4 Defensive Stocks - SCG, PFP, WOW, AMC

Stocks’ Details

Scentre Group

Well Diversified Business Model:Scentre Group (ASX: SCG), formerly known as Westfield Holdings Limited, is a retail landlord company, which changed its name to Scentre Group on 30 June 2014. It was founded in Blacktown (Greater Western Sydney) in July 1959 with 12 shops, 2 department stores, and a supermarket. It has a well-diversified business model which provides a unique strategic advantage to the group and deliver outstanding returns through its integrated operating platform. The group generates revenue from three sources i.e., property, development & construction, and management services which contributed around 81.7%, 16.1%, and 2.2% revenue in total revenue respectively, in 1H FY18. Currently, the company has a high-quality portfolio of 39 shopping centers which is valued at around $54.4 billion and has around 11,500 retailers in more than 3.6 million square meters of retail space. As at 30 June 2018, the group has total assets of $37.6 billion and posted 3.5% increase in assets under management to $52.8 billion. Besides this, the group has a high-quality retail space that attracts high traffic flow and is still in demand with occupancy across the company’s portfolio to be above 99.5%. Moreover, the company has delivered 2.5% growth in comparable net operating income (NOI) for 1H FY18, signifying a growth at the lower end of SCG’s FY18 guidance range of 2.5% to 3.0%. It was mainly impacted by lower annual rent escalation during the period. Additionally, for 1HFY18, the company has witnessed 2.1% growth in total specialty in-store sales and 1.6% for the year. Majors in-store sales grew 0.7% for the first half 2018 and 0.3% for the year. The total stable portfolio in-store sales grew 1.3% for the half year and 1.1% for the year 2018. Based on the first half year performance, the group reconfirms its full-year forecast FFO growth of approximately 4% and distribution growth of 2%. Moreover, the Comparable NOI growth and weighted average interest rate for the full year are expected to be in the range of 2.5%-3% and 4.4%, respectively as compared to prior year. Hence, we trust the management’s ability to address growth opportunities ahead backed by its well-diversified business model.

Scentre Group’s Portfolio (Source: Company Reports)

Meanwhile, the share has fallen 8.90% in the past three months as at October 25, 2018 and traded at reasonable PE multiple of 4.84x. The stock has a market capitalization of $20.68 Bn, annual dividend yield of 5.64% and a beta of 0.72x as on October 26, 2018, representing undervalued scenario at the current juncture. We, therefore, maintain our “Buy” recommendation on the stock at the current market price of $3.900.
 

Propel Funeral Partners Limited

Strong Balance Sheet and Decent Outlook: Propel Funeral Partners Limited (ASX: PFP) has recently presented its business prospects at the Bell Potter Emerging Leaders Conference and highlighted about FY18 activity, a trading update on Q1 FY19 and general comments on PFP’s outlook for 1H FY19. As per the presentation, it was observed that the Operating EBITDA grew by 75% to $21.5 Mn in FY18 over the prior year. It was mainly driven by the robust funeral volumes growth and average revenue per funeral growth (ARFG) rate of 67% and 5.5%, respectively in FY18. Operating NPAT came in at $12.3 Mn, implying solid growth of 125% on Y-o-Y basis. As at 30 June 2018, the company has growing portfolio which operates across 103 locations in FY18 and expects to accumulate 108 locations by the end of FY19. Moreover, the company has entered into new markets in WA and the ACT. There were also expansions made in the existing markets in QLD, NSW, and VIC.

In the Q1 FY19, the company recorded revenue growth of 20% to $24 Mn as compared to the prior corresponding period (PCP) on the back of strong funeral volumes growth during the period. As a result, operating EBITDA margin came in at +26% in Q1FY19 which is broadly in-line with the FY18 EBITDA margin of 26.6%. Besides this, the company has a strong and conservative balance sheet, along with positive operating cash flows which provide financial flexibility to support potential future dividends and growth initiatives, including acquisitions. The targeted dividend payout ratio remains unchanged at 75% to 85%.


