Last month we launched a unique TAMIM special purpose vehicle (SPV). This Fund has invested in what we saw as a special opportunity to invest in a company that had reached a seminal moment in its history. A milestone that would be the catalyst for crystallising significant shareholder value. Our thesis was bang on (if a little early) and we now expect further upside. Read on to find out why.
Authors: Ron Shamgar
This TAMIM SPV was established to invest in just one company, amaysim Australia Ltd (AYS.ASX). No, the ‘a’ is not supposed to be capitalised in amaysim’s case. AYS is Australia’s largest mobile virtual network operator (MVNO) and is also the fourth largest mobile subscriber base in the country with 1.2m customers, but importantly 850k contracted subscribers.
AYS, as a MVNO, utilizes the Optus mobile network. A MVNO is essentially a marketing company that helps mobile carriers fill up capacity on their networks in order to get a return on their large infrastructure investment. AYS owns its customers and its brand. AYS has a network service agreement (NSA) with Optus which expires in June 2022. At that point AYS can take their customers to another network if they chose to.
What is a MVNO?
Broadly speaking (the definition varies a bit from one market to the next) in this context, a Mobile Virtual Network Operator or MVNO is an organisation that provides a mobile service to its customers but does not have an actual network of its own. That is, they don’t own or manage all or part of the underlying physical network and infrastructure. They typically ‘piggy back’ on an larger mobile provider’s network while retaining the actual subscribers via a network service agreement (NSA).
MVNOs are very common and every competitive mobile market around the world has them. For a MVNO, in order to make a financial return you need significant scale. From time to time a MVNO becomes extremely successful and even a dominant player in its industry. AYS is such a case. This leads to profitability and strong cash generation.
In FY20 AYS’ Mobile division generated $191m revenues and $10m in EBITDA. As MVNOs become large and a meaningful part of any given carrier’s subscriber base, their NSAs become very strategic assets and valuable to their network partner or other carriers in the market. AYS’ contracted subscriber base is now 8% of Optus’ 10.5m subscribers and their only growth channel.
Source: AYS company filings
In a sense, Optus simply can’t afford to lose the AYS contract in 2022. It is this unique situation that we saw as an opportunity and a catalyst for AYS to potentially be taken over. Although Optus is the natural owner of AYS, it is not too difficult to switch mobile subscribers onto another network and so AYS is a very attractive MVNO for the other players, including Telstra (18m subscribers) and Vodafone (now TPG with 5.4m subscribers).
Source: TPG company filings
As we researched the entire global MVNO industry, we noticed that most players that have hit scale get acquired at this point of their evolution. The reason being that the carrier cost of a MVNO is the revenues and margins to a carrier. In FY20, AYS generated Optus $100m in revenues and this year we estimate that AYS will generate $140m in carrier revenues which, by our analysis, is 70-80% increments EBITDA margin to Optus or $100m EBITDA (Singtel is Optus’ parent company).
Singtel, TPG and the like currently trade on 10x EV/EBITDA multiples, hence AYS is arguably worth $1bn in market cap to either of these incumbents. We believe that AYS is the last remaining opportunity in Australia for a carrier to simply grab 850,000 contracted mobile subscribers in one hit and thus add significant profitability right away.
This can happen through a couple of avenues. The first is simply an improved NSA agreement, which AYS has tendered out, or an acquisition of AYS or AYS’ Mobile business. The initial thesis presented to our investors estimated that an acquisition attempt would take place within six months of the SPV’s launch. It ended up taking less than four weeks…
The current situation has Optus offering to buy the AYS Mobile business. The sale is for $250m and is not, we believe, on favourable terms to investors. An outright scheme for AYS would be more attractive. The current offer will see AYS distribute approximately 84 cents (including franking) after costs and taxes to investors. On our entry prices, that is an approximate 25% return over an estimated nine month time frame – not bad but not good enough.
We believe this is an opportunistic offer by Optus and sets the scene for other players such as Telstra, TPG, or even the likes of supermarket chains and AGL to make competing bids or even just match the offer as a scheme. In any scenario, Optus can’t afford to lose AYS’s subscribers and Telstra and Vodafone/TPG can’t afford to pass on the opportunity to grow their subscribers by 5% and 15% respectively. Optus will have to match or counter bid. Either way, we see AYS’ worth well north of $1.00 per share and, with the AYS EGM slated for January 2021, we anticipate a bidding war emerging in the next couple of months.
