  • Salesforce.com dominates the SFA space but still only controls 30% in a highly fragmented market that continues to grow double digits each year, suggesting there is still room to run.
  • The company has added legs to the overall growth story, including customer service, marketing automation, e-commerce, analytics, and artificial intelligence.
  • Salesforce.com’s margins are subscale, with a runway to more than 100 basis points of operating expansion annually for the next decade. Indeed, management has put more emphasis on expanding margins in recent quarters.

Company Profile

Salesforce.com provides enterprise cloud computing solutions, including Sales Cloud, the company’s main customer relationship management software-as-a-service product. Salesforce.com also offers Service Cloud for customer support, Marketing Cloud for digital marketing campaigns, Commerce Cloud as an e-commerce engine, the Sales force Platform, which allows enterprises to build applications, and other solutions, such as Mule Soft for data integration.

(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
Global stocks Shares

Perpetual Ltd. Asset under Management increases by 246% over pcp to $98.3 bn

Investment Thesis:

  • PPT is a business having vast diversification, with earnings obtained from trustee services, financial advice and funds management.
  • PPT has a chance to increase FUM (Funds Under Management) through its Global Share Fund, which has a strong performance track record over 1, 3 and 5-years and significant capacity. 
  • PPT maintains FUM in Australian equities, which is of maximum amount. This equates to levelled earnings growth unless PPT can attract FUM into international equities, credit and multi-asset strategies (and other incubated funds).
  • Inflow of funds from retail and institutional investors are expected to be high especially from positive compulsory superannuation trend and Perpetual Private. 
  • Perpetual Private’s high potential to ramp up growth in funds under management and funds under advice.
  • Process of cost improvements in Perpetual Private and Corporate Trust.

Key Risks:

  • Probability of any significant underperformance across funds.
  • Key man risk surrounding key management or investment management personnel.
  • Probability of change in regulation (superannuation) with major interest on retirement income (annuities) than creation of wealth.
  • The average base management fee (bps) annually (excluding performance fee) continues to be stable at ~70bps but there are risks caused due to drawbacks from pressures on fees.
  • The provision of financial advice and Perpetual Private adjoins more regulation and compliance costs.
  • Industry funds, which are building in-house capabilities (~15-20% of total PPT funds under management), have good exposure.

Key Highlights:

  • The operating revenue increased +31% and underlying profit after tax was up +26% post the acquisition of Trillium and Barrow Hanley.
  • Statutory NPAT decreased -9% because of the significant one-off costs.
  • PPT’s assets under management increased by +246% over pcp (previous corresponding period) to $98.3bn, wherein significant amount of funds outperformed their respective benchmarks over the year.
  • Fully franked final ordinary dividend of A$0.96 per share was declared, thereby amounting the total FY21 dividend to A$1.80 per share, which is up +16% over pcp.
  • Perpetual Asset Management Australia delivered total revenue of A$165.7m, which was down -5% over pcp.
  • Perpetual Asset Management International (new international division comprising the Trillium and Barrow Hanley businesses), had total revenue of A$139.2m and underlying profit before tax was A$40.7m.
  • Perpetual Private delivered total revenue of $183.8m, relatively unchanged over pcp and underlying profit before tax of A$35m.
  • Perpetual Corporate Trust delivered total revenue of $134.9m, up +7% over pcp and underlying profit before tax of A$63.8m, which was +9% higher over pcp.

Company Profile:

Perpetual Ltd (PPT) is an ASX-listed independent wealth manager with three core divisions in Perpetual Investments (one of Australia’s largest investment managers); Perpetual Private (one of Australia’s premier high net worth advice business); and Perpetual Corporate Trust (which provides trustee services). PPT looks after ~$98.3 billion in funds under management, ~$17.0 billion in funds under advice and ~$922.8 billion in funds under administration (as on 30 June 2021).

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
Philosophy Technical Picks Technology Stocks

Super Retail’s strong balance sheet with plenty of room to invest

Investment Thesis

  • Trading at a discount to our valuation, with attractive trading multiples and dividend yield.
  • SUL’s four core segments have strong tailwinds/fundamentals. For example, vehicle aftermarket sales continue to be strong (with an increase in secondhand vehicles sold (Supercheap); travellers seeking social distancing and thus moving away from public transportation (Supercheap); with Covid lockdown measures in force, more people would spend their holidays domestically (BCF; macpac), utilising their vehicles (Supercheap); increasing awareness of fit and healthy living (Supercheap); (rebel).
  • A strong capital position.
  • Strong brands in BCF, Macppac, Rebel, and Supercheap, as well as solid industry positions in oligopolies and a solid store network.
  • With over 8 million members, this is an appealing loyalty programme.
  • Making the switch to an omni-channel business. Previously, the business was modelled on like-to-like store numbers; however, management now thinks of business metrics in terms of club members and has been capable of growing active club membership much faster than store numbers (store numbers in the last 5 years have grown +2 percent CAGR vs active club members at +10 percent CAGR), supplying an opportunity to expand customer base and thus (most of the customers are omni channel). Management continues to push for increased online sales (Covid-19 added to this tailwind), with online sales currently accounting for 13-15 percent of total sales and expected to rise to 20-25 percent over the next five years.

