Westpac Banking Corporation

WBC Details

Payment of Dividend Despite Challenging Business Environment: Westpac Banking Corporation (ASX: WBC) provides banking, financial and related services and has a market capitalisation of $71.87 Bn as on 20^th November 2020. During FY20, the bank recorded a fall of 66% in statutory net profit to $2,290 million, mainly due to higher impairment charges, increased notable items as well as the steep decline in economic activity. In addition, WBC also incurred higher expenses because of the increased resources to handle unprecedented COVID-19 demands and fixing its compliance issues. Despite the challenges created by the global pandemic, the bank declared a fully franked final dividend of 31 cents per share, which is payable on 18^th December 2020. Total dividend for FY20 stood at 31 cents per share, reflecting a payout ratio of 49% of its full-year statutory result. This proved as a maximum dividend Westpac could pay under current APRA guidance.

Key Financials (Source: Company Reports)

Outlook: WBC is becoming a simpler and stronger bank supported by its focus on three priorities - fix, simplify and perform. However, the bank is expecting its business growth at a slower pace in the upcoming year.

Valuation Methodology: Price to Book Value Multiple Based Relative Valuation (Illustrative)

Price to Book Value Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The bank ended FY20 with a strong balance sheet supported by the growth of 32 bps in CET1 capital ratio to 11.13% as on 30^th September 2020. WBC reported Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) of 151% and 121.7% as on 30th September 2020 as compared to 146% and 116.1% as on 30th June 2020, respectively. On a technical analysis front, the stock of WBC has a support level of ~$16.471 and an immediate resistance level of ~$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 of low double-digit upside (in percentage terms). Therefore, considering the decent dividend and strong balance sheet, we give a “Buy” recommendation on the stock at the current market price of $19.910 per share, up by 0.05% on 20^th November 2020.

WBC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

AGL Energy Limited

AGL Details

Acquisition of Click Energy: AGL Energy Limited (ASX: AGL) is engaged in the operation of Australia's largest retail energy and dual fuel customer base and consists of a substantial portfolio of wholesale energy contracts and assets to support its retail customer base. On 31^st August 2020, the company reached an agreement for the 100% acquisition of Click Energy Group Holdings Pty Ltd for a consideration of $115 million, which is a wholly-owned subsidiary of amaysim Australia Limited. The company anticipates the acquisition to be modestly accretive to its underlying earnings. In addition, the acquisition would be financed from its existing debt facilities.

Decent Growth in Operating Cash Flow: For the year ended 30^th June 2020, the company reported an underlying profit after tax amounting to $816 million, reflecting a fall of 22% due to the unplanned outage at Loy Yang in 1H FY20,  reduction in gas sales volumes, lower wholesale electricity and large-scale generation certificate prices, and increased depreciation and amortisation expense. The company reported net cash flow from operating activities of $2,156 million, indicating a rise of 35%. This allowed the company to undertake a $622 Mn on-market share buy-back in the 12 months to August 2020.  AGL paid a final dividend of 51 cents per share on 25^th September 2020, which was franked to 80%. This took the total dividend for FY20 to 98 cents per share.

Key Financials (Source: Company Reports)

Outlook: The company is planning to pay special dividends in FY21 and FY22. For FY21, the company is expecting earnings in the range of $560 Mn -$660 Mn.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

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

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company ended FY20 with strong funding and liquidity, which may support reinvestment in the existing business, growth opportunities and ongoing capital management initiatives. The stock of AGL is inclined towards its 52-week low level of $12.460, offering decent opportunities for accumulation. We have valued the stock using the price to earnings 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 Contact Energy Ltd (ASX: CEN), Genesis Energy Ltd (ASX: GNE) and Origin Energy Ltd (ASX: ORG), to name few. On a technical analysis front, the stock of AGL has a support level of ~$12.43 and a resistance level of ~$17.684. Therefore, in light of decent operating cash flows, acquisition of Click Energy, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $13.090 per share, up by 0.925% on 20^th November 2020.

AGL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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