Challenger Limited

CGF Details

Govt’s Proposed Retirement Income Framework- Growth Catalyst: Challenger Ltd (ASX: CGF) is an investment management firm which offers annuities and guaranteed retirement income products and manages assets for domestic and international clients. Recently, the company has reported strong growth in annuity sales which reflects the success of its strategy to expand its distribution and product offering. At the end of the first quarter of FY 19, Funds Management (FUM) came in at $78.2 billion, showing a rise of $0.3 Bn for the quarter or 14% higher than 12 months ago. FUM was mainly driven by the positive investment markets of $0.7 Bn and was partially offset by net outflows of $0.4 Bn.

Further, the company recorded the second highest quarterly annuity sales of $1,171 Mn for the Q1 2019, exhibiting a rise of 7% on PCP basis. This rise was seen on account of the strong demand for secure income from the growing number of retirees with increasing retirement savings. Annuity sales are also benefiting from Challenger’s expanded distribution reach. Additionally, for FY19, the company is on track to achieve a normalized net profit before tax growth of between 8% and 12% on FY18. Also, the company remains intact to its 18% pre-tax normalized ROE target.

Growth Proposition: As of now, the company focuses on expanding its distribution reach by making its full range of annuities available on the fast-growing specialist Netwealth platform. Recently, the Government reaffirmed its support for the development of more efficient retirement income products. For this purpose, the government has designed a new retirement income contract under which the superannuation trustees will be required to offer members Comprehensive Income Products for Retirement from 1 July 2020. This will drive significant growth in annuity sales and positions Challenger well for the future.

Value Proposition: The company is trading at a P/E multiple of around 17.96 times, while the sectoral average is 19.14 times which signifies that the company is trading at a lower price. Also, the company’s dividend yield stands at 3.66% v/s the industry average of 2.34% which indicates that the firm is currently undervalued in terms of yield generated. RoE stood at 10.1% in FY18 which is in-line with the industry average, representing decent return within the same industry.

CGF’s Life Asset allocation through pie chart (Source: Company Reports)
Meanwhile, the stock price has fallen over the past one month by 8.40%, also over the period of past six months the stock has receded by 22.83%. If we look at the YTD performance, the stock is down by a drastic 30.66%, thus demonstrating a below par performance. However, considering the Govt’s proposed retirement income framework and the increasing FUM coupled with its expanding distribution reach across platforms, we reiterate our “Buy” recommendation on the stock at the current market price of $9.730.


 
CGF Daily Chart (Source: Thomson Reuters)
 

Commonwealth Bank of Australia

CBA Details

Focus on the Core Business & Capitalisation Amidst the Regulatory Issues Instilled by APRA: Commonwealth Bank of Australia (ASX: CBA) is a large-cap company with market capitalization of $125.51 Bn as on November 14, 2018. For the first quarter ended 30 September 2018, the company’s operating income was up by 1% on the back of higher other banking income while the net interest income growth was flat. Consequently, the group’s NIM’s were lower in Q1FY19 due to higher funding costs & home loan price competition. The company achieved a growth in Cash NPAT of 11% to $4,474 during the 1Q FY19 as compared to 2H FY18 quarterly average of $2,237 Mn. Further, the home lending portfolio & household deposits grew by 3.1% & 8.9%, respectively in Q1FY19.

Asset Quality & Provisioning: The credit quality of the Group’s lending portfolios remained sound with Loan Impairment Expense of $216 million in the quarter which equated to 11 basis points of Gross Loans and Acceptances (GLAA). Besides this, the Group has adopted AASB 9 (Accounting Standard 9) from 1 July 2018 resulting in a $1.06 billion increase in collective provisions and a 28 bps rise in collective provision coverage to 1.03%. Finally, the total provisions were broadly stable during the quarter.

Moreover,the company is committed to enhance the shareholder’s wealth on the back of generating good returns in years to come. For that, the Board has decided to divest the Global asset management business of the bank to Mitsubishi UFJ Trust and Banking Corporation (MUTB) for the total cash consideration of $4.13 Bn. This transaction is expected to deliver an increase of approximately $2.9 billion of Common Equity Tier 1 (CET1) capital, and hence the bank would have robust capitalization as per the BASEL III requirements.

Value Proposition: The company is trading at a PE multiple (TTM) of 13.27 times while the industry average stands at 17.53 times, this signifies that the company is trading cheap at the current levels. Also, the P/B ratio which is a widely followed valuation metric in the banking space shows that the company is undervalued as compared to the banking industry. The dividend yield stands at 6.08%.
 

CBA’s Impaired assets and provisioning (Source: Company Reports)

Meanwhile, the stock price has given a modest run over the past one month by 8.03%, however over the period of past 6 months the stock has been flat inching up just by 0.14%; however, if we look at the YTD performance, the stock is down by 11.62%. Considering the strong volume growth across segments and continued focus on the core banking operations, we maintain our “Buy” recommendation on the stock at the current market price of $69.21.


