Tag: Australian Market

Categories
Shares Small Cap

Bank of Queensland brings forward cost savings to offset margin pressure

Business Strategy and Outlook

Bank of Queensland is one of Australia’s top-10 largest banks, but is considerably smaller than the four major Australian banks. Preceding the global financial crisis, the bank grew aggressively via acquisitions and the rollout of its distinctive owner-manager branch franchise model. However, expanding the branch network and diversifying away from traditional residential lending came at a cost, with additional equity required to fund growth, significantly increased bad debts, and multiple banking systems, which resulted in deteriorating cost/income and returns on equity. 

The aim is to ensure the bank is more competitive, particularly in the home loan market, but this investment giving the bank any competitive edge. At best, it can narrow the gap to peers, but with the big investment budgets of the majors, those innovations are likely to be hard to keep up with. Bank of Queensland has branches owned by branch managers and corporate branches. The model has the potential for the bank to outperform its peers on customer service, with owner branch managers building relationships with local customers, and niche business lending specialists with an understanding of borrower needs and industry.

Financial Strength

The capital structure and balance sheet provide comfort that the bank can manage a large increase in loan losses associated with COVID-19, but it remains the greatest threat to the bank’s capital position. Common equity Tier 1 capital was 9.8% as at August 2021, well above APRA’s 8.5% minimum capital benchmark for standardised banks. It is expected that the bank will pay out around 60% to 65% of earnings given the credit growth outlook, elevated investment in the banking platform, and integration of ME Bank. Our fair value estimate for no-moat rated Bank of Queensland is unchanged at AUD 8.50.

With the elevated savings rate in 2020, the bank has been able to increase its share of funding from customer deposits to 70% as at Aug. 31, 2021, up from pre-COVID-19 levels of 64% as at Aug. 31, 2019. In March 2020 the RBA announced the Term Funding Facility, or TFF, which provided three-year funding at 0.25%. From Nov. 4, 2020, new drawdowns would pay 0.1%. The initial funding available via the TFF was set at 3% of the bank’s outstanding loan balance, with an additional 2% of balances announced in November.

Bulls Say’s

  • The appointment of new senior executives and a clean out of the troubled commercial loan portfolio has ensured a more risk-conscious culture. 
  • Substantial capital raisings bolstered the balance sheet, ensuring that the bank satisfies capital rules and can still fund investments in technology and expand loan balances. 
  • Productivity improvements not only lead to improved operating margins, but a more streamlined loan approval process lifts mortgage growth rates. 
  • Management extract greater cost and revenue synergies from the acquisition of ME Bank.

Company Profile 

Bank of Queensland, or BOQ, is an Australia-based bank offering home loans, personal finance, and commercial loans. BOQ operates both owner-managed and corporate branches, and is the owner of Virgin Money Australia. Its BOQ business includes the BOQ branded commercial lending activity, BOQ Finance and BOQ Specialist businesses. The division provides tailored business banking solutions including commercial lending, equipment finance and leasing, cashflow finance, foreign exchange, interest rate hedging, transaction banking, and deposit solutions for commercial customers

(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
Dividend Stocks Sectors

Attractive valuation and yield makes Aurizon an appealing stock

Investment Thesis:

  • Undemanding valuation relative to the market. 
  • Current share price is factoring in several negative sentiments already. 
  • Higher (and stabilizing) commodity prices should translate into improving volumes. 
  • Better than expected performance on the cost out. 
  • Attractive dividend yield 
  • Mostly defensive earnings backed by contracts, providing stability in shareholder returns. 
  • The Company does have long-term plans to reduce exposure to coal.

Key Risks:

  • Significant decline in commodity prices leading to mine closures or reduce volumes from customers. Any potential declines in iron ore prices. 
  • Structural decline in some commodities (e.g. coal). 
  • High costs impacting margins. 
  • Contract repricing resulting in longer term revenue loss. 
  • Pricing pressure to increase. 
  • Potential cuts to dividends given the elevated payout ratio. 
  • Weather related impacts.

