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Dividend Stocks Shares

National Australia Bank (NAB) delivered a solid FY21 result despite underlying profit declining

Investment Thesis

  • Ongoing share back should be supportive of share price levels.
  • Well capitalized after the capital raising.
  • Expectations of further customer remediation costs.
  • Impairment charges provisioned for in 1H20 with lower risk of further impairments (especially as a low interest rate environment helps customers and arrears).
  • Strong franchise model with management capable of improving below a 40% cost to income ratio (however we do not factor in management’s long-term target of 35%). 
  • Potential pressure on net interest margins as competition intensifies with other major banks in a low interest rate environment. Though we expect these pressures to slightly alleviate as we move into a higher interest rate environment.
  • Improving return on equity with management proving their abilities in recent times to manage profitability in a low interest rate environment.
  • Strong provisioning coverage.
  • A well-diversified loan book.

Key Risk

  • Low growth environment impacting earnings.
  • Potential cuts or reduction to dividends due to low earnings growth. 
  • Intense competition for loan and deposit growth.
  • Normalizing / increase in bad and doubtful debts or increase in provisioning.
  • Funding pressure for deposits and wholesale funding (increased funding costs).
  • Any legal fees, settlements, loss or penalties associated with ASIC or US-based law suits.

FY21 Results Key Highlights:  Relative to the pcp:

  • Revenue declined -2.4% to $16,729m. Excluding large notable items in FY20, revenue was -3.0% lower, on lower Markets & Treasury (M&T) income, which was challenged due to limited trading opportunities.
  • Cash earnings up 76.8% to $6,558m. Excluding FY20 large notable items, cash earnings were up +38.6%.
  • Cash return on equity up 420 basis points to 10.7%.
  • Net interest margin of 1.71%, was 6bps lower due to M&T. NAB saw NIM pressure due to the low interest rate environment, home lending competitive pressures and a mix shift towards more fixed rate lending.
  • Group Common Equity Tier 1 ratio of 13% was up 153bps from September 2020 and includes 29bps net proceeds from the sale of MLC Wealth. Leverage ratio (APRA basis) is at 5.8%. Liquidity ratio quarterly average of 128%. Net Stable Funding Ratio of 123%.
  • Fully franked final dividend per share of 67 cents was up from 30cps in 2H20, and brings full year dividend to $1.27 per share, up +111% from 60cps in FY20.
  • Credit impairment charge write-back of $217m (versus $2,762m in FY20) reflecting forward looking provisions and lower underlying charges.
  • Collective provisions at 1.35 of credit risk weighted assets.

Company Profile

National Australia Bank Limited (NAB) is one of Australia’s largest banks, with the majority of their financial service businesses operating in Australia and New Zealand. The bank also has a presence in Asia, UK and the US. NAB offers banking services, credit and access card facilities, leasing, housing and general finance, international and investing banking, wealth and funds management, life insurance and custodian, trusts and nominee services.  

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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Brokers Call – 17 November 2021

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Daily Report Financial Markets

Japan Market Outlook – 17 November 2021

TOKYO, JAPAN - OCTOBER 01: A stock board displays market indices at the Tokyo Stock Exchange (TSE)2 on October 01, 2020 in Tokyo, Japan. Japan's Tokyo Stock Exchange has suspended all the trading after encountering a technical issue in the morning of October 1, 2020. As of 10:00 am, it is unknown when it will be resumed. (Photo by Yuichi Yamazaki/Getty Images)
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Shanghai Market Outlook – 17 November 2021

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USA Market Outlook – 17 November 2021

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Morning Report Global Markets Update – 17 November 2021

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Australian Market Outlook – 17 November 2021

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Commodities Trading Ideas & Charts

Targa Improves Modeling of Grand Prix and Product Margins

Business Strategy and Outlook

Targa Resources is primarily a gatherer and processor of natural gas with an attractive position in the Permian Basin and other key U.S. shale plays. 

Targa’s longer-term growth picture over the next few years will be its Permian G&P position, liquefied petroleum gas exports, and the ramp-up of the Grand Prix natural gas liquids pipeline. There are few long-term concerns about the G&P business, because of the high level of competitive intensity within the Permian will keep returns extremely low. 

 The future of LPG exports and Grand Prix are quite attractive. LPG exports are largely contracted out to 2022 and sent mainly to Asian and Latin American markets. India remains a potentially attractive option under a government scheme designed to encourage LPG usage. Targa has wisely expanded its export capacity recently, and volumes are at record levels.

