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Global stocks

PetroChina and Sinopec Guides Significant Improvement in 1H Earnings; Positive Readthrough for CNOOC

Overall, the sector is still undervalued but our preferred pick is CNOOC, given its upstream focus and cost efficiency with all-in cost of below USD 30 per barrel. Higher oil prices should be positive for oil producers, this could be negative for PetroChina’s and Sinopec’s downstream operations, especially if the government decides to delay price hikes for refined products to prevent inflation. The better earnings are widely expected by the market, given that the weak results in 2020 were due to lower oil prices and COVID-19 disruptions. PetroChina and Sinopec attributed the improvement to recovery in prices and demand for oil and gas products, as well as stringent cost controls.

Oil prices are likely to remain elevated (above midcycle price of USD 60 per barrel for Brent) for at least another 6-12 months, in our view, as supply/demand dynamics support current price levels. All is going according to plan with a continued vaccine rollout, decline in infections, and recovery in demand. On the supply side, an accelerated return of Iran volumes continues to pose a risk, but we still see the situation as manageable.

Company Profile

China Petroleum & Chemical, or Sinopec, is one of China’s national oil companies and one of Asian’s largest integrated oil companies in terms of revenue. Its income is derived primarily from refining and marketing of oil products and petrochemical production. Sinopec has China’s largest petrol station network with over 30,000 stations and enjoys significant market share in petrochemicals. Established in 2000 by China Petrochemical Corporation, a state-owned enterprise and majority shareholder, the company also owns oil and gas assets in Shandong and Sichuan provinces. It has a smaller global upstream presence than peers PetroChina and CNOOC.

(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

The Semiconductor Shortage Is Holding Back Ford’s June Sales

The semiconductor shortage ravaging the auto industry should bottom out in mid-2021, so gradual inventory improvement throughout the year, though a full recovery to take until 2022 or even 2023. The good news is that demand is excellent, with many consumers ready to spend money after holding back vehicle spending last year due to the pandemic.

Ford reported June sales on July 2 that showed the semiconductor shortage is hurting it notably worse than the rest of the industry. Management has repeatedly cited the impact of the Renesas plant fire in Japan as a major problem for Ford. June sales fell year over year by 26.9%, which far underperformed the industry’s 17.8% growth. We don’t see Ford having poor demand. The problem is low supply caused by the semiconductor shortage. With time Ford’s sales to be stronger in the second half of 2021 than the first half. First-half sales rose by 4.9% versus first-half 2020 (which is an easy comparable due to the pandemic), with about equal growth at the Ford and Lincoln brands. The 4.9% lags GM’s first-half 2021 growth of 19.8%. Ford’s first-half volume is down by about 20% from the first half of 2019. The best bright spot in Ford’s June sales is the Lincoln Navigator SUV, which grew volume by 15.5%. Lincoln’s SUVs had a first half of the year sales record, with retail channel sales up 23.3% year over year. June F-Series sales fell by 29.9%, and the company now has over 100,000 reservations for the all-electric F-150 Lightning due next year.

Company Profile

Ford Motor Co. manufactures automobiles under its Ford and Lincoln brands. The company has about 14% market share in the United States and about, 7% share in Europe. Sales in North America and Europe made up 69% and 19.5% of 2020 auto revenue, respectively. Ford has about 186,000 employees, including about 58,000 UAW employees, and is based in Dearborn, Michigan.

(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
Shares Small Cap

Bega Cheese’s Strength isn’t Strong Enough to Justify a Financial Moat

Competitive pressures from branded peers, niche operators, and private label products and a reliance on powerful supermarket customers will weigh on Bega’s ability to increase prices, leading to potential market share and margin deterioration. Despite the firm’s strategic shift toward a more diverse product offering, we expect dairy products to continue to represent the majority of Bega’s sales over the next decade, exposing the firm to commodity pricing and volatile input costs.

