Stocks’ Details

Milton Corporation Limited

Low-Cost Investment Manager: Milton Corporation Limited (ASX: MLT) invests in companies and trusts, real property development, fixed interest securities, and liquid assets such as cash and term deposits. The market capitalisation of the company stood at $2.84 billion as on 24^th July 2020. The company holds a diverse portfolio of Australian listed companies, which was valued at $2.7 billion as of 30^th June 2020 with total assets of $2.9 billion. MLT is an efficient and low-cost manager of investments. The company’s operating costs reflects 0.14% of average total assets. As per the preliminary final report 2020, the company recorded a net profit after tax amounting to $116.9 million, reflecting a fall of 20.8%. For the year ended 30^th June 2020, the company declared final ordinary dividend (fully franked) of 8.5 cps, taking the full-year ordinary dividend to 17.5 cps.

Dividend and Investment Growth (Source: Company Reports)

Focus on Short-Term Factors: The company would continue to look through short-term factors to focus on growing its investments in companies with strong long-term prospects. However, the company anticipates heightened volatility in the upcoming period.

Key Risks: The company is mainly exposed to credit, market and liquidity risk, which can affect its future financial performance. Credit risk arises from the investment in liquid assets, such as cash, bank’s term deposits, and income receivable. Market risk is influenced by changes in market prices, which would affect the fair value of the financial instrument.

Stock Recommendation: FY20 has proved as a transformative year for the company’s investment portfolio with bank weightings decreased from 28% at 30 June 2019 to 17% at year-end.  As of 30^th June 2020, the cash balance of the company stood at $114.1 million with no outstanding debt. Therefore, considering the diverse portfolio of Australian listed companies, reduced bank weightings and nil debt position, we give a “Hold” rating on the stock at the current market price of $4.270 per share, up by 0.946% on 24^th July 2020.

Tabcorp Holdings Limited

New Appointment on the Board: Tabcorp Holdings Limited (ASX: TAH) is involved in the provisioning of gambling and other entertainment services. The market capitalisation of the company stood at $7.36 billion as on 24^th July 2020. Recently, the company announced the appointment of Steven Gregg as Chairman of TAH, who will succeed Paula Dwyer, retiring on 31^st December 2020. The company also announced that David Attenborough would retire as Managing Director & Chief Executive Officer in 1H CY21. In another update, the company stated that it had inked a binding term sheet with Jumbo Interactive Limited to amend and extend the existing commercial reseller agreements, which include an agreement with Jumbo for resale of Tabcorp lottery products for a 10-year term until on or about July 2030.

The binding term sheet also includes a fixed extension fee of $15 million payable by Jumbo to Tabcorp upon commencement. Moreover, the binding terms sheet include customary termination rights for distribution agreements of this type permitting Tabcorp to terminate each of the reseller arrangements on 30 days’ notice if  Jumbo fails to perform its obligations, enters into a similar arrangement with third parties, or there is a change of control of Jumbo. The following picture gives an overview of revenue contribution from different business:

Revenue Contribution (Source: Company Reports)

COVID-19 Impact: As of now, the company is not in a position to provide specific guidance on earnings or financial impacts, considering the high level of uncertainty regarding the impact of COVID-19 on the Group in FY20 and, likely, FY21. However, the company continues to work proactively and collaboratively with all its stakeholders to emerge from the COVID-19 period as strongly as possible. The company has scheduled to release its FY20 results on 18^th August 2020.

Key Risks: The key business risk with the company include breach of laws and licences, and compliance and conduct risk, consumer discretionary spending, and competition and disruption. In addition, the company is also exposed to financial risks such as changes in interest rates and foreign currency exchange rates, counterparty credit and liquidity risks.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: As of 15^th May 2020, the company had available liquidity of $820 million as compared to $749 million of 3^rd April 2020. We have valued the stock using the P/E multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Aristocrat Leisure Ltd (ASX: ALL), Crown Resorts Ltd (ASX: CWN), Star Entertainment Group Ltd (ASX: SGR), etc. and arrived at a target price of low double-digit upside (in percentage terms). Hence, in light of the extension of the existing commercial reseller agreements and increased liquidity, we give a “Buy” recommendation on the stock at the current market price of $3.640 per share, up by 0.552% on 24^th July 2020.

The Star Entertainment Group Limited

New COVID-19 Related Restrictions: The Star Entertainment Group Limited (ASX: SGR) is engaged in the management of integrated resorts with gaming, entertainment and hospitality services. The market capitalisation of the company stood at $2.68 billion as on 24^th July 2020. The company recently noted order made by NSW Government Public Health department in relation to COVID-19 related restrictions that apply to hospitality venues, including The Star Sydney. The company added that the new restrictions require The Star Sydney to continue complying with the minimum of 4 square metres per patron, each separate area within the casino will also be subject to a maximum of 300 patrons. The Star Sydney would focus on prioritising visitation by its highest value patrons. Earlier, the company has welcomed the decision of the Queensland Government to end the second Gold Coast casino licence process.  During 1H FY20, the company reported normalised EBITDA amounting to $307 million, which stood at the upper range of October 2019 guidance.

Key Financials (Source: Company Reports)

Reduction in Capital Expenditures: For FY20 and FY21, the company has reduced expected Group capital expenditure by around $25 million and $175 million, respectively. The company is likely to release its FY20 results on 20^th August 2020.

Key Risks: The company is mainly exposed to the risk presented by the increased competition, which can affect the Group’s key markets of Sydney, Brisbane, and Gold Coast. In addition, the business is also sensitive to data and systems security and reliability risk and major business disruption events.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: Current ratio of the company stood at 0.94x in 1HFY20, reflecting YoY growth of 11.0%. This implies that the company is well-placed to settle its short-term obligation against the broader industry. Debt to equity of the company stood at 0.37x in 1H FY20 against the industry median of 0.54x. We have valued the stock using the P/E multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Aristocrat Leisure Ltd (ASX: ALL), Crown Resorts Ltd (ASX: CWN), Tabcorp Holdings Ltd (ASX: TAH), etc., and arrived at a target price of low double-digit upside (in percentage terms). Thus, considering the performance in 1HFY20, decent liquidity position and deleveraged balance sheet, we give a “Buy” recommendation on the stock at the current market price of $2.770 per share, down by 2.12% on 24^th July 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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