Reporting Season
-Banyan Tree Research
In the past week, we entered our fourth 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 investment managers to date. Individual stock reports are available upon request.
- Sydney Airport (SYD) – Neutral. Sydney Airport (SYD) reported as expected but troubled 1H21 results which reflected the impact of the ongoing pandemic (and associated quarantine measures) on travel. SYD’s share price of $7.70, is up +41.5% over the past year, but remains below its share price at the advent of the pandemic of $8.41 (on 7 February 2020). No doubt its share price is being held up by recent takeover offers, which have been rejected. On the conference call with SYD, management reaffirmed the Board’s rejection of these offers. CEO Geoff Culbert stated “I want to take a moment to cover the non-binding indicative offers we received on the 2nd of July and the 13th of August from the Sydney Aviation Alliance consortium…The board carefully considered the offer at $8.25, and again $8.45… for all the reasons… set out in the ASX releases, issued on 15th July and 16th August. The board unanimously concluded that the offers undervalued Sydney Airport and were not in the best interests of security holders. It’s important to emphasize that the boards don’t have a philosophical objection to engaging with any entity that wishes to propose a transaction or a change in control of the Company and they’re open to engaging with the Sydney Aviation Alliance consortium, should the consortium be prepared to lift its indicative offer. It’s worth noting that the ongoing lockdowns in Sydney and across the various parts of the country haven’t changed the board’s assessment, because in determining the value of the airport, you have to take into account, the long-term value. Before Covid, Sydney Airport was Australia’s single largest infrastructure asset, generating close to 7% of the GDP of the state of New South Wales… We are Australia’s International gateway to the world, and domestically, we are the central hub in one of the world’s busiest and most profitable aviation networks. Over many years, we have just demonstrated both an ability to generate stable and growing cash flows, and provide consistent and reliable returns to security holders… whatever is happening with coronavirus and lockdowns at the moment won’t impact the view on valuation, which is underpinned by the fundamentals of the business and that long track record of success”. We reaffirm Neutral recommendation, as the timing of when we will see a reversion to normalised earnings (which is reliant on the roll out of the Covid vaccine globally, and the end to quarantine measures), remains uncertain; but we have no doubt as to the quality of SYD’s assets and ensuing easing border restrictions domestically and internationally, will see SYD’s valuation and share price re-rate quickly. We also see a sustained weakness in the share price as a buying opportunity.
- Amcor Ltd (AMC) – Buy. Amcor Ltd (AMC) delivered strong growth and higher EBIT margins despite steep raw material cost increases and supply constraints, delivering both EPS and FCF above management’s upgraded guidance. Management completed Bemis integration with financial targets exceeding expectations. Strong shareholder returns continued with FY21 dividend of 47cps and share repurchases of $350m. We maintain our Buy recommendation given AMC’s defensive earnings, solid FY22 outlook and focus on shareholder returns.
- ASX Ltd (ASX) – Neutral. ASX delivered a mixed FY21 result in light of record levels of retail trading from last year and the effects of the RBA’s current policy settings, delivering operating revenue of $951.5m, up +1.4% over pcp, with listings and issuer services making a strong contribution to growth, with revenue increasing +8.9% to $258.2m. Partially offset by a weaker performance from the Derivatives and OTC markets segment, which saw a -10.4% decline in revenue to $284.6m, reflecting a decline in futures volume and low-interest rates. Total expenses of $310.3m, were up +8.4% over pcp, remaining in line with management’s guidance of +8-9% growth, reflecting the growth in full-time employees as a result of the timing of FY20 hires and new roles to support the Company’s growth initiatives. Management guided for growth to moderate in FY22 with expectation of +5-7% increase. The Board declared a final dividend of 112.4cps, reflecting a payout ratio of 90% of underlying profit, bringing FY21 dividend to 223.6cps. Management provided solid outlook commentary citing equities trading is likely to remain robust due to Covid-19 related uncertainty and geopolitical issues, in addition to a well-supported pipeline of listings and settlements to benefit from fiscal stimulus and strong mortgage issuance. Maintain Neutral.