Sid Ruttala fleshes out a number of the points that Robert Swift has been talking about in his weekly Ausbiz appearances. Heading into the pointy end of the US presidential election, there is always heightened uncertainty in investment markets and (as much as we might want to given 2020 so far) this is not the time to bury one’s head in the sand and hope for the best.
Author: Sid Ruttala
This week we revert back to the macroeconomy, taking stock of what the markets may look like in the final stretch of this year and heading into 2021. The fundamental question on everyone’s mind is what things look like going forward given the continued instability in the geopolitical space and upcoming US elections on November 3. This uncertainty always has an impact on investment markets. Longer-term, we may have finally crossed the debt rubicon – where we may never actually pay back the incredible amount of both household and fiscal debt. If this is the case, what does this mean for financial markets and asset classes going forward? Quite a chunky, and one might say ambitious, project to sum up in a few paragraphs, but let me try in any case.
Some Context
Firstly, let me begin by saying I gave up on watching the first presidential debate after spending all of ten minutes fending off a migraine. Suffice it to say, the markets didn’t react all that well either. As though the uncertainty surrounding the current policy environment wasn’t enough, the rhetoric was positively vitriolic. But, never fear, investors can take reprieve in the fact that election cycles have short-term implications (volatility) but never in the long-run. At worst, as is shown below, we may have to worry about a democratic sweep (even here history is on the investor’s side). For the long-term investors, think back to the Bush election that was decided by the court as well. I say “as well” because this one is in all likelihood going there too, hence Trump’s urgency with a supreme court nomination. We certainly didn’t flinch then and this time is not likely to be any different. Same with every doomsday scenario that we faced in recent history, Watergate, First Gulf War, 9/11, Iraq War, the list goes on and on. So what do we care about?
What Does Matter?
So now that I’ve told you that it’s the liquidity and monetary policy that matters more for financial markets than questions of underlying GDP growth (if that were the case then we should all be growing at 1.5% p.a. as opposed to the double digits that we have become used to), let us look at the biggest risk of them all: The probability of a reversal in monetary policy. One that is only possible should we see surprises in headline inflation. If so, when and how is this likely to happen?
Let us begin with some basic figures around debt. As can be seen in the figure below, current gross debt to GDP in percentage terms stands at close to 400% of GDP. As of this year, US Federal Government debt stands at close to 107% of GDP, a sum vast enough that the natural impulse from any central bank is to keep a lid on rates to keep up serviceability. In Australia, this figure stands at a more “manageable” 45% of GDP, but household debt is second highest amongst OECD countries which presents an altogether different but perhaps more severe headache. Why is this a problem?
It’s not a problem immediately since it does naturally keep a lid on yields. However, the cost comes in other forms, typically income inequality and asset price inflation. Since subsequent increases to liquidity end up flowing towards asset price inflation and yield suppression.
For investors, the bigger problem is that even slight increases to CPI inflation can have amplified flow-on effects for asset prices. As I have mentioned in previous articles, the discount rate for valuations is typically the risk-free rate of return, which is the cash rate, and even a slight change from a true 0 to a nominal positive can have vast implications, especially across the high growth segment that is trading at historically high PE’s. With regards to Australia, have a look at the below graph of asset prices plotted against the (inverted) cash rate.
Coincidence? Methinks not.
So Where to Next?
What has been immediately evident when pouring over past comments from central banks across not only Australia but Jackson Hole in the US and the ECB is that there is a slow realisation that rates are unlikely to be normalised in the short-run. The only way out of this pickle is to actively have headline inflation shoot above the cash rate, with the outcome, of course, being that you inflate away the real value of the debt over time (positive). Effectively a write-off but not called as such. The fall guys, if Japan and Europe are anything to go by, are the financials who 1) have to hold a certain proportion of their balance sheets in government bonds; and 2) are forced, via the cash rate and ES transactions, to take the pain should inflation come back into the picture and real rates stay put.As such, the biggest risk is not necessarily political but an impetus for change in central bank policy. This is not the markets as we know them and it is for this reason that the yield curve no longer predicts the future as was typically the case (i.e. predicting the likelihood of monetary tightening and recessionary scenarios) and the 10-year barely budges despite increased volatility or sell-offs (another way of saying, if necessary, they will control the slope). In any case, we still can’t grapple with the notion of taking 10-year duration treasuries for a paltry 0.63% yield. It doesn’t make sense when you consider that this becomes significantly negative in real terms after taking into consideration the Fed’s target inflation of 2%. That is unless you have conviction that yields will go further into nominally negative territory, which we won’t rule out yet even if Powell has. We all know how long Lowe lasted in his vehement ruling out of QE closer to home.
