Westpac Banking Corporation

WBC Details

Sale of Businesses: Westpac Banking Corporation (ASX: WBC) is a leading bank in Australia that provides banking, financial and related services. The market capitalisation of the bank stood at ~$73.20 billion as on 7^th December 2020. Recently, the bank announced the divestment of its Pacific businesses - Westpac Fiji and its 89.91% interest in Westpac Bank PNG Limited to Kina Securities Limited in order to focus on the consumer, business and institutional banking in Australia and New Zealand. The bank would receive sales consideration of up to $420 million. The sale is subject to various regulatory approvals in Fiji and PNG and approval of Kina Bank’s shareholders and is likely to be completed in 2H FY21. On 2^nd December 2020, the company announced the sale of Westpac General Insurance Limited and Westpac General Insurance Services Limited to Allianz at a sale price of $725 million, which reflects a  multiple of 1.3x FY20 gross written premium and is estimated to result in a small post-tax gain on sale in FY 2021. This sale is also is subject to various approvals and is likely to be finished in 2H FY21. In addition, the bank reached an exclusive 20- year agreement for the distribution of general insurance products to Westpac’s customers.

Financial Highlights: For the financial year ended 30^th September 2020, the bank witnessed a fall of 66% in statutory net profit to $2,290 million, mainly because of higher impairment charges, increased notable items as well as the steep decline in economic activity. In addition, the bank also made higher expenses because of the increased resourcing to handle unprecedented COVID-19 demands and fixing its compliance issues.

Maximum Dividend Under APRA Guidance: The bank declared a fully franked final dividend of 31 cents per share, which is payable on 18^th December 2020 despite the challenges created by the global pandemic.  This took total dividend for FY20 to 31 cents per share, which proved as a maximum dividend WBC could pay under current APRA guidance.

Financial Summary (Source: Company Reports)

Outlook: Looking forward, the bank is committed to support its customers and the economy through these challenging times.  The bank is becoming a simpler and stronger bank supported by its focus on three priorities fix, simplify and perform.

Valuation Methodology: Price to Book Value Multiple Based Relative Valuation (Illustrative)

Price to Book Value Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: As on 30^th September 2020, the bank had Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) of 151% and 121.7%, respectively. On a technical front, the stock of WBC has a support level of ~$16.013 and resistance level of ~$26.011. We have valued the stock using the price to book value multiple based illustrative relative valuation and have arrived at a target price of low double-digit (in percentage terms). Thus, considering the growth in CET1 capital ratio, modest outlook, decent liquidity and funding capacity, and valuation, we give a “Buy” recommendation on the stock at the current market price of $20.270 per share on 7^th December 2020.

WBC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Orica Limited

ORI Details

Achievement of Major Initiatives Despite COVID-19 Pandemic: Orica Limited (ASX: ORI) provides commercial explosives and blasting systems to the mining and infrastructure markets. The market capitalisation of the company stood at ~$6.54 billion as on 7^th December 2020. During 2H FY20, the company experienced disruptions in its strategic momentum due to COVID-19. However, ORI achieved all the major initiatives, as well as passed all the key strategic milestones in spite of the impact of the pandemic. These initiatives mainly include the successful acquisition of Exsa and launch of SAP project. For the year ended 30^th September 2020, the company recorded a fall of 9% in underlying EBIT to ~$605 million, before individually significant items. During the year, the company reported statutory NPAT amounting to $168 million, indicating a fall of 31% over pcp. ORI noted net operating cash flows of $277 million and cash conversion of 74.4%.

In order to retain shareholders, the company declared an unfranked final ordinary dividend of 16.5 cents per share, which brought the full-year 2020 dividend to 33.0 cents per share. The company would pay the said divided on 15 January 2021.

Key Financials (Source: Company Reports)

Outlook: The company is expecting its EBIT for FY21 to be skewed towards 2H FY20. In addition, the company anticipates an increase in EBITDA and a return to EBIT growth in FY21, which is likely to be supported by continued momentum in its business. ORI is anticipating capital expenditure in the range of $380 million and $400 million (excluding Burrup) with a continued focus on growth capital and plant reliability for FY21.

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

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

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

Stock Recommendation: The company ended FY20 with net debt of $1.8 billion and gearing of 36.4%. The gearing was within the company’s target range of 30-40%. The stock of ORI has corrected 5.28% and 8.03% in the last three and six months, respectively. As a result, the stock is trading towards its 52-week low of $13.250, offering decent opportunities for accumulation. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price, which is offering an upside of low double-digit (in percentage terms). On a technical front, the stock has a support level of ~$14.965 and resistance level of ~$17.652.  Thus, in light of the achievement of strategic initiatives, expectation for EBIT growth in FY21, gearing level, we give a “Buy” recommendation on the stock at the current market price of $16.210 per share, up by 0.558% on 7^th December 2020.

ORI Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Select Harvests Limited

SHV Details

Record Crop Volume in FY20: Select Harvests Limited (ASX: SHV) is engaged in the growing, processing, packaging, and marketing of almonds from company-owned orchards and investor-owned orchards. The market capitalisation of the company stood at ~$647.68 million as on 7^th December 2020. FY20 was the 3rd consecutive year of increasing volume, wherein, it witnessed a rise of 560 MT to record almonds volume of 23,250 MT. This was mainly due to decent growing conditions and investment in frost fans mitigating the impact of frosts on its trees. NPAT for the year amounted to $25.0 million as compared to $53.0 million in FY19. EBITDA for the period stood at $57.8 million against $95.2 million in FY19.

