Business Strategy & Outlook
Incitec Pivot aims to expand its business around its strong global market share in explosives. This provides an increasingly stable earnings stream relative to volatile earnings from its fertilizer business. Competitive advantages include a duopoly Australian explosives business and global explosives operations. Incitec Pivot is also a dominant player in the Australian domestic fertilizer market and enjoys a degree of domestic fertilizer pricing power from its dominant market share in eastern states, but it is too small to influence global prices. The fertilizer business does not possess an economic moat. Explosive earnings are leveraged to mining volumes as much as price and should benefit from long-term global growth in demand for minerals and metals. Additionally, mining strip ratios are expected to increase over time, with more explosives required to mine the same amount of ore. Given these dynamics, the demand for ammonium nitrate is to continue growing. However, growth is likely to be uneven and subject to cyclical changes in demand for commodities. Significant increases in capacity have led to near-term oversupply of ammonium nitrate on the east and west coasts of Australia. Incitec Pivot is consequently focused on ensuring all new projects meet strict financial criteria. There will likely be an oversupply of ammonium nitrate in Western Australia to 2020 and in Eastern Australia to 2021.
In Western Australia, Orica has commissioned a new plant in the Pilbara with Yara of Norway. Incitec Pivot sources its ammonium nitrate from Wesfarmers in the west, so margins will be overly hurt by the oversupply. Incitec Pivot’s explosives business is strategically short ammonium nitrate, or AN, production capacity by around 200,000 tonnes in a long-capacity market. A superior product offering is essential to facilitate this strategy, with demand supported by flexible third-party agreements that are footprint-logical. Expansion at Moranbah in the east would only be considered after markets come back into balance.
Financial Strengths
Group net operating cash flow increased 68% to AUD 1.09 billion in fiscal 2022. This allowed net debt to fall by 7% to AUD 949 million. Gearing is modest at 15% and net debt/EBITDA just 0.5. Low debt with a strong fiscal 2023 cash flow forecast creates optionality for additional capital management. Debt ratios are well below the company’s 1.0 to 1.5 net debt/EBITDA target range. This places Incitec in a sound position to navigate the conversion of Gibson Island to import only and to explore new opportunities like green hydrogen manufacture. That and/or capital management post fiscal 2022. There is an expressed concern over capital misallocation in the recent past, including on-market share buy-backs. It is pleasing therefore that management has expressed an investment bias to capital-light and faster cash returning projects aligned to the strategy. The equity capital raised in fiscal 2020 increased the company’s liquidity and supported a continued investment grade credit rating. Over the long run, Incitec Pivot to return approximately 50% of earnings to shareholders through dividends, which is a reasonable payout ratio.
Bulls Say
- Investors enjoy bumper dividends at peak cycle times.
- Continued growth of the explosives business will reduce earnings volatility.
- Over the longer term, explosives earnings are favorably leveraged to mining volumes rather than prices, and mine strip ratios are expected to increase over time.
Company Description
Incitec Pivot is a leading global explosives company with operations in Australia, Asia, and the Americas. It is estimated its share of the global commercial explosives market at about 15%. Explosives contribute 80% of EBIT. Incitec Pivot is also a major Australian fertilizer producer and distributor and is the only Australian manufacturer of ammonium phosphates and urea. Ammonium phosphates are sold in the domestic market and exported.
(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.
Investment Thesis
- WPR currently trades at a discount to its NTA
- Solid distribution yield.
- On market buyback should be supportive of WPR’s share price levels.
- As of FY21, quality $3.09bn asset portfolio (433 properties) with Weighted Average Lease Expiry (WALE) of 10.0 years.
- Majority of assets on triple net leases, where the tenant is responsible for all property outgoings.
- Waypoint REIT leases to Viva Energy who has an Alliance Agreement/Site Agreements with Coles Express and a brand License Agreement with Shell.
- Potential expansion of property network by way of earnings accretive acquisitions.
- Solid capital management with gearing with flexibility to make further acquisitions.
- High barrier to entry; difficult to replicate asset portfolio.
Key Risks
- Tenant concentration risk.
- Termination of the alliance agreement with Coles Express.
- Competition by other branded service stations.
- Increased cost of fuel supply putting pressure on tenants.
- The sale of properties in the portfolio resulted in lower rental income.
