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Dividend Stocks

ASX performed a mixed FY21 as a result of retail trading

Investment Thesis

  • M&A that adds value or product/service innovation
  • Monopoly position in a number of segments, with an EBIT margin of 70% and ROTE of 30%.
  • A quality management team has been established to assist any new CEO. The team has a detailed awareness of future operational and IT requirements, as well as strong ties to legislators and regulators.
  • With net cash and an AA credit rating, the balance sheet is strong.
  • The ASX stands to profit from rising superannuation and population trends.
  • The ASX could profit from global connectivity’s fundamental expansion.

Key Risks

  • Capex execution runs the risk of falling short of expectations in terms of ROIC.
  • Volume growth is expected to be slow, while profitability are expected to be flat.
  • Competitors’ or a new start-technological up’s and product innovation could jeopardise ASX’s market hegemony.
  • Regulation poses a threat.

FY21 results summary

Operating revenue increased +1.4 percent year on year to $951.5 million, driven by strong growth in Listings& Issuer Services (supported by new listings and increased issuer activity), Equity Post-Trade Services (reflecting higher settlement activity), and Trading Services (underpinned by increased demand for information services), partially offset by declines in Derivatives and OTC Markets as current policy settings reverted. Total expenses increased by +8.4 percent years on year to $310.3 million, in line with management’s guidance of +8-9 percent growth, due to additional costs to support licence to operate and growth initiatives, as well as variable costs associated with issuer activity. EBIT fell -1.7 percent years on year, with margin falling -210 basis points to 67.4 percent. Statutory profit was -3.6 percent lower than pcp. Net interest income fell 44.3 percent year on year to $46.7 million as a result of the RBA’s current policy settings, which resulted in lower interest earnings on ASX’s own capital and a lower investment spread on ASX collateral. Capital expenditure (capex) was $109.8 million, up 36.5 percent year on year, reflecting the expanded CHESS replacement project and ASX’s ongoing commitment to strengthen foundations for a future exchange.

Company Description  

ASX Ltd (ASX) operates Australia’s main stock exchange and equity derivatives market. ASX has four core segments:  (1) Listings and Issuer Services (covers capital raisings, investment products, and a range of services ASX provide to listed companies); (2) Derivatives and OTC Markets (covers OTC Clearing, equity options and Austraclear including the ASX collateral management service); (3) Trading Services (encompasses cash equities trading, information services and technical services); and (4) Equity Post-Trade Services (encompasses the clearing and settlement of the entire Australian cash market).

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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Global stocks Shares

Analysts estimate increase in Stifel Fair Value

Additionally, an initial need for capital in the recession and then low interest rates and a strong stock market led to high capital-raising activity.

Stifel Financial has a long history of being an active acquirer. With several hundred million dollars of arguably excess capital, the company could make some decent-size acquisitions. The company may see some growth from a renewed commitment to its independent advisor business.

Stifel has been deepening its expertise in certain niche areas lately through acquisitions. The KBW merger improved the company’s presence in financial industry investment banking, and Stifel has made a series of public finance firm acquisitions over the past several years. In wealth management, adding Barclays’ advisors can help the firm move more upmarket. The investment banking and wealth management landscape is undergoing a decent amount of change from regulations, such as those related to capital requirements and fiduciary standards.

Financial Strength:

Stifel’s financial health is fairly good. At the end of 2020, the company had approximately $1.1 billion of corporate debt and over $2 billion of cash on its balance sheet. Its next large debt maturity is $500 million in 2024.The Company’s total leverage is less than 8, which is fair considering the mix of its investment banking and traditional banking operations. At the end of 2020, Stifel was at its disclosed target of 11.9% Tier 1 leverage ratio. Given that its Tier 1 leverage ratio is above management’s previously stated target of 10%, the company would resume more material share repurchases or pursue acquisitions. 

Bulls Say:

Stifel’s string of acquisitions has increased operational scale and expertise. Stifel is an experienced acquirer and integrator. A recession could provide ample acquisition opportunities. Net interest income growth over the previous several years at the company’s bank materially expanded wealth management operating margins, and the increased size of the bank and wealth management business provides diversification with its institutional securities business.

Company Profile:

Stifel Financial is a middle-market-focused investment bank that produces more than 90% of its revenue in the United States. Approximately 60% of the company’s net revenue is derived from its global wealth management division, which supports over 2,000 financial advisors, with the remainder coming from its institutional securities business. Stifel has a history of being an active acquirer of other financial service firms.

(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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Global stocks

G8 Education Fair Value Cut to AUD 2.00 but Remains Materially Undervalued

Although the result contained several positive aspects, we now expect some of G8’s recent expenses growth to be permanent. This expectation results in a reduction in our long-term profit margin expectations, with our long-term underlying NPAT margin forecast falling to 12% from 14%.

