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Dividend Stocks Shares Technical Picks

“Can Lives Here” Is No Marketing Gimmick for Commonwealth Bank

Amber markets itself as a provider of cheap electricity, which Commonwealth Bank will promote to its mobile banking customers. Little Birdie will help the bank provide rewards and exclusive offers for Commonwealth Bank customers, probably a way of winning back share from the likes of Afterpay. The initiatives will not appeal to everyone, with these product enhancements likely appealing more to younger demographics who in the future become more profitable home loan customers. Generating annual profit north of AUD 8 billion, the bank has the luxury to: 1) invest in new and even unproven products; and 2) respond to consumer preferences.

It’s hard to say if recent investments will lead to material revenue windfalls, but we think the bank’s relatively small investments make sense as it attempts to build more engaged and satisfied customers. Our buy now, pay later analyst expects the market to grow materially over the next 10 years, but the incumbents will lose share, partly due to the major banks rolling out their own offerings. Commonwealth Bank shares are up over 50% in the last 12 months, and while we agree confidence in the earnings and dividend outlook is warranted, shares trade at a 30% premium to our fair value estimate. The fully franked dividend of AUD 4 per share, or 4% yield is likely attracting retail investors, but we caution against chasing shares for income. It is not hard to imagine the share price falling more than AUD 4 in a tough year, or even a month for that matter. Hopefully the earnings share price volatility of 2020 has not already been forgotten.

Commonwealth Bank’s consumer lending business, less than 2.5% of loans but we estimate around 8.5% of operating income, includes credit cards which are being impacted by growth in the buy now, pay later, or BNPL, sector. It’s not a surprise the bank is fighting back. It owns 5% of Klarna (50% of Klarna Australia), has the CBA BNPL offering, and a no-interest card called Neo.

Company Profile

Commonwealth Bank is Australia’s largest bank with operations spanning Australia, New Zealand, and Asia. Its core business is the provision of retail, business, and institutional banking services. An exit from wealth management is ongoing, with the bank still holding a 45% stake in Colonial First State. The bank has placed a greater emphasis on banking in recent years.

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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

Digital Giants Finally Click Like Button on Nine’s News Content

Management projects the deals to propel an AUD 30 to 40 million EBITDA uplift in fiscal 2022 for the publishing unit. Some of this increase will likely be driven by continuing cost cuts and efficiency improvements. However, we believe the bulk of it is from the new content supply deals—juicy high margin arrangements which finally shift the image of the much-maligned and structurally-challenged division to one that can now much better monetise its (albeit still dwindling) journalistic resources.

Our fiscal 2021 earnings forecasts for Nine are largely intact. But we have increased our EBITDA estimates from fiscal 2022 by 6% on average, giving effect to the uplift from the new content supply agreements (up to three years with Facebook, five years with Google), as well as lifting the expected benefits from management’s relentless focus on costs in the publishing business. More specifically, from our fiscal 2021 publishing EBITDA forecast base of AUD 124 million, we now expect fiscal 2022 EBITDA to be AUD 158 million, up from AUD 120 million. Investors and, more importantly, the journalist community will be keenly watching how these digital platform deals change management’s resource and capital allocation to the publishing division in the future. Judging by the 26% premium that no-moat-rated Nine shares are trading at relative to our intrinsic assessment, it appears investors are betting the publishing unit will become an even bigger cash cow that Nine will milk, in order to fund its growth ambitions for the digital-centric units such as 9Now and Stan. On the other hand, competition is intensifying in the digital space, and we prefer to remain on the conservative side.

Company Profile

Nine Entertainment operates Nine Network, a free-to-air television network spread across five capital cities, as well as in regional Northern New South Wales and Darwin. It also owns Australia’s third-largest portfolio of online digital properties, one that reaches more than 60% of the country’s active online audience. The merger with Fairfax combines Nine’s top-ranked TV

network and the second-largest newspaper group, topped with a collection of quality digital assets in Nine Digital, subscription video on demand operator Stan, and Fairfax’s 59%-owned Domain. It ensures the merged entity remains relevant in the eyes of audiences and advertisers.

