Stocks’ Details

Vicinity Centres

June 2020 Valuations Update: Vicinity Centres (ASX: VCX) is one of Australia's leading retail property groups with a fully integrated asset management platform and 64 retail assets under management. On 24 July 2020, the company announced independent valuations of its 60 direct-owned retail properties, which have resulted in a net valuation decline for the overall portfolio of 11.3% for the six-month period to 30 June 2020. The valuation decline was driven by several factors including 21 basis point softening in the weighted average capitalisation rate of the portfolio to 5.47%; short term one-off COVID-19 related adjustments; lower sales and market rent growth, and increased capital expenditure allowances.

Summary of the Valuations (Source: Company Reports)

Strengthening Balance sheet via Equity Raising: The company recently closed its non-underwritten Security Purchase Plan, wherein it raised around $32.6 million. This follows the company’s $1,200 million underwritten institutional placement completed on 2 June 2020. The equity raising will strengthen the company’s balance sheet and will provide it the flexibility to respond to the uncertainty caused by COVID-19 and the evolving retail landscape. The net proceeds from the placement will also be used to repay debt.

H1FY20 Highlights: In the first half of FY20, the company had reported a statutory net profit after tax of $242.8 million and Funds from operations (FFO) of $337.0 million. For the period, the company paid a distribution of 7.70 cents per security, reflecting a payout ratio of 94.9% of adjusted FFO (AFFO).

H1FY20 Results (Source: Company Reports)

What to Expect: Before the outbreak of Covid-19, the company was expecting its FY20 distribution payout ratio to be at the upper end of the target range of 95% to 100% of AFFO. However, due to the uncertainty surrounding the Covid-19 impacts, the Board of VCX has determined not to pay any distribution for the six months ending 30 June 2020. The company has also withdrawn its earnings guidance. Looking ahead, the company’s strategy of focusing on market-leading destinations is expected to deliver returns for investors over the medium to long term. The company is scheduled to release its FY20 results on 19 August 2020.

Key Risks: The company is exposed to the risks and threats of Coronavirus as it is having an increasing impact on global travel, trade and near-term economic growth expectations. As the majority of the company’s earnings are derived from rental income, periods of subdued retail market conditions, changing consumer behaviour and shopping preferences, digital technology and growth in online retailing have the potential to impact vacancy rates, rental growth, asset values and profitability.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of VCX has corrected by 48.62% in the past six months and is inclined towards its 52-week low price of $0.905, offering a decent opportunity for accumulation. The company has an annual dividend yield of 11.99%. We have valued the stock using EV/Sales multiple based illustrative relative valuation method and have arrived at a target price of low double digit-upside (in % terms). For the purpose, we have taken peers like Charter Hall Retail REIT (ASX: CQR), GPT Group (ASX: GPT), Scentre Group (ASX: SCG), etc. Considering the company’s recent equity raising and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $1.270, down by 2.682% on 3 August 2020. 

Boral Limited

New CEO Appointed: Boral Limited (ASX: BLD) is involved in the manufacturing and supply of building and construction materials. The company has a market capitalisation of $4.4 billion as on 03 August 2020. The Board of BLD has recently appointed Zlatko Todorcevski as the company’s new Chief Executive Officer (CEO) & Managing Director. Zlatko’s experience in leading major transformations, including business turnarounds, as well as in capital allocation and strategic portfolio management, is critically important for the company.

Responding to COVID-19 Impacts: In the first four months of 2HFY20, the company’s revenues were down in most of its business, relative to pcp, due to volume and cost pressures associated with bushfires in Australia in January, followed by COVID-19 impacts. In response to COVID-19, the company has reduced its costs and discretionary expenditure, including labour costs, across the business. It intends to reduce its capital expenditure by ~15-20% to ~$330 million in FY2020. Further, the company is rigorously managing its cash flow and working capital. The company is developing more detailed plans, including a review of ongoing SG&A and operational requirements, to ensure the business has appropriate cost structures as it moves into FY2021.