The Grand Prix NGL pipeline will be a highly attractive asset that takes advantage of Targa’s position in the Permian Basin to move over 350,000 barrels per day of NGLs by our estimates in 2021 (expandable to 550,000 b/d) to Mont Belvieu, and links Targa assets at both ends of the pipe, giving it more control over the molecule and ability to earn multiple fees. The Grand Prix pipeline will reduce Targa’s costs for NGLs, as it will no longer pay third-party tariffs to transport its NGLs to market.

Financial Strength 

In 2020, Targa’s financial health was weak but  has changed in a strong energy market in 2021 and Targa’s own efforts to fix its balance sheet. Targa has repaid $1 billion in debt in 2021, funded with strong earnings and lots of free cash by cutting the dividend and capital spending, and leverage is expected to reach 3.25 times by year-end, a commendable accomplishment for a firm that has historically run well over 4 times leverage. Still, Targa’s exposure to weaker customers is greater than peers’, as it disclosed that less than half of its revenue by our estimates is from investment-grade or letter of credit-backed customers. Peers tend to be around 75%-85% investment-grade or letter of credit-backed.Targa has boosted the dividend to $1.40 per share annually in November 2021, up from the $0.40 annually it paid out since March 2020. Previously, the payout was $3.64 annually. Share buybacks are now on the menu, as even after the expected Stonepeak repurchase in 2022 for $925 million, Targa will still have about $250 million-$300 million in excess free cash flow.

Bull Says

  • Targa is leveraged to the high-growth Permian, and its Grand Prix pipeline is expected to increase volumes 25% in 2021. 
  • Targa has reduced debt by $1 billion in 2021, which is a good accomplishment for what has historically been a highly leveraged firm. 
  • Targa is a significant fractionation player at the attractive Mont Belvieu hub.

Company Profile

Targa Resources is a midstream firm that primarily operates gathering and processing assets with substantial positions in the Permian, Stack, Scoop, and Bakken plays. It has 813,000 barrels a day of gross fractionation capacity at Mont Belvieu and operates a liquefied petroleum gas export terminal. The Grand Prix natural gas liquids pipeline recently entered full service.

(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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LICs LICs

Loomis Sayles Global Equity Fund: Concentrated portfolio of best global equities

The Responsible Entity (RE) is Investors Mutual Limited who has appointed Loomis, Sayles & Company, L.P as the Investment Manager of the Fund. Loomis Sayles is a global asset manager that was established in 1926 and had over US$350b AUM as at 30 June 2021 across fixed income and equity investment mandates.

The Fund has a long only investment strategy with a fundamental bottom-up investment approach with the portfolio representing the “best ideas” of the investment team. The Fund seeks to deliver a return (after fees and expenses but before taxes) in excess of the benchmark (MSCI All Country World Index) over a full market cycle, which is considered to be 3-5 years. The Manager has an unconstrained mandate with no sector, style or geographic limitations. Stock selection is driven by the fundamental bottom up analysis undertaken by the investment team. The portfolio is concentrated given the investable universe with 35-65 stocks. The Manager has a long-term investment horizon and as such typically has low levels of portfolio turnover. The portfolio is expected to be largely fully invested at all times, with the portfolio typically having a cash position of less than 5%.

Investment Team:

Eileen Riley and Lee Rosenbaum have managed the investment strategy behind the Loomis Sayles Global Equity Fund since 2013. They’re supported by a team of analysts and a solid foundation of interconnected firm-wide resources, enabling them to leverage extensive research capabilities across equity and debt. Collaboration helps ensure capital flows to the team’s best ideas.

Performance:

Global Equity Fund1 month1 yr2 yrs3 yrsSince Inception
Total Return2.70%27.20%19.00%20.00%20.00%
Benchmark*1.10%28.30%14.90%15.40%15.40%
Outperformance1.60%-1.10%4.10%4.60%4.60%

About the fund:

The Loomis Sayles Global Equity Fund seeks to provide a concentrated portfolio of best ideas in global equities. Using foresight and flexibility, the team behind the Loomis Sayles Global Equity Fund look far and wide to pursue attractive, sustainable potential returns. Their sound investment philosophy and disciplined process focus on uncovering drivers of long-term company performance. The research-driven approach is unconstrained by style, sector, or geography, with the flexibility to invest across market capitalisations, while risk management is integral to every investment decision.

This delivers a distinctive yet disciplined approach to global equities investing which looks different to other funds while seeking to deliver potential returns above the benchmark over the long term.

(Source: FNArena, loomissayles.com.au)

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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Property

James Hardie adjusted EBIT was up by 26% to US$205.07

Above view of chef engineer in shirt and tie explaining sketch to manual workers in industry

Investment Thesis

  • Largest producer of non-asbestos fibre cement 
  • Ongoing momentum in the U.S. housing market and global markets. 
  • Fibre cement taking market share from vinyl and other siding products. 
  • Strong R&D program to stay ahead of competition. 
  • Leveraged to a falling AUD/USD. 
  • New CEO may bring a fresh perspective on existing strategy. 
  • Productivity gains. 
  • Investment plan over the next 3 years should deliver solid earnings growth.

