September, 2023
Key Contributors
CSL (CSL, underweight) – our underweight to the globally focused biotechnology company contributed positively to performance during the quarter, as the stock continued to weaken following the pre-release in June of FY24 group earnings guidance which was below market expectations (around 10% lower than consensus for group FY24 NPATA). The weaker operating outlook was driven by lower growth in the core blood plasma business, Behring, as cost pressures pushed out the margin recovery story. We retain our cautious outlook for Behring, driven by increased competition, elevated and prolonged cost pressures, adverse relative product growth rates and longer-term product substitution risk. Trading on 25.9-times forward FY24 P/E, we currently retain an underweight position.
Carsales.com (CAR, overweight) -- the online auto classifieds company outperformed during the period following its full-year result. The result proved up CAR’s investment case of the recent acquisitions of Trader Interactive in the US business and Webmotors in Brazil, with both businesses demonstrating double digit yield growth as dynamic pricing models were introduced. Combined with a strengthened market position in Australian private car sales, there is now much greater visibility around continued price and yield increases across the business.
Key Detractors
ResMed (RMD, overweight) – our overweight position in the medical equipment manufacturer detracted during the month following the release of its full-year results. We would characterise the share price weakness as driven by firstly an increased focus on the potential future impact of weight loss drugs GLP-1s on the sleep-apnoea market and, secondly, an eventual return of competitor Phillips into the sleep-apnoea device market in the USA. There was also a degree of gross margin disappointment following delivery of the company’s full year result. Notwithstanding the above factors, we continue to see a solid market penetration outlook for RMD’s CPAP devices, and hence believe these are factored into expectations at current levels with the stock trading on an attractive valuation (21.7 times P/E FY24 vs 28.1 times longterm average).
Iluka Resources (ILU, overweight) – our overweight position in the mineral sands company was a detractor during the quarter. Iluka reported a 10% decline in mineral sands revenue and a 22% decline in underlying EBITDA in its FY23 results, with the market concerned over the short-term outlook for mineral sands demand notwithstanding ILU's commentary of flat pricing in the second half. We continue to like mineral sands markets long-term and favour ILU 's leverage as the world's largest Zircon producer and fifth largest producer of titanium feedstocks. Iluka is moving into Rare Earths production through the Eneabba refinery and should be a critical component producer for the EV industry.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Sept-2023.pdfAugust, 2023
Key Contributors
Carsales.com (CAR, overweight) – the online auto classifieds company outperformed during the month following its full-year results. The results proved up CAR’s investment case of the recent acquisitions of Trader Interactive in the US business and Webmotors in Brazil with both businesses demonstrating double digit yield growth as dynamic pricing models were introduced. Combined with a strengthened market position in Australian private car sales, there is now much greater visibility around continued price and yield increases across the business.
NEXTDC (NXT, overweight) – Data centre operator NEXTDC continued to perform strongly during the month after announcing another large step-up in contracted capacity. NXT has signed 25MW of capacity mainly in its M2 (Melbourne) data centre. This brings NXT to a 60MW (70%) increase in contracted capacity in the last three months, highlighting a step change in demand for data centre capacity and the company’s market leading capability.
Key Detractors
Resmed (RMD, overweight) – our overweight position in the medical equipment manufacturer detracted during the month following its full-year results. A number of characteristics drove this share price weakness including in particular an increased focus on the potential future impact of weight loss drugs GLP-1s on the sleep-apnoea market; the return of competitor Phillips into the sleep-apnoea device market in the USA; and, to a lesser extent a degree of gross margin disappointment following delivery of the company’s full year result. Notwithstanding the above factors, we continue to see a solid market penetration outlook for RMD’s CPAP devices, and hence believe these are factored into expectations at current levels with the stock trading on an attractive valuation (21.6x P/E NTM vs 28.1x long-term average).
Alumina (AWC, overweight) – our overweight position in the alumina producer was a detractor during the month following its half-year results. We are concerned that environmental approvals to mine, close to the Serpentine dam may not be received in a timely manner, and the company has less than 12 months of remaining low-grade ore to mine at Huntly. We see a material risk that the Kwinana and Wagerup refineries may be forced to curtail production or even close at a time where the company's debt levels are approaching unsustainable levels. This has led us to exit the position.
Key Purchases
APA Group (APA) – we initiated a position in the gas transmission pipeline company via participation in an equity raising used to fund Alinta’s Pilbara assets. The acquisition of the Alinta assets gives APA an attractive platform to deploy capital into the decarbonisation of mining operations in the Pilbara through the development of renewable generation and transmission infrastructure. APA trades on a valuation of 11.5x FY24 EV/EBITDA and a 6.5% dividend yield, which we view as an attractive entry point.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund_Aug-2023.pdfJuly, 2023
Key Contributors
CSL (CSL, underweight) – our underweight to the globally focused biotechnology company contributed positively to performance in July as the stock continued to weaken following the pre-release in June of FY24 group earnings guidance which was below market expectations (around 10% lower than consensus for group FY24 NPATA). The weaker operating outlook was driven by lower growth in its core blood plasma business, Behring, as cost pressures delay the margin recovery story. We retain our cautious outlook for Behring, driven by increased competition, elevated and prolonged cost pressures, adverse relative product growth rates and longerterm product substitution risk. Trading on 28.0 times forward P/E, we retain an underweight position.
United Malt (UMG, overweight) – the global commercial malt processor and distributor outperformed as Malteries Soufflet signed a binding deal to acquire UMG at $5.00 a share (a +45% premium to the undisturbed price) following an extensive period of due diligence.
