Investment Matters

Profit reporting season continues

Australian Equities sub-portfolio

Origin logo

Origin Energy (Neutral impact)

Company description

Origin Energy is an integrated energy provider that is involved in power generation, energy retailing (electricity and gas) and the production/export of natural gas.​

FY-21 result

Origin Energy’s result was largely pre-announced.

As expected, the result was significantly weaker in Energy Markets (electricity and gas retailing) – impacted by weaker wholesale electricity prices and the unfavourable movement in relative gas prices.

Despite this, the controllable elements of Origin’s business have continued to improve. Cost to serve customers has declined in line with initiatives outlined three years ago and customer satisfaction (as evident by a rise in net promoter scores) has improved.

Cash flow from APLNG continues to be strong, with a focus on lowering breakeven production costs positioning the company well for normalisation of oil prices – which will flow through in FY-22.

Read through for FY-22

The company has already foreshadowed a weaker year next year in Energy Markets, which will be offset by a stronger year in APLNG (assuming the price of oil – which its LNG exports are linked to – holds at its current levels).

With the rolling off of unfavourable gas supply contracts, a forecasted rise in electricity prices and a continued decline in cost to serve its customers, Energy Markets should see a meaningful rebound in earnings in FY-23 along with continued strong cash generation from APLNG.

Despite a challenging couple of years –FY-22 should signal the ‘bottom’ of the recent decline in earnings.

We continue to see Origin’s playing a key role in the National Electricity Market over the longer term and that the optionality it has in transforming its generation portfolio is underappreciated. The stock is a core holding in client portfolios.

Price reaction on the day of announcement

-4.1%

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Magellan logo

Magellan Financial (Negative impact)

Company description

A global fund manager led by Hamish Douglas with over $100 billion in funds under management. A majority of funds under management are invested in its Global Equities and Global Listed Infrastructure strategies.

FY-21 result

The performance of Magellan’s Global Fund was admittedly weak in FY-21. This is largely attributable to the decision to hold higher levels of cash leading into the November vaccine rally.

This weaker performance slowed the rapid growth in funds under management (new funds invested in Magellan) that we have seen over the past few years. However, despite weak performance - inflows remained positive (approximately 5% of total funds under management) – a testament to the resilience of Magellan’s brand, reputation and clever initiatives over the year (such as a consolidation of its trusts).

This, added to investment performance meant management fees (the main component of revenue) continued to grow in FY-21 (+7%), however not at the same pace as the past. Furthermore, performance fees are significantly lower (-63%). given weak performance.

The clash between short-term performance and long-term value-creating investment was evident in the market reaction.

What puzzled us was the strong focus on an accounting-based, non-cash loss largely attributable to Magellan’s investment in Barrenjoey (a new Australian investment bank). We were less surprised that significant start-up costs have been incurred in attracting top tier talent and see that the investment could be worth significantly more in the future.

We see that there remains upside in the business, with the market attributing little to the potential for a continuation of growth in funds under management with a performance improvement.

Read through for FY-22

Performance in FY-22 will depend on investment returns and the ability to attract new funds under management.

The company has positioned itself for growth, with the launch of several new funds over the year.

While growth will be offset by slightly higher operating costs next year, we expect that with a return to outperformance Magellan will return to attracting strong inflows, performance fees and growth in profitability.

Price reaction on the day of announcement

-10.2%

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HTE logo

Here, There and Everywhere (HT&E) (Positive impact)

Company description

Media and entertainment company. Operates Australian Radio Network (ARN) including radio stations KISS 101.1 and Gold 104.3. HT&E is also the Australian licensee of podcasting network iHeartRadio.​

FY-21 result (first half)

HT&E’s revenue has continued to rebound in line with the broader radio advertising market in FY-21, after a challenging FY-20 (marked by a significant pullback in advertising as COVID hit).

Radio listenership continues to grow, and the company continues to outperform peers in terms of rating.

Industry data shows advertising revenue has rebounded well – with ads placed through agencies nearing pre-COVID levels. However, ads placed directly have rebounded to a lesser degree, with the SME market slower to recover.

With this rebound in revenue, we saw an unwind of some of the cost control measures implemented last year, however, the recovery in profitability was strong (a 55% increase in operating profit).

Importantly, the company is seeing strong opportunities in digital (podcasting) – with listenership growing significantly amongst Australians. Its focus in the near term will be monetising this listenership and building awareness of the advertising opportunity in digital.

Further details were also released about the company’s stake in Soprano, which will be acquired by Link Mobility. The company retains optionality in this stake, with a limited escrow period (6 months) on the shares it has received. The company has reclassified the interest as “held for sale” and we see optionality in the proceeds, particularly in a media landscape that is consolidating.

Read through for FY-22

A key takeaway from the result was that despite lockdown measures being re-instituted, the company has seen minimal ad cancellations relative to last year, with bookings for the remainder of the year tracking well ahead of last year.

Furthermore, we are pleased that digital revenue has grown to approximately $1m per month, with a significant proportion of marginal revenue likely to fall through to the bottom line.

Overall, we see that the result helped quell some fears about the resilience of the radio advertising market in the face of further lockdowns.

