Investment Thesis

• Relative to major banks, BEN trades at fair value in our view, on 13.2x one-year forward price to earnings, 0.9x price to book and dividend yield of ~5.0%. 
• Strong franchise model with funding predominately by way of deposits. 
• Expected low levels of impairment charges (especially as a low interest rate environment helps customers and arrears). 
• Continued strong cost discipline, improving efficiency and boosting performance. 
• Advanced accreditation in progress (which may improve ROE). 
• Potential pressure on net interest margins as competition intensifies, with major banks in a low interest rate environment. 
• Leading in terms of customer satisfaction and net promoter metrics, which are increasingly key in a period where trust is paramount.

Key Risks

• Intense competition for loan growth, combined with further discounting. 
• Volatility in Homesafe earnings. 
• Increase in bad and doubtful debts or increase in provisioning. It is to monitor the asset quality of Rural Bank and Great Southern portfolios. 
• Funding pressure for deposits and wholesale funding.

FY21 Results Highlights

• Statutory net profit of $243.9m, up +67.3%. Cash earnings after tax of $219.7m, up 1.9%. Cash earnings per share of 41.4cps declined -5.5%. Total income was $849.0m, up +3.3%. Operating expenses of $517.4m, down -3.1% as BEN was able to drive cost reductions across the business. 
• Net interest margin of 2.30% was down 7bps, reflecting “active pricing and volume management for lending and deposits, despite lower lending rates due to a mix of growth and competitive new business rates”. Core BEN NIM of 1.97% was up +6bps on 2H20 NIM of 1.93%. Management noted the December 2020 exit NIM was -3bps lower, which again highlights margin pressure remains from front book/back book repricing. However, we expect this to be offset by favourable funding costs. 
• Bad and doubtful debts of $19.5m, declined – 15.9%, and comprises 6bps of gross loans. This was a solid outcome and we are likely to continue to see lower BDDs in the near-term. However, we remain cautious of this trend further out as government assistance starts to pull back. 
• Common Equity Tier 1 of 9.36%, improved 36 basis points on the pcp, above APRA’s ‘unquestionably strong’ benchmark.

Company Profile 

Bendigo and Adelaide Bank Ltd (BEN) offers a variety of banking and other financial services including internet banking, housing finance, retail and business banking, commercial finance, funds management, treasury and foreign exchange services, superannuation and trustee 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.

Investment Thesis:

• Attractive dividend yield of 5.4%. 
• Market-leading position in New Zealand. Dominant market share in Mobile, Broadband and is the leader in IT Services. 
• Strong capacity for growth demonstrated across all segments, with IT expected to continue to be a key driver as more consumers and businesses migrate to the Cloud. 
• Investments in Broadband and the roll-out of 4.5G should see its lagging broadband segment improve.
• Multi-product offerings provide interesting points of differentiation from other telco providers. 
• Implementation of “Agile” leading to further cost reductions and operating efficiencies. 
• Increasing customer demand for higher-margin cloud-based services. 
• Increases in ARPU growth and connections despite weak industry conditions 
• SPK still commands a strong market positions and has the ability to invest in technologies and areas which could provide room for growth.

Key Risks:

• Unsuccessful migration of copper wire customers resulting in earnings drag in May due to weather conditions. 
• More competition in its Mobile and Broadband segments leading to aggressive margin contraction, especially as products become commoditized. 
• Risk of cost blowout (for instance in network upgrades or maintenance). 
• Churn risk. 
• Balance sheet risk (including credit ratings risk) should earnings decline due competitive and structural risks. 
• Reduced flexibility and increased net debt if unable to fund total dividend by earnings per share 
• Any network disruptions/outages.

Key highlights:

• SPK’s earnings were negatively impacted by Covid-19 with ongoing loss of mobile roaming revenues and lower growth broadband and prepaid markets.
• EBITDA was up +0.4% to $502m, despite Covid-19 impacts, offset from strong cost controls.
• Margin of 27.4% was 60bps lower than the pcp. NPAT was -11.4% lower to $148m, driven by a $29m increase in depreciation and amortisation charges resulting from the shorter asset lives of new digital technologies, and higher depreciation related to customer and property leases.
• Operating expenses declined $30m, or -2.3%, offsetting revenue declines
• NPAT was -11.4% lower to $148m, driven by a $29m increase in depreciation and amortisation charges resulting from the shorter asset lives of new digital technologies, and higher depreciation related to customer and property leases.
• Free cash flow of $113m, was up $63m over the pcp on tight management of working capital resulting in higher cash conversion rate of 102%.

Company Description: 

Spark New Zealand Ltd (SPK) is a New Zealand based telecommunications company. SPK’s key services are the provision of telephone lines, mobile telecommunications, broadband services and IT services. Its key product offerings are Spark Home, Mobile & Business, Spark Digital, Spark Ventures, and Spark Connect. The Company operates four main segments: (1) Spark Home, Mobile & Business; (2) Spark Digital; (3) Spark Connect & Platforms; and (4) Spark Ventures & Wholesale.

(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.