- Bapcor Ltd (BAP) – Buy. BAP delivered a record result with FY21 revenue up +20.4% over the pcp, driven by increased revenue and earnings across all business segments. Both pro forma EBITDA and NPAT, were up +28.8%, and +46.5% respectively, over the pcp. No quantitative earnings guidance was provided, with management promising to provide an update at the AGM. However, management did provide – “in FY22, Bapcor aims to deliver pro forma earnings at least at the level of FY21; however, this is dependent on the extent of lockdowns and other government-imposed restrictions… however, Bapcor has historically shown to be resilient to economic downturns.” BAP also proposed a new DC in Brisbane, Queensland to increase market share. The DC is expected to cost $34m, commence mid-2023, drive an annual EBITDA benefit of $4m to $6m by reducing operating costs. Maintain Buy – current lockdowns are creating uncertainty, but long-term stable defensive growth remains intact.
- Cleanaway Waste Management (CWY) – Neutral. Cleanaway Waste Management (CWY) reported solid FY21 results, however missed market estimates for key revenue and earnings metrics. FY21 Results Highlights included (relative to the pcp): (1) underlying net revenue increased +4.7% to $2.2 bn. (2) underlying EBITDA of $535.1m, increased 3.8%. (3) Underlying NPAT of $153.2m was up +2.1%. Statutory NPAT of $147.7m, up +31.2%. (4) The Board declared a final dividend of 2.35 cps, up from 2.1cps in FY10, and brings the total dividend to 4.6cps, up +12.2%. CWY is participating in the Instant Asset Write Off Scheme, which management expects will reduce tax payments in FY22, FY23 and FY24. CWY will pay a fully franked final dividend for FY21, however, because of lower tax payments due to the Instant Asset Write Off Scheme, CWY “does not expect to resume franking dividends fully until calendar year 2024”. (5) Net debt to EBITDA of 1.61x was up from 1.46x in FY20. (6) CWY had net underlying adjustments of $5.5m after tax covering costs associated with acquisition and integration, write offs and the CEO transition, partially offset by unwinding of a prior period provision and net finance related adjustments. On the conference call with CWY, management did not provide overall FY22 quantitative earnings guidance but did caution that the NSW lockdowns are expected to have a negative ~$4m EBITDA monthly impact. We yield to this caution – maintain Neutral.
- Cochlear Ltd (COH) – Neutral. 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. On the conference call with COH, management provided FY22 earnings guidance highlighting “we’re guiding to between $265m to $285m, just 12% to 20% increase on the FY21 underlying profit; we expect our net profit margin to move back to 18%, but it won’t get there this year… in part, that’s due to us continuing to invest, while we still have countries that are not back at full speed”. Maintain Neutral – COH’s outlook guidance underwhelmed and management’s comments around some markets (EMEA) taking longer to recover means margin recovery will also be protracted. However, we remain positive on the medium to long-term outlook and see COH as a high quality company (assets, R&D, market position, management team).
- Domino’s Pizza Enterprises (DMP) – Downgrade to Neutral. DMP reported strong FY21 results reflecting global food sales across the network up +14.6% (or +9.3% on a Same Store Sales basis) to $3.74bn over the pcp (with Online sales of $2.93bn, up +21.5%) This drove FY21 earnings (EBIT) of $293.0m, up +27.2%. 2H21 food sales increased +12.8% to $1.9bn (or +10.2% on a Same Store Sales basis), despite management highlighting challenging trading conditions due to the ongoing pandemic, with “stores in each market are responding to local conditions – societal restrictions remain in place in most markets, which continue to affect carry-out sales while delivery orders remain strong”. Free Cash flow was up +40.2% to $216.2m. DMP opened 285 new stores, up +10.7%, which surpassed DMP’s 3-5 Year outlook (+7-9%), with positive contributions from all markets, led by Japan setting a record of 126 new stores. On a positive note, management provided an FY22 trading update highlighting FY22 has made a solid start with 2,974 stores delivering +7.7% network sales growth (+2.7% on a Same Store basis). Management also revised upwards their 3-5 Year Outlook for new store openings to +9-12%, up from +7-9%; 3-5 Year Outlook for net capex increased to $100-150m, up from $60-100m; dividend payout ratio to be increased to 80% of NPAT (after minority interest), up from 70%. We downgrade to Neutral given the strong share price rally since our upgrade on 3 Mar-21 – DMP is up +61.2% vs S&P/ASX 200 +11.9% (at the time of writing).
