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Tenneco stock ride performance products and systems for light vehicle

× In our opinion, Tenneco stock valuation has been unfairly punished because of the high level of debt after the Federal-Mogul acquisition; the postponement of the separation of DRiV, which implies previously unanticipated integration challenges; as well as transient operating environment and cost issues.

× The company has demonstrated an ability to perform in an unfavorable operating environment while carrying a high debt burden. In 2008 and 2009, total debt/EBITDA exceeded 4.0 times. In 2009, the stock hit a low of $0.70. Since then, shares have traded as high as $68.71 (2016), and total debt/EBITDA reached a low of 1.6 (2014). At the end of the second quarter of 2019, the credit metric was 3.5 times.

× Our forecast assumes 1% pro forma average annual revenue growth from 2017 (the year before the Federal-Mogul acquisition) to 2023 versus a 4% 10-year historical growth rate for old Tenneco. Our Stage I EBITDA margin assumptions average 9.7%, with a normalized sustainable midcycle of 9.6%.

× During the past 10-years, Tenneco’s high, low, and median EBITDA margins have been 9.6%, 7.3%, and 9.1%. In 2017, including targeted $200 million integration cost savings and adding $50 million for public company costs for the eventual spin-off of DRiV, we estimate pro forma EBITDA margin would have been 10.4% versus Tenneco’s as-reported 9.4%.

× We estimate that for our model to generate a fair value equivalent to the sell-side consensus estimate and the current market valuation, investors would have to believe midcycle EBITDA margins of 5.5% and 5.0%, respectively.

Tenneco Inc. designs, manufactures, and sells clean air, powertrain, and ride performance products and systems for light vehicle, commercial truck, off-highway, industrial, and aftermarket customers worldwide. The company operates through Clean Air, Powertrain, Ride Performance, and Motorparts segments. It offers clean air products and systems, including catalytic converters and diesel oxidation catalysts; diesel particulate filters(DPFs); burner systems; lean nitrogen oxide (NOx) traps; selective catalytic reduction (SCR) systems; hydrocarbon vaporizers and injectors; SCR-coated diesel particulate filters systems; urea dosing systems; four-way catalysts; alternative NOx reduction technologies; mufflers and resonators; fabricated exhaust manifolds; pipes; hydroformed assemblies; elastomeric hangers and isolators; and aftertreatment control units. The company also provides powertrain products and systems, such as pistons; piston rings; cylinder liners; valve seats and guides; bearings; spark plugs; valvetrain products; system protection products; and seals and gaskets. In addition, it offers motor parts, including steering and suspension, braking, sealing, engine, emission, and maintenance products, as well as shocks and struts; and ride performance products and systems comprising advanced suspension technologies, and ride control and braking products, as well as noise, vibration, and harshness performance materials. The company was formerly known as Tenneco Automotive Inc. and changed its name to Tenneco Inc. in 2005.

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Dividend Stocks

Flight Centre Travel– Trading Update Supports Recovery

Furthermore, the cost of maintaining the physical network (wages, rent) is likely to magnify the impact on earnings from just a slight weakness at the top line. However, the corporate travel unit within Flight Centre is more profitable (lower fixed costs, more automated), structurally more resilient (more essential travel volume, longer growth runway) and will become a bigger part of the group going forward.

Key Investment Considerations

  • The company’s ability to thrive in a weakened retail environment demonstrates earnings resilience.
  • History suggests Flight Centre’s earnings do not benefit significantly from a stronger Australian dollar, while the effect of a weak domestic currency is typically offset by airlines lowering fares, travellers substituting lowerpriced overseas destinations such as Bali, and a rise in higher-margin domestic travel.
  • Flight Centre’s offshore initiatives are still paying off, and we remain optimistic that the firm’s highly developed ability to exploit profitable industry niches will generate acceptable returns overseas.
  • A strong balance sheet allows Flight Centre to take advantage of weakness in the economic cycle via opportunistic acquisitions or increasing market share via investment in marketing initiatives. It also enables the development of new products to more effectively address specific market segments.
  • Brand strength provides a potent underpinning for the blended online/physical store offering.
  • Travel agents are customer aggregators. As it is the largest agent in Australia, scale enables Flight Centre to negotiate favourable deals with travel providers.
  • Domestic market success does not guarantee the sustained success of offshore expansion. The firm’s scale in offshore markets is significantly less than in Australia.
  • Occupancy and staff costs reduce the competitiveness of brick-and-mortar travel agents, such as Flight Centre, relative to online-only competitors who contend with much lower overheads. New generations of consumers are increasingly confident about shopping online, which reduces the cost of market entry for new players.