The market reacted negatively to G8’s result, with the share price falling 6% on the day. G8 usually generates most of its revenue in the second half of the year which typically boosts profit margins. However, the company has been unable to increase prices as usual in the middle of this year, due to the pandemic, which will impact margins in the second half. G8’s prices have been unable to keep pace with wages growth over the past couple of years, partly due to lower immigration due to the pandemic. Although management have created strategies to address the scarcity of labour and labour productivity, these solutions have costs too. G8’s earnings are particularly sensitive to wage inflation because wages typically equate to around 60% of revenue and because G8’s margins are relatively small.

G8’s management said that attracting and retaining talent is the greatest challenge facing the sector. In July 2021, G8’s occupancy rate had recovered to just 1 percentage point below levels achieved in July 2019, before the pandemic. However, the coronavirus outbreak and related lockdowns have caused this gap to widen to 2.6 percentage points in August 2021, relative to August 2019. We expect the second half of 2020 will be tough for G8, with lockdowns likely to continue for most of the half. However, we also expect Australian vaccination rates to enter 2022 with 70% to 80% of the population likely vaccinated, paving the way for a permanent reopening of the country.

Although the latest childcare sector support measures are a positive for childcare centre operators, they only add to the complexity of forecasting G8’s near-term earnings. Aside from the complexity caused by the pandemic’s impact on occupancy rates and subsidies, G8’s earnings are also distorted by recent reshuffling of its childcare centre portfolio, re -categorisation of expenses, the ramp-up of new centres, and change to the definitions of key performance indicators, such as occupancy. This complexity may mean the market will remain wary of G8 shares until the expected recovery is evidenced in reported results, likely in late 2022.

Despite our lower fair value, at the current market price of AUD 0.99 per share, we continue to believe G8 is materially undervalued. Although the childcare industry faces turmoil in the near term and wage inflation pressures in the longer term, we still expect G8’s occupancy rates to recover in 2022 as the pandemic subsides. Importantly, G8’s decision to raise equity capital in 2020, and repay all its net debt, means the company is well placed to weather the latest lockdowns and will likely reinstate dividends in 2022. The reinstatement of G8’s dividends will be an important step for Australian tax residents, because they will likely be fully franked. Franked dividends are effectively a return of corporate tax to shareholders and the reinstatement of franked dividends, which we expect in early 2021, may be a catalyst for a rerating of the stock.

Company Profile

G8 Education operates a portfolio of around 480 childcare centres in Australia, implying a market share of around 8%. The company is highly dependent on government subsidies, which comprise around 60% of childcare fees, but we expect subsidies to continue growing with childcare demand. G8 does not own the buildings from which its childcare centres operate, and labour costs comprise around 60% of expenses, with rental costs comprising around 15%.

(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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Commodities Trading Ideas & Charts

Newcrest Mining’s Strong Financial Performance For FY21

Investment Thesis 

• The present share price is trading at a more than 10% discount to our equal weighted (DCF, PE-Multiple, EV / EBITDA) valuation of NCM.

• Among gold mining peers in Australia, NCM has one of the lowest cost bases.

• NCM has one of the lowest cost bases among gold mining peers in Australia. The sustained cost outs will lower the All-in Sustaining Cash Cost (AISC), subject to currency fluctuations (AUD).

• Commodity prices (gold and copper) surprise on the upside, owing to geopolitical worries.

• Leveraged to global monetary policy decisions and the USD, which we view appreciating against other currencies, notably the Australian dollar. 

• NCM has organic development options at Lihir, Cadia, and Golpu.

• NCM offers expansion opportunities at Havieron and Red Chris.

• Strong assets with a lengthy reserve life.

• A solid management team with significant mining expertise.

Key Risks

• Further weakening global macroeconomic conditions.

• A decrease in the group’s output profile.

• Reduced free cash flow means the company will fail its dividend projections.

• A worsening in the global supply and demand equilibrium.

• A decline in gold and copper prices.

• Production difficulties, execution risk, delay, or unscheduled mine shutdown.

• Negative fluctuations in the AUD/USD.

FY21 results summary

Actual earnings of $1,164 million climbed +55 percent year on year, owing to higher realised gold (up +17 percent year on year) and copper (up +42 percent year on year) prices, favourable fair value adjustments recognised on copper derivatives, and other factors, NCM’s investment in the Fruta del Norte finance facilities, and record copper production from Cadia, partially offset by lower gold sales volumes due to lower production (down -3.6 percent year on year), increased income tax expense as a result of the Company’s improved profitability, the unfavourable impact on operating costs (including depreciation) from the strengthening of the AUD against the USD, additional costs associated with COVID-19 measures ($70 million), higher treatment, refining, and transshipment costs and higher Price linked costs such as royalties. Record FCF of $1,104m was mainly due to to pcp, which was characterised by a net cash outflow of $1,291m relating to M&A growth investments, compared to a $21m outflow in the current period (FCF before M&A activity was $455m, +68% higher than pcp, with higher operating cash flows only partially offset by increased investment in major capital projects at Cadia, Increased production stripping activity at Lihir and Red Chris, as well as higher sustaining capital at all ongoing operations).

