Investment Matters

New investments

We purchased positions in three companies for your equity portfolio this week – WorleyParsons, Coronado and Paladin.

WorleyParsons and Coronado were both capital raisings – Coronado as an IPO (initial public offer, ASX debut) and WorleyParsons as an issue of new shares to fund a major acquisition.  The last one, Paladin, was a standard on-market purchase.

The timing of these acquisitions has not been related to the developments on the market this week.  Your Investment Team, has been examining Coronado and Paladin for an extended period.  WorleyParsons has been followed by your Investment Team for many years (it was in your equity portfolio for a brief period in 2009, before it became too expensive).  We were able to acquire the shares under the raising at what we assess to be a favourable price.

My college Paul Grace has provided summaries on each below, including the investment rationale of each.

-          Fleur Graves

Investment summaries

WorleyParsons (ASX Code: WOR):  WorleyParsons is a global professional services company that has expertise in the hydrocarbon, minerals, metals, chemicals and infrastructure sectors.  WorleyParsons has made a substantial acquisition (enterprise value AU$4.6 billion) of the Energy, Chemicals and Resources division (ECR) of Jacobs Engineering, a US-listed global engineering and professional services company.  

The acquisition of Jacobs’ ECR division was at an attractive price (11.5 x EBITDA pre-synergies, 8.5x post cost synergies), and allows WorleyParsons to broaden its capabilities (e.g. increased capability in downstream hydrocarbons and chemicals).  Additionally, WorleyParsons expects to achieve significant synergies. 

We consider WorleyParsons to be a company with quality management, and strong execution ability in the sectors in which they operate.  Additionally, with low exposure to lump-sum style contracts, they have a favourable operational risk profile.

We acquired the shares at what we assess to be an attractive price and at 8% discount to the theoretical ex-rights price.  Our research indicates there has been meaningful under-investment in the energy sector since 2014.  We expect this to turn around - in fact we are starting to see this now (e.g. increasing contract backlog).  This is expected to provide significant tailwinds for the company in the future.

Paladin (ASX Code: PDN): Paladin is a uranium producer with tier one assets and significant operational experience. The investment reflects our view that the market is approaching a significant supply shortfall in the near term, as prices have been uneconomical for even the lowest cost producers.

On the basis that nuclear energy remains a significant part of the global energy mix in the future – a prospect that is aided by the fact it is one of the few carbon-favourable sources of base load power available – we assess prices should head higher in the short to medium term.

We have purchased Paladin at what we assess is a price that represents significant value, given the quality of its assets and our assessment regarding the uranium price outlook.

Coronado (ASX Code: CRN): we are attracted to Coronado's metallurgical coal (a critical input in the production of steel) assets. The company is the fifth largest producer of metallurgical coal in the world (by export volume 2017), has a significant reserve life (estimated at 33 years), and is a lower cost producer (sitting on the left of the cost curve).  It owns large-scale operations in both Australia and the US, producing 20.2 Mt of saleable coal in 2017.

The company plans to pay out between 60% and 100% of its free cash flow in the form of dividends.  In the first year, at the offer price of $4.00, a dividend yield of 12.4% (before franking credits) is expected.  We assess, in the medium term, metallurgical coal prices will remain higher than their historical long-term average (given a lack of new supply), and the company will continue to generate substantial free cash flow – enabling it to pay sizeable dividends on an ongoing basis.

- Paul Grace