Reporting Season
– Banyan Tree Research
In the past week, we entered our first week of Australian reporting season for August 2021. No doubt, the enduring impact of Covid-19 pandemic on financial earnings in the past six months will become clearer as Australian corporates announce confessions. We are focused on deciphering: (1) the quality of earnings – what is recurring and non-recurring earnings; (2) the strength of corporate balance sheets; and (3) valuations – i.e. what is the intrinsic value of companies in a post Covid-19 world. In this report, we reproduce commentary provided by our analysts to date. Individual stock reports are available upon request.
- ALE Property Group (LEP) – Neutral. LEP reported solid but as expected FY21 earnings results. Statutory profit of $179.2m increased from $159.2m from (i) net valuation gains of $141.3m; (ii) higher distributable earnings of $4.0m; (iii) profit from asset divestments of $4.2m; and (iv) lower derivative movements of $6.1m; offset by higher borrowing cost amortisation of $4.0m. (2) Distributable income of $34.4m or 17.15 cps, an increase of 13%. Management provided FY22 distribution guidance of 22.0cps, up +2.3% on pcp. We remain Neutral on valuation grounds (LEP trades on a 33.7% premium to its NTA) and we remain watchful over the litigation outcome. Management reaffirmed that 35.6% of the portfolio remains under-rented, which represents upside to rental income.
- Janus Henderson Group (JHG) – Buy. JHG reported strong 2Q21 results, with adjusted EPS of US$1.16 coming in ahead of market expectations. 2Q21 adjusted revenue of $603.6m was +17% higher than the $516.6m in 1Q21, driven by (1) management fees of $494.5m, up +6% (on higher average assets and average net management fee margin improved to 47.1bps from 46.8bps); and (2) performance fees of $77.4m, up from $17m in 1Q21 (on stronger investment performance and seasonality). On the conference call with management, JHG noted its solid capital management, stating “…cash and cash equivalents were $965m as at the 30th of June, an increase of $141m resulting from the strong cash flow generation from the profits… During the second quarter, we paid approximately $65m in dividends to shareholders and declared a $0.38 per share dividend… with our strong balance sheet, significant cash flow generation and reduced regulatory capital requirements, the Board has authorized a $200m buyback, which is expected to be completed by the next AGM in April 2022. The $230m buyback completed in the first quarter, the quarterly dividend, including a 6% increase announced last quarter, and the additional $200m of buyback that we’ve announced today demonstrates our commitment of returning excess cash to shareholders”. We maintain our Buy recommendation – we have upgraded our earnings estimates for FY21 and relative market multiples, resulting in our valuation increasing to $60.22 per share.
- Rio Tinto (RIO) – Neutral. RIO delivered as expected but strong 1H21 results reflecting record underlying earnings of US$12.2bn, up +156% relative to the pcp; $13.7bn net cash generated from operating activities was 143% higher than 1H20 on higher pricing for iron ore, aluminium, and copper. This in turn saw net earnings of $12.3bn (reflecting basic EPS of 761.0cps) significantly higher than the pcp. On the conference call with analysts, RIO’s CEO Jakob Stausholm noted the strong results reflected “Government stimulus in response to ongoing Covid-19 pressures has driven strong demand for our products at a time of constrained supply resulting in a significant spike in most prices”. Further, RIO committed $2.4bn in funding for its high-quality Jadar lithium project, signalling their large-scale entry into the battery materials market. With a net cash position of $3.1bn, RIO’s net gearing ratio (net (cash) / debt to total capital) improved to (6)%. The Board declared a cash return of 561cps, made up of an interim dividend of 376cps and a special dividend of 185cps. We maintain our Neutral on valuation grounds but do note we expect strong cash generation and the Company to continue to pay strong dividend levels.