 (Source: Morningstar)

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Dividend Stocks Shares Technical Picks

Fortescue Metals Group- Iron Ore Price to Strong

There is an approximate one-month delay between shipping the iron ore and prices being finalised. Higher profit versus last year was driven primarily by price, which rose 21% to USD 79 per tonne. Volumes were mildly positive, with iron ore shipments up 6% to 177 million tonnes. The strong result saw Fortescue increase total dividends by 54% to AUD 1.72 per share, slightly ahead of our AUD 1.60 forecast.

We make no change to our AUD 7.70 per share fair value estimate. While the fiscal 2020 result was strong, we struggle to see how the buoyant iron ore price can be sustained. It’s hard to imagine external conditions getting materially better, and we see longer-term downside. On the demand side, we see a coming headwind as infrastructure spending to offset the COVID-19 downturn in China abates and as urbanisation and infrastructure requirements

generally reduce. The peak of urbanisation has passed, and China’s stock of housing and infrastructure is now relatively mature. We expect China’s steel consumption to slow accordingly and for a growing proportion of steel to come from recycling at the expense of iron ore demand.

We see modest supply additions from Fortescue’s Iron Bridge, Vale’s planned 20 million tonne S11D expansion, and the 7 million-8 million tonne Samarco restart. Longer term, the restart of production from Vale’s mines interrupted by the 2019 Feijao tailings dam failure is material. Production in 2020 is likely to be almost 100 million tonnes lower than we expected before the failure, or about 6% of global supply.

Admittedly, the outlook for near-term earnings is very strong. We expect only a 9% decline in earnings in fiscal 2021 from fiscal 2020’s record level. However, the iron ore price is way above its marginal cost, reflecting the dual shocks to supply–primarily from Vale since 2019 –and demand from China’s stimulus.

Year-to-date steel production in China is up a remarkable 2.8% with a sharp recovery from the February COVID-19- related downturn. In July 2020, steel output in China was up 9.1% on the same month in 2019. The uptick in iron ore imports has been even stronger with China imports up 12% to 659 million tonnes in the year ended July 2020. And for the month of July, imports were a record 102 million tonnes and up 24% on July 2019. With China the dominant source of demand for iron ore, accounting for more than 70% of seaborne consumption, strength there has more than offset any weakness everywhere else.

 (Source: Morningstar)

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Global stocks

Hongkong Land’s Long-Term Vision Is Maintained After a Century

Over more than a century, it assiduously assembled, maintained and upgraded these assets and turned them into a portfolio consisting of the most desirable office addresses and retail locations in the city. The HK portfolio accounts for nearly 65% of the company’s earnings, all of which stable rental incomes.

HKL is the second-largest office landlord in Hong Kong behind Swire Properties, but one with the most centrally located assets. It is the clear beneficiary of rising demand in the HK office sector, prior to a weakened market in 2020. Driven by strong demand from Chinese corporates establishing presence in the city, corporates are particularly attracted to the high-grade office spaces offered by HKL. Beyond the attraction of modern grade-A office spaces, these assets offer sizable floor plates, unrivalled visibility and prestige, due to their storied histories and locations.

Fundamentally, existing office space and new supply in HK is below that of world financial centers. The small CBD with tight supply was a key driver of the decentralization trend. While office demand weakened in 2020 due to the social unrest and coronavirus pandemic, HKL’s assets maintained near full occupancy, attributable to its selection of blue-chip tenants and lease management. We expect the company’s portfolio in the city to fare well in coming years, underpinned by demand from Chinese corporates and the city’s status as a world financial center.

The company holds investment properties in Singapore, Jakarta, and Beijing. It also currently has development projects in Singapore and China. Given Hong Kong’s current high asset value, acquisitions in recent years include large commercial projects and development projects in several cities across the Asia-Pacific. However, the company’s focus in Hong Kong is clear. During the downturn in 1982, the company disposed most of its overseas assets in a bid to shore up its balance sheet and hold on to its core portfolio in Hong Kong.

