Investment Thesis :
- Leading market positions with strategic locations in areas with strong population growth.
- Positively correlated with population growth throughout time.
- Increasing digitalization to save costs and improve the supply chain’s efficiency.
- For the core Australian Food segment, key leading indicators (such as basket size / goods per basket) are improving.
- Customer metrics and transaction growth are both improving.
- The momentum of BIG W is expected to continue.
- Capital management post Endeavour deal.
Key Risks:
- The Food & Petrol business is seeing more margin pressure.
- Changing consumer preferences and purchasing trends, as well as increased retail competition.
- Deterioration in balance sheet as a result of lower earnings.
- Unfavourable fluctuation in AUD/USD (international sourcing).
Key highlights of FY 2021:
Following the demerger of Endeavour Drinks, Woolworths Ltd (WOW) posted solid FY21 results and a $2 billion off-market buy-back. Relative to pcp:
- During the year Woolworth reported sales of $67,278 million were up 5.7 percent (online sales of $5,602 million were up 58.1 percent).
- The revenue of Woolworth is from following segment (1) Australian Food (2) ) New Zealand Food (3) ) New Zealand Food (4) Discontinued operations.
- In the year 2021 , 80%of sales revenue of Woolworths (continuing operation )was from Australia amounting to $44,441m , 12% of sales revenue was from new zealand zone amounting to $6,652,8% of revenue from BIG W amounting to $4,583 and sales from discontinued operation “Endeavour Drinks” amounted $10167.
- During the year, the firms EBIT was $3,663m, up by 13.7% EBIT from continuing operations was $2,764m, up by 11.1% driven by a 9% increase from Australian Food and an increase of over 300% from BIG W.
- Group EBIT margin was 5%, up by 28bps.
- Cost of doing business increased 16bps due to higher CODB in NZ and higher contribution from Big, which operates on a higher CODB.
- NPAT of $1,972m, up by 22.9%.
- The Board declared a final dividend of 55cps which brings FY21 dividend to 108cps, up by 14.9%. Shareholders on the record date of 3 September 2021 are eligible for the final dividend of $0.55
$2bn off-market buy-back: WOW announced $2bn capital return via an off-market buy-back. The Buy-Back will be handled through a tender process. . Eligible Shareholders who choose to participate can offer to sell some or all of their Shares to WOW at: (1) a discount to the Market Price of 10% to 14% (inclusive) at 1% intervals; or (2) the Buy-Back Price established by WOW after the tender process is completed (as a Final Price Offer). (1) a discount to the Market Price of 10% to 14% (inclusive) at 1% intervals; or (2) the Buy-Back Price (1) a discount to the Market Price of 10% to 14% (inclusive) at 1% intervals; or (2) the Buy-Back Price, established by WOW. The Buy-Back Price will be determined as the lowest price at which WOW can buy back the targeted amount of capital.
The buyback period begins on September 13 and ends on October 15, 2021. On October 21, 2021, the Buy-Back Price will be paid to successful Eligible Shareholders.
Shareholders benefits from buyback: The Buy-Back Price paid for each share purchased back will be $4.31, with the remaining being a fully franked dividend. The Buy-Back Price may be lower than the price at which one might sell their shares on ASX, but after-tax return may be greater because of personal tax status and the tax treatment of the Capital Component, dividend Component, and franking credits.
Company Profile:
Woolworths Limited (WOW) is an Australian retailer that operates supermarkets, speciality and discount department shops, as well as liquor and electronics stores. Woolworths also produces processed foods, exports and wholesales food, and sells gasoline. The corporation also owns and runs hotels that feature pubs, restaurants, lodging, and gambling.
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:
- Management believes they are 24 months ahead of their competitors driven by proven and market leading technology, thereby making PME’s product command a price premium.
- New contract wins by Pro Medicus (more win rates plus higher value per contract) and increase in usage by existing clients.
- Launch of new products namely; Enterprise imaging solutions, exploring other “ologies” such as cardiology and ophthalmology.
- Development of artificial intelligence (AI) capabilities.
- Leveraged to the digital health data thematic and industry’s transition to cloud.
- Business expansion into new geographies.
- Probability of Mergers and Acquisitions.
Key Risks:
- Stock price exposed to more volatility on account of high valuation.
- Long lead time to close contracts and scalability of new contract leads to disappointment with reference to market anticipations.
- Renewal of contracts (pricing pressure) and potential budget reduction at hospitals leads to the delay of software upgrades / investment.
- Large scale players and new entrants with innovative technology offer increase in competitive pressures.
- Reliability of system i.e. data breach or drop in quality.
- Regulatory / funding changes, for instance, reimbursement changes leading to lower imaging volumes.
Key Highlights:
- PME to benefit from their recent contract wins and is positively leveraged to several important themes – digital health data, replacing legacy technology with PME’s innovative platform, AI adoption in imaging, Electronic Health Records (EHR) driving PME’s Enterprise Imaging solutions and PME’s cloud solution substantially increasing its concerned market.
