15 September 2020

Twice a year we summarise the half-year and full-year results of the companies in the ALCE portfolio. Although the COVID-19 pandemic has affected some of the results for the June 2020 half year, the companies in the portfolio remain strong. Several – e.g. APA, Amcor, BWP, Spark NZ, Steadfast, and Waypoint – have not been materially affected by the pandemic. Others – e.g. ASX, Coles, and Wesfarmers – have done very well in recent months.

Power utility AGL unsettled investors with a net profit which was lower than expected, but it also promised dividends which were higher than expected. The main problem was that lower demand caused a drop in wholesale electricity prices, at the same time as the expiry of old gas contracts brought higher gas prices. AGL customer demand rose 1% despite the 2% decline in market demand. The 51c final dividend meant that the FY20 dividend was cut by 18% to 98c, but management indicated that for the next two years the company would pay a special dividend to top up the payout ratio from 75% at present to 100%.

Rather than focusing on the effects of bushfires and pandemics, we consider it more useful for investors to look at the longer-term trends in AGL’s core businesses. Although EBITDA fell 9% to $2,070m, cash flow from operations rose 35% to $2,156m. The company not only saw an improvement in employee engagement, it also recorded an increase in its popularity with customers (as measured by an increase in Net Promoter Score). AGL is making good on its promise to de-carbonize: by end-2021 it plans to offer carbon-neutral options across its entire product range. By 2024 it plans to install 850MW of grid-scale batteries (compared to 30MW at present) and to lift the percentage of electricity capacity from renewables and clean storage to 34% (from 22% at present).

US-based packaging group Amcor said that it had managed its plants around the world throughout the COVID-19 crisis with minimal disruption and without material increases in operating costs. The coronavirus pandemic had varying impacts on demand for Amcor’s products, but volumes were up 1% in the June half-year. FY20 underlying net profit rose 8.5% to USD1.03bn, and adjusted free cash flow rose 26% to USD1.26bn.

Management indicated that FY21 EPS was expected to increase by 5% to 10%, on a constant currency basis. About half the increase would come from organic growth and about half from realizing synergies from last year’s acquisition of Bemis. Because Arminius is forecasting that the US dollar will fall against major currencies, we believe that Amcor’s EPS will fall slightly in Australian dollar terms.

For FY20, pipeline owner and operator APA reported a 4.8% increase in revenue to $2,130m and a 5.1% increase in EBITDA to $1,654m. Operating cash flow per share rose 8.3% to 92.9c, and the full-year distribution was lifted 6.3% to 50.0c, equivalent to 54% of operating cash flow. APA’s earnings have not been seriously affected by the COVID-19 crisis because around 90% of its revenues are regulated or from take-or-pay contracts. Management expects FY21 EBITDA and distributions to be similar to FY20.

As expected, record trading volumes and capital raising since March 2020 propelled share market operator ASX to record profits and a record share price. FY20 revenues rose 8.6% to $938m, and EBIT rose 8.6% to $652m. The full-year dividend was lifted 4.5% to 238.9c, equivalent to 90% of underlying earnings per share. The continued strength of cash equities trading and capital raisings suggests that FY21 will be ASX’s eleventh successive year of profit increases.

BWP Trust, which is the landlord of most Bunnings stores, reported a very good June half and a very good FY20. Like-for-like rents rose 2.4% in the financial year, leading to a 1.0% rise in distributions to 18.29c per unit. During the March to June lockdowns, BWP received 98.8% of rent due, the only exceptions being some specialty tenants such as gyms, which were legally obliged to close. Unlike other retail landlords, the value of BWP’s property portfolio rose by $93m year-on-year. Gearing is a modest 19.7%, and management expects the level of the FY21 distribution to be similar to FY20.

New Zealand communications infrastructure group Chorus maintained its FY20 earnings guidance despite the COVID-19 crisis, and now it has delivered. (All figures are in NZ dollars.) EBITDA of $648m was in line with guidance, and a 14c final dividend, making 24c for the year (23c in FY19). The lockdown slowed the fibre roll-out, but it is now back on schedule. Customer satisfaction increased, partly because the network held up well under the sudden rise in usage and partly because Chorus put in place a number of support packages for customers, suppliers, and contractors. Management guidance for FY21 is EBITDA about the same and a 1c increase in dividends.

As expected, Coles has had a very good pandemic. The supermarket and liquor store operator was doing very well even before all the panic-buying and the precautionary pantry-filling. Sales per square meter rose 5.0% to $17,547. For the year ended 30 June 2020, a 6.9% gain in sales lifted EBIT by 4.7% and net profit after tax by 7.1% (71.2c per share). The final dividend was increased 14.6% to 27.5c, making 57.5c for the year. The balance sheet remains very strong, with only $362m debt and $2.2bn in undrawn facilities. Since the spin-off, Coles has put in place multi-year programs to upgrade its supply chain, reduce prices, and improve customer satisfaction, and these programs are already showing results in all three areas.

Industrial supplier GUD Holdings has weathered the COVID-19 storm reasonably well. Its automotive businesses were worse affected than its water pump businesses. FY20 revenue fell 1%, net profit dropped 22% to $46m, but operating cash flow rose 47% to $65m. The company cut its final dividend from 31cps to 12cps. Gearing remains a modest 34%. Management said that its automotive and water pump markets were showing signs of recovery. The GUD share price is now only 5% below its pre-COVID-19 level.

Despite a reported post-tax loss of $575m, media group Nine Entertainment found positives as well as negatives in the coronavirus pandemic. The loss was caused by $665m write-downs of intangibles; underlying net profit was $141m. For free-to-air television, advertisers cancelled spending in the June half, leading to a 14% fall in revenue and a 42% fall in EBITDA. For Nine Radio, a similar slide in advertising saw revenue fall 22% and EBITDA fall 78%. The Metro Media businesses (Age, Herald, AFR) were more resilient: revenue dropped 6% and EBITDA dropped 10%. Domain (real estate website) suffered a 10% fall in revenue and a 19% fall in EBITDA as property sales dried up.