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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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Funds Funds

Fidelity Low-Priced Stock K6

Human hand stacking generic coins over a black background with hexagonal golden shapes. Concept of investment management and portfolio diversification. Composite image between a hand photography and a 3D background.

As a long-term investor, he looks for resilient companies with staying power and doesn’t chase fads. He tries to avoid firms that lack an enduring competitive advantage, steers clear of those loaded up with too much debt, and scrutinizes their leadership’s integrity and prowess. The strategy stands out for its sprawling portfolio of 800-plus stocks drawn from across the globe and market-cap spectrum. Once solidly small-cap-focused, it now orients toward mid-caps but distinguishes itself from that category by owning an above-average stake of large caps (34% of assets) and small caps (30%). Its generous helping of European and Japanese firms, which have tended to enhance the strategy’s risk-adjusted returns, also sticks out.

Altogether, foreign stocks regularly soak up more than 35% of the portfolio, typically the highest share in the category. Tillinghast’s partiality for high-quality fare reveals itself through the portfolio’s average returns on equity, which are far higher than the Russell Midcap Value Index’s, and its aggregate debt/capital ratio, which is consistently lower. Tillinghast’s risk-conscious approach doesn’t have much of a thrill factor. It can lead to results that lag well behind its peers during bull markets.

Yet the strategy’s typically subdued volatility and durability in market drawdowns have consistently made up for its seemingly pedestrian results in rallies. Over the past decade through April 2021, its Sharpe ratio (a measure of risk-adjusted returns) beat 95% of funds in either the small- or mid-cap categories (excluding growth funds). The strategy’s ability to maintain its edge, despite its massive asset base of more than $41 billion, underscores its advantages.

The fund’s older version has posted phenomenal absolute and risk-adjusted returns under Joel Tillinghast, who has managed it for more than three decades. From its 1989 inception through April 2021, the fund gained 13.7% annualized, among best showings of any surviving fund in the mid- or small-cap categories. It exhibited lower volatility than relevant benchmarks and the average midvalue and mid-blend fund (its current and former category, respectively) despite an above-average foreign-equity stake. The fund has also consistently preserved capital better than its rivals during stress periods.

For example, during 2020’s pandemic-induced bear market (Feb. 21-March 23), the fund dropped 36.6% versus the Russell Midcap Value Index’s 43.7% loss. The fund’s resilience and steady gains have reliably made for outstanding risk-adjusted returns, despite its at-times less-than-thrilling total returns.

The fund’s gains only matched the index over the past decade, but earned its returns with an ample cash cushion and steadier returns. The strategy’s girth does make outperformance more difficult than in the early years; Tillinghast cannot invest as easily in the smalland mid-cap fare that he favors. He’s done better at Fidelity Series Intrinsic Opportunities FDMLX, which is his smaller, more nimble fund available for investment only by other of Fidelity’s products

Source:Morningstar

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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

Ramsay Health Care Ltd

Ramsay’s offer of GBP 2.40 per Spire share represents an enterprise value of GBP 2 billion or EV/EBITDA multiple of 10.9 on pre coronavirus fiscal 2019 earnings. Post-acquisition, our EPS for fiscal years 2023 to 2025 increases by an average of 11%, slightly ahead of the high-single-digit EPS accretion management guided for fiscal 2024. However, we still view the transaction price as fair, with shares still screening as overvalued.

We expect Spire’s revenue to grow at a low-single-digit percent and operating margin to largely be maintained at 10%. In addition, we factor in GBP 26 million in annualised cost synergies from fiscal 2024 through procurement benefits, capacity utilisation and a reduction in administrative costs. The scheme is first subject to a Spire shareholder vote expected in July 2021, followed by a likely 12-month review process by the U.K. Competition Market Authority, or CMA. Ramsay’s 8% market share combined with Spire’s 17% would create the largest independent hospital operator in the U.K., but at most we anticipate CMA may require Ramsay to divest certain hospitals or clinics. Accordingly, we forecast full integration and control in fiscal 2023 and full realization of synergies in fiscal 2024.