How to Allocate?
This is where the political policy side does come back into the equation, albeit indirectly. Fiscal policy can change the inflation expectations and headline CPI quite drastically. This happened to be the reason why most direct stimulus measures advocated by the Chancellor of the Exchequer in the UK, Rishi Sunak, and the $600 USD a week jobless benefit advocated by the Democrats are good short-term measures. Since they feed through directly into spending as opposed to tax cuts or cash rates, which feed through to asset price inflation. Direct demand targeting measures that come through these types of spending programs, even infrastructure-related, have a two-fold impact: 1) they squeeze out the corporate sector as a percentage of GDP (i.e. assuming finite capital) and 2) increase consumption.
The allocation in this instance should depend on whether the higher inflation warrants a change in monetary policy, in which case the allocation would then be towards lower growth but higher correlated and higher-yielding materials and commodities (e.g. copper) sectors as well as, TIPS (Treasury Inflation Protected-Securities) and infrastructure. If inflation is low enough to not warrant any overarching changes to monetary policy (which is more likely) then the idea is to sequentially revert back to value and gold. By the way, this is where I disagree with Robert, I continue to believe that gold is not the best hedge against inflation but is one against uncertainty.
Finally, remember that even if we have a different administration in the US, good luck reversing the corporate tax cuts in the Senate. Probability-wise, we will have more fiscal stimulus and this time around there will not be much opposition to spending as was the case in the past. Trying to oppose big-ticket spending programs with rhetoric about prudence, as was the case under the Obama administration, won’t fly when your own party threw caution to the wind and blew it out (Federal government debt) by $8.3tn USD in the space of four years and tax cuts in the middle of uninterrupted economic expansion.
Whoever wins and however much uncertainty there is, the two rules to assess these markets by, just like Buffett’s two rules of investing, are 1) liquidity; and 2) remember rule one.
All things considered, Brambles put out some stellar numbers. CHEP America delivered sales growth of 10%, Latin America (LatAm) at 15%, with the major impact of Covid being felt in the Eurozone area where the Kegstar and Container businesses, as was evident, reported a 7% decline in revenue in constant currency terms (12% if you take currency out of the equation). As a result, overall guidance remained on the conservative side going into 2021 with flat to 4% y-o-y growth in sales and flat to 5% of EBIT growth.Management has broadly been rather disciplined in managing its costs, though the lockdowns did materially create some cost inflation. The business remains well capitalised with Net Debt/EBIT at 1.1x and a cash flow conversion for the FY2020 coming in at 106%. Across the board, the outperformer has been the resilient consumer stables segment which saw a surge in demand for pallet volumes though this was somewhat offset by higher costs (i.e. higher transport costs as a result of Covid related disruptions).
What was pleasing to see was the fact that close to 50% of the growth across North America came from increases in the price of related products, growing unit profitability. The current payout ratio stands at 53% (including share buy-backs).
We expect the company to stay consistent in the payout ratio and assuming no further lockdowns that the business progressively returns to pre-covid levels of growth in Europe.
Red Flags & Risks: Management has some consistency and is of a good enough pedigree when it comes to the business. The big risks come from external shocks especially with regards to the Eurozone business. The indicators to watch will be new car registrations and European automotive data, which seems to indicate some recovery within the broader segment. UK is probably a laggard due to uncertainty around lockdowns and Brexit.
The cost side of the business, when it comes to increased supply chain complexity and lockdowns, is a metric that the company will have to manage effectively going forward. Currency has also been a headache in terms of overall profitability and, again, I am more bullish on the AUD relative to the Euro and USD, which presents a hurdle for the company going forward.
