Tag: Australian Market

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Shares

Scentre Group – Shares Still Look Undervalued

However, the group faces challenges from consumers closing their wallets in 2020 due to the coronavirus, and from e-commerce taking a greater share of spending over time. The business has been allocating more space to food, entertainment and services in response to online competition undermining the rent it receives from discretionary retailers. We expect tenants will resist agreeing to traditional annual increases above CPI without corresponding revenue growth. As such, we forecast lower income growth in the long run, weighing on property values.

Key Investment Consideration

Under pressure specialty tenants pay higher rent per square metre than anchor tenants, and therefore drive Scentre Group’s profitability.

Scentre Group has high leverage, and has so far resisted raising equity in 2020, unlike other retail REITs. It can persevere, but we think it needs an improved operating environment in calendar 2021 to avoid an equity raise. OThe quality of Scentre’s assets will ensure they remain pre-eminent shopping destinations in Australia, but we expect e commerce will undermine its pricing power.

Our base case is Scentre either avoids an equity raise, or takes advantage of a rally in sentiment towards REITs to issue equity at less dilutive prices. But we include a dilutive equity raise in our bear case. A realistic possibility is something in between, perhaps a smaller rights issue at a less dilutive price, when markets are optimistic about recovery.

It’s possible our very high uncertainty rating could reduce if operational performance improves once distancing requirements fade, and Scentre reduces debt. With income underpinned by contractual leases under nearly all circumstances, Scentre’s revenue is much more predictable than many other companies. However, the pandemic is one of those rare circumstances, and until that subsides uncertainty remains.

Australian shopping centres are in better shape than their counterparts in the United States, due to lower retail space per person, and a larger share of anchor tenants such as supermarkets.

Population growth in Australia was among the fastest in the developed world until coronavirus. If immigration recovers it would provide infill demand at Scentre’s assets.

Despite retail spending switching online, retailers still need a physical presence to maintain their brand. Premium retailers have little choice but to locate shops in the malls of Scentre and a handful of other groups, given the quality of locations and centres.

While Scentre has one of the highest-quality shopping centre portfolios in Australia, rents are higher than for convenience focused centres, and high end consumer goods are most at risk from online competition.

In response to online competition, Scentre Group has remixed its tenant profile towards food, entertainment and services. However, these categories are more sensitive to social distancing preferences, and typically require higher tenant incentives and maintenance capital expenditure.

Retail space per person is higher in Australia than it is in Europe, and the amount of floorspace devoted to under pressure department stores is high. High end malls in the U.S. may benefit from the closure of marginal malls, but outright closures of rival malls is likely to be less frequent in Australia.

 (Source: Morningstar)

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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.

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Global stocks

Pendal Group – Investment outlook

We forecast FUM to grow 10% per year to about AUD 146 billion by fiscal 2025–exceeding management’s “50% growth by fiscal 2025” target–mainly driven by market returns of 7.5% per year. A key highlight was the persistence of Pendal’s improved performance since the COVID-19 selloff, which should help attract stronger inflows over the near term. With 71% of FUM in funds that have outperformed their benchmarks over a 3-year period (above the 3-year average of 66%), 52% of funds are now in the first and second quartiles (over a 1-year period).

Performance will be the primary driver of fund flows. While we also expect new money into Pendal’s new offerings– such as its Regnan ESG products–we don’t expect them to add meaningfully to FUM in the near term. Amid the proliferation of ESG funds and ETFs, we question if these new products will materially add to flow in the foreseeable future. Magellan’s Global Sustainable strategy has amassed just AUD 151 million in FUM after four years, while Trillium, Perpetual’s ESG manager, has circa AUD 6 billion in FUM after operating for 38 years.

Pendal could suffer further outflows, notably from the U.K./ European equities and Westpac mandates, but we see risk declining. We understand clients who withdrew their funds due to Brexit uncertainties tended to be non-U.K clients, and they currently make up less than 20% of Pendal’s U.K./ European equity mandates.

Elsewhere, the guided 8%-10% growth in fiscal 2021 fixed costs and a one-off spend of AUD 15-18 million from fiscal 2021-24 are largely strategic (focused on new products, marketing and technology), and in our view, are necessary to help Pendal grow FUM and revenue amid an increasingly competitive investment landscape. We assume Pendal will spend at the higher end of guidance, and forecast the costto- income ratio to average 64%–above the 3-year average of 60%–over the next three years and trend downwards thereafter.

