Business Strategy and Outlook
Unibail-Rodamco-Westfield or URW, was formed in 1968, and it acquired several large malls through to 1995, and offices thereafter. In 2000 it launched a conventions and exhibitions business and is now the European leader in that sector. In 2007 Unibail merged with Rodamco, becoming the largest retail REIT in continental Europe. The group expanded into the United Kingdom and United States via the acquisition of Westfield in 2018.
The Westfield acquisition was via a combination of cash and scrip, and management committed to noncore asset sales to reduce debt. Progress was good until the COVID crisis crimped its previous earnings certainty, and market sentiment toward URW. The group’s assets remain high quality, owning centres that are among the best in Europe and the United States. Its iconic assets include the Carrousel du Louvre in Paris, Westfield Mall of Scandinavia in Stockholm, Westfield centres at Stratford and Shepherd’s Bush in London, the Westfield World Trade Centre in New York, Westfield Valley Fair in the San Francisco region, and many others. It is foreseenURW’s malls to perform strongly once economic conditions return to approximately normal. However, URW’s large debt load combined with an earnings hole of unknown duration has put the balance sheet under pressure.
URW was able to issue debt during the COVID crisis at cheap prices (albeit slightly higher than 2019 levels), but needs to reduce debt. In November 2020, shareholders rejected a proposed EUR 3.5 billion equity raising. URW may instead exit its more than EUR 10 billion of assets in North America, sell more than EUR 2 billion of assets in Europe, pay no distributions until 2023, and cut development spend. Given the fast-changing landscape, it wouldn’t be of surprise to see further adjustments to the strategy, with management taking an opportunistic approach, with options including full or partial asset sales, development partnerships.
Financial Strength
URW is under financial pressure due to its high debt load combined with a hole in its earnings from coronavirus shutdowns, social distancing, and related economic damage. Its loan to valuation ratio of 42.5% (pro forma, as at Dec. 31, 2021) is excessive in Analysts’ view. A proposed EUR 3.5 billion equity raising was rejected by shareholders in November 2020, URW instead raising cash through European asset sales over 2021 and 2022, and potentially EUR 10 billion of sales in North America. It is assumed the capital proceeds will be used to repay debt, and are confident gearing can be brought under 35%, however, to go much lower than that will require favourable conditions for asset sales, which could take time. If the economy approaches normal conditions and other planned cash collection/retention measures proceed, the company should be on a firmer footing. However, if COVID-19 variants result in consumer aversion to public places well into 2022, it is possible URW would have to raise equity again. In the event of dangerous new variants that require longer restrictions on retail trading, there is a remote risk this could completely wipe out current securityholders, though this would be an extreme scenario. A prolonged rise in interest rates is also a risk, though URW’s long-dated debt profile and leases linked to CPI and tenant sales provide some protection from this.
Bulls Say’s
- COVID-19 vaccine rollouts, and the milder omicron virus variant, should help URW’s rents and asset sales in coming years.
- URW tenants have recovered to sales numbers near pre-COVID-19 levels. Though not maintained, this suggests that rents should eventually recover to preCOVID-19 levels once pandemic issues are in the past.
- Although e-commerce competition is intense, a lot of the damage has already been done. URW’s affluent catchments remain desirable for retailers, who require a physical presence to maintain their brand and customer service standards.
Company Profile
Unibail-Rodamco-Westfield, or URW, owns a portfolio of quality malls, about two thirds in continental Europe. Since acquiring Westfield in 2018 URW also has about 10% in the U.K. and about 25% in the U.S., but it plans to drastically reduce exposure to the latter. More than 90% of rent comes from shopping centres, the remainder from offices, mostly Paris, as well as some offices attached to mixed-use assets around the world, and a similar amount from a conventions and exhibitions business in France.
(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.
Western Asset Australian Bond is a compelling choice for domestic fixed-interest exposure owing to its bestin-class team and straightforward approach. Anthony Kirkham, head of investment/portfolio manager, is the leader of this strategy, and we have high regard for his investment knowledge and skills.
Approach
The philosophy of the team is to identify mispricings within sectors and securities allocating active risk in areas in which it has conviction while ensuring the portfolio remains diversified to avoid singular themes being pervasive through the portfolio. The team takes account of global macro insight from the global investment strategy committee and overlays its domestic market knowledge to come up with a base-case expectation looking forward six to nine months depending upon their conviction. In addition to this, the team develops multiple upside and downside scenarios as a risk-management framework.