My Expectations: Personally, I remain optimistic about Brambles assuming that governments across Europe and North America don’t insist upon further lockdowns. Numbers-wise, we have seen consistent growth across automotive sales and registrations as well as demand catching up in Europe (the main laggard). I remain positive on management and its focus on carbon neutrality as well as the ESG frameworks that should see the company trade at a decent valuation premium. BXB is also a good defensive to add to any portfolio (i.e. consumer staples), I would be surprised if the company doesn’t beat guidance through 2021.
Dividend Yield: A dividend yield of 2.4%, assuming a share price of $10.72 AUD.
We expect this to stay consistent through much of next year with further growth likely to be in second-half of 2020 on a nominal basis.
Amcor Plc (AMC.ASX)
Decent numbers from Amcor, sales growth came in at -1.6% in constant currency terms and EBIT growth was 6.7%. More importantly, management has seemingly integrated last year’s Bemis acquisition well with significant reductions in overhead and procurement costs feeding through into the bottom line ($80m USD). AMC reported adjusted EPS of 64.2c (an increase of 13%) and free cash flow of $1.2bn USD (an increase of 26%).
Drilling down further, the flexibles segment came in slightly lower (-0.9%) though volumes were largely flat indicating that this was a result of unfavourable raw material costs and product mix. Rigids continued to remain flat despite demand from broad-based pharmaceuticals (higher volumes but lower return due to currency and pricing mix issues).
Perhaps more surprising was the minimal impact of Covid-19 on the companies’ operations with plants continuing to operate at full capacity. Though this was somewhat offset by lower than expected demand across emerging markets in the Food & Beverage segments. While the business remains well capitalised, there is a concern (maybe a tad old-fashioned on my part) with debt coming in at close to $6.13bn USD and continuing to increase year-on-year. Guidance-wise, management has indicated continued EPS growth of 5-10% in constant currency terms.
Red Flags & Risks: AMC is probably an unusually complex company for the everyday investor to assess, with operations across 39 countries and 180 plants. This makes it hard to determine what the impact of any single factor is on the overall numbers. Currency remains the biggest issue as are costs on a relative currency basis.
The geopolitical and inflationary risks across emerging markets are likely to create continued headaches for management, especially across LatAm following the acquisition of Bemis. China also continues to act as a buffer of sorts.
My Expectations: A complex business that will continue to behave as a defensive rather than a growth play. I do not see any catalysts for a rerating of the underlying price but there is a fairly established price-range so if you wished to trade it between the $14-16 AUD mark, good luck. A strong AUD should see a disproportionately negative impact for the Australian based investor. That said, we should continue to see sustainable EPS growth in the high single digits for the foreseeable future and the lack of a material impact from Covid indicates that the business is somewhat operationally Covid-proof in terms of cash flows.
Dividend Yield: Assuming a share price of $15.16 AUD, then the current yield stands at about 4.42%.
On a nominal basis, my expectations are that this will go up at a high single-digit rate over the coming decade or so.
Insurance Australia Group Ltd (IAG.ASX)
What a year for IAG… and not in a good way. We have a new CEO, Nick Hawkins, after the retirement of the previous one. It cannot be said that the chair looked for the replacement exhaustively seeing as Mr Hawkins has been a fixture of the company for more than a decade, acting as the CFO for much of that tenure. Mr Hawkins took up the reins and immediately set to work by backing the lockdowns as a policy along the east coast of Australia. Of course, the fact that auto claims might be avoided would have nothing to do with it. One must accept though, he has to get all the help he can.
Numbers-wise, the group has been buffeted by one headwind after the other. The FY20 reported margin fell by 10.1% with $53m AUD attributable to widening off credit spreads and an overrun of the net natural peril claims (Covid-19, bushfires etc. etc.) as well as deterioration of long-tail classes. To explain this concept briefly, these are liabilities of the business, claims incurred but not reported since they take a longer period to settle. Overall profit fell about 40% to around $435m AUD. Of concern in this overall NPAT number is the fat that if we strip out the sale of IAG’s stake in SBI (State Bank of India), which added approx. $326m AUD, then we have a grand total of $108m of profit. Compare this to the previous year which stood at $1.076bn AUD, a decline of close to 90%. Diluted EPS was down by 68.8% to 12.2c p/s. CET1 was down slightly to 1.23, though this is one thing not to be overly concerned with (finally!) since it is well above regulatory requirements.
The one upside for this year has been the slight increase in gross written premium (GWP) across both Australia and NZ, up 0.3% and 2.4% respectively.