In November 2020, Bega entered an agreement to acquire Lion Dairy and Drinks from Kirin Group for AUD 534 million with the deal expected to be finalized in January 2021. Revenue from the branded segment, which includes spreads and grocery products and Lion’s Dairy and Drinks portfolio, to expand at a CAGR of 7.4% to fiscal 2025, underpinned by new product innovation and bolt-on acquisitions. Historically, Bega Cheese has made limited investment in its brands, particularly in Australia where Fonterra is the licensee of the Bega brand, however since acquiring the spreads and grocery business in 2018, marketing spend as proportion of revenue has increased to 3% from 1% and it to remain the higher level.

Bega Cheese’s Supply Chain and Manufacturing

At least 70% of Bega’s energy consumption is from fossil fuel generation. But these risks are immaterial to our unchanged AUD 5.00 per share fair value estimate and high uncertainty rating. Bega Cheese already operates in a highly competitive market, with a largely commoditized product offering and high private label penetration in key categories. Bega Cheese’s supply chain and manufacturing is heavily reliant on water, exposing the company to increased water costs and community backlash from inefficient water use.As pressure mounts to reduce global carbon emissions, there is the potential for a reintroduction of regulated carbon pricing in Australia, however, this is not factored into our base case. Extreme weather events such as droughts and bushfires may result in higher input costs, margin deterioration from reduced production volumes, disruptions to the supply chain and increased scrutiny on resource use. Climate change risk may lead to extreme weather in the short term or changing climate patterns longer-term impacting its supply chain and input costs. Management is certainly diversifying Bega Cheese’s product offering and building out the branded business through acquisitive growth in recent years

Financial Strength

Bega’s balance sheet will be stretched following the acquisition of Lion Dairy and Drinks, with pro forma net debt/EBITDA on a post AASB 16 basis deteriorating to 3.3 (from 2.3 pre-acquisition). Bega funded the acquisition through a AUD 401 million equity raising and AUD 267 million of new and extended debt facilities. The balance sheet to gradually deleverage as synergies are delivered, earnings improve and noncore assets are divested, with net debt/EBITDA falling to below the firm’s target of 2 by fiscal 2024. Bega will continue to explore potential bolt on acquisitions and partake in industry rationalisation. While the timing and scale of further acquisitions is uncertain, Bega has the capacity to pursue smaller acquisitions while maintaining a dividend payout ratio of 50% normalised EPS.

Changing Consumer Trends

  • Bega is shifting investment to the spreads and grocery business, which we view as less commoditised and higher margin than dairy, with strong niche positions in Vegemite and peanut butter
  • External factors outside of Bega’s control, such as the weather, can adversely impact supply and demand dynamics. This can impact commodity prices, inputs costs and the firm’s supply chain and lead to volatile earnings
  • Changing consumer trends toward dairy-free and vegan diets could lead to declines in per-capita dairy and cheese consumption, weighing on the majority of Bega’s earnings

Company Profile

Bega Cheese is an Australian based dairy processor and food manufacturer of well-known brands including Bega Cheese and Vegemite. On a pre-acquisition of Lion’s Dairy and Drink’s basis, the firm generated approximately 70% of sales from its domestic market, with the remainder from exports to over 40 countries, predominately in Asia. Bega Cheese operates two segments: the branded segment which produces consumer packaged goods primarily sold through the supermarket and foodservice channels and the bulk segment which produces commodity dairy ingredients primarily sold through the business-to-business channel.

(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
ipo IPO Watch

Following Over Subscribed IPO, Resource Base to Acquire Black Range Metal Project

Black Range Acquisition

Following the completion of an initial public offering (IPO) and planned relisting on the Australian Securities Exchange, junior minerals company Resource Base will pursue an aggressive exploration campaign at the potential Black Range base metals property in northwest Victoria.

In February, Resource Base obtained a conditional right to purchase Black Range from its present owner, Navarre Minerals (ASX: NML). The firms reached a definitive agreement under which Navarre will dispose the non-core asset in exchange for $1.52 million in Resource Base shares upon listing.

A second tranche of 2.5 million shares will be awarded to Navarre upon the announcement of a JORC resource of 100,000 tonnes within five years, and a third 6 million share tranche will be issued upon the delivery of the project’s comprehensive feasibility study.

