Reporting Season
-Banyan Tree Research
In the past week, we entered our second week of the 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 investment managers to date. Individual stock reports are available upon request.
- Commonwealth Bank of Australia (CBA) – Neutral.
CBA reported strong FY21 results – Both Statutory NPAT of $8,843m and Cash NPAT of $8,653m, were up +20% on FY20, on improved economic conditions and outlook resulting in a lower loan impairment expense and strong operational performance. CBA also announced an off-market share buy-back returning $6bn of excess capital. On the conference call, management highlighted “our capital surplus has now grown to $11.5bn above the unquestionably strong benchmark; we are well placed to continue to support our customers and manage ongoing uncertainties while also returning, a portion of that excess to our shareholders via $6bn off-market Buy-Back of shares… in deciding to structure the capital return in the form of an off-market Buy-Back of shares the Board considered a number of factors. This form of capital return was considered the most optimal structure; our shareholders will benefit from a lower share count which supports better return on equity and dividend per share outcomes over the long term. Domestic shareholders who participate in the Buy-Back will also benefit from the associated distribution of surplus franking credits”. Further, the Board declared a final dividend of $2.00 per share, fully franked, which equates to payout ratio of 71%, or ~75% normalising for long run loan loss rates. This brings FY21 dividend payment to $3.50 per share, fully franked, up +17% on FY20. Note that eligible shareholders will still receive the dividend with payment scheduled on 29 September 2021 regardless of whether they participate in the Buy-Back or not. We cannot provide a recommendation on participation in the Buy-Back as it concerns individual tax implications. Separately, we are attracted to CBA for its quality and dividend yield, but on valuation grounds, we retain our Neutral rating.
- Charter Hall Long WALE REIT (CLW) – Upgrade to Buy.
CLW reported as expected but solid FY21 results, underpinned by solid performance in its underlying property portfolio which saw (1) operating earnings of $159.0m, or 29.2cpu, up +3.2%. Net property income of $221.6m, up +25.5%, driven by $41.8m from acquisitions and like-for-like rental growth of 2.4%. (2) retained a long weighted lease expiry of 13.2years (albeit down from 14.0 years in FY20. (3) Portfolio cap rate declined 65 bps from 5.42% to 4.77%. (4) 48% of the portfolio are triple net leases where tenants pay for all outgoings, maintenance, and capex. Management also reconfirmed “that based on information currently available and barring any unforeseen events or further Covid-19 impacts, CLW provides FY22 Operating EPS guidance of growth of no less than 4.5% over FY21 Operating EPS of 29.2 cents. This equates to a forecast FY22 EPS of 6.4% based on CLW’s closing price as at 1 July 2021 of $4.78”. With CLW trading at a slight discount to its NTA and offering a solid dividend yield, we upgrade our recommendation to Buy.
- Challenger Ltd (CGF) – Neutral.
Challenger Ltd (CGF) delivered an expected FY21 result with profit within its guidance range – (1) Normalised NPBT of $396m, down -22% over the pcp but reflects CGF’s decision to maintain more defensive portfolio settings during pandemic (in holding more cash and liquid assets); (2) Normalised NPAT of $279m, was down -19% over the pcp; (3) statutory NPAT $592m, reflected positive investment experience of $319m. CGF saw its funds management division report a +30% increase in funds under management while Challenger Life saw its book grow +14% in FY21. Normalised cost to income ratio of 41.2% was 550bps higher than the 35.7% in the pcp. The Board declared a final dividend of 10.5cps which brings the full year dividend to 20.0cps, up +14%, fully franked, with normalised payout ratio of 48.2%. The dividend payments in FY21 are positive in our view and implies the Board was confident in CGF’s capital position after having paused paying dividends in the early stages of the Covid pandemic. CGF also completed its acquisition of MyLifeFinance Limited (MLMF) for $35m. As a reminder, MLMF is an Australian-based customer savings and loans bank which was owned by MyLife7MyMoney Superannuation Fund (Catholic Super). Separately, CEO Richard Howes announced his intention to step down but will remain in his role until March 2022. The Board will conduct a search for his replacement whilst long-serving CGF executive Chris Plater, has been appointed Deputy CEO. FY22 earnings guidance infers solid momentum in CGF’s operations, however, we believe 12-mth forward PE-multiple of 13.4x (which is above its long-term average) accounts for this.
- Suncorp Group (SUN) – Upgrade to Buy.
SUN reported strong FY21 result reflecting cash earnings of $1,064m, up +42.1% and Group NPAT, up +13.1% to $1,033m, driven by increased Profit After Tax in Insurance (Australia) (up +42.4%) and Suncorp Bank (up +69.0%) offset by profit in New Zealand (NZ), down -18.4% (in A$), due to increased natural hazard costs. SUN reported improved top-line growth, with Insurance (Australia) and NZ delivering Gross Written Premium (GWP) growth of 5.5% and 9.2% respectively (best insurance top-line performance in almost a decade). Suncorp Bank delivered home lending growth of 0.8% over the second half and at 31 July 2021 had achieved six consecutive months of growth in home loans. The Board declared a fully franked final ordinary dividend of 40cps which brings FY21 total fully franked ordinary dividends to 66cps (on a 79.3% payout ratio, and up from 36cps in FY20, on 60.7% payout ratio), a fully franked 8 cent special dividend, and an on-market share buyback of up to $250m (which should support its share price). SUN noted they are in a strong position and “struck an appropriate balance between returning capital to shareholders and retaining appropriate buffers for uncertainty. After the proposed returns, we will continue to hold almost $400m in excess capital at the Group level”. On qualitative and valuation grounds, we upgrade SUN to Buy.
- Transurban Group (TCL) – Neutral.
TCL’s FY21 earnings (EBITDA) of $1.81bn were down -3.3% relative to FY20; as measures to contain the ongoing pandemic depressed traffic in Melbourne and North America. Total revenue of $2,613m was flat relative to the pcp with Toll revenue of $2,486m, down -0.3% offset by Other revenue of $127m, up +8.8%. Toll revenue growth in Sydney (up +19.2%) and Brisbane (up +7.7%) was offset by Melbourne (down -17.6%) and North America (-39.9%), which saw Average Daily Traffic (ADT) declines of 24.5% and 13.3%, respectively, due to lockdown measures associated with Covid-19. Free cash of $1.27bn was down -13.5% on pcp. Distribution of 31.5cps for FY21 included a final dividend of 21.5cps. TCL’s financial accounts also highlighted they have sold 50% of its Chesapeake assets, as previously announced in Dec-20. TCL provided a disappointing update on the West Gate Tunnel Project and a dispute between the parties involved. TCL did not provide quantitative FY22 distribution guidance, but “advises that it expects the FY22 distribution will be in line with Free Cash, excluding Capital Releases.” TCL has a high-quality asset base, with the focus on new growth projects critical toward maintaining distribution growth and potential for significant capital releases (~$2bn out to 2025). However, TCL faces challenges in the West Gate Tunnel dispute, and lack of appetite for public transport (i.e. boost for roads) impacts from permanent/extended work from home with the ongoing pandemic (and associated containment measures) – maintain Neutral on valuation grounds though we see downside risks.