Red Flags & Risks: From a risk perspective, CET1 stands well above requirements though there has been downward pressure. The biggest risks remain continued uncertainty in credit markets and long-tail liabilities as a result of both Covid and the related business continuity insurance segments. The sale of the SBI stake at precisely the bottom of the market was rather disappointing from a shareholder perspective but might have been required from a prudence standpoint. That is not even mentioning the optics/marketing side, seeing as the headline would have been profit decline of 90% without it.
Insurance margins continue to be concerning as does the general outlook for the insurance sector overall, a segment which was arguably blindsided by the market volatility. Credit spreads, though stable at this stage, are likely to see continued volatility going into Q4 and early next year. The business has withdrawn all guidance for 2021.
My Expectations: Former-CEO Peter Hammer, in my opinion, could not have chosen a worse time for retirement. That said, the business has been prudent in its balance sheet management and withdrawing guidance. Not a buy for me though as we will likely see stable GWP but declining profitability and insurance margins.
Dividend Yield: The current yield stands at 2.2% assuming a share price $4.54 AUD.
For me, there is total uncertainty and no expectations as to what the next financial year might look like. From a risk-return perspective for the yield based investor, the company remains prudently capitalised enough that a better option may be to buy the notes (IAGPD) which offer the BBSW+4.7%.
This week we look at one of the most overlooked but stellar results of the 2020 reporting season. This company has grown earnings at a compound rate of 44% p.a. for the last four years and requires little capital to grow. The business is benefitting from structural tailwinds and, we believe, is on track to potentially hit the $100M net profit milestone in 2021 yet is only being valued at $550M or a PE of 6x by the market.
Authors: Ron Shamgar
Resimac (RMC.ASX) is one of the largest non-bank mortgage originators in the country. Over the last four years, RMC has grown AUM from $8.9bn to $14.9bn, a CAGR of 14%. Over that same period NPAT has grown from $13m to $56m, or 44% CAGR, demonstrating the strong operating leverage in their business model. This was driven by strong net interest margin (NIM) improvement to 190 bps, compared to 153 bps last year, and a significant improvement in their cost to income ratio, now 37.9% compared to 56.6% in FY19. Return on equity (RoE) increased from 17.3% to 25.5%, given the capital light nature of the business. The final dividend was raised from 1 cent to 1.8 cents while the net cash balance rose to $23m.
Source: RMC company filings
More importantly, RMC is benefitting from favourable cost of funding while its banking peers are seeing deposit margin pressure. RMC is growing at 7x system growth by offering quick turnaround time for brokers and an excellent service proposition and positioning itself as more of a digital non-bank with a strong direct to consumer digital brand in homeloans.com.au.
Source: RMC company filings
RMC has the most extensive funding of any Australian non-bank both through their international RMBS issuance program and their seven warehouse facilities. This is a key competitive advantage while other lenders have struggled. This was demonstrated by RMC’s AUM growth over the Covid period, where their rate of growth was maintained despite a significant dip in the market. Other non-banks were forced to reduce volume over funding and capitalisation concerns.
Also important is the fact that RMC’s profit is driven not just by NIM but also strong volume growth and a tightly managed cost structure. Their AUM base is 22% higher as a starting point so, in the absence of any further growth in the loan book, RMC could still grow profit in FY21. Dissecting the NIM movement further, NIM increased from 153 bps to 190 bps in FY20, noting that NIM was 183 bps in the 1H FY20 and 197 bps in 2H. The increase was driven by a reduction in the spread between the BBSW and the Cash Rate and RMC only passing on three of the four rate cuts in FY20 (noting that 1 bps is worth $1.3M of PBT).
Source: RMC company filings
If conditions remain as they are today, we believe RMC could deliver a NIM result in excess of 204 bps. If this is the case, RMC could see NPAT in the range of $74m to $105m or a PE multiple of 5-7.5x based on a range of scenarios. Another way to look at the FY20 result is that in spite of the $16m special Covid provision, RMC were still able to grow 2H NPAT to $28.8m. This absorbed 100% of the incremental provision which gives a potential $90m profit start for FY21 plus additional growth.
We are forecasting potential for $100m net profit in FY21, which should then see the stock valued at around $3.00, more than double its current price.