 
CBA Daily Chart (Source: Thomson Reuters)
 

BHP Billiton Limited

BHP Details

Robust EBITDA margins coupled with optimum dividend pay-outs: BHP Billiton Ltd. (ASX: BHP) is an international resources company. The Company's principal business lines are mineral exploration and production. The company is the mining bellwether in Australian markets with a market cap of AU$105.5 Bn as on November 14, 2018. The company has posted strong numbers for the year ended June 30, 2018 on account of robust operating performance & higher commodity prices. The EBITDA margin for the company stands at 55% while EBITDA is at US$24.1Bn, exhibiting a growth of 20% on a Y-o-Y basis driven by volume growth of 8%.

Growth Proposition: Going forth, we believe that the company is committed to the objective of appreciation in shareholders wealth which is evident from the recent developments regarding disposal of the Non-continuing operation of the on-shore US shale assets, the proceeds of which will be returned to the shareholders in the form of a buyback and special dividend. Moreover, considering the strong free cash flows and constant volume growth across its core segments, the future operating performance seems to be very promising.
 

 
BHP’s Non-Financial KPI’s (Source: Company Reports)

Meanwhile, the stock price has marginally fallen over the past one month by 1.47%, also over the period of past six months the stock has receded by 2.78%; however, if we look at the YTD performance, the stock is up by 10.68 %, which shows a steady performance in the long run. Considering the hefty dividend pay-outs and strong operating performance, we maintain our “Hold” recommendation on the stock at the current market price of $32.110.


 
BHP Daily Chart (Source: Thomson Reuters)
 

Boral Limited

BLD Details

Strong operating margins driving the ROI: Boral Ltd (ASX: BLD) is a manufacturer and supplier of building and construction materials in Australia and internationally. Boral supplies building products to the residential and commercial building markets, operates clay brick business in the U.S. (for clay roof tiles and fly ash) along with the production of plasterboard, timber products, and concrete products. As per the latest release to the ASX dated October 30, 2018, the company has clocked an EBITDA of $1,056 Mn for FY18, reflecting a growth of 47% on Y-o-Y basis. In consonance, the NPAT before amortization also saw a rise of 47% to reach $514 Mn. This growth was on account of the healthy EBITDA margins across all geographical segments and full recovery of cost increases through regular price increases. The company has declared a full year dividend of 26.5 cps, exhibiting a growth of 10% on a Y-O-Y basis.

Recently, the company decided to dispose of the firm’s US Block business to Quikrete Holdings Inc for the total consideration of US$156 Mn. In our view, this divestment would help the company to strengthen its balance sheet and aid in focussing on core operations. With residential activity holding up well in Australia, which is its biggest market, the stock seems to be promising enough.

Meanwhile, the stock price has fallen substantially over the past one month by 15.38%, also over the period of past six months, the stock has receded by 19.07%. Moreover, if we look at the YTD performance, the stock is down by a drastic 30.45%, thus demonstrating a low trading level. The stock looks extremely oversold at this level and thus we can expect a recovery in the upcoming period with the consideration of its strong operating performance across sectors and healthy operating margins. We, therefore, maintain our “Buy” recommendation on the stock at the current market price of $5.340.


 
BLD Daily Chart (Source: Thomson Reuters)
 

Scentre Group

SCG Details

Robust growth in FFO and Buoyancy in the Sector:Scentre Group (ASX: SCG) owns and operates a portfolio of shopping centres in Australia and New Zealand. The Company's strategy is to invest in quality regional shopping centres and to invest in these assets through redevelopment, capitalizing on its vertically integrated operating platform to undertake development, design and construction, leasing, management and marketing of the centres. The company has a market capitalization of circa $21.48 Bn as on November 14, 2018. Recently, the company declared its Q3 FY18 numbers stating that the company has achieved an occupancy of 99.5% across its portfolio with a total lettable area of 3.7 million Sq. Mtr. which shows that high quality retail space is in demand. The firm is also holding a strong portfolio in the re-development space where it has successfully opened more than $1Bn worth redevelopment work across 4 Australian states.

Moreover, the company has reiterated its guidance for the 12-month ending 31 December 2018 of growth in Funds from operation at the rate of 4%while the FFO for the 1H FY18 came in at $657.2 Mn. The EBIT during the same period stood at $947.5 Mn, representing a growth of 1.7% on a Y-O-Y basis. The distribution is expected to be 22.16 cents per security for the full year, signifying a rise of 2% on a Y-O-Y basis.
 

   
SCG’s speciality in-store sales growth (Source: Company Reports)

Meanwhile, the stock price has risen by 6.60 % over the past one month; and, if we look at the YTD performance, the stock is down by 3.35 %. Considering the real estate property prices in its operational geographies and growth in the funds from operations, the sector and company are slated to display some buoyancy despite tight lending norms. We maintain our “Buy” recommendation on the stock at the current market price of $3.96.


 
SCG Daily Chart (Source: Thomson Reuters)
 

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