Stocks’ Details

Qantas Airways Limited

Robust Performance by Qantas International in 3Q FY19: Qantas Airways Limited (ASX: QAN) operates international and domestic air transportation services, freight services and frequent flyer loyalty program. Strong earnings across the Group in FY18 and 1HFY19 shows that the company has maintained its decent financial framework towards net debt, capital expenditure and return on investment. Recently, the company updated about its Buy-Back Plan that as per its 21 February 2019 buyback scheme, the group has bought back a total of 45,614,156 shares via on-market trade for the total consideration of $252,517,074.15 till 24 May 2019. The group intends to buy back remaining shares with an aggregate consideration up to $52,482,925.85.

3Q FY19 Trading Updates:QAN continued to witness strong revenue growth in 3QFY19 and remained on track to offset the adverse impact of substantially higher fuel costs as compared to the last year. The Group has posted revenue growth of 2.3% to $4.4 billion with Unit Revenue growth of 4%.

Domestic Unit Revenue was up by 1.1%, in line with expectations given the Easter timing shift whereas International Unit Revenue witnessed a higher growth of 6.2%, largely supported by robust performance by Qantas International. Overall market share of corporate travel revenue was up by 2.5 percentage points in 3Q FY19 which is at high in the last three years, despite a net decreased capacity.


Operational Performance in 3Q FY19 (Source: Company Reports)
 
Outlook: Domestic corporate market for May and June is likely to see increased softness, especially in financial services, telecommunications and few parts of the construction. However, going forward, 4QFY19 is likely to witness higher growth in top line as compared to 3QFY19 due to the shift in the timing of Easter which started in 3Q of FY18 but moved into the 4Q of FY19 for a longer period. Overall, the management expects the Group to experience a record level of top line and strong cash flow in FY19.

Recommendation: At the current market price of $5.410 per share, the stock is trading at price to earnings multiple of 10.60x. Currently, the stock is available at EV/EBITDA of 3.7x, which is lower than the industry median of 5.2x. The national carrier is in a fundamentally strong position with strength in key part of the portfolio to offset the headwind from other parts. Hence, we recommend a “Buy” rating on the stock at the current market price of $5.410 per share (down 1.815% on 27 May 2019).
 

Super Retail Group Ltd

Customer Loyalty – A Sustainable Advantage: Super Retail Group Ltd (ASX: SUL) is primarily involved in the retail industry. The Group has grown through both organic growth and mergers and acquisitions with principal activities to include retailing of auto parts and accessories, boating, camping outdoor equipment, fishing equipment, and apparel, etc. The company recently informed that the Commonwealth Bank of Australia has become an initial substantial holder in SUL with a total voting power of 5.01%.

Trading Update for the first 17 Weeks of 2H FY19: The Auto and Sports business of the company performed in-line with expectations, while BCF segment was able to maintain its revenue growth trajectory despite ongoing compression on the margin front. SUL’s three core brands – Supercheap Auto, Rebel and BCF enjoy market-leading customer loyalty performance whereas Macpac is an emerging & credible brand in a high growth segment. Auto retailing, Outdoor retailing and Sports retailing segment recorded a like for like revenue growth of 4.2%, 5.3%, and 4% respectively for the period under consideration. The overall top-line growth (like for like) for the Group stood at 3.3% YTD to 27 April 2019 with total unallocated costs to be around $21 million and capex of ~$85 million.


 
Like for Like Revenue Growth for 17 Weeks to 27 April 2019 (Source: Company Reports)
 
Outlook: Going forward, the company will continue to enhance omni-retail channels to offer the customers with various touchpoints to involve with SUL and to expand further growth for the Group.Along with that, the strong customer base for the company presents substantial opportunities to capitalise on the potential of SUL’s brands.

Stock Recommendation: Extensive store network, sector leading brands, customer loyalty, and increasing e-commerce ability provide SUL a strong position which sets it different from its peer group and new entrants within the retail sector in Australia and New Zealand.

