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Commodities Trading Ideas & Charts

Spark Directors Recommend Takeover Offer

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Australian regulated electricity distribution networks, and 15% of a major electricity transmission network. Citi Power and Powercor are two of five electricity distributors in Victoria, while SA Power Networks is the sole electricity distributor in South Australia. Trans Grid is the major electricity transmitter in New South Wales. 

The Victorian networks contribute just under half of EBITDA, with 40% from South Australia and the remainder coming from Trans Grid. Regulated tariffs account for 80%-90% of group revenue, with unregulated and semi regulated services accounting for the balance. Semi regulated services include public lighting and meter reading. Unregulated services include services on other owners’ networks, asset rentals, and facilities access. These operations are generally higher-margin and more volatile. 

Spark is a solid company, with investments in Australian electricity distribution networks generating highly secure cash flow under a transparent regulatory regime. This is a major headwind for earnings. Capital expenditure on upgrading and expanding networks adds to the regulated asset base and helps revenue growth in the long term. EBITDA margins were solid at 71% in 2020. The main determinant of margins is the favorability of regulatory decisions.

Financial Strength

Spark Infrastructure is in sound financial health. Spark carries a high debt load, as do other regulated utilities. This should be manageable because of highly secure revenue, except in a severe credit crisis. Credit metrics are likely to deteriorate because of regulatory pressure on returns but should, on balance, remain reasonable. Leverage, measured as net debt/regulated asset base, was 72% for VPN and 74% for SAPN in December 2020. This is above some peers; however, this metric understates these assets’ financial strength, given material unregulated revenue streams. Trans Grid is more heavily geared, with net debt/regulated and contracted asset base of 81%. 

Bull Says

  • Revenue is highly secure between regulatory resets, underpinned by regulated tariffs and defensive volume.
  • Lower interest rates and cost-saving programs are helping offset lower returns.
  • core assets have a debt-funding cost advantage because of a halo effect from majority owner Cheung Kong Infrastructure.

Company Profile

Spark Infrastructure Group (ASX: SKI) owns 49% interests in three electricity distribution companies: Powercor, servicing western suburbs of Melbourne; Citi Power, servicing Melbourne’s inner suburbs and central business district; and SA Power Networks, servicing South Australia. Powercor and Citi Power are collectively known as Victoria Power Networks. It also owns 15% of Trans Grid, the main electricity transmission network in New South Wales. The assets are heavily regulated, falling under the purview of the Australian Energy Regulator.

 (Source: Morningstar)

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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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Fixed Income Fixed Income

Good addition for diversification especially for investors looking to gain ESG exposure

taking into account a variety of environmental, social, and governance (ESG) issues. The Fund seeks to provide such a total return approach, offering duration exposure at suitable points in the cycle, as well as defensive positioning in a soaring rate environment, and invests solely in domestic assets, avoiding the importation of global risks (e.g. currency) and offering a different risk profile.

Philosophy of Investing

Bond markets, diverge from fundamental fair value due to a variety of factors such as central bank/government activity, fund flows, and investor positioning. Top down analysis is critical for identifying opportunities to exploit resulting inefficiencies in fixed income markets, while individual stock selection plays a secondary role in adding value for high grade bond markets such as Australia.

Investment Process

The diagram below best summarises Altus’ investment process. The Scenario – based forecasting and building a case for the Best Case, Central Case, and Worst Case is, the most important component of the investment process. By creating a well-thought-out and researched narrative for each case, the investment team is able to answer important questions and describe the macroeconomic landscape. . Generally agree with their current position in each case and the analysis that supports it. Not necessarily agree with their point of view, we do value the analysis and the manner in which the narrative was presented.

Source: Altius Asset Management 

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

Orora Limited (ASX: ORA)

  • Exposure to the growth of both developed and emerging economies.
  • Headwinds in the near term should be factored into the price.
  • Following a recent strategic assessment, the strategy has been revised.
  • Bolt-on acquisitions (and the synergies that come with them) can help complement organic growth.
  • Leveraged against the AUD/USD and is now declining.
  • Corporate activities that could occur.
  • Management of capital (current on-market share buyback plus potential for additional initiatives).

