a diversified portfolio of 86 pub and bottle-shop properties on long leases to Australia’s largest pub and drinks operator. All properties are leased to Australia’s largest pub operator, Endeavour Group. The tenant, Endeavour, was spun out of Australia’s giant supermarket chain Woolworths.
A feature of the leases are their long terms, with most leases starting in November 2003 for a 25-year initial term, with the tenant also having four 10-year options to renew. …ALE benefits from these investments via increased valuations and from market rent reviews in 2018 and 2028. The 2018 rent reviews were subject to a cap and floor of 10% but the 2028 reviews are uncapped. In other years, ALE receives contracted rents that grow in accordance with the consumer price index. Most leases are also on attractive triple-net terms, where the tenant is responsible for most operating costs (other Queensland land tax) and capital expenditures.
Endeavour’s hotel and bottle-shop earnings have grown significantly above the consumer price index since November 2003. Along with other characteristics, independent valuers typically assess market rents at 35%-45% of EBITDA (before rent).
Company’s Future outlook
We expect strong continued earnings growth at its properties, supported by strong population growth and our view that authorities would have a bias toward existing operators in approving liquor and gaming licences, making it more difficult for new entrants.
There is a high degree of uncertainty about the outcome of the 2028 reviews as they will depend on things like interest rates and the regulatory environment at the time. Although our base case is for a positive uplift in rents at the 2028 reviews, there are several risks that could negatively affect pub earnings, including adverse changes in gambling and liquor regulation.
Financial Strength
ALE Property Group is in solid financial health. Credit metrics appear aggressive-net debt/EBITDA over 9 times and interest cover of just 2.4 times-but we are comfortable giving highly defensive revenue under long-term leases to a strong tenant. ALE has been reducing its gearing (net debt/total assets less cash) from 65.2% at the end of fiscal 2008 to 36% in June 2021, well below covenant limit of 65%. Our base case assumes ALE maintains gearing at around current levels. Cap rate compression combined with CPI-linked rental increases has seen fair values of properties increase significantly from fiscal 2014. ALE has no major debt maturities until August 2022 (AUD 150 million), followed by November 2023 (AUD 150 million not including CPI increases). Of net debt, 100% is hedged until November 2025 to mitigate against interest-rate risk. ALE has an investment-grade credit rating of Baa2 (negative outlook) from Moody’s.
Bulls Say
- The REIT enjoys stable income underpinned by long term inflation-linked leases with a strong tenant.
- There is major potential upside to rental income from capped market rent reviews currently underway and uncapped market rent reviews in 2028.
- Astute internal management has a good record of creating shareholder value.
Company Profile
ALE Property Group is an internally managed Australian real estate investment trust with a portfolio of 86 freehold pubs across Australia. It is a stapled entity comprising one trust and a company that acts as a responsible entity. The portfolio is valued at more than AUD 1 billion: 48% in Victoria, 31% in Queensland, 14% in New South Wales, and small exposures to South Australia and Western Australia. All properties are leased to Australia’s largest pub operator, Endeavour Group.
(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.
U.S.-dollar-denominated investment-grade bond market and harnessing the market’s collective wisdom about the relative value of each bond by weighting bonds according to their market value. This is a sound approach because it promotes low turnover, limits credit risk, and is cost-effective, and because the market does a decent job pricing these bonds. The index weights its holdings by market value and is rebalanced monthly. This yields a conservative portfolio, which limits its return potential but also cuts downside risk and makes for a good complement to stock holdings.
Portfolio:
This portfolio mimics the contours of the taxable U.S. investment-grade bond market, engendering a conservative portfolio relative to the intermediate core bond category average. The fund typically courts a similar amount of interest-rate risk, but as of September 2021, its average effective duration of 6.7 years was slightly higher than the category average, which stood at 6.0 years. U.S. Treasuries account for approximately 39% of this fund’s assets, giving the portfolio its conservative bend. Agency MBS and corporate bonds account for about 27% and 26% of the fund’s total assets, respectively.
People:
Schwab’s passive fixed-income portfolio management team has consistently provided tight index tracking performance. Its thoughtful portfolio construction process and continued investment in technology have distinguished it from the pack. Schwab has a narrower, simpler fund lineup than some of its larger peers, so its fixed-income index management team is smaller. However, it makes efficient use of its resources and is well-equipped to deliver cost-efficient and high-fidelity index tracking for the strategies it manages.