Key Detractors
Iluka (ILU, overweight) – our overweight position in the mineral sands company was a detractor during the month. Despite the company's solid June quarterly production report, ILU expects demand to be softer during 2H23. Competitor Tronox also highlighted this trend which led to market concerns. While we see short-term demand risks, traditional supply sources – particularly in South Africa – appear to be in decline, supporting ILU's expectations for flat pricing in the second half. We continue to favour the mineral sands markets for long-term investment, and specifically ILU as the world's largest Zircon producer and fifth largest producer of titanium feedstocks. Iluka is moving into Rare Earths production through its Eneabba refinery, adding potential for the company to become a critical component producer for the EV industry.
National Australia Bank (NAB, underweight) – the bank sector performed well during the month as the market began to place a higher probability on a soft landing and interest rates remaining higher for longer. We remain underweight, with Australia’s banks facing material earnings pressures through declining net interest margins, elevated expense growth and a normalisation in bad debt expenses, meaning sector EPS is likely to be at peak levels.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Jul-2023.pdfJune, 2023
Key Contributors
Xero (XRO, overweight) – the online accounting software provider outperformed during the quarter after announcing a solid result, with subscribers and revenue in line with expectations and EBITDA ahead of estimates. The result saw XRO’s new CEO provide more detail about the company’s shift towards more disciplined growth, with an increased focus on yield as a growth lever along with subscriber growth.
Insurance Australia Group (IAG, overweight) – our position in Australia’s largest personal lines insurer added value over the period following a positive investor day update, which demonstrated more conservative setting around reinsurance and perils allowances, de-risking the growth outlook.
Key Detractors
Link Group (LNK, overweight) – the diversified superannuation administration provider underperformed over the period following an adverse update in late June specific to its Retirement & Superannuation Solutions (RSS) business which confirmed that a superannuation customer representing approximately 4% of the business’ revenue would not be renewing their contract in FY25. Notwithstanding LNK calling out that FY23 was overall tracking ahead of expectations, the share price weakened as investors queried if LNK may need to trade off margin for renewal certainty in future years.
United Malt (UMG, overweight) – the global commercial malt processor and distributor underperformed during the period. UMG received a takeover bid from peer Malteries Soufflet priced at $5.00/share (+45% premium to prior closing price) in late March but has retraced modestly from its highs as a degree of deal risk began to be priced. Our view has been that Malteries Soufflet has required time to undertake sufficient due diligence and that the likelihood of a deal proceeding remains high. Positively, following end of the June period on 3 July, UMG received confirmation of the bid proceeding at $5.00 subject to a number of deal requirements. This saw the stock up +8.6% on the first trading day in July.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Jun-2023.pdfMay, 2023
Key Contributors
Xero (XRO, overweight) – the online accounting software provider outperformed during the month after announcing a solid result, with subscribers and revenue in line with expectations and EBITDA ahead of estimates. The result saw XRO’s new CEO provide more detail about the company’s shift towards more disciplined growth with an increased focus on yield as a growth lever along with subscriber growth.
Key Detractors
CSL (CSL, underweight) – our underweight to the globally focused biotechnology company detracted from performance in May, which coincided with the release of results from blood plasma peers Grifols and Takeda. These updates provided some supportive data points for the outlook for its blood plasma business, Behring (approximately 65% of CSL group earnings), in particular the return of donors to collection centres and moderating donor fees from peak levels. Nevertheless, there remain a number of more challenged aspects to the outlook for blood plasma economics, including elevated non-donor fee cost inflation, increased competition, adverse relative product growth rates and longer-term product substitution risk. Trading on 30.2-times forward P/E, we retain an underweight position.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-May-2023.pdfApril, 2023
Key Contributors
Reliance Worldwide (RWC, overweight) – the manufacturer and distributor of plumbing and heating parts outperformed following the release of its March-quarter trading update. The trading update was broadly positive, demonstrating the resilience of its repair-focussed end markets (total sales growth of +14.2% for the nine months ending March-23) and a robust margin outlook supported by cost-out plans and easing raw material cost pressure. We view RWC as a compelling opportunity, with the market pricing for a significant decline in earnings (P/E of only 14.9 times vs 17.0 times mid cycle) whereas we remain constructive on the demand environment given the defensive nature of RWC's revenue base, the majority of which relates to repair and remodelling sales.
Key Detractors
United Malt (UMG, overweight) – the global commercial malt processor and distributor underperformed during the period. UMG received a takeover bid from peer Malteries Soufflet priced at $5.00/share (+45% premium to prior closing price) in the prior month and retraced modestly from its highs close to the deal terms. Malteries Soufflet is currently undertaking due diligence and we believe that the likelihood of a deal proceeding is high.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Apr-2023.pdfMarch, 2023
Key Contributors
United Malt (UMG, overweight) – the global commercial malt processor and distributor outperformed during the period after receiving a takeover bid from peer Malteries Soufflet priced at $5.00/share (+45% premium to prior closing price). It emerged that Malteries Soufflet has submitted four bids for UMG since December 2022, indicating strong interest in UMG’s assets. We believe that the likelihood of a deal proceeding is high.
Reliance Worldwide (RWC, overweight) – the manufacturer and distributor of plumbing and heating parts outperformed early in the quarter as the 30-year US mortgage rates compressed ~30bps and the market's belief that the Fed was getting closer to the top of this rate hiking cycle strengthened. RWC also outperformed after its March Investor Day at which it announced two new products which should drive EBIT upgrades in later years (FY25+). We view RWC as a compelling opportunity, with the market pricing for a significant decline in earnings (P/E of only 14.5 times vs 17.0 times mid cycle) whereas we remain constructive on the demand environment given the defensive nature of RWC's revenue base, the majority of which relates to repair and remodelling sales.
