BHP Billiton Ltd
Strong operating margins and rise in commodity prices could be growth catalysts:BHP Billiton Ltd. (ASX: BHP) is an international resources company. The Company's principal business lines are mineral exploration and production, including coal, iron ore, gold, titanium, ferroalloys, nickel and copper concentrate, as well as petroleum exploration, production, and refining. The company is the mining bellwether in Australian markets with a market cap of AU$107.03 Bn as on November 12, 2018. The company has posted strong numbers for the year ended June 30, 2018 on account of robust operating performance & higher commodity prices. The underlying EBITDA margins for the company stands at 55% while underlying EBITDA is at US$24.1 Bn, exhibiting a growth of 20% on a Y-o-Y basis driven by volume growth of 8%. Hence, we believe that the company is committed to the objective of appreciation in shareholders wealth which is evident from the recent developments regarding disposal of the Non-continuing operation of the on-shore US shale assets, the proceeds of which will be returned to the shareholders in the form of a buyback and special dividend. Moreover, considering the strong free cash flows and constant volume growth across its core segments, the future operating performance seems to be very promising.
BHP’s Underlying EBITDA Margins Trend (in %) (Source: Company Reports)
Meanwhile, the stock price has marginally fallen over the past one month by 3.52%, however over the period of past 6 months the stock has given a modest rise of 3.79% also if we look at the YTD performance, the stock is up by 12.57 %, which shows a steady performance on the exchange. Also, it is constantly hovering near its 52 weeks high, which indicates a bullish trend. Considering the hefty dividend pay-outs and strong operating performance & improving operational efficiencies, we reiterate our “Hold” recommendation on the stock at the current market price of $33.41.
Corporate Travel Management Limited
Strong Free Cash flows to fuel expansion and growth: Corporate Travel Management Limited (ASX: CTD) offers corporate travel management services. The Company operates on a fee for service model and provides business travel advice and services, bookings, ticketing, and ancillary services, and offers travel data diagnostics and recommendations. The company has a market cap of AU$2.28 Bn as on November 12, 2018. The company has posted strong numbers for the FY 2018 on account of robust operating performance demonstrated by a rise in underlying EBITDA of around 27% to $125.4 Mn; the statutory NPAT rose by 41% to $76.7 Mn which exhibits that the company has been able to cut down on its non-operating expenses. This performance has reinforced the company’s global expansion strategy, with organic growth contributing $18.9 million to its profit growth.
Growth Proposition: The company has declared fully franked dividend of 36 cents per share, an increase of 20 percent on the prior corresponding period, which is a clear indicator towards better earnings quality and that the company is generating stable cash flows. The group’s net cash flows from operating activities stood at $94.4 Mn. These strong cash flows will enable the company to focus on its strategy of expansion by the means of continued organic growth & acquisitions. Moreover, capitalizing on a scale and the global network will enable the firm to optimize supplier performance, thus reducing operational costs.
Value Proposition:The company is trading at P/E multiple of around 29.03 times, while the industry average is 42.79 times, however the companies such as Flight centre which is about double its market cap is trading at a P/E multiple of 17.51 times, thus considering that industry average may have some outliers and we consider that the stock is a bit expensive at this point of time. Also, there have been recent allegations put up by VGI partners against the company on its Corporate governance and financial reporting, which raises some substantial issues, against which the firm is in the process of rebuttals.
CTD Global Presence and share of EBITDA (in $Mn) (Source: Company Reports)
Meanwhile, the stock price has fallen substantially over the past one month by 26.99%, also over the period of past six months the stock has receded by 17.54% however if we look at the YTD performance, the stock is marginally up by 0.91 %, which shows a steady performance in the long term. Considering the strong operating performance but lingering corporate governance issues, we recommend a “Hold” rating on the stock at the current market price of $21.84, up 3.9% on November 12, 2018 while it got a boost from insider buying update.
Insurance Australia Group Limited
Lacklustre price performance with no growth plans: Insurance Australia Group Ltd (ASX: IAG) is an Australia-based international general insurance group with operations in Australia, New Zealand, and Asia. The Group provides a range of personal and commercial insurance products, primarily motor vehicle and home insurance. The company has a market cap of about $16.69 Bn as on November 12, 2018. The company has posted muted numbers for the FY 2018 on account of marginal increase in gross written premium of 1.8% to $11,647 Mn. The underlying margin also saw a moderate rise of 170 bps while the Net profit after tax saw a decline of 0.6% & stood at $923 Mn in FY18.
Moreover, the company has declared fully franked dividend of 34 cents per share an increase of only 3 percent on the prior corresponding period which is a clear indicator that there isn’t a satisfactory growth in terms of operating cash flows.Further, the company has introduced a “capital management initiative” to distribute surplus capital to shareholders in the absence of significant operational demands for capital, which is a clear indicator that the company doesn’t have specific growth or expansion plans at this point.
IAG Gross written premium trends (Source: Company Reports)
Meanwhile, the stock price has seen a marginal rise over the past one month by 0.98%, however over the period of past six months the stock has receded by 11.30%. Also, if we look at the YTD performance, the stock is down by a mere 0.55%, which shows a poor performance on the exchange. As of now, the company doesn’t have any growth plans; hence it doesn’t fit in the Long-term investment rationale. Therefore, we recommend to watch the stock while it last traded at the price of $ 7.250.
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