Stocks’ Details

Scentre Group

Decent Liquidity Position: Scentre Group (ASX: SCG) owns and operates Westfield in Australia and New Zealand with interests in 42 Westfield Living Centres. The company recently announced the appointment of Guy Russo as a Director, effective from 1^st September 2020.

March Quarter Highlights: During the quarter, the company completed 496 leasing deals, representing ~ 80,000 square metres of gross lettable area. Operating performance was strong during January and February before the COVID-19 outbreak in March 2020. The company launched Westfield Direct, a new drive-through, contactless click and collect service available across all its centres. Retail in-store sales grew in the first two months, followed by a decline in March. Comparable specialty in-store sales for the quarter went down by 7.1%. Considering the uncertainty regarding the pandemic impacts, the company suspended its guidance for 2020 and decided to not pay an interim dividend for the six months ended 30^th June 2020.

Comparable In-store Sales (Source: Company Reports)

What to Expect: As a preliminary estimate, the company expects 1H 2020 net operating cashflow to be over $250 million. Due to the impact of the pandemic, the carrying value of the property portfolio as at 30^th June 2020 is expected to reduce by ~10% on the value reported at 31^st December 2019. The company expects to release the half-year results on 25^th August 2020.

Key Risks: With a significant portion of earnings derived from rental income, the company is exposed to the risk of rent payments due to COVID-19. The company operates in a highly capital-intensive industry and may face difficulties in raising debt at a reasonable price.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of the company corrected by 11.16% in the last three months and is currently inclined towards its 52-week low of $1.350. On the technical analysis front, the stock of the company has a support level of ~$1.6 and a resistance level at ~$2.53. As of 30^th June 2020, the company had available liquidity of $4.4 billion. The decision of not paying any dividend for the first half seems prudent in light of the company’s capital retention needs and delivery of long-term returns for shareholders. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the decent liquidity position and operational performance, resilient portfolio, and current trading levels, we give a ‘Buy’ recommendation on the stock at the current market price of $1.99, as on 20^th August 2020.

The A2 Milk Company Limited

Strong Growth in Asia Pacific: The A2 Milk Company Limited (ASX: A2M) is primarily engaged in the sale of branded products made with milk from cows that produce milk naturally containing only the A2 protein type.

Results Highlights: During the year ended 30^th June 2020, the company reported excellent performance across all markets and product groups. Total revenue for the period increased by 32.8% to NZ$1.73 billion. EBITDA increased by 32.9% and came in at NZ$549.7 million. NPAT for the year stood at NZ$385.8 million, up 34.1% on the previous year. During the year, the company invested NZ$194.3 million in marketing for opportunities in China and the USA. Notably, label infant nutrition sales in China doubled to $337.7 million, with distribution expanded to ~19,100 stores. In the USA, milk revenue increased by 91.2%, with an increased distribution presence in ~20,300 stores.

Segment-Wise Revenue & EBITDA: Total revenue from ANZ, China & Other Asia, and the USA, came in at NZ$965.7 million, NZ$699.4 million, and NZ$66.1 million, respectively. EBITDA for the first two segments stood at NZ$465.6 million and NZ$224.8 million, while the USA recorded an EBITDA loss of NZ$50.5 million, primarily due to COVID-19 impact. On the product front, infant nutrition generated the largest revenue of NZ$1,423.9 million, up 33.8% on pcp, followed by liquid milk and other nutritional products.

Financial Results (Source: Company Reports)

Outlook: Notwithstanding the COVID-19 related uncertainties, the company expects continued strong revenue growth in FY21, on the back of investments in marketing and organisational capability. EBITDA margin for the year is anticipated between 30% - 31% and FY21 capex is estimated at NZ$50 million.

Key Risks: The business is exposed to potential product quality, food safety, or food integrity events that may cause concerns among consumers and can impact brand reputation. Intense competition can lead to erosion of market share in core markets, thereby, impacting revenues. Heavy reliance on key relationships with strategic partners, including key supply and distribution partners can impact operations if the parties reduce their support to the business due to an unforeseen event.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of the company gave positive returns of 15.73% in the last six months and is currently inclined towards its 52-week high of $20.050. On the technical analysis front, the stock of the company has a support level of ~$17.16 and a resistance level at ~$19.9. During FY20, the company generated an operating cash flow of NZ$427.4 million. Cash at the end of the period stood at NZ$854.2 million. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a limited upside (in percentage terms). Considering the performance in FY20, decent outlook, current trading levels, and valuation upside, we suggest investors to wait for better entry levels, and hence, have a watch stance on the stock at the current market price of $18.16, down 0.493% on 20^th August 2020.

APA Group

Execution of Agreement with Cooper Energy: APA Group (ASX: APA) owns and operates energy infrastructure assets and businesses. The company recently announced the execution of an agreement with Cooper Energy to complete the commissioning of the Orbost Gas Processing Plant and commence firm supply to Cooper Energy’s term gas customers. In another update, the company notified about the appointment of Adam Watson as the CFO in place of Peter Fredricson, the retiring CFO.

Distribution & Guidance Update: For the six months ended 30^th June 2020, the company is set to pay an estimated final distribution of 27.0 cents per security on 16^th September 2020, which will amount to a total dividend of 50.0 cents for FY20, up 6.4% on FY19. The company will confirm the actual amount of dividend with the release of FY20 financial results on 26^th August 2020. Due to delays in commissioning of the Orbost Gas Processing Plant due to COVID-19, the company revised its EBITDA guidance for FY20. As per the revised guidance, EBITDA is expected between $1,635 - $1,655 million.

H1FY20 Highlights: During the half year ended 31^st December 2019, the company’s revenue amounted to $1,077.8 million, up 6.4% on the prior year period. EBITDA came in at $842.2 million, up 6.9% on pcp. Operating cash flow climbed 8.9% and came in at $511.9 million.

H1 Financial Highlights (Source: Company Reports)

Key Risks: Changes in policy and regulations can impact APA’s business as the company has a portfolio of significant assets and investments subject to economic regulation, with respect to the price that APA is allowed to charge for certain services. Other potential headwinds for the business, include the extent of competition from new gas transportation pipelines, gas prices and new technologies or gas swap contracts, etc. 

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of the company is currently inclined towards its 52-week high of $11.85. In the last one month, the stock went up by 2.80%. On the technical analysis front, the stock of the company has a support level of ~$10.94 and a resistance level at ~$11.85. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). Considering the execution of the agreement with Cooper Energy, upcoming results announcement, and current trading levels, we maintain a ‘Hold’ rating on the stock at the current market price of $11.37, down 0.263% on 20^th August 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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