Key highlights:

  • Management noted that they have identified growth opportunities. Near-term earnings appear to be more stable.
  • Group revenue of $3,019m was down -1%, EBITDA of $1,482m was up +1% (with operating costs down -4%), and NPAT of $533m mostly unchanged
  • The flat earnings outcome for the year were driven by a decline in Coal volume being offset by higher earnings in Bulk and Network, primarily due to the commencement of WIRP fee billing.
  • Cost improvements came on the back of lower access and lower fuel expenses, with cost pressure from volume growth in Bulk being offset by transformation benefits
  • AZJ maintained its 100% dividend payout ratio with a final dividend of 14.4cps (up +5% YoY + 70% franked), taking FY21 dividend to 28.8cps.
  • The segment wise contribution of Aurizon is as follows:
  • Network: FY21 revenue was up +4% YoY (Track Access +4%, Services & Other -19%) and EBITDA was up +6% to $849m. Segment earnings were driven by revenue growth and supported by lower operating costs (down -3%) and Energy & Fuel expenses (down -5%).
  • Coal: FY21 revenue was down -9% YoY (Above Rail -8%, Track Access -13%) and EBITDA down -13% to $533m, with earnings supported by lower operating costs (down -4%) and access costs (down -11%). Top line growth was impacted by a decline in haulage volumes over the year.
  • Bulk: FY21 revenue was up +4% YoY (net of access, revenue was up +10%), driven by new contract and services growth. EBITDA was up +27% to $140m, with earnings driven higher by lower operating costs (down -6%) and access costs (down -23%)

Company Description: 

Aurizon Holdings Ltd (AZJ) operates an integrated heavy haul freight railway in Australia. It transports various commodities, such as mining, agricultural, industrial and retail products; and retail goods and groceries across small and big towns and cities, as well as coal and iron ore. The Company also operates and manages the Central Queensland Coal Network that consists of approximately 2,670 kilometres of track network; and provides various specialist services in rail design, engineering, construction, management, and maintenance, as well as offers supply chain solutions. In addition, it transports bulk freight for customers in the resources, manufacturing, and primary industries sectors. The Company was formerly known as QR National Limited and changed its name to Aurizon Holdings Limited in December 2012. AZJ is headquartered in Brisbane, Australia.

(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.

Categories
Sectors Technology Technology Stocks

Electronic Arts delivered strongest 2Q earnings in its entire history driven by Apex Legends and FIFA

fintech icon on abstract financial technology background represent Blockchain and Fintech Investment Financial Internet Technology Concept.

Investment Thesis:

  • Attractive long-term drivers in online gaming 
  • Strong core franchises in Madden NFL, FIFA, The Sims and Need for Speed 
  • New product release surprise on the upside including Apex Legends 
  • The growing popularity in Esports should benefit EA
  • Mobile advertising presents significant opportunity (though not without execution risk)
  • Solid free cash flow generation and strong balance sheet, the Company has ample room to support capital management initiatives (such as a share buyback)

Key Risks:

  • New competition and new product release from existing competitors could impact EA’s growth rate.  
  • Key franchises or new product releases fail to attract gamers or meet investor growth expectations. 
  • Cloud gaming could be disruptive for incumbents. 
  • Adverse regulatory changes. 
  • Concentration of revenue / earnings to a small group of games. 
  • Disruption to mobile growth (e.g. growth in smart glasses displaces smartphones). 
  • Loss of content licensing agreements with owners (FIFA, NFL)

Key highlights:

