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Can These Fallen Souffles Rise Twice?

Weekly Reports | Nov 25 2020

This story features AMP LIMITED, and other companies. For more info SHARE ANALYSIS: AMP

By Tim Boreham, Editor, The New Criterion

Can these fallen soufflés rise twice?

The ASX is replete with hugely successful companies that not long ago were small caps, such as Afterpay and Fortescue Metals.

Sadly, there’s also the reverse: ‘famous name’ blue chips that have fallen out of favour and have been unable to participate in the virile market recovery.

Takeover raiders have sniffed the blood in the water and have offered to put AMP ((AMP)) and Village Roadshow ((VRL)) out of their misery. But there’s no guarantee the deals will complete.

Other fallen names could present turnaround opportunities.

Pretty much nothing has been going right for Crown Resorts ((CWN)), which is under siege on several regulatory fronts centering on money laundering concerns, while the pandemic shut down its cornerstone Melbourne money bin.

Last week the company deferred the opening of the non-gaming parts of its $2 billion Sydney casino, until after the NSW Independent Liquor and Gaming Authority releases the findings of its public inquiry into Crown’s conduct.

In October Fitch cut Crown’s BBB credit rating from stable to negative.

The ratings agency said the downgrade reflected “the risks to Crown’s operations and financial profile from potential outcomes of the various inquiries, which could include fines, changes in operating conditions and regulations, or changes to or loss of licences.”

As any gambler knows, fortunes can swing wildly.

In Melbourne Crown has been allowed to re-open, albeit across ten VIP areas with a maximum of ten patrons each.

The patrons will be overseen by a “Covid marshal” so don’t dare turn up without a mask.

Crown’s earnings declined 80 per cent to $79.5 million in the year to June 2020; bearing in mind the company operated under normal conditions in the December half.

Despite the travails, Crown shares are some 50 per cent higher than their March 20 low of $6.12 a share; they’re also 34 per cent off their five year peak of $14.23 on August 24, 2018.

Despite Crown’s self-confessed money laundering shortcomings it’s hard to think the company will lose its licence to operate in Melbourne or Sydney.

If Crown’s golden ticket remains intact, the odds will favour the company in the longer term.

Telstra ((TLS))

Why did the valuation of the nation’s biggest telco go backwards during the most communications-hungry event in history?

The answer in part lies with intense mobile and broadband competition resulting in more “all you can eat” deals than a pre-pandemic Las Vegas buffet.

The National Broadband Network (NBN) has also had the democratic effect of rendering Telstra a price-taking reseller just like everyone else.

Another reason is that Telstra’s valuation does not reflect the intrinsic worth of infrastructure such as its mobile towers.

The telco this month took matters into its own hands by announcing the pending legal split of its business into three divisions: InfraCo Fixed (ducts, fibre, data centres and such), InfraCo Mobile (mobile towers) and ServeCo (innovations and customer service).

We’re sure the marketing department will come up with some snazzier names.

The move puts into train an expected “monetisation event”, which to the telco’s 1.27 million (mainly layperson) shareholders means flogging the towers for a lot of money.

Meanwhile, Australian Competition and Consumer Commission data shows that Telstra accounted for only 33.6 per cent of NBN connections in the September quarter, compared with its overall historical share of 45.7 per cent.

One reason for this is the connections are tilted to metro areas, where competition is fiercest.

There are signs mobile and internet pricing is becoming more rational, although there’s a question mark over whether Vodafone will emulate Telstra’s recent price increases.

On the short term Telstra has reiterated its guidance of $6.5-7 billion of underlying earnings for the current year, compared with $7.4bn previously. Management expects these earnings to return to growth in 2021-22, with targeted earnings of $7.5-8.5bn in 2022-23.

Famished yield seekers can lock in a 16 cents per share dividend fully franked, equating to a 5 per cent yield.

Unlike over the last four years, hopefully Telstra will ring up capital growth for investors as well. 

Myer Holdings ((MYR))

With a mere $220 million market cap entity, Myer headed to microcap territory and yet the once-esteemed retailer chalked up $2.6 billion of sales in the year to July 2020.

Myer’s fate is now in the hands of long-time agitator Solomon Lew, who with the help of fund manager Geoff Wilson forced the departure of Myer chairman Gary Hounsell.

Takeover rumours abound.

Myer’s redemption story is one of a serious tilt to online sales, a channel that accounted for $422 million or 16 per cent of total sales for the year.

The category more than doubled during the national lockdowns.

CEO John King sticks to an “aspirational” target of growing online sales to $1 billion.

He reckons that as a department store Myer has the advantage of a better range, while the cachet of the Myer name provides succour to first time online users (in other words, the retailer’s baked-on older customers forced to use ecommerce).

In theory, Myer could thrive with an online focus which is more profitable. A wee problem is what to do with the excess store space – and in some cases whole redundant stores.

The retailer has won Covid-related rent concessions and is engaged in “constructive dialogue” with its landlords about its future footprint.

The space retreat is ongoing, with Myer reducing its coverage by 14,000 square metres in 2018-19 and 26,000 sqm in 2019-20. The retailer also has 76,000 sqm across 21 leases expiring within eight years.

That provides some serious leverage for dealing with the likes of Scentre and Vicinity, which aren’t known for taking a step back.

We reckon the latest revival effort, dubbed ‘customer first’, is the last chance for Myer, which has trotted out myriad remedial programs since infamously listing at $4.10 a share in late 2009 (ascribing a $2.3 billion market cap).

It might take a (virus) crisis to implement the requisite hard decisions on store presence and staffing, rather than just tinkering with the merchandise.

McMillan Shakespeare ((MMS))

The salary packaging and fleet leasing firm in September had the indignity of being turfed out of the S&P ASX 200 index.

In happier times, McMillan Shakespeare could do nothing wrong as it surfed demand for novated leasing and other tax-effective salary arrangements.

Critics argue the business was – and is – based on the available fringe benefits tax concessions for not for profit organisations, which could be removed at the stroke of a pen.

The Rudd Government promised to wield such a quill, but the threat abated after the coalition won the 2013 election.

The company nonetheless moved to diversify its earnings, including vehicle finance and insurance warranty broking and an underwhelming foray into fleet management in Britain.

In the company also paid $8 million for full ownership of Plan Partners (a provider of plan management and support services for companies involved in the National Disability Insurance Scheme).

The company says the coronavirus had a “sharp and severe” impact on the business, which is not surprising given its orientation to (a) car usage and (b) workplaces.

Business picked up in May and June, but not quite to pre-pandemic levels.

Broker Morgan Stanley factors in current year underlying earnings of $119 million, compared with $99m in 2019-20.

Despite spending $80 million on share buybacks last year and having net cash of $66m, the company suspended its final dividend.

Assuming divs resume for the current half, the stock trades on a handy yield of just under 5 per cent.

Disclaimer: Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

Content included in this article is not by association the view of FNArena (see our disclaimer).

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CHARTS

AMP CWN MMS MYR TLS

For more info SHARE ANALYSIS: AMP - AMP LIMITED

For more info SHARE ANALYSIS: CWN - CROWN RESORTS LIMITED

For more info SHARE ANALYSIS: MMS - MCMILLAN SHAKESPEARE LIMITED

For more info SHARE ANALYSIS: MYR - MYER HOLDINGS LIMITED

For more info SHARE ANALYSIS: TLS - TELSTRA CORPORATION LIMITED