Stocks’ Details
 

Transurban Group

Progressive Recovery in Traffic: Transurban Group (ASX: TCL) owns, operates, and develops toll roads and intelligent transport systems. The market capitalisation of the company stood at ~$41.46 billion as on 22^nd June 2020. Recently, the company provided a trading update, wherein, it stated that TCL is working with contractors and governments to deliver its portfolio of large-scale, highly complex projects, keeping thousands of people in local jobs and supporting the supply chain. TCL experienced progressive recovery in traffic from mid-April, which is in line with easing government restrictions. However, traffic performance will be sensitive to future government responses.

For the six months ended 30^th June 2020, the company would pay distribution amounting to 16.0 cents per stapled security. This brought the total FY20 distribution to 47.0 cents per stapled security, of which 2.0 cents is fully franked. At the current market price (CMP) of $14.540, annual dividend yield of the company stood at ~4.02%, which is higher than the industry median (Transport Infrastructure) of 2.7% on TTM basis.


Transurban Traffic Update (Source: Company Reports)

Distribution for FY21: TCL expects FY21 distribution would be in line with Free Cash, excluding capital releases. The future performance of the company would be sensitive to future government responses and overall economic conditions.

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

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Key Risk: The company’s business is exposed to concession agreements. Earnings arise from the concession agreements account for virtually all of Transurban’s earnings. When the concession agreements expire, the toll roads and related infrastructure must be returned to the relevant government counterparty. TCL is also sensitive to traffic volumes risk, which is associated with any developments that reduce traffic volumes or inhibit the growth in traffic volumes.

Stock Recommendation: Gross margin and EBITDA margin of the company stood at 60.7% and 52.2% in 1H FY20, reflecting YoY growth of 6.2% and 5.5%, respectively. The stock of TCL has provided a return of 9.70% in the last one month.  We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Thus, considering the progressive recovery in traffic, distribution for FY20 and expected distribution for FY21, we give a “Hold” recommendation on the stock at the current market price of $14.540 per share, down by 4.09% on 22^nd June 2020.
 

Centuria Capital Group

Acquisition of Augusta Capital Limited: Centuria Capital Group (ASX: CNI) is in the business of funds management and financial services. The market capitalisation of the company stood at ~$893.6 million as on 22^nd June 2020. Recently, the company filed a formal takeover notice in New Zealand for the acquisition of all of the fully paid ordinary shares in Augusta Capital Limited at the consideration of NZ$130 million. The shareholders of Augusta would receive NZ$0.20 in cash per share and 0.392 Centuria securities for every 1 Augusta share they own. This acquisition would increase AUM of CNI by 24% to A$8.9 billion. The transaction is likely to be financed through Centuria scrip and cash reserves.

For the year ending 30^th June 2020, the company declared a final distribution amounting to 5.20 cents per stapled security and it is expected to be payable on 8^th July 2020 with an ex-distribution date of 29 June 2020. 

Distribution Component and Key Dates (Source: Company Reports)

Guidance: For FY20, the company expects operating earnings of 11.5 cps and reiterated its distribution guidance of 9.7 cps.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Key Risk: CNI is sensitive to numerous financial risks because of its activities. These risks include market risk (including interest rate risk and price risk), credit risk and liquidity risk. CNI uses interest rate swaps in order to manage interest rate risk. 

Stock Recommendation: The company possesses $135 million of free cash with operating gearing of 0.4%. Return on equity of the company stood at 12.9% in 1H FY20 as compared to the industry median of 3.8%. We have valued the stock using the P/E multiple based illustrative relative valuation method andarrived at a target price with the upside of low double-digit (in percentage terms). Hence, considering the synergistic benefits from the acquisition of Augusta Capital, decent returns to shareholders, and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.850 per share on 22^nd June 2020.
 