- G8 Education (GEM) – Buy. GEM reported 1H21 results in line with expectations, with earnings reflecting Operating EBIT (after lease interest) of $38.9m was much improved from the $19.7m in CY20 H1 (restated). The uplift was driven by an improvement in national Core average occupancy of 68.0%, up from 65.1% in CY20 H1 but remains lower than pre-Covid levels of 70.4% in CY19 H1. Despite no interim dividend being paid (as expected), investors would be pleased that the Board “expects dividend payments to recommence with a full-year CY21 dividend intended to be paid in CY22.” However, cautious over management’s concerns with the ongoing Covid-19, with management highlighting “recent lockdowns have impacted the seasonal trend in H2 with the progressively stricter lockdowns expected to weigh on attendances in several states. The gap on CY19 core occupancy narrowed to 1% pt in early July but widened again to be 2.6% pts lower… Earnings impact for the remainder of H2 is dependent on multiple variables, including attendance levels in response to evolving lockdown scenarios, any further Government support and how we adapt our operations”. We are cognisant of the challenges and potentially long recovery path GEM faces; however, we maintain our Buy recommendation given the stock trades at a >10% discount to our valuation.
- HT&E Ltd (HT1) – Buy. HT&E (HT1) delivered a very strong 1H CY21 result on the back of improving radio advertising markets in Australia and Hong Kong led by higher consumer confidence. Core group revenue was up +18.2% to $109.9m (a like basis revenue was up +21%), underlying EBITDA of $30.4m up +55.9%, and NPAT of $16.3m up +352.8%. Pleasingly, the Board reinstated the dividend and declared a fully franked interim dividend of 3.5cps. Maintain Buy – we continue to expect an improvement in advertising markets over the medium term (notwithstanding disruptions from lockdowns). Further, we believe consolidation within the media industry will remain a theme as domestic media companies continue to look to build scale to compete with the likes of Facebook, YouTube, Google and Instagram.
- Inghams Group (ING) – Buy. In our view, despite the disruptions from national lockdowns in Australia and New Zealand, ING delivered a solid result which came in line with management’s recent guidance and ahead of expectations. Group revenue was up +4.4% YoY, with Core Poultry volumes up +4.2% (particularly solid in NZ up +6.3%). Group underlying EBITDA was up +9.6% and underlying NPAT was up +57.4%, driven by top line growth and ongoing focus on operational efficiencies. We maintain our Buy recommendation on the view that end market conditions are improving for ING (notwithstanding latest lockdowns – however management is now better prepared), very strong balance sheet and uncertainty around supply contract renewals put to bed. However, we are cognisant of the current lockdowns extending and this does create uncertainty over near-term outlook, hence why no FY22 earnings guidance was provided
- IRESS Ltd (IRE) – Downgrade to Neutral. Iress Limited (IRE) reported 1H21 results as expected as IRE held an Investor Day on July 29 and pre-released these interim results. Management declared earnings came in line with full year guidance which implies earnings are skewed towards 2H21 (as guidance assumes 16-21% growth in segment profit compared to the first half result). Relative to the pcp, pro forma net profit and pro forma EPS was up +9% and 6% respectively. On the OneVue acquisition, management noted “the OneVue integration is meeting all milestones. The rollout of our integration between Xplan and OneVue is planned to start in the second half of the year”. Separate to the 1H21 results, IRE announced on 29 July 2021, the Iress Board is in discussions with funds represented by EQT Fund Management (EQT) following proposals made by EQT on 18 June 2021 and 4 July 2021 to acquire 100% of IRE’s shares at $14.80 per share and $15.30 to $15.50 per share respectively. On 10 August 2021, IRE received a revised offer from EQT to acquire all of IRE’s shares via a scheme of arrangement at a revised implied value of A$15.91 cash per share before franking credits (cash consideration of A$15.75 to be paid by EQT plus a permitted FY21 interim dividend for eligible shareholders up to A$0.161 per Iress share). IRE has agreed to grant EQT 30 days for exclusive due diligence. According to IRE, “subject to due diligence, agreement of a Scheme Implementation Deed and the absence of a superior proposal, the Board intends to unanimously recommend”. The implied value of the revised offer implies “a 61.2% premium to A$9.87 per share, being the VWAP for the three months leading up to and including 9 June 2021… [and] equates to an equity value of A$3.1bn and an enterprise value of A$3.2bn and implies valuation multiples of FY21 P/E multiple of 52.3x, based on Iress’ underlying FY21 NPAT target of A$59.5m; and FY23 P/E multiple of 37.3x, based on Iress’ underlying FY23 NPAT target of A$83.5m”. Since our Buy recommendation on 24 February 2021, IRE’s share price has appreciated 63.8%, and now trades on less attractive valuations and multiples; our Downgrade to Neutral is a balancing act between acknowledging EQT’s offer underpins the current share price (which is at a 5.1% discount to EQT’s revised offer price), versus the risks should the offer dissipate for any reason, in our view.
