Stocks’ Details

Contact Energy Limited

New Loan Facility with Westpac NZ: Contact Energy Limited (ASX: CEN) is involved in the generation and retailing of electricity. The market capitalisation of the company stood at A$5.29 Bn as on 16^th January 2020.  As per a market update, CEN and Westpac NZ have recently entered into a 4-year sustainability-linked loan facility of $50 million. This loan facility happens to be the first such loan, which has been issued by Westpac NZ, as well as one of the first of its type in New Zealand. The company would be receiving a discounted interest rate on the sustainability-linked loan in the event of meeting ambitious targets, which are linked to its environmental, social as well as governance (ESG) rating, which has been determined by the independent rating agency RobecoSAM. 

The company would be releasing its results for the six months ending 31 December 2019 (1H FY20) on 10^th February 2020. CEN’s Board declared a final FY19 dividend amounting to 23 cps, with a rise of 21%, which took the full-year dividend to 39 cps. At the current market price of A$7.240 per share, the Annual dividend yield of the company stood at 4.75%. The following picture provides an idea of customer business performance:


Customer Business Performance (Source: Company Reports)

Target for Dividend: The sale of assets has provided an improvement to the strength of the company’s balance sheet and positions CEN well for future investment. For FY20, the Board of the company is aiming to distribute a dividend of 39 cents per share, in-line with FY19. 
 
Valuation Methodology: EV to Sales Multiple Approach

EV/Sales Based Valuation (Source: Thomson Reuters), *1 NZD = 0.96 AUD
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The Board of the company changed the distribution policy so as to target a payout of 100% of expected operating free cash flow, considering the ability of the business to generate cash flows. We have valued the stock using EV to Sales multiple based relative valuation method, and for the purpose, we have taken peers such as Beach Energy Ltd (ASX: BPT), Origin Energy Ltd (ASX: ORG), Senex Energy Ltd (ASX: SXY) and AusNet Services Ltd (ASX: AST). As a result, we have arrived at a target price offering an upside of lower single digit (in percentage terms).Therefore, in light of a decent outlook, recent loan facility with Westpac NZ, and current trading levels, we maintain a “Hold” rating on the stock at the current market price of A$7.240 per share, down 1.63% on 16^th January 2020. 

Pendal Group Limited

December Quarter Net Outflows stood at $1.3 billion: Pendal Group Limited (ASX: PDL) is a global asset management company. The market capitalisation of the company stood at A$2.73 Bn as on 16^th January 2020. For the quarter ended 31^st December 2019, fund under management of the company stood at $101.4 Bn, reflecting a rise of 1%. The company reported net positive flows into UK equities and net outflows for the quarter amounted to $1.3 Bn.

During FY19, the company declared a total dividend amounting to 45 cents per share, which comprised a final dividend of 25 cents per share. The company added that the total shareholder return since listing stood at 188%. This reflects that the company has provided decent returns as compared to 67% return of the Standard and Poor’s ASX 200 Accumulation Index over the same period. At the current market price of A$8.430 per share, the annual dividend yield of the company stood at 5.33%, which is well above the industry average (Financials) of 4.5% on TTM basis.


Funds Under Management (Source: Company Reports)

Expectation of Growth: The company expects growth in demand for income offerings on the back of an ageing population worldwide, which is driven by increasing life expectancy as well as a likely shift to income-generating, low volatility investment strategies.

Valuation Methodology: P/BV Multiple Approach

P/B Based Valuation (Source: Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The offshore presence of the company has grown significantly and provided an increasing contribution to the Group’s FUM and profit, since the acquisition of the JOHCM business. As per ASX, the stock of PDL is trading towards its 52-week high level of $9.590.  We have valued the stock using Price to Book based relative valuation, and for the purpose, we have taken peers such as Perpetual Ltd (ASX: PPT), Janus Henderson Group PLC (ASX: JHG), Challenger Ltd (ASX: CGF), etc. We have arrived at a target price which is offering a correction of higher single-digit (in percentage terms). Thus, considering the current trading levels and stretched valuations, we have a watch stance on the stock at the current market price of A$8.430 per share, down 0.237% on 16^th January 2020.

Super Retail Group Limited

Improvement in Sales: Super Retail Group Limited (ASX: SUL) is engaged in the operation of specialty retail stores in the tools, automotive, sports and leisure categories. The market capitalisation of the company stood at A$2.05 Bn as on 16^th January 2020. The company recently announced that UBS Group AG and its related bodies corporate, has become an initial substantial holder in the company on 23^rd December 2019 with a voting power of 5.86%. 

Even in relatively subdued economic conditions, the group has delivered a solid result for the financial year 2019 with total sales growth of 5.4% and like-for-like sales growth in all four divisions. For the financial year 2019, the company paid total fully franked dividends amounting to 50 cents per share. At the current market price of A$9.770 per share, the annual dividend yield of the company stood at 4.81% as compared to the industry median (Consumer Cyclicals) of 4.3% on TTM basis. The following picture depicts growth in sales across the four businesses of the group during the first 16 weeks of 2019/2020:


Sales Growth (Source: Company Reports)

Future Focus: SUL remains focused on growing its market share with the help of investment in its digital capability as well as an omni-retail platform to provide customers with a seamless multi-channel shopping experience.

Valuation Methodology: P/E Multiple Approach

P/E Based Valuation (Source: Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Net margin of the company stood at 5.1% in FY19 as compared to the industry median of 3.4%. This reflects that the company has improved its position to convert its topline into the bottom line as compared to the broader industry. Return on equity of the company stood at 17.5% in FY19 as compared to the industry median of 14.4%. We have valued the stock using the price to earnings-based relative valuation method and arrived at a target price, which is offering an upside of lower double-digit (in percentage terms). Thus, considering the decent returns to shareholders, growth in sales and current trading levels, we maintain a “Hold” rating on the stock at the current market price of A$9.770 per share, down 5.967% on 16^th January 2020.


Comparative Price Chart (Source: Thomson Reuters)

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