Eclipse Prospect

After the acquisition is completed, Resource Base will conduct exploration, pre-feasibility studies, and bankable feasibility studies on the project to show the commercial viability of a mining operation.

The Eclipse opportunity, which sits in the Stavely corridor and is considered prospective for volcanic-hosted massive sulphide mineralisation, is Resource Base’s priority objective within the project.

The first two years as a public business will also include evaluating fresh exploration and acquisition prospects, as well as completing studies for near-term copper and gold production.

“The company will also consider further merger and acquisition activity where appropriate, with a view to growing the company and creating further value for shareholders.”

Company Profile

Resource Base Limited is a mineral exploration company focused on the acquisition and development of highly prospective exploration projects with demonstrated potential for scalable discoveries.

(Source: Small Caps)

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

Recent Acquisitions and Divestments Have transformed Charter Hall Retail REIT’s Portfolio

The group also recently announced another acquisition, spending AUD 51.2 million to buy the Butler Central Shopping Centre in Western Australia. Purchased on a 6% cap rate, which is about in line with our estimated yield on Charter Hall Retail REIT.

Recent acquisitions and divestments have transformed Charter Hall Retail REIT’s portfolio. AUD 177 million portfolio of shopping centers was sold in fiscal 2020. Then in July 2020, the REIT acquired a stake in a Coles distribution centre with 14 years remaining on the lease, with fixed annual rental uplifts of 2.75%. As at June 30, 2020, Woolworths was the largest tenant, representing 18% of income, but we expect Coles will be the largest tenant by the end of fiscal 2021. Aldi is also likely to rise in our view (currently 2% of income), via store numbers increasing in Charter Hall’s portfolio. And BP now represents about 12% of rental income, from zero a year ago. Wesfarmers will likely decline
Slightly as a result of Target stores closing or converting to Kmarts.

Rent is Charter Hall Retail REIT’s dominant revenue driver. Unlike many other Australian REITs, it does not operate any meaningful funds management business, and is unlikely to do so given funds management opportunities are housed in the head stock Charter Hall.

Financial strength
Charter Hall Retail REIT is in reasonable financial health after raising equity in April and May 2020, bolstering the balance sheet. Gearing reduced from near 40% in December 2019 to 35% in December 2020 (as measured by look-through gearing, which is net debt/assets, including debt obligations in underlying vehicles). The covenant of most concern is over an underlying fund, not the entire REIT. It specifies that gearing within that fund is limited to 55%. The fund is already geared to at 40.5%. That implies that a 25% fall in asset values would see that fund flirting with a breach. This fund represents only a small portion of the REIT’s overall assets, so we estimate leverage problems there could be solved by a modest cash injection into the fund – that should be affordable given manageable gearing at the REIT level of 35% (December 2020).

Bulls Say
• Well over half of revenue comes from tenants that we consider to have a low likelihood of missing rent payments. Combined with long leases on anchor tenants, CQR’s income is relatively resilient.
• Interest rates look set to remain lower for longer, suggesting that the market will maintain low discount rates on property assets that can generate income.
• Good anchor tenants generate foot traffic, and Charter Hall Retail charges rent well below levels in high-end discretionary focused shopping malls, suggesting less vulnerability to e-commerce.

Company profile
Charter Hall Retail REIT, or CQR, owns and manages a portfolio of convenience focused retail properties, including neighborhood and sub regional shopping centers, 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
Technology Stocks

Sustainalytics Rated Weibo – Medium ESG Risk

daily newspaper and a magnifying glass to find news

Weibo’s recent content enhancements include video accounts (similar to Weixin’s), video pages with both professionally generated content and user-generated content (similar to YouTube channels), the discovery zone (where users can find the popular discussion topics at the main entrance of Weibo), and vertical videos focused on user-generated content.

With the increasing importance of more focused marketing and return on investment for advertisers, Weibo has started to catch up. For example, Weibo introduced optimized cost per x model in 2019. Advertisers can also evaluate their sales conversion on Tmall from the fans accumulated through advertising campaigns on Weibo in collaboration with Alibaba through the uni-marketing program. We expect to see increasing product development costs in the next few quarters. We believe investment in research and development is vital for Weibo even if that means near-term margin compression.