At the current market price of $9.200 per share, the stock is trading at price to earnings multiple of 14.27x. The stock has generated a return of ~35% on YTD basis. Annual dividend yield for the stock comes in at 5.31% which is quite attractive. Hence, considering the aforesaid parameters, we recommend a “Buy” rating on the stock at the current market price of $9.200 (down 0.325% on 27 May 2019).
 

Challenger Limited

Total AUM Witnessed 4% Growth in 3QFY19: Challenger Limited (ASX: CGF) operates in two segments – Life and Fund Management. Life is the market leader in Australian retirement incomes, with a 73% annuity market share, as per the Annual Report for FY18. The Fund Management is growing strongly, with FUM (Fund Under Management) doubling over the last 5 years to $78 billion. Recently, the company disclosed that Vanguard Group has become a substantial holder of the group with the voting power of 5.241% since 17 May 2019. Moreover, CGF, who isa substantial holder of Reliance Worldwide Corporation Limited has increased its stakes from 5.31% to 6.77% on 23 May 2019.

Moreover, the company announced about the distribution payment of A$1.0400 with total dividend distribution rate of 4.1300 % per annum for CGFPB - CAP NOTE 3-BBSW+4.40% PERP NON-CUM RED T-05-23and it will be paid on August 22, 2019 with the record date of August 14, 2019 and ex-date of August 13, 2019.

3Q FY19 Performance: Total AUM for the company stood at $81 billion with 4% growth in the quarter, driven by the rebound in investment markets. Total annuity sales at $662 million, down 13% (pcp) continued to be impacted by lower Japanese sales and general disruption in the Australian financial advice market. Expansion of the strategic relationship with MS&AD, which was announced in March, has progressed well in the quarter.

Quarterly Annuity Sales by Channel in $ Mn (Source: Company Reports)
 
Outlook: Challenger has reaffirmed the normalised net profit before tax to be in the range of $545 million to $565 million in FY19.

Stock Recommendation: With the vision to provide a financial security for retirement to the customers, the long-term growth outlook remains strong on the back of higher retirement savings, recognized leadership in the space, broad product offerings, investment strategies, etc. At the current market price of $8.040 per share, the stock is trading at price to earnings multiple of 36.800x. Hence, considering the aforesaid facts, we give a “Buy” recommendation on the stock at the current market of $8.040 per share (down 0.248% on 27 May 2019).
 

Westpac Banking Corporation

Remediation & Restructuring Cost Impacted Earnings in 1H FY19: Westpac Banking Corporation (ASX: WBC) provides financial services which include lending, deposit taking, payments services, investment portfolio management and advice, superannuation and funds management, etc. WBC has recently announced the ordinary fully paid dividend of A$0.9400 per share with ex-date and payment date of May 16, 2019 and June 24, 2019, respectively.

1H FY19 Result Highlights: The bank has posted a benign result in the first half of FY19 surrounded by weaker business conditions and the bank dealing decisively with outstanding issues, including remediation and resetting of wealth strategy. The bank announced a reported profit of $3,173 million with cash earnings of $3,296 million, down 22% in 1H FY19, largely impacted by major remediation and restructuring items.

Despite the prevailed challenges in 1H FY 2019, the balance sheet has remained strong across all dimensions of asset quality, capital and liquidity.Coming to the cost management, removal of $146 million in 1HFY19 was on track to meet the cost reduction target of $400 million over FY19. The company has reduced full time equivalent staff by 788 in the first half, and expenses excluding major remediation and restructuring items were down 3% on 2H18.

CET1 (Common Equity Tier 1) capital ratio of 10.64%stood above APRA’s unquestionably strong benchmark.

1HFY19 earnings snapshot (Source: Company Reports)
 
Stock Recommendation: The bank is in the process of implementing the recommendations of the Royal Commission and other industry initiatives while continuing to invest in technology and digital platforms. At the current market price of $27.920 per share, annual dividend yield for the stock stands at 6.69%. The stock has risen ~15% on YTD basis. Considering the above-mentioned facts, we recommend a “Buy” rating on the stock at the current market price of $27.920 per share (down 0.711% on 27 May 2019).

Comparative Price Chart (Source: Thomson Reuters)    
 

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