Categories
Dividend Stocks

Charter Hall Retail REIT Looks Defensive; Shares Fairly Valued

But we maintain our long-term assumptions and AUD 3.85 fair value estimate, which sees the stock screen as fairly valued. The REIT announced a final distribution of AUD 12.70 cents per security, taking full year distributions to AUD 23.40 cps. As a result of recent restrictions, the New South Wales and Victorian governments have reimplemented a landlord code of conduct similar to that enforced in 2020. The scheme forces landlords to provide rent waivers and deferrals for small to medium enterprises where turnover has been curtailed due to restrictions. This is likely to push more consumers to online shopping channels, fuelling the ecommerce trend.

While the near-term impact hurts especially with lockdowns potentially lasting late into calendar 2021 in line with the current vaccine rollout pace, the overall impact on Charter Hall Retail should be contained, relative to the impact in 2020. Its portfolio is increasingly dominated by major longleased tenants that are not eligible to defer rents under the government schemes. Also, the REIT has made significant efforts to increase omnichannel capabilities for tenants including click and collect facilities. This should reduce the financial impact on stores and thus reduce the need to waive or defer rent.

Company’s Future Outlook 

We forecast operating earnings per share to increase by 5% to AUD 28.60 per security in fiscal 2022, underpinned by a 2% increase in rental growth. We don’t expect there to be another equity raising, even in an extended lockdown, after one in 2020. Overall Balance sheet gearing looks modest at 33%, which sits at the midpoint of the target range of 30% to 40%. We view 55% of the REIT’s tenants as defensive (unlikely to miss a rent payment), which include the likes of Woolworths, Coles, bp, Wesfarmers, and Aldi. Supermarkets and service stations are also less likely to be impacted by COVID-19 restrictions. The proportion of portfolio income that these major tenants contribute to has steadily increased over the years, with the top five listed above representative of 54% of the portfolio income, up from 51% in fiscal 2020.

Company Profile 

Charter Hall Retail REIT, or CQR, owns and manages a portfolio of convenience focused retail properties, including neighbourhood and subregional shopping centres, service stations, and some retail logistics properties. The REIT is managed by Charter Hall, a listed, diversified fund manager and developer, which owns a minority stake in CQR, and frequently partners with it on acquisitions and developments. More than half of rental income comes from major tenants Woolworths, Coles, Wesfarmers, Aldi and BP (the latter occupies service station assets). The portfolio is more seasoned than some convenience rivals, with approximately two thirds of supermarket tenants at or near thresholds for paying turnover-linked rent.

(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.

Categories
Commodities Trading Ideas & Charts

Air Product’s Fiscal Q3 Results & Unveils Updated Capital Deployment Plan

public industrial gas companies have consistently delivered lucrative returns because of their economic moats. Demand for industrial gases is strongly correlated to industrial production. As such, organic revenue growth will largely depend on global economic conditions. Since Seifi Ghasemi was appointed CEO in 2014, new management has launched several initiatives that drastically improved Air Products’ profitability, raising EBITDA margins by over 1,500 basis points.  Air Products is poised for rapid growth over the next few years due to its 10-year capital allocation plan. The industrial gas firm aims to deploy over $30 billion during the decade from fiscal 2018 through fiscal 2027 and has already either spent or committed roughly $18 billion of that amount.

Financial Strength 

Management has indicated that maintaining an investment-grade credit rating is a priority. The company has used proceeds from its divestments of noncore operations (including the spin-off of its electronic materials division as Versum Materials in 2016 and the sale of its specialty additives business to Evonik in 2017) to reduce debt and fuel investment.The company held roughly $8 billion of gross debt as of Dec. 31, 2020, compared with $6.2 billion in cash and short-term investments. Liquidity includes an undrawn $2.5 billion multicurrency revolving credit facility, which is also used to support a commercial paper program. 

