Categories
Property

ALE Property Group(LEP)

Mortgage, investment, real estate and property concept. Dollar money and house keys
  • Triple net leases to ALH.
  • High quality property portfolio with positive fundamentals and supportive demographics.
  • Potential upside as LEP’s assets have significant land value (95 hectares) and LEP continues to explore development opportunities with ALH.
  • Long term leases with average lease term of >8 years (and positive lease terms).
  • 100% occupancy rate as all properties are leased to ALH.
  • Solid distribution yield.
  • Potential rental growth from upcoming rental reviews in 2018.
  • Demand for pub property investment remains strong

Key Risks

We see the following key risks to investment thesis:

  • Interest rate levels may rise or deterioration in credit/capital markets and thus reduced profitability and distributions
  • Any slowdown in demand and net absorption for retail space.
  • Any deterioration in property fundamentals especially delays with developments, declining asset values, bankruptcies and rising vacancies.
  • Declines in property valuations.
  • Rental rates post reviews may be unfavorable.
  • Weakness in rental demand – Slow wage growth and on the back of rising costs of living.
  • LEP is exposed to single tenant risk from ALH via any default on rental payments. ALH is part of Endeavour Group, which is likely to be demerged in CY20. Whilst default remains unlikely, single tenant risk is higher than previous levels.
  • Adverse regulatory changes on liquor or gaming licenses could impact the profitability of tenants (lockout laws repeals may not be as effective as desired).
  • Distribution has been less than distributable profit, and management has had to finance the difference using cash reserves and undrawn debt facilities. However, net gearing is at historically low levels.
  • REITs as bond proxy stocks are impacted by expected cash rate hikes.

Property portfolio highlights

(1) divestment of non-core assets. LEP divested $72.86m of non-core assets, at a yield of 4.4% and 24.2% premium to book value. Proceeds were used to reduce net debt and partially restructure LEP’s interest rate swap book. LEP’s asset at Tudor Inn, Cheltenham Victoria and Royal Exchange Hotel, Toowong Queensland are currently for sale by tender and auction respectively. 

(2) Valuation uplift. 36 properties (44% of the portfolio) were independently valued, and Directors’ valuations were undertaken for the remaining 44 properties (56%), and resulted in an uplift of $89.71m, or 7.45%, since December 2020, to total value of $1,294.261m (on 4.59% adopted passing yield versus 4.94% in December 2020).

Company Description  

ALE Property Group (LEP) is the owner of Australia’s largest portfolio of freehold pub properties. Established in November 2003, ALE owns a portfolio of 86 pub properties across Australia, with a value of ~$1,172.1m (average value of $12.6m on weighted average cap rate of 5.09%). All the properties are leased to Australian Leisure and Hospitality Group Limited (ALH). ALH is Australia’s largest pub operator with ~330 licensed venues, ~550 liquor outlets and ~1,900 short stay rooms.

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

Zurich Investments Australia Property

The strategy is managed by Renaissance Asset Management while its distribution and marketing functions are provided by Zurich Investments. Co-founders Carlos Cocaro and Damien Barrack established Renaissance in 2003, however, their history of working together dates back to the late 1990s. The experienced duo often express contrarian views on the property stocks and sub-sectors in their investment universe, however, they continue to impress with the depth of research and insights that back up their opinion.

Relentless value-focus and considered risk-taking

Renaissance is value-focused, and this translates into sizable departures from index weightings or investing off-benchmark. The portfolio actively tilts toward sectors and companies that look the cheapest, which means it can have significant small-cap exposures at times. All research and valuation estimates are internally driven and modelled. The portfolio managers meet with companies every six months and inspect key property assets about every three years, or at other times if required.

The pair’s views on a trust’s strategy, asset management, and capital management skills are then captured in five-year earnings forecasts for each security. Careful analysis of the property sector is another key input into valuations and overall portfolio positioning. From a risk perspective, stocks must have a minimum interest cover of at least 2 times and/or a debt/asset ratio of less than 40% to be considered. 

Portfolio construction is determined by a value-ranking model with three yardsticks–twoyear distribution yields, five-year internal rates of return, and price/net asset value–with a definite leaning toward the first two measures. Dipping into off-benchmark stocks means liquidity can be scarce, but the team handles this through patience, buying into weakness and selling into strength.