- Potential for excess supply of service stations thus affecting valuations and other property metrics of the portfolio.
Key Highlights: Relative to the pcp and on a constant currency basis:
- Distributable Earnings of $61.4m, up +0.2%.
- Statutory net profit of $213.8m, down -15.1%, due to lower net valuation gains on investment property partially offset by higher net valuation gains on derivatives.
- Net tangible assets per security of $3.18, up +7.8% over 1H21-end of $2.95. WPR saw 71 investment properties (which equates to over one-sixth of the portfolio) independently valued in 1H22 with directors’ valuations performed on the balance. This resulted in a gross valuation uplift of $139.5m and the portfolio weighted average capitalisation rate (WACR) tightening to 5.02% at 1H22-end. 29 non-core assets exchanged or settled for $141.8m, in line with WPR’s carrying value at FY21-end.
- WPR’s pro forma gearing of 26.1% declined from 27.3%. Pro forma weighted average debt maturity of 4.9 years, improved from 4.5 years.
- Management confirmed the distribution for the three-month period ended 30 June2022 of 4.51 cents per security.
Company Description
Waypoint REIT Ltd (WPR) is an Australian listed REIT that owns a portfolio of service stations across all of Australia’s states and territories. It currently owns 469 service stations in its portfolio. Its service stations are leased on a long-term basis to Viva Energy Australia who has licence and brand agreements with Shell and Coles Express.
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.
Investment Thesis
- Trades below the valuation and represents >10% upside to current share price.
- PPT is a diversified business with earnings derived from trustee services, financial advice and funds management.
- PPT has an opportunity to increase FUM via its Global Share Fund, which has a strong performance track record over 1, 3 and 5-years and significant capacity, whilst PPT continues to maintain FUM in Australia equities which is near maximum capacity. This equates to flattish earnings growth unless PPT can attract FUM into international equities, credit and multi-asset strategies (and other incubated funds).
- Retail and institutional inflow of funds is expected to be solid especially from positive compulsory superannuation trend and flow from Perpetual Private.
- Potential for Perpetual Private to drive growth in funds under management and funds under advice.
- Cost improvements in Perpetual Private and Corporate Trust.
Key Risks
- Any significant underperformance across funds.
- Significant key man risk around key management or investment management personnel.
- Potential change in regulation (superannuation) with more focus on retirement income (annuities) than wealth creation.
- Average base management fee (bps) per annum (excluding performance fee) continues to be stable at ~70bps but there are risks to the downside from pressures on fees.
- More regulation and compliance costs associated with the provision of financial advice and Perpetual Private.
- Exposure to industry funds which are building in-house capabilities (~15-20% of total PPT funds under management).
Key Highlights: Relative to the pcp and on a constant currency basis:
- The company entered into a binding Scheme Implementation Deed to acquire 100% of shares in Pendal Group, targeted to be implemented by late CY22/early CY23 and Pendal shareholders receiving 1 PPT share for every 7.50 Pendal shares plus $1.976 cash/Pendal share (implying an offer price of $6.54/Pendal share), with acquisition expected to;
- Realise $60m of annual pre-tax synergies within the first two years and deliver double digit EPS accretion for PPT in the 12 months post implementation, with one-off costs to achieve synergies of $110m phased with majority incurred over 18 months and other transaction costs of $40m.
- Create greater scale with $1.4bn in revenue and ~$456m in UPBT driven by increased economies of scale, and combined AUM of >$201bn, covering Global, US, UK, European and Australian equities, Multi Asset and Cash and Fixed Income strategies, significantly improving market position and brand recognition.
- Expanded team with employees across 16 locations around the globe and enhanced global distribution network. Management expects to fund the cash component of the offer totalling $757m via a new debt facility, which will also re-finance Perpetual’s existing debt facility and include undrawn headroom for liquidity management purposes and expects pro forma leverage to be ~1.7x gross debt/pro forma EBITDA (~1.3x Net Debt/pro forma EBITDA) with de-leveraging occurring in year 3 post-implementation given the strong cash flow generation of the combined businesses with a clear pathway to 1.2x Gross Debt/pro forma EBITDA (~0.8x Net Debt).