Company Description 

Newcrest Mining Limited (NCM)engages in the exploration, mine development, mine operation, and the sale of gold and gold/copper concentrates. It is also involved in the exploration of silver deposits. The company primarily owns and operates mines and projects located in Cadia and Telfer in Australia; Lihir based in Papua New Guinea; Gosowong based in Indonesia; Bonikro based in Cote dIvoire in West Africa.

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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Commodities Trading Ideas & Charts

Murphy Using Windfall from High Oil Prices to Accelerate Deleveraging

spinning off its retail gas and refinery businesses. Historically, the company’s capital efficiency was skewed to the weaker end of the peer group range, even after this transformation, but management has since narrowed the gap by downsizing the portfolio and shifting capital toward higher-margin projects.

The firm is a top-five producer in the Gulf of Mexico, and the region accounts for almost half of its production. It signed a joint-venture agreement with Petrobras in late 2018, giving it an 80% stake in the combined assets of the two companies. Murphy has a number of expansion projects lined up there that should offset legacy declines and enable it to hold production flat in the next few years. There is regulatory risk, though: U.S. President Joe Biden has pledged to halt offshore oil and gas permitting activity (to demonstrate his climate credentials). 

 Like other shale producers, the firm has made considerable progress cutting costs and boosting productivity since the post-2014 downturn. However, while the firm still has over 1,400 drillable locations in inventory, fewer than 350 of them are in the prolific Karnes County area. When this portion is exhausted, well performance, and thus returns, could deteriorate. 

Financial Strength

The COVID-19-related collapse in crude prices during 2020 has taken its toll on most upstream oil firms, and Murphy has seen its leverage ratios tick higher as well. At the end of the last reporting period, debt/capital was 40% and net debt /EBITDA was 2.37 times. The firm currently holds about $2.8 billion of debt, and has roughly $1.7 billion in liquidity ($200 million cash and about $1.5 billion undrawn bank credit). The term structure of the firm’s debt is reasonably well spread out, and only about 20% of the outstanding notes come due before 2024 (the firm has maturities totaling $500 million in 2022). Murphy is likely to generate free cash flows of at least $100 million-$150 million in 2021 and 2022, based on strip prices, and its potential for generating free cash should increase further in 2023 (when some of the firm’s longer-term investments in the Gulf of Mexico start producing oil and contributing to cash flows). So the firm should have no issues covering the 2022 notes with cash, but if the operating environment deteriorates, management could always try to refinance the 2022 notes or lean on the revolver.

Bulls Say

  • The joint venture with Petrobras is accretive to Murphy’s production and generates cash flows that can be redeployed in the Eagle Ford and offshore.
  • The Karnes County portion of Murphy’s Eagle Ford acreage offers economics that are as good as or better than any other U.S. shale.
  • Murphy’s diversified portfolio gives it access to oil and natural gas markets in several regions, insulating it to a degree from commodity price fluctuations or regulatory risks.

Company Profile

Murphy Oil is an independent exploration and production company developing unconventional resources in the United States and Canada. At the end of 2020, the company reported net proven reserves of 715 million barrels of oil equivalent. Consolidated production averaged 174.5 thousand barrels of oil equivalent per day in 2020, at a ratio of 66% oil and natural gas liquids and 34% natural gas.

 (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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Global stocks Shares

Positive effect on Amcor stock as the company’s net income and free cash flow increase

  • Flattering exposure to the growth of both emerging and developed markets.
  • A well-defined strategy for increasing shareholder value.
  • Acquisitions that are bolt-ons provide an opportunity to supplement organic growth.
  • A strong balance sheet.
  • Leveraged against a falling AUD/USD
  • Advantages from the recently finished Bemis acquisition will begin to flow.
  • Capital management initiatives include a $500 million share buyback currently underway.

Key Risks

The following are the key challenges to the investment thesis:

  • Management fails to realise the proposed synergies in the Bemis transaction.
  • Increasing competition causing margin erosion and potential balance-sheet stress (e.g. reduced earnings leading to potential debt covenant breaches).
  • Cost constraints on inputs that the company is unable to pass on to customers (even though the Company does pass through input costs).
  • Global economic growth has slowed.
  • Value-destroying acquisition.
  • The risk of emerging markets.
  • Unfavorable movements in the AUD/USD.