Key Detractors
Incitec Pivot (IPL, overweight) – the manufacturer and distributor of fertilisers and explosives products underperformed over the period, as the price for Tampa ammonia fell 55% over the last three months on weaker gas prices in Europe and weaker demand. After IPL announced the sale agreement for its WALA asset (20 March 2023), the group is now much less exposed to movements in ammonia pricing going forward. IPL achieved a better-than-expected sale price for WALA of U$1.68bn and announced a value accretive offtake agreement with CF Industries. We expect that IPL will be able to commence its previously announced buyback of A$400m after its 1H23 result and may upgrade the buyback program with the A$1.25bn of net cash proceeds from the WALA sale.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Mar-2023.pdfFebruary, 2023
Key Contributors
QBE Insurance (QBE, overweight) – the general insurer performed strongly during the month, reporting a solid full year result which was largely in line with expectations, with guidance for gross written premium growth for 2023 of mid to high single digits leading to upgraded earnings expectations. QBE has made material progress in de-risking its portfolio which, combined with the strong revenue environment and the benefit to earnings from higher interest rates, have led to strong earnings and return outlook.
Link Administration (LNK, overweight) – the outsourced services provider appreciated during the month as the company made material progress in resolving the uncertainty overhanging it UK Fund Solutions business. LNK announced that it had an in-principal agreement with potential acquirer Waystone to purchase its Fund Solutions business, with the UK regulator (FCA) agreeing that the proceeds from the sale would be sufficient to cover its restitution claims for unitholders in the collapsed Woodford funds.
Key Detractors
Northern Star (NST, overweight) – the gold producer was a negative contributor during the month. Following a period of strong outperformance late in 2022, NST tracked the gold price lower in February, with gold declining 5% to US$1,817/oz at month end. We continue to favour NST's solid assets and strong cost control. Aspirations to grow the business from current production of ~1.5Moz p.a. to >2Moz p.a. by 2026 remain achievable within the current portfolio, led by the Thunderbox mill expansion project and improving grades at its Super Pit and Pogo (Alaska) assets. The company remains the quality name in the gold sector, in our view.
PEXA (PXA, overweight) – the electronic conveyancing company underperformed during the period, despite reporting a solid result for the six months to December 2022. With the background of the anticipated slowdown in house transaction volumes in Australia already an overhang on the stock, PXA guided to a slower roll out of its UK platform and higher than anticipated losses in its startup digital business.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Feb-2023.pdfJanuary, 2023
Key Contributors
Reliance Worldwide (RWC, overweight) – the plumbing supplies company outperformed over the month of January following news of the widespread freeze event in the US in late December. These freeze events occur approximately every three years and this one should provide a solid boost to sales as repairs are undertaken to rectify frozen pipes. US 30-year mortgage rates also compressed ~50bps over the month, a positive move for home renovators that look to draw on their mortgages, with the share price also responding positively to this movement. Looking at the stock more broadly, the market is showing concern for a falling demand environment and RWC FY23 estimates were lowered after the company's August result and 1Q23 update. We believe RWC is a compelling opportunity with the market pricing for a significant decline in earnings (P/E of only 14 times vs 17 times mid cycle), while we remain constructive on the demand environment given the defensive nature of the majority of RWC’s repair and remodelling sales.
JB Hi-Fi (JBH, overweight) – the specialist retailer outperformed during the period, with the stock continuing to re-rate higher on a strong trading update and resilient consumer spending patterns. Both JB Hi-Fi and The Good Guys margins held up better than expected, with no evidence of a reversion to pre-COVID levels to date. We view JBH as a best-in-class operator that is well positioned to navigate the volatility ahead despite a softening consumer environment, with strong cash generation and a robust balance sheet. Unlike other COVID beneficiaries, consensus earnings already reflect a -30% earnings decline over the next three years, resulting in the company trading at a discount which we believe is unwarranted (8 times EV/EBIT vs 10 times long-term average).
Key Detractors
Incitec Pivot (IPL, overweight) – the explosives, fertilisers and industrial chemicals company underperformed over the month as ammonia prices reduced 23% to $790/t. Ammonia prices in Europe have been falling with demand in Asia very soft, the removal of an 5.5% EU import duty & EU gas prices in late December at their lowest level for seven months. We note these movements are temporary rather than structural and note that spot prices are in line with consensus forecasts for FY23. We remain overweight the company, with positive catalysts on the horizon for the stock.
Origin Energy (ORG, overweight) – the energy retailer is under a takeover offer and lagged the market during the month, falling modestly despite an upgrade to full year earnings guidance for its Energy Markets business. The exclusive due diligence period with suitors Brookfield and EIG was extended again during the month, then ultimately lapsed without a binding bid materialising. The parties remain in talks, and we expect an update from the company imminently.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Jan-2023.pdfDecember, 2022
Key Contributors
Origin Energy (ORG, overweight) – the energy company disclosed a takeover approach from Brookfield and EIG at $9.00 per share, a 55% premium to the pre-disclosure share price, valuing the company at an enterprise value of $18.4b. Talks had been ongoing since August and the indicative approach at $9.00 has been recommended by the Board, should the bid become binding. We view $9.00 as a fair price for Origin’s privileged energy assets and retail position, noting that the deal will be subject to FIRB and ACCC approval, with the latter subject to a public review.