Narrow-moat rated Air Products reported mixed fiscal third quarter results, as its sales of $2,605 million beat the FactSet consensus estimate of $2,498 million, but adjusted EPS of $2.31 fell $0.05 short of expectations. The industrial gas firm also lowered the top end of its full-year fiscal 2021 adjusted EPS guidance range by a nickel, from $8.95-$9.10 to $8.95-$9.05. Fiscal third-quarter sales increased 26% year over year and 4% sequentially, driven by a continued recovery in the firm’s end markets.

Air Products unveiled its updated capital deployment plan and aims to deploy over $30 billion during the decade from fiscal 2018 through fiscal 2027. The company has already either spent or committed roughly $17.8 billion of that amount. Management said on the earnings call that of the remaining $12.2 billion, it expects to invest roughly $5 billion to support the existing business and the remainder in large growth projects, focusing on opportunities in gasification, green hydrogen, and carbon capture.

Bulls Say’s 

  • Air Products is poised for rapid growth due to business opportunities that drive its ambitious $30 billion capital allocation plan.
  • After acquiring Shell’s and GE’s gasification businesses in 2018, Air Products is the global leader in this segment and is poised to benefit from growing coal gasification in China and India.
  • The company’s focus on on-site investments will result in a derisked portfolio with more stable cash flows.

Company Profile 

Since its founding in 1940, Air Products has become one of the leading industrial gas suppliers globally, with operations in 50 countries and 19,000 employees. The company is the largest supplier of hydrogen and helium in the world. It has a unique portfolio serving customers in a number of industries, including chemicals, energy, healthcare, metals, and electronics. Air Products generated $8.9 billion in revenue in fiscal 2020.

(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.

Categories
Technology Stocks

Netwealth remains overvalued yet well positioned

fintech icon on abstract financial technology background represent Blockchain and Fintech Investment Financial Internet Technology Concept.

The company charges for its software based on the value of funds under management on its platform, comprising over 95% of group revenue, in addition to providing Netwealth-branded investment products, which are managed by third-party investment managers.

Netwealth has exploited the bureaucracy and lethargy of the relatively small number of large and dominant Australian financial services firms to develop a superior investment administration platform that has quickly increased funds under administration (FUA). The company has benefited from regulatory change such as the Future of Financial Advice (FOFA) reforms, which require financial advisors to act in their clients’ best interests. It also got the advantage of banning of trail commission fees previously paid by investment administration platforms and investment advisors for recommending their products. Despite being the largest of the independent investment platforms, Netwealth has a number of independent platform competitors such as Hub 24 and Praemium.

Financial Strength:

The service-based and capital-light business model of Netwealth has minimum requirement for debt or equity capital, which keeps it in good financial health. The company expenses, rather than capitalises, research and development costs, which results in strong cash conversion. This means that most operating cash flow is available for dividend payments.

Funds under management and administration (FUMA) increased by 52% in fiscal 2021, the fee rate, or revenue divided by FUMA, fell by 23% due to pricing pressure, resulting in revenue growth of 17%. The PE ratio of Netwealth, in 2021, is as high as 78.0, which makes it overvalued.

From a balance sheet perspective, Netwealth remains in excellent shape, with net cash balance of AUD 81 million at the end of fiscal year 2021 and a consistent net cash balance since listing on the ASX in 2017.

Bulls Say:

Netwealth has only a small proportion of the investment administration market, at around 4%, but has won market share quickly, and significant growth potential remains.

Netwealth has a low fixed-cost base which means operating leverage is high and further strong revenue growth should be amplified at the EPS level. A high single digit CAGR increase in investment administration platform industry is expected which would provide a strong underlying tailwind for Netwealth.

Company Profile:

Netwealth provides cloud-based investment administration software as a service, or SaaS, in Australia via its proprietary platform. Netwealth’s platform provides portfolio administration, investment management tools, and investment and managed account services to financial intermediaries and directly to clients. The company charges SaaS fees based on funds under management on its platform. Netwealth also offers Netwealth-branded investment products on its platform which are managed by third-party investment managers.

(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.