Bank of Queensland Limited

Strong Capital and Liquidity Position: Bank of Queensland Limited (ASX: BOQ) provides banking, financial and related services. The market capitalisation of the bank stood at ~$2.85 billion as on 22^nd June 2020. During 1H FY20, the bank reported cash earnings after tax amounting to $151 million, reflecting a fall of 10% over 1H FY19. This was mainly due to restructuring charges and intangible asset review. During the half-year, the bank managed to deliver strong balance sheet growth while maintaining asset quality across the portfolio. The strong capital and liquidity positions would ensure stability during the period of economic uncertainty caused by COVID-19.

Previously, BOQ had decided to defer the payment of interim dividend considering the downside scenarios in light of the impacts of COVID-19. At CMP of $6.30, annual dividend yield of the company stood at 10.37%, which seems to be a bit inflated due to steep price correction in the past six months.


Key Financials (Source: Company Reports)

Uncertain Economic Outlook: BOQ is well capitalised to navigate through the potential downside economic impacts from COVID-19. BOQ has enough capital to support asset growth and transformation agenda. However, BOQ expects the future economic outlook to be uncertain as a result of the rapid escalation of COVID-19 and subsequent actions to contain the virus that has resulted in extraordinary economic dislocation.

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

P/BV Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Key Risk: As of now, the bank’s business is mainly sensitive to the future economic outlook, which is uncertain. Moreover, BOQ is exposed to credit risk associated with the default of debtor or transactional counterparty. BOQ’s risks also include liquidity and funding risk, which arises on the inability to meet or generate sufficient cash resources to address its payment obligation.

Stock Recommendation: At the end of half-year, BOQ was in a strong funding position with customer deposits flat at $32 billion and a liquidity coverage ratio of 133%. We have valued the stock using Price to Book Value multiple based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in percentage terms). For the purpose, we have taken peers such as Westpac Banking Corp (ASX: WBC), Bendigo and Adelaide Bank Ltd (ASX: BEN) and Australia and New Zealand Banking Group Ltd (ASX: ANZ). Thus, considering the strong liquidity and capital position and decent growth in the balance sheet, we give a “Buy” recommendation on the stock at the current market price of $6.320 per share, up by 0.797% on 22^nd June 2020.
 

WAM Capital Limited

Strong Portfolio Performance: WAM Capital Limited (ASX: WAM) is an investment management company, managed by Wilson Asset Management. The market capitalisation of the company stood at ~$1.37 billion as on 22^nd June 2020. The company reported an investment portfolio performance of 15.7% in the month of May 2020, which was contributed by automotive company Bapcor Limited (ASX: BAP), retail travel agency Webjet Limited (ASX: WEB) and agricultural companies Elders Limited (ASX: ELD) and GrainCorp Limited (ASX: GNC). During 1H FY20, WAM experienced growth of 168.4% in operating profit before tax to $95.6 million, reflecting the solid investment portfolio performance over the period. Since its inception, the company has paid dividends amounting to 246.25 cents per share. While in 1H FY20, the company declared a fully franked interim dividend of 7.75 cents per share. 


Dividend History (Source: Company Reports)

Focus for Future: WAM is focused on undervalued growth opportunities in the Australian market. WAM’s ability to generate franking credits is dependent upon the receipt of franked dividends from investments and the payment of tax.
Key Risk:  As of now, the key risk with the business involves the second wave of coronavirus, rise in the US-China trade tensions, the shape of the economic recovery as well as the heightened valuations occurring in segments of the market.

Stock Recommendation: In the month of May 2020, the Australian stock market experienced a continuous rebound on the face of reopening of economies. During 1HFY20, the company provided a total shareholder return of 15.2%, indicating the company’s solid investment portfolio performance and the increase in the share price premium to NTA. The stock of WAM has provided returns of 2.16% and 6.46% in the past one and three months, respectively. Therefore, considering the focus on undervalued growth opportunities, continuous rebound in the equity market and strong investment portfolio performance, we give a “Buy” recommendation on the stock at the current market price of $1.870 per share, down by 1.319% on 22^nd June 2020.

               
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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