Key Detractors
Reliance Worldwide (RWC, overweight) – the plumbing supplies company underperformed during the period following James Hardie's (ASX listed peer) weaker than expected market update. The market is showing concern for a falling demand environment and RWC FY23 estimates were lowered after the August result. We believe RWC's reaction to JHX's update is un-warranted. We believe RWC is a compelling opportunity with the market pricing for a significant decline in earnings (P/E of only 12 times vs 17 times mid cycle), while we remain constructive on the demand environment given the defensive nature of the majority of RWC's repair and remodelling sales. In addition, the widespread and strong US freeze over the holiday period in late December should provide a strong boost to sales as repairs are undertaken to rectify frozen pipes.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Dec-2022.pdfNovember, 2022
Key Contributors
Origin Energy (ORG, overweight) – the energy company disclosed a takeover approach from Brookfield and EIG at $9.00 per share, a 55% premium to the pre-disclosure share price, valuing the company at an enterprise value of $18.4b. Talks had been ongoing since August and the indicative approach at $9.00 has been recommended by the Board. We remain attracted to Origin’s privileged energy assets and retail position, noting that the deal will be subject to FIRB and ACCC approval, with the latter subject to a public review.
Sandfire (SFR, overweight) – the copper producer was a positive contributor to the portfolio during the period. Copper prices increased 9% over the month to close at US$3.73/lb. We like copper as a commodity given its leverage to electrification as a key material in batteries and electric motors. In addition, the company undertook an equity raising during the period which was well received by investors. We participated in the company's $200m Entitlement Offer during the period and view the raising as an important de-risking event for the balance sheet. The company is now better funded to complete the Motheo project in Namibia, and progress drilling activities to increase the mine life at the MATSA asset in Southern Spain. Further de-risking of these projects, coupled with the positive outlook for copper markets, will continue to generate share price outperformance in our view.
Key Detractors
Aristocrat Leisure (ALL, overweight) – the gaming company underperformed during the period following a slightly disappointing result, which saw Digital momentum slow more than expected after an initial rally through October. We retain a positive view on the company given ALL's dominant position in Land-Based gaming and expect that Digital revenues will likely normalise after a period of outsized growth. Longer term, we see significant opportunities across both divisions and retain conviction in ALL’s growth potential.
Fortescue Metals (FMG, underweight) – the iron ore producer was a detractor during the period as the stock outperformed on rising iron ore prices. During November, the benchmark 62% Fe index rose 27% to close at US$101/t on expectations that a shift away from COVID-zero policies in China would support industrial production and housing starts. As a highcost iron ore producer, Fortescue is highly levered to movements in spot iron ore prices. We continue to view iron ore prices as unsustainably high relative to cost curve support, particularly in light of November's commodity price rally. As a result, we are happy to remain underweight FMG. BHP is our preferred exposure to iron ore given higher grades, lower operating costs, and a diversified commodity base.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Nov-2022.pdfOctober, 2022
Key Contributors
CSL (CSL, underweight) – our underweight position contributed to portfolio returns following the company hosting an investor day for its newly acquired Vifor business. Vifor is a leading iron-deficiency and kidney-related treatments (new treatments for CSL) and now contributes 15% to group sales and earnings. While informative around the medium to longer term opportunities for the business, the update saw modest negative earnings revisions as a result of less earnings accretion from the deal. Overall, at this early stage, we view the Vifor business as being lower quality to Behring (around 70% group earnings) given generic substitution risks over coming years, and elevated expectations on new product commercialisation. Within the healthcare space we favour ResMed and continue to see better stock opportunities elsewhere; CSL continues to command a P/E multiple in excess of 30 times for a growth profile that is exposed to ongoing cost and competition pressures.
Link Group (LNK, overweight) – the company’s share price recovered somewhat during the month following sharp underperformance in the prior month following termination of the agreed deal with Dye & Durham to buy the company. We still see considerable value in LNK and a pathway to crystalizing this value and regard the announced demerger of its stake in PEXA as an appropriate first step. LNK received a substantial bid from Dye & Durham for its Corporate Markets and Banking & Credit Markets businesses during the month which further highlights the value in the constituent parts of LNK.
Key Detractors
National Australia Bank (NAB, underweight) – the banking sector performed strongly over the month as the market factored in higher expectations around the pace of net interest margin expansion, with the banks being near term beneficiaries from a higher interest rate environment. We expect the benefit to bank earnings from higher net interest margins will be transitory in nature as deposit pricing catches up and front book mortgage competition remains intense.
Reliance Worldwide (RWC, overweight) – the plumbing supplies company underperformed during the period following the release of its 1Q23 result which showed volumes are softening modestly across the business (-1.9% in 1Q) and expectations that volumes will be down mid-single digits in the Americas division over FY23. Margins were also weak at 21.4% (ex EZ Flo), with the price recovery for cost inflation insufficient to cover cost inflation in the quarter. Over the full year, raw material costs should deflate, which should mean that margins improve over the full year. Whilst the quarterly result was weak, we regard the sell-off as over-done and retain our conviction in the longer-term investment thesis.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Oct-2022.pdfSeptember, 2022
Key Contributors
OZ Minerals (OZL, overweight) – the copper miner was a positive contributor to the portfolio during the month following BHP’s $25/share takeover offer for the company. The offer represented a 32% premium to prior close. With the OZL board rejecting the initial offer, we recognize the potential for BHP to return with a higher bid. The potential for a counterbidder to emerge is limited, in our view, given BHP’s significant regional synergies with Oz Minerals. We retain our fundamental positive view on OZL due to its two high quality, long life, 100% owned copper mines in South Australia - Prominent Hill and Carrapateena. We expect the company’s copper production to double to >200ktpa by 2030, as Carrapateena moves to a block caving operation, and the company develops the greenfield West Musgrave copper/nickel deposit in Western Australia.
