Stocks’ Details

Scentre Group

Occupancy Across Portfolio at 99%: Scentre Group (ASX: SCG) is the owner and operator of Westfield in Australia and New Zealand with interests in 41 centres, encompassing ~ 11,500 outlets and total AUM (assets under management) of ~$54.2 billion. The Group recently released an update about the change of interests of the substantial holder and stated that The Vanguard Group has raised its interest to 10.278% from 9.274% earlier.

The company released its 1^st Quarterly Operating Update and stated that it is generating $24.1 billion of annual retail in-store sales across Australia and New Zealand.Additionally, 7.5% of all retail sales occur through the Westfield platform.
Financial Performance in FY18: The company delivered results for FY18, in-line with forecast combined with higher customer visitation to 535 million and annual in-store sales to $24 billion. Occupancy across portfolio continued to be more than 99% in FY18 with FFO (Funds from Operations) of $1.34 billion representing 25.24 cents per security, up 3.9% and distribution of 22.16 cents per security, up 2%.

Comparable net operating income (NOI) recorded a growth of 2.5% for FY18, primarily driven by contracted annual rent escalations. Occupancy remained strong at 99.3% at year-end reflecting retailer demand for quality space in the living centres. The net debt on the balance sheet as on 31 December 2018 stood at $13.5 billion with interest coverage of 3.5x and gearing of 33.9%, depicting healthy debt profile.


Reconciliation from Profit to FFO (Source: Company Reports)
 
Outlook- The Group reconfirms forecast FFO growth for the 12 months ending 31 December 2019 of ~3%. The distribution for 2019 is expected at 22.60 per security, up 2% and Comparable NOI growth is projected at ~2.5%. The management also informed that Westfield Newmarket development is progressing well with staged openings and is likely to commence in early third quarter of 2019.

Stock Recommendation:The stock has fallen 3.76% in the past three months as on May 17, 2019. At the current market price of $3.840, the stock is trading at price to earnings multiple of 8.910x. With occupancy across the portfolio at 99% for more than 20 years, strong financial position along with comfortable gearing and interest coverage, healthy NOI, etc. bodes well for the future growth of the company. Hence, we give a “Buy” recommendation on the stock at the current market price of $3.840 per share.
 

Woolworths Group Limited

Improved Sales Momentum in 3Q FY19: Woolworths Group Limited (ASX: WOW) is engaged in retails operation primarily in Australia and New Zealand with 3,774 stores and ~202,000 employees at the end of FY18.

3Q FY19 Performance: As per the recently released sales results for third quarter of FY19, the momentum (in-terms of sales) has improved across the segments with Australian Food comparable sales growth of 4.2% (Easter-adjusted) was a highlight, after a challenging first half.Apart from the positive transaction and item growth, lower deflation and settled weather also supported the overall healthy sales numbers. After slower sales growth in 1H FY19, Endeavour Drinks’ sales improved in Q3 FY19 with Easter-adjusted comparable growth of 5.9%. However, the management still expects Endeavour Drinks’ EBIT for FY19 to be below than FY18.

Growth in BIG W sales has been strong with Easter-adjusted comparable sales growth of 7.4%. The challenge for BIG W to convert strong sales growth into improved profit still a challenge and the management continues to expect a loss before interest and tax in the range of $80 million to $100 million in FY19. New Zealand Food recorded solid Easter-adjusted comparable growth of 3.8% and Hotels also witnessed an improvement on 2Q FY19 with growth of 2.7%.


Third Quarter FY19 Sales (Source: Company Reports)

Going forward, the management expects the market to remain challenging for Australian Food which includes ongoing input cost pressures. The company will remain focused on opportunities to simplify the businesses to improve productivity without impacting the experience for customers.

Stock Recommendation: At the current market price of $34.180 per share, the stock is trading at price to earnings multiple of 25.250x. The stock is currently trading at its 52-week high price of $34.180. Hence, considering the investment thesis and current trading level, we give a “Hold” recommendation on the stock at the current market price of $34.180 per share (up 2.213% on 17 May 2019).
 

