Stocks’ Details

BHP Billiton 

Capital Allocation:BHP Billiton Limited (ASX: BHP) is a leading global resources company and on track to generate maximum cash flow, maintain capital discipline and increase value and returns to its shareholders. Recently, the group reported another year of free cash flow generation with US$ 12.5 Bn after the community investment expenditure of more than US$77 million and supplier expenditure of ~ US$15.8 Bn in FY18. Based on the FY18 results, the group has reviewed its guidance metric for FY19 and expects to deliver productivity gain of approximately US$ 1 bn in place of US$2 Bn due to announced divestment and challenging operating conditions at two BMA mines in FY18. Although, the company’s dividend policy provides for a minimum 50 per cent payout of Underlying attributable profit at every reporting period. Therefore, theBoard of Directors has declared a fully franked second half ordinary dividend of 46 US cents per share (cps) and a special dividend of 17 US cps, bringing the total dividend of 63 cents per share and it will be payable on September 25, 2018 with the record date of September 07, 2018. This summarized a total dividend payment of 118 US cents per share for the full year, representing a 42% rise over the previous year. We expect that the company will maintain to continue its dividend policy to provide minimum 50% payout of Underlying attributable profit in years to come.


Capital Allocation (Source: Company Reports)

Meanwhile, the stock has risen 10.85 percent in the past six months as at September 19, 2018 and traded at 52-week higher level. Hence, we maintain our “Hold” recommendation on the stock at the current market price of $ 32.77 by looking at decent outlook ahead despite certain challenges.
 

Rio Tinto
 

Maintained Decent Capital Position after Cash Return to Shareholders:Rio Tinto Limited’s (ASX: RIO) stock climbed up 3.581 percent on September 20, 2018 after the announcement of Buy-back event in which the company intends to buy back 412,414,348 ordinary shares with an aggregate price of about $3.2 billion for the purpose of returning proceeds from disposal of assets. This return of $3.2 billion proceeds to its shareholders demonstrates company’s commitment to capital discipline. The timings and form of shareholder return in respect of further proceeding are going to be announced with 2018 full year results. The participation in the Buy-back is not compulsory for the shareholders. On the financial front, RIO delivered $0.3 billion free cash flow from productivity. The company is reshaping the portfolio by divestments of $5 billion. The company’s EBITDA was $9.2 billion in the first half of FY2018. Company’s total cash returns to shareholders are $7.2 billion which includes interim results of $3.2 billion and disposable proceeds of $4 billion. The gross debt of the company has been reduced by $2.1 billion in 1H 2018. The net earnings of the company were US$4,380 million in 1H 2018.

2018 cash returns to shareholders (Source: Company Reports)

Besides this, Current ratio and Quick ratio stood at 1.47x and 1.11x in 1HFY18 which is broadly in-line with the Industry Median. The group declared fully franked interim dividend of 127 US cents per share which will be paid on September 20, 2018, representing a dividend rise of 15% as compared to the previous corresponding period. Based on historical dividend performance, we expect that the company will continue to pay the dividend to its shareholder despite the volatile conditions. As of now, it is trading at an annual dividend yield of 5.3 per cent per annum. Meanwhile, the share price was down by 8.21 per cent in the past three months (as at September 19, 2018) and traded at PE level of 10.33x. But the stock still looks at a higher side; hence, we maintain our “Expensive” recommendation at the current market price of $ 78.100.

 

Magellan Financial Group Limited

Revised Dividend Policy: Magellan Financial Group Limited (ASX: MFG) has recently issued shares of about 88,784 under MFG’s Employee Share Purchase Plan at the price of $27.92 per share. Recently, the group experienced net inflows of $292 million in August month, which included net retail inflows of $74 million and net institutional inflows of $218 million. While in July month, the Group experienced net inflows of $98 Mn, which included net retail inflows of $106 Mn and net institutional outflows of $8 Mn as of 31 July 2018. There was a decent growth of 6.6% in total funds under Management from July 2018 to August 2018. This growth was mainly supported by decent growth of institutional fund management business. Moreover, the group has revised its dividend policy and stated that the company will pay Interim and Final Dividends of 90% to 95% of the net profit after tax of Magellan’s Funds Management business (excluding performance fees) from the previous payout of between 75% and 80%.

FUM as at August 2018 (Source: Company Reports)
Meanwhile, the share price has risen 20.11 percent on September 20, 2018 and traded at higher level. Based on foregoing, we maintain our “Hold” recommendation on the stock at the current market price of $28.0.
 

Westpac Banking Corporation

Consistently Paying Dividend to its Shareholders:Westpac Banking Corporation (ASX: WBC) has recently announced the distribution of $0.3000 per security for SFI (Self-Funding Instalments) over securities in Crown Resorts Limited (CWN) as mentioned in PDS (Product Disclosure Statement) and dividends will be applied to reduce the Completion Payment of the SFIs and will be paid on or about 5 October 2018 with the ex-distribution/ entitlement date of 20 September 2018. Besides this, the group disclosed its distribution payment of AUD 0.89560000 with dividend distribution rate of 1.9318 % per annum for WBCPD - CAP NOTE 3-BBSW+3.20% PERP NON-CUM RED T-03-19 and it will be paid on December 10, 2018 with the record date of November 30, 2018.
 