Management has revised its dividend payout policy to 80%-95% of underlying profit after tax (which will replace cash NPAT as an underlying profit measure) starting fiscal 2021. We think this is a reasonable range, underpinned by the group’s low capital requirements, strong free cash flow and pristine balance sheet with no debt. We currently assume a payout ratio of 88%, which equates to a midcycle dividend yield of 6.5%.

 (Source: Morningstar)

Disclaimer

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.

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Global stocks

Perpetual Ltd– Perpetual to Go Full Steam

While it benefits from Australia’s ageing demographics and the compulsory superannuation contribution levy, its core Australian equity funds are suffering from net outflows, owing to structural issues of industry superfunds managing more Australian equities in-house and investors increasing allocation to cheaper passive investments and global assets as well as poor short-term performance. Recent acquisitions of Barrow Hanley and Trillium improve the earnings outlook in its funds management business, and it should benefit from continued growth in its private and trust segments and improving markets.

Key Investment Consideration

  • Its core investment segment is facing the structural issues of increasing allocations to passive investment styles and global assets, as well as industry superfunds managing more Australian equities in-house.
  • Its earnings are highly sensitive to equity market and macroeconomic conditions such as credit growth, and investor confidence, making it a high-beta stock.
  • Its funds under management and advice provide it with a recurring revenue stream and generate high returns on invested capital and strong free cash flows. It should also benefit from increases in the compulsory superannuation contribution.
  • Perpetual’s large scale of funds under management and advice provide it with recurring revenue streams and allow it to generate high returns on invested capital. Combined with relatively low maintenance capital requirements, it generates strong free cash flows allowing it to maintain a high dividend payout ratio.
  • Perpetual’s private segment is well positioned to take advantage of its heritage brand, as well as Australia’s aging demographic and growth in the high-net-wealth financial advisory sector. It also benefits from less regulatory scrutiny than advisors like the major Australian banks, AMP, and IOOF, which focus more
  • on the mass affluent.
  • Perpetual should benefit from the continuing growth in retirement FUM from the phased-in increase of the compulsory superannuation contribution levy from 9.5% to 12%.
  • Perpetual’s core investments segment is facing the structural issues of investors increasing allocations to passive investment styles and global assets, as well as industry superfunds managing more equities inhouse.
  • Its earnings are highly sensitive to equity market and macroeconomic conditions such as GDP and business and investor confidence, making it a high-beta stock.
  • Perpetual is not well positioned to take advantage of the likely increase in allocation of Australian investors
  • to passive investments.

 (Source: Morningstar)

Disclaimer

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.

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Global stocks

Fisher & Paykel Healthcare Corp Ltd

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However, unsurprisingly, management relayed that hardware and consumables demand began to normalise in fourth-quarter fiscal 2021 after peaking in the third. Critically, COVID-19 hospitalisation rates in North America and Europe have come down substantially as vaccines are administered, with the two regions contributing 74% of fiscal 2021 revenue. Accordingly, we still expect a material decline as strong COVID-19-induced sales are lapped and leave our fiscal 2022 revenue forecast of NZD 1.61 billion unchanged. Shares screen as overvalued, as we surmise the market is extrapolating elevated demand too far in the future.

Fisher’s short-term outlook is challenged. Further localised waves of COVID-19 are unlikely to sustain elevated hardware demand. Consumable volumes are also unlikely to repeat, as this requires an immediate shift in clinical practices to utilise nasal high flow therapy for general respiratory support. Our long-run outlook is broadly unchanged and factors in an ongoing transition. Our normalised revenue growth of 15% in the new applications consumables segment is the primary driver of our midcycle group revenue growth and operating margin forecasts of 10% and 30%, respectively, largely consistent with Fisher’s long-term targets of 12% and 30%, respectively  

Fisher declared a final dividend of NZD 0.22 per share, increasing total dividends for fiscal 2021 by 38% to NZD 0.38 per share, fully imputed. We forecast Fisher to maintain its net cash position over the forecast period, NZD 303 million at fiscal 2021 year-end, and to comfortably afford a 60% dividend payout ratio. We have increased our fiscal 2022 capital expenditure forecast to peak at NZD 245 million in line with guidance as Fisher builds a third manufacturing facility in Mexico.

