Stocks’ Details

BHP Group Limited

Robust Earnings Despite COVID-19: BHP Group Limited (ASX: BHP) is involved in the exploration, production, and processing of minerals. The market capitalisation of the company stood at $117.42 Bn as on 18^th August 2020. Despite COVID-19, the company managed to report robust earnings and decent free cash flow during FY20. The company recorded underlying EBITDA amounting to US$22.1 billion at a margin of 53%, and profit from operations of US$14.4 billion. Net operating cash flow for the period stood at US$15.7 billion, and free cash flow amounted to US$8.1 billion. These results reflect the strength, resilience and quality of its people and portfolio. The company has declared a final dividend of 55 US cents per share, which includes an additional amount of 17 US cents per share. This took the total dividend for FY20 to US$1.20 per share, reflecting a payout ratio of 67%. The company will pay the final dividend on 22^nd September 2020.

Key Financials (Source: Company Reports)

Guidance: The company is optimistic about its long-term outlook with near-term COVID-19 uncertainty for its commodities. For FY21, the company is expecting petroleum production in the range of 95 – 102 MMboe. The company will conduct its Annual General Meeting on 14^th October 2020.

Key Risks: The group’s business is sensitive to strategic risks, such as capital allocation, competitive advantage, market disruptions and geopolitics and macro-economic risks. Also, the financial performance of the group could be impacted by adverse movements in commodity prices.

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

Stock Recommendation: The company intends to concentrate its coal portfolio on higher-quality coking coals in order to improve its portfolio for value, risk and returns. Underlying return on capital employed stood at 17% in FY20. The company ended FY20 with a strong balance sheet, comprising net debt of US$12.0 billion, which was at the bottom end of its target range. The company expects to maintain net debt towards the lower end of the target range of US$12 to US$17 billion in the near term. On technical analysis front, the stock of the company has a support level at ~$36.529 and a resistance level at ~$41.453. We have valued the stock using the P/E multiple based illustrative relative valuation method, and for the purpose, we have taken peers such as Rio Tinto Ltd (ASX: RIO), Sandfire Resources Ltd (ASX: SFR), and Lynas Corporation Ltd (ASX: LYC), and arrived at a target price of high single-digit upside (in percentage terms). Thus, considering the robust earnings, decent free cash flows, strong balance sheet and low debt levels, we maintain a “Hold” rating on the stock at the current market price of $39.650 per share, down by 0.527% on 18^th August 2020.

Westpac Banking Corporation

A Look at Q3 FY20 Results: Westpac Banking Corporation (ASX: WBC) provides banking, financial and related services. The market capitalisation of the bank stood at $63.53 Bn as on 18^th July 2020. Recently, the bank released its results for Q3 FY20, wherein it reported unaudited statutory net profit amounting to $1.12 billion. The cash earnings for the period stood at $1.32 billion as compared to 1H FY20 quarterly average of $497 million. Net interest margin for the quarter stood at 2.05%. The bank has maintained a strong balance sheet and increased provisions for bad debts to support its prudent approach to manage impairments.

Cash Earnings (Source: Company Reports)

Outlook: During Q4 FY20, the bank will complete its review of specialist businesses. While the domestic and global outlook is highly uncertain, WBC continues to be well-positioned to support its customers.

Key Risks: The major risk for the bank is the AUSTRAC matter, which may increase impairment charges of the bank. In addition, increased environmental regulation, rising costs, and decreased global purchasing power due to the COVID-19 pandemic are expected to pose challenges.

Valuation Methodology: P/BV Multiple Based Relative Valuation (Illustrative)

P/BV Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As at 30^th June 2020, the Common equity tier 1 capital ratio stood at 10.80%. Also, WBC has decided not to pay a dividend for 1H FY20. On technical analysis front, the stock of the bank has a support level at ~$16.265 and a resistance level at ~$20.171. We have valued the stock using the Price to Book Value multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). For the purpose, we have taken peers such as National Australia Bank Ltd (ASX: NAB), Bendigo and Adelaide Bank Ltd (ASX: BEN) and Australia and New Zealand Banking Group Ltd (ASX: ANZ). Therefore, in light of the strong balance sheet and growth in cash earnings, we give a “Buy” recommendation on the stock at the current market price of $17.180 per share, down by 2.331% on 18^th August 2020. 

Coles Group Limited

Decent Growth in Sales Revenue: Coles Group Limited (ASX: COL) is in the retailing of fresh food, groceries, household goods, liquor, fuels and financial services through stores and online. The market capitalisation of the company stood at $25.25 Bn as on 18^th August 2020. For the year ended 30^th June 2020, the company reported sales revenue amounting to $37.4 billion, reflecting a rise of 6.9%, with sales revenue growth in all segments. The supermarkets segment reported a growth of 6.8% in sales revenue to $33.0 billion. This indicates the implementation of the refreshed strategy, growth in online sales, increased penetration of Own Brand, the launch of tailored ranges as well as the commencement of the Smarter Selling efficiency program. During Q4 FY20, the liquor comparable sales growth stood at 20.2%.

Key Financials (Source: Company Reports)

What to Expect: The company operates in a highly uncertain environment, however, COL seems to be in a robust position to take benefits of opportunities as they arise. For FY21, the company anticipates gross operating capital expenditure of around $1 billion. The company has scheduled to conducts its 2020 Annual General Meeting on 5^th November 2020.

Key Risks: The company’s financial performance could be impacted by increasing the market share of competitors. In addition, the business is also sensitive to consumer behaviour and expectations, which are changing rapidly.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: For FY20, the company declared a fully franked final dividend of 27.5 cents per share, reflecting a rise of 14.6% over the final dividend of FY19. COL has delivered a total shareholder return of 31.7% during FY20.  On the technical analysis front, the stock of the company has a support level of ~$18.284 and a resistance level at ~$19.272. We have valued the stock using the price to cash flow multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). For the purpose, we have taken peers such as Woolworths Group Ltd (ASX: WOW), Metcash Ltd (ASX: MTS), Super Retail Group Ltd (ASX: SUL), etc. Thus, considering the revenue growth in all segments, implementation of the refreshed strategy, and decent returns to shareholders, we give a “Hold” recommendation on the stock at the current market price of $18.710 per share, down by 1.162% on 18^th August 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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