Portfolio
The portfolio can invest across government, semi-government, supranational, credit, securitised assets, inflation-linked bonds, and cash. As of November 2021, over 40% of the portfolio was invested in investment grade corporate bonds, around 25% in semi-government issues, 20% in government, 10% in supranational, with a small amount of mortgage-backed and asset-backed securities. Active duration moved short relative to the benchmark around mid-2021 but came back in line with the index around year-end. Similar to most Australian bond managers, they entered 2021 overweight in credit, indicative of their opportunistic profile.
People
The fund is managed by a seasoned team of investors who remain dedicated to this strategy. The team is led by Anthony Kirkham, who has had more than 30 years of wider experience, including nearly two decades at Western Asset Management and leading this strategy since 2002. Kirkham has credit analyst, dealer, and portfolio manager experience working for Commonwealth Bank, Metway Bank, RACV Investments, and Citigroup. He is supported by Damon Shinnick, who is a portfolio manager with a focus on credit portfolios.
Performance
This strategy has performed well over the medium and long term, especially compared with peers. It has delivered returns above the Bloomberg AusBond Composite Index, net of fees, over the past decade. That is ahead of its target return of 75 basis points (gross of fees) over the benchmark and market cycle. A tracking error of 100 basis points is targeted. Perhaps more impressive, though, is that these results put the strategy’s flagship A share class in the first quartile of its Morningstar Category over the trailing three, five, and 10 years to December 2021. Sector allocations and credit exposure continue to drive performance.
(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.
Business Strategy and Outlook:
Terex provides customers an extensive product portfolio consisting of aerial lifts and materials processing equipment. Terex will continue to be one of the top companies in the heavy equipment industry, with strong brands that resonate with users across construction, industrial, utility, mining, and residential markets. Customers value Terex’s high-quality and strong-performing products, which also have good residual values. Terex also helps customers reduce their total cost of ownership through improved operational and fuel efficiency, limited machine down-time, and consistent parts availability.
The company’s strategy shifted in late 2015, when it repositioned its operations around two core segments, aerial work platforms and materials processing equipment and divested its unprofitable construction equipment, material handling and port solutions, and mobile cranes businesses. Company’s two core segments are market leaders in their respective industries. In aerial lifts, its Genie brand is highly regarded and offers customers a full line of products, including booms, scissor lifts, and telehandlers. The Genie brand also provides customers with valuable product features, such as safety, accessibility, and capacity, allowing Terex to achieve better pricing.
Financial Strength:
Terex maintains a sound balance sheet. Total debt at the end of 2021 stood at $674 million, which equates to a net debt/adjusted EBTIDA ratio just above 1. The company’s net leverage ratio declined significantly in 2021, as management paid down a substantial portion of debt $503 million. Terex will generate close to $300 million in free cash flow, supporting its ability to return free cash flow to shareholders. Looking ahead, management should focus on growing its dividend and tuck-in acquisitions to grow its two core segments. Management is determined to rationalize its manufacturing footprint and reduce its selling, general, and administrative spending to improve cost efficiencies. The company’s cash position as of year-end 2021 stood at $267 million on its balance sheet. The company has access to $600 million in credit facilities. Terex maintains a strong financial position, supported by a clean balance sheet and strong free cash flow prospects.
Bulls Say:
- Increased infrastructure spending in the U.S. and emerging markets could result in more downstream equipment purchases (materials processing), driving higher sales growth for Terex.
- Non-residential construction spending may begin to recover from pandemic lows, creating demand for Terex’s aerial products.
- The aging aerial fleet could lead users to buy newer models with advanced features, boosting sales of Terex’s aerial lifts.
Company Profile:
Terex is a global manufacturer of aerial work platforms, materials processing equipment, and specialty equipment, such as material handlers, cranes, and concrete mixer trucks. Its current composition is a result of numerous acquisitions over several decades and a recent shift to focus on its two core segments after divesting a handful of underperforming businesses. The company’s remaining segments see heavy demand in nonresidential construction as well as in maintenance, manufacturing, energy, and materials management.
(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.
Business Strategy and Outlook
Seek captures 90% of total time spent online searching for jobs, dominating the Australian market. This dominance within a small niche global geographic market, built through a first-mover advantage, represents a strong competitive advantage given its network effect. Australians view seek.com.au as their first port of call for looking for employment, which is why we ascribe a narrow moat to the company.