Tyro (TYR, overweight) – the payments technology company outperformed during the quarter after receiving a bid from a private equity firm Potentia at $1.24, a 31% premium to the prevailing share price pre bid. We view the timing of the bid as highly opportunistic and the price as dramatically undervaluing the business. TYR’s result and guidance during the quarter demonstrated that cost discipline is being instilled in the organisation and that the revenue line continues to grow strongly.
Key Detractors
Link Group (LNK, overweight) – the superannuation admin and property technology company fell materially in the quarter following its takeover by Dye & Durham being scuppered at the eleventh hour by the UK’s Financial Conduct Authority (FCA). The FCA has imposed an £50m fine on LNK’s UK Fund Solutions business and a potential restitution payment of up to £306m for the Woodford issue which has been under investigation since 2019. Despite the uncertainty this creates, we still see considerable value in LNK and a pathway to crystalising this value with the announced demerger of its stake in PEXA an appropriate first step.
Atlas Arteria (ALX, overweight) – the toll road operator underperformed following the announcement of the acquisition of the Chicago Skyway toll road and a $3b associated capital raising at $6.30, a 19% discount to the predeal share price. This was unquestionably a negative development given ALX was being actively pursued by suitor IFM who had built a stake at $8.10. ALX have paid a very full price for the asset and the transaction has lowered our valuation for the stock, although the transaction itself does not rule out IFM returning with another bid.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Sept-2022.pdfAugust, 2022
Key Contributors
OZ Minerals (OZL, overweight) – the copper producer was a positive contributor to the portfolio during the period following BHP’s takeover offer for the company. The offer, priced at $25 per share, represented a 32% premium to the pre-bid price. With the OZL board rejecting the initial offer, we recognize the potential for BHP to return with a higher bid. The potential for a counterbidder to emerge is limited, in our view, given BHP’s significant available regional synergies. We retain our fundamental positive view on OZL due to its two high quality, long life, 100% owned copper mines in South Australia – Prominent Hill and Carrapateena. We expect the company’s copper production to double to >200ktpa by 2030, as Carrapateena moves to a block caving operation, and the company develops the greenfield West Musgrave copper/nickel deposit in Western Australia.
IGO (IGO, overweight) – the battery minerals miner was a key contributor during the period on lithium price strength ahead of consensus forecasts. Our positive thesis is premised on the miner’s US$1.4bn Greenbushes and A$1.25bn Western Areas (WSA) acquisitions, and its existing portfolio of high-quality assets. We support the acquisitions for several reasons.Greenbushes gives IGO exposure to a high-quality, long-dated asset (>20 years mine life) and completes IGO’s suite of battery commodities with the company already producing nickel, copper and cobalt. We support the WSA acquisition on the grounds it diversifies production (rebalancing commodity exposure to 70% Li, 30% Ni) and extends the mine life for nickel production (which is currently through its world-class Nova asset).
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Aug-2022.pdfJuly, 2022
Key Contributors
Link Administration (LNK, overweight) – the company outperformed following the announcement of a revised offer by Dye and Durham priced at $4.81 that was agreed to by LNK’s Board. The revised offer includes structural undertakings on Dye and Durham’s behalf to divest its Australian conveyancing software assets, which should see it placate concerns previously raised by the ACCC.
Rio Tinto (RIO, underweight) – our underweight position in Rio Tinto was a positive contributor to July performance. Falling prices in RIO’s key commodities iron ore (-5% to US$114/t), copper (-4% to US$3.60/lb) and alumina (-10% to US$330/t) all contributed to the company’s underperformance. The company’s June quarterly report included updated cost guidance, underlining the challenging cost environment for mining companies as power, diesel and labour costs all rose. Additionally downgrades to alumina and aluminium production guidance weighed on the company’s share price performance. We remain negative towards the outlook for iron ore on the grounds China’s property sector faces significant challenges, impacting demand for both steel and iron ore.
Latitude Group (LFS, overweight) – the company outperformed during the period having been sharply sold off in the prior month due to concerns around consumer credit quality and following the announcement of the termination of its acquisition of Humm. Whilst we do expect to see some deterioration in the company’s credit quality metrics over the coming 12 months, the company enters a period of economic slowdown at a strong starting point on the quality of loans written, low delinquency rates and higher than normal provisions for loan losses. Even factoring in the potential for a large step up in bad debts, LFS trades on 8 times forward earnings which we view as inexpensive.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Jul-2022.pdfJune, 2022
Key Contributors
Atlas Arteria (ALX, overweight) – the toll road operator outperformed due to its transparent inflation hedge and, moreover, as IFM’s global infrastructure fund took a 14.96% stake in the company, causing speculation of a possible takeover bid. We maintain an overweight position based on ALX’s strong liquidity and balance sheet position, discounted valuation and exposure to traffic recovery in Europe and the US. ALX trades on less than 11.0 times normalised EV/EBITDA, which sufficiently captures the disruption from COVID-19 as travel restrictions and lockdowns reduce traffic volumes in the short term. Beyond traffic normalisation, we see a path towards value creation for ALX through concession extensions at APRR achieved as a means of funding expansion projects and settling the Dulles Greenway tolling regime.
Key Detractors
Tyro Payments (TYR, overweight) – the payment solutions provider underperformed as the outlook for higher real rates pressured the stock’s valuation and, secondly, after the surprise departure of the chief executive. We remain overweight on the grounds that short-term headwinds (wage inflation, increased investment spending) are, in our view, more than reflected in TYR’s valuation. As the lead provider of software that allows payment terminals to be integrated into point-of-sale (POS) systems, TYR remains in a defendable position versus peers such as the banks which rely on a clunky intermediary.