  • Electronic Arts Inc (EA) delivered the strongest 2Q in the history of EA, beating consensus estimates at both the top line ($1.83bn vs estimate of $1.75bn) and bottom line (EPS of $1.02 vs estimate of $0.56) driven by live services led by Apex Legends (reached $1.6bn in lifetime bookings) and FIFA Ultimate Team.
  • The Company’s net bookings of $1.85bn beat management’s guidance by $126m
  • Management remained positive on the launch of Battlefield 2042 (over 7.7 million players took part in the beta) noting that interest in Battlefield 2042 is higher than the interest the Company received heading into 2018’s Battlefield
  • the acquisitions of Glu, Codemasters, Metalhead and Playdemic should help EA make mobile a major growth driver (important to sustain topline growth as console and PC engagement declines as the pandemic recedes), and strong digital mix for full game sales
  • After a successful relationship between EA and soccer’s global governing body FIFA over multiple decades, it appears recent contract renewal discussions are not going well as the disagreement comes down to fees
  • Net bookings of $7.625bn (vs $7.3bn previously) driven by ongoing strength from Apex and FIFA and just under $100m from six months of Playdemic, partially offset by pressure on some of mobile titles including product changes and IDFA impacts
  • Management closed the acquisition of Playdemic, further strengthening the mobile native organization within EA, which management expects could be sharply focused on accelerating growth in portfolio of more than 15 top mobile live services as well as introducing new experiences that take powerful IP including Battlefield in the expanding mobile audience.

Company Description: 

Electronic Arts (NASDAQ: EA) is a leading digital interactive entertainment company, with leading gaming brands globally. The Company develops and distributes content and services on mobiles, personal computers (PCs) and gaming consoles. Some of the Company’s key franchises Madden NFL, EA SPORTS FIFA, The Sims and Need for Speed. The Company’s portfolio of games includes fully owned original IP games and also licensed content. Apex Legends, Anthem, Battlefield, The Sims, EA SPORTS, Need for Speed, Dragon Age, and Plants vs. Zombies are trademarks of Electronic Arts Inc. John Madden, NFL and FIFA are the property of their respective owners and used with permission. According to EA data, the Company has greater than 300 million registered players around the globe.

(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.

Categories
Global stocks Shares

Strong customer retention and new business growth drives QBE earnings higher

Investment Thesis:

  • New CEO announced could bring a fresh perspective and potential rebasing of earnings. 
  • As a global insurer, QBE’s operations are much more diversified than domestic peers which means insurance risk is more spread out. 
  • Solid global reinsurance program should insulate earnings from catastrophe claims. 
  • Expected prolonged period of lower interest rates (which does not benefit QBE’s investment portfolio). 
  • Committed to the share buyback program. 
  • Undertook a simplification process and sold non-core operations.

Key Risks:

  • Prolonged period of pricing pressures. 
  • Adverse CAT claims. 
  • Ongoing prolonged period low interest rates and volatility in credit spreads which affects QBE’s predominately defensive portfolio. 
  • As a global insurer, QBE’s operations are much more diversified than domestic peers which means insurance risk is more spread out. However, at the same time, as it underwrites across the globe, the business it is more difficult to forecast and analyse claims and pricing environment as well as reinsurance.
  • Undesirable investment returns below management guidance. 
  • Prolonged poor performances in Asia

Key highlights:

  • QBE delivered 1H21 net income of $441m (vs loss of $712m y/y) as QBE continued to post solid premium rate increases (average group-wide rate increases averaged +9.7%) across all segments, as well as strong customer retention and new business growth.
  • However, management warned rate momentum is showing signs of moderating in some geographies and products, particularly in International Markets.
  • QBE’s operational efficiency program saw expense ratio improve -60bps over pcp to 13.7%. Balance sheet remained strong with gearing improving to 31.1%.
  • The Board declared an interim dividend of 11cps (up +175% over pcp) and guided to typically higher catastrophe incidence and Crop result variability in 2H21.
  • QBE saw expense ratio improve -60bps over pcp to 13.7%, with management announcing its next phase of efficiency program (focused on IT modernisation and digitisation) remains on track to deliver an expense ratio of 13% by 2023, anticipating a restructuring charge of $150m to be expensed over three years (of which $29m was recognised in 1H21).
  • Gross written premium increased +20% to $10,203m reflecting the strong premium rate environment

Company Description: 

QBE Insurance Group Ltd (QBE) is a global general insurer that underwrites commercial and personal policies across North America, Australia and New Zealand, Europe and emerging markets. QBE’s Equator Re segment is its captive reinsurer, providing reinsurance protection to the entire Group’s operating divisions.

(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.