Tag: Australian Market

Hot on the heels of the USD 2.15 billion (AUD 2.9 billion) sale of its North American building products division, Boral has offloaded its Australian timber business for AUD 65 million and anticipates further proceeds of USD 125 million (AUD 170 million) for the Meridian Brick divestment.

The surviving Australia segment, which accounted for approximately 60% of group earnings prior to sell-downs, consists of construction materials and cement, and the building products business units. The construction materials and cement business unit comprise quarries, asphalt, transport, landfill, property, cement and concrete placing activities. This business unit represents around 90% of Australia earnings and has the greater competitive strengths, though not sufficient to drive a moat overall. Building products, meanwhile, includes West Coast bricks, roofing, masonry and timber products and represents the remaining 10% of segment EBIT. These businesses are the less moaty.

Financial Strength:

The fair value of Boral Ltd has been maintained by the analysts at AUD 7.40. 

Since Seven Group (which holds 59.2% stakes in Boral) closed its AUD 7.40 takeover offer in July 2021, Boral shares drifted off to a low of AUD 5.80 in September, before staging a modest recovery to the current circa AUD 6.20. The fair value estimate of the analysts equates to a 2026 EV/EBITDA multiple of 6.7, a P/E of 14.5, and dividend yield of 4.8%.

Boral’s balance sheet is now flush with cash and a return of capital a near certainty in fiscal 2022. Prior to asset sale receipts, the company ended fiscal 2021 with AUD 900 million in net debt, excluding operating leases. But with cash from asset sales it expects to be in a position to return up to AUD 3 billion or AUD 2.70 per share of surplus capital by way of an equal capital reduction, subject to shareholder approval at the AGM on Oct. 28, 2021 and subject to an appropriate class ruling from the Australian Tax Office.

Company Profile:

Boral is Australia’s largest construction materials and building supplier, with an expanding footprint in U.S. fly ash and building products markets, and exposure to Asian construction materials markets via a joint venture with USG Corp. Previously operating as a conglomerate, Boral now exists as a pure-play, construction materials and building products group following the demerger of the group’s energy business, Origin Energy, in 2000. In Australia, the company is an integrated construction materials player, while operating fly ash and building products businesses in the U.S. The company’s joint venture, USG Boral, is a gypsum-based building product manufacturer and distributor in Australia, Asia and the Middle East. Boral formed the JV with USG Corp in 2014.

(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.

Successive acquisitions have seen the company become Australia’s fourth largest concrete and aggregates player. However, Adbri currently lacks full vertical integration in key Victorian and Queensland construction materials markets. This has left the group with an inability to fully benefit from demand from major infrastructure projects in these markets, and left Adbri’s earnings susceptible to falling demand from residential construction through the current Australian housing construction downturn, which began in late 2018. 

Acquisitions within these markets are therefore viewed positively, and with an improved ability to supply infrastructure projects in all major metro markets, the resilience of Adbri’s earnings in the next cycle will be strengthened.

There are concerns regarding the recent loss of the Alcoa lime supply contract highlights Adbri’s intention to allocate growth capital to its lime business. Competition from lime imports has proved too strong with Alcoa-the largest lime buyer in the Western Australia, or WA, market–to source lime offshore from 2021. A reassessment of the lime growth strategy is required, in our view.

Financial Strength 

The balance sheet remains in decent shape. It is anticipated that pressure on Adbri’s balance sheet will build near-term, owing to the AUD 200 million of capital expenditure over the 2021–2022 period associated with the previously announced Kwinana upgrade project. We expect leverage(defined as net debt including lease liabilities/EBITDA)to peak at 2.4 times in 2022, remaining below Adbri’s leverage covenant of 3.0 times. We anticipate balance sheet metrics will improve from 2023 onward as the cyclical recovery in new home construction and Adbri’s earnings gathers pace. An AUD 5.5 cent interim dividend was announced. We continue to forecast full-year 2021 dividends of AUD 0.12 per share reflecting an approximate 75% payout of net income. Adbri’s has ample liquidity to support operations through the medium term. 

Bulls Say 

• Infrastructure spending will offset declining residential construction activity and provide top-line growth. 
• A conservative balance sheet provides capacity for continued downstream acquisitions promising better returns. 
• The eventual turning of the housing cycle will support price increases in coming years.

Company Profile

Formed by the merger of S.A. Portland Cement and Adelaide Cement in 1971, Adbri is an integrated cement, lime, concrete and aggregates, and concrete products business. Adbri currently sells about 3 million metric tons of cement and 1 million metric tons of lime per year, making it Australia’s largest lime and second-largest cement supplier. Key geographic regions include Western Australia and South Australia with a focus on residential construction, infrastructure, and industrial markets including mining.

 (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.

We anticipate Coles and Woolworths to report food price deflation continued in the September quarter of 2021. However, we expect prices to reflate in the December quarter with food inflation to average 1.5% in fiscal 2022. We forecast higher prices to support the operating margins of supermarket operators, offsetting weak sales growth post-lockdowns. 

