Tag: Australian Market
About The Benchmark
A sector sub-index of the S&P/ASX 200, this index tracks the performance of Australian real estate investment trusts (A-REITs) and mortgage REITs.
Fund Objective
The SPDR S&P/ASX 200 Listed Property Fund seeks to closely track, before fees and expenses, the returns of the S&P/ASX 200 A-REIT Index.
Process
SLF aims to fully replicate the S&P/ASX 200 A-REIT Index. REITs are listed vehicles that own and operate property. REITs are required to pass on the majority of their income to investors to enjoy favourable taxation arrangements, and distributions are not franked. High payout ratios and an absence of franking mean that REITs typically offer a high headline yield relative to other stock market sectors. SLF is by far the longest running, with an FUM of AUD 650 million as at September 2021, which helps it to maintain trading levels far above most rivals. SPDR doesn’t participate in securities lending for Australian ETFs.
Portfolio
With the relatively short list of A-REIT names in the S&P/ASX 200, the portfolio is understandably concentrated. As at September 2021, the index consists of 24 holdings, with the top 10 accounting for over 85% of the total portfolio. The exposure to the largest current holding, Goodman Group, has ballooned significantly over the past five years to 27% from around 11%. Seeing that the index is relatively untouched by any reconstitutions, portfolio turnover is quite low at 5%. However, in case of an eventual entry or exit of the constituents, the concentrated index is susceptible to reconstitution, which may lead to a meaningfully altered portfolio.
| Top 10 Holdings | Weight (%) |
| GOODMAN GROUP | 27.07 |
| SCENTRE GROUP | 11.52 |
| DEXUS/AU | 8.59 |
| MIRVAC GROUP | 8.17 |
| STOCKLAND | 7.98 |
| GPT GROUP | 7.27 |
| CHARTER HALL GROUP | 5.93 |
| VICINITY CENTRES | 4.91 |
| SHOPPING CENTRES AUSTRALASIA | 2.20 |
| CHARTER HALL LONG WALE REIT | 2.06 |
Sector Allocation
| Sub-Industry Breakdown | Weight (%) |
| Diversified REITs | 34.79 |
| Industrial REITs | 28.49 |
| Retail REITs | 23.96 |
| Office REITs | 9.46 |
| Specialized REITs | 1.90 |
| Residential REITs | 1.41 |
People
The Global Equity Beta Solution team that is responsible for managing this ETF has undergone a leadership transition recently. Effective September 2021, John Tucker has been appointed as the new chief investment officer, replacing Lynn Blake, who has taken retirement. Tucker is a State Street veteran who has been in multiple senior leadership roles within GEBS for the past 20 years. The ecosystem and structure of the investment team is well-defined, where research and trading functions are centralised and spread out globally; however, portfolio managers are based locally. Australia-domiciled passive products are managed by a core team of Tucker and four portfolio managers: Alexander King, Lillian Poon, Andrew Howson, and Elda Dong.
Performance
The fund has managed its tracking difference well, matching up to the benchmark after accounting for management fees. SLF has recorded a return of 6.54% since its inception in 2002. As at the close of 2019, the annualised five-year returns for the fund stood at an attractive 10.55%, outperforming the category returns of 9.87%. The rally was mainly driven by the strong returns of Goodman Group in the latter half of the five-year period.
| Total Return | 1 Month | 3 Month | 6 Month | 1 Year | 3 Year p.a | 5 Year p.a | Since Inception p.a |
| Fund (%) | 0.38 | 4.27 | 12.07 | 30.25 | 9.57 | 8.63 | 6.54 |
| Index (%) | 0.42 | 4.38 | 12.34 | 30.87 | 9.87 | 8.96 | 6.78 |
(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:
- Attractive market dynamics – growing population requiring hearing aids, improving health in EM providing more access to devices such as hearing aids and relatively underpenetrated market
- There remains a significant, unmet and addressable clinical need for cochlear and acoustic implants that is expected to continue to underpin the long‐term sustainable growth of COH
- Market leading positions globally
- Direct-to-consumer marketing expected to fast track market growth
- Best in class R&D program (significant dollar amount) leading to continual development of new products and upgrades to existing suite of products
- New product launches driving continued demand in all segments
- Attractive exposure to growth in China, India and more recently Japan
- Solid balance sheet position
- Potential benefit from Australian tax incentive
- Subject to successful passage of legislation, the patent box tax regime for medical technology and biotechnology should encourage development of innovation in Australia by taxing corporate income derived from patents at a concessional effective corporate tax rate of 17%, with the concession applying from income years starting on or after 1 July 2022
Key Risks:
- Product recall
- Sustained coronavirus outbreak which delays recommencement of hospital operations in China
- R&D program fails to deliver innovative products
- Increase in competitive pressures
- Change in government reimbursement policy
- Adverse movements in AUD/USD
- Emerging market does not recoup – significant downside to earnings
Key highlights:
- COH reported strong FY21 results, with earnings (underlying NPAT) up +54% to $237m and within guidance of $225-$245m, despite Covid-19 impacted surgery activity recovering to varied levels across both developed and emerging markets
- For FY22, it is expected to deliver net profit of $265‐285m, a 12‐20% increase on underlying net profit for FY21, based on a 74 cent AUD/USD