We view the acquisition as strategically sound, in addition to extending Ramsay’s geographic reach. Spire provides more exposure to private revenue streams and higher acuity inpatient admissions. This complements and balances Ramsay’s U.K. case mix, which is dominated by day patients and revenue sourced from the National Health Service. We anticipate Ramsay to fund the deal through existing debt facilities and still afford a 50% dividend payout ratio. However, Ramsay indicated potential capital management initiatives or asset sales to deleverage its balance sheet if needed.

Profile.

Ramsay Health Care is the fifth-largest global private hospital operator with approximately 480 locations in 11 countries. The key markets in which it operates are Australia, France, the U.K., Sweden and Norway. It is the largest private hospital group in each of these markets other than Norway where it is number two and the U.K. where it ranks fourth. Ramsay Health Care has a history of acquisitive growth, with the most recent acquisition being that of Stockholm-listed Capio AB in November 2018. 51%-owned Ramsay General de Sante is listed on Euro next Paris. Ramsay Health Care undertakes both private and publicly funded healthcare.

Source:Morningstar

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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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Funds Funds

Invesco Intermediate Term Muni Inc

This is one of the larger muni credit teams in the industry, with 16 portfolio managers and 24 muni research analysts. It has grown primarily by way of Invesco’s acquisitions, though, and the current research configuration doesn’t have a significant history navigating market turbulence together. Veteran muni manager Mark Paris, Invesco’s muni-bond head, manages this strategy alongside nine other portfolio managers. The muni research team is large, and given this team’s preference for nonrated deals, the effort is adequate for this mandate.

The strategy absorbed a legacy Oppenheimer counterpart in mid-May 2020, though the portfolio’s profile largely remained intact over the past year. This team has a long-standing specialization in high-yield munis, and this portfolio can hold up to 35% of assets combined in below-investment-grade and nonrated bonds per its mandate. Over the past five years, the portfolio has maintained anywhere from 8% to 14% exposure to below-investment-grade munis and a similar range in nonrated issues. The team’s preference for smaller nonrated bonds can carry more liquidity risk than the typical muni national intermediate portfolio does. The team aims to minimize risk through sector diversification and limits issuer specific risk by keeping position sizes relatively small.

The strategy’s Y shares gained 3.6% annualized from October 2015 through April 30, 2021, modestly outpacing the typical muni national intermediate Morningstar Category peer’s 3.4% annualized gain, though it was also more volatile, with a top-quartile standard deviation over the same period.

Adequate for a higher-yielding offering

The process employed here combines top-down macro analysis and bottom-up credit research with a focus on below-investment grade fare, though it lacks a distinctive competitive edge. The 10-person management team running this strategy is responsible for portfolio construction and risk monitoring, which is essential as the managers regularly invest in nonrated bonds. Analysts provide long- and short-term outlooks and assign proprietary ratings to each bond. The credit research team leads also meet as needed to review any changes to these ratings as well as any special circumstances around distressed securities in the portfolio

This team has a long-standing specialization in high-yield muni bonds, and this portfolio can hold up to 35% of assets in below-investment-grade and nonrated bonds. Over the past five years, the portfolio has maintained anywhere from 8% to 14% exposure to below-investment grade munis and a similar range in nonrated issues. The team’s preference for smaller nonrated bonds can carry more liquidity risk than the typical muni national intermediate portfolio does. The team aims to minimize risks through sector diversification and limits issuer-specific risk by keeping position sizes relatively small.

Portfolio – Credit-oriented

As of March 2021, the portfolio’s largest sector exposures were industrial development and pollution-control (12%), hospital (12%), and dedicated tax (12%) revenue bonds. Life-care and higher education bonds were the next largest sectors at 8% and 7%, respectively. This portfolio has historically had a larger stake in nonrated fare than its typical muni national intermediate peer. As of March 2021, the portfolio’s 14% nonrated stake was more than 3 times its typical peer’s 3% stake. This exposure primarily comprises revenue bonds in continuing care retirement communities, hospitals, charter schools, and toll roads. The portfolio also has substantial exposure to tobacco settlement bonds; its 5% exposure is higher than the typical peer’s 1% exposure as well as the 0.4% in its S&P Municipal Bond Index benchmark.

