Investment Matters

Profit Reporting Season Begins

The starter pistol was fired on Monday, with Profit Reporting Season beginning in earnest.

As always, this was led by Property REITS, with three companies within clients’ Property sub-portfolio reporting, along with one company in the Australian Equities sub-portfolio.

Australian Equities sub-portfolio

QBE (positive impact)

QBE

 

 

 

Company description: 

Diversified global insurer with a presence across a range of insurance and reinsurance lines.

QBE is a core Top 5 holding in your Australian Equity Portfolio.

FY-21 result: 

As expected, QBE demonstrated a large positive swing in profitability, relative to last year.

Last year’s result was plagued by elevated catastrophe claims (bushfires, hail and storm activity) and COVID related provisions and claims.

There were again higher catastrophe claims this year – which were expected. However, with little to no other negative surprises, QBE posted a good profit result.

There was a large positive surprise, with the release of provisions put aside in prior years for claims. Provision release is term used for when a company returns fund to profits that it previously thought it would need for costs from prior periods.

The company largely achieved better profitability through strong premium growth and a reduction in expenses (commissions paid and operating expenses as a percentage of premiums).

This saw the all-important combined operating ratio (COR). – the metric by which we judge the profitability of insurance operations fall to 93.3%. While this may not sound positive, it is better to think of this ratio in the inverse – i.e. as a gross insurance profit margin (profit after reinsurance, commissions, expenses) of 6.7% on premiums collected. This is the highest margin the company has achieved since 2018.

While investment profits remain weak (low interest rates), the company is conservatively positioned to benefit from an environment where expected returns and interest rates are higher.

Read through for FY-22: 

Management did not provide guidance for full-year (FY-21) profits – it expects to appoint a new CEO in the coming weeks. We may receive further updates then.

Its result came with some conservatism, with management signalling the possibility of a moderation in premium growth moving forward and catch-up inflation of claim expenses.

We continue to take a long-term view of the stock. With a conservatively positioned investment portfolio and overall healthy outlook for premiums, we expect QBE to be a significant beneficiary from a rising interest rate environment.

Price reaction on the day of announcement: 

+8.1% yesterday and +15.9% month to date.

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Property sub-portfolio

Garda Diversified Property Fund (neutral impact)

Garda logo

 

 

 

Company description: 

Managed real estate investment, development and asset management group. The fund favours small industrial and suburban office assets.

FY-21 result: 

Garda have seen a significant uplift in the value of their properties over the past year, with its NTA (the ‘book value’ of their assets’) rising by 21% after the revaluation of its portfolio.

We like Garda as they have a focus on creating value through development, rather than acquiring established assets and are active buyers and sellers of property. This results in willingness to recycle assets at favourable prices to fund growth, rather than simply ‘raise more money’.

The group has recently been orienting its portfolio towards industrial property.

With three industrial acquisitions this year, the company has a significant pipeline of industrial developments that should flow through over the coming years and deliver an uplift in value on cost.

Garda’s total distributions for the year have been 7.2 cents per unit (a circa 5.3% distribution yield at the current price).

Read through for FY-22: 

Garda expect to maintain their current distribution of 7.2 cents per annum, which reflects a distribution yield of 5.3% at current prices.

The focus next year continues to be on the development and pre-leasing of their industrial projects.

Price reaction on the day of announcement: 

-1.8% and +3.1% month to date.

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Goodman Group (neutral impact)

Goodman logo

 

 

 

Company description: 

Industrial property group with operations that span development, ownership and management of global industrial property assets.

FY-21 result: 

Goodman checked all of the boxes you would expect from a quality property group.

Occupancy remains high (98.1%), rental growth reasonable (+3.2%) and gearing below its target range (~18% on a look-through basis).

Its distribution for the year has been 30 cents (a circa 1.3% distribution yield at the current price) which at face value is on the weaker side for the property sector overall. However, this largely reflects the growth in future profits implied from the group’s significant development and asset management operations.

The company has benefited from strong prices in the sector, which has pushed up the value of its properties to the tune of $1.3bn in FY-21.

Operating profit was weaker in property investment (the properties it owns) and property management (its asset management business). This is as the company has divested several assets over the past year, which impacted the overall level of profits – rather than profitability per se.

However, the capital from these sales has gone into funding Goodman’s considerable pipeline of development assets, with development profits growing by 25% over the year.

This helped delivered full-year profit growth for the group of 14%.

Read through for FY-22: 

Goodman’s management expects profit growth next year to be in the range of 10%.

This disappointed, relative to the market’s expectations. Goodman’s management have taken a conservative approach in forecasting profit growth for next year, due to the uncertainty brought by COVID.

This conservatism is due to the potential impact on the completion of new developments, through the supply of labour and supply chain impacts.

While there is cause for conservatism in the short term, these dynamics are likely to be favourable for industrial assets in the long.

There is a large and growing need for industrial assets globally, with COVID accelerating the move to online purchase of goods. This has strengthened Goodman’s development pipeline and opportunities in the near term that exist on a global scale.

Goodman continues to invest heavily in developing new assets with an average annual production rate of $6.6 bn worth of assets expected, at high margins (30-40%+).

To fund this growth, we expect the company’s dividend to be flat over the next few years.

While a quality exposure, we see Goodman as fully priced at current levels.

Price reaction on the day of announcement:

-2.3% and flat month-to date.

Goodman’s asset management and development platform spans the globe

Goodman Asset Maagement

Source: Goodman Group

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Mirvac Group (neutral impact)

Mirvac logo

 

 

 

 

Company description:

Diversified property group. Developer, owner, and asset manager. Its portfolio consists of assets spanning office, retail, industrial and residential sectors.

FY-21 result:

Mirvac can be split into three businesses: its investment portfolio, development and asset management.

Earnings from its investment portfolio (owned buildings and build to rent apartments) rebounded post-COVID, with lower rental relief and the completion of developments.

It holds a diversified portfolio of assets across office, retail and industrial properties in which occupancy remains high (95%+ across portfolios). Gearing is also at reasonable levels (22.8%).

A strong property price environment also saw significant property revaluation gains. This also benefited its asset management business, driving modest growth in fund management earnings.

The main story for the company this year has been the strength of its residential development portfolio. Development earnings were strong as settlements of master-built homes were high (2,562 lots!). Sales have benefited from strong government support (HomeBuilder, First Home Loan deposit scheme etc) and falling interest rates.

Furthermore, there was a significant uplift after the completion of several key mixed-use and commercial developments.

The company highlighted a strong pipeline of residential developments with strong demand for master-built residences, and the desirability of apartments amongst younger adults in the current housing market.

Its total distributions for the year have been 30 cents (a circa 3.3% distribution yield at the current price).

Read through for FY-22: 

Mirvac, like Centuria last week, guided towards an earnings number that was on an ‘at least’ basis.

Its guidance still implies a 7% growth in earnings – led by strong residential pre-sales (3,300 lots) in FY-21

This again reflects some conservatism around rent collections (particularly its retail portfolio) and the timing of residential settlements, as well as planned asset sales over the next year.

We like the exposure Mirvac gives to Australia’s residential development sector and the exposure to value creation through improvements and development activity.

Price reaction on the day of announcement:

-0.7% and +4.2% month to date.

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