On the financial front, its net interest margin for the third quarter ending June 2018, has reduced to 2.06% compared to 2.17% in 1H18, due to higher funding costs and lower contribution from Group’s Treasury. WBC’s Common Equity Tier 1 (CET1) capital ratio of 10.4 percent as of 30 June 2018 marked a de-growth of 10 bps from March 2018. It was mainly impacted by the conversion of $566 Mn of preference shares to ordinary shares while it was offset by the determination of FY18 Dividend (net of DRP).

Net Interest Margin (Source: Company Reports)

Meanwhile, the share price has fallen 6.44 percent in the past one month as at September 19, 2018 and traded at 52-week lower level of $27.24. By looking at the history of dividend policy to pay regularly to its shareholders along with decent fundamentals and business outlook, we maintain our “Buy” recommendation on the stock at the current market price of $28.09.
 

Qantas Airways 

Strong Growth Trajectory: Qantas Airways Limited (ASX: QAN) has updated the market about the progress on several transactions under its ongoing buy-back event. The group indicated to buy back shares with an aggregate total consideration of $332 million. As of now, the group has bought back a total of 56,30,306 shares via on-market trade for the total consideration of A$ 3,48,85,648.35. Recently, the group has presented its business prospects at CLSA Investor’s Forum, Hongkong and highlighted about FY18 activity and outlook. As per the release, the company is on track to achieve $500-600 million of EBIT by 2022 supported by increasing core Qantas Frequent Flyers, growing earnings mix from new businesses, and diversifying into new customer products across financial services, health, and wellness. We expect that the group has a robust outlook underpinned by growing its loyalty business, continuing transformation program, and disciplined financial framework approach which provides decent free cash flow along with strong balance sheet position.

Qantas Loyalty EBIT Trend (Source: Company Reports)

Meanwhile, the share price has fallen 6.79 percent in the past three months and traded at reasonable PE level of 10.790x. Based on aforesaid facts, we maintain our “Buy” recommendation on the stock at the current market price of $5.960 (down by 1.325% on September 20, 2018).
 

WAM Research 

Decent Investment Performance Ahead:WAM Research Limited (ASX: WAX) is a small-cap company with the market capitalization of circa $316.52 Mn as of 20 September 2018. The group objective is to safeguard the financial futures of its shareholders. Moreover, the group has a proven track record of paying fully franked dividends. Historically, the company has paid the dividends consistently and is maintaining an annual dividend yield of 6.40% as on average of 5-year basis. During FY18, the Board was delighted to deliver shareholders a fully franked full-year dividend of 9.5 cents per share, an increase of 5.6% on the previous year, with the fully franked final dividend being 4.75 cents per share. Since inception, WAX has paid 89.9 cents per share in fully franked dividends to shareholders. We expect that the company will continue to perform better backed by improving investment performance with the support of highly skilled investment team.

Fully Franked Dividends Since Inception (Source: Company Reports)

In the meantime, the stock has risen 10.89 percent in the past three months and traded at 52-week higher level. Given the lack of wage inflation and no clear catalyst to drive domestic economic growth in the short-to-medium term, we expect interest rates in Australia to remain on hold for some time unless the present trade war scenario at global level puts pressure on the Australian dollar. Hence, we continue to maintain our “Hold” recommendation on the stock at the current market price of $1.660.
 

Aventus Retail Property Fund

Traded at Lower PE level: Aventus Retail Property Fund (ASX: AVN) is one the largest Real Estate company by market cap in Australia. The company has recently announced a proposal to internalize its management functions (Internalisation or the Proposal) with a target to achieve immediate benefits to earnings, governance, and create long-term strategic value to the unitholders. According to the internalization, the group is required to pay $143 million to internalize the management of AVN (including investment management, property management, and development management services) and $5 million for the acquisition of the existing net assets of APG by establishing a new stapled security structure for the Fund. This proposal is planned to be funded through a combination of AVN stapled securities, issued to the sellers at AVN’s 30 June 2018 NTA of $2.38. However, the Proposal is subject to several conditions, that include getting the approval of AVN’s unitholders by ordinary resolutions at an Extraordinary General Meeting to be held on 25 September 2018. On the analysis front, the company reported FY18 FFO of 18.1 cents per unit, up 2.3% on FY17. The sales growth of AVN’s major tenants is believed to have moderated though remains positive, particularly for the non-household categories, which make up around 34% of AVN’s tenant base. Based on FY18 performance, the group has guided to report FY19 FFO of 18.2 cents per unit, subject to the approval of internalization.


Housing Outlook (Source: Company Reports)

Meanwhile, the share price has fallen 4.80 percent in the past three months as at September 19, 2018 and trades at low PE level of 7.930x, representing undervalued scenario at the current juncture. Hence, we maintain our “Speculative Buy” recommendation on the stock at the current price of $ 2.220 with a dividend yield of 7.46%.

Below is the Table that Gives an Insight on Free Cash Flow for the above 7 Stocks:

Free Cash Flow (Source: Company Reports and Thomson Reuters)

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