Stocks’ Details

National Australia Bank Limited

Issue of Subordinated Notes: National Australia Bank Limited (ASX: NAB) is a well-known bank in Australia and has a market capitalisation of A$74.12 Bn as on 16^th December 2019. The bank recently announced that it has issued CAD1,000,000,000 subordinated notes, which are due in June 2030 with respect to its US$100,000,000,000 global medium-term note programme. In another update, the bank stated that it has issued A$500,000,000 Fixed-to-Floating Rate Capital Notes pursuant to its Capital Notes Programme for the Issue of Additional Tier 1 Capital Notes. The following picture provides an overview of the 2020 financial calendar:


2020 Financial Calendar (Source: Company Reports)

Preparation for Future:The bank is addressing issues of the past and is preparing for the future. The bank also stated that the Australian economic growth has slowed and is anticipated to remain below trend in 2020 and 2021, and also added that the New Zealand growth has slowed to a modest level.  There are expectations that the near-term rise in exports and strength with respect to public spending might support broader Australian economy. 

Valuation Methodology: Price to Book Value Based Approach

P/B based valuation (Source: Thomson Reuters)

Stock Recommendation:The common equity tier 1 (CET1) ratio of the group stood at 10.38% in FY19, reflecting a rise of 18bps as compared to September 2018. The Board of the bank has declared a final dividend of 83 cents per share, 100% franked. We have valued the stock using Price to Book Value based approach and arrived at a target price of lower double-digit upside (in percentage terms). Thus, considering the clear actions to meet customer and community expectations, cost savings of $480 million which were achieved in FY 2019, and expected upside, we give a “Buy” recommendation on the stock at the current market price of A$25.520 per share, up 1.471% on 16^th December 2019.

Commonwealth Bank of Australia
Capital Requirement of RBNZ:Commonwealth Bank of Australia (ASX: CBA) provides banking, financial and related services. The market capitalisation of the bank stood at A$141.73 Bn as on 16^th December 2019. The bank recently announced it has made a change to its substantial holdings in Charter Hall Group on 13^th December 2019 and the current voting power stands at 0.28% as compared to the previous voting power of 3.93%. In another update, the bank announced impacts of final capital requirement of RBNZ (Reserve Bank of New Zealand). The bank stated that, as confirmed by RBNZ, the risk-weighted assets of internal ratings-based banks such as ASB Bank Limited would increase to around 90% of that required under a standardised approach.

The Tier 1 capital requirement would increase to 16% of RWA, out of which 13.5% must be in the form of Common Equity Tier 1 capital. Tier 2 capital would remain in the framework and can comprise 2% of the minimum Total capital ratio of 18%. Also, it was added that existing Additional Tier 1 and Tier 2 contingent instruments issued by NZ banks would no longer be eligible under RBNZ’s new capital criteria. This would be phased out over the transition period. However, as at 30 September 2019, Level 2 CET1 ratio of CBA stood at 10.6% and would not be affected by requirements.


Key Numbers Q1 FY20 (Source: Company Reports)

Well-Placed to Address Changing Landscape:As per 2019 Annual Report, the Bank is well-positioned to navigate changing landscape on the back of resilient balance sheet, robust customer base as well as leading distribution and digital assets.The Bank is committed to comprehensively and efficiently addressing remediation issues, impacting customers of its banking and wealth management businesses.

Valuation Methodology: P/BV Based Valuation

P/BV Based Valuation (Source: Thomson Reuters)

Stock Recommendation:CBA is focused on continuing to serve the requirements of customers and is making the necessary changes to become a simpler, better bank. During FY19, the bank witnessed a rise of 11% in loan impairment expense. We have valued the stock using price to book value multiple approach, which depicts that the stock might witness a minor correction in the upcoming period. As per ASX, the stock of CBA is trading towards its 52-week high levels. Thus, considering the current trading levels and stretched valuations, we have a watch view on the stock at the current market price of A$81.460 per share, up 1.749% on 16^th December 2019.
 

BlueScope Steel Limited

Appointment of Non-Executive Director:BlueScope Steel Limited (ASX: BSL) is involved in the manufacturing of steel and has a market capitalisation of A$7.72 Bn as on 16^th December 2019. The company recently announced that it has bought back 34,860,638 shares at the consideration of $439,847,203 pursuant to its daily share buy-back notice. BSL, through a release, announced that it has appointed Kathleen Conlon, as a Non-executive Director, which would be effective from 1^st February 2020. The following picture provides an idea of financial dates for 2020:


2020 Financial Dates (Source: Company Reports)

Focused on Generating Returns: The company expects underlying earnings before interest and tax to be lower by approximately 45% lower as compared to $499 million of 2H FY19.The company is focused on generating returns above its cost of capital for creating value for its shareholders.

Outlook:The company is currently a very resilient global company having a strong balance sheet as well as high-quality assets which provide the capacity to withstand and potentially reap the benefits of the tough cyclical conditions. With respect to North America, the business continues to witness good demand conditions and order intake, although customer lead times remain extended because of the high activity levels and some weather-related delays.

Valuation Methodology: P/CF Multiple Approach 

P/CF Valuation Multiple (Source: Thomson Reuters)

Stock Recommendation: During the span of three months and six months, the stock of BSL has provided returns of 18.64% and 33.42%, respectively. We have valued the stock using price to cash flow multiple and arrived at the target price, which is offering an upside of lower double-digit (in percentage terms). Therefore, in light of the company’s aim of a capital structure of around zero net debt for the consolidated group, decent returns in the past period, we maintain a “Hold” rating on the stock at the current market price of A$15.510 per share, up 1.972% on 16^th December 2019.
 

REA Group Ltd

Chairman’s Address to Shareholders:REA Group Ltd (ASX: REA) provides property and property-related services on websites as well as mobile apps throughout Australia and Asia and has a market capitalisation of A$13.96 Bn as on 16^th December 2019. Recently, the Chairman of the company addressed the shareholders and stated that FY19 has proven to be another year of strong performance, wherein the company reported revenue growth of 8% and the figure stood at $874.9 million, and EBITDA amounted to $501.2 million, reflecting the growth of 8%. The company also achieved a rise of 6% in net profit, and the figure stood at $295.5 million. In addition, the company also reported results for the three months ended 30^th September 2019, where   the revenue of the company stood at $202.3 million, and EBITDA from core operations stood at $114.9 million.


Q1 FY20 Results (Source: Company Reports)

Greater Value to Customers:The company remain committed to the opportunities within its global investments. The company continue to invest in the areas where it expects the most potential to provide greater value to its customers as well as the consumers.

Stock Recommendation:The company has delivered robust growth in challenging market conditions. During FY19, the company reported a growth of 6% to 224.3 cents in EPS and declared dividend amounting to 118.0 cents with a growth of 8%. The company also introduced several new features to drive more value to consumers in FY19. The stock of REA delivered returns of 14.53% in last six months and 42.77% on a YTD basis. Therefore, in light of decent outlook, returns in the past period, and performance of FY19, we give a “Hold” recommendation on the stock at the current market price of A$108.800 per share, up 2.622% on 16^th December 2019. 
 
 
Comparative Price Chart (Source: Thomson Reuters)

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