Performance – Behaves as expected

The strategy’s long-term record under lead manager Mark Paris is decent, though it has seen more volatility than its typical national intermediate muni peer. Its Y shares gained 3.6% annualized from October 2015 through April 30, 2021, modestly outpacing the typical muni national intermediate peer’s 3.4% annualized gain, though it also had a top-quartile standard deviation over the same period, suggesting a more volatile ride than most.

The team’s preference to court more credit risk in this strategy than its typical peer means it may lag when muni credit markets get rough and benefit when risk is rewarded.

(Source: Morning star)

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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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Funds Funds

Diamond Hill High Yield Inv

Bill Zox joined Diamond Hill in 2001 as an equity analyst. He was named a portfolio manager on Diamond Hill Corporate Credit DHSTX in April 2006 before taking over lead management in 2008. John McClain joined the firm in June 2014 as a credit analyst and was also named comanager of Diamond Hill Corporate Credit in February 2015.

The strategy’s investment approach stands out relative to its high-yield bond Morningstar Category peers’. The team focuses on relatively small issues and tends to make sizable bets on its best ideas (up to 10% per issuer), thereby increasing idiosyncratic and liquidity risk. The portfolio has on average about 30% of assets concentrated in its top 10 positions. That said, the team offsets those risks somewhat by treading lightly in the market’s lowest-quality names and limiting how much it will own of an individual issue. This process combines an intrinsic value-driven and contrarian approach to build a high current income portfolio with the opportunity for capital appreciation targeting a high-yield Morningstar Category best-quartile return over rolling five-year periods. While the portfolio’s concentration and idiosyncratic risks are material, the managers’ analytical rigor and responsible balancing of its risks provides comfort.

A distinctive and disciplined investment process

This process combines an intrinsic value-driven and contrarian approach to build a high current income portfolio with the opportunity for capital appreciation targeting a category best-quartile return over rolling five-year periods and a 150 basis points gross excess return over the ICE BofA U.S. High Yield Index benchmark.

Comanagers Bill Zox and John McClain execute a disciplined value approach: They buy issues when their market prices are lower than the team’s estimate of intrinsic business value and sell them when their initial thesis has played out or when there are better opportunities in the market. When valuations get rich and opportunities get scarce, the managers may run a larger-thanpeers allocation to investment-grade bonds to reduce the portfolio’s market risk

The team focuses on relatively small issues and tends to make sizable bets on its best ideas (up to 10% per issuer), thereby increasing idiosyncratic and liquidity risk. The portfolio has on average about 30% of assets concentrated in the top 10 positions. That said, the team offsets those risks somewhat by treading lightly in the market’s lowest-quality names and limiting how much it will own of an individual issue

An opportunistically managed portfolio driven by valuations

In response to the 2019 credit rally, the team raised its investment-grade bond exposure up to 20% at the end of that year, its highest level since the strategy’s January 2015 inception, leaving the strategy in a relatively good position to face the coronavirus-driven sell-off that started at the end of February 2020. As the market plunged, the team rotated capital and pushed the portfolio’s credit quality profile even higher as it found numerous investment-grade opportunities in names that included Nvidia, TJX, and Sysco. At the end of 2020’s first quarter, bonds rated BBB or higher represented close to 34% of assets.

After riding the Fed’s wave of purchases and betting on the economy reopening through the second half of 2020, the managers shifted gears. As valuations got rich, they rotated the portfolio out of some higher-rated longer-duration fare into shorter-maturity higher-yielding securities. At the end of March 2021, investmentgrade bonds represented less than 5% of the strategy’s assets, and its allocation to BB-rated bonds went down to 35% from almost 42% at the end of 2020 while bonds rated B moved the other way to 48% from 41% over the same period.