Profile

Fisher & Paykel Healthcare is one of the three largest respiratory care device companies globally. It is the market leader in hospital use humidifiers, masks and related consumables and the number three player in the at-home treatment of sleep apnoea using respiratory devices. Both the hospital and homecare markets for respiratory devices are growing strongly in the developed markets in which Fisher & Paykel has a presence. The company earns almost 50% of revenue in the U.S., 30% in Europe with Asia Pacific the biggest contributor to the balance. Fisher & Paykel conduct their own R&D and hold over a thousand patents with another 1,200 pending. They manufacture in New Zealand and Mexico and have a multi-channel distribution model.

Source:Morningstar

Disclaimer

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
Shares

Metcash Is Falling Behind

Convenience and locally tailored product ranges remain a point of differentiation for smaller independent retailers, but consumers are increasingly willing to sacrifice convenience for value.Scale has proved to be an important attribute, enabling the larger retailers to pass on better pricing through purchasing power and the ability to spread the cost of distribution across a wider revenue base. The volumes that Woolworths and Coles flow through their supply chains are considerably larger than those for Metcash.

  • The expansion of discount supermarket Aldi is likely to continue pressuring on profit margins in the Australian supermarket sector.
  • The larger supermarket groups are using their scale advantage to offer lower prices and take market share from independent retailers.
  • The expansion of its hardware business through the acquisition of the Home Timber & Hardware Group further diversified earnings, but the food and grocery business still accounts for the majority of earnings.
  • Metcash’s supermarket sales grew by 14% in the first quarter, still ahead of supermarket giant Coles. However, the temporary advantage of the many stores within Metcash’s network of independent IGAs is likely waning. While restrictions were severe, customers were more inclined to shop at their local grocer to avoid longer travel distances and crowds.
  • Metcash dominates the Australian wholesale distribution of packaged groceries to the independent retailer. From th small corner shop to the local independent supermarket, Metcash acts as a co-operative, funnelling independent sales volume through a single channel to derive buying power to negotiate volume discounts with manufacturers. Metcash is the fourth force in the supermarket and liquor industry, with 11% market share (IGA), with Woolworths and Coles accounting for 65%, and Aldi 9%.
  • The predominant supplier of packaged groceries to independent retailers provides a monopolistic market position to sustain above-average returns on capital.
  • Strategic and cost-cutting initiatives undertaken by Metcash are gaining traction. Also, independent supermarket operators across all states are stepping up investments in new stores, additional floor spare, and refurbishments.
  • Metcash’s acquisitive expansion of its hardware business has diversified the company’s earnings and cash flows away from the robust competition and lower margins experienced in the food and grocery business.
  • Intense competition between Coles, Woolworths, and Aldi is leading to price deflation to capture sales volume. A loss of volume from the independent channel could make it increasingly difficult for Metcash to match grocery pricing from its larger rivals.
  • Metcash’s customers (independent retailers) are effectively competing through differentiation of convenience, product range and service. These points of difference are likely to become marginalised in periods of economic constraint.

 (Source: Morningstar)

Disclaimer

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

Spark New Zealand Ltd

Vodafone New Zealand will have been under private equity ownership for close to three years by the time its fiscal 2022 ends in March 2022. During that time, its EBITDA is likely to have posted a CAGR of 2.3% to NZD 495 million, the midpoint of management’s fiscal 2022 guidance range. The lift has primarily been driven by cost-outs and efficiency gains, with revenue CAGR at just 0.3% but EBITDA margin lifting by 140 basis points to our estimated 24.7% in fiscal 2022. Over the same period (but with a June-end balance date), narrow-moat Spark could post EBITDAI CAGR of 1.7% based on our fiscal 2022 forecast. Margin has been consistent at just above 31%.

