Author: Sid Ruttala
Below are the previous articles in this series:
Talking Top Ten | Part 1: The Banks
Talking Top Ten | Part 2: CSL, BHP & Wesfarmers
Talking Top Ten | Part 3: Fortescue, Woolies & Transurban
Talking Top Twenty | Part 4: MQG, Telstra & Rio
Goodman Group (GMG.ASX)
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.”
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.
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.
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?).
On a nominal basis, this is likely to stay consistent for the next 12-24 months and there is potential for significant upside thereafter.