The company declared a fully franked final dividend of 4 cps, which is likely to be paid on 5 February 2021 to the shareholders registered on 11^th December 2021. This brought the full-year dividend to 13 cents per share. At the current market price of $5.310 dated 7^th December 2020, the annual dividend yield of the company stood at 2.40%, slightly higher than the industry median (Food & Tobacco) of 2.2% on TTM basis.

Dividend History (Source: ASX)

Outlook: Moving forward, the company is optimistic about the global macro demand for almonds. In addition, the company is likely to commence harvesting for the next crop in February 2021, with expected deliveries in April 2021. Moreover, the beginning of 2020/21 water season has witnessed decent weather conditions and a movement of water prices back to long-term averages.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: As on 30^th September 2020, the net bank debt/equity ratio stood at 14.2%. The stock of SHV is trading towards its 52-week low levels of $5.156, offering decent opportunities for accumulation.  On a technical front, the stock has a support level of ~$5.147 and resistance level of ~$6.749. The stock is currently trading higher than the average-52-weeks price level band, offering a decent opportunity for accumulation. We have valued the stock using the price to earnings multiple based illustrative relative valuation and have arrived at a target price of low double-digit (in percentage terms). For the purpose, we have taken peers such as Nufarm Ltd (ASX: NUF), GrainCorp Ltd (ASX: GNC), and Ecofibre Ltd (ASX: EOF), to name a few. Hence, considering the record crop volume, demand for almonds, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $5.310, per share, down by 1.849% on 7^th December 2020.

SHV Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Premier Investments Limited

PMV Details

Decent Growth in Bottom Line: Premier Investments Limited (ASX: PMV) operates numerous specialty retail fashion chains within the specialty retail fashion markets in Australia, New Zealand, Asia and Europe. The market capitalisation of the company stood at $3.65 billion as on 7^th December 2020. For the year ended 25^th July 2020, the company reported net profit after tax (NPAT) amounting to $137.8 million, reflecting YoY growth of 29%. This was mainly contributed by Premier Retail, which reported a record underlying earnings before interest and tax (EBIT) of $187.2 million, up by 11.9% on FY19. The company’s retail business (Premier Retail) recorded a growth of 48.8% in online sales to $220.4 million in FY20. In addition, for the first 18 weeks of FY21, Premier Retail’s online sales soared by 70% over the same period of last year.

For FY20, the company declared a fully franked final dividend of 36 cps, which brought the full-year dividends to 70 cents per share. This was in line with FY19 dividend of 70 cents per share. The company would pay the final dividend on 28 January 2021 with a record date of 7 January 2021.

Online Sales Growth (Source: Company Reports)

Outlook: The company’s five apparel brands are well-placed to deliver future growth. In addition, the company’s major investment in technology, people and new marketing initiatives may deliver a world- class platform and the customer experience in FY21 and beyond.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The company closed FY20 with a strong balance sheet mainly supported by an increased cash balance of $448.8 million and a fall of $20.8 million in interest-bearing debt to $146.7 million. In the last three and six months, the stock of PMV has provided returns of 22.27% and 36.33%, respectively.

The 52-week low-high range for the stock stands at $8.130 - $23.980, respectively. We have valued the stock using the price to earnings multiple based illustrative relative valuation and have arrived at a target price of high single-digit (in percentage terms). For the purpose, we have taken peers such as Metcash Ltd (ASX: MTS), Bapcor Ltd (ASX: BAP), and Breville Group Ltd (ASX: BRG), to name a few. On a technical front, the stock has a support level of ~$18.504 and an immediate resistance level of ~$24.003. Thus, considering decent returns in the past months, strong balance sheet, and robust online sales growth in FY20, we give a “Hold” rating on the stock at the current market price of $23.030 per share, up by 0.130% on 7^th December 2020.

PMV Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Coles Group Limited

COL Details

Decent Growth in Sales Revenue: Coles Group Limited (ASX: COL) is engaged in retailing products like fresh food, groceries, household goods, liquor, fuel and financial services through stores and online channel. The market capitalisation of the company stood at $23.98 billion as on 7^th December 2020. During Q1 FY21, the company’s sales revenue witnessed a rise of 10.5% to $9.6 billion. In addition, Supermarkets comparable sales growth stood at 9.7% to $8.4 billion, this was supported by Victoria, and to a lesser extent New South Wales, as Stage 3 and subsequently Stage 4 restrictions were introduced. The company’s online sales revenue moved up by 57.1%, which is contributing to 6% of overall Supermarkets sales.

Growth in Final Dividend: During FY20, the company recorded a growth of 6.9% in sales revenue to $37.4 billion along with sales revenue growth in all segments. During FY20, the company declared a final fully franked dividend of 27.5 cents per share, which indicated a rise of a 14.6% on the final dividend of FY19. This took the total FY20 dividend to 57.5 cents per share.

Key Metrics (Source: Company Reports)

Outlook: The company recorded supermarkets comparable sales growth of 6.4% in the first four weeks of Q2 FY21. For FY21, the company plans to renew around 65 stores and to open 15 to 20 new stores. In addition, the company is expecting a gross operating capital expenditure of around $1 billion.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: COL closed FY20 with net debt of $362 million and a leverage ratio of 0.4x. In addition, the company is committed to diversify its funding sources and extend the debt maturity profile in near-term. The stock of COL has provided returns of 6.25% and 15.35% in the last three and six months, respectively. We have valued the stock using the price to cash flow multiple based illustrative relative valuation and have arrived at a target price of low double-digit (in percentage terms). On a technical front, the stock has a support level of ~$16.693 and an immediate resistance level of ~$18.747. Therefore, considering the growth in sales revenue, uplift in final dividend and returns in the past months, we give a “Hold” recommendation on the stock at the current market price of $18.260 per share, up by 1.557% on 7^th December 2020.

COL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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