May, 2022
Key Contributors Worley (WOR, overweight) – the engineering services firm outperformed due to expectations the global energy crisis will stimulate capex for both oil & gas and energy transition projects. We remain overweight the company. Following the Jacobs ECR acquisition, the business is diversified across different markets and is, in our view, well positioned to capture higher structural demand from energy transition work to low carbon solutions in addition to its traditional work for the oil & gas industry. We believe WOR’s valuation provides significant support at current levels, with the stock trading on 18.9 times forward earnings, a sharp discount to the Industrials exFinancials at 25.5 times. Amcor (AMC, overweight) – the plastic packaging company outperformed after announcing a stronger-than-expected trading update. Earnings per share in the third quarter came in at US20.4 cents per share, 4% above consensus and 13%
Key Detractors Link Administration (LNK, overweight) – the company underperformed over speculation the recent acquisition offer by Dye and Durham may not complete and after the ACCC temporarily suspended its approval timeline until it received further information. Notwithstanding the uncertainty, we remain overweight the stock. We see compelling value in its base share registry business and electronic conveyancing business PEXA, which has been supported by recent corporate interest. We hold a positive view of PEXA premised on its infrastructure-like characteristics of the property settlement exchange upon maturity, supplemented by numerous growth opportunities in immediate adjacencies. Further, LNK is positively leveraged to higher US interest rates, which we see as a meaningful tailwind over the medium term. Lastly, LNK trades at 17.4 times forward earnings, a discount to the ASX200 Industrials ex-Financials at 23.3 times.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-May-2022.pdfApril, 2022
Key Contributors
Worley (WOR, overweight) – the engineering services firm outperformed due to expectations the global energy crisis will stimulate capex for both oil & gas and energy transition projects. We remain overweight the company. Following the Jacobs ECR acquisition, the business is diversified across different markets and is well positioned to capture higher structural demand from energy transition work to low carbon solutions in addition to its traditional work for the oil & gas industry. We believe WOR’s valuation provides significant support at current levels, with the stock trading on 18.9 times forward earnings, a sharp discount to the Industrials exFinancials at 25.5 times. QBE Insurance (QBE, overweight) – the insurer outperformed without any material company-specific news. Our positive view towards the general insurer is premised on the company benefiting from an ongoing global hardening cycle in commercial insurance along with a return to unit growth after several years of volume declines as the company exited sub economic exposures. QBE’s recent result demonstrated that
Key Detractors
Aristocrat Leisure (ALL, overweight) – the gaming company underperformed after its proposed acquisition of US-based Playtech fell through. While we view the outcome as disappointing, ALL still has significant opportunities to enter Real Money Gaming – a market which has compelling growth prospects – through other potential acquisitions. More broadly, our positive investment view remains premised on ALL’s dominant position in Land-Based Games and significant opportunities from Digital, which offers a wide range of outcomes. We see ALL’s valuation as undervalued at 21.6 times forward earnings when considering the Industrials ExFinancials trades at 25.5 times and ALL’s superior long-term growth potential
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Emerging-Leaders-Fund-Apr-2022-1.pdfMarch, 2022
Key Contributors
BHP Group (BHP, overweight) – the miner outperformed amid higher iron ore prices (up 32% to US$158/t), as it completed the unification of its dual-listed structure and, lastly, after announcing a solid 2QFY22 result with strong iron ore production offsetting lower-than-expected volumes from copper, met coal and oil. Following its unification and benchmark adjustment, we are modestly overweight the iron ore miner. We continue to hold BHP on the grounds of its attractive valuation (3.1 times forward EV/EBITDA), strong free cash flow (FCF yield >10%) and robust balance sheet, with management carrying out a well-defined capital allocation strategy. However, more broadly we are negative towards the outlook for iron ore on the grounds China’s property sector faces significant challenges (and hence steel), with our underweight reflected in underweights Rio Tinto (RIO) and Fortescue Metals (FMG).
Key Detractors
Aristocrat Leisure (ALL, overweight) – the gaming company underperformed after its proposed acquisition of US-based Playtech fell through. While we view the outcome as disappointing, ALL still has significant opportunities to enter Real Money Gaming – a market which has compelling growth prospects – through other potential acquisitions. More broadly, our positive investment view remains premised on ALL’s dominant position in Land-Based Games and significant opportunities from Digital, which offers a wide range of outcomes. We see ALL’s valuation as undervalued at 21.6 times forward earnings when considering the Industrials ExFinancials trades at 25.5 times and ALL’s superior long-term growth potential.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Mar-2022.pdfFebruary, 2022
Key Contributors:
Northern Star (NST, overweight) – the gold miner outperformed as the commodity increased by 6% to $US1,910 per ounce in response to growing uncertainty around the Ukraine-Russia conflict. The company also delivered its 1H22 result, with cash NPAT of $430mn between guidance for $425- 440mn. For the full year, FY22 guidance was unchanged at 1.55-1.65mn ounces at an all-in sustaining cost of $1,475- 1575/oz. We remain overweight NST. We believe the company will benefit from higher-than-expected production and reserves/resources after taking full ownership of the KCGM SuperPit Mine last year. We see the company’s valuation as attractive at 6.4 times forward EV/EBITDA, which is only marginally above the wider Gold sector despite a superior
Key Detractors:
Aristocrat Leisure (ALL, overweight) – the gaming company underperformed after its proposed acquisition of US-based Playtech fell through. While we view the outcome as disappointing, ALL still has significant opportunities to enter Real Money Gaming – a market which has compelling growth prospects – through other potential acquisitions. More broadly, our positive investment view remains premised on ALL’s dominant position in Land-Based Games and significant opportunities from Digital, which offers a wide range of outcomes. We see ALL’s valuation as undervalued at 22.0 times forward earnings when considering the Industrials ExFinancials trades at 24.5 times and ALL’s superior long-term growth potential.