Disclaimer: RMC is currently held in TAMIM portfolios.
Sid Ruttala once again delves into the top end of the market, working his way down the larger companies on the ASX. This week we look at Goodman Group (GMG), Newcrest Mining (NCM) and Woodside Petroleum (WPL).
Goodman has put out some interesting results, the most surprising of which was the WIP (Work-in-Progress) increasing to $6.5bn, a sign of future earnings growth. Although the headline does require a little more nuance given that much of this was a result of low completions over Q4 ($100m AUD vs. the $1.3bn expected in the previous 9-month period). Covid-19, as expected, did impact the business in that it has, for one thing, decreased the payout ratio, a positive sign of good balance sheet management. The downside being slower completion of the WIP through much of this year and the first half next year. Earnings are thus likely to stay muted until Q4 of next year especially curtailed if we see further lockdowns across the jurisdictions the firm operates in.
Earnings-wise, operating profit came in at $1.06bn, an increase of 12.5%. EPS was 57.5c, an increase of close to 11.5% and above guidance of 9%. They also reported an increase in AUM, increasing to $51.6bn AUD. Of this approximately $2.9bn AUD came from revaluation (mark-to-market) gains across the Group and Partnerships.
An overall solid result delivered from management who have shown both balance-sheet and strategic discipline. Management’s commentary and guidance remained bullish throughout the reporting, pointing to strong occupier and investor demand as well as a focus on logistics assets (though commercial has been the big red-flag). Looking at the business overall, we remain of the view that Goodman has maintained the right focus across the industrial and multi-tenant warehousing assets that will see both secular growth as well as increased profitability from the digitalisation trends that were catalysed post-Covid, a trend rewarded by its share price returning 34% CYTD, a clear outperformer in the ASX20.
“Scarcity of land is driving increased intensity of use including multi-storey logistics, data centres, and other commercial uses, providing potential value add opportunities – Continued transition to fewer, higher value and longer lead times of development projects.”
- GMG Full Year Results Presentation
Red Flags & Risks: GMG operates in the right segments of the property market going forward, which should not only sustain them from an underlying valuation standpoint but will likely see continued growth. That said, much will be contingent upon the impact of Covid on WIP. Going into next year we are likely to see delays further impact the balance sheet and put downward pressure on the payout ratio as management seeks to maintain working capital, a big risk for the dividend and yield-starved investor.
Gearing also remains a big issue to us. Although management has indicated that it will seek to cap gearing to below 10%, I think it highly unlikely that this expectation will be met or management will seek to use partnership leverage in an effort to supplement an increased development throughput (somewhat hiding this aspect from the parent company’s balance sheet). That said, with rates as low as they are and unlikely to head higher across Australia, North America or the UK, this might not necessarily be a bad thing.
My Expectations: Personally, I remain optimistic about Goodman. The company has the ingredients to make up a stellar anchor for any portfolio. Management’s focus on the Logistics business as well as land scarcity being a major issue across every jurisdiction it operates in, including the UK and China, they are playing within the right sectors and at the right time to benefit from the move toward digital and the advent of e-commerce. Their promotion of Carbon Neutrality and playing to ESG frameworks should allow the securities to trade at a consistent premium to their peers. Overall, a solid business and well-capitalised.
Dividend Yield: A dividend yield of 1.6%, assuming a share price of 18 AUD.
We expect this to stay consistent through much of next year with further growth likely to be in 2022 on a nominal basis. 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) and things get interesting, especially with a WALE of 15 years. It remains a buy for me.
Newcrest Mining (NCM.ASX)
Solid results from Newcrest, nothing to write home about though. Production stood at 2.2 Moz (million ounces) of gold and 138 Kt (thousand tonnes) of copper at an AISC (All-In Sustaining Costs) of $862/oz, showing that Newcrest remains a relatively low-cost producer. Given the continued upside in the price of gold, underlying profit increased to $750m, an increase of 34% on the previous year, with FCF (Free Cash Flow) of $647m.
The Lihir project was a disappointment with production only coming in at 776 Koz and is beset with issues around clay content, ore mix and the grade. Breaking down the AISC, Lihir (Newcrest’s largest project by resource) stands at approximately $1,204/oz. The Telfer and Red Chris projects come in at $1281/oz and $1703/oz respectively. The outlier is the Cadia project, at $160/oz, which enables the company to drag down the cost base massively.
