Investment Thesis:
- Short term challenges being cyclical in nature when coupled with the impacts of the Covid-19 brings muted outlook for the company in terms of the earnings
- ALD operates in the market which offers very high market entry barrier restricting the number of players
- Replication of the infrastructure and supply chain process is difficult
- Refinery capacity is set to be exceeded by the regional product growth over the duration of next five years, thereby putting the Lytton refinery business in top notch position
- Acquisitions would further lead the way towards market expansion
- Refining to be provided less exposure
- Significant growth is expected to be delivered during the medium to long term duration by revamping retail/convenience model
- Management of capital in an efficient manner
Key Risks:
- Lytton refinery facing operational and incident risks
- Impact of Coronavirus on refinery margins
- Continuation of drop in refinery margins
- Refinery and retail facing competitive pressures
- Currency movements in adverse directions (USD and AUD)
- Longer term disruption from Electronic Vehicles (EV).
- Regulatory risk.
- Class actions by franchisees or employees (e.g. employee underpayments by franchisees).
Key Highlights:
- ALD reported 70.8% increase in 1H21 RCOP NPAT to $205m mainly driven by Fuels & Infrastructure business, which delivered an +85% increase in EBIT largely due to the improvement in profitability of the Lytton refinery and the receipt of the Federal Government’s Temporary Refining Production Payment of $40m
- Strong balance sheet with high amount of liquidity and proforma leverage of 1.6 times
- Net borrowings were $735m, i.e. up by 69% over 2H20, reflecting the $300m off-market buy-back during the period
- Shareholder returns continued with the Company completing $300m off-market buy-back
- Declaration of a fully franked interim dividend of 52 cps, representing a 61% payout ratio of 1H21 RCOP NPAT
- A non-binding indicative proposal to acquire Z Energy (a Wellington headquartered fuel distribution and retailing company that owns and manages 330 fuel stations and truck shops in NZ) funded through new debt facilities, proceeds from any divestments and an equity issuance in the order of ~A$600m
- The segment of Fuels & Infrastructure (ex-Lytton) RCOP EBIT declined 7% to $159m primarily due to a reduction in earnings from Trading and Shipping as the elevated imported volumes in 2020 were replaced by Lytton refinery production in 1H21.
- Total Convenience Retail segment fuel sales volumes were 2.05bl, +3% higher over pcp (+5% on a like-for-like basis), however, earnings from fuel sales declined due to diesel margins lagging movement in crude prices
Company Description:
Ampol Limited (ALD) purchases, refines, distributes and markets petroleum products in Australia. The company’s products include petroleum, motor oil, lubricants, diesel fuel and jet fuel. Caltex also operates convenience stores, fast food stores and service stations throughout Australia. ALD operates one refinery (Lytton, QLD), 25 terminals, 107 depots and about 2,000 service stations and diesel/truck stops. The Caltex infrastructure network is a key competitive advantage
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
- Leveraged on ongoing administration outsourcing by retail super funds.
- LNK is still vulnerable to any further increase in PEXA’s valuation.
- Fund Administration contract wins and increased market activity
- Delivering on its offshore expansion storey successfully.
- The cost out programme improves efficiency.
- Uncertainty about Brexit will be removed, as will the potential discount assumed in current valuation / share price.
- Bolt-on acquisitions that add value.
- Currency movements that are favourable.
- Capital management – As part of the FY21 results, a $150 million on-market buyback was announced.
Key Risks
- Lower market activity and business / investor confidence.
- Fund administration lost major client contracts.
- Adverse changes in super regulatory environment e.g – super account consolidation.
- Lack of product development.
- Fluctuation in currency movement.
- Discontinuation of the current share buyback to conduct a large-scale acquisition.
FY21 Results Highlights
- Revenue of $1,160m was a -6% decline, “due to the impact of Covid-19 on the European business and regulatory changes in retirement and superannuation solutions resulting in lower following the transfer of many low balance inactive accounts to the ATO”.
- Operating EBIT of $141m was a -21% decline.
- Operating NPATA of $113m was -18% lower PEXA’s positive $32.7m contribution.
- Statutory NPAT of -$163m, was a worst result that the -$103m in FY20, due to non-cash impairment charge of $183m for the Banking & Credit Management business which continues to see low levels of new activity because of Covid-19 and high levels of government intervention reducing portfolio sales in this market.
- LNK saw net operating cash flow of $293m, down -8%. Net operating cash flow conversion was 114%.
- LNK retained a strong balance sheet with net debt was down $296m to $455m and leverage ratio (Net Debt/EBITDA) down from 2.7x to 1.8x (below the bottom of guidance leverage ratio).
- LNK received $180m of net proceeds received from the PEXA IPO.
- Company announced an on-market buyback of up to $150m.
Company Profile
Link Administration Holding Ltd (LNK) is the largest provider of superannuation fund administration services to super fund in Australia. Further, the Company is also a leading provider of shareholder management and analytics, share registry and other services to corporates in Australia and globally. The Company has 5 main divisions:(1)Retirement & Super Solutions (RSS), (2) Corporate Markets (CM), (3) Technology &Operations (T&O), (4)Fund Solutions (FS) and (5) Banking & Credit Management (BCM). LNK was listed on the ASX in October 2015.
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
- China’s investigation outcomes are better than expected.
- There is a significant opportunity to expand its Asian business (reallocation opportunities).
- Premiumization and good cost control provide opportunities for group margin expansion.
