Stocks’ Details
 

WAM Research Limited

Strong Investment Portfolio Performance: WAM Research Limited (ASX: WAX) is an investment management company, which is managed by Wilson Asset Management Group. WAX focuses on undervalued growth opportunities in Australia. The market capitalisation of the company stood at $257.4 Mn as on 16^th June 2020. Recently, the company updated the market with the investment performance for the month of May 2020, wherein it reported an investment portfolio performance of 14.1% p.a. This solid investment was contributed by automotive company, Bapcor Limited, education placement service provider, IDP Education and home furnishing retailer, Adairs Limited.

Since its inception, the company has paid a dividend of 109.2 cents. During 1H FY20, WAX announced a fully franked interim dividend of 4.9 cents per share. The company experienced a rise of 152.8% in operating profit before tax to $14.6 million. At the current market price dated 16^th June 2020, the annual dividend yield of the company stands at 7.33% as compared to the industry median (Investment Banking & Investment Services) of 5.1% on TTM basis.

 
Dividend History (Source: Company Reports)

Commitment to Pay Dividend: The Board of the company is committed to pay a stream of fully franked dividend to shareholders. However, this is subject to enough profit reserves and franking credits.

Key Risks: As per the key personnel of Wilson Asset Management, the unparalleled monetary and fiscal stimulus continue to underpin asset prices. As of now, risks to the business involve 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 rebound in the Australian equity market continued as economies reopened and anticipation of V-Shaped recovery increased. The stock of WAX has provided decent returns of 4.72% and 9.92% in the past one and three months, respectively.  Therefore, in light of constant dividend payment history, commitment to pay dividends in future and strong investment performance, we give a “Buy” recommendation on the stock at the current market price of $1.365 per share, up by 2.632% on 16^th June 2020.

Scentre Group

Strong Operational Performance: Scentre Group (ASX: SCG) owns and operates Westfield in Australia and New Zealand with interests in 42 Westfield Living Centres. The market capitalisation of the company stood at $11.42 Bn as on 16^th June 2020. Recently, the company has priced a US$1.5 billion debt issue in the United States market. The proceeds from this debt issue would be used to repay existing indebtedness including, borrowings under the Group’s revolving bank facilities. During Q1 FY20, SCG’s all 42 Westfield Living Centres were open. In the month of January and February 2020, the operating performance of the company was strong. Retailer in-store sales for these months witnessed continuous growth, and sales for March 2020 were impacted due to restrictions imposed by the government because of COVID-19. Comparable specialty in-store sales went down by 7.1% for the quarter to March 2020.

SCG has decided not to pay an interim distribution for 1H FY20 considering the uncertainty in relation to COVID-19 pandemic, its duration, the economic impact, and the timing of operating cash flows for the Group. However, the company paid a distribution of 22.60 cents per security during FY19, reflecting growth of 2.0%. At the current market price dated 16^th June 2020, the annual dividend yield of the company stood at 10.27% against the industry median (Residential & Commercial REITs) 6% on TTM basis.


Sales Growth (Source: Company Reports)

Withdrawal of Guidance: The company has suspended its outlook for FY20 due to COVID-19 pandemic and volatility in markets globally.

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

Operational Risk: Being a property group, SCG faces operational risks which might affect the achievement of its targeted financial results.

Stock Recommendation:  The Group has obtained additional unsecured bank facilities with a two-year duration. As at 1^st April 2020, the liquidity position of the company stood at $3.1 billion. SCG also has $2.5 billion of bonds and bank facilities maturing through to 31 December 2021. Over the span of five years (2015-2019), the company has maintained a positive free cash flow with a CAGR of 2%. This implies the prudent use of working capital in the past years. We have valued the stock using the P/E multiple based illustrative relative valuation method andarrived at a target price with an upside of low double-digit (in percentage terms). Thus, considering the decent operational performance, increased liquidity position, and prudent use of working capital, we give a “Buy” recommendation on the stock at the current market price of $2.310 per share, up by 5% on 16^th June 2020.