Categories
Global stocks Shares

Berkshire’s Equities in Q2; Apple Remains Top Stock

selling some $2.1 billion worth of stock while also acquiring a little over $1 billion of equities. Based on the insurer’s recent 13- F filing, Berkshire trimmed positions in US Bancorp and Chevron, and sold off more than 10% of the investment portfolio’s stakes in Abbvie (selling 2.3 million shares or 10.2% of its holdings), General Motors (7.0 million shares or 10.4% of its holdings), Bristol-Myers Squibb (4.7 million shares or 15.3% of its holdings), and Marsh & McLennan (1.1 million shares or 20.6% of its holdings). Berkshire also disposed of meaningful amounts of Merck (8.7 million shares, or 48.8% of its holdings) and Liberty Global Cl C shares (5.5 million shares, or 74.5% of its holdings), while completely eliminating the firm’s holdings in Liberty Global Cl A, Biogen, and Axalta Coating Systems.

As for the purchases, almost all of them involved existing holdings as Berkshire added to stakes in Kroger (picking up 10.7 million shares and increasing its position by 21.0%), Aon (around 300,000 shares and increasing its position by 7.3%), and Restoration Hardware (35,500 shares for a 2.0% increase in the company’s holdings). Berkshire had originated stakes in the pharmaceuticals–AbbVie, Biogen, Bristol Myers Squibb and Merck–as well as the insurance brokers—Marsh & McLennan and Aon–in just the past year and a half, but many of these stocks have seen marked gains in just the past few quarters, allowing the insurer’s main managers of many of these smaller holdings (relative to the portfolio overall)–CEO Warren Buffett’s two lieutenants Todd Combs and Ted Weschler–to take some profit off the table. Even so, the firm ended the second quarter with $293.0 billion of reportable equity holdings.

Berkshire’s top 5 positions of Apple (41.5%), Bank of America (14.2%), American Express (8.6%),Coca-Cola (7.4%), and Kraft Heinz (4.5%), accounted for 76.2% of the insurer’s 13-F equity portfolio, and its top 10 holdings, which included Moody’s (3.1%), Verizon Communications (3.0%), US Bancorp (2.5%), DaVita (1.5%), and Charter Communications (1.3%), accounted for 87.5%. Given the changes in Berkshire’s 13-F portfolio during the second quarter, the financial services sector now accounts for 28.7% of the portfolio (up from 28.5% at the end of March 2021), with technology stocks at 43.2% (up from 41.8%), and consumer defensive names decreasing to 12.8% (from 13.3%).

Company Profile 

Berkshire Hathaway is a holding company with a wide array of subsidiaries engaged in diverse activities. The firm’s core business segment is insurance, run primarily through Geico, Berkshire Hathaway Reinsurance Group and Berkshire Hathaway Primary Group. Berkshire has used the excess cash thrown off from these and its other operations over the years to acquire Burlington Northern Santa Fe (railroad), Berkshire Hathaway Energy (utilities and energy distributors), and the firms that make up its manufacturing, service, and retailing operations (which include five of Berkshire’s largest noninsurance pretax earnings generators: Precision Castparts, Lubrizol, Clayton Homes, Marmon and IMC/ISCAR). The conglomerate is unique in that it is run on a completely decentralized basis. 

(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.

Categories
Property

HPI Reports Solid Fiscal 2021; Recent Acquisitions to Drive Stronger Growth in 2022

Elderly woman holding a small house in her hands

Pubs are primarily in Queensland, leased almost exclusively to Queensland Venue Co, a joint venture between subsidiaries of supermarket giant Coles and Australian Venue Company, or AVC. A key attraction of Hotel Property is favourable lease terms that provide for predictable above-inflation rental income from long-term leases.HPI also benefits from low interest rates, population growth and restrictive liquor licensing laws in Queensland. Close to 90% of Hotel Property’s freehold properties are in Queensland, predominantly pubs that are leased to QVC. The joint venture leases generate about 90% of Hotel Property’s rental income. This risk has been substantially alleviated due renewal of most leases for an extended 10 to 15-year period. Key near term risk is whether the corona virus threatens the viability of the tenant, given AVC is highly geared. Longer term risks include a potential changes in liquor and gambling laws making pub licences less valuable 