Numbers-wise, EBITDA at $1.3bn USD is in line with my expectations and net debt stands at $624m. The firm maintained a 30% payout ratio.
Red Flags & Risks: Newcrest remains an outlier from other gold majors from a risk perspective. I say this because their main projects retain a reserve life of 21 years, astounding in that this is significantly higher (by about 50%) than their nearest competitors, Barrick and Newmont. However, the biggest risk remains the cost of production once Cadia the outlier is stripped out, with the average set to then rise above $1200/oz. Management has been prudent in keeping debt limited and rolling over existing debt onto a new rate given the interest rate environment.
From a valuation perspective and for a gold play, the company remains at a reasonable valuation. In saying that, there will likely be continued issues with production, especially at Lihir. The company will have to keep growth in mind along with jurisdictional risks, especially across Ecuador and the PNG.
My Expectations: I remain optimistic about the price of gold given the global monetary and fiscal policy environment. That said, we are likely to continue to see volatility as much of the selling in the short-run will be the result of covering losses across other asset classes. Assuming that we sustain prices at current levels, much of Newcrest’s future will be contingent upon curtailing costs that seem to have gotten ahead of the company.
The growth catalysts are likely to come from Wafi-Golpu, Hevieron and Red Chris which could double the output over the coming decade if executed correctly. I remain of the opinion that much better plays for gold exposure exist, so not yet a buy for me.
Dividend Yield: Assuming a share price of $13.50 AUD, then the current yield stands at about 1.1%.
On a nominal basis, my expectations are that this will go up at a double digit rate over the coming decade or so, despite the cost of production and assuming the payout ratio stays put at 30%.
Woodside Petroleum (WPL.ASX)
For those of you unaware, this author is a particularly long-term bull when it comes to oil. This isn’t necessarily in the hopes of V-shaped recovery but rather a consideration of the supply-side of the equation, with the contention that much of the high-cost production across the Permian is unlikely to recover back to pre-Covid levels. This, taken in conjunction with the fact that low-cost producers in the case of Saudi Arabia and Russia, have break-even budgets (i.e. budgetary break break-even as opposed to cost of production) above $80 USD p/barrel (please refer to my previous articles for a breakdown of this thesis).
WPL has been interesting to watch, especially given the upside of many of the junior gas players following Morrison’s rhetoric around a gas led recovery. Even based upon this thematic one would’ve expected one of this nation’s largest producers of LNG to have benefitted, but investors seem to think otherwise. Numbers-wise the company continues to meet expectations with production and expenditure guidance largely unchanged. 2020 came in at approximately 100MMBOE (million barrels of oil equivalent) and total expenditure was flat at $2.4bn. With investment expenditure down, this shows that most of this was a result of FX and Covid-related oil mess (i.e. a positive, indicating that the actual cost of production is in line with expectations).
The company remains well-capitalised with $7.5bn in liquidity, making it likely to target M&A activity going forward and being a prime beneficiary as the global supply chain continues to consolidate. Recent key catalysts have included the outright bid for Sangomar (Senegal) in competition with Lukoil, a bid that I would personally applaud given the fact that it was, for one thing, at a palatable price (something that was perhaps enabled by US sanctions on Russia, who said politics wasn’t good for business?).
Red Flags & Risks: The company remains well-capitalised and is a cash cow with current free cash flow yield coming in at approximately 11.6% at 2021 guidance. The big risk will be the short-term volatility in the price of oil, though the company remains well hedged with over 13m barrels through to December 2020 (so any upward swing in the price before then is a disadvantage, though there were call options purchased for 7.9m barrels), potentially expensive but prudent.
My Expectations: I have conviction that management will remain disciplined and that they will continue to scout for deals, providing good catalysts into the future. The underlying security will be volatile, given the procyclicality of oil, but remains a consistent provider of income. The discussions with regards to Pluto and Scarborough are ongoing and provide short-term catalysts (Exxon out). Personally, I would look to accumulate from weak hands at anything below $20 per share. Long-term price target, assuming an oil price of $50 USD/barrel, is $36.
Dividend Yield: The yield is a solid 7.2% assuming a share price of 18 AUD.
On a nominal basis, this is likely to stay consistent for the next 12-24 months and there is potential for significant upside thereafter.
