Investment Matters

Company News: ANZ, Boral, Sandfire, CML Group and Healius

Australian Equities sub-portfolio


ANZ (neutral impact) released its result for the full year (FY-20).

Banks face challenging circumstances, from COVID, risks around bad debts, reduced profitability caused by low interest rates and general heightened uncertainty.

Banking in Australia has changed, and so to have the price of banks shares – down more than 20% since the beginning of the year. Our decision to invest for the first time in many years at current levels is a response to current conditions not to past performance. Whilst remaining significantly “underweight” (our exposure is around half of index type portfolios) we see both ANZ and NAB trading at a discount to fundamental value (-23%). We believe ANZ also offer the best prospective dividend yield (FY21-2) in the sector at above 4.5% (avg).

Based on the latest results the change is apparent to management also, CEO Elliott stated that ANZ is positioned for “lower growth, increased scrutiny and a wave of disruption”. ANZ has simplified and reshaped. It is managing costs with discipline but also increasing investment in areas of future growth/necessary capability. Therefore, ANZ is controlling what it can control.

The issues it cannot control include enormous amount of “excess liquidity” in the system as households and business save the stimulus injected by the Reserve Bank and government alike. These excesses drive down pricing and in turn the returns the company generates from its capital. Clients who en masse in March/April sought relief in a range of ways, have begun to normalise their accounts, but significant work to restructure or write-off the worst of these remains to be done. In such circumstance's banks continue to increase “provisions” for future losses - this deflates profits.

Going forward the outcome for ANZ and others bank alike will depend upon how quickly economic activity can recover, the degree to which this recovery will require more debt, and the degree to which this debt can be profitably deployed. Whilst waiting ANZ knows it needs to prepare for all outcomes, and hence must continue to invest in technology and meaningful service.

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Boral (positive impact) discussed the outcome of its strategic review under new CEO Zlatko Todorcevski at its annual general meeting this week.

The company has decided to sell its stake in USG Boral, the plasterboard business owned in a joint venture with German building material company Knauf. The sale will be for a consideration of A$1.43 billion – a price that exceeds our value of the business. The proceeds will be put towards paying down debt as well as funding new growth opportunities.

The company also discussed the sale of its US-based assets, which it has received informal offers for. It is trialling several initiatives with respect to these assets but is considering their sale if superior value can be achieved.

Boral also indicated it will be employing a strong focus on costs with respect to its Australian businesses. As part of this, it will be reassessing its portfolio and footprint, improving its agility in coming to market with new products, as well as looking to extract greater value from its property assets.

Furthermore, trading in the first quarter has been better than expected. In Australia, concrete and cement volumes have reflected a lull in activity before the implementation of major infrastructure projects. In North America margins have improved although maintaining supply remains an issue in what is a booming market and operating conditions impacted by COVID-19. Fly ash volumes were also impacted by a reduction in supply from utilities (coal-fired power stations) although the company is aggressively pursuing other sources of supply to meet strong demand.

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Sandfire (neutral impact) gave an update for the first quarter of FY-21.

Production was ahead of full-year expectations, although is expected to moderate over the next few quarters as the company transitions through lower grade areas as part of its mine plan. It remains on track to meet the upper end of its guidance for FY2021, with respect to production and costs.

The company is looking towards transitioning to gold production at its primary mine, DeGrussa, as existing copper reserves are depleted. This will allow the company to extract more value out of its existing infrastructure in the Doolgunna region.

Greater focus was placed on the progress it has made advancing its two growth assets – T3 in Botswana and its Black Butte project in Montana.
Sandfire is looking to expand its processing capacity at T3, with drill results at surrounding sites promising. It is set to release its maiden resource estimate for a potential expansion site, A4, in the December Quarter.

The company also issued a feasibility study for its Black Butte Copper Project. Reserve and resource statements (the amount of copper quantified thus far) were underwhelming, with project returns below market expectations. However, there remains further scope for exploration in the area, which is largely undefined, providing upside to prima facie project economics.

We see that the market remains focused on a gap in production that may arise in 2023 and 2024 as the company transitions through projects, with the company’s share price undemanding relative to its prospects for growth.

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CML Group (positive impact) announced it will rebrand its invoice financing products to “Earlypay”, as part of its digital transformation.

With the recent acquisition of Skippr, the company is now able to onboard smaller customers (providing facilities greater than $20k relative to greater then $200k previous), in a shorter time frame (24-48 hrs compared to 1-2 weeks previously) as part of a process that is more automated.

The shift expands the company’s addressable market by 140% and will allow it to capitalise on growing small business financing needs as government support is tapered.

The company also provided a trading update.

Margins remained depressed, with lower interest income as clients draw down a smaller amount of their facilities (reflecting reduced working capital requirements and government stimulus). However, they are expected to recover as demand for funding rebounds.

Pleasingly, all Equipment Finance clients have returned to payment, after that repayment deferrals were provided over the past 6 months. Furthermore, the company is close to securing a $36 million warehouse facility to be provided by the AOFM’s Structured Finance Support Fund, which will replace more expensive funding and reducing its finance costs.

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Healius (positive impact) provided a trading update for the first quarter of FY-21 late last week. Activity has been strong in pathology, aided by higher margin COVID testing, with revenue and underlying profitability (EBIT) for the quarter ahead of last year by 17% and 150% respectively. Imaging volumes (excluding Victoria) have also recovered and are now ahead of last year. We are cautious in extrapolating this performance, as it likely represents the fulfilment of a backlog of activity that has built up during COVID. Importantly, the sale of the company’s medical centre business remains on track and is expected to complete before the end of the calendar year.