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Stocks for Diversification

September 18, 2015 | Team Kalkine
Stocks for Diversification

BHP Billiton

Improved Production to offset earnings pressure: BHP Billiton Limited (ASX: BHP) earnings before interest and tax dipped by USD 382 million during the financial year 2015, against USD 73 million increase in 2014 financial year, impacted by the declining commodity prices which resulted in the fall in average realized prices. But, BHP’s overall production rose 9% on year over year (yoy) basis in the fiscal year 2015, boosted by the first production from the Escondida organic growth project, Stage three expansion of BMA hay point and Escondida oxide leach area project production contributing to the overall production increase. On the other hand, the stock tumbled 17.2% in last six months (as of sep 17), impacted by commodity prices and impairment charges on the back of South32 demerger.


BHP Daily Chart (Source: Thomson Reuters)

But, BHP has improved its focus on operational efficiencies for its core assets portfolio, offering some respite to its profitability for the coming years. BHP can thus be considered given the above and a strong dividend yield of 6.84%. We reiterate our “BUY” recommendation to the stock at the current price of $24.46.
 

Australia and New Zealand Banking Group



Delivered Stable performance, despite challenging conditions: Australia and New Zealand Banking Group (ASX: ANZ) delivered a decent performance despite the CET1 ratio impact, wherein the group’s cash profit rose 4.3% yoy to $5.4 billion in the nine months ended on June 30 of fiscal year of 2015. The bank is also selling its Esanda dealer finance business, an $8.3 billion business of loans to motor vehicle dealers, to focus on its core business. The group had also stabilized Net Interest Margin during the third quarter of FY15. The group is focusing on its Asian business growth and launched a “super-regional strategy” program to build a solid presence in Asia as compared to its Australian peers. Management has also addressed the investors’ concerns over China growth, by reaffirming the China’s growth outlook over 7% to 7.5% per year. The statutory profit improved 11% yoy to $5.6 billion against $5 billion in pcp, driven by the improved customer franchises across Australia, New Zealand and Asia Pacific. Customer deposits witnessed solid performance, surging by 9.5% on a year over year basis, driven by net loans and advances increase by 7.7% yoy during FY15. Cross border payments represented over 25% of the institutional total customer revenues as of first half of 2015. The shares have been impacted in the last six months due to China concerns. With management addressing these growth concerns, we believe that the correction have placed this bank at even more cheaper valuation trading at an attractive P/E of 10.41x and is also a strong dividend player, with a yield of 6.42%. We remain bullish on the stock and reiterate our “BUY” recommendation at the current price of $28.4.
 
 
ANZ Daily Chart (Source: Thomson Reuters)
 

Woolworths Limited

Reorganizing business to offset the ongoing performance pressure: Woolworths Limited (ASX: WOW) continued to witness pressure on sales, which reduced 0.2% yoy to $60.7 billion impacted by the group’s Australian Food, liquor and petrol as well as General Merchandise segments . Therefore, WOW undertook measures to revive its business across all the segments and launched an Australian Supermarket Customer first Strategy, thorough which WOW estimates an expansion in sales over the next three years. Woolworths is also focusing on enhancing shopping experience, through offers and better communication. The group invested over $200 million on price strategy during the second half of FY15, and estimates to do the same during the first half of FY16. Accordingly, over 9,000 items from WOW were cheaper as compared to its major competitor Coles during fourth quarter of 2015, as per the Nielsen Homescan reports. The group’s transition to Lean Retail Model helped them to achieve significant costs savings of >$500 million, ahead of their targets. However, the stock dipped over 8.2% in just last four weeks, impacted by Moody’s downgrade of the group’s long-term senior unsecured note to BBB+ rating with a stable outlook from A credit rating with negative outlook.

 
Lean Retail Model (Source: Company reports)

But, the group is making efforts to boost its fiscal year of 2016 performance by investing in price, service and experience, and has a decent dividend yield of 5.7%. The stock downfall have led to a cheaper P/E of 14.5x, as compared to its competitors. Based on the foregoing, we reiterate our “BUY” recommendation on WOW at current price of $24.82.


WOW Daily Report (Source: Thomson Reuters)
 

REA Group Limited


Ongoing Market Leadership: REA Group Limited (ASX: REA) reported a solid FY15 performance, with revenues increasing by 20% year on year (yoy) to $522.9 million, while Net profit improved by 24% yoy to $185.4 million and the group enhanced its total dividends by 23% yoy to 70 cents per share for the 2015 financial year. Australian business realestate.com.au generated a solid revenue growth of 21% on a year over year basis to $472.8 million, although the overall Australian market listing volumes decreased by 4%. The average monthly visits to realestate.com.au main and mobile sites surged by 26% during the year and is 24.3 million above per month as compared to the number two site. The realestate.com.au posted 5.7 times more time on site, engaging audience effectively. The average number of monthly page views on realestate.com.au reached 991 million, which is 6.4 times against the number two site. REA group’s iProperty investment in Asia paid off, with the Asian business delivering a solid revenue growth of 88% yoy to $4.5 million in FY15 and EBITDA surge of 150% yoy to $0.6 million. European operations also generated a growth of 6% to $45.6 million during the period while reporting an outstanding EBITDA growth of 85% to $9.7 million. The Average monthly visits to the group’s combined European sites rose by 7% to 10.6 million, partly contributed to the revenue increase.


REA Daily Chart (Source: Thomson Reuters)

The stock rallied over 14.2% in the last three months (as of sep 17), despite the broader S&P/ASX 200 index decline of 8% during the same period. We remain bullish on the stock and reiterate our “BUY” recommendation at the current price of $44.62.
 
 
REA’s portfolio (Source: Company Reports)
 

Greencross Limited

Promises solid potential: Greencross Limited’s (ASX: GXL) total store count rose by 65 stores to 200 during the 2015 fiscal year, while the clinics increased by 21 to 132. Greencross added five more stores in FY16 year to date totaling the store count to 205 (first six weeks of the year). Total clinic numbers reached 136 in YTD of FY16. Meanwhile, Greencross overall outlets reached 341 by YTD of FY16. GXL was also able to enhance its online business by 80%, although it comprises only 1% of the group’s Retail sales. Greencross reported a 45% yoy revenue increase to $644 million for the fiscal year of 2015, driven by the City Farmers acquisition. Greencross’ has a huge target pet sector market in Australia worth over $9 billion. Moreover, this market is forecasted to grow at around 4% per annum to reach $11 billion by 2020. Greencross customers spend 5x more at GXL stores which offers retail, vet and grooming services as compared to customers who shop only at its retail stores and 2x more than by customers who use only Greencross vet. Accordingly, the firm has three major growth platforms, with these areas promising attractive returns and significant potential, helping the group to achieve its target to boost the market share from 8% (with 332 outlets) to 20%. The firm intends to make Vet acquisitions which would represent $20 million of the annualized revenues of FY16, wherein two vet acquisitions have already been finished during YTD FY2016. Although the stock corrected over 10.7% on news that David would be stepping down from the CEO role, an equally talented Martin Nicholas, the group’s present Chief Financial Officer (CFO) has substituted for CEO of Greencross.
 
 
Greencross target pipeline (Source: Company Reports)

We believe that investors have recently overreacted on management change news, and need to leverage the recent correction as an opportunity to enter the stock given its potential. Based on the foregoing, we recommend a “BUY” on GXL at the current price of $6.25.


GXL Daily Chart (Source: Thomson Reuters)

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The information given by Kalkine Pty Ltd ABN34 154 808 312 (Australian Financial Services License Number 425376) on this website is general information or advice only.

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