The shares have been punished so far in 2015 and they are down around 14% compared to a decline of just under 7% in the broader S&P/ASX 200. It is understandable that some investors are getting nervous when they look at their declining portfolios, there is a good reason to be optimistic on this company in the long-term. It has a substantial market share as the third largest lender to the booming real estate market in Australia having expanded its mortgage portfolio above the market average for five consecutive years. In New Zealand, it controls a dominating 31% of total loans and advances.
Overview FY10 & FY14 (Source: Company Reports)
Clearly, all these markets will rise and fall over a period of time but nothing is likely to threaten the dominance of this group. Secondly, it is unique among Australian banks in its expansion strategy in Asia and aims to generate between 25% and 30% of its profits outside its domestic bases by 2017. There are risks involved but it could prove to be a major competitive edge in the long-term. Similarly, dividends will depend on earnings performance but as long as this group continues to grow, dividends will be a major attraction. The stock is currently available at a multiple of around 10 times and produces a dividend yield of around 6.8% fully franked.
ANZ Daily Chart (Source: Thomson Reuters)
Woolworths Limited
In its annual report for FY 2015, the company reported group sales of $60.67 billion down by 0.2%. Total group EBIT was $ 3.74 billion before significant items (a decline of 0.7%) and $ 3.32 billion after significant items (a decline of 12 %). Total group net profit after tax was $ 2.14 billion, a decline of 12.5%. Margins were gross profit 27.5% compared to 27.11%, Cost of Doing Business was 21.32% compared to 20.90% and EBIT margin was 6.18% compared to 6.21%. Ordinary EPS was down 0.7% to 195.2 cents per share but total dividend was up 1.5% to 139 cents per share. Return on average funds employed was 25.73% compared to 26.98% a drop of 125 basis points. Simultaneously, the company noted that as anticipated, Moody's Investor Services revised its long-term senior unsecured credit rating from A3 (Negative Outlook) to Baa1 (Stable Outlook). This revision is not expected to have a material impact and both capacity and pricing will be adequate for future needs.
Dividend and Buy-back Distribution (Source: Company Reports)
We do note a drag from ageing stores that is causing WOW to lose out to competitors such as Coles, but an opportunity in future may emerge if Woolworths starts refurbishing more stores while others may slow down.
Further, WOW’s managing director, Grant O'Brien said that this is a strong business with a lot of potential with a strong competitive advantage in the form of operating efficiencies. It has the market leadership position in all key Australian markets and is evolving and transforming to cope with the dramatically changed market environment. It has a unique platform from which more than 29 million customers are served every week.
WOW Daily Chart (Source: Thomson Reuters)
In fact, we believe that the price correction caused by the decline in net profit and the credit rating downgrades provides a unique window of opportunity to buy this attractive stock in terms of income and dividend yield. The price correction has in fact caused an increase in the dividend yield which was already at attractive levels. Though there is the genuine risk of falling profits, we do not believe that dividends will be impacted and that the company will continue to pay an attractive dividend.
G8 Education
In its interim report for the half year 2015, the group pointed out that it continues to execute the strategy of disciplined portfolio growth and the provision of exceptional early education to communities and the families. A total of 21 new centres were added during the period and these met all the selection criteria which included a complementary fit to the broader portfolio and an immediate positive contribution to profitability. At the level of the centre, the corporate model continues to provide substantial support and investment to the staff at the centres enabling them to deliver first class educational outcomes through the curriculum. Revenues grew by 66% to $ 310.9 million and the half yearly net profit after tax grew by 73% to $ 28.2 million in comparison to the previous year. This performance has been underpinned by the positive contribution from the 88 child-care centres acquired in the second half of 2014 and the 21 centres acquired in the first half of 2015. The underlying EPS was 8.75 cents per share and the dividends paid for the quarters ended March and June 2015 were each 6 cents per share.
Group Financial Performance (Source: Company Reports)
Affinity Education Group Ltd has announced the position regarding its potential takeover offer from this company which will miss out on the opportunity though it will receive an attractive cash compensation for its holding which it will sell at a profit. Interestingly, the G8 management has agreed to vote in favour of the Anchorage offer subject to certain conditions which are standard in these types of transactions. Further, Jenny Hutson, the chairwoman of G8 Education resigned after the loss of the bid for Affinity Education to Anchorage.