Fair Value and Profit Drivers

Our fair value estimate for Hongkong Land is USD 7.20, implying a price/book ratio of 0.5 times, a forward P/E of 20 times, and enterprise value/EBITDA of 22 times. Our valuation is based on a cost of equity of 8.5% and a weighted average cost of capital of 6.9%. Over the next five years, we expect average return on invested capital to average 9%.

As Hongkong Land is a property investor first and foremost, and its development projects in Singapore, China and elsewhere are more opportunistic, we believe the long-term growth is driven by rental growth of its core portfolio in Hong Kong, and to a lesser degree in Singapore. For the Hong Kong office portfolio, we assume spot rental of HKD 110 per square foot per month, compared with an average rental of HKD 120 per square foot per month in 2020. With lease expiry at 4.6 years, we assume 20% annual lease expiry over the next five years. As such, we project blended net rental declines by 1.5% annually over the next two years, before a recovery thereafter.

Average net rent for its retail portfolio was HKD 164 per square foot per month in 2020, due to rental subsidies offered. Excluding the subsidies, rental was HKD 212 per square foot per month. Our spot rental in 2021 factors in a decline of 10%. With lease expiry declining to 1.9 years as retailers are unwilling to commit to longer leases, we expect blended rental to fall 8% in 2021. We assume near full occupancy as most luxury brands’ flagship stores are located in Hongkong Land’s properties in Central. As such, we do not expect any impact from a consolidation of luxury stores to be a negative impact. Further, fitouts for flagship stores are high.

Hongkong Land Holdings Ltd

Hongkong Land is a property investor mainly holding prime commercial assets in Hong Kong and Singapore. The company is the second-largest office landlord in Hong Kong with a portfolio of centrally located assets totalling 4.1 million square feet of office space along with 0.6 million square feet of retail space. It also holds 1.6 million square feet of prime office space in Singapore. Rental income accounts for about 75% of the operating profit, with most coming from Hong Kong. Property development projects in Singapore and China contribute the rest. The company was founded in 1889 and is dual-listed on the London Stock Exchange, with a secondary listing on the Singapore Exchange. It is 50%-owned by Jardine Matheson Holdings.

Source: Morningstar

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Dividend Stocks Shares

Coca-Cola Amatil Ltd– Uncertainties Remain

While we expect cost control, plans to launch smaller package sizes at higher prices per litre, and an increasing line up of non-carbonated drinks, we forecast volume declines in soft drinks and a negative mix shift from reduced on-the-go sales to drive a double-digit decline in EPS in 2020. Nonetheless, we’re encouraged by the firm’s continued market share gains, and expect earnings growth to rebound in 2021 and beyond. On top of this organic outlook, Amatil has received a non-binding offer to take over the company from fellow bottler CCEP at an attractive price. Uncertainty remains, but we think there is a strong change the deal progresses.

Key Investment Considerations

  • Coca-Cola Amatil is facing declining carbonated beverage consumption and heightened bottled water competition in its core Australian market, which will likely limit the firm’s near-term pricing power. Despite challenges in mainstream soft drinks, Amatil’s distribution deals with third parties, growth opportunities in emerging markets, and launches of smaller package sizes should drive positive annual revenue gains.
  • Amatil aims to pay out more than 80% of its annual earnings in dividends, and we forecast a low-single-digit growth pace. We expect dividends will remain unfranked until 2021, after which we see franking at 50%.
  • Coca-Cola Amatil’s long-standing relationship with The Coca-Cola Company (TCCC) and a solid distribution network and retailer relationships in Australia, New Zealand, Fiji, Indonesia, and Papua New Guinea, afford the beverage bottler sustainable brand intangible assets and a cost advantage versus its competitors and potential upstarts. However, health-led headwinds in developed markets will likely drive further pressure on Amatil’s carbonated beverage portfolio.
  • The Coca-Cola Company’s nearly 31% ownership in Coca-Cola Amatil solidifies the relationship between the parent company and bottler, and an upcoming shift to incidence-based pricing should further align the firms’ goals.
  • Indonesia is a major long-run growth opportunity for Amatil, given the country’s continued economic development and relatively low rate of packaged beverage consumption.
  • Amatil has opportunities to increase its asset utilisation through additional distribution partnerships, such as recent deals struck with Monster Energy, Molson Coors, and Restaurant Brands.
  • Developments such as container return schemes in NSW and other Australian states, and potential sugary beverage taxes, serve as a price increase for consumers, and likely accelerate the decline of CSD volumes in Australia.
  • Pricing has been dented by both competitors and customers; Amatil has driven costs out of its production system, but a continued inability to pass through raw material inflation to consumers presents a long-term challenge.
  • The Coca-Cola Company owns the rights to Amatil’s major brands, and could negatively alter the pricing consideration for beverage concentrate purchasing.