January, 2022
Australian equities declined sharply in January as high inflation spurred Federal Banks to accelerate quantitative tapering and signal earlier rate rises. At a sector level, high-PE cohorts within Health Care (-12.1%) and Information Technology (-18.4%) recorded the most significant declines, led by companies with long-dated cash flows like Afterpay (APT, -19.9%), Xero (XRO, -20.2%), Wisetech Global (WTC, -22.7%), Altium (-21.0%) and Pro Medicus (PME, - 27.8%). Gold (-12.8%) also declined significantly given its negative correlation with real interest rates.
Key Contributors BHP Group (BHP, overweight) – the miner outperformed amid higher iron ore prices (up 18% to US$142/t), as it completed the unification of its dual-listed structure and, lastly, after announcing a solid 2QFY22 result with strong iron ore production offsetting lower-than-expected volumes from copper, met coal and oil. Following its unification and benchmark adjustment, we are modestly overweight the iron ore miner. We continue to hold BHP on the grounds of its attractive valuation (3.1 times forward EV/EBITDA), strong free cash flow (FCF yield >10%) and robust balance sheet, with management carrying out a well-defined capital allocation strategy. However, more broadly we are negative towards the outlook for iron ore on the grounds China’s property sector faces significant challenges (and hence steel), with our underweight reflected in underweights Rio Tinto (RIO) and Fortescue Metals (FMG).
Key Purchases Amcor (AMC) – we increased our position in the packaging company during the period. We view AMC as a defensive stock with a strong dividend yield (+4.0%) that should generate strong EPS growth in FY22 (+13%), before returning to more normal levels from FY23 onwards (mid-single digit). While AMC’s Flexibles division faces volume headwinds as customers turn away from non-recyclable plastics, we believe the company is moving in the right direction from the point of view of producing more recycles product and using more postconsume resin. Further, shifts to higher margin customers (pharmaceutical and medical) and cost-out initiatives will provide an offset. Lastly, we view AMC’s valuation as attractive at 14.9 times forward P/E, below its 15.4 times long-term average.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Jan-2022.pdfDecember, 2021
Australian equities rose modestly in the December 2021 quarter as strong performances from the miners and defensive sectors offset weakness elsewhere. The ASX 200 Accumulation Index increased by 2.1% during the quarter, taking its 2021 return to +17.2%. The local index underperformed global indices, with the MSCI World Index returning 8.2% during the quarter even as a new COVID variant, labelled Omicron, drove uncertainty around the growth outlook.
Further, persistent inflation in the US continued to stoke concerns about faster tapering and US interest rate rises. At a sector level, Metals & Mining (+13.9%) provided the most support to the benchmark, led by a rally in iron ore miners Fortescue Metals Group (FMG, +28.4%) and BHP Group (BHP, +10.3%). Elsewhere, battery material producers Mineral Resources (MIN, +25.0%) and Lynas Rare Earths (LYC, +51.6%) also delivered strong returns. Other positive sectors were Communication Services (+4.9%) and Real Estate (+9.3%). Defensive names such as Telstra (TLS, +6.4%) and Goodman Group (GMG, +22.9%) were the top performing stocks in their sectors.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Dec-2021.pdfNovember, 2021
The ASX 200 Accumulation Index declined 0.5% during the month, taking its 12-month return to +15.5%. Globally, equities declined late in the period (MSCI World Index -1.4% for November) as the latest COVID variant, labelled Omicron, drove uncertainty around the growth outlook. Further, persistent inflation in the US continued to stoke concerns about faster tapering and US interest rate rises.
At a sector level, Metals & Mining (+6.8%) provided the most support to the benchmark, led by a rally in iron ore miners Fortescue Metals Group (FMG, +22.1%), Rio Tinto (RIO, +3.6%) and BHP Group (BHP, +7.6%). Elsewhere, battery material producers Mineral Resources (MIN, +17.3%) and Lynas Rare Earths (LYC, +21.0%) also delivered strong returns.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Nov-2021.pdfOctober, 2021
The ASX 200 Accumulation Index declined 0.1% during the month, taking its 12-month return to 28.0%. The local index underperformed global indices – with the MSCI World Index returning 5.5% – as Australian 10-year bond yields lifted 59 bps to 2.08% during the period on expectations the RBA would hike rates earlier amid inflation pressure.
Gold (+9.1%) was the top performer during the period, with the sector seen as a beneficiary of stronger inflation. Within the sector, Newcrest (NCM, +9.9%), Northern Star (NST, +8.7%), Silver Lake Resources (SLR, +26.5%) and West African Resources (WAF, +34.0%) contributed most to the benchmark’s return.
Key Contributors
Rio Tinto (RIO, underweight) – the miner declined alongside the iron ore price (-10% to $US107/t) and as it cut Pilbara production guidance in CY21 to 320-325mt (from 325mt). The company also increased its decarbonization capex from $US1.5bn over the next three years to $US7.5bn from CY22 to CY30 as part of its new target to reduce emissions by 50% by 2030.Notwithstanding RIO’s position as a high-quality iron ore operator, our preferred exposure remains BHP Group (BHP), which has a diversified portfolio (with latent value in its other commodity exposures) and a clear strategy of capital allocation.
