Tag: Australian Market
Business Strategy and Outlook
WHSP is a value investment style-oriented investment house with approximately AUD 9 billion in net asset value. Its approach to growing shareholder value is somewhat distinct from many fund managers and capital allocators, benefitting from advantages in its corporate structure, investment-style and from an unconstrained investment mandate. WHSP allocates capital largely in Australian equity markets–both public and private–where it feels its reputation as a long-term passive allocator of capital provides it with advantages. This reputation has been built over decades and is supported by a cross-shareholding with Brickworks–a unique corporate structure in Australian equity markets—partially shielding WHSP from the vagaries of equity markets. As a result, WHSP has greater flexibility to allocate capital in a manner abiding with true value investing paradigms, importantly including the ability to invest in a contrarian manner and with long time horizons. The group’s structure–as an investment holding company with a source of captive capital–provides further advantages. Constraints imposed by the requirement to fund redemptions in bear markets, and/or the need to ‘index hug’ in bull markets are less of a concern to WHSP, as often is the case for mutual fund structures. While these attributes are advantageous, they don’t provide a guarantee that the firm’s past successes will be replicated.
WHSP provides capital on a long-term and passive basis, differing from private equity firms which are actively involved in management and strategy of investee enterprises. WHSP’s investment horizon also differs from uncertainty rating for WHSP. With negligible debt carried at the parent entity-level, WHSP’s cost of capital is therefore estimated at 11.0%. Analysts have incorporated the expected benefits of the Milton Corporation merger within their fair value estimate as of June 23, 2021. At the time, Analysts increased their fair value estimate by 9% to AUD 23.10 per share. It is seen that immaterial cost synergies associated with combining the two investment houses. Analysts’ valuation uplift is predominantly driven by WHSP financing the transaction with its overvalued scrip, which prior to the announcement was trading at a 43% premium to their fair value estimate.
Financial Strength
WHSP has an appropriately conservative approach to the use of debt. Net debt for the WHSP parent entity stood at AUD 26 million at fiscal 2021 year-end. Historically, WHSP’s approach has been for the parent-entity to remain ungeared and to hold significant cash balances at times. Holding significant cash balances at certain points in the equity market cycle is a central component of the value investment style and WHSP’s model for long-term shareholder value creation. Nonetheless, the advent of ultra-low interest rates in recent years has made the holding cash punitive. Therefore, the group uses debt facilities to access liquidity to take advantage of periods when equity market prices detach from long-term fundamentals. Nonetheless, WHSP parent-level gearing will remain modest with an upper limit of 15% (net debt equity) in place. The financial leverage of the group’s parent-entity is the most appropriate indicator of the financial health of WHSP. The financial exposure of WHSP to the fixed obligations, including debt, of its investments is inadvertently misstated in its consolidated financial statements. Under IFRS accounting standards, variation exists in terms of the extent and manner of reporting balance sheet items of WHSP’s investments in the group’s consolidated financial statements. The level of ownership in each investment dictates whether balance sheet items are fully consolidated or not. Regardless of the extent of WHSP’s ownership in each of its individual investments, there exists no material recourse or guarantees from WHSP of the debt or other fixed obligations of any of its investments. WHSP aims to pay steadily increasing dividends to shareholders from operating cash flow of the WHSP parent entity. The financial statements of the WHSP parent entity reflect WHSP’s status as an investor and the cash flows which WHSP receive as an investor in the multitude of businesses which it invests in
Bulls Say’s
- WHSP’s uncompromising value investment style will likely see shareholder value creation continue.
- A cross-shareholding provides a strong defence against the short-term whims of equity markets.
- TPG’s recent merger with Vodafone Australia could improve the merged entity’s competitive position
Company Profile
Washington H. Soul Pattinson, or WHSP, is a value-oriented investment house which invests in public and privately held companies. As an investor, WHSP allocates capital with a view to taking a long-term position in its investments and on a passive basis. A long-held cross-shareholding in one of its investments–Brickworks–has provided a shield to WHSP from the short term-ism that is often pervasive in equity markets. In 2021, WHSP merged with fellow investment house, Milton Corporation
(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.