 (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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Dividend Stocks

Cochlear Ltd- outlook

As such, we expect growth in this market to fade over the next 10 years.To combat this pressure, Cochlear is actively trying to grow the adult developed market for cochlear implants, which we estimate to be approximately 40% of current annual units. However, the cost of growing awareness and reimbursement support results in minimal operating leverage and the company has specifically guided to flat margins post the initial recovery from the pandemic.

Key Investment Consideration

  • Increasing investment is required to achieve top-line growth resulting in no operating leverage. OThe annuity-like revenue from sound processor upgrades and accessories to growing implant recipient base is set to increase from 30% in fiscal 2020 to approximately 50% of revenue by 2030.
  • Despite forecasting an 11.2% revenue improvement in fiscal 2021 off a depressed base year, we do not anticipate Cochlear to resume paying dividends until fiscal 2022 when it is expected to become free cash flow positive again.
  • There are signs Cochlear is looking to expand beyond the hearing market with the investment in Nyxoah, a company focused on development of a hypoglossal nerve stimulation therapy for the treatment of obstructive sleep apnoea, a large under penetrated market.
  • The annuity-like revenue from sound processor upgrades is an increasingly important component of the revenue stream.
  • Cochlear earns ROICs well ahead of the cost of capital even in our bear case scenario, which is testament to the
  • high quality of the company.
  • Growth in the cochlear implant market is becoming more costly to achieve and the lack of operating leverage limits the potential upside to earnings going forward.
  • The arrival of lost-cost competitor, Nurotron, could disrupt markets other than China should it seek to expand and this could trigger price deflation for incumbents.
  • The COVID-19 crisis could cause a significant outright loss of adult potential cochlear implant recipients as they avoid hospitals and cancel rather than defer elective surgeries. The referral and assessment process takes between nine and 12 months and as such, the impacts will take some time to be visible in the financial results.

 (Source: Morningstar)

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Property

Cromwell PropertyLtd – Cromwell FVE Unchanged

We see that as appropriate given gearing was an aggressive 42% as at June 30, 2020. There were some acquisitions on behalf of funds management clients, but these should generate fee revenue for Cromwell without stretching the balance sheet unduly.

We’re now more confident Cromwell’s lease to Qantas is not in jeopardy. We estimate the lease generates rent of AUD 20-35 million per year, which is only a tiny part of Qantas’ approximate AUD 12 billion 2020 cost base. Morningstar views Qantas as able to pay its bills. Furthermore, Qantas itself appears to view the lease as rocksolid because in September 2020 the airline advertised office space at its Mascot headquarters on a sub-lease basis. This suggests to us that Qantas is locked into the lease, and Cromwell will continue to collect rent at least until the lease’s 2032 expiry.

Qantas alone counts for about 15% of Cromwell’s gross rental income. Another 41% comes from federal, NSW, or Queensland government tenants. The landlord code of conduct has been extended generally until the new year, depending on the state. However we don’t view the code of conduct as onerous for Cromwell given SME tenants only represent about 9% of income.

We wouldn’t be surprised to see ARA’s proportional takeover offer price increased given solid performance in Cromwell’s portfolio and a strong market recovery sine the offer was first made. While the offer was only for 29% of each investor’s securities, when combined with ARA’s existing stake, and takeover creep provisions which allow ARA to buy securities on market at certain times, ARA may eventually gain control of Cromwell. The offer price offers no control premium, which is a further reason why we think investors should reject it.

 (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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Dividend Stocks Shares Technical Picks

Domino’s Pizza Enterprises- Outlook

The stock suits investors seeking exposure to the food and beverage sector. Australia can still increase its store base by around 40% over the next decade. European growth is much more substantial, with potential to substantially increase the existing store base to around 2,850 outlets during the next decade. In its capacity as a master franchisee, Domino’s capital requirements are limited, which means that royalty payments should continue to be paid as dividends.

