Stocks’ Details

Most of the stocks across the sectors witnessed a decent rise on ASX on 20 May 2019 following the ruling conservative party’s victory in Australia’s general election. With the return of Prime Minister Scott Morrison, Banks are expected to benefit the most as policies like capital gains tax reform, negative-gearing reform, etc will be ruled out now. Hence, the companies in Australia are likely to operate in a stabilized environment with an end of an uncertain political atmosphere. Let’s have a look at a few stocks that are expected to benefit from the election scenario. It is also noteworthy that some of the stocks in related real estate space may also benefit from the changing landscape.
 

National Australia Bank Limited

Cash Earnings Excluding Remediation Costs In-line with 1HFY18: National Australia Bank Limited (ASX: NAB) is engaged in the business of banking services, credit and access card facilities, leasing, housing and general finance, international banking, investment banking, wealth management services, funds management and custodian, trustee and nominee services.

NAB’s three-year transformation program announced in November 2017 is now the halfway mark and remains on track, despite higher than expected regulatory and compliance costs. Product numbers are lower, down 75 in 1H FY19 to 420 as compared with 600 at September 2017 as the bank has moved towards a simpler offering increasingly capable of digital origination. To strengthen the balance sheet continues to be a priority for the Bank. In conjunction with the decision to partially underwrite the 1H FY19 dividend reinvestment plan, the bank has a strong capital position and well positioned to exceed APRA’s ‘Unquestionably Strong Capital’ benchmark by January 2020.

Recent Updates: NAB recently updated that Philip Wayne CHRONICAN (Director) acquired 10,000 ordinary shares for the consideration of $241,553 and simultaneously offloaded 1,000 ordinary shares for the consideration of $24,150 via on-market trade in his indirect capacity as on 16 May 2019. The bank has announced an ordinary fully paid dividend of $0.8300 per share with ex-date and payment date as on May 14, 2019 and July 3, 2019, respectively. Pursuant to its domestic Debt Issuance Programme, the bank on 17 May 2019, has issued A$1,000,000,000 subordinated floating rate medium term notes due May 2029 (‘Subordinated MTNs’).

1H FY19 Performance: The first half of FY19 continued to remain challenging with Royal Commission recommendations, the APRA self-assessments, various regulatory interventions and actions, and then the resulting remediation activity. As a result, 1H FY19 results include a further $525 million in customer-related remediation costs ($325 million in cash earnings). 1H FY19 cash earnings (ex-remediation costs) at $3,279 million were broadly flat as compared with 1H FY18 ($3,289 million), with revenue up 1% reflecting market share gains in SME and home lending, and expenses 2% higher.

NIM (Net Interest Margin) was down 7bps on the back of housing lending competition and product mix changes.


Key Financial Indicators (Source: Company Reports)
 
Asset quality metrics have been impacted by higher arrears for Australian housing lending, loss rates for this portfolio remain low at 2bps. Collective provisions associated with forward looking adjustments for targeted sectors increased again over 1 HFY19 and now stand at $614 million.

On Capital, Funding and Liquidity front, the Group Common Equity Tier1 (CET1) ratio stood at 10.40% as at 31 March 2019, up 20 bps from September 2018. The Bank is well placed to exceed APRA’s unquestionably strong’ target of 10.5% by January 2020. Liquidity coverage ratio (LCR) quarterly average of 130% and Net Stable Funding Ratio (NSFR) of 112%, were broadly in-line with September 2018.

Outlook and Stock Recommendation: With a challenging period for the industry, NAB has taken actions to address the expectations of customers. Hence, considering the steps taken by the bank, healthy balance sheet, sufficient capital and liquidity, we give a “Buy” recommendation on the stock at the current market price of $26.150 per share (down 0.191% on 22 May 2019).
 

Westpac Banking Corporation

CET1 at 10.64% Above APRA’s Unquestionably Strong Benchmark: Westpac Banking Corporation (ASX: WBC) provides financial services including lending, deposit taking, payment services, investment portfolio management and advice, superannuation and funds management, insurance services, etc.

1HFY19 Performance: Net profit for First Half 2019 at $3,173 millionwas a decrease of $1,025 million or 24% as compared to 1H FY18. The primary reason behind the lower results was significant provisions for estimated customer refunds, payments and associated costs of amount to $617 million (post tax) and $136 million (post tax) costs associated with the restructuring of the Wealth business, which together reduced net profit after tax (NPAT) by $753 million. Asset quality remained sound, with stressed exposures as a percentage of total committed exposures at 1.10%, up 1bps as compared to 1H FY18.


1HFY19 Earnings Snapshot (Source: Company Reports)

WBC has maintained the strength of the balance sheet.Common equity tier 1 ratio at 10.6% as on 31 March 2019 was above APRA’s unquestionably strong benchmark. The LCR at 138% was higher as compared to 133% at September 2018. NSFR was marginally changed at 113% from 114% at September 2018.

Outlook and Recommendation: WBC has reiterated that its service strategy remains unchanged. With this, the Group has highlighted three priorities for 2019 which are – to deal with outstanding issues, to build momentum in the customer franchise, and to reduce structural cost. At the current market price of $28.810 per share, the stock is available at the price to earnings multiple of 13.830x with annual dividend yield of 6.6%. Hence, considering the aforesaid parameters, we give a “Buy” recommendation on the stock at the current market price of $28.810 per share (up 1.088% on May 22, 2019).
 

REA Group Limited

Decent Performance in Q3FY19: REA Group Limited (ASX: REA) provides property and property-related services on websites and mobile apps across Australia and Asia. The Group delivered revenue growth of 13% (pcp) to $667.8 million for 9M FY19 and EBITDA growth from core operations of 15% (pcp) to $404.7 million during the same period. In 3QFY19, REA recorded revenue growth of 7% to $198.6 million with EBITDA growth of 6% to $110.7 million.


Key Financials in 3Q FY19 and 9M FY19 (Source: Company Reports)

Results in the third quarter of FY19 were strengthened by the Australian Residential and Developer businesses, and the inclusion of the Hometrack business which was absent in the previous corresponding period. The Commercial and Developer businesses achieved solid revenue growth on the back of an increase in project profile duration, higher developer display advertising and an increase in commercial depth penetration. Media, data and other revenue continued to grow due to the inclusion of the Hometrack business which is likely to record revenue in the range of $14m - $16m and EBITDA between $6 Mn and $7 Mn in FY19. REA achieved higher growth in a challenging market with significant declines in new residential listing volumes and new project commencements.

Outlook and Valuation: The stock is currently trading close to its 52-week high price of $94.370. Annual dividend yield of the stock stands at 1.26% with higher PE multiple of 99.79x. The stock has gained ~25% on YTD basis and ~13% in the last 5-trading sessions.

With less uncertainty surrounding the property market after Federal election, we give a “Hold” recommendation on the stock at the current market price of $92.020 per share (down 1.054% on 22 May 2019).


Comparative Price Chart (Source: Thomson Reuters)   

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