To improve small and medium-size enterprise ad revenue, Weibo is expanding into untapped and faster-growing verticals such as Taobao merchants, online education, and online gaming by restructuring its sales team since 2019. For example, it has enhanced cooperation between sales and technical teams to provide customized services to top SMEs of key verticals. The success of the new model is unclear because of the disruption from COVID-19.

Financial Strength

Weibo has a strong balance sheet with a net cash position of $1.06 billion as of December 2020. The company started to make a profit in the second quarter of 2015. Operating leverage has increased significantly in recent years; the operating margin improved from 7.8% in 2015 to 25.5% in 2018 and 30.0% in 2020. This has helped the company to generate free cash flow from 2015 to 2020. The company has significantly beefed up its cash war chest through operating activities and note issuances in the past few years. The balance sheet displayed an increase in long-term investments from $695 million in December 2018 to $1,179 million in December 2020, while generating operating cash flow of $742 million during 2020. We expect Weibo to continue to make long-term strategic investments with its cash. We do not expect it to pay dividend in the next few years. As of March 30, 2021, Moody’s assigned a Baa2 (previously Baa1) issuer rating to Weibo with a stable outlook (previously negative). Moody’s been concerned about using Weibo’s assets and cash to service or repays the privatization debt of Sina.

Bulls Say

  • Weibo has been able to sustain its status as the go to platform for following top trends and topics and celebrities.
  • Weibo puts more focus on return on investment for advertisers and now provides optimized cost per x.
  • Weibo upgraded its ad platform to enhance marketing scenarios, ad formats, algorithms, and Big Data analysis to increase its competitiveness.

Company Profile

Weibo is the largest social media platform in China. As of 2020, Weibo had 521 million monthly active users and 225 million daily active users, many of whom are drawn there by the millions of key opinion leaders in entertainment, sports, and business circles. Sina is the major shareholder, holding 44.7% of shares and with 70.8% voting power; Alibaba holds 29.8% of shares and 15.7% voting power

(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

Asbestos Ringfence Doesn’t Alter Our Long-Term View of ITT, but it simplifies the business

After reviewing the terms of the deal and modeling it in the background based on pro-forma, we don’t expect to materially alter our FactSet consensus low fair value estimate of $89 per share (the math in our model currently suggests a reduction in the intrinsic value of about $1).

However, we await further details in order to re-publish our model. While the company estimates an after-tax loss of $27 million in the second quarter, according to the 8-K filing, it’s still evaluating the accounting for the transaction.

At a high level, the terms of the deal are rather simple. The deal effectively ringfences ITT from further asbestos-related and other product liabilities, as the indemnification provisions aren’t subject to any cap or time limits. ITT contributed approximately $398 million of cash to InTelCo, which is the subsidiary that holds these liabilities, in order to adequately capitalize the entity. As part of the deal, ITT’s balance sheet removes all asbestos obligations and related insurance and deferred tax assets as of July 1. Delticus, Warburg Pincus’ investment vehicle, will assume the operational management of InTelCo, including the administration of all asbestos claims.

While the deal may negligibly reduce our fair value, we like that it allows ITT to close a chapter on having to manage this legacy liability. The transaction simplifies the balance sheet, removes a layer of investor uncertainty, including “known unknowns,” and allows ITT to focus on its core operations. From that standpoint, the deal is a win

Company Profile

ITT is a diversified industrial conglomerate with nearly $3 billion in sales. After the spin-offs of Xylem and Exelis in 2011, the company’s products primarily include brake pads, shock absorbers, pumps, valves, connectors, and switches. Its customers include original-equipment and Tier 1 manufacturers as well as aftermarket customers. ITT uses a network of approximately 700 independent distributors, which accounts for about one third of overall revenue. Nearly three fourths of the company’s sales are made in North America and Europe. ITT’s primary end markets include automotive, rail, oil and gas, aerospace and defense, chemical, mining, and general industrial.

(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.