Price reaction on the day of announcement

+6.8%

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Emeco logo

Emeco (Neutral Impact)

 

Company description

Emeco is a mining fleet rental company with in-house maintenance capability. It has a strategy of purchasing mid-life assets and utilizing its maintenance capability to deliver stronger returns on investment. Recently it has acquired an underground mining services company as it looks to expand its operations.​

FY-21 result

Emeco’s operating profit was at the upper end of the range it had guided the market towards.

It has benefited from strong activity in the West (Western Australia), on the back of rising commodity prices, which has seen good demand for its fleet. Growth is expected to continue to be strong into next year.

Demand has been more subdued in the East, on the back of weakness in coal prices and as several coal-related contracts were renewed. However, the company expects a material ramp-up in activity moving towards the second half of next year as utilisation of its fleet improves.

Its underground mining division, Pit N Portal, has grown revenues as projects ramped up. The company anticipates this will continue, making a meaningful contribution in the second half of next year.

We were pleased to see Emeco reinstate a modest dividend (approximately 1%) and a buyback - in line with its recently outlined capital management policy. This is the outcome of the company significantly reducing its gearing over several years and successfully refinancing its debt.

While the company flagged elevated spending to renew and maintain its fleet in the coming years, we see this as having been anticipated by the market.

Read through for FY-22

The company expects earnings to be moderately higher next year (in the range of +10%) as underground projects ramp up, growth in the West continues to be strong and idle fleet is deployed in the East. 

Price reaction on the day of announcement

-5.0%.


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Newcrest logo

Newcrest (Neutral Impact)

Company description

Newcrest is the largest gold producer listed on the ASX – with multiple producing mines and a strong pipeline of developments.

FY-21 result

The results of mining companies are largely pre-announced – as they provide quarterly activity reports to the market.

The company has benefited from elevated commodity prices over the period (particularly copper) which has seen a significant increase in cash flow. This resulted in Newcrest ending the year in a net cash position and on a strong footing to fund future development (Havieron, Red Chris and Cadia expansion).

Strong cash flow translated than the announcement of a much higher than expected dividend (a final dividend of 40 US cents per share, bringing the total dividend for the year to 55 US cents per share or a dividend yield of approximately 3%).

Read through for FY-22

Guidance for capital expenditure was higher than expected and production will be slightly lower. Higher costs are expected to be incurred next year due to a major shutdown of Newcrest’s flagship low-cost Cadia mine (SAG mill motor change) and continued COVID related costs.

However, our focus remains on the role Newcrest plays in clients’ overall portfolios. The position provides exposure to the price of gold (the predominant driver of its share price) through quality low-cost, long-life assets. This exposure provides diversification and a form of insurance during times of volatility and adverse market movements.

Just as important as providing immediate gold exposure, the Newcrest assets are extraordinarily long-life mines with exceptional development potential over the next 20+ years. Whilst the current market concentrates on companies with spectacular short-term prospects, we believe part of any well-constructed portfolio will be a good sprinkling of very long-term assets.

Price reaction on the day of announcement

+1.0%

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Perpetual

Perpetual (Neutral Impact)

Company description

Predominantly an investment manager (Perpetual Asset Management) which is expanding to have a global presence. Other business segments include Perpetual Private and Perpetual Corporate Trust which provide a range of services including financial planning, investment administration and custody.

FY-21 result

FY-21 has been a transformational year for Perpetual, after the acquisition of Barrow Hanley and Trillium, two US-based fund managers.

This has seen funds under management more than triple. Perpetual has continued to build out distribution for these newly acquired funds, which have a heritage and excellent performance history but have suffered from a lack of distribution and marketing.

This translated to a meaningful increase in the company’s cost base as it builds a platform for growth and international expansion

Read through for FY-22

Costs are expected to continue to trend higher as Barrow Hanley makes a full-year contribution to costs and as the company builds distribution capability for these acquired funds

However, we expect this investment to translate into a growth in funds under management over the longer term.

Furthermore, the company continues to look to expand through small acquisitions, such as its recent purchase of Jacaranda.

The acquisition of a significant stake in Perpetual over the past 12 months has proven fruitful, as both the recovery in global markets, and the return of emphasis towards value investing has been rewarded. We retain more than 2/3rd of the position.

Price reaction on the day of announcement

-0.9%

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Property sub-portfolio

Home Co

Home Consortium Daily Needs REIT (ASX: HDN) (Positive impact)

Company description

An Australian Real Estate Investment Trust listed on the ASX with a mandate to invest in convenience-based assets across the target sub-sectors of Neighbourhood Retail, Large Format Retail and Health & Services.

FY-21 result

The Daily Needs REIT has been a resilient property exposure and strong performer over the past twelve months.

With a portfolio of largely metropolitan-based large format convenience assets, occupancy has remained high (99.3%) and collections strong (99%).

We see this as a resilient exposure to retail property due to the relatively low occupancy costs across the portfolio (average gross rents of $325 / sqm) with upside from the potential to develop existing sites (brownfield development) at attractive returns.

Read through for FY-22

With the completion of several developments in FY-22, it is expected net operating income (the property equivalent of operating profit) will rise by 5%.

This should support a distribution per unit of 8 cents (a distribution yield of 5.4% at current prices.

Price reaction on the day of announcement

+1.0%

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