The stable competitive environment, with the two major players focused on margin optimisation against a stagnant revenue backdrop, has seen Spark grow its free cash flow to our forecast NZD 452 million in fiscal 2021. This represents a CAGR of 24.5% from fiscal 2019 (before Vodafone fell into private equity ownership), fortifying the NZD 0.25 annual dividend, come rain, hail, or COVID. The key issue for Spark is what Vodafone might do beyond fiscal 2022? Will Vodafone’s private equity owners be content to continue to chip away costs from the circa NZD 500 million EBITDA base (from NZD 463 million in fiscal 2019 before they took over)? Or will they take advantage of the recent heightened capital expenditure intensity to facilitate a step-up in Vodafone’s revenue which has remained static at NZD 2.0 billion since the takeover?

Our current intrinsic assessment for Spark largely assumes the status quo in competitive dynamics. But Vodafone owners’ actions from next year warrant close attention. For the record, Vodafone management is emphasising an intention to keep simplifying and digitising the business. It implies a continuation of the current cost-optimisation strategy, while lifting the utilisation of its network assets, including the 5G network being rolled out (for example, fixed wireless). That private equity 101 strategy has served Vodafone well to-date. In fiscal 2019 before the company fell under private equity ownership, its revenue was NZD 2.0 billion and EBITDA was NZD 463 million, at a margin of 23.3%. By fiscal 2022, we forecast stable revenue at around NZD 2.0 billion but EBITDA at NZD 495 million, equating to 24.7% margin.

Granted, fiscal 2022 may still have some remnant COVID impact, but the point remains that Vodafone’s earnings growth has been mostly cost-driven. Meanwhile, Vodafone’s capital expenditure/revenue averaged under 12% for four years before it was bought by private equity. Since then, its capital expenditure/revenue has steadily increased to over 13%. This is designed not only to address previous under-investment under Vodafone plc ownership, but also as an important prerequisite to realising management’s long-term aspiration to lift Vodafone’s EBITDA margin to Spark’s 30%-plus level. To achieve this, we believe cost-out can only go so far and revenue growth resuscitation must play a role. This is in part why we forecast Spark’s earnings before interest, tax, depreciation, amortisation, and investment income, or EBITDAI, margin to drift slightly towards the 30% level longer-term.

This would be below the 31.2% we project for fiscal 2022—a level Spark management is aspiring to maintain on a sustainable basis. Of course, Spark shareholders would prefer to see the current competitive stability continue. In fiscal 2019 before Vodafone’s ownership change, Spark’s EBITDAI was NZD 1,090 million at a margin of 31.0%, while producing free cash flow of NZD 292 million.

By fiscal 2021, we project Spark’s EBITDAI to have increased to NZD 1,120 million (inclusive of NZD 50 million of COVID-related hit), at a margin of 31.2%, while producing free cash flow of NZD 452 million. However, we suspect even Spark management will not expect this competitive stability to continue indefinitely. This may well be why the group is keen to showcase its non-telco businesses such as its IT and managed services division. It is a unit that accounts for a third of group revenue, 28% of group gross margin and with solid fundamentals to lift its share in an NZD 6.0 billion market that is growing at 4% to 6% per year.

Source:Morningstar

Disclaimer

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
Shares

Netwealth Group -Still Racing Higher and Looking Increasingly Overvalued

However, with low switching costs, we expect strong FUMA growth to be offset by industry fee compression, as platform providers largely compete on price. We expect Netwealth to generate a revenue CAGR of 12% over the next decade, and the relatively fixed-cost nature of the business and associated operating leverage should drive margin expansion and a 13% EBIT CAGR over the decade.

Key Considerations

Netwealth is the largest independent investment administration platform in Australia but still only comprises around 3% of the market.

The wealth management sector is experiencing fee compression as a result of technological innovation, and we expect this trend to continue.

Administration platform fees could potentially compress to close to zero, as they have done in the U.S., where platform managers monetise their intellectual property via transactional revenue.

Netwealth provides investment administration software as a service, or SaaS, in Australia via its proprietary software platform, which includes investment portfolio administration, investment management tools, and investment and managed account services. The company charges for its software based on the value of funds under management on its platform, comprising over 95% of group revenue, in addition to providing Netwealth-branded investment products, which are managed by third-party investment managers.

In contrast to the independent platforms, the large vertically integrated wealth managers have narrow economic moat ratings. With the wealth business contributing less than 10% of earnings for most of these companies, their economic moats don’t necessarily reflect their platform businesses or even their wealth management businesses, as these companies are very large and diversified financial services organisations. However, IOOF, which only owns a vertically integrated wealth management business, has a narrow economic moat based on switching costs and intangible assets.

