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Blue-Chip

Best Blue-chips to Buy

October 12, 2015 | Team Kalkine
Best Blue-chips to Buy

Woodside Petroleum Limited


 
The most dramatic event in the oil and gas sector was the audacious bid valued at roughly $ 11.6 billion by this company for Oil Search Limited which was widely considered by many experts to be low. The general feeling was that Woodside would have to increase the offer in order to have a realistic chance of success. However, shares in the company rallied after it played down the chances of increasing the offer and shares in Oil Search also gained a little. This reaction would appear to suggest the takeover bid is not particularly palatable to shareholders of both companies at least in its present form. The Woodside CEO Peter Coleman said that the offer was a full price by any measure and indicated that the market should not expect a sweetened offer for Oil Search. It is quite possible that a part of the market reaction could have been caused by the overnight increase in West Texas Intermediate oil prices but we would guess that the more important factor is that the Woodside appears, at least for the moment, to be resisting pressure to increase its share swap offer.



Financials (Source: Company Reports)
 
Though there has been media speculation that Woodside is shopping around for debt to add a cash component to the share swap offer, this appears to have been disliked by its shareholders and Coleman has said that he cannot increase the offer because any increase would be dilutive for Woodside’s shareholders. Bank of America Merrill Lynch who is advising Woodside on the transaction has pointed out that it will be a good deal for Oil Search shareholders if they consider the increased dividend payout which would be available if the transaction goes through.
 
Regardless of the success of this transaction, Woodside has a strong balance sheet which can enable it to acquire distressed assets from the many troubled companies in the sector cheaply. We also believe that if this transaction fails, we can expect to see an accretive transaction over the next few months to boost growth. The dividend yield is about 8.48%. Accordingly, we would rate Woodside as a Buy at the current price of $32.02.


WPL Daily Chart (Source: Thomson Reuters)

Woolworths Limited


 
There have been a number of questions about Australia’s largest retailer Woolworths Limited and its perception in the minds of some investors that it has been underperforming in the supermarket business, and more particularly, for its decision to enter the hardware space because of the growing losses from the Masters Home Improvement business. More recently, there has been the small year-on-year decline in its EPS and opinion of experts entails that EPS will continue to decline from FY 2016 through FY 2018. Also, the recent capital injection ($70 million by WOW and $35 million by Lowe’s) into the JV vehicle, Hydrox Holdings indicates some loss of money though new store format was expected to have good sales growth.


Dividend and distribution (Source: Company Reports)
 
An overview of the results for FY 2015 shows that NPAT was in line with the previous year at around $ 2.45 billion though the dividend was up 1.5% to 139 cents per share. The EBIT growth for Australian Food, Liquor and Petrol grew by only 2.3% as a reflection of the subdued growth in the second half of the year. The Australian food business is being reset to ensure a sustainable competitive position and provide shareholders with satisfactory returns. The company is also in the process of implementing a three-year strategy which will make customers more satisfied. $ 200 million has been spent to lower prices in the second half of FY 2015 and this initiative has continued into FY 2016. Reinvestment into team hours in FY 2015 and FY 2016 has resulted in improved availability and customer service though, given the scale and the timing of the sweeping changes, it will take a while to translate into increased sales. General merchandise has been affected by the Big W business transformation, and stock availability and inventory clearance will continue to affect the first quarter of FY 2016 though an improvement in profitability is targeted for the entire year, improved sales momentum needs to be generated over the critical Christmas period.
 
However, we regard the retailer as a world-class company with a dominant and leading market position and believe that this would be a good time to buy the stock at the current price of $26.6 to cash in on any future improvements and benefits.


WOW Daily Chart (Source: Thomson Reuters)

Lend Lease Group


 
The booming Australian property market has done wonders for the share price of property developer Lend Lease Group over the past couple of years and it has comfortably outperformed the S&P/ASX200. It is a complicated business but investors willing to undertake the exercise of analysis could benefit substantially. The company is an international property manager and developer which has a market capitalisation of around $9.2 billion. The company has operations in Australia, Asia, Europe and the Americas and also a large international investment property portfolio worth approximately $17.4 billion. However, it should be noted that around 70% of its earnings are generated in Australia.
 
