This is one company with which we’re sure the vast majority of our readership has had a pleasant experience with through their investment careers. Despite the volatility, it continues to be one of the few consistent performers in the ASX50. The company and management has once again managed to surprise in releasing yet another round of stellar results. Numbers wise, revenue continued to grow by 11% and Covid, while impacting the supply chain in regards to the collection of Plasma, has not materially impacted revenues.
The company remains well-capitalised with over $750m USD cash on the balance and available liquidity of close to $3.1bn USD. What was perhaps missing in the reporting, was an indication of how the Vitaeris Inc. acquisition was coming along. Although this seemed to be a small acquisition given the broader portfolio, it was interesting in that Vitaeris was conducting phase III clinical trials for a treatment for organ rejection within kidney transplant patients. Another niche but highly promising and potentially lucrative market. Perhaps not in the same way as haemophilia but arguably on par, with existing treatments in that particular instance ranging from anywhere between $300,000-$500,000 USD per patient (more than compensating for the small market size).
In terms of the competitive environment, the vast majority of the portfolio including the immunoglobulins and Seqirus related products are plasma based and, although CSL has a marked advantage in this area given the highly consolidated nature (oligopolistic structure with the closest competitor being Grifols), there is also potential for competition from recombinants (see below). The next phase of growth will very much rely on the Asian markets where cost will play a greater and more significant role. In other words they have to compete with recombinants in the developed world (i.e. recombinants being more expensive) and cost in the east. The product pipeline, including the acquisition of Vitaeris, is potentially a way to diversify the portfolio but this remains in its infancy.
We would expect the payout ratio to remain the same but on an absolute basis for dividends to grow at double digits over a long term horizon.
Stellar results from BHP with FY20 NPAT of $9.1bn USD, EBITDA margin of 53% and, most importantly for the yield hunters, a 55c US p/s dividend, lower than expected but in my opinion prudent and a number which still represents a 72% payout ratio. As expected, the laggards were the petroleum and coal divisions. What was exciting (in my view) was the potential divestment of half of BHP’s coal production, especially thermal and PCI assets (didn’t necessarily expect the Bass Strait Gas assets to be included). But any demerger via a trade sale, especially a demerger when trying to get rid of thermal assets, would have to be sweetened.
The company continues to look for oil acquisitions, in which they would of course be joining their global counterparts (Exxon et al.). My expectation is bolt-on acquisitions of juniors (maybe the Gulf of Mexico or, even more interesting, Horizon’s P&G interests which lie on the pipeline route of ExxonMobil and Oil Search).
What was rather disappointing, however, was the copper division especially in a time of stellar copper prices. Underlying EBITDA of $4.35bn USD was less than impressive due to higher costs in Antamina and Olympic dam. This, I feel, is one division to which management could allocate some much needed resources, the existing pipeline of Tier-1 assets look less than stellar especially when compared with Rio’s Winu (this includes the LATAM assets where costs have been kept reasonably within range).
BHP remains a credible substitute for the banks from an income perspective.
Wesfarmers results showcased fantastic performance across the retail segments. Bunnings was the standout with same store sales growing by 14% through FY20 and delivering an overall EBIT of $1.8bn AUD (17.6% growth). Target remains the outlier (on the downside) continuing to be loss making while Kmart remains profitable. Revenues were cushioned primarily via strong online sales growth( coming in at close to 34%), with the major impact of Covid coming from supply-chain constraints (stock-outs).
Officeworks, with an EBIT of $190m AUD, represented double digit growth (13.8%). What was surprising to me was the chemical, energy and fertilizer divisions which beat on expectations. Volumes continued to grow for both chemicals and fertilizers, though LPG was weaker within expectations. Overall this segment still delivered an EBIT of $450m AUD (not Bunnings type growth but nothing to cause concern).
With a proven consistency in terms of payout, a good yield for the income hunters.
BHP is currently owned by the author of this article, Sid Ruttala. TAMIM has no current exposure to the three stocks mentioned in this article.