Monadelphous Group Limited

New Contracts Support Revenue Growth: Monadelphous Group Limited (ASX: MND) is engaged in the provision of engineering services within Australia. The market capitalisation of the company stood at $1.06 Bn as on 16^thJune 2020. Recently, the company has secured construction and maintenance contracts in the resources and energy sectors with a combined value of around $150 million. These include (1) contract under its existing BHP WAIO Asset Panel Framework Agreement associated with the dewatering of surplus water at Mining Area C, (2) three-year contract with Rio Tinto for the provisioning of maintenance services and minor projects on its Pilbara marine infrastructure and (3) 1-year extensions to its two existing fixed plant maintenance and shutdown crane services contracts with Fortescue Metals Group.

Moreover, MND has also inked a contract to provide mechanical and electrical maintenance and turnaround services for a customer’s midstream operations in the Queensland coal seam gas market with a term of four years. During 1H FY20, the company reported revenue amounting to $852.0 million, reflecting a rise of 2.6%. During the half-year, the company declared fully franked interim dividend of 22 cents per share. Over the span of three years (2017-2019), MND has maintained a dividend payout ratio in the range of 80% -90% of NPAT.


Revenue by Division (Source: Company Reports)

Suspension of Guidance: The company has suspended its revenue guidance for the 2019/2020 financial year due to the outbreak of the coronavirus.

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

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

Risk from Financial Instruments: MND is exposed to financial risks that directly arise from its operations. The main risks arising from its financial instruments are interest rate risk, foreign currency risk, credit risk and liquidity risk.

Stock Recommendation: Due to COVID-19, the engineering construction division has witnessed supply chain issues, which resulted in delays in large resources construction projects currently in progress. Net margin of the company stood at 3.7% in 1H FY20 as compared to the industry median of 2.6%. This reflects that MND possesses decent capabilities to convert its topline into the bottom line against the broader industry. Current ratio of the company stood at 2.05x in 1H FY20 against the industry median of 1.13x, reflecting a decent position of the company to pay off its short-term obligations. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Downer EDI Ltd (ASX: DOW), CIMIC Group Ltd (ASX: CIM) etc., and arrived at a target price with an upside of low double-digit (in percentage terms). Thus, considering the recently secured contracts with a value of $150 million, growth in revenue during 1H FY20, and decent liquidity position, we give a “Buy” recommendation on the stock at the current market price of $11.600 per share, up by 3.571% on 16^th June 2020. 

Telstra Corporation Limited

Pricing of $500 Million Bond Issue Telstra Corporation Limited (ASX: TLS) is engaged in the provisioning of telecommunications and information services. The market capitalisation of the company stood at $37.11 Bn as on 16^th June 2020. The company recently announced that it anticipates a non-cash impairment and write-down of the carrying value of its 35% stake in Foxtel. This is expected to write down the value of TLS’s share in Foxtel from A$750 million to around A$450 million. The company has priced a €500 million bond issue, which would further strengthen its balance sheet. TLS would use these proceeds for general corporate purposes including pre-funding of future debt maturities.

On a reported basis, total income of the company stood at $13.4 billion during 1H FY20, reflecting a decline of 2.8%. During 1H FY20, TLS announced a fully franked interim dividend amounting to 8 cents per share, comprising an ordinary interim dividend of 5 cents per share and a special interim dividend of 3 cents per share. It paid $951 million to shareholders in the form of dividends for the half-year.


Total Income (Source: Company Reports)

Guidance: For FY20, the company expects total income in the range of $25.3 billion to $27.3 billion and underlying EBITDA in the ambit of $7.4 billion to $7.9 billion.

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

Material Risk: The company operates in an environment that is constantly evolving and facing rapid changes. Key material risks that can affect its operations are economic, environmental, and social sustainability risks.

Stock Recommendation: On 1^st April 2020, credit rating agency S&P reaffirmed its A- (stable) credit rating. The company is optimistic that its continued access to low-cost capital and A-band credit rating reflects the strength of the business and attractiveness to global capital markets during this very volatile time. TLS has brought forward $500 million of capex from the 2HFY21 in order to support the investment requirements for enhanced network capacity and roll out of key projects. Debt to equity multiple of the company stood at 1.38x in 1H FY20 as compared to the industry median of 1.14x. We have valued the stock using the P/E multiple based illustrative relative valuation method andarrived at a target price with an upside of low double-digit (in percentage terms).Hence, considering the strength of the business, capex of $500 million and decent outlook, we give a “Buy” recommendation on the stock at the current market price of $3.210 per share, up by 2.885% on 16^th June 2020. 

 
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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