We still believe that in addition to the potential upside in the stock price, the stock represents an attractive income investment with the dividend yield of about 8.3% on an attractive multiple.
GEM Daily Chart (Source: Thomson Reuters)
Rio Tinto Limited
RIO’s latest news on selling 40% stake in the Bengalla coal mine in New South Wales state for about US$606 million along with refurbishing ownership structure of its Coal & Allied unit enabled the company to outpace the Australia's resources index. This comes under the binding agreement between New Hope Corporation Limited and RIO.
Additionally and in response to the devastating effect on the commodities market because of the slowdown in the Chinese economy, this company seems to be doing all the right things. It is actively pursued efficiency ruthlessly and has reduced costs to the point where it is one of the lowest cost producers in the global iron ore industry. In response to the lower price environment, it has increased production and put more pressure on its less efficient competitive while strengthening its own position in the industry. However, iron ore prices are currently at a 10 year low and are unlikely to improve significantly in the medium term because Chinese demand is unlikely to pick up.
Market Scenario_China (Source: Company Reports)
However, the company strongly believes that despite the collapse in prices, what the world actually needs is a larger supply and has reiterated its forecast that steel production in China will peak at 1 billion tons and that global demand for iron ore will increase to 3 billion tons by 2030. The demand growth is underpinned by 220 million Chinese expected to urbanise over the next 15 years as 320 million did so in the 15 years to 2015. Further, 120 million tonnes of supply from marginal producers is expected to leave the market this year with another 45 million tonnes likely to follow because of the low price environment. What is significant is the company's prediction that non-Chinese steel demand is expected to increase by 65% by the year 2030. This translates into an annualised growth of 2.5% every year for the next 15 years. The company argues that Australia is too focused on China and is not the only market in the world. For instance, India is expected to be the second largest consumer of steel in the world after China by 2030 and the lowest cost producers are the most likely to benefit.
The company has used advanced technology including surveillance drones and driverless trucks to cut $ 200 million in maintenance expenditure and the falling prices of the Australian dollar and energy are giving it some headroom even at the current low iron ore prices. Against the current prices of around USD 50 per tonne, the company has a cash cost of just over USD 15 per tonne and it is getting ready to build a new mine called Silvergrass to raise production to 360,000,000 t from that region.
RIO Daily Chart (Source: Thomson Reuters)
We consider that the stock continues to be a worthwhile long-term investment because of its high quality management and the strength of its balance sheet because of the increase in cash flows in excess of 10% every year over the last five years. The dividend yield, which it should have no difficulty maintaining, is a fully franked approximately 6.4% forecast to increase over the next two years.
Flight Centre
Flight Centre shares rose more than 10% after the travel retailer defied pessimists by announcing a better than expected profit result and stronger outlook for the year ahead. The results included net profit up 24% to $256.5m, revenue up 6.8% to $206.9m and an unchanged final dividend at 97 cents per share. Though the underlying pre-tax profit was 3.4% lower than $ 363.7 million, it was higher than the expectations of analysts and at the upper end of the guidance issued in June. What is more, the company has predicted growth of between 4% and 8% for the next year because of the improved outlook in its core Australian market and the strength of its operations overseas.
CEO Graham Turner said that the international operations and the corporate travel business were performing well but the guidance for the next year depends on a better performance from the leisure business in Australia. The company has also reported some lost business to online players and low-cost carriers which has led to decline in the stock price over the past few months but this appears to be an overreaction on the part of investors because the company is still doing well in the more lucrative segments of the market. Another concern revolves around the ACCC launching a further appeal for the competition law test case despite the Full court’s decision in favour of FLT. The company mentioned to again oppose the action.
Overseas EBIT Growth (Source: Company Reports)
On the other hand, the weakening AUD and US dollar appreciation seem to help FLT. We are also confident that the group will continue to do well in the future and that the dividend is sustainable and could even increase. The current dividend yield is around 4.3% fully franked and we consider the stock to be a worthwhile income investment.
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