Investment Matters

Company News: Coronado, Challenger, Indiore, WorleyParsons & more

Coronado released its first quarterly report as a listed company.  Production (saleable) was 4.9Mt for Q-4, totaling 20.2Mt for FY-18 (FY= CY for Coronado).  Pricing was favourable, which contributed to its net cash balance being meaningfully ahead of where we had forecast for 31-Dec-18.  The company is on track to meet the IPO prospectus guidance (IPO’d on 23-Oct-18).  Also of note, 78% of coal sales was metallurgical (used in the manufacture of steel).

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Challenger released a profit downgrade.  The company advised FY-19 earnings are now expected to be 7.8% lower than previously forecast (using midpoint of the guidance figures), which equates to earnings roughly equal or a bit ahead of FY-18 (a PBT of $547m).

The company cited lower returns from its Life portfolio – market volatility and reducing exposure to property related investments have impacted earnings.  Additionally, fee income from its funds business was lower than the pcp (prior corresponding period).

Challenger was a 2.9% weight in your portfolio on the day before the announcement (22-Jan-19).  It has been a long term core holding in your equity portfolio.  In fact, exactly 10 years earlier (22-Jan-09) Challenger was a 10.7% weight in your portfolio.  Over the time of ownership, as the share price has rallied, the weight in your portfolio has been reduced meaningfully.   Challenger generates strong returns on equity, but its share price can be volatile.  In regard to this, we believe it is important to look through the volatility and instead focus on:

 

Source: First Samuel, Company reports, IRESS

In other words, your Investment Team is focused on Challenger’s ability to grow its earnings over time.  Which we assess it will do; leveraging its annuity offering in the retirement space, as well as benefiting from the higher global interest rate environment (that is starting to occur).

We bought a moderate quantity of shares subsequent to the announcement, taking advantage of the share price weakness.

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Indiore advised that it has insufficient ore to process through its Phase 3 process plant.  The company has cancelled the Phase 3 project, and initiated an independent review of the Phase 3 project’s approval and go-ahead process.  This is a very disappointing development.  The company is in a trading halt until 28-Feb-19, with a further announcement expected then.

We will monitor the outcome of the independent review, and review the company’s proposed way forward, before making any decisions regarding this investment.

Indiore was a smaller weight in your equity portfolio.  (Such investments are often progressed in a measured way – with an initial portfolio weight usually not exceeding 3% - then exposure increased as the company develops and grows.)  Even as a smaller weight, this is still a disappointing and unexpected outcome.

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WorleyParsons was awarded three notable contracts.  Firstly, an EPCM (see below) contract for the new acrylate styrene acrylonitrile (“ASA”) facility, in Bayport on the U.S. Gulf Coast.  The plant will have a 100 kilotons capacity.  ASA is a thermoplastic used in a variety of applications such as automotive, appliances, building materials, furniture, toys and 3D printing.

Secondly, WorleyParsons was awarded another EPCM contract with major gold miner Newmont - for their undergorund operations at the Tanami mine (NT).

Under an EPCM contract, Worley is responsible for the engineering, procurement, and the management of the construction.

The third contract was an EPC contract for a gas processing plant in Alberta Canada, with a capacity to process 24,000 bbls of raw condensate per day.

Under an EPC contract, Worley is responsible for the engineering, procurement, and completing the construction itself.

WorleyParsons, an engineering and project management services provider in the energy, chemical and infrastructure sectors, is a relatively new addition to your portfolio.

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General insurer and bank, Suncorp, advised that it has exceeded it reinsurance cap because of storms and other natural hazard events (including the Dec-18 Sydney hail storm, Wide Bay Burnett storm Oct-18).  Whilst it is disappointing that Suncorp has exceeded the cap (and has done so for the majority of years over the last decade), your Investment Team expects the impact on net profit is that it will be circa 5% to 10% lower than it would have otherwise been.

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Healius, formally named Primary Health Care, received a non-binding indicative takeover proposal from Jangho, a Chinese company and a substantial presence on the share register (14.23%).  The price was $3.25 per share (versus a share price of $2.23 at CY-18 close).  Healius’ Board promptly rejected the approach, indicating that it was “opportunistic and fundamentally undervalues Healius”.  The parties have reportedly continued dialogue subsequent to the rejection.  Even if a revised proposal were to eventuate, the FIRB is likely to have concerns.

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BHP released its quarterly activities' report, which showed weak production numbers in 2Q vs 1Q and higher unit costs. It has, however, affirmed its production guidance for all commodities (iron ore, petroleum, coal) while it increased its guidance for copper production (due to the failed sale of Cerro Colarado). It expects unit costs to normalise and remain in line with guidance over the full year period. Furthermore, BHP is on schedule and on budget in the development of its five major projects pertaining to iron ore, copper, petroleum and potash, while exceeding its target for production from the North West Shelf Greater Western Flank-B project (JV gas development) ahead of schedule (in October) and under budget.

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In an interesting development in the parcel locker market (which TZ Limited competes in on a global basis), Neopost acquired Parcel Pending for more than US$100m (source: Nasdaq article). 

Neopost is a French-headquartered global provider of digital communications, logistics and mail solutions which operates globally.  It has a market capitalisation of US$767.5m (source: Yahoo! Finance), and is part of the SBF120 index.  It has acquired Parcel Pending as part of a 3-year growth strategy.  Parcel Pending is a US-based smart locker company, with revenue of more than US$30m in 2018 (source: Nasdaq article).

Parcel lockers is a growing opportunity globally, and we assess this acquisition confirms the prospects that TZ has.  TZ is building a good business in Australia, and in the US.  It has strong medium and longer term prospects.  

Additionally, TZ released its Dec-18 quarterly report.  Revenue was up (vs pcp) for H-1 FY-19 at $6.4m (with another $1m recognised in the first week of Jan-19 when a major shipment was made).  We are seeing the progress the company is making coming through in the financial numbers, and we forecast earnings (EBIT) to be positive in H-2 FY-19.  Whilst we don’t expect to be rewarded (in regard to earnings) over the coming year, the business has not reached full operational momentum, and we assess the potential in the business is not reflected in the current share price.

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Origin Energy released its quarterly report (ending 31-Dec-18).  Origin received record revenue from the APLNG joint venture project at $741m (Origin's share).   This was 23% more than the Sep-18 quarter, and up 45% on the pcp (Dec-17 quarter).  Higher effective oil prices and higher production versus the Sep-18 quarter, drove this increase. Origin received net cash distributions of $393m from APLNG for H-1-FY-19.  In relation to Origin's energy generation and retailing business, electricity sales volumes were 5% lower than the pcp (Dec-17), and gas volumes were 1% higher.

- Fleur Graves