- Magellan Financial Group (MFG) – Buy. MFG’s FY21 adjusted net profit of A$412.7m, declined -5.8% over pcp, which came in below consensus estimate of A$434m, as a year of trailing the market for MFG’s most important global equities strategy, the Magellan Global Fund, reduced the performance fee take for FY21 by -63% to $30.1m. The core business of funds management still managed to grow despite a lesser outperformance overall, and the Company reported management and service fees increasing +7% over pcp to $635.4m and average FUM increase of +9% to $103.7bn. The Board declared a final dividend of $1.141 a share taking FY21 dividend to $1.22 a share and announced a dividend reinvestment plan discounted at 1.5%. Management forecast FY22 expenses of A$125-130m, largely driven by bringing into account deferred bonuses as deferred remuneration arrangements are reset, and some salary increases driven by expected modest new hires and increases in salaries. Management announced Barrenjoey has enjoyed a very strong start as a new firm, noting “What Barrenjoey achieved to date is very impressive and even though a number of businesses are yet to come online, there is clear momentum and revenue generation potential for the coming year…Overall the business is developing ahead of expectations.” Maintain Buy – we remain watchful of the relative underperformance of the global equity fund, however we continue to see solid earnings growth for MFG and over the medium term we expect Associates (currently a drag) to start contributing to the bottom line.
- Newcrest Mining (NCM) – Buy. Newcrest Mining (NCM) delivered a strong operational and financial performance for FY21, producing 2.1m ounces of gold at an AISC (all-in sustaining cost) of $911 per ounce, which combined with the benefit of higher gold and copper prices, translated into a record underlying profit of $1.2bn (up +55% on pcp and above consensus) and a record FCF of $1.1bn (vs outflow of $621m in pcp). This translated to healthy shareholder returns, with NCM declaring a final fully franked dividend of US40cps, up +129% on pcp, equating to a record total full year dividend of US55cps, representing 41% payout of FCF. Management announced it has not experienced any material Covid-19 related disruptions to production or to the supply of goods and services. The Board approved the Cadia PC1-2 Pre-Feasibility Study to the next stage, with management announcing “PC1-2 has an attractive rate of return and is expected to help sustain Cadia’s position as a Tier 1, low-cost producer for decades to come.” Maintain Buy – FY22 outlook guidance may have disappointed but growth projects remain intact and share price is trading >10% below our valuation.
- Oil Search (OSH) – Buy. Oil Search (OSH) reported solid 1H21 results, with earnings (NPAT) of US$139.0m, beating market expectations (of US$107m) and the highest free cashflow since the 2018 PNG earthquake. The positive results were underpinned by solid operational performance at PNG LNG, which continues to produce above nameplate capacity, despite curtailed volumes during the completion of maintenance. On the Santos revised proposal, OSH stated “after an improved non-binding, indicative merger proposal was received in late July, a proposed 61.5 / 38.5 merger ratio was agreed with Santos Ltd on 2 August 2021. If the transaction is approved, Santos will acquire all Oil Search shares by exchanging 0.6275 new Santos shares for each Oil Search share at completion… the intention of the Oil Search Board is to unanimously recommend that shareholders vote in favour… subject to an independent expert concluding that the proposal is in the best interests of Oil Search shareholders, and to no superior proposal being received… subject to a number of conditions including Oil Search shareholder approval, PNG National Court approval and other regulatory approvals”. Maintain Buy. Santos Ltd (STO) research report is available upon request.
- oOh!Media Ltd (OML) – Buy. oOh!Media Ltd (OML) reported solid 1H21 results, reflecting improvement in earnings relative to 1H20 driven by revenue recovery across key formats in Australia (Road, Retail and Street Furniture) and NZ. Relative to the pcp, 1H21 revenue of $251.6m was up +23%, Underlying EBITDA up +209% to $33.3m and reported net loss after tax of $9.3m versus a loss of $28.0m in 1H20. No specific quantitative FY21 earnings guidance was provided but management did provide “revenue for Q3 is currently pacing 38% higher than the corresponding period in 2020 and 74% of Q3 2019”. However, “forward visibility remains uncertain given the ongoing effects of Covid-19 lockdowns and associated movement restrictions, however we expect that when the current lockdowns end there will be a strong recovery in audiences and associated revenues as has been the case previously. Capital expenditure for the full year will be at or under $25m and remains focused on revenue growth opportunities and concession renewals.” We rate OML a Buy given the Company’s leverage (47% market share in combined Aus/NZ) to ad spend pick up once restrictions ease. Pleasingly, management noted that they are not seeing strong cancellations as they did last year (3Q21 to date revenue is pacing +38% vs pcp). With a strong balance sheet and strong earnings recovery over the short term (all else being equal), we are prepared to look through the short-term noise. The key downside to our view is extended lockdowns / economic downturn.