Key Risks

  • Margin loss due to competitive forces.
  • Cost pressures in the supply chain that the company is unable to pass on to customers.
  • Economic conditions in the United States, emerging markets, and Australia are deteriorating.
  • Risk associated with emerging markets.
  • Adverse Movements in AUD/USD exchange rates 
  • OCC prices are decreasing.

FY21 group result highlights

Group revenue was slightly down (-0.8 percent) to $3.5 billion (up +7.8% in constant currency), operating earnings (EBIT) were up +11.6 percent to $249.1 million (up +17.3 percent in CC), underlying NPAT was up +23.7 percent to $156.7 million, EPS was up +29 percent to 16.9 cents (also driven by the on-market share buyback), and the full year dividend of 14cps up +16.7% on pcp. 2) Balance sheet. The impact of the on-market share buyback boosted leverage from 0.9x to 1.5x. Leverage, on the other hand, is still far below management’s goal range of 2 – 2.5x.

Company Description 

Orora Limited (ORA) provides packaging products and services. Orora is a global packaging manufacturer, distributor and visual communication solutions company The Company offers fibres, and glass and beverage can be packaged materials in Australia and Asia and packaging distribution services in North America and Australia.   

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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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Shares Small Cap

HT&E Limited (ASX: HT1)

  • Additional cost savings, notably a large reduction in corporate overhead expenditures.
  • The ATO and HT1 are anticipated to reach an agreement in the near future.
  • Changes in media ownership rules could lead to more corporate activity. Upside to the valuation of Soprano (25% interest) 
  • Initiatives for capital management that are still in progress.
  • A solid financial statement.

Key Risks

  • Decline in advertising dollars (radio and outdoor), particularly if Australia’s retail industry is under stress.
  • The structure of radio is being disrupted.
  • Increased tender competition from large players.
  • With worldwide expansion, there is a danger of poor execution.
  • The tax liabilities of the Australian Taxation Office materialize at a higher level than expected by the market.
  • Hong Kong could detract from the group’s performance (Corona virus or protests escalate).
  • Lockdowns relating to Covid-19 are being reintroduced around the country.

1H CY21 group results 

HT1 had a great first half of the year, owing to a solid market recovery. Core revenue increased by 18.2 percent to $109.9 million, underlying EBITDA increased by 55.9% to $30.4 million, underlying EBIT increased by 139.5 percent to $23.7 million, and NPAT increased by 352.8 percent to $16.3 million. On a like-for-like basis, group sales increased by 21%, owing to higher consumer confidence and advertising spend in Australia and Hong Kong. Higher cost of sales (ongoing investment in digital audio capability) and the resumption of marketing and certain discretionary spending that were deferred to the pandemic in the pcp drove up operating costs (up +9% vs pcp, or up +12% on a similar basis). The Board reinstated the dividend and announced a fully franked interim dividend of 3.5cps vs. zero in the PCP due to strengthening market circumstances.

Company Description  

HT&E Limited (HT1) is a media and entertainment company with operations in Australia, New Zealand and Hong Kong. The Company operates the following key segments: (1) Australian Radio Network (ARN) – metropolitan radio networks including KIIS Network, The Edge96.One and Mix106.3 Canberra; (2) Hong KongOutdoor (Cody) – Billboard, transit and other outdoor advertising in Hong Kong, with over 300 outdoor advertising panels and in-bus multimedia advertising across 1,200 buses; and (3) Digital Investments – digital assets including iHeartRadio, Emotive and Conversant Media.   

