Investment Matters

Company News

Last week, we made a small initial investment in building and construction materials company Boral.  In recent years, the company has diversified across geographies, with an exposure to the US of approximately 50% (with the remaining 50% exposure to Australia).  Our initial investment represents a starting position, which we will add to at prices we see as favourable.  Boral is well-positioned in the medium-long term to benefit from a likely increase in fiscal stimulus and infrastructure spending.  We see that its current share price overweights expectations of near-term weakness in economic conditions.  Furthermore, Boral will also provide a source of income for the portfolio, currently trading at a price which represents a partially franked (50%) dividend yield of 5.56% (based on last year’s dividend).

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Challenger Financial (marginally positive impact) released an update to the market as to its performance in the first quarter of FY-20.  With respect to its Life division, the company has seen a strong increase in sales (+124% in comparison to the previous quarter), largely due to an increased uptake of its Guaranteed Index Return and Challenger Index Plus products (sold to institutions) and strong sales in Japan (following the launch of USD denominated products from the 1st of July this year).  Sales in Australia continue to be subdued, particularly the sale of lifetime annuities.  The company also saw funds under management in its Fund Management business increased by 2.4% in comparison to the previous quarter, primarily due to Fidante Partners’ positive net flows and investment performance.  The company also re-affirmed its guidance for normalised net profit after tax of $500-$550m.

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360 Capital’s (marginal positive impact) part-owned real estate investment fund, the 360 Capital Total Return Fund (TOT) announced it has entered into a Scheme of Implementation Deed to acquire listed investment company URB Investments (URB).  Under the scheme, URB shareholders will receive 0.9833 TOT units for each URB share they hold, implying a 3% premium over the company’s pre-tax NTA (net tangible asset) value per share (as at 30 September 2019).  Management rights for URB will be transferred to 360 Capital Group as part of the scheme.  If approved, the scheme is expected to be implemented in the week commencing 16 December.

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Southern Cross Limited (negative impact) announced it will acquire Seven West Media Group Limited’s Western Australia regional radio business (Redwave Media).  The transaction, which is subject to regulatory approval, is at a purchase price of $28m (payable in cash), which represents an FY-19 EV/EBITDA multiple of 8x, a price we assess as reasonable. 

Furthermore, this week, the company released an update with regards to trading conditions for the first half of FY-20.  In the quarter to September 30, the company has seen revenue decline by 8.5% (in comparison to the September quarter of last year), with declines in both audio and television segments.  The company believes that it has retained its consolidated share in the advertising market, implying a decline in the market overall.

It now expects adjusted operating profit for 1H-FY20 to be in the range of $60-$68M, in comparison to an underlying operating profit of $82.9m reported in 1H-FY-19, although it anticipates lower capital depreciation for the half and lower capital expenditure ($5m-$7m less than FY19).

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Paladin Energy (neutral impact) released the results of phase I of its pre-feasibility study.  The phase I study looked to identify the costs associated with the re-start and optimisation of its flagship mine, Langer-Heinrich. The company estimates it will require capital expenditure of US$80m (which was broadly in line with expectations) for the restart of the mine, with a confirmed required lead time of 12 months to production.  Furthermore, the company has identified potential to expand production at the mine, from 5.2 million pounds per annum (Mlb pa) to 6.5 (Mlb pa), at an anticipated cost of US$30m, as well as the potential to reduce in its all-in sustaining costs for the life of the asset by US$4.50/lb (from current anticipated costs of US$33/lb, which is to be further studied over the coming 6 months).

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Cardno (neutral impact) last week announced that shareholders overwhelmingly voted in favour of its proposed demerger scheme.  The company will now seek approval of the scheme from the Federal Court of Australia, with implementation expected on 31 October and trading of shares in Intega (on a normal settlement basis) expected to commence from the 1 November 2019.  We believe the commencement of trading in the two new vehicles will provide an opportunity for FSL to invest further in the parts of Cardno that we see the best value.  Historically demerger events have created value for investors willing to have a view on which of the two parts provides more upside.