Rudi's View | Jul 05 2019
In this week's Weekly Insights (this is Part Two):
–Do I Have A Few Surprises For (Most Of) You!
-M&A Is Back; Who's The Next Target?
-Three Charts To Mark Mid-2019
-Caveat Emptor: Retail Landlords
-Rudi On Tour
By Rudi Filapek-Vandyck, Editor FNArena
M&A Is Back; Who's The Next Target?
The latest Australian equities strategy update by stockbroker Morgans has identified no less than 48 M&A candidates listed on the local exchange.
While the broker's market strategists acknowledge buying equity in a company purely on the expectation that a takeover approach is soon to be unleashed is far from a fail safe strategy (to put it mildly), Morgans nevertheless argues M&A appeal can offer some downside protection for companies under pressure and/or operating in structurally challenged sectors, including mining services, aged care and retirement village operators, as well as bricks & mortar retailers.
The list of selected (potential) targets ranges from AGL Energy ((AGL)) to Neuren Pharmaceutical ((NEU)) and Nufarm ((NUF)), to Perpetual ((PPT)), Red 5 ((RED)), Hub24 ((HUB)), Rhinomed ((RNO)), Bapcor ((BAP)) and Santos ((STO)).
The stockbroker has highlighted six standout opportunities for investors looking to explore the theme; APA Group ((APA)), Emeco Holdings ((EHL)), Superloop ((SLC)), Qube Holdings ((QUB)), and Senex Energy ((SXY)).
Three Charts To Mark Mid-2019
As we've moved past mid-year calendar 2019 this week, I found the three charts below combined, all from various Morgan Stanley research reports, offer a great summary of the swift change in global market dynamics after 2018 ended on such a sour note.
First there is the observation the "all assets in the negative" by the end of 2018 has swiftly been followed up with an "all assets gain".
The second chart shows the origin of this shift: the US bond market quickly shifted from pricing in three more rate hikes, to now four rate cuts by the Federal Reserve.
Chart number three shows how weak manufacturing PMIs have subsequently become with both headline and new orders sinking into negative territory in June. We're back, or even below, levels last seen during economic and financial markets turmoil of early 2016. Can we have the same recovery? That's the $20m question that will determine the outlook for equities in the six and twelve months ahead.
To state that Countplus ((CUP)) has had a tough time in years past would be a grave understatement. The listed umbrella for accountants and financial advisors witnessed its share price trading near $2 up until mid-2014, but then prospects soured pretty quickly.
Countplus shares entered calendar 2019 hovering around 50c but have posted a strong rally towards 90c in recent weeks. Maybe Wilsons elevating the stock to its Conviction Calls might have something to do with it?
Wilsons lauds management for having successfully turned around the core operations. And now Countplus is buying more advisory business from Commonwealth Bank ((CBA)) at a price tag of $2.5m while Wilsons values the acquired businesses at circa $40m.
Someone's having a bargain thanks to the Royal Commission into banks, and Wilsons also believes CBA is a motivated vendor who'd want to ensure a smooth transition and little hiccups afterwards. This also applies to CBA's 35.85% in the company. Wilsons' Conviction Buy rating is accompanied by a $1.47 price target.
Even more intriguing is that ASX-newcomer Whispir ((WSP)) has also been added to the list of Conviction Calls. Whispir provides a cloud-based communications platform to over 500 users in the corporate and public sector worldwide. The company only listed on June 19, but Wilsons put it straight through to the Conviction Calls list with a price target of $2.
Whispir raised $46m at $1.60 a share in an IPO underwritten by Wilsons and Ord Minnett. The latter coincidentally has also initiated coverage with a Buy rating and $2 price target.
Other stocks still on Wilsons Conviction Calls are Bravura Solutions ((BVS)), EML Payments ((EML)), ReadyTech ((RDY)), Collins Foods ((CKF)), Ridley Corp ((RIC)), ImpediMed ((IPD)), National Veterinary Care ((NVL)), EQT Holdings ((EQT)), Pinnacle Investment ((PNI)), Noni B ((NBL)), Ausdrill ((ASL)), Mastermyne ((MYE)), and Whitehaven Coal ((WHC)).
Small cap analysts at Canaccord Genuity equally dusted off their Australia Focus List this week, revealing the following thirteen inclusions:
AMA Group ((AMA)), Appen ((APX)), Ausdrill, Bigtincan Holdings ((BTH)), Codan ((CDA)), Cooper Energy ((COE)), Healthia ((HLA)), Independence Group ((IGO)), Kogan ((KGN)), Money3 Corp ((MNY)), OZ Minerals ((OZL)), Primero Group ((PGX), and Perseus Mining ((PRU)).
At Bell Potter, head of research Peter Quinton has set a target of 7000 for mid-year 2020 for the ASX200. Quinton also updated his list of Champion Stocks; the kind one buys and keeps in the bottom drawer, confident they will add value to the portfolio if given enough time and breathing space.
The June update on Champion Stocks generated no changes, which makes it more of a reiteration of prior research and selections. The eight names on Quinton's list are Amcor ((AMC)), Transurban ((TCL)), Challenger ((CGF)), Lendlease ((LLC)), Goodman Group ((GMG)), Netwealth ((NWL)), CSL ((CSL)), Sonic Healthcare ((SHL)), and Brambles ((BXB)).
I noted in the past there is a parallel with the research into All-Weather Performers by myself, but different minds do not necessarily think alike. Thus Quinton's selection contains both overlap and differences.