Decent Geographic presence (Source: Company Reports)

Recently, the group has changed its registered office and principal place of business to Level 18.03, 135 King Street, Sydney NSW 2000, effective from 19 October 2018. Meanwhile, the share has fallen 5.8% in the past one month as at October 25, 2018 and traded close to 52-week lower level of $2.600. Based on a decent outlook and current trading level, we, maintain our “Speculative Buy” recommendation on the stock at the current market price of $2.650.
 

Woolworths Group Limited

Customer Oriented Strategy Will Support Growth Momentum: Woolworths Group Limited (ASX: WOW) is a large-cap company with the market capitalization of circa $36.29 Bn as of October 26, 2018. Recently, the Vanguard Group Inc. became the substantial holder of the group since October 15, 2018 by holding 5.0 percent of the voting power based on 65,875,116 ordinary shares. It was noted that WOW has maintained the Net Interest Margin at 2.9% in FY18 which is slightly higher than the industry average of 2.8%. Moreover, the company has also generated a significant return for the shareholders with ROE at 16.0% in FY18 against the industry average of 11.2%. Both quick ratio and current ratio indicate the decent health of the company at 0.32x and 0.78x respectively compared to the Industry average of 0.35x and 0.82X respectively. On the working capital front, Average receivable days and inventory days for FY18 came in at 2.7 days and 38 days, respectively which is lower than the prior corresponding period figures of 2.8 days and 41 days. Resultantly, the cash conversion cycle (CCC) stood at negative 6.7 days, reflecting better management policy towards its working capital policy. Hence, we believe that the company has a number of opportunities for growth which will be strengthened by focusing on regaining customer trust on price, expanding and roll out customer 1 ranges, improving customers’ shopping experience and stock flow across the business to ensure growth momentum for the upcoming period.


Customer Highlights (Source: Company Reports)

Meanwhile, the share price has fallen 8.77% in the past three months as of October 25, 2018 and traded below the average of 52 week high and low prices of $28.15. Despite the fall, the price did not break below its support level of $26.489. Hence, we maintain our “Hold” recommendation on the stock at the current market price of $27.310.
 

Amcor Limited

Strong financial metrics and consistent margin improvement: Amcor Limited (ASX: AMC) has posted good numbers in FY18 and reaffirms its guidance for FY19 which looks promising and expects solid PBIT growth, in constant currency terms, for the full fiscal year 2019. The company has two reporting segments i.e., Flexible and Rigid Plastic which contributed PBIT of approximately 73% and 27%, respectively in the total PBIT for FY18. In the flexibles segment, earnings in 1HFY19 are expected to be modestly higher than the prior corresponding period based on current expectations for raw material costs in the second quarter. In the rigid plastics segment, the earnings in 1HFY19 are expected to be modestly higher than the prior year, based on modest volume growth in Q2 FY19. Further, the company is targeting free cash flow between $200 to $300 million for FY19. Besides this, the company has recorded EBIT margins almost double over the last 10 years from 7.1% to around 11.6%, which puts Amcor at or near the top of large-scale players in the packaging industry. As a result, returns on average funds employed stood at 19% in FY18 and it is well above the weighted average cost of capital. Based on the strong financial metric and consistent margin improvement, the shareholders awarded superior returns over time.

Strong financial metrics and consistent margin improvement (Source: Company Reports)

From the analysis front, the company has consistently achieved higher Net Margins over the past few years.For FY18, the net margin came in at 7.9% as compared to the prior year which was at 6.7%. Over the period, the company has also generated a significant return for the shareholders with ROE at 79.5% with RoIC of 15.9% in FY18. Meanwhile, the stock has performed negative YTD return of 16.98% and traded at reasonable PE level of 15.01x. Based on solid financial metrics and consistent margin improvement, we, maintain our “Buy” recommendation on the stock at the market price of $12.920.


Stock Price Comparative Chart (Source: Thomson Reuters)
 
 

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