The residential portfolio has been performing strongly because of rising property prices in most of Australia’s major cities as well as in London and contains more than 20,000 residential properties with 4,000 of these currently in the delivery stage. $3.6 billion in pre-sales have been booked for the next three financial years which should provide solid growth as well as earnings. However, it should be noted that high property prices and low interest rates have resulted in an increased supply of new properties from major developers so that the delivery of large new apartment buildings combined with a slackening in the market could affect property developers. The company has also pointed out that the increase in land prices in Australia is making new projects less attractive than in the past and the company is looking to expand its urban regeneration programme particularly in Asia and the Americas.


Key Metrics (Source: Company Reports)

The commercial portfolio contains six commercial towers which are currently being finalised or being delivered and these projects should start to generate positive cash flow by FY 2016. The company has also recently announced that it has finalised an agreement with Crown Resorts for a world-class integrated resort and casino project in Sydney and the contract for the development is estimated at $ 1 billion. The major issue the company needs to address is to secure tenants for its new commercial towers since it already has some towers without secure tenants and it cannot afford these vacancies for any substantial period of time. The recent new-look food court and dining area at Sydney’s Barangaroo seems to be an effort to entice customers and thus add to growth.
 

LLC Daily Chart (Source: Thomson Reuters)

We believe that the future growth prospects of the company are substantial and accordingly rate the stock as a Buy at the current price of $12.62
 

National Australia Bank Ltd


 
The trading update for the third quarter of FY 2015 shows good results with further progress having been made on strategic priorities. Cash earnings of approximately $ 1.75 billion were up approximately 9% over the same period of the previous year and 6% over the quarterly average of the March 2015 half-year results. The statutory net profit attributable to the owners of the company was $ 1.85 billion. On the basis of cash earnings, revenues grew by approximately 4% and excluding the gain from a legal settlement, the figure works out to approximately 2%. Group net interest margin declined because of weaker income for Treasury and Markets and intense competition for business lending. Expenses rose by approximately 4% because of investments in priority customer segments and the impact of changes in currency rates. The charge for Bad and Doubtful Debts fell by 15% to $ 193 million primarily because of lower charges In Australian Banking.


Revenue and Risks Statistics (Source: Company Reports)
 
The bank has maintained its focus on the core business in Australia and New Zealand with disciplined investments in priority customer segments such as home lending and SME. Business Banking loan growth has accelerated in the priority segments which is encouraging because of the improvement in Australian business confidence. Good progress is also been made in addressing legacy and low return on assets to sharpen the focus of the business in Australia and New Zealand. Maintaining a strong balance sheet has been a priority and the recently completed rights issue of $ 5.5 billion was in pursuance of this objective.
 
Though the bank has something of a reputation as an underperformer in the past, it has surprisingly performed better than its peers so far in FY 2015 and we believe that the bold steps on restructuring will show benefits in due course. We would rates the stock as a Buy at the current price of $31.4.


NAB Daily Chart (Source: Thomson Reuters)
 

Australia and New Zealand Banking Group


 
This is one of the big four Australian banks which control more than 90% of the Australian banking market and is globally ranked among the top 25 banks by market capitalisation. Though these banks compete fiercely with one another, they all have a strong long-term economic moat and competitions will find it difficult to enter the market and compete against them. The bank has also in September 2015 completed a Share Purchase Plan which raised common equity of $ 720 million to meet the new stricter regulatory requirements.
 
The trading update for the nine months to 30 June 2015 reports an unaudited cash profit of $ 5.4 billion up by 4% and statutory net profit of $ 5.58 million up 11%. The super-regional strategy continues to provide differentiated sources of revenue and options for future growth and is supporting performance in every aspect of the business.
The Australian Retail and Commercial businesses continue to outperform peers particularly in the area of mortgages and are delivering strongly. International and Institutional Banking are performing well and handling responses to the complex market conditions. Some factors such as global liquidity and depressed commodity prices are proving to be headwinds while other factors such as market volatility and currency movements are providing tailwinds. Credit quality is improving and gross impaired assets have improved by 3%. As at 30 June 2015, the Common Equity Tier 1 Ratio was 8.6%; and following the completion of the institutional placement of $ 2.5 billion, the same improved to 9.2%.
 

Financial Overview (Source: Company Reports)

At the current prices, the group produces a dividend yield of 6.36% and we consider this to be extremely attractive for income investors and we do not believe that the bank will have any problems in sustaining its dividends. In addition to the yield, we also see potential for an upside in the stock price and rate the stock as a Buy at $28.35.


ANZ Daily Chart (Source: Thomson Reuters)

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