Stocks’ Details

Oil Search Limited

Quarterly Highlights: Oil Search Limited (ASX: OSH) is engaged in exploration, development and production for oil and gas resources. During the third quarter ended 30 September 2019, total production was 6.81mmboe, marginally lower than the previous quarter. The production from PNG LNG Project and Oil Search-operated oil fields was curtailed during the part of August and in September, because of reduced rates of liquids loading after detection of damage to one of the mooring chains at Oil Search-operated offshore liquids loading facility in Gulf of Papua. Total revenue for the quarter declined by 5%, from US$378.9m in Jun2019 to US$361.1m in Sep2019, reflecting the lower product sales and timing of shipments, with three LNG cargoes on the water at the end of the quarter, weaker global oil prices and a higher proportion of condensate related to oil in the product mix.

The company also has a liquidity buffer of US$300 million of short-term facilities and US$900 million of medium-term facilities. The following image is important from the capital management perspective:


Capital Management (Source: Company Reports)

Outlook: Due to offshore liquids loading facility issue, which negatively impacted the production during the third quarter, the production guidance for 2019 has been revised to 27 – 29 mmboe from the earlier, 28 - 31 mmboe. OSH also anticipates the unit production costs to be in the range of US$12 to US$13/boe, reflecting lower production base, costs with respect to the repairs to the mooring buoy and lower insurance receipts for earthquake remediation activities.The company has also reduced the capital cost guidance due to the deferral of spending on FEED activities for LNG expansion and adjusted work programmes on Oil Search-operated assets.

Stock Recommendation: As per the ASX, the performance of the stock increased by 4.90% on YTD basis and went up by 2.97% in the past one month. EBITDA and net margin of the company stand at 71.7% and 20.8%, higher than the industry median of 36.2% and 18.4%, respectively, implying that the company is efficient in cutting its cost and has a good profitability. Taking into consideration the company’s performance and its profit margins, we recommend a “Buy” rating on the stock at the current price of A$7.420 per share, up by 1.923% on November 6, 2019.
 

Woolworths Group Limited

Endeavour Group Transformation:Woolworths Group Limited (ASX: WOW) is in the business of food, general merchandise and speciality retailing through chain store operations. The company announced that the Federal Court has approved the dispatch of the Restructure Booklet, which involves an internal reorganisation through the transfer of assets and liabilities of the Woolworths Drinks Business and Woolworths’ 75% ownership interest in ALH into a distinct legal entity, forming Endeavour Group. Post restructuring, the company will work towards completing the ALH Merger, following which Endeavour Group will be owned by Woolworths and Bruce Mathieson Group, with a percentage stake of 85.4% and 14.6%, respectively. The company, following the merger plans to separate the Endeavour Group from the Woolworths Group.

Quarterly sales update and notice of AGM: During the 14 weeks to 06 October 2019, Group sales from continuing operations soared by 7.1% to $15.9bn. The group also witnessed a growth of 37.4% in Online sales. 2019 AGM of the company is to be held on or around December 16, 2019.


First Quarter Sales (Source: Company Reports)

Outlook:Renewals, improved fresh experience and range localisation are expected to support sales growth for Australian Food. Online sales are also expected to grow strongly along with an increase in roll out of metro stores. The company stated that the New Zealand Food will focus on prices, fresh quality and experience, and building on Simpler for Stores. Endeavour Drinks will continue to evolve to improve the digital experience, by delivering more localised ranging and by improving service and convenience. WOW also expects a reduction in lossespertaining to BIG W, following the closure of unprofitable stores.

Stock Recommendation: As per the ASX, the stock gained 15.93% in the past 6 months and witnessed a CAGR of 1.84% in the gross profit over the period covering FY15 to FY19. Gross margin and RoE of the company stand at 29.1% and 14.4%, higher than the industry median of 26.2% and 13.3%, indicating that the company is making reasonable profit on sales. Considering the performance in FY19, trading update and a decent outlook, we give a “Hold” recommendation on the stock at the market price of $37.370, down 0.849% on 06 November 2019.
 

Telstra Corporation Limited

Updated FY20 guidance for NBN Co's Corp Plan: Telstra Corporation Limited (ASX: TLS) is a telecommunications Carrier and provides information services, including mobiles, internet, and pay television. TLS’s FY20 guidance was predicated on NBN Co’s Corporate Plan 2020, which updated its outlook. Therefore, TLS no longer anticipates FY20 being the year of peak and expects the same to occur in FY21. It also expects that the Underlying EBITDA excluding in-year NBN headwind to grow up to $500 million in FY20.

