Eight Defensive Stocks – Should you pay a heed?

Scentre Group (ASX: SCG)

Growth in Funds from Operations: For H1FY17, Scentre Group reported 3.5% growth for Funds from Operations (FFO) at $638 million representing 12.01 cents per security (cps), and distribution of 10.86 cents per security, up 2%. Excluding the impact of transactions, FFO growth would have been approximately 5%. For the six months to 30 June 2017, profit for the group was $1.4 billion, including $929 million of revaluation gains driven primarily through continued growth in operating income across the portfolio and the completion of the Westfield Chermside redevelopment. Further, Scentre Group commenced $900 million (SCG share: $625 million) in developments with expected total returns of more than 15%. The group successfully completed the $355 million development at Westfield Chermside, setting a new benchmark in creating extraordinary retail and lifestyle destinations. Further, the group announced that it will extend its current practice to grow distributions at a lower rate than earnings growth until it reaches a payout ratio at 85% of FFO. The distribution is targeted to grow at 2% per annum until the target payout ratio of 85% is achieved.  The Group has a strong balance sheet with gearing of 33.9% at 30 June 2017 and is on track to deliver its forecast for full year growth in Funds from Operations of approximately 4.25%. Given the ongoing project developments and modest outlook for FY17, we maintain a “Buy” recommendation on the stock at the current price of $ 3.93

Ramsay Health Care Ltd (ASX: RHC)

Guidance Upgrade: In view of strong first half results and the continuation of robust growth across all operations, Ramsay Health Care Ltd had earlier this year upgraded guidance of core NPAT and core EPS growth to 12% to 14% for full FY 2017 (previously 10% to 12%). On the other hand, RHC reported that it has been working cooperatively with the Australian Competition and Consumer Commission (ACCC) during its investigation into a matter in Coffs Harbor. Earlier, its Australian chief executive was accused of threatening doctors after they moved to set up a competing clinic. Thereafter, the ACCC launched federal court action against Ramsay claiming that it had threatened local surgeons at Coffs Harbour, who were considering opening their own clinic. Ramsay operates the only private hospital and private day surgery facilities in the Coffs Harbour region, and local specialists use those operating theatres to perform surgical procedures on private patients. Irrespective of the news but weighted on the group performance, the stock moved up 5.68% in last three months. We reiterate a “Hold” recommendation on the stock at the current market price of $ 73.92

CSL Ltd (ASX: CSL)

Solid Revenue Growth from Seqirus: For FY17, CSL Ltd reported a 24% yoy (year on year) growth in underlying net profit after tax (NPAT) at $1,337 million. Revenue grew 15% yoy to $6,923 million and earnings before interest and tax (EBIT) increased by 23% yoy to $1,769 million. Influenza (Seqirus) witnessed a solid revenue growth of 23%, driven by planned transition to quadrivalent products, FLUAD® and increase in pandemic reservation fees. The company expects solid ongoing demand for CSL Behring biotherapies and strong market acceptance of newly approved specialty product Haegarda®, while the haemophilia market continues to evolve. 

Financial summary (Source: Company reports)

Notably, the new generation products, Idelvion® (refax-FP) and Afstyla® (rFVIII-SC) are well placed and expected to more than offset the anticipated decline in earnings contribution from Helixate®, as its supply contract ends this calendar year. On the other hand, CSL group’s net profit after tax for FY18 is expected to be in the range of approximately $1,480 million to $1,550 million at constant currency. The stock has moved up 16.5% in last one year (as on August 23, 2017) and is trading at elevated levels. We maintain an “Expensive” recommendation at the current price of $ 128.00

Sonic Healthcare Ltd (ASX: SHL)