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

Record Profit for Newcrest Mining Sees it in Strong Financial Shape for New Developments

The improvement was principally driven by commodity prices, with the realised gold and copper prices up 17% and 42%, respectively. Production guidance for fiscal 2022 of about 1.9 million ounces of gold and 125,000 to 130,000 tonnes of copper was basically as we expected but cost guidance is a bit higher but not sufficiently to warrant a fair value estimate change and thus we retain its share fair value estimate at AUD 29.50 per share 

Newcrest is in very strong financial shape post the record profit. We also think the company has a decent suite of development projects with life extensions likely at Cadia and Lihir, and development of Havieron and Red Chris looking likely. Newcrest remains one of our better value picks among generally overvalued miners. Gold could get also a second wind from an investor flight to safety given the threat posed by the COVID-19 delta variant.

Newcrest remains busy on the exploration and development front. Approval of the next panel cave at Cadia was expected and we continue to think Newcrest is likely to mine there for multiple decades. New project activity remains focused primarily on exploration, development and feasibility studies at Havieron and Red Chris. The recent, and expected, extension to the Telfer open pit will provide an important bridge to production from Havieron, as well as allow Newcrest to continue to explore further potential for life extensions at Telfer itself. We continue to be encouraged by the exploration results at Red Chris with Newcrest focused on growing the higher-grade zone. Like with Cadia’s development, the high-grade zones help to underpin the initial large-scale underground mining effort and infrastructure expenditure, and subsequently open up the broader lower-grade mineralisation for profitable mining.

On the other hand, the tailwind from increased gold and copper prices in fiscal 2021 more than offset a 4% reduction in gold production. EBITDA increased 29% to USD 2.4 billion. Likewise, net operating cash flow after tax was strong, rising 56% to USD 2.3 billion. Newcrest has about USD 240 million net cash and the strong financial position was reflected in a more than doubling of the final dividend to USD 40 cents fully franked. The full year payout of USD 55 cents fully franked more than doubled last year’s USD 25 cent fully franked total.

The increasing shareholder returns are an appropriate use of funds given the windfall cash flows from higher gold and copper prices. We expect net operating cash flows to likely more than cover Newcrest’s likely capital expenditure requirements for the next few years. However, we expect future dividends to decline from the fiscal 2021 payout to average nearly USD 40 cents a share to fiscal 2026. The forecast reflects our expectation for earnings to fall with forecast declines in gold and copper prices from 2021’s elevated levels. We expect dividends to remain a secondary consideration for Newcrest, with the primary focus on value creation through efficient operation of the mines, exploration and developments.

Company profile

Newcrest is an Australia-based gold and, to a lesser extent, copper miner. Operations are predominantly in Australia and Papua New Guinea, with a smaller mine in Canada. Cash costs are below the industry average, underpinned by improvements at Lihir and Cadia. Newcrest is one of the larger global gold producers but accounts for less than 3% of total supply. Gold mining is relatively fragmented.

(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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Dividend Stocks

Continued Spending on the Home Improves Profitability at Wide-Moat Home Depot

 to deliver more than $140 billion in revenue in 2021. It continues to benefit from a healthy level of housing turnover along with improvements in its merchandising and distribution network. The firm earns a wide economic moat rating because of its economies of scale and brand equity. While Home Depot has produced strong historical returns as a result of its scale, operational excellence and concise merchandising remain key tenets underlying our margin expansion forecast. Its flexible distribution network will help elevate the firm’s brand intangible asset, with faster time to delivery improving the do-it-yourself experience and market delivery centers catering to the pro business. 

Home Depot should continue to capture top-line growth beyond 2021, bolstered by aging housing stock and rising home prices, even when lapping robust COVID-19 demand. Other internal catalysts for top-line growth could come from the firm’s efficient supply chain, improved merchandising technology, and penetration of adjacent customer product segments (most recently bolstered by the acquisition of HD Supply). Expansion of newer (like textiles from the Company Store acquisition) and existing (such as appliances) categories could also drive demand.

The commitment to better merchandising and an efficient supply chain has led the firm to achieve operating margins and adjusted returns on invested capital, including goodwill, of 13.8% and 30%, respectively, in 2020. Additionally, Home Depot’s focus on cross-selling products in both its DIY and its maintenance, repair, and operations channel should support stable pricing and volatility in the sales base, helping achieve further operating margin lift, with the metric reaching above 15% sustainably over the next decade.