Highlights of key FY21 results

  • EBIT increased by 8% to $1,621 million, with margins enhancing by +60 basis points to 12.6 percent. 
  • GAAP net income of $939 million, a +53 percent increase, translates to GAAP EPS of 60.2 cents, a +58 percent increase (or adjusted EPS of 74.4 cents, a +16 percent increase on a CC basis, above guidance range).
  • Adjusted FCF of $1.1bn, flat -9.9 percent over pcp (albeit at the upper end of guidance range), effected by rising capex on organic growth projects, lower working capital benefit, and adverse tax payment timing compared to pcp.
  • Return on average funds employed of 15.4 percent, an increase of +140 basis points over the pcp. 
  • The Board declared a final dividend of 11.75 cents per share, bringing the full-year dividend to 47 cents per share, and repurchased $350 million (2% ) of outstanding shares.

Company Description 

Amcor Limited (AMC) is an international integrated packaging company offering packing and related services. Amcor primarily produces a wide range of packaging products which include corrugated boxes, cartons, aluminum and steel cans, flexible plastic packaging, PET plastic bottles and jars, and multi-wall sacks. The company has operations in Australasia, North America, Latin America, Europe and Asia.

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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Dividend Stocks

P&G Cleans Up in Fiscal 2021, but Inflationary and Competive Headwinds Could Stall Its Trajectory

                   

 However, this performance is not solely a by-product of the pandemic, which has seen consumers place an outsize emphasis on cleaning and disinfecting. Rather, we attribute these marks to the strategic course P&G embarked on more than seven years ago (rightsizing its category and geographic reach by shedding more than 100 brands to ensure resources were being effectively allocated to the highest-return opportunities, while maintaining a stringent focus on costs). As a part of this playbook, P&G also adopted a more holistic approach to brand investing across its business .

But even as its top line appears healthy, P&G is facing unrelenting commodity cost inflation that management has qualitatively pegged as some of the most significant in some time. However, we think the degree of inflation combined with P&G’s innovation mandate (rooted in consumer-valued new fare) should make such increases more palatable. Further,  P&G is now involved in leaning into brand spending to illustrate the value its products offer consumers as opposed to turning off the spigot to preserve profits in this uncertain climate. This aligns with our forecast for P&G to direct around 3% and 10%-11% of sales long term to research and development and marketing, respectively, relative to the 2.7% and 10.5% expended on average the past five years.

Financial Strength

P&G maintains solid financial health. The firm continues to throw off a significant amount of cash, with free cash flow amounting to around $15 billion in fiscal 2021 .We expect P&G will remain committed to returning excess cash to shareholders and will increase its dividend, to an average payout ratio north of 60%. For the year 2020 the firms revenue stood at 70.950 USD million while its EBIT was 16,143 USD million. On the other hand the firms EV/EBIDTA was 18.2 while its P/E ratio was 23.4 for the year 2020.

 We believe P&G is also open to bolting on select brands and businesses to its mix over time. The firms acquired Germany-based narrow-moat Merck’s consumer healthcare brands for $4 billion in April 2018. In our view, this deal stood to replace the scale and technological know-how lost following the dissolution of its joint venture partnership with no-moat Teva at the end of fiscal 2018. As such, we don’t think it signals a reversal in the firm’s strategy to operate with a leaner brand mix. Rather, at just 1%-2% of sales, we believe this addition aligned with management’s rhetoric that it intends to selectively bolster its reach in attractive categories (consumer health growing midsingle digits) and geographies. Beyond this deal, P&G has failed to assert itself as a consolidator in the global household and personal-care arena.

Bulls Say

  • To the extent that retailers and consumers continue to find favour with leading branded operators, P&G’s sales trajectory may outpace our expectations.
  • Additional opportunities to narrow its product mix could enable P&G to more effectively direct its brand spending to the highest-return areas.
  • As P&G reaches the end of its second $10 billion cost reduction effort, further savings (probably related to reducing overhead and bolstering the yield on its manufacturing footprint and marketing investments) could manifest if efficiency is as engrained in its culture as management suggests.

Company Profile

Since its founding in 1837, Procter & Gamble has become one of the world’s largest consumer product manufacturers, generating more than $75 billion in annual sales. It operates with a line up of leading brands, including 21 that generate more than $1 billion each in annual global sales, such as Tide laundry detergent, Charmin toilet paper, Pantene shampoo, and Pampers diapers. P&G sold its last remaining food brand, Pringles, to Kellogg in calendar 2012. Sales outside its home turf represent around 55% of the firm’s consolidated total, with around one third coming from emerging markets.

(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.