Morningstar’s proprietary Little Shopping Basket indicates prices were flat at Coles and declined by 1% at Woolworths in the September quarter 2021 versus the prior corresponding period against a backdrop of rising upstream costs, including cost pressures experienced by manufacturers of consumer-packaged goods, or CPGs.

Heading into the upcoming release of first-quarter fiscal 2022 sales figures in late October, we maintain our fair value estimates of AUD 24.00 and AUD 13.20 per share for narrow moat Woolworths and no-moat Coles, respectively. 

Although we estimate Woolworths dropped prices by more than Coles in the September quarter, our shopping basket was still cheaper at Coles than at Woolworths. Our average Coles basket was priced at a 2% discount to the average Woolworths basket consisting of identical items, suggesting Coles competed more aggressively on price.

 Large global suppliers have been sounding the alarm regarding inflationary pressures within their supply chains. 

Nonetheless, we don’t anticipate rising input costs to materially impact profit margins at Coles and Woolworth in fiscal 2022, as their suppliers are likely to partially internalise any inflation, and we expect the supermarkets to successfully pass on higher cost of goods sold to consumers in the form of low-single-digit price rises. Coles and Woolworths enjoy dominating positions within the Australian grocery retailing sector and can leverage buying power in their price negotiations with suppliers. Increasing the level of private label penetration also offers supermarkets the option to better manage the price of their baskets.

From fiscal 2024, we expect sales growth of the Australian food retailing industry to recover to a sustainable rate of about 4% annually, underpinned by food price inflation of 2.5% and population growth of around 1.5%. 

We also track a discount grocery basket, comparing private label product pricing at Woolworths, Coles, and Aldi. Our discount basket indicates prices were roughly the same at Woolworths and Aldi in the September quarter 2021, while the average private label product at Coles was priced at around a mid-single-digit premium, after adjusting for packaging sizes. 

We infer from our baskets differences in pricing strategies between the two majors. We conclude Woolworths aims to match Aldi on private label pricing, while Coles’ comparable private label range is less competitively priced. Rather, Coles seems to be focusing on matching Woolworths on its branded product range. 

However, we caution the readthrough from our baskets has its limitations due their small sample sizes. Morningstar’s Little Shopping Basket and our discount grocery basket each track only a small subset of products across the vast ranges stocked by Australian supermarket retailers. Also, over time periods shorter than a full year promotional cycle, differences in promotional schedules impact results.

 (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:

• U.S. growth opportunity– the U.S. online sports betting market continues to open following the 2018 supreme court ruling which legalise the industry. Market growth estimates forecast the industry to grow to US$51bn by 2033. 
• Strong management team with a solid track record – the ability to grow market share in a competitive and mature market of Australia gives us some confidence the management team have the right strategy in place to build share in the U.S. 
• Proprietary technology stack – The speed and usability are key differentiating factors. PBH operates proprietary technology, which it developed inhouse. This means new modifications and updates are easier to implement (i.e., more control) with inhouse tech versus outsourced (i.e., having to go to an external provider each time with an update). 
• Cross sell opportunities with iGaming – PBH’s recently launched iGaming product (online casino) is already highlighting cross-sell opportunities to its customers.

Key Risks:

• Rising competitive pressures
• Adverse regulatory change in key operating jurisdictions (Australia / U.S.)
• Loss of market share in key regions or growth rate fails to meet market expectations
• Higher than expected costs – especially around investment in sales & marketing to drive market share
• Trading on high PE-multiples / valuations means the Company is more prone to share price volatility
• Cyber-attack on PBH’s platform

Key highlights:

• PBH’s FY21 results were largely in line with expectations, with group revenue up +159% to $194.7m and gross profit up +129% to $87.6m YoY.
• The recently launched iGaming product represents another growth opportunity (backed by a strong management team), with management noting that ~71% of all iGaming players have placed an in-play wager and 40% of cash active clients have placed an iGaming bet since launch.
• The more mature market of Australia still has room to grow, with PointsBet, the no. 5 player (by online market share) and management still targeting 10% online market share by 2025.
• Group normalised EBITDA for the year was a loss of $156.1m vs loss of $37.6m in the pcp, as PBH continues to invest in the business to scale the U.S. business and invests in its technology stack.
• Australian Trading segment reported revenue of $150.7m (vs $68.2m in pcp) and EBITDA of $9.2m (vs $6.9m in the pcp).
• USA segment reported revenue of $42.3m (vs $7.0m in pcp) and EBITDA loss of $149.6m (vs loss of $38.2m in pcp). During the year, PBH operational in six U.S. states: New Jersey, Iowa, Indiana, Illinois, Colorado, and Michigan.
• Balance sheet is in a good position to support investment in growth, with pro forma cash balance of $665.2m (post the July 21 capital raising).

Company Description: 

PointsBet Holdings Ltd (PBH), founded in 2015, is a corporate bookmaker with operations in Australia and the United States (New Jersey, Iowa, Illinois and Indiana). PointsBet has developed a scalable cloud-based wagering platform which offers customers sports and racing wagering products. PBH’s key products include fixed odds sports, fixed odds racing and PointsBetting.

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.