Stocks’ Details

Westpac Banking Corporation

Quarterly Update on Credit Quality and Capital Funding: Westpac Banking Corporation (ASX: WBC) provides financial services including lending, deposit taking, general finance etc. As on 25 March 2020, the market capitalization of the bank stood at$52.41 billion. The bank has recently declared a fully franked dividend of AUD 0.7676 on WBCPI - CAP NOTE 3-BBSW+3.70% PERP NON-CUM RED T-07-26 which is to be paid on 18 June 2020. The bank has recently released its capital, funding and credit quality report for the first quarter of FY20, wherein it reported a sound credit quality with a rise of 1.7% in total provision balances. WBC also reported a common equity tier 1 capital ratio 10.8% and Level 1 common equity Tier 1 capital ratio 11.1%. These ratios have been impacted by share purchase plan, institutional share placement, and payment of dividend and higher RWAs.

 
Capital Ratios (Source: Company Reports)

What to Expect From WBC: While WBC may face some uncertainties in the shorter run owing to global pandemic of COVID-19, medium to long term outlook for the bank is encouraging because of its size and strength of its balance sheet, quality and scale of customers and financial resources.

Valuation Methodology:Price to Cash Flow Multiple Based Relative Valuation

Price to Cash Flow Multiple Based Approach (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of WBC is trading very close to its 52-week low level of $13.470, proffering a decent opportunity to enter the market. At the current market price of $15.850, annual dividend yield stands at 11.99%. During FY19, efficiency ratio of the company witnessed an improvement over the previous year and stood at 49.7%, up from 44% in FY18. In the same time span, net interest margin of the company stood at 2.16%, higher than the industry median of 1.93%. Considering the current trading levels, higher margins and decent growth opportunities in the longer term, we have valued the stock using price to cash flow multiple based relative valuation method and arrived at a target upside of lower double-digit (in percentage terms). Hence, we recommend a “Buy” rating on the stock at the current market price of $15.850, up by 9.235% on 25 March 2020.

 
Bank of Queensland Limited

 
Five-Year Strategy for Sustainable Growth: Bank of Queensland Limited (ASX: BOQ) provides banking, financial and related services. As on 25 March 2020, the market capitalization of the bank stood at $2.14 billion. In the recently held investor presentation, the bank revealed the details of its five-year strategy to drive enhanced customer experiences, generate sustainable and profitable growth and create long term shareholder value. For the quarter ended 30 November 2019, Common Equity Tier 1 Capital Ratio of the bank stood at 9.5% and Total Capital Ratio was 12.8%.


Capital Ratios (Source: Company Reports)

Future Expectations and Guidance: The bank is prioritizing profitable returns to its shareholders and is simplifying its business to improve productivity and address costs. The bank has recently provided guidance for FY20 and expects income growth and an improved impairment outcome. It also expects FY20 cash earnings to be approximately 4% - 6% lower than FY19 due to softer market conditions across the globe. However, BOQ is targeting dividend payout ratio of 70% to 80% of cash earnings.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation 

Price to Earnings Multiple Based Approach (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of BOQ is trading very close to its 52-weeks’ low level of $4.560, proffering an excellent opportunity for accumulation. At the current market price of $4.80, annual dividend yield stands at 13.83%. During FY19, net interest margin of the bank was in line with the industry median and stood at 1.93%. In the same time span, efficiency ratio of the bank was 55.8%, higher than the industry median of 52.3%. Considering the trading levels, higher efficiency ratios and decent outlook, we have valued the stock using price to earnings based relative valuation method and arrived at a target upside of lower double-digit (in percentage terms). Hence, we recommend a ‘Buy’ rating on the stock at the current market price of $4.80, up by 2.128% on 25 March 2020.

National Australia Bank Limited

Removal of Class from Official Quotation: National Australia Bank Limited (ASX: NAB) provides banking services, access card services, international banking, fund management etc. The bank has recently announced that NAB Capital Notes were suspended from official quotation on 11 March 2020 and the resale to the nominated purchaser was completed on 23 March 2020. The bank will cut 200bps from the rate on new loans and all overdrafts on its flagship digital business product QuickBiz, effective March 30 and will reduce variable rates on small business loans by 100bps. These measures will provide significant relief to businesses and homebuyers over the next six months.
During the Q1FY20, Common Equity Tier 1 ratio of the bank stood at 10.6% and leverage Ratio of the bank went up to 5.6%, slightly up from 5.5% in September 2019. In the same time span, total RWA (Risk-Weighted Assets) were in line with the previous quarter and stood at $415 billion.