Performance:
The fund’s performance during the trailing 10 years through August 2021 has not been spectacular. It lagged the category average by 29 basis points annually. Although it exhibited slightly less volatility, ultimately its risk-adjusted performance (as measured by Sharpe ratio) ranked just outside of the category’s middle third. The fund also held up much better than category peers during the novel coronavirus-driven sell-off.
(Source: Factsheet from www.schwabassetmanagement.com)
Price:
Analysts find it difficult to analyse expenses since it comes directly from the returns. The fees levied by the share class is under cheap quintile. Analysts expect that it would be able to generate positive alpha relative to its benchmark index.
(Source: Factsheet from www.schwabassetmanagement.com) (Source: Morningstar)
About ETF:
Schwab U.S. Aggregate Bond ETF SCHZ boasts a low fee and conservative portfolio, traits that make it a great core bond holding. The fund tracks the Bloomberg Barclays U.S. Aggregate Bond Index, which includes investment-grade U.S.- dollar-denominated bonds with at least one year until maturity. The index weights bonds by market value, tilting the portfolio toward the largest and most liquid issues. This approach also harnesses the market’s collective wisdom about the relative value of each security, a prudent approach for the long term. That said, bond-issuing activity influences the composition of this portfolio. Approximately 70% of the fund’s assets carried a AAA credit rating as of September 2021, while the category average was 57%. The fund’s category-relative performance will largely hinge on the performance of credit risky bonds.
(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.
Investment Thesis
- Based on our valuation, ANN’s share price trades at a >10% discount to our DCF valuation.
- ANN is a quality business with global manufacturing capabilities.
- We believe our 5-yr forward earnings estimates are on the conservative side and capture the moderating growth likely to be seen from the elevated levels experienced in FY21.
- FX translation should be positive for the Company.
- Raw material cost pressures can be shared with customers and suppliers.
- ANN has a strong balance sheet position with flexibility to return cash to shareholders or borrowing capacity for acquisitions
Key Risks
We see the following key risks to our investment thesis:
- Product recall.
- Trade wars escalate, leading to higher tariffs.
- Increase in competitive pressures.
- Adverse movements in AUD/USD.
- Emerging or developed market growth disappoints.
- Any worst or better prices for raw materials.
FY21 key trading metrics
- Sales of $2,027m, up +25.6% (+22.5% in CC) with Healthcare organic growth of +34.8% and Industrial organic growth of +7.1%.
- EBIT of $338m, up +56.0% (+51.4% in CC) with margin improving +330bps to 16.7%, driven by higher production volumes, pricing/mix benefit and SG&A operating leverage, partly offset by elevated labour and freight costs combined with increase in inventory provisions
- Profit Attributable to ANN shareholders of $246.7m, up +57.5% (+48.5% in CC) and EPS of 192.2cps (EPS would have been 193.9cps, without Cloud Computing accounting policy change), up +59.9% (+50.8% I CC).
- Operating Cash Flow of $49.2m (down -74.3% over pcp) representing cash conversion of 60.9%, negatively impacted due to greater investment in working capital to support top line growth along with pricing impact as well as higher capex to increase capacity in a number of higher demanded products. Capex increased +36.5% over pcp to $82.7m, however, remained below management’s $95-105m guidance due to temporary delays to shipments and installation as a result of COVID-19, with management expecting FY22 capex spend to be $80-100m.
- ROCE saw significant improvement (up +590bps to 19.8% pre-tax and up +550bps to 16.8% post tax), predominantly due to strong EBIT growth.
Company Description
Ansell Ltd (ANN) operates two global business units: (1) Ansell’s Industrial segment manufactures and markets multi-use protection solutions specific for hand, foot, and body protection, for a wide-range of industries such as automotive, chemical, metal fabrication; (2) Ansell’s Healthcare segment (Medical + Single Use) offers a full range of surgical and examination gloves covering all applications, as well as healthcare safety devices and active infection protection products. The segment also manufactures and markets single use hand protection. Ansell recently sold its sold its Sexual Wellness Global Business Unit group.
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.