Hotel Property Investments, or HPI, reported a solid fiscal 2021 result. Adjusted funds from operations rose 7% to AUD 32.5 million on 2.5% like-for-like rental increases and acquisitions. Weighted average lease expiry remains long at 10.8 years. This suggests revenue is highly defensive, but have lingering concerns about the financial health of the key tenants, Queensland Venue Company and Australian Venue Company, with ongoing threat of corona virus lockdowns and social distancing requirements. Net tangible assets increased 10% to AUD 3.30 per security as the average capitalisation rate tightened 20 basis points to 5.9% amid the ongoing low interest rate environment. HPI is in reasonable financial health. Debt to assets was 38% in fiscal 2021, towards the bottom of management’s 35% to 45% target range

HPI made nine acquisitions in regional Queensland in fiscal 2021, worth AUD 96 million. We like the strategy of teaming up with the key tenant to take over pubs and separate the operations from the property, as we think supporting the tenant with capital contributions to aid its growth strategy will lead to better rental yields and longer lease terms than buying pub properties on its own. The main drawbacks are that acquisitions have been of lower quality than its existing pubs and exposure to QVC/AVC increases. Of HPI’s 54 properties, 49 are leased to QVC/AVC.

Financial strength

Financial Strength Hotel Property is in sound financial health, with gearing (debt less cash/total assets less cash) of about 38% as at June 2021, well below covenant gearing of 60% and slightly below its own target gearing of between 35% and 45%. It’s also comfortably meeting its interest cover covenant of 1.5 times, with current interest cover (earnings before interest and tax/interest expense) of above 3.9 times. Debt maturity profile is fairly long at 5.7 years. The recent precipitous fall in interest rates should alleviate interest costs because about 40% of its debt is on floating rates.

        Bulls Says

  • Hotel Property Investments’ distribution yield is higher than most Australian REIT peers, supported by most contracted annual rental increases averaging the lesser of 2 times CPI or 4%.
  • Rental income is underpinned by long lease terms.
  • Liquor and most gaming licenses are retained by Hotel Property when leases expire. This is a contingent asset that should be a draw-card for potential pub tenants in the absence of adverse regulatory changes.

Company Profile

Hotel Property Investments is an Australian REIT with a portfolio of freehold pub properties primarily in Queensland. Its portfolio is almost exclusively leased to Queensland Venue Company on triple-net long-term leases where the tenant is responsible for outgoings (except land tax in Queensland), resulting in relatively low maintenance expenses. Most leases also provide for annual rental increases typically at the lower of 4% or two times the average of the last five years consumer price index

(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.

Categories
Global stocks

China Merchants Bank’s First-Half Results Posted Strong Growth in Fee Income

China Merchants Bank stands out thanks to its leading position in retail banking business and enviable funding costs advantage, which delivers one of the strongest returns on assets among peers. We believe strong returns and competitive advantages endow it with a narrow economic moat.

CMB’s long time focus on customer-oriented strategy rewards the bank a premium customer base and a strong brand reputation as a wealth manager. The bank is progressing well with its digital customer acquisition strategy via the online channel that is seeing strong growth in the number of customers in the upper-middle class and their assets under management, or AUM. The bank enjoys one of the highest user penetration rates in the industry. CMB mobile application contributed 98% of total wealth management customers and 84% of transactions in the first half of 2021.

China Merchants Bank’s or CMB’s first-half results reported strong year-on-year growth in both total revenue and net profit at 14% and 23%, respectively. Positives include stable cost/income ratio and lower-than-expected credit costs in the second quarter, along with strong revenue growth and continuous improvement in credit quality as well as substantial customer base and strength in fee-based business. Fee income growth further expanded to 24% year on year, led by 40% and 17% growth in agency sales of financial products and of custody services. These two categories accounted for over 55% of total fee income. Credit card-related and credit business related fee income remained weak at zero and 5% growth, but this is reflective of weak service consumptions due to COVID-19 prevention and control measures.