A category leader with a best-in-class long-term volatility-adjusted record

The team’s attention to valuations together with strong credit selection have helped the strategy hold up better than most rivals during high-yield sell-offs. For instance, despite the energy-led sell-off that started in June 2015, an investment in McDermott International MDR was the largest contributor that year, and the portfolio’s energy stake was the largest relative contributor to the strategy’s 0.3% return, which bested 90% of its category peers. Likewise, the strategy outperformed its typical peer by 184 basis points in the last quarter of 2018 and ended that year ahead of 97% of competitors.

(Source: Morning star)

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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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Dividend Stocks

Regis Resources

Gold grades for resources yet to be converted to reserves at Duketon are on about 30% below reserves and if converted will likely be far less profitable. If developed, the McPhillamys mine should add another mine with just under 10 years of reserves in the medium term. Excess returns for the five-year forecast period are a function of sound acquisitions and developments. However, it will be difficult to replicate this investment success. The potential development of McPhillamys is likely to come at a higher unit capital cost and generate lower returns than the existing operations.

Regis’ gold mines do not represent in-perpetuity businesses, and this is a key reason we see the shares as overvalued. To illustrate the importance of finite life, if we were to assume production continued indefinitely, our fair value estimate would almost double to around AUD 7 per share. Reserves at the operating Duketon mines are sufficient for just over five years production at forecast fiscal 2020 rate. Short reserve life means additional resources, in the shape of exploration and development expenditure, will need to be spent to extend operations. But ultimately there’s no guarantee exploration will be successful.

Profile

Regis Resources is one of Australia’s largest gold companies, producing around 350,000 ounces of gold per year. Cash costs are below the industry average. Operating mines are located in Western Australia, which brings relatively low sovereign risk. Management has a sound operating track record and an appropriate bias towards strong balance sheets and dividends; however, the gold price and new investments will be the primary arbiters of long-term returns. Development of the McPhillamys deposit in New South Wales, if approved, should add approximately 200,000 ounces of gold production a year in the medium term.

 (Source: Morningstar)

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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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Dividend Stocks

Qube Holdings Ltd– Weathering the Storm

However, Qube’s strategy to consolidate a fragmented industry should deliver above-market rates of growth and scale benefits. Qube is developing the Moorebank intermodal terminal and warehouses, located on the Southern Sydney Freight Line, to help alleviate congestion at Port Botany and drive efficiencies in the distribution supply chain. Moorebank, on full completion and ramp-up, should materially contribute to group earnings and deliver a strong competitive advantage for the group’s logistics operations.

Key Investment Consideration

  • Logistics and bulk operations are cyclical and highly dependent on container and bulk volumes. Operating conditions are challenging, with COVID-19 and tough competition pressuring margins and volumes.
  • Our forecasts assume mid single-digit revenue growth in the medium term for Qube, supported by organic growth, scale benefits, investment in new projects, and acquisitions.
  • The development of Moorebank as an intermodal precinct should significantly improve the economics and efficiency of managing container volumes to and from Port Botany over rail.
  • Qube’s strategy is to consolidate the fragmented logistics chain surrounding the export and import of containers, bulk products, automobiles, and general cargo, to create a more efficient and cost-effective supply chain. The business has enjoyed some successes to date, though significant scope for industry consolidation remains.
  • There is significant potential to increase efficiency through vertical integration of port logistics services. Qube will attempt to deliver on this strategy through consolidation and integration.
  • The Moorebank Intermodal Terminal should become a key piece of Sydney’s transport infrastructure, driving
  • strong returns for Qube.
  • Senior management has a proven track record in the port logistics segment and has demonstrated an ability to generate strong returns for shareholders.
  • A corporate structure of associate companies, acquired businesses, and newly purchased assets limits transparency. Meanwhile, a strategy focused on acquisitions adds integration risk. OWhile Qube’s long-term prospects are attractive, its businesses are cyclical and cash flow may be affected by a deterioration in economic conditions.
  • There are still risks surrounding the development of Moorebank and other projects. Currently trading on a high P/E ratio, any disappointments could hit the share price hard.
  • A key positive is the firm’s strengthening financial health, which will get a major boost if the Moorebank Logistics Park, or MLP, is sold. Net debt/EBITDA was a relatively aggressive 3.8 times in fiscal 2020, and could fall below 1 times if Moorebank sells, which we consider conservative.
  • The sale of MLP is progressing well. After receiving nonbinding indicative offers from a range of potential suitors, Qube has entered exclusive negotiation with LOGOS Property Group, an Asia Pacific property investor. There is no guarantee an attractive offer will be made but values for good-quality industrial property are holding up well, as seen in Goodman Group’s security price. The coronavirus hasn’t hurt–online shopping, which requires investment in logistics and industrial property, is booming and interest rates have reduced.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