- Pro Medicus Ltd (PME) reported solid FY21 results outperforming the market estimates. The profit before tax of $42.6m, was up +41.0% mainly because of significant revenue growth in three key jurisdictions – North America, up +18.0%, Australia, up +23.4% and Europe, up +25.7%.
- Revenue of $67.9m is up by 19.5%
- Underlying profit before tax $42.6m, which is up by 41.0%
- Net profit of $30.9m is up by 33.7%.
- PME remains debt-free with cash reserves at year-end of $61.8m, 42.4% higher than pcp.
- The Board declared a fully franked final dividend of 8c per share, which brings the total FY21 dividend to 15cps.
- In FY21, PME won key contracts which are as follows: (1) NYU Langone (A$25.0m, 7-year) (2) Zwanger-Pesiri (A$8.5m, 5-year renewal) (3) LMU Klinikum (A$10.0m, 7-year) (4) Medstar Health (A$18.0m, 5-year) (5) Intermountain Healthcare (A$40.0m, 7-year) (6) University of California (A$31.0m, 7-year) (7) University of Vermont (A$14.0m, 8-year)
Company Profile:
Pro Medicus Ltd (PME) was founded in 1983 and provides a full range of radiology IT software and services to hospitals, imaging centers and health care groups globally. In Jan-09, PME purchased Visage Imaging, which has become a global provider of leading-edge enterprise imaging solutions, pioneering the best-of-breed, or Deconstructed PACSSM enterprise imaging strategy. Visage 7 technology delivers fast, multi-dimensional images streamed via an intelligent thin-client viewer. The company offers a leading suite of RIS, PACS and e-health solutions constituting one of the most comprehensive end-to-end offerings in radiology. Pro Medicus has global offices in Melbourne, Berlin (R&D) and San Diego (Sales).
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
- Difficult part to replicate is high quality assets.
- Attractive and Growing distribution yield.
- Highly credit worthy customers.
- Currently, the US focuses on assessing international opportunities.
- Growth through acquisitions.
- Customers are diversified by sectors.
- Largest owner of gas transmission pipelines in Australia.
- Opportunity to grow its renewable business.
- Management announced their ambition to achieve net zero operations emissions by 2050.
Key Risks
- Negative market/investor sentiment toward “bond proxies.”
- Pipeline regulators may make future regulatory changes.
- The energy sector affects a large number of businesses.
- Issues with infrastructure, such as explosions or ruptures.
- COAG’s adverse decision examines transmission costs.
- Contract terms on existing capacity are being shortened.
FY21 Result Summary
- Revenue (excluding pass-through) increased +0.7% year on year to $2,144.5m, boosted in part by a partial year contribution from the Orbost Gas Processing Plant.
- Underlying EBITDA decreases -1.3% over pcp to $1,633million, due to increased investment in strategic development opportunities and capability, higher insurance and compliance cost and softer contract renewals in challenging market conditions.
- NPAT (excluding significant items) was down -9.6% to $281.8m due to the lower EBITDA and higher depreciation costs from growing asset base. Reported NPAT was $3.7m, impacted by the $249.3m non-cash Orbost impairment charge and $148m in finance costs associated with bond note redemptions.
- Total capex increased +3.3 percent year on year to $432.5 million (growth capex decreased -1.5 percent to $283.5 million and stay-in-business capex increased +23 percent to $134.6 million), with management expecting organic growth capex to exceed $1.3 billion over FY22-24, up from $1 billion in 1H21.
- Free Cash Flow of $901.9 million was down -5.7 percent year on year, owing primarily to a one-time distribution and interest earned by APA from its investments in SEA Gas in FY20. Approximately, 6% dividend is offered by Australian Pipeline Trust Group.
Company Profile
APA Group Limited (APA) is a natural gas infrastructure company. The Company owns and/or operates gas transmission and distribution assets whose pipelines span every state and territory in mainland Australia. APA Group also holds minority interests in energy infrastructure enterprises. APA derives its revenue through a mix of regulated revenue, long-term negotiated contracts, asset management fees and investment earnings.
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
- Ageing Population Requires more diagnostic tests especially as medicine focuses on Preventives medicine
- Market leading positions in Pathology(number one in Australia, Germany, Switzerland and United Kingdom number three in US). Australia is the Second leading player in the market in Imaging.
- Establishment of Global Channels to high barriers entry.
- Organic growth and potential improvement from margin cost strategy on the acquisition of ongoing bolt.
- Leveraged against a weakening dollar.
- Globally Diversified.
Key Risks
- Diagnostic expenses are being decreased as a result of disruptive technology.
- Market share is being lost due to competitive threats.
- Deregulation has resulted in the establishment of new pathology collection centres.
- Regulative changes that are detrimental (fee cuts).
- Growth that has been disappointing.
- Unfavorable currency fluctuations (AUD, EUR, USD).
FY21 results highlights
- Revenue Growth of +28 to A$8.8 billion. In constant Currency, revenue of $9,129 million was up +33.7%, driven by Covid-19 testing revenue in each of SHL’s laboratory businesses. Base business revenue (exclude Covid testing) grew +6% versus FY20 and +4% versus FY19.