Investment Thesis:
- Leading global market position, with high barriers to entry (very capital intensive).
- Attractive exposure to both developed markets and emerging markets’ growth.
- Clearly defined strategy to create shareholder value.
- Bolt-on acquisitions provide opportunity to supplement organic growth.
- Solid balance sheet.
- Leveraged to a falling AUD/USD.
- Benefits from the recently completed Bemis acquisition to start flowing through.
- Capital management initiatives – current share buyback of $600m.
Key Risks:
- Management fail to realize the synergies proposed in the Bemis transaction.
- Competitive pressures leading to margin erosion and potential balance sheet pressure (e.g. reduced earnings leading to potential debt covenant breaches).
- Input cost pressures in which the Company is unable to pass on to customers (even though the Company does pass through input costs).
- Deterioration in global economic growth.
- Value destructive acquisition.
- Emerging markets risk.
- Adverse movements in AUD/USD.
Key highlights:
AMC’s 1H22 result highlighted the Company’s defensive capabilities and ability to recover higher input costs. Despite supply chain constraints holding back volumes, the Company delivered volume growth during the period and, on a further positive note, management’s comments suggested demand remains robust leading into 2H22. EBIT margin in both segments Flexibles and Rigid were down during the period (driven by input costs) but should improve in future periods. Management reiterated their previously provided FY22 guidance – EPS growth of 7-11% – however increased the share buyback amount to $600m (from $400m previously) for the full year. In our view, AMC’s current share price is screening attractively – trading on a 12-mth forward blended PE multiple of 13.9x and dividend yield of ~4.0%.
• Group 1H22 headline results : AMC delivered solid 1H22 results, with revenue up +12% to $6.93bn, operating earnings (EBIT) up +5% to $769m and EPS up +9% to 35.8cps. Top line growth was assisted by approximately $650m driven by price increases highlighting AMC’s ability to pass through higher costs. Excluding pass through, organic sales were up +2% driven by higher volumes and favourable mix. AMC repurchased ~$300m shares in 1H22 and expect to repurchase a total of $600m in FY22. Group leverage (net debt / EBITDA) at the end of the period was 2.9x.
• Flexibles segment : Segment revenue was up +10% to $5.35bn, consisting of 2% organic growth (focusing on priority segments such as Healthcare, Coffee & Pet Food) and $480m boost from higher raw material costs recovery.
• Rigid Packaging segment : Segment revenue was up +17% to $1.58bn, however this includes +13% uplift from the pass through of higher raw material costs. Excluding pass through, segment revenue was up +4%. In North America, AMC saw solid underlying demand in the beverage business with volumes up +3% (accelerating to +6% in 2Q22).
• M&A quite whilst Bemis is bedded down and Covid hinders DD process : AMC hasn’t been active with bolt-on acquisitions in recent history, a key part of AMC’s growth strategy.
• Outlook – reaffirmed previous guidance : Management expects adjusted EPS to grow by 7-11% in constant currency terms, adjusted free cash flow of $1.1 – 1.2bn, and approximately $600m allocated to share repurchase (increased from $400m previously).
Company Description:
Amcor Limited (AMC) is an international integrated packaging company offering packing and related services. Amcor primarily produces a wide range of packaging products which include corrugated boxes, cartons, aluminum and steel cans, flexible plastic packaging, PET plastic bottles and jars, and multi-wall sacks. The company has operations in Australasia, North America, Latin America, Europe, and Asia.
(Source: Banyantree)
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.
Business Strategy and Outlook
Magellan is an active manager of listed equities and infrastructure. The firm has a fundamental, high-conviction investment approach. Its flagship Global strategy has historically tilted toward IT, e-commerce platforms, and consumer franchises; preferring large, developed market multinationals. FUM have been attracted by consistently achieving excess returns with lower volatility and drawdowns relative to peers.