- Orora Ltd (ORA) – Neutral. ORA delivered a solid FY21 result, which came in ahead of consensus expectations – revenue of $3,538m was up +7.8% YoY (in constant currency terms) and +3.8% above consensus; operating earnings (EBITDA) of $369.3m was up +11.5% YoY (CC terms) and +1.7% ahead of estimates; and NPAT of $156.7m was up +34.1% YoY (CC terms) and 2.1% above consensus. The highlight of the result was the strong performance in the North America business, which delivered revenue growth of +8.2% and EBIT growth of +43.0% year-on-year (YoY) in constant currency. For FY22, management forecast underlying group earnings to grow, largely driven by North America with Australasia expected to be flat YoY. We maintain our Neutral recommendation – the stock had re-rate heading into the FY21 results and currently trades largely in line with our valuation.
- Pact Group Holdings (PGH) – Neutral. PGH reported a very strong FY21 result relative to the consensus and our expectations, which was reflective inthe strong share price reaction post the results release. Whilst group revenue of $1,762m (-3% YoY) came in below expectations (missed consensus estimates by -1.3% & Banyantree by -1.1%), the beat came at the earnings (EBIT) and NPAT line, with better than expected margin outcome – FY21 EBIT margin up +120bps to 10.4% versus consensus 9.9% and Banyantree 9.6%. Consequently, group underlying EBIT was +3% ahead of consensus and +7.1% ahead of our estimates. Despite the miss at the top line, we are seeing good momentum in PGH’s core businesses (Contract Manufacturing divestment process is ongoing). No quantitative guidance was provided, though management did note near-term impact to margins from higher raw material and international freight costs. In our view, improving earnings momentum is captured into the current share price, which is trading on a forward PE-multiple of ~17x. Maintain Neutral.
- Perpetual Ltd (PPT) – Neutral. PPT saw operating revenue increase +31% and underlying profit after tax up +26% amid the inclusion of Trillium and Barrow Hanley acquisitions. However, statutory NPAT declined -9% due to significant one-off costs. The Company’s assets under management grew +246% over pcp to $98.3bn, with a significant amount of funds outperforming their respective benchmarks over the year (100% of PAMA funds outperformed their relative benchmarks and 92% of PAMI equity strategies and 77% of PAMI fixed income strategies exceeded their respective benchmarks). The Board declared a fully franked final ordinary dividend of A$0.96 per share, bringing the total FY21 dividend to A$1.80 per share, up +16% over pcp. Maintain Neutral – we like PPT’s growth strategy (looking to move into Europe / Asia), a more diversified revenue base (recent addition of new strategies) and an attractive dividend yield. However, we believe our blended valuation of $41.14 captures these positives consisting of DCF ($42.00) and PE-multiple ($40.27), where we ascribe a higher PE-multiple vs PPT’s historical average to capture the changing revenue mix.
- Super Retail Group (SUL) – Buy. Super Retail Group (SUL) delivered strong FY21 results which were in line with market expectations – with record sales, up +22%, EBIT up +80%, and normalised NPAT doubling. The Board also declared a final dividend of 55.0cps, bringing total dividend to 88cps for FY21, significantly higher than the 19.5cps in FY20. On the conference call with SUL, management highlighted the “strong results [were] driven by unprecedented customer demand, but more importantly, the continued successful execution of the Group’s omni-retail strategy”. Indeed, with the pandemic ongoing, SUL appears well-placed with management noting its “omni-retail capability enabled it to pivot to online channels to meet consumer demand through both Click & Collect and home delivery”. We rate SUL a Buy, premised on the following reason: (1) strong balance sheet, with ample room to invest; (2) attractive exposure to the health & wellbeing segment (we believe this will remain a strong theme coming out of Covid-19) via brands with strong market presence; (3) attractive loyalty program with 8 million members (these members represent 63% of group sales and have grown at a 4-Yr CAGR of 11.4% p.a.); and (4) attractive dividend yield ~5%.