Capital and Leverage Ratios (Source: Company Reports)

Valuation Methodology: Price to earnings Multiple Based Relative Valuation

Price to Earnings Multiple Based Approach (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of NAB is trading close to its 52-weeks’ low level of $13.195, proffering a decent opportunity for the investors to enter the market. At the current market price of $15.790, annual dividend yield stands at 11.53%. During FY19, efficiency ratio witnessed an increase over the previous year and stood at 57.2%, up from 51.9%. Considering the trading levels, improvement in efficiency ratio and improvement in leverage ratio, we have valued the stock using the price to earnings multiple based relative valuation method and arrived at a target upside of lower double-digit (in percentage terms). Hence, we recommend a ‘Buy’ rating on the stock at the current market price of $15.790, up by 9.653% on 25 March 2020.

The Star Entertainment Group Limited

Earnings up in Challenging Conditions: The Star Entertainment Group Limited (ASX: SGR) is engaged in the management of integrated resorts with gaming, entertainment and hospitality services. As on 25 March 2020, the market capitalization of the company stood at $1.48 billion. During 1H20, normalized net revenue of the company went up by 1.9% to $1,131 million and EBITDA witnessed an increase of 3.5% to $307 million. This resulted in an increase of 2.1% in NPAT to $126 million.


1H20 Financial Highlights (Source: Company Reports)

COVID-19 Directives: The company is following the government directives requiring the closure of all non-essential businesses and hence has ceased gaming activities, food and beverage, banqueting and conferencing offerings. The shutdown of the casino might have an impact on the company operations. However, the management is focused on mitigation strategies to minimize effects and conserve liquidity. 

What to Expect: The company is prioritizing to improve, and de-risk returns for the shareholders by delivering on its investment strategy. It is also trying to manage the competitive environment and is executing its capital efficient model.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation Method

EV/Sales Multiple Based Approach (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of SGR is trading close to its 52-week low level of $1.525. During 1H20, gross margin of the company stood at 95.1%, higher than the industry median of 55.7%. In the same time span, net margin of the company witnessed an improvement over the previous half and stood at 7.3%. up from 4.9%. At the current market price of $1.620, annual dividend yield stands at 12.69%. Considering the trading levels, improvement in margins and decent outlook, we have valued the stock using EV/Sales multiple based relative valuation method and arrived at a target upside of lower double-digit (in percentage terms). Hence, we recommend a ‘Hold’ rating on the stock at the current market price of $1.620, up by 0.31% on 25 March 2020.

Transurban Group

Hills M2 Asset to Raise $815 Million: Transurban Group (ASX: TCL) is an owner, operator and developer of electronic toll roads and intelligent transport systems. As on 25 March 2020, the market capitalization of the company stood at $30.58 billion. The company has recently announced that Hills M2 Motorway, which is 100% owned by Transurban, has reached contractual close to raise $815 million of non-recourse debt via two new bank debt facilities. This issuance will increase the Group’s weighted average maturity.

During 1H20, the company reported an increase of 2.3% in average daily traffic across portfolio and a growth of 9.5% in EBITDA to $1,094 million. In the same time span, net profit after tax went up by 11.1% to $162 million.


1H20 Financial Highlights (Source: Company Reports)

Growth Opportunities: The company is well positioned to capitalize on emerging market opportunities. It has delivered on near-term priorities and is continuing to enhance core capabilities and operational discipline. The company has identified pipeline of projects and acquisitions materializing in core markets and has a strong capital position representing enhance capability.

Stock Recommendation: The company remains ahead of investment case and is strengthening communities through transport. During 1H20, net margin of the company witnessed an improvement over the previous half and stood at 7.6%, up from 1.2% in 2H19. In the same time span, ROE of the company went up to 2.2% from 0.55 in 2H19. At the current market price of $12.430, annual dividend yield stands at 5.46%. Considering the improvement in margins, decent growth opportunities and financial performance, we recommend a ‘Buy’ rating on the stock at the current market price of $12.430, up by 11.181% on 25 March 2020. 
 
 
Comparative Price Chart (Source: Thomson Reuters)

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