BHP Group Limited

Strong Cost Discipline: BHP Group Limited (ASX: BHP) operates in four reportable segments of petroleum, Copper, Iron Ore and Coal, aligned with the commodities extraction and marketing. The company’s strategy is to own and operate large, long-life, low-cost, expandable, upstream assets diversified by commodity, geography, and market. Strong cost discipline by the company has resulted in a continued reduction in unit costs over the past five years.


Reduction in Unit Cost (Source: Company Reports)
 
The company recently released a presentation of 2019 “Global Metals, Mining and Steel Conference” wherein BHP CEO covered various aspects of BHP. On capital discipline front, the management updated that net debt in the range of USD$10 billion to 15 billion islikely to be maintained with capital expenditure of <USD$8 billion per annum to FY20. The management also expects ROCE (Return on Capital Employed) to reach ~20% by FY22 (at FY17 prices).
 
The Group recently updated that BHP Group Limited and BHP Group Plc, both have been served with legal proceedings filed in the Business and Property Courts of Liverpool, England.
 
BHP Operational Review for Nine Months Ended 31 March 2019: The company witnessed a strong operational performance during March 2019 quarter, despite weather impacts across Australia and Chile. In Petroleum, the Atlantis Phase 3 project in the US Gulf of Mexico was approved and the Bélé-1 exploration well in Trinidad and Tobago encountered hydrocarbons during the quarter. The Group copper equivalent production was broadly unchanged over the nine months ended March 2019, with volumes for the full year also expected to be in line with last year.
 
The management expects FY19 unit costs for Petroleum, Escondida and Queensland Coal to be in line with guidance.Unit costs for Western Australia Iron Ore are now expected to be below US$15 per tonne, reflecting impacts of Tropical Cyclone Veronica. Unit costs for New South Wales Energy Coal are now expected to be approximately US$51 per tonne, following changes to the mine plan.
 
The management has not changed the FY19 production guidance for petroleum, copper, metallurgical coal and energy coal. Iron ore production guidance decreased to 265 and 270 Mt (100% basis), reflecting impacts of Tropical Cyclone Veronica.
 
Stock Recommendation: The stock of BHP has delivered the return of 16.47% in the span of one year. Moreover, in the time frame of six months and three months, the returns were 23.80% and 3.95%, respectively. Hence, considering the production guidance, fundamentals, valuation and price performance, we recommend a “Hold” recommendation on the stock at the current market price of $38.460 per share. (up 2.451% on 17 May 2019).
 

Downer EDI Limited

Delivered Strong Performance in 1HFY19:Downer EDI Limited (ASX: DOW) is the leading provider of integrated services in Australia and New Zealand. It also owns 88% of Spotless Group Holdings Limited. The company recently announced that it has been selected by Chorus Limited for the 2019 Field Services Agreement which will generate revenue to Downer of ~$220 million.
 
Downer is focused on winning and delivering secure, long term service revenue and leveraging its expertise to drive margin expansion over time.Services businesses of the company provide high quality and predictable earnings base. Over the past few years, the company has witnessed a strong track record of meeting guidance by delivering healthy numbers.
 

 
Consecutive financial years hitting (or exceeding) guidance (Source: Company Reports)
 
Strong Operating Cash Flow: In 1H FY19, total revenue for the Group increased by $522.5 million, or 8.6%, to $6.6 billion.Statutory net profit after tax and before amortisation of acquired intangible assets (NPATA) stood at $163.4 million, up from $5.7 million and up 23.8% from underlying NPATA of $132.0 million in 1HFY19. Operating cash flow for 1H FY19 stood strong at $355.3 million, up 15.7% from pcp on the back of strong contract performance, distributions from equity accounted investment and contribution from acquisitions, representing cash conversion of 90.7% of adjusted EBITDA.
 
The Group had liquidity of $1.4 billion comprising cash balances of $505.3 million and undrawn committed debt facilities of $855.0 million as on 31 December 2018.
 
Stock Recommendation: The stock has risen 19.76% on a YTD basis and trading at near to its 52-week high price of $8.170. At the current market price of $8.000, the stock is trading at 22.240x of earnings multiple. Hence, considering the aforesaid facts and current trading level, we recommend a “Hold” rating on the stock at the current market price of $8.000 per share (up 0.503% on 17 May 2019).


Comparative Price Chart (Source: Thomson Reuters)   
 

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