Financial Strength

The bank boasts stable funding, as customer deposits represent 74% of total liabilities. CMB has improved its capital strength over the past three years: The equity/assets ratio increased to 8.7% by 2020, thanks to improving capital efficiency. Its core Tier 1 capital ratio and capital adequacy ratio reached 12.3% and 16.5%, respectively, by 2020. CMB has recorded a healthy capital position and strong returns, as evidenced by an average of over 16% return on equity over the past five years.

Bulls Say

  • CMB expects to add 15 million, or 10% of its 160 million customer pool, over the next three years. We expect this to support its industry-leading fee income growth and funding costs in the future.
  • With monthly active users reaching over 105 million, CMB’s two mobile applications were among the most popular banking app in China.
  • CMB’s retail banking business boasts the largest retail AUM per customer, which is more than two times that of its closest competitors in China.

Company Profile

With headquarters in Shenzhen, China Merchants Bank was founded in 1987. The bank is China’s seventh-largest listed bank by assets, with the largest distribution network among China’s joint-stock banks. CMB’s network is expanding rapidly. Its outlets are located mainly in China’s more developed areas, such as the Pearl River and Yangtze River deltas. The firm has 18% and 82% of its shares listed on the Hong Kong and Shanghai exchanges, respectively. It has no foreign strategic investors. China Merchants Group is its largest shareholder, with a 30% stake. Retail banking, corporate banking and wholesale banking accounted for 52%, 45%, and 3% of total profit before tax, respectively, and 54%, 42%, and 4% of total revenue in 20220.

 (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.

Categories
Commodities Trading Ideas & Charts

Investors Overlooking Occidental’s long term Cash Generation Potential

fair value is estimated to $37 per share, from $32. The increase primarily reflects a reduced cost of capital assumption. Given how quickly the firm is deleveraging it is appropriate to penalize the firm with an above average cost of debt.

The preoccupation with near-term capital returns has driven investors away from Occidental. The firm is still coping with uncomfortable leverage ratios following the ill-timed 2019 acquisition of Anadarko Petroleum, making debt reduction the only prudent use of its excess cash. The market is overlooking the firm’s relatively modest base decline. 

Oxy has a diversified portfolio, with oil and gas contributions from non-shale assets in the Middle East and the Gulf of Mexico to complement its unconventional operations in the Permian Basin and the DJ Basin. So it can more easily sustain its production than shale pure plays that must continually invest in new drilling to offset steep declines from existing wells.

Company’s performance

The firm’s enhanced oil recovery operations further reduces the base decline. The firm also generates stable cash flows from its extensive midstream and chemical segments. As a result, the firm can hold its volumes flat with a long term reinvestment rate of about 35%. And when the firm reaches its target debt level, which it can realistically do in 6 months from now, given how quickly it is generating excess cash, then that very low reinvestment rate should leave plenty of free cash to distribute. The three firms we highlighted earlier–Pioneer, Devon, and EOG–have 2025 discretionary cash flow yields of about 10% at current prices. 

Company’s Future Outlook

That means the market is baking in long-term dividend yields of around 5%, assuming these firms plan to return half of their surplus cash. In contrast, Oxy’s discretionary cash flow yields in 2025, after accounting for all capital spending and preferred dividends, is over 20% at the current price. This underscores our view that shares are undervalued.

Company Profile

Occidental Petroleum Corporation (NYSE: OXY) is an independent exploration and production company with operations in the United States, Latin America, and the Middle East. At the end of 2020, the company reported net proved reserves of 2.9 billion barrels of oil equivalent. Net production averaged 1,306 thousand barrels of oil equivalent per day in 2020 at a ratio of 74% oil and natural gas liquids and 26% 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.