Bulls Say

  • Home Depot’s focus on distribution and merchandising should improve productivity and increase domestic share in a stable housing market, increasing sales and margins.
  • The company has returned $56 billion to its shareholders through dividends and share buybacks over the past five years–more than 15% of its market cap. It has consistently increased its dividend and used excess cash to repurchase shares.
  • The addressable pro market is around $55 billion, and Interline and HD Supply make up around 10% share, leaving meaningful upside up for grabs.

Financial Strength

Home Depot raised $5 billion in long-term debt in March 2020 to ensure it could weather COVID-19 without disruption, and raised another roughly $3 billion in the fourth quarter of 2020 to help facilitate the acquisition of HD Supply. This led Home Depot to end 2020 with a total long-term debt load of more than $35 billion and a debt/capital ratio of 0.92.Strong free cash flow to equity that has averaged about 10% of sales over the past five years supports higher leverage, and we expect the company will stay within its targeted adjusted debt/EBITDAR metric of 2 times over the long term. The balance sheet’s $25 billion in net property, plant, and equipment provides an asset base to secure more debt if necessary. 

Company Profile

Home Depot is the world’s largest home improvement specialty retailer, operating nearly 2,300 warehouse-format stores offering more than 30,000 products in store and 1 million products online in the United States, Canada, and Mexico. Its stores offer numerous building materials, home improvement products, lawn and garden products, and decor products and provide various services, including home improvement installation services and tool and equipment rentals. The acquisition of distributor Interline Brands in 2015 allowed Home Depot to enter the maintenance, repair, and operations business, which has been expanded through the tie-up with HD Supply. 

(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

Morrisons’ Strong Balance Sheet and Store Estate Attracts Private Equity Interest

Although operating margins in the grocery industry are similar among the Big Four, we reckon Morrisons has a more efficient operating cost structure than Tesco and Sainsbury’s. It also has a stronger balance sheet than its Big Four peers.Morison It has large-store exposure, with no convenience-store presence and an online channel growing through third-party partnerships (Ocado and Amazon). Its strategy is centred on driving traffic in stores through the provision of additional services such as hand car washes, tyre change concessions, and parcel pickup services on top of a stronger core food offering. The company targets higher exposure in growth channels through capital-light partnerships in wholesale (Amazon, McColl’s, LuLu), online (Ocado), and convenience (Rontec forecourts). Although we believe management’s plan makes sense in the current market environment, it highlights the company’s limited channel exposure in an increasingly multichannel world. We view the company’s channel positioning as problematic despite the new initiatives, especially in a period of balance sheet deleveraging and tighter capital expenditure budgets (making it hard for the firm to develop its own convenience-store network)

On Aug. 19 Morrisons reached an agreement for a recommended cash offer of GBX 285.00 per share by Clayton, Dubilier & Rice Funds, or CD&R, a private equity fund, which implies a premium of about 60% to the closing price on June 18 (last business day before possible offer by CD&R) and an enterprise value multiple of 9 times the grocer’s underlying EBITDA or about 20.7 times Morrisons’ underlying EPS. The offer is equivalent to a cash consideration of approximately GBP 7.00 billion on a fully diluted basis. Morrisons’ board intends to recommend unanimously that shareholders vote in favour of the takeover, to be proposed at the general meeting in the week commencing Oct. 4.We intend to increase our GBX 252.00 fair value estimate to reflect the most recent offer. 

We think the current offer is very generous for Morrisons’ shareholders. In our estimates, the value the new owner can successfully extract from a potential monetization of the grocer’s vast store estate could be about GBX 70.00 per share. We believe, at these levels, the new owner could still achieve good returns on invested capital but only by realizing significant structural cost savings and leveraging up the balance sheet (Morrisons exhibits high capacity to leverage: net debt/EBITDAR ratio of about 2.4 times versus 3.4 times for Tesco and Sainsbury’s, excluding the banks).