Key Risk

  • Increasing competitive pressures.
  • Any supply chain issues, particularly as a result of the impact of Covid-19 on logistics, that have an impact on earnings.
  • Increasing cost pressures are eroding margins (e.g. more brand or marketing investment required due to competitive pressures).
  • A disappointing income update or failure to achieve the market’s expected growth rates could cause the stock price to re-rate significantly lower.

SUL’s Strong Balance Sheet

  • Net cash position of $242.3 million, resulting from a July 2020 equity raise and strong trading throughout the period.
  • Fixed charge cover is 3.1x (based on commonplace EBITDAL) and is anticipated to stabilise in the low to mid 2x range.
  • SUL has $600 million in undrawn committed debt facilities.
  • “While Covid-19-related trading restrictions and lockdowns continue, the Group intends to preserve a very commercially produced position,” said management. 
  • Once trading conditions have normalised, the Group intends to aim for a long-term net debt/EBITDA position (pre AASB 16) of 0 to 0.5x.”

Company Profile 

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

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
Shares Small Cap

Improvements in occupancy to be the major driver for driving up G8 revenues

Investment Thesis

  • Trading at a discount to our valuation.
  • With a growing population, the long-term outlook for childcare demand remains positive (organic and net immigration).
  • Increased emphasis on both organic and acquired growth.
  • Increasing exposure to international markets (Asia).
  • Strategic investor China First Capital Group (12.45% stake in GEM) may see a collaborative expansion into the Chinese market.
  • The Company’s national footprint enables it to scale more effectively than competitors and mom and pop shops.
  • A global operator could be interested in acquiring the company.
  • Improve occupancy levels by leveraging – (rough estimates) A 1% increase in occupancy equates to $10-11 million in revenue and a $3 million EBIT benefit.

Key Risks 

  • The company faces execution risk in meeting its FY19 earnings per share (EPS) target.
  • Pricing pressure is being exerted as a result of increased competition.
  • Increased supply in some areas has resulted in lower occupancy rates.
  • Acquisition with a negative impact on value (s).
  • Execution risk associated with offshore expansion.
  • Childcare funding cuts or adverse regulatory changes
  • Australia is experiencing a recession.
  • Dividend reduction

FY21 Result Highlights

  • Revenue of $421.5 million (vs. $308.2 million in CY20 H1 and $429.9 million in CY19 H1) reflects occupancy recovery and the effects of greenfield growth, Victorian Government Covid-19 payments, and the February fee review, offset by divestments.
  • GEM saw an increase in national Core average occupancy to 68.0 percent (from 65.1 percent in CY20 H1), but it remains below pre-Covid levels of 70.4 percent in CY19 H1.
  • Operating EBIT (after lease interest) of $38.9m was up from $19.7m in CY20 H1 (restated) and in line with $38.8m in CY19 H1 (restated), owing to the “benefits of the Improvement Process, February fee review, and greenfield growth being invested in increasing system support and quality.” 
  • The statutory NPAT of $25.1 million was an improvement over the net loss after tax of $244 million.
  • GEM’s balance sheet remains strong, with a net cash position.
  • GEM did not pay an interim dividend, but the Board “expects dividend payments to resume with a full-year CY21 dividend to be paid in CY22.”
  • GEM’s employee remediation programme is well-advanced, with a provision of $80 million pre-tax ($57 million after tax), less costs incurred to date.

Company Profile 

G8 Education Limited (GEM) owns and operates care and education services in Australia and Singapore through a range of brands. The Company initially listed on the ASX in December 2007 under the name of Early Learning Services, but later merged with Payce Child Care to become G8 Education.

(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
Technology Stocks

WiseTech FVE Under Review Following Stronger Than Expected Fiscal 2021 Result and Outlook

The firm reported revenue of AUD 508 million which was in line with our AUD 510 million forecast. However, fiscal 2021 EBITDA of AUD 207 million was 22% above our AUD 170 million forecast. Underlying NPAT of 108 million was 19% above our forecast. Management’s comments indicate this margin improvement is unlikely to be lost as the pandemic subsides, as will be the case for some other ASX listed technology companies.