Key Risks

  • Competitive pressures leading to margin decline. 
  • Input cost pressures which the company is unable to pass on to customers. 
  • Deterioration in housing starts (U.S., Australia). 
  • Unable to achieve its growth and market share target, which likely see a derating of the stock. 
  • Adverse movements in asbestos claims. 
  • Disappointing primary demand growth (PDG) relative to market expectations. 
  • Manufacturing / operational issues impacting earnings.

2Q22 Results Summary

  • Net sales increased +23% over pcp to US$903.2m, driven by volume growth (up +14%) and price/mix improvement (up +9%).
  • Group adjusted operating earnings (EBIT) were up +26% to US$205.7m, delivering an EBIT margin of 22.8%. Earnings were driven by top line growth and ongoing operational improvement.
  • Segment revenue was up +23% to US$635.3m, driven by exteriors volume growth of +16%. Broadly, top line growth consisted of volume up +14% and price/mix up +9%. EBIT of US$182.5m was up in line with revenue at +23%, with margin softer by -20bps at 28.7% due to higher production and distribution costs.
  • Segment revenue was up +18% to US$144.4m, driven by strong performance in Australia. Price/mix growth in Australia and New Zealand contributed +9% to top line growth, whilst segment volume growth contributed +11%. EBIT was up +15% to US$44.5m, with margin softer -90bps at 30.8% due to higher production & distribution costs and higher SG&A expenses.
  • Segment revenue was up +24% to US$123.5m, driven by fibre cement and fibre gypsum net sales growth of +40% and +20%, respectively. Price/mix contributed +8% to top line growth due to the shift to higher value mix. Adjusted EBIT of US$16.7m was up +50% on pcp with EBIT margin up +250bps to 13.6%. Margin was assisted by lower SG&A expenses.

Company Profile 

James Hardie Industries Plc (JHX) manufactures building products for new home construction and remodeling. JHX’s products include fibre cement siding, backer board, and pipe. The company operates in the US, Australia and New Zealand.

(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

  • Largest producer of non-asbestos fibre cement 
  • Ongoing momentum in the U.S. housing market and global markets. 
  • Fibre cement taking market share from vinyl and other siding products. 
  • Strong R&D program to stay ahead of competition. 
  • Leveraged to a falling AUD/USD. 
  • New CEO may bring a fresh perspective on existing strategy. 
  • Productivity gains. 
  • Investment plan over the next 3 years should deliver solid earnings growth.

Key Risks

  • Competitive pressures leading to margin decline. 
  • Input cost pressures which the company is unable to pass on to customers. 
  • Deterioration in housing starts (U.S., Australia). 
  • Unable to achieve its growth and market share target, which likely see a derating of the stock. 
  • Adverse movements in asbestos claims. 
  • Disappointing primary demand growth (PDG) relative to market expectations. 
  • Manufacturing / operational issues impacting earnings.

2Q22 Results Summary

  • Net sales increased +23% over pcp to US$903.2m, driven by volume growth (up +14%) and price/mix improvement (up +9%).
  • Group adjusted operating earnings (EBIT) were up +26% to US$205.7m, delivering an EBIT margin of 22.8%. Earnings were driven by top line growth and ongoing operational improvement.
  • Segment revenue was up +23% to US$635.3m, driven by exteriors volume growth of +16%. Broadly, top line growth consisted of volume up +14% and price/mix up +9%. EBIT of US$182.5m was up in line with revenue at +23%, with margin softer by -20bps at 28.7% due to higher production and distribution costs.
  • Segment revenue was up +18% to US$144.4m, driven by strong performance in Australia. Price/mix growth in Australia and New Zealand contributed +9% to top line growth, whilst segment volume growth contributed +11%. EBIT was up +15% to US$44.5m, with margin softer -90bps at 30.8% due to higher production & distribution costs and higher SG&A expenses.
  • Segment revenue was up +24% to US$123.5m, driven by fibre cement and fibre gypsum net sales growth of +40% and +20%, respectively. Price/mix contributed +8% to top line growth due to the shift to higher value mix. Adjusted EBIT of US$16.7m was up +50% on pcp with EBIT margin up +250bps to 13.6%. Margin was assisted by lower SG&A expenses.

Company Profile 

James Hardie Industries Plc (JHX) manufactures building products for new home construction and remodeling. JHX’s products include fibre cement siding, backer board, and pipe. The company operates in the US, Australia and New Zealand.

(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.