Dividend and Financial Performance: The company declared a dividend of 8 cents per share on ordinary fully paid shares, which was paid on September 26, 2019. During the year, EBITDA (Earnings Before Interest, Tax Depreciation and Amortisation) of the company went down by 21.7% to $8bn. This was mainly due to the impact of the NBN with Telstra absorbing around $600 million of negative recurring EBITDA headwind in the period.


Financial Performance (Source: Company Reports)

Outlook: The company has seen strong progress on T22 strategy and expects the underlying trends to improve in FY20. The company has achieved good momentum in reducing costs and is targeting a further reduction in underlying fixed costs.

Stock Recommendation: As per the ASX, the stock witnessed a rise of 5.01% in the past 6 months. Gross margin and ROE of the company stand at 63.8% and 14.8%, higher than the industry median of 61% and 6.2%, respectively. This indicates that the company is managing its costs effectively. Considering the update on outlook and reduction in costs during the year, we recommend a “Hold” rating on the stock at the current market price of $3.470, down 0.857% on November 6, 2019.
 

Westpac Banking Corporation

Westpac completes $2 billion institutional placement and Westpac Self-Funding Instalments over securities in BOQ:Westpac Banking Corporation (ASX: WBC) provides financial services including lending, deposit taking, investment platforms and other financial services. The company will issue approximately 79 million fully paid ordinary shares at the price of $25.32 per share, under a fully underwritten $2bn institutional share placement. The bank also notified regarding a fully franked dividend of $0.3100 per security in respect of Bank of Queensland Limited, which is to be paid on or around 27 November 2019.

Financial Updates:During the year ended 30 September 2019, the company reported a final dividend of 80 cents per share, representing a payout ratio of 79%.Both reported net profit and cash EPS of the company went down by 16% to $6,784mn and 198.2 cents, respectively, reflecting the challenging economic environment.


FY19 Financial Snapshot (Source: Company Reports)

Stock Recommendation: During the FY19, CET1 (Common Equity Tier 1) capital ratio went up by 4 bps. However, CET1 capital ratio was impacted by ~75 bps from operational risk overlays, new standardised model for derivatives RWA (Risk Weighted Assets), customer remediation provisions and costs associated with the exit of financial planning. During the time span of FY15 to FY19, the bank reported a CAGR of 4.34% in the net interest income and the stock witnessed a fall of 4.57% in the past 3 months.  The company has increased Australian banking customer numbers by 124k to 11.2m over FY19 and also expects to report productivity savings of $500m in 2020. Taking into consideration the growth in net interest income and growth prospects, we recommend a “Buy” rating on the stock at the current market price of $27.250, up 0.294% on November 06, 2019.
 

Evolution Mining Limited

Decent EBITDA margin: Evolution Mining Limited (ASX: EVN) is engaged in the business of exploration, mine development, mine operations and sale of gold/copper concentrate. The company recently announced its financial results wherein, it reported operating mine cash flow of $771mn and a strong EBITDA margin of 48%. In FY19, EVN produced 753,001 ounces of gold at an All-in Sustaining Cost (AISC) of $924 per ounce. This ranks the company as one of the lowest cost gold producers in the world.

Quarterly Performance: During the period ended 30 September 2019, gold production stood at 191,967 ounces, with record production reported at Cowal. The company reported a net mine cash flow of $207.4 million, up by 36% on the prior quarter. Net cash position of the company also increased to $91.7mn from $35.2mn in the previous quarter.


Production and Sales summary (Source: Company Reports)

What to expect: The company expects the gold production in FY20 to be in the range of 725,000 – 775,000 ounces. EVN also increased the AISC guidance by $50/oz to $940 – $990/oz, comprising of $20/oz increase from the impact of revised metal price assumptions on royalties & by-product credits and A$30/oz increase due to stability issues in Mt Rawdon pit west.

Stock Recommendation: The company witnessed a CAGR of 22.7% in revenue in the time span of FY15 to FY19. Gross profit, over the same period, posted a CAGR of 28.92%. As per the ASX, the performance of the stock went up by 33.98% in the past 6 months but encountered a fall of 11.54% in the past 30 days. EBITDA margin of the company stands at 46.7%, higher than the industry margin of 29.1%, implying that the company is managing its costs well. Currently, the stock is trading at slightly below the average of 52-week low and high range of $2.980-$5.585. Hence, considering the aforesaid facts, decent expectation in production, and current trading levels, we recommend a “Buy” rating on the stock at the current market price of $4.1, down 0.966% on November 6, 2019.

 
Comparative Price Chart (Source: Thomson Reuters)

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