- EBITDA growth of +81% to A$ 2.6 Billion (or +89% on constant Currency basis) driven by +97% EBITDA Growth of +89% in the laboratory division due to Covid-19 testing.
- Net profit growth of +149% to A$1.3 billion, reflecting growth in revenue and SHL’s strong operating leverage.
- Sonic Healthcare achieved margin accretion in both laboratory and imaging divisions.
- SHL’s balance sheet is well placed with record low gearing level and liquidity of ~A$1.5bnto fund growth via acquisitions.
- Gearing (Net debt/[Net debt + equity) of 12.5%, interest cover (EBITA/Net interest expense) of 33.8x and debt cover (Net debt/EBITDA) of 0.4x all improved from 21.6%, 20.5x and 1.0x, respectively, at Dec-20 (and remains within covenant limit of <55%, >3.25x, and <3.5x respectively).
- As per its progressive dividend policy, sonic healthcare declared a final dividend of 55cps, up +8% and franked to 65%. Total dividends are up +7%.
Company Profile
Sonic Healthcare (SHL) is a medical diagnostics company with operations in Australia, New Zealand, and Europe. The company provides a comprehensive range of pathology and diagnostic imaging services to medical practitioners, hospitals and their patients along with providing administrative services and facilities to medical practitioners. SHL has three main segments: (1) Pathology/clinical laboratory services based in Australia, NZ, UK, US, Germany, Switzerland, Belgium and Ireland. (2) Diagnostic imaging services in Australia; and (3) Other which includes medical centre operations (IPN), occupational health services (Sonic HealthPlus) and laboratory automation development (GLP Systems).
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
- Upside potential to NEC’s share price from investors ascribing a higher value for Stan, NEC’s subscription video of demand (SVOD). Stan is now cash flow positive and profitable, with margins having the potential to surprise on the upside.
- Relatively attractive dividend yield of ~4%.
- NEC is a now a much more diversified business, with revenue not dominated by traditional FTA TV but also attractive digital platforms and assets.
- Cost out strategy – looking to remove $230m in structural costs.
- Corporate activity given NEC’s strategic assets.
- Trading below our valuation.
Key Risks
We see the following key risks to our investment thesis:
- Competitive pressure in Free to Air (FTA) TV and SVOD.
- Stan growth (subscriber numbers or breakeven point) disappoints market expectations.
- Structural decline in TV audiences continues to impact sentiment towards the stock.
- Deterioration in advertising markets.
- Cost blowouts in obtaining new programming/content.
- Increased competition from Netflix and Disney.
FY21 Results Highlights. Relative to the pcp:
- Revenue of $2,331.5, up +8%.
- Group EBITDA of $564.7m, was up +43%.
- NPAT of $277.5m, was up +76%, which translates to fully diluted EPS of 15.3%, up +83%.
- The Board declared a final dividend per share of 5.5cps which brings full year total dividends to 10.5cps, up +50%, and equates to a payout ratio of ~69% (in line with management’s policy of paying ~60-80% through the cycle).
Current trading environment and outlook
NEC did not provide specific quantitative FY22 earnings guidance but did provide significant colour:
- “Nine started the new financial year strongly, well supported across our platforms by advertisers from all categories. In the current quarter, Nine’s metro FTA ad revenue is expected to be up almost 20% on the same quarter last year. Forward bookings remain ahead of same day last year, with positive market momentum continuing into Q2, notwithstanding more difficult comparables, including timing of the NRL. The FTA ad market has recovered more quickly and convincingly than previously expected. FY22 will see the return of some cyclical costs – Nine currently expects FTA costs in FY22 to be ~3% higher than FY21”.
- 9Now: “continues its strong growth trajectory, with around 70% revenue growth in July (on pcp). Nine expects positive momentum to continue through the rest of FY22, as 9Now establishes its place in the broader digital video market”.
- Nine Radio: “Notwithstanding the short-term impact of the lockdown on the radio market, Nine Radio’s Q1 ad revenues are expected to grow in the double-digits (%), with further share improvement across both agency and local ad sales. Coupled with Nine Radio’s restructured cost base, this is expected to underpin strong profit leverage as the ad market recovers”.
- Stan: “Total costs for Stan Sport in FY22 are now expected to be at the lower end of the $70-90m range previously cited. Whilst this investment will reduce Stan’s overall EBITDA in the short term (in FY22 combined EBITDA for Stan Entertainment and Stan Sport is expected to be in the low double-digit millions of dollars), over the medium and longer term, it is expected to significantly grow earnings”.
- Publishing: “As previously announced, Nine expects growth of $30-40m in Publishing EBITDA in FY22 on FY21”.
Company Description
Nine Entertainment Co (NEC), through its subsidiaries, broadcast news and current affairs, sporting events, comedy, entertainment and lifestyle programs. Nine Entertainment serves customers throughout Australia. NEC has repositioned itself from a linear free-to-air broadcaster, to a creator and distributor of cross-platform, premium content. While the channel Nine Network remains core, it is now complemented by subscription video on demand (SVOD) provider Stan, a live streaming and catch-up service 9Now, digital network nine.com.au and array of digital content.
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.