Maintaining Strong Liquidity Position and a Robust Balance Sheet:  On 15 May 2020, the company announced that it has increased and extended its debt financing facilities with a new US Private Placement (USPP) note issue of US$200 million. In addition, Boral has secured approvals for several new bilateral bank loan facilities totalling $365 million, which will be the next tranche of undrawn debt to mature in May 2022. On a pro-forma basis, Boral Limited has around $1.30 billion of available cash and undrawn committed funds. Increased and extended debt finance facilities and solid cash management is supporting strong liquidity.

Liquidity (Source: Company Reports)

H1FY20 Results Highlights: In the first half of FY20, the company reported revenue of $2,989 million and NPAT (reported) of $156 million. For the half-year period, the company paid an interim dividend of 9.5 cents per share, down by 27% on pcp.

H1FY20 Snapshot (Source: Company reports)

What to Expect: Due to the high level of uncertainty surrounding the spread, duration and impact of COVID-19, the company has withdrawn its FY20 guidance. With the help of Covid-19 response measures, the company now seems to be well-placed to get through the current challenging times. The company is focused on prudent balance sheet management to ensure operational flexibility, including reactivating and fully underwriting the DRP and exploring non-core asset sales. The company is expected to release its FY20 results on 28 August 2020.

Key Risks: The Covid-19 pandemic has created supply chain risks and business interruptions for the company. The company is also exposed to various industry and market risks including structural and cyclical demand changes; political and regulatory change; macroeconomic and geopolitical conditions; inflationary impacts from rising input costs, changes to construction methods and materials and movements in foreign exchange rates.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of BLD is currently trading slightly higher than the average 52 weeks price level band. The company has an annual dividend yield of 6.41%. We have valued the stock using the Price to Cash Flow multiple based illustrative valuation method and have arrived at a target price of low double digit-upside (in % terms). For the purpose, we have taken peers like James Hardie Industries PLC (ASX: JHX), CSR Ltd (ASX: CSR), Incitec Pivot Ltd (ASX: IPL), etc. Considering the company’s decent liquidity position, robust balance sheet and valuation, we give a “Buy” recommendation on the stock at the current market price of $3.580 on 3 August 2020.

Monadelphous Group Limited

Zenviron Secures Contract in Regional Victoria: Monadelphous Group Limited (ASX: MND) is a leading engineering group in Australia that is primarily involved in providing construction, maintenance and industrial services to the energy, resources and infrastructure sectors. On 3^rd August 2020, Zenviron Pty Ltd, a joint venture company in which MND holds 55% interest, announced that it has been awarded a contract with General Electric International Inc for the delivery of the Murra Warra Stage II Wind Farm in regional Victoria. Under the contract, Zenviron will perform around $80 million of works.

Contracts Update: In an update provided on 1 June 2020, MND informed that it has secured a number of construction and maintenance contracts in the resources and energy sectors. These contracts have a combined value of around $150 million. The company continues to build on its relationships with long-term customers in both the mining and oil and gas sectors.

H1FY20 Result Highlights: In the first half of FY20, the company secured major construction contracts at Rio Tinto’s West Angelas Project and at Albemarle Lithium’s Kemerton lithium hydroxide plant. For the half-year period, the company reported revenue of $852 million and EBITDA of $59.1 million. For H1FY20, the company declared a dividend of 22 cents per share (fully franked), down by 12% on pcp.

H1FY20 Results (Source: Company Reports)

Key Risks: The Company’s short to medium-term financial performance is dependent on the extent and duration of Covid-19 impacts on MND’s operational activity and productivity levels. Further, the company’s financial instruments expose it to interest rate risk, foreign currency risk, credit risk and liquidity risk.

What to Expect: Before Covid-19 outbreak, the company was expecting to achieve a growth of 10% in its revenue for FY20. However, due to the uncertainty surrounding the impact of Covid-19, the company has withdrawn the guidance. To ensure that the company operates as productively and profitably as possible, MND has implemented a large number of actions to protect the business, including the implementation of a targeted cost reduction plan across the business. The company is scheduled to release its FY20 results on 18 August 2020.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (illustrative)

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of MND has corrected by 49.20% in the past six months and is trading close to its 52 weeks low price. The company currently has an annual dividend yield of 5.05%. We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target price with lower double-digit upside (in % terms). Considering the company’s recently secured contracts, its decent performance in H1FY20, and current trading levels, we give a “Buy” recommendation to the stock at the current market price of $7.990, down by 10.325% on 3 August 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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