- The recovery in America’s business could result in significantly higher margins.
- Currency movements in favour (due to a falling AUD/USD).
- Additional capital-management initiatives.
Key Risks
- Further deterioration (or worst than expected) outcome from china tariff / investigation.
- United States turnaround disappoints.
- Consumptions of wine decreases in the key market.
- Unfavorable condition in demand and supply of wine’s global market.
- Increase competition in key market.
- Currency fluctuations that are unfavorable (negative translation effect).
- Changes in Chinese policy and/or demand have an impact on volume growth.
FY21 Results Highlights
- EBITS of $510.3 Million, was in line with the pcp, on EBITS margin 0.6ppts higher to 19.9%. On an organic basis, EBITS was up +3%, reflecting top-line growth driven by $10-30 Premium portfolio and improved CODB, partially offset by ongoing impacts from the pandemic, significantly reduced shipments to Mainland China (due to import duties) and higher COGS on Australian sourced wine.
- Strong operating cash flow reflects a lower Californian vintage intake and adjusted Australian vintage, in addition to shift in regional sales mix in Asia. Cash conversion of 100.8% (or 96.9% excluding the changes in non-current luxury and premium inventory) was in line with TWE’s target of 90% or above.
- Net debt declined $376.5m to $1,057.7m as a net debt to EBITDAS of 1.6x improved from 2.1x at year end. TWE has total available liquidity of $1.2billion at year ended versus $1.4billion at FY20 end.
- Return on Capital Employed improves 0.6ppts to 10.8%.
- The board declared a final dividend of 13.0cps, up and resulted in the full year dividend of 28.0cps (equating to payout of 65% of NPAT, consistent with TWE’s long term dividend policy).
Company Profile
Treasury Wine Estates (TWE) is one of the world’s largest wine companies listed on the ASX. As a vertically integrated business, TWE is focused on three key activities: grape growing and sourcing, winemaking and brand-led marketing. Grape Growing & Sourcing – TWE access quality grapes from a range of sources including company-owned and leased vineyards, grower vineyards and the bulk wine market. Winemaking – in Australia, TWE’s winemaking and packaging facilities are primarily located in South Australia, NSW and Victoria. The Company also has facilities in NZ and the US. Brand-led Marketing – TWE builds their brands through marketing and distributes its products across the world.
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.
Growth in Aurizon bulk business to offset stagnant coal. Coal prices have recovered but downward pressure is likely to remain on haulage rates and volumes due to intense competition. The coal-haulage market is highly concentrated, with few competitors and a few large customers. Commercial contracts, which are typically five to 12 years in length, underpin defensive revenue with customer commitment to take-or-pay (around 70%), pass-through of rail network access fees, and annual consumer price index increases. These contracts have helped insulate the firm from volatility in coal demand and supply factors to date.
Aurizon’s non-coal bulk-haulage operations are typically low-margin and extremely variable, with customers based in the volatile agricultural, manufacturing and mining sectors. Aurizon’s iron ore customers are typically higher-cost juniors. The long-term outlook remains challenging for these firms, despite recent iron ore strength, as low-cost majors continue to bring on new supply, despite China slowing. Aurizon’s earnings from iron ore haulage could disappear over the medium term.
Aurizon’s Central Queensland Coal Network, or CQCN, provides essential transport infrastructure for the main metallurgical-coal-mining region in Australia. The CQCN is leased from the Queensland government until June 2109, with competitor access and access charges strictly regulated by the Queensland Competition Authority. Despite being highly regulated and needing large capital investment, the CQCN is a monopolistic rail system that provides Aurizon with highly predictable long-term revenue. Typically, regulated tariffs are the main source of Aurizon’s revenue from the CQCN, with the access undertaking set every three to five years. However, until 2027 network tariffs are set under an agreement with customers.
Financial Strength
Aurizon’s financial health is sound. As of June 2021, gearing stood at 45.6%, up from 37% in 2016 and 30% in 2015.Net debt/EBITDA of 2.4 times in fiscal 2021 is reasonable, and should fall modestly in the medium term in the absence of acquisitions or share buybacks. The firm pays out up to 100% of underlying NPAT as dividends. Further share buybacks are also possible, funded by proceeds from asset sales and debt. Cash flows are relatively reliable thanks to long-term take-or-pay coal-haulage contracts and the regulated rail network business. Capital expenditure has been fairly flat since fiscal 2017 at roughly AUD 500 million each year, mainly comprising stay-in-business capital expenditure. Aurizon has completed large-scale rail network extensions and is focused on cost-cutting. Investment in the bulk division is increasing but free cash flows should remain strong.
Bulls Say
- Restructuring initiatives should substantially decrease operating costs.
- Improving efficiency, essential transport infrastructure, and reasonable level of debt should ensure steady earnings, except in the most difficult circumstances.
- Aurizon is reducing overhead costs and improving network efficiency to generate economic returns.
- The bulk division has good growth prospects, though it is dwarfed by coal-exposed divisions.
Company Profile
Aurizon operates rail haulage of coal, iron ore, and freight, and owns a regulated rail network in Queensland. Bulk export coal haulage from mine to port contributes 40% of earnings. The freight and iron ore segment contributes 10% of earnings and undertakes the rail haulage of bulk agricultural, mining, and industrial products. The rail network, composed of 2,670 kilometres of coal rail network under a 99-year lease from the Queensland government, contributes around half of earnings.
(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.