- The Board declared a fully franked final dividend of 97cps, resulting in a total dividend for the full year of 209cps, an increase of +16% y/y, representing a payout ratio of 80%, in line with company’s payout range of 60-90% UPAT on an annualised basis.
- ROE improved +44bps y/y to 16.2%.
Company Description
Perpetual Ltd (PPT) is an ASX-listed independent wealth manager with three core segments in (1) Perpetual Investments which is one of Australia’s largest investment managers; (2) Perpetual Private which is one of Australia’s premier high net worth advice business; and (3) Perpetual Corporate Trust which provides trustee services. PPT manages ~$98.3 billion in funds under management, ~$17.0 billion in funds under advice and ~$922.8 billion in funds under administration (as at 30 June 2021).
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.
Investment Thesis
- Improvement in scrap prices across key regions.
- Cloud recycling could add significant earnings over the long run.
- Investment in improving scrap quality should improve SGM’s competitive position.
- Undemanding valuation relative to its own historical average and ASX200 Industrials Index.
- Self-help initiatives to support earnings.
- Improving Return on Capital (ROC).
- Current on-market share buyback.
Key Risks
- Significant downturn in global economy.
- Trade war between China and the U.S. escalates.
- Weaker scrap prices in key regions.
- Lower volumes.
- Regulatory changes – particularly around China’s anti-pollution policies.
- Cost pressures impacting group margins
Key Highlights: Relative to the pcp and on a constant currency basis:
- Underlying revenue of $9,264.4m was up +56.6%, driven by higher volumes and selling prices (ferrous and non-ferrous). Sales volumes of 8,106m tonnes, was up +12.2%.
- Underlying operating earnings (EBIT) of $756.1m was up +95.6% on pcp, driven predominantly by: strong contribution from SA Recycling, contributing the bulk of the $144.8m improvement in JV contribution; non-acquired growth in volumes contributed over $100m; and $307.8m in margin growth. Earnings growth was partially offset by $170.9m increase in organic metal costs. Underlying NPAT of $578.9m was up +103.8%.
- The Board declared a final dividend of 50cps (50% franked), bringing the full year dividend to 91.0cps, up +116.7% YoY.
- Return on productive assets (capital efficiency) improved by 16% to 39.0%. (5) Capital expenditure forecast for FY23 was increased – at the March Investor Day management estimated FY23 sustaining and environmental capex would be approximately $175m, however this has been increased to $220m due to higher spending on environmental and increased costs from inflation.
- North America Metal (NAM) sales revenue of $2,669.9m was up 66.8% driven by higher sales prices and sales volumes (up +17.7%). Intake also improved over the period and was higher than pre-Covid levels. Trading margin of $881.4m was up +55% as a significant proportion of the trading margin spread in percentage terms was retained due to higher commodity prices. Segment underlying EBIT of $293.4m was up +114.2%.
- Australia & New Zealand Metal (ANZ) revenue of $1,694.4m was up +54.2% driven by +55.2% increase in average selling prices. Sales volumes were largely unchanged on pcp (-0.3% YoY). Trading margin of $423.1m was up +34.9%. Costs were up +16.5% and lower than NAM due to flat volumes. Segment EBIT of $186.9m was up +80.2%.
- UK Metal sales volumes were up +9.0% YoY and average selling prices up +47.3%, driving sales revenue growth of +60.6% YoY to $1,594.9m. Management noted that the Trading Margin of $234.6m was up only +23.9% “due to market structure and competitive dynamics, UK was not able to hold onto as much of the sales price increase as NAM or ANZ.” Segment underlying EBIT of $69.8m was up +52.7% on pcp.
- Sims Lifecycle Services reported revenue of $327m (up +2.5%) and underlying EBIT of $16.3m was down -25.2% driven by the 30% reduction in prices for units resold, driven by reduced manufacturing activity in China due to Covid lockdowns.
- SA Recycling reported sales volumes growth of +33.3%, sales revenue up +74.8% to $4,993.1m, trading margin of $1,520.1m up +69% and underlying EBIT (50% share) of $298.5m
Company Description
Sims Ltd (SGM) collects, sorts and processes scrap metal materials which are recycled for resale. SGM’s segments include ferrous recycling, non-ferrous recycling, secondary processing of non-ferrous metals and plastics, international trading of metal commodities and the merchandising of steel semi-fabricated products.
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.