Key Considerations

  • Domino’s was an early adopter of digital. By migrating orders online, the company has been able to save costs, establish a customer database, and up-sell to customers.
  • Japan and Europe are underpenetrated markets. Replicating its success in Australia abroad presents a significant growth opportunity.
  • Short-term drivers can materially affect year-to-year earnings, including currency movements, raw material input costs, and changes to foreign government policies related to sales taxes and wages.
  • Domino’s is a highly visible brand based on a successful U.S. business model. Across Domino’s three regions, sales have increase at a CAGR of 14% over the past four years. We expect annual growth rates to continue in the low teens over the next five years.
  • The pizza market in Europe is highly fragmented, presenting significant opportunity for Domino’s to take market share with an attractive value proposition, increased convenience to the customer, and a differentiated product offering.
  • The company’s large network size has positive implications for discounted supplier arrangements.
  • There is a high level of competition, stemming from independent pizza stores and other quick-service restaurants.
  • The company might evaluate its target markets in new countries incorrectly, given the geographical distance and cultural variances.
  • The low-price business model may still be affected by slowing retail and discretionary spending.

 (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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Dividend Stocks Shares

Costa Group Holdings – Expansion to Drive Costa’s Earnings Growth

The Australian fresh produce industry enjoys some protection from imports, with strict biosecurity restrictions and Australia’s relative geographic isolation. But the local market is highly fragmented, and competing product lines are largely commoditised. Further, Costa’s concentrated customer base prevents the establishment of an economic moat because the balance of bargaining power lies with its powerful customers, notably the dominant supermarket chains.

Key Investment Considerations

  • Costa Group’s earnings are highly exposed to the major Australian supermarkets, which constitutes around 70% of produce revenue.
  • Fluctuations in weather and climate can lead to volatility in pricing and yield.
  • International berry expansion to China is running according to Costa’s original five-year plan and appears set for significant growth.
  • Costa’s strong market share in key categories mitigates its high customer concentration risk.
  • International berry expansion to China is running according to Costa’s original five-year plan, and appears set for significant growth.
  • Costa is well-positioned to capitalise on high growth in emergent product categories, such as blackberries.
  • Costa Group’s earnings are highly exposed to the major Australian supermarkets, which constitute the majority of revenue.
  • Severe weather conditions can lead to undesirable volatility in both pricing and yield.
  • Access to water is also imperative to Costa’s business, and restrictions or termination of water rights due to events such as drought would adversely affect Costa’s ability to maintain its crops.

 (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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Property

Dexus- Solid Balance Sheet

The majority is in the Sydney CBD or fringe (54% by book value), as well as substantial CBD exposure in Melbourne (18%) and Brisbane (13%), and minor other holdings around Australia. The group has a sizable industrial property portfolio (14% of income), and small retail and healthcare property interests. Funds management and property management accounts for about 8% of income, with funds management the group’s fastest growth engine. The group targets a gearing of 30 40%, so financial risk is moderate considering that revenue is underpinned by long leases with fixed or CPI uplifts. Its funds management business is sticky given lock-ups and switching costs (exit penalties, and tax/transaction costs).

Key Investments

  • Rental income is underpinned by high-quality assets, relatively long leases, and fixed or CPI-linked escalations. Developments and the funds-management platform can add to growth.
  • Very low government bond yields increase the relative attractiveness of Dexus’ yield, but the share price would likely retrace sharply to any unexpected jump in bond yields, or further negative earnings surprises.
  • Office supply is increasing and Dexus has material lease expiries in fiscal 2021 and 2022 (especially in Melbourne, 25% in fiscal 2021). The group will likely offer substantial lease incentives to attract tenants.
  • Dexus owns a high-grade office property portfolio and a solid industrial portfolio, and it will likely benefit from an ongoing demand for quality property from the likes of pension funds, sovereign wealth funds and other offshore investors.
  • Population growth boosts the value of Dexus’ assets with high-quality sites achieving more rent bargaining power, and some low quality sites potentially switching to higher value uses. OLower interest rates could weigh on capitalisation rates, offsetting pressure on rent collections.
  • Capitalisation rates are historically low and likely to rise. Even if government bond yields remain low compared with history, property is not a risk-free asset and should be priced with appropriate risk premiums. OProperty may be considered a bond proxy, but it is not a bond. The poor performance of retail property is a reminder that property can be disrupted by technology, as is now occuring with the work-from-home trend undermining office rents.
  • Office and industrial property have benefited from several years of tight supply and rents have increased dramatically. COVID-19 is likely to cause that to unwind.

 (Source: Morningstar)

Disclaimer

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.