Digital media, by contrast, has had a very good lockdown and now provides 48% of group EBITDA. Stan (subscription video on demand) recorded its first profitable year, based on a jump in subscribers from 1.7m to 2.2m and a 54% increase in revenue. 9Now (broadcast video on demand) enjoyed increases of 24% in monthly active users, 32% in revenue and 36% in EBITDA. In view of the group’s strong cash flow and modest debt, directors felt comfortable enough to declare a 2c final dividend, making 7c for the year. No guidance was given, but management has set longer-term targets and accelerated its cost reduction plans.

The coronavirus pandemic caught packaging group Orora in a “year of transition”. The sale of the Australasian fibre business on 30 April allowed Orora to consolidate its shares 4-for-5, to pay shareholders a 12.4cps capital return, and to pay a 37.3cps special dividend (50% franked). The company’s strong balance sheet gives it many options for growth, as it is carrying only $292m in debt. But Orora certainly needs to find growth: FY20 saw operating cash flow fall 30% to $170m.

Global insurer QBE gave shareholders some pleasant surprises in its first-half results. It presented a strong capital position, detailed its risk exposures, and declared a dividend of 4c. As a result of raising $1.3bn in April, QBE’s regulatory capital was 1.8x the APRA minimum, its debt to equity ratio was down to 30%, and its long term Financial Strength Rating was recently re-affirmed as A+ by S&P and Fitch. Investment losses were only USD90m (-0.4%), thanks to very small exposures to listed equities and sub-investment grade debt, and management expects to earn 1.75%.
In gross written premium, organic growth was 10%, partly because of an 8.7% increase in average rates during the June half. The unhealthy combined operating ratio of 103.4% reduces to 97.4% if the cost of COVID-19 is taken out. QBE estimates that the ultimate cost of COVID-19 will be $600m, assuming that governments and law courts do not rewrite the terms of its business interruption policies.

Insurance broker Steadfast said that COVID-19 had not had a material impact on its business. All employees have been working from home since 24 March, resulting in lower costs. During the June 2020 quarter, the arrears rate did not increase, volumes remained steady, and premiums continued to rise. Steadfast recorded a statutory loss of $55m because of impairments, acquisition expenses and other non-recurring items. The group’s underlying net profit rose 22.6% to $109m, which was substantially exceeded by operating cash flow. A 6c final dividend made 9.6c for the year, up 12.9%. Gearing was 21.5%, with $181m of unused debt facilities. Management indicated that underlying net profit was expected to rise 5% to 10% in FY21, to the range $115m to $122m.

New Zealand telco Spark maintained its earnings guidance despite COVID-19, and its FY20 result is in line with that guidance. (All figures are in NZ dollars.) Earnings before interest, tax, depreciation, amortisation and net investment income (EBITDAI) rose 2.1% to $1113m, based on a 2.5% revenue increase. Management estimated that COVID-19 reduced EBITDAI by $25m. Net profit rose 4.4% to $427m, and a 12.5c final dividend made 25c for the year. Spark has successfully completed its last three-year plan, and in September it will announce the details of its next plan.

Toll road operator Transurban reported a 6.4% fall in FY20 EBITDA, thanks to COVID-19. Toll revenue fell 5.0% because daily traffic fell by 8.6% on average across all areas of operation. Recovery will depend on how fast governments re-open each region, as well as how long people continue to work from home or remain unemployed. Traffic numbers are still about 20% below pre-COVID-19 levels even if Melbourne is excluded. Management was keen to emphasize that traffic would rebound, premised on population growth, rising congestion, and health fears about public transport. The NorthConnex, M8 and M5 East projects are starting in FY21, and the company has significant organic growth opportunities in the longer term.
The final distribution was cut to 16.0 cps, compared to 31.0c in the Dec 2019 half and 30.0c in the June 2019 half. FY21 looks like another year of low traffic numbers and reduced distributions. Management noted that the FY21 distribution would depend on the level of free cash flow, excluding capital releases: the FY20 level was $1,156m (42.3cps) before $330m of capital releases, totalling $1,476m (54.0cps), so the FY21 distribution is likely to be lower unless traffic volumes improve soon.

Service station owner Waypoint has proved extremely resilient during the pandemic, with the result that its unit price is almost back to where it was in February. Unlike the office and retail landlords, it collected 99.9% of rent due. Its only problem tenants were seven non-fuel businesses. In the June half year, Waypoint lifted earnings by 3.8% to $57.8m and raised its distribution by 0.23c to 7.41cps. Unlike the office and retail landlords, Waypoint saw the value of its properties increase: NTA rose from 229cps to 238cps. Gearing remains a modest 30.5% with weighted average maturity of 4.3 years. Waypoint’s 474 service stations have a total value of $2.8bn, with 100% occupancy, triple net leases, and annual increases around 3%.

Retail conglomerate Wesfarmers has enjoyed strong sales in its Bunnings, Officeworks, Kmart and online divisions during the coronavirus pandemic, but management was cautious about the outlook after stimulus payments terminated next year. The group’s FY20 revenue rose 10.5% to $30.8bn and underlying net profit rose 7.4% to $2.08bn. The final dividend of 95c included a 15c special dividend from the proceeds of selling down Wesfarmers’ stake in Coles. The problem divisions of Target and Industrial & Safety were written down by $575m and $310m respectively. Wesfarmers’ $0.5bn net cash position gives it immense scope for acquisitions, but management was extremely cautious about the future, warning of further costs to the Australian economy as we learned to live with COVID-19.


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