Out-of-favour names and off-index small caps create differentiated portfolio

The value mindset results in a very different portfolio from the highly concentrated S&P/ASX 300 A-REIT Index at times. A chunky overweight in cheaper small caps since 2007 was curtailed in 2017 as they saw pricey-looking smaller names offering less opportunity, while valuation extremes in some large-cap stocks offered potential. This fund is not shy about participating in IPOs or soon after, as was illustrated by a number of IPO investments in 2016. 

Value remains the prime consideration for investment, illustrated by Renaissance’s investment into Propertylink after the stock underperformed following its IPO. Renaissance is overweight malls (as at 31 May 2021), particularly flagship operators such as Scentre Group, Vicinity, and Carindale shopping centre; the team feels that, while there is a cyclical and structural slowdown in retail, retail flagships will hold up better than their current market value implies. 

The team liked the office space from 2016 onward but viewed many of the stocks as expensive, but it did well from holding a relatively cheap Investa Office. In 2019, Renaissance expanded its underweight to Goodman Group, which it view as overpriced and with high operational leverage that could hurt in a downturn. Throughout 2020, the portfolio was overweight large caps because of better value but rotated into higher-yielding small-cap names at the beginning of 2021.

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

Taiwan Semiconductor Manufacturing Co.( TSMC)

JAPÓN BOLSA:KMA06. TOKIO (JAPÓN), 03/01/2018.- Un grupo de mujeres usan kimono durante la ceremonia de apertura de la Bolsa de Tokio de Japan Exchange Group, Inc. de la primera sesión comercial de Año Nuevo en 2018 en la Bolsa de Tokio, en Tokio, (Japón) hoy, jueves 4 de enero de 2018. EFE/KIMIMASA MAYAMA
  • Market leading position and room for further consolidation. TSMC’s significant expenditure on R&D should help it maintain this leadership position.
  • TSMC is leading the race in developing the new age of semiconductor chips such as Logic Technology, with thinner wafers being developed every year.
  • High barriers to entry – significant level of capital and know-how required to start a semiconductor business.
  • Independent and pure-play focus on manufacturing without marketing or branding of product eliminates conflict of interest with customers.

Key Risks

We identify the following key risks to investment thesis:

  • Moderating global economic growth, especially in the U.S. and China.
  • Trade tensions between the U.S. and China.
  • Operational risks such as suboptimal manufacturing quality of products e.g. Fab14B photo incident.
  • Softening smartphone sales and production. There may be a time-lag before the layout of 5G and AI materialize into sales for TSMC, e.g. regulatory restrictions.
  • Increasing commodity prices and difficulty for TSMC to improve margins. 
  • Unfavorable exchange rate movements between NT$ and currencies used in transactions (however, TSMC utilizes hedging strategies to manage this risk).

Management Outlook:

Forecasting strong demand for industry-leading 5nm and 7nm technologies, driven by all four growth platforms (smartphone, HPC, IoT and Automotive-related applications), anticipating 3Q21 revenue of US$14.6-14.9bn, and gross profit margin of 49.5-51.5% and operating profit margin of 38.5-40.5% (based on the exchange rate assumption of 1 US dollar to 27.9 NT dollars). Mr. C. C. Wei (CEO) noted, “For FY21, we now forecast the overall semiconductor market excluding memory to grow about 17%, while foundry industry growth is forecast to be about 20%, and remain confident we can outperform the foundry revenue growth and grow above 20% in 2021 in US$…we now expect our long-term revenue CAGR from 2020 to 2025 to be near the high end of our 10-15% CAGR range in US$…however, in the near term, we continue to observe both short-term imbalances in the supply chain driven by the need to ensure supply security as well as a structural increase in long-term demand, and while the short-term imbalance may or may not persist, we expect our capacity to remain tied throughout the year and into 2022, fuelled by strong demand for our industry-leading advanced and special technologies.”

Company Description  

Taiwan Semiconductor Manufacturing Company Limited (TSMC), together with its subsidiaries, engages in manufacturing, selling, packaging, testing, and computer-aided design of integrated circuits and other semiconductor devices. Based in Taiwan, the company manufactures masks and electronic spare parts; researches, develops, designs, manufactures, sells, packages, and tests colour filters; and offers customer and engineering support services. TSMC is the largest semiconductor manufacturing foundry in the world.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.