Seek’s international investments offer strong growth potential. Through a close working relationship with investment group Tiger Fund, Seek has acquired minority shareholdings in the number-one online job sites in Brazil, Mexico, Indonesia, Thailand, Malaysia, the Philippines, and China. Low Internet penetration is a common feature among these countries while gross domestic product growth rates remain comparatively high. The Chinese investment, Zhaopin, is of particular interest, as funds continue to be reinvested back into further establishing its growing online market share. Internet data indicates that Zhaopin and rival 51Job continue to trade the desired number-one market position back and forth from month to month. Morningstar analysts view Seek as an entrepreneurial organisation that is unafraid to create new concepts and push the boundaries in offering a range of new services within education and job-seeking to an online market that is rapidly evolving, compared with traditional business models.
Morningstar analysts have increased our fair value estimate for narrow-moat rated Seek by 8% to AUD 21.50 per share following its stronger than expected first-half financial result. The strong result partly reflects the currently tight job market in Australia but also more maintainable improvements, such as higher revenue per advertisement. The fair value increase reflects a combination of the time value of money boost to our financial model and higher earnings forecasts. For example, we’ve increased our revenue CAGR for the “core” ANZ business to 11% from 8% over the next decade and increased its average EBITDA margin to 63% from 62% over this period.
Financial Strength
Morningstar analysts have increased our fair value estimate for narrow-moat rated Seek by 8% to AUD 21.50 per share following its stronger than expected first-half financial result. The strong result partly reflects the currently tight job market in Australia but also more maintainable improvements, such as higher revenue per advertisement. The fair value increase reflects a combination of the time value of money boost to our financial model and higher earnings forecasts. For example, we’ve increased our revenue CAGR for the “core” ANZ business to 11% from 8% over the next decade and increased its average EBITDA margin to 63% from 62% over this period.
Bulls Say
- Seek has a dominant position in the Australian market underpinned by a network effect-based economic moat. This enables strong cash generation to fund other overseas businesses.
- Seek has successfully diversified beyond its core Australian business to build a global online employment marketing group.
- The network effect, epitomised by successful online market Titans such as Google, eBay, and Facebook, demonstrates the virtuous circle of the largest audiences attracting more and more users because of audience size.
Company Profile
Seek operates the dominant Australian online job advertising website, capturing 90% of time spent online looking for jobs. It also has an education division that provides vocational courses online. Overseas investments provide Seek with market-leading positions in the online jobs market in Asia and Latin America.
(Source: Morningstar)
- Relative to the pcp: (1)
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.
Business Strategy and Outlook:
Material inflation is occurring in the home appliances category and presents both upside and downside risk to earnings. Management estimates prices for appliances, representing most sales at The Good Guys on estimate, have risen on average by about 8%. Higher average unit prices could bolster revenues in the second half, even if sales volumes decline as expected. However, relatively high inflation in relation to growth in consumers disposable income could weaken demand further, offsetting the positive impact. Management hasn’t yet observed any unusually high inflation in consumer electronics, the key category at JB Hi-Fi stores.
Higher online sales penetration and robust in-store sales at stand-alone stores offset the drop-in footfall to JB Hi-Fi’s mall stores. Low-single-digit group sales growth held up at similar levels to the December quarter-though continue to forecast a decline in the second half and sales decreasing by 3% in fiscal 2022.
Financial Strength:
A 2% decline in group sales and AUD 288 million in net profit after tax were pre-announced in January 2022. However, a surprise off-market buyback perhaps explains a 5% uptick in the shares following the release. JB Hi-Fi is returning AUD 250 million in funds via the buyback, following two strong years of trading which has resulted in an under-geared balance sheet and significant franking credits. The buyback price will be between 8% and 14% below the five-day volume-weighted average price, or VWAP, to April 8, 2022. A capital component of AUD 3.18 per share will be paid, with the remainder in the form of a fully franked dividend. At AUD 43.00 analysts estimate JB Hi-Fi will buy back 5.8 million shares or 5% of currently issued capital. While the expected buyback price is lower than current share prices, Australian taxpayers who have a low marginal tax rate could benefit materially from participating versus selling shares on market.
JB Hi-Fi declared a fully franked dividend of AUD 1.63 per share, representing a 65% payout ratio of first-half underlying earnings.
Company Profile:
JB Hi-Fi Limited is a specialty retailer of branded home entertainment products. The group’s products particularly focus on consumer electronics, electrical goods, and white goods through its JB Hi-Fi, JB Hi-Fi Home, and The Good Guys stores. The company primarily operates from stand-alone destination sites and shopping centre locations in Australia and New Zealand, but the online platform is becoming increasingly important.
(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.