- Sales revenue is expected to benefit from market growth, with a continuing recovery in surgery rates across many countries more affected by Covid
- The management will continue their investment in market growth activities
- Capex is expected to be ~$70‐90m for FY22 and includes around $20m related to a major process transformation and IT systems upgrade, a program that is expected to be a $100‐120m investment over the next four to five years
- Effective tax rate is expected to decline to ~25% as a result of the introduction of changes to the R&D tax concession by the Australian government, with legislated changes to take effect from 1 July 2021
- The Board is committed to maintaining the dividend policy which targets a 70% payout of underlying net profit
- Record sales revenue of $1,493m, was up +10%, or +19% in constant currency (CC), driven by market share gains, market growth and rescheduled surgeries post Covid lockdowns
- Implant units climbed +15% to 36,456 (developed markets up ~20%; emerging markets up ~10%), compared to FY19, implant units increased +7%
- The Board declared final dividend of $1.40 which brings full year dividends to $2.55 per share, up +59% and equates payout ratio of 71% of underlying net profit, in line with COH’s 70% target payout
- COH’s balance sheet position remains strong with net cash of $564.6m at year-end, improving from $457m in FY20
Company Description:
Cochlear Ltd (COH) researches, develops and markets cochlear implant systems for hearing impaired people. COH’s hearing implant systems include Nucleus and Baha and are sold globally. COH has direct operations in 20 countries and 2,800 employees.
(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
Nufarm is a major producer of crop-protection products including herbicides, fungicides, and pesticides, selling into all major world markets. The company is leveraged to growing demand for crops for biofuels, and food from rapidly industrialising markets such as China and India. Growth should come from astute brand and offshore business investments and from a customer-service-focused strategy. However, the global crop-protection markets are competitive and earnings are cyclical, given a reliance on seasonal conditions. Sumitomo Chemical’s 16% investment in Nufarm endorses the quality of its global distribution. Collaboration broadens product portfolios and adds distribution in Asia.
Nufarm has a growing presence in North America and Europe. Sound sales momentum has been evident in North America and Europe. Several Chinese companies have previously expressed interest in acquiring Nufarm, but withdrew either because of too high a price demanded by the board, or because of reduced availability of debt. In 2010, Japanese company Sumitomo Chemical bought 20% of Nufarm, subsequently increasing its stake to 23% before diluting to 16%. The resultant collaboration should boost the performance of both companies, given little product portfolio overlap.
Financial Strength
Nufarm’s balance sheet is in great shape. In early April 2020, the company received AUD 1.2 billion net sale proceeds from major shareholder Sumitomo, for the sale of its South American crop protection and seed treatment operations in Brazil, Argentina, Colombia, and Chile. This significantly bolstered the finances at a very fortuitous time, coming mid coronavirus. Prior to this in January 2020, group net debt had stood at a whopping AUD 1.6 billion. Nufarm’s under-leveraged balance sheet remains a strength. Fiscal 2021 net operating cash flow rebounded strongly from negative AUD 398 million in the pcp to positive AUD 370 million. This reflects a focus on working capital management. It sees net debt down 40% to a modest AUD 173 million, leverage (ND/(ND+E)) of just 8% and net debt/EBITDA very comfortable at 0.5. Net working capital significantly improved post sale of the Latin American business and remains a focus with improved debtor collections, reduced inventory and foreign exchange translation.
Our AUD 7.00 fair value for no-moat crop protection company Nufarm. Underlying fiscal 2021 NPAT improved to positive AUD 61 million against an underlying loss of AUD 67 million in the pcp. NPAT in the fiscal second half was negligible at just AUD 0.7 million. On a full fiscal year basis, APAC revenue enjoyed a sharp turnaround, up 52% to AUD 858 million and segment EBITDA margin nearly doubled to 12.7%. Nufarm shares plunged 8.5% on the day of profit release, a strange response given an all-important strong cash flow performance. The fall may have been in reaction to a decline in salmon demand impacting sales of Omega-3 canola. But there is a long way to run on Omega-3, still in its infancy, and we are unconcerned.
Bulls Say’s
- Nufarm benefits from potential strength in soft commodities markets.
- Nufarm has well-established distribution platforms in most major global agricultural markets.
- Product and geographic diversification helps reduce earnings volatility.
Company Profile
Nufarm Limited is a global crop-protection company that develops, manufactures, and sells a range of crop-protection products, including herbicides, insecticides, and fungicides. Nufarm sells its products in most of the world’s major agricultural regions, and operates primarily in the off-patent segment of the crop-protection market. Nufarm operates along two business lines: crop protection and seed technologies.
(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
- Ongoing share back should be supportive of share price levels.
- Well capitalized after the capital raising.
- Expectations of further customer remediation costs.