Key Detractors:
Star Entertainment (SGR, overweight) – the casino operator underperformed in response to media allegations that it had enabled suspected money laundering, fraud and foreign interference. Following the allegations, the company announced that the Liquor and Gaming Authority’s regular review of The Star Sydney would now also incorporate public hearings. We reduced our position in the company following the media allegations. We had taken some comfort from SGR having undergone several recent reviews without any major issues identified, in stark contrast to Crown Resorts (CWN). However, the allegations raise the risk profile of the stock, introduces the possibility there may be sanctions against the company, and may remove potential upside opportunities (extra gaming licences, concessions). We are engaging extensively with management and are undertaking further independent validation in relation to the allegations, which the company has labelled as misleading.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Oct-2021.pdfSeptember, 2021
Key Contributors.
Carsales.com (CAR, overweight) – the online automotive company outperformed as its FY21 result came in at the top end of guidance issued in May, with revenue and NPAT growing 4% and 11% respectively y/y. While prolonged lockdowns in NSW and VIC clouds the outlook for FY22, CAR still expects ‘solid growth’ in underlying NAPT. A new product launch called “carsales Select” – a digital offering allowing consumers to purchase used cars directly from dealers – also impressed investors. We remain overweight the automotive online classifieds company. Our positive view is premised on the belief CAR should benefit from attractive earnings growth, conservative accounting (with low capitalisation of research and development investment), and product initiatives to drive long-term growth (such as transitioning from a leads-based model to a transaction-based model) and undervalued international businesses. Fortescue Metals Group (FMG, underweight) – the iron ore miner underperformed as the commodity price declined 44% to US$119 per tonne in response to China clamping down on steel output to lessen pollution. The fall overshadowed a strong FY21 result in which FMG delivered record earnings and dividends, with NPAT more than doubling to US$10.3bn (in line with consensus). However, much of the attention was focused on Fortescue Future Industries (FFI), a subsidiary which will receive 10% of FMG’s future NPAT to invest in renewable energy projects. We remain underweight FMG based on its stretched valuation metrics and our view that current iron ore prices are unsustainable. We prefer exposure to iron ore through BHP Group (BHP), which has a diversified portfolio (with latent value in its other commodity exposures) and a clear strategy of capital allocation.
Key Detractors:
Ansell (ANN, overweight) – the protective equipment manufacturer underperformed as its FY21 result missed market expectations. FY21 EPS came in at $1.29 – below consensus by 3% – as performance from its Industrial division was underwhelming despite the manufacturing rebound in the US. Further, FY22 EPS of $1.75-1.95% was 4% below consensus as management cautioned that COVID-related sales would fade and COVID outbreaks were disrupting its manufacturing plants in 1H22. Nevertheless, we remain overweight the company. Though we expect an air pocket in exam and single-use earnings as higher capacity in the market suppresses pricing, we expect ANN underlying earnings to reclaim its FY21 COVID peak by FY23 as underlying earnings grow. More broadly, we expect both divisions to benefit from internal programs to increase operational efficiency, higher margins from new distributor agreements and shifts towards higher-value products. Lastly, ANN has a strong balance sheet; we estimate $220mn of buy-back capacity. We do not believe this is captured by consensus; the stock trades at 13.8 times, a large discount to the wider Industrials ex-Financials at 29.3 times.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Sept-2021.pdfAugust, 2021
Key Contributors Fortescue Metals Group (FMG, underweight) – the iron ore miner underperformed as the commodity price declined 15% to US$154 per tonne in response to China clamping down on.
Afterpay (APT, underweight) – the buy-now, pay-later company outperformed after receiving a takeover bid from US digital payments company Square in an all-scrip bid equating to a 30% premium to APT’s last traded share price. With APT’s board recommending shareholders accept the offer, we remain underweight as we see better opportunities elsewhere. Our original underweight thesis was based on the prospect of heightened regulation (e.g. expense verification), increased competition and the sustainability of the company’s attractive margins.
Key Detractors BHP Group (BHP, overweight) – the miner underperformed during the period over uncertainty relating to several major initiatives and the iron ore price falling 15%, which overshadowed its strongest earnings result since FY12. Underlying EBITDA came in at US$37.4bn, in line with expectations, and the final dividend was a record US$2.00 per share, with BHP returning US$15bn to shareholders during FY21. Management announced it intends to collapse its dualcompany structure and transfer all investors to its ASX-listed entity, Moreover, the company plans to exit Petroleum by merging the division with Woodside Petroleum (WPL) under a deal in which BHP shareholders receive WPL scrip. We support the moves and BHP’s pivot into Potash, which was done for a good price and strengthens its position as the world’s energy transition accelerates. We continue to see the company’s valuation as attractive in the context of strong free-cash-flow generation at spot commodity prices. BHP trades on a 12- month forward P/E of 8.3 times, an EV/EBITDA of 3.0 times, and generates a FCF yield of >10%. Its balance sheet is robust (gearing ~7%), with management carrying out a well-defined capital allocation strategy.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Aug-2021.pdfJuly, 2021
Australian shares rose modestly in July despite ongoing lockdowns across the east coast of the country.
The S&P/ASX 200 Accumulation Index returned 1.1% for the month, taking its 12-month return to 28.6%. However, the market lagged overseas indices, with the S&P500 returning 2.4% during the month amid an upbeat US corporate earnings season.
Metals & Mining ex-Gold (+9.1%) was the top contributor to the index, supported in the most part by BHP Group (BHP, +10.1%), Rio Tinto (RIO, +5.4%) and Fortescue Metals Group (FMG, +6.7%) as