Magellan’s products are well-distributed. Its funds are featured across platforms.There is a focus on targeting retail investors, with product expansion an increasingly common driver of growth. After pioneering the first active ETF in Australia in 2015, Magellan has worked on attracting new FUM via its partnership initiatives, launching its own low-cost active ETFs, and introducing a new equity fund that caters to retirees seeking predictable income.
Morningstar analysts think Magellan has built the foundations for ongoing earnings growth, supported by its economic moat, product variety, and historically strong track record. Regardless, the potential earnings upside from these positive traits will take time to manifest. In light of Magellan’s recent underperformance, Mornigstars analysts believe a sustained improved track record will be the precursor to stronger fund inflows.
Morningstar analysts anticipate fee margin compression from investors trading down from Magellan’s core funds in preference for its low-cost ETFs, mix shift to other asset classes, and industry wide fee pressure. Continued strong performance is key to sustaining margins, as future FUM growth is likely to hinge more on market movements rather than net inflows given Magellan’s maturity and scale.
Capable Hands Remain at the Helm of Magellan; Valuation Upside High as Shares Lose Steam
Magellan has historically delivered above market returns with relatively low drawdowns. This has allowed it to rapidly scale in FUM to over AUD 93 billion and provides the foundation for continued earnings growth. While Morningstar analysts don’t believe it will be immune from the structural trend of investors moving to passive investments, ongoing competition among fund managers and major institutions in-housing their asset management, and is better placed than most active managers to address these headwinds. Magellan is moving beyond just managing money, to implementing new initiatives such as product expansion to attract new money. Morningstar analysts believe shares are undervalued, but concur there are limited near-term earnings and share price catalysts due to recent underperformance.
Chairman and CIO Hamish Douglass’ indefinite leave from Magellan . But morningstar analysts don’t believe this is overly value-destructive for shareholders. In the interim, Chris Mackay and Nikki Thomas will work with Magellan’s investment team to manage its flagship Global Equity strategies. The strategies are in good hands. Mackay is Magellan’s co-founder, and was its chairman and CIO until 2012. Despite analysts’ conviction in Magellan, Morningstar’s analyst concern is not all investors may be willing to ride out this storm. Thus Morningstar analysts have lowered its fair value estimate to AUD 34.50 per share from AUD 38, after factoring in 3% more net outflows than before and further trimming our retail fee forecasts.
Financial Strength
Magellan is in sound financial health. The firm has a conservative balance sheet with no debt, with its financial position also boosted by solid operating cash flows. As of June 30, 2021, Magellan had cash and equivalents of about AUD 212 million and financial investments with a net fair value of around AUD 453 million mainly invested in its own unlisted funds and listed shares. This should provide it with enough liquidity to cope with most market conditions. Its high dividend payout ratio of: (1) 90%-95% of the net profit after tax of its core funds management business before performance fees; and (2) annual performance fee dividend in the range of 90%-95% of net crystallised performance fees after tax reflects the capital-light nature of asset management.
Bulls Say
- Magellan retains an intangible brand, supported by historically strong performance, which it has leveraged to hold on to client funds, attract new money and charge premium fees.
- Due to structural market trends and product expansion initiatives, the prospects for organic FUM growth is strong, notably from investors seeking to diversify exposure to international equities or gain a steady retirement income stream.
- Aside from domestic tailwinds from superannuation, Magellan’s distribution relationships in the much larger offshore markets of the U.K. and the U.S. should support growth.
Company Profile
Magellan Financial Group is an Australia-based niche funds manager. Established in 2006, the firm specialises in the management of equity and infrastructure funds for domestic retail and institutional investors. Magellan has been particularly successful in winning mandates from global institutional investors. Current FUM is split across global equities, infrastructure and Australian equities.
(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.