For fiscal 2022, the revenue expected to be between AUD 600 and 635 million as per management provided earnings guidance which is only 5% above our forecasts. However, the EBITDA guidance range of AUD 260 to 285 million is 32% above our forecast. 

Prior to the result, our forecasts assumed a 21% underlying EPS CAGR over the next decade and a terminal P/E multiple of 19. However, over the past seven years, WiseTech’s revenue has grown at a CAGR of 34% and the shares have traded on a P/E multiple of around 100. However, we can achieve a fair value equal to the current market price of AUD 46.50 if we assume an EPS CAGR of 27% over the next decade and a terminal P/E ratio of 27. We will consider the feasibility of such a scenario while the stock is under review.

The company also has a very high customer retention rate and a high and growing proportion of revenue is recurring. These attributes, combined with the very large addressable market and scalable and cash generative business model, means WiseTech has a very strong earnings growth outlook and an incredibly strong balance sheet.

The WiseTech share price initially rose by 58% on the day of the result before falling back to a 28% gain by the close of trading. We expect the share price jump reflects the market’s surprise at the strength of the result and outlook, in addition to the relatively low free float. The intraday volatility also reflects the uncertainty associated with the high-growth earnings outlook, whereby small differences in investor assumptions can have a large impact on the intrinsic value.

Company Profile

WiseTech is a leading global provider of logistics software, and 19 of the largest 20 third-party logistics companies are customers of the firm. The company has a very strong customer retention rate of over 99% per year, and is growing quickly as its global SaaS platform replaces legacy software. The company reinvests around 30% of revenue into research and development, but around 50% of this cost is capitalised, leading to poor cash conversion. Founder Richard White remains CEO and the largest shareholders.

 (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
Expert Insights Shares Small Cap

Ampol the Latest to Join the Energy M&A Frenzy with Bid for No-Moat Z Energy

Word equity under magnifying glass --- Image by © Image Source/Corbis

in line with the Ampol’s bid. The decline in value is in accord with the terms of a proposed merger and our prior standalone fair value estimates. Merger and acquisition activity continues at a frenetic pace in the Australasian fossil fuel space, coronavirus fragility and carbon concerns marking some as prey. Ampol is proposing an NZD 3.78 per share cash offer for Z Energy via scheme of arrangement. Australia’s largest refined fuel retailer has been granted a four week-exclusivity period in which to undertake due diligence prior to formalising the offer for its smaller New Zealand counterpart.

The equity issuance may take the form of partial share consideration to Z shareholders. Or Ampol may simply conducting a pro rata entitlement offer to its own shareholders, which would be done following regulatory approval and nearer the date of completion. Ampol may have to sell-down some NZ assets to meet NZ competition guidelines. This could include its Gull network. With Ampol shares falling on the bid news, and Z Energy shares rising but not meeting the bid price, the implication is the market on balance thinks Ampol is paying too much, or at least that the bid won’t succeed. The natural question is how do we reconcile this with our much higher standalone valuation for Z.

Company’s Future Outlook 

Despite there being no certainty that discussions will result in a binding agreement, we think the chance of success is high. The latest is apparently the fourth in a series of nonbinding offers from Ampol, including at NZD 3.35, NZD 3.50, and NZD 3.60 along the way. And there is logic to a merger– Ampol and Z have very similar business models. Z Energy’s board wouldn’t have opened the books if the chance of a deal proceeding was low. At NZD 3.78 Ampol will be getting Z Energy at a material 33% discount to our NZD 5.60 standalone fair value. 

Our formal recommendation for Z shareholders is don’t accept, based solely upon the offer’s material discount to our NZD 5.60 standalone fair value. However, we suspect that advice is likely to prove academic. Z shares rose just over 14% on the day to NZD 3.48, though still 8% below the proposed bid level. They have moved just into 4-star territory from 3-star prior. Z Energy shares have been in the doldrums for over two years given intense retail fuel competition in New Zealand, more recently exacerbated by COVID-19 disruption.

The shares have fallen from a peak of NZD 8.65 and have only recently show signs of life from NZD 2.56 lows. Ampol’s most recent offer price represents a 24% premium to the last NZD 3.04 close. We suspect there is Z Energy shareholder fatigue that might help Ampol’s offer along. However, if Ampol’s bid were to fall over, our stand-alone Z Energy fair value estimate is unchanged at NZD 5.60.

Company Profile 

Z Energy was born of the purchase of Shell New Zealand’s downstream operations by Infratil and the New Zealand Superannuation Fund in 2010. It has since transitioned to New Zealand’s largest stand-alone retailer of refined petroleum products and meets close to half of the nation’s transport fuel requirements, serving both retail and commercial customers. The principal activities of Z Energy are importing, distributing and selling transport fuel and related products. The business has scale and sells a full range of transport fuels.

(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.