Author: Sid Ruttala
The earlier parts to Talking Top Twenty, can be found here:
Part 1: The Banks – CBA & WBC
Part 2: The Banks – NAB & ANZ
Part 3: BHP & Fortescue
Part 4: CSL & Wesfarmers
Part 5: Woolies & Macquarie
Part 6: Telstra & Rio
Doing this exercise last year, we had mentioned the vulnerability of TCL to the Covid economy. While lockdowns and policy responses have made an impact, what has been pleasing was the recovery across most of the firm’s markets with perhaps the exception of Melbourne. Sydney, Montreal and Washington have seen some recovery. Importantly though, the numbers across major markets, with the exception of NSW, are still below pre-Covid (i.e. 2019) levels. Management guidance has indicated that traffic and volume is returning. This is despite changes to flexible working arrangements and the increased use of online retail (both long-term headwinds to the business). One interesting trend that we saw was that 59% of GWA (Greater Washington Area) commuters were likely to use their cars on a daily basis, a higher number by 5% from pre-pandemic levels. Combine this with record high vehicle sales and there might be more to this story than meets the eye. That is to say, are users less likely to use public transport as a result of the pandemic?
Numbers-wise, EBITDA for 1H21 continued to decline to $840m with margins also continuing to see a decline, from 75.7% to 69.0%. Revenue came in at $1.21bn, compared to $1.445bn in the same half last year. On top of this, substantial changes to the AUD have hit the bottom line quite hard with net financing costs increasing by $313m overall. However, the company has been busy with cleaning up the balance sheet and taking advantage of the low interest rate environment while it’s available (as is evident by the refinancing of WestConnex, still yet to see the reduction in net interest costs going forward). It is also good to see the potential to take on additional projects, including the expansion into Maryland. With the Biden Administration’s focus on upgrading the ailing US infrastructure system, the company is well placed to take advantage, this is likely where the next spurt of growth is to come from).
Despite TCL being, in my view, a great reflation trade especially with the recent refinancing’s taking place (where inflation would effectively act as a transfer of returns mechanism from debt holders to equity holders), the situation remains rather messy. We are not likely to see a return to profitability until mid-next year at the earliest. Would’ve liked to see more focus on the new projects in the pipeline as opposed to traffic and volume metrics which we believe the market has already priced in. That said, we are likely to see increased numbers through next year and over the next five years with dividends (assuming pre-covid payout ratios) likely to double as vaccinations are rolled out across North America and Australia. The company, while well capitalised, will also likely require further equity injections as it bids for new projects and finishes off the existing pipeline particularly in North America and especially Maryland, though some of it will be funded by further debt and prudent sale of at least half of the existing US assets.
Red Flags & Risks: Government policy across major markets, including vaccine uptake and rollout, remains the biggest risk in the near term for the company. Heavy and large trucking haulage still remains pleasantly surprising though and this should continue to grow as economies release some of the pent-up demand. Longer term, the increased use of flexible-work arrangements and de-urbanisation across the more developed markets (something which touched on last time) remains a headwind.
My Expectations: The business will focus on expanding its North American footprint going forward, the Biden Administration’s focus on infrastructure does create some tailwinds alongside increased spending in Australia. Not a buy yet as we believe the company will have to do a cap raise in the medium term in order to progress some of their more ambitious projects. This would be the time to get in.
Dividend Yield: 2.6%, assuming a share price of $14 AUD.
I personally remain of the view that the payout ratio will be consistent, the nominal dividend will remain around 40c p/s for now and should head back above 50c by 2022. Over the long-run I am quite bullish given the tailwinds and assuming leadership are prudent in their balance sheet management.
Goodman continues to interest me with its result. WIP (Work-in-Progress), which surprised me last time I undertook this exercise, came through at $8.4bn AUD for 1H21 (compared to $6.5bn last year). The more recent quarterly gave it an increase to $9.6bn (as of March). Again, a sign of future earnings growth. However, rather less pleasing was that, although development starts were significantly above long-run average levels, my expectation is that completions are substantially below (a bold move but does add some risk). Profitability-wise, the average yield of development WIP is expected to be around 6.8%, a slight but significant increase from the 6.6% previously reported.
Numbers-wise, operating profit was up 16% to $614.9m, gearing reduced to 4.5% from 7.5% and importantly a WALE of 14 years (a stellar outcome). Net debt continued to decline to $800m; a strong balance sheet with $2.3bn in available liquidity. Occupancy rates across owned property remained about 97%. Overall, Goodman has surprised on the upside, I was expecting earnings to stay muted. Granted I did not foresee a bullish property market that saw the business make revaluation gains of close to $1.3bn and the payout ratio back to pre-covid levels quicker than expected.
The company has demonstrated a great degree of resilience through Covid with over 140 transactions globally. There is no doubt that they were pushed along by a resurgent real estate market not only in Australia but across all of the markets in which they operate.
Red Flags & Risks: My biggest risk when we last visited GMG was the likely impact of Covid, this (somewhat surprisingly) appears to have been misplaced. Revaluations have been a tailwind for the business but herein lies the biggest risk going forward. That is, even though we have seen the business benefit from the segments it plays in, a change in monetary policy could be the biggest risk for the long-term investor.
My Expectations: Personally, I remain optimistic about Goodman. Management has delivered according to expectations and their portfolio looks fantastic, including the logistics business.
Dividend Yield: 1.5%, assuming a share price of $19.79 AUD.
We expect this to stay consistent through much of next year with further growth on a nominal basis likely to be in 2022. This may be unattractive for many but I would say look at it like a bond proxy (i.e. a substitute for investment-grade bonds with nominal upside even without inflation). In that context, it remains a buy for me.