Bulls Say

  • Morrisons is a well-managed company with one of the most efficient operating cost structures relative to peers.
  • The firm has good balance sheet and cash flow management. Working capital has been squeezed, selective store property sold off, and capital spending held in check.
  • Morrisons has a large freehold store estate.

Financial Strength

Morrisons is in reasonably good financial health, with low levels of net debt, a pension surplus, and modest levels of free cash generation. At the beginning of February 2020, net debt had been reduced to around GBP 1 billion which implies a net debt/adjusted EBITDA ratio of 2.4.Financial leverage has also been reduced through sales of freehold stores and disposals, which have generated close to GBP 1,000 million in proceeds in recent years..Capital spending remains moderate, and like other U.K. grocers, Morrisons is no longer in strong store-expansion mode. 

Company Profile

Founded by William Morrison in 1899, Wm Morrison Supermarkets is the U.K.’s fourth-largest grocery chain, with a market share of around 10%. The 2004 takeover of rival Safeway transformed the firm in terms of scale and gave it a significant presence outside its base in Northern England. The company operates about 500 stores, entirely in the United Kingdom. Morrisons has an online presence via a partnership with Ocado and Amazon and has lately been trying to expand its wholesale channel with new agreements (McColl’s).

(Source: Morning Star)

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

Streamlined Portfolio Should Continue to See Solid Demand as Apartments Recover

The company invests in metropolitan markets with solid demographic trends that allow the company to maintain high occupancies and pass along consistent rent increases. Demand for apartments depends on economic conditions in their markets like job growth, income growth, decreasing homeownership rates, high relative cost of single-family housing, and attractive urban centers. Apartment Income has significantly simplified and streamlined its portfolio and strategy over the past decade. 

While the company has decreased its portfolio from over 300 properties at the end of 2008 to 96 properties in the current portfolio, the company owns approximately the same number of assets over that time frame in the 8 markets it currently considers to be its core markets. The company’s exit from markets with lower growth prospects has increased the portfolio’s expected average growth. In 2020, Apartment Income spun off its development pipeline and lease-up portfolio into its own company so that the remaining company could focus on the highest-quality assets.

Financial Strength 

Apartment Income is in decent financial shape from a liquidity and a solvency perspective. Debt maturities in the near term should be manageable through a combination of refinancing, asset sale proceeds, and free cash flow. The company should be able to access the capital markets when acquisition and development opportunities arise. As a REIT, Apartment Income is required to pay out 90% of its income as dividends to shareholders, which limits its ability to retain its cash flow. However, the company’s current run-rate dividend is easily covered by the company’s cash flow from operating activities, providing Apartment Income plenty of flexibility to make capital allocation and investment decisions. 

Fair value estimate to $47.50 per share from $44 after incorporating second-quarter results and adjusting our near-term forecasts to account for a better-than-anticipated recovery from the pandemic. Our fair value estimate implies a 4.3% cap rate on our forward four-quarter net operating income forecast, 23 times multiple on our forward four-quarter funds from operations estimate, and 3.5% dividend yield based on a $1.64 annualized payout. Currently project $200 million of dispositions a year at an average cap rate of 5.75% and $100 million-$200 million of acquisitions at 5.25% cap rates as the company looks to recycle lower-quality assets to fund the acquisition of higher-quality assets. Apartment Income’s net asset value to be approximately $39 per share.

Bulls Say’s

  • Apartment Income’s diversified portfolio of mainly suburban and infill assets should see less impact from supply, which is more concentrated in urban, luxury markets.
  • Positive demographic and economic trends will fuel strong demand for apartment rentals, including the millennial generation, which is beginning to move to the suburbs but still lack the necessary capital to purchase a home.
  • While supply growth may be near a peak now, rising construction prices and higher lending standards will reduce construction starts and reduce supply growth in the future.

Company Profile 

Apartment Investment and Management Co. owns a portfolio of 96 apartment communities with over 26,000 units. The company focuses on owning large, high-quality properties in the urban and suburban submarkets of Boston, Denver, Los Angeles, Miami, Philadelphia, San Diego, San Francisco, and Washington, D.C.

(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.