Medibank Private Ltd– Will Grow Earnings

Operating in a heavily regulated industry, Australian health insurers typically produce stable and defensive earnings and, in our opinion, Medibank is well placed to produce solid long-term earnings growth. Future changes to regulations could hurt Medibank’s prospects, but we don’t believe the government would materially damage the viability of the private health insurance sector in Australia. Growth is supported by government reliance on private health insurers to partially fund escalating healthcare costs. Government policies and incentives encourage participation, with 53% of the population covered for private hospital and/or ancillary health insurance.

Key Investment Considerations

  • Smaller players on thin margins may need to reign in customer acquisition spend if industry wide claim inflation is not slowed. Medibank can continue to generate attractive returns.
  • Mid-single digit earnings and dividend growth, with Medibank’s ability to pay out 75% to 85% of earnings as dividends sustainable.
  • Medibank is Australia’s largest private health insurer, with 1.8 million policyholders covering approximately 3.5 million people under the Medibank and ahm brands. Medibank Private was established in 1976 to bring increased competition to the private health insurance industry, with the government selling the business in 2014 via an initial public offering. The ahm business was acquired in 2009, with Medibank successfully using the brand to grow its share of younger customers. The dual brand strategy has successfully allowed the group to offer differentiated pricing and messaging to grow members and profits. Medibank has over 400,000 policyholders under the ahm brand, up from only 160,000 in 2010. In our opinion, Medibank offers steady long-term defensive earnings growth.
  • There are 37 registered health insurers in Australia, with the top five accounting for around 80% of the market by policy numbers. Despite the “free” universal public system in Australia, close to 44% of Australia’s population of 25.5 million 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. Long-term growth prospects are supported by government reliance on private health insurers to partially fund escalating healthcare costs. With an ageing population, higher demand for more intense healthcare will further pressure the public health system.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

McMillan Shakespeare Ltd

McMillan is the leader in providing salary packaging and novated leases in Australia, and enjoys strong long-term relationships stemming from also being the first outsourced salary packaging service provider in the country. Its integrated business model allows cross-selling of products and also provides bargaining power when sourcing motor vehicles from dealers.

However, these advantages have not delivered significantly higher operating margins than its other major peer, SmartGroup Corporation. McMillan also lacks pricing power, having had to reduce margins to retain its largest employer customer–the Queensland state government—in 2016. Furthermore, the industry’s relatively low capital requirements suggests that barriers to entry are low.

Major risks include material changes to the current fringe benefits tax, or FBT, concessions in Australia, and an economic downturn which will affect employment conditions. These risks have certainly been amplified in the prevailing COVID-19 outbreak, which is likely to see higher unemployment and a recession. Such an environment would reduce demand for salary packaging and novated leases.

Australian government has laid out around AUD 320 billion in fiscal stimulus to date (or about 16% of GDP), with potentially more follow-ups. It’s possible that a future Australian government could revisit the FBT regime to generate more revenue in the face of federal budget deficits. If this were to occur, the high growth and returns generated by McMillan’s salary packaging and novated leasing business–its main source of revenue–would be compromised.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.