Performance Boost from German and Swiss Businesses: For FY17, Sonic Healthcare reported a net profit of A$428 million, on revenues of A$5,122 million in line with previous guidance. Key highlights of the results were the improvement in margins in both Laboratory & Imaging divisions, and the return to earnings growth and margin enhancement in Australian laboratory business, which had been impacted by abnormal cost growth due to industry issues for several years. Further, German and Swiss businesses performed remarkably well, with strong organic revenue growth and focussed cost control. The acquisitions completed in the year, including Staber in Germany and West Pacific Medical in the USA, have performed to expectation and integration projects are well advanced. However, given the continuous adverse currency impact on results and the ongoing margins’ scenario, we give an “Expensive” recommendation at the current price of $ 22.04

Growthpoint Properties Australia Ltd (ASX: GOZ)

Debt Funding Diversification: Growthpoint Properties Australia provided its FY2017 annual results entailing $278.1 million in statutory profit, an increase of 26.8%, and FFO of 25.5 cents per security, an increase of 11.4% on FY16. The group’s balance sheet gearing was reduced by 410 basis points to 39.0% from 43.1% at 30 June 2016. The group’s sources of debt funding have been further diversified with the completion of first US Private Placement (USPP) debt issuance. The Weighted average rent review surged to 3.3%, from 3.1% of last year. Although the result has been encouraging, GOZ still witnesses disparity in outcomes across the different states in Australia while the industrial trends look to be stable. It might be worth to watch the stock going forward while we give an “Expensive” recommendation at the current price of $ 3.21

Spark Infrastructure Group (ASX: SKI)

Managing Liquidity Position: Spark Infrastructure has lately announced that ETSA Utilities Finance (funding vehicle for SA Power Networks) has successfully placed $375m of 7-year fixed rate Australian Medium Term Notes maturing in August 2024 and $175m of 5-year floating rate notes maturing in August 2022. Further, Victoria Power Networks (Finance) Pty (VPNF), the Common Funding Vehicle for Victoria Power Networks (CitiPower and Powercor), has successfully placed A$150m of Australian Medium-Term Notes, maturing in August 2027. The proceeds will be used to manage liquidity position and fund the continued asset growth of VPN’s network businesses. Earlier this year, the group in its full year (ending December 31, 2016) results reported NPAT slip of 7.89% to $81.08m while revenue from ordinary activities was down 9.86%. Given the consistent dividend payments and overall prospects, we maintain a “Buy” at the current price of $ 2.61

Macquarie Atlas Roads Group (ASX: MQA)

Improved Traffic Levels: In its June 2017 quarter results, Macquarie Atlas Roads reported that its quarterly weighted average toll revenue and traffic increased by 4.5% and 4.3%, respectively, on the prior corresponding period. For the six months to 30 June 2017, weighted average toll revenue growth was 3.7% while traffic over the same period was up 2.6%. In another update, the group’s performance fee for the 12 months ended 30 June 2017 was found to be outperforming the benchmark (S&P/ASX 300 Industrials Accumulation Index) by 6.1%. The group is set to announce its half year (ended June 2017) results on August 31, 2017. The stock is trading at higher levels, and we give a “Hold” recommendation at the current price of $ 5.68

Toll Revenue and Traffic (Source: Company Reports)

Transurban Group (ASX: TCL)

Rise in Proportional Toll Revenue: Transurban Group’s FY2017 proportional EBITDA soared up 10.1% and proportional toll revenue increased by 10.6% to $2,153 million. The group aims to undertake technology upgrades for improving access to information and providing additional account options. TCL has also enhanced its digital platforms with release of CityLink and Transurban Linkt apps. TCL’s CTW and GUN projects have been rated “Excellent” by Infrastructure Sustainability Council of Australia. It is noteworthy that TCL’s toll revenues have moved up across all networks. For instance, proportional toll revenue at Brisbane increased 22.9% to $385 million. Under FY18 distribution guidance, TCL intends to pay 56.0 cps including 3.0 cps fully franked, and this would imply growth in FY18 of 8.7%. Given the steady returns and growth opportunities,we put a “Buy” recommendation at the current price of $ 12.08

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