- Impairment charges provisioned for in 1H20 with lower risk of further impairments (especially as a low interest rate environment helps customers and arrears).
- Strong franchise model with management capable of improving below a 40% cost to income ratio (however we do not factor in management’s long-term target of 35%).
- Potential pressure on net interest margins as competition intensifies with other major banks in a low interest rate environment. Though we expect these pressures to slightly alleviate as we move into a higher interest rate environment.
- Improving return on equity with management proving their abilities in recent times to manage profitability in a low interest rate environment.
- Strong provisioning coverage.
- A well-diversified loan book.
Key Risk
- Low growth environment impacting earnings.
- Potential cuts or reduction to dividends due to low earnings growth.
- Intense competition for loan and deposit growth.
- Normalizing / increase in bad and doubtful debts or increase in provisioning.
- Funding pressure for deposits and wholesale funding (increased funding costs).
- Any legal fees, settlements, loss or penalties associated with ASIC or US-based law suits.
FY21 Results Key Highlights: Relative to the pcp:
- Revenue declined -2.4% to $16,729m. Excluding large notable items in FY20, revenue was -3.0% lower, on lower Markets & Treasury (M&T) income, which was challenged due to limited trading opportunities.
- Cash earnings up 76.8% to $6,558m. Excluding FY20 large notable items, cash earnings were up +38.6%.
- Cash return on equity up 420 basis points to 10.7%.
- Net interest margin of 1.71%, was 6bps lower due to M&T. NAB saw NIM pressure due to the low interest rate environment, home lending competitive pressures and a mix shift towards more fixed rate lending.
- Group Common Equity Tier 1 ratio of 13% was up 153bps from September 2020 and includes 29bps net proceeds from the sale of MLC Wealth. Leverage ratio (APRA basis) is at 5.8%. Liquidity ratio quarterly average of 128%. Net Stable Funding Ratio of 123%.
- Fully franked final dividend per share of 67 cents was up from 30cps in 2H20, and brings full year dividend to $1.27 per share, up +111% from 60cps in FY20.
- Credit impairment charge write-back of $217m (versus $2,762m in FY20) reflecting forward looking provisions and lower underlying charges.
- Collective provisions at 1.35 of credit risk weighted assets.
Company Profile
National Australia Bank Limited (NAB) is one of Australia’s largest banks, with the majority of their financial service businesses operating in Australia and New Zealand. The bank also has a presence in Asia, UK and the US. NAB offers banking services, credit and access card facilities, leasing, housing and general finance, international and investing banking, wealth and funds management, life insurance and custodian, trusts and nominee services.
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.
The Responsible Entity (RE) is Investors Mutual Limited who has appointed Loomis, Sayles & Company, L.P as the Investment Manager of the Fund. Loomis Sayles is a global asset manager that was established in 1926 and had over US$350b AUM as at 30 June 2021 across fixed income and equity investment mandates.
The Fund has a long only investment strategy with a fundamental bottom-up investment approach with the portfolio representing the “best ideas” of the investment team. The Fund seeks to deliver a return (after fees and expenses but before taxes) in excess of the benchmark (MSCI All Country World Index) over a full market cycle, which is considered to be 3-5 years. The Manager has an unconstrained mandate with no sector, style or geographic limitations. Stock selection is driven by the fundamental bottom up analysis undertaken by the investment team. The portfolio is concentrated given the investable universe with 35-65 stocks. The Manager has a long-term investment horizon and as such typically has low levels of portfolio turnover. The portfolio is expected to be largely fully invested at all times, with the portfolio typically having a cash position of less than 5%.
Investment Team:
Eileen Riley and Lee Rosenbaum have managed the investment strategy behind the Loomis Sayles Global Equity Fund since 2013. They’re supported by a team of analysts and a solid foundation of interconnected firm-wide resources, enabling them to leverage extensive research capabilities across equity and debt. Collaboration helps ensure capital flows to the team’s best ideas.
Performance:
| Global Equity Fund | 1 month | 1 yr | 2 yrs | 3 yrs | Since Inception |
| Total Return | 2.70% | 27.20% | 19.00% | 20.00% | 20.00% |
| Benchmark* | 1.10% | 28.30% | 14.90% | 15.40% | 15.40% |
| Outperformance | 1.60% | -1.10% | 4.10% | 4.60% | 4.60% |
About the fund:
The Loomis Sayles Global Equity Fund seeks to provide a concentrated portfolio of best ideas in global equities. Using foresight and flexibility, the team behind the Loomis Sayles Global Equity Fund look far and wide to pursue attractive, sustainable potential returns. Their sound investment philosophy and disciplined process focus on uncovering drivers of long-term company performance. The research-driven approach is unconstrained by style, sector, or geography, with the flexibility to invest across market capitalisations, while risk management is integral to every investment decision.
This delivers a distinctive yet disciplined approach to global equities investing which looks different to other funds while seeking to deliver potential returns above the benchmark over the long term.
(Source: FNArena, loomissayles.com.au)
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.