Netwealth may be affected by the requirement that financial advisors act in their clients’ “best interests” if financial advisors feel obliged to move their clients onto the cheapest administration platform. This could create significant downward fee pressure for platforms.

Netwealth operates in a commoditised industry and is much smaller than many of its competitors. We expect the larger administration platforms to continue improving the functionality of their platforms and compete more

aggressively on price.

 (Source: Morningstar)

Disclaimer

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 Shares

NIB Holdings Ltd – Grow Earnings Over Time

Approximately 53% of the population is covered by private health insurance because of taxation benefits, shorter wait times, a choice of doctor and hospital, and cover of ancillary health services. NIB demutualised and listed on the Australian Securities Exchange in 2007. It is Australia’s fourth-largest health fund. Attractive long-term industry dynamics are supported by a growing population, government taxation incentives and penalties, and regulated pricing.

  • By spending on customer acquisition NIB can continue to take share, but annual growth in policyholders is expected to be low given affordability issues.
  • NIB can continue to generate attractive returns, using scale benefits and modest switching costs in a highly regulated industry. NIB could also participate in industry consolidation if smaller players become unprofitable.
  • We forecast mid-single digit earnings and dividend growth, with NIB’s 60% to 70% dividend payout ratio lower than peers being a reflection of the firm’s strategy to make small acquisitions to strengthen the private health business and diversify revenue.
  • NIB made two acquisitions to grow its travel insurance offering in recent years, with the rationale to diversify revenue outside of private health insurance, add exposure and scale in an industry expected to experience long-term growth, and leverage its claims management capability and existing distribution channels. We believe NIB will find success in cross-selling, but the business remains dependent on travel activity and being commoditised, is vulnerable to pricing pressure. While leveraging the NIB brand in Australia may come with some success, we do not believe insurers can build a competitive advantage on intangible assets.
  • Industry growth is tied to a steadily increasing population, ageing demographics and the unavoidable rise in healthcare spending. Governments will continue to incentivise participation in private health insurance to share the burden of escalating healthcare costs.
  • Premium growth is generally tied to the increasing cost of healthcare. The government regulator approves/rejects price increases as part of an annual review. Very few have been rejected which helps reduce uncertainty around insurance margins.
  • The symbiotic relationship of private hospital operators, and buyer power over general practitioners, is a key strength of NIB’s business model. Private hospitals are reliant on the private insurance system, as the majority of private hospital income is paid by the insurers.

 (Source: Morningstar)

Disclaimer

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 Shares

United Malt Group Ltd – Result as a Public Company Offers Optimism

Nonetheless, the company is the fourth-largest global malt processor and works with some of the world’s largest breweries and distillers as well as fast-growing craft producers. Although management expects United to face higher near-term costs related to its recent public listing, we think this will be offset by longer-term savings. But despite some attractive aspects of the business, we don’t think United has carved an economic moat. It is a commodity processor, with a high degree of fixed costs and limited ability to substantially differentiate its product.

Key Considerations

  • Although we anticipate craft beer consumption–a key driver for malt demand–will rise as a proportion of overall beer in United’s primary markets, the rate of growth is likely to slow, owing to the already high amount of craft brewers globally and flat overall beer volume trends.
  • Long-term client contracts, and the ability to pass through costs in periods of high barley prices help underpin a stable earnings stream and a manageable dividend policy.
  • We expect slowing end-market demand and limited barriers to supply additions driving returns on invested capital about equal to the company’s weighted average cost of capital.
  • Underlying earnings are stable, supported by longterm client contracts and its ability to pass through costs during periods of high barley prices.
  • United Malt benefits from rising craft beer production globally, which requires greater malt volumes and attracts higher prices.
  • Opportunities exist for further penetration into relatively underdeveloped beer markets, such as Asia and Latin America.
  • The commodity products that United Malt provide are readily available from competitors, and the company has little pricing power over the products it buys and sells, making for slim margins.
  • Barley acreage has declined in favour of other adjunct grains like corn or soybean in recent years, which could lead to periods of short supply and higher short-term costs.
  • The loss of key brewing customers, especially if they become self-sufficient for malt, could materially threaten its earnings stream.

 (Source: Morningstar)

Disclaimer

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.