Late addition on Thursday: Stockbroker Morgans' update on High Conviction stocks has generated no changes, which means the selection continues to comprise of ResMed ((RMD)), Sonic Healthcare, OZ Minerals, Westpac ((WBC)), Australian Finance Group ((AFG)), Kina Securities ((KSL)), and Senex Energy.
Morgans strategists did take the opportunity to highlight what they believe are the most outstanding opportunities from recent sector updates and this selection consists of Westpac, Orora ((ORA)), Treasury Wine Estates ((TWE)) and Oil Search ((OSH)).
Caveat Emptor: Retail Landlords
Shares in Goodman Group ((GMG)) are up more than 50% since last year October and the performance of Charter Hall ((CHC)) has been even better over the period, but Vicinity Centres ((VCX)) shares are down and Unibail-Rodamco-Westfield ((URW)) looks downright ugly on a price chart.
Welcome to the treacherous new world of investing in stocks for income and yield. UR Westfield is offering a forecast 3.8% on a payout ratio of circa 95%, whereas the forecast yield from Vicinity Centres shares sits well above the market average at 6.4%. On the other hand, Goodman Group shares post six years-plus share price rally are left offering but a paltry 2% while for Charter Hall the forward looking estimated yield has fallen to 3.8%.
Yet, the above does not by default mean Vicinity Centres is now the safest option of the four, or that the only way is down for shares in Goodman Group.
Property specialists at UBS and Citi, to name but two, have been warning for a while now that investors should be extra-careful when considering buying shares in retail landlords. UR Westfield and Vicinity Centres are but two examples of a whole bunch of listed retail assets owners, also including Stockland ((SGP)), Aventus Group ((AVN)), Shopping Centres Australasia ((SCP)), Charter Hall Retail REIT ((CQR)), and others.
The main threat comes from a rapidly changing, challenging environment for bricks & mortar retailers, and the potential implications for those who own and operate the properties from which these retailers battle for survival. The share market already reflects a much more cautious view on how this dynamic might play out, which explains why most retail landlords have not participated in the 2019 stock market revival; or continue encountering selling pressure whenever an upswing occurs.
One of the visible impacts is the fact an estimated $12bn in retail assets are currently up for sale in Australia. UBS analysts recently estimated $7bn in retail assets are up for sale plus $5bn of unlisted equity. Analysts at Citi point out this represents close to three years of typical transaction volume. Which is why every property team in the country is closely watching who's buying and at what price.
The flow on effect of assets (potentially) being sold at a discount in order to get buyers to commit can be quite pronounced for listed REITs, which keeps a rather large question mark open ended for those with large portfolios, even if they are not looking to sell themselves.
And while current valuation discounts implied can make sector laggards look attractive for yield and/or value-oriented investors, both Citi and UBS point out things can get a lot worse still should experiences from the UK and the US be replicated in Australia. The main points of contention are to what level do rents for retailers need to fall to keep them viable and competitive; and how much more do landlords need to spend to prevent their assets from degrading?
As is so often the case in these financial matters, relatively small changes in assumptions projected into the future can have a major impact on valuations for landlords. Which is why the teams at UBS and Citi have been cautioning investors, and continue to do so.
Making matters even more complicated is the fact that examining reported numbers by the various trusts simply opens up inconsistencies and apparent contradictions. For example, UBS analysts note Scentre Group's published operational expenses (opex) are running at circa 30bps of assets, but then publicly available data for two of the group's assets, Penrith and Carindale, put the relevant number at 70bps – more than double.
Similarly, UBS finds it difficult to reconcile Vicinity Centre's opex of 50bps while GPT ((GPT)) reports its opex is 90bps and the latter is believed to operate the higher quality asset portfolio?
Property specialists at Citi firmly believe the outlook for retailers margins are to remain under pressure for much longer, while the development returns on shopping malls are now noticeably under pressure. Both factors can have a significant impact on the future value of landlord's assets.
The analysts at Citi have further reduced their valuations across the sector, now valuing retail assets some -9% below book value, or -13% when leverage is incorporated. In response, Citi analysts have decided to reiterate their Sell ratings for Scentre Group, GPT, Charter Hall Retail REIT, Shopping Centres Australasia, BWP Trust ((BWP)), and Stockland.
Citi analysts point out, discounts for comparable retail landlords in the US and the UK of -20% below Net Asset Value (NAV) have become rather common, even after NAVs already pulled back considerably. Citi's advice to investors remains firm and unchanged: buy non-retail exposure within the local REIT sector. Investors should not assume worst case scenarios are by now priced in.
Most favoured sector exposures at UBS are Lendlease ((LLC)), Goodman Group, Dexus Property Group ((DXS)), GPT, Centuria Metro REIT ((CMA)), and Rural Funds ((RFF)). Least preferred are Stockland, Mirvac ((MGR)), and Vicinity Centres.
Audio interview Wednesday this week:
Rudi On Tour In 2019
-AIA National Conference, Gold Coast, Qld, 28-31 July
-AIA and ASA, Perth, WA, October 1
(This story was written on Monday and Tuesday 1st & 2nd July 2019. It was published on the day in the form of an email to paying subscribers, and again on Thursday as a story on the website. Part two follows on Friday).
(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.
In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: firstname.lastname@example.org or via the direct messaging system on the website).
BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS
Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:
– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
– Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.
Subscriptions cost $440 (incl GST) for twelve months or $245 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index2.cfm?type=dsp_signup
(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)
P.S. I – All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to My Alerts (top bar of the website) and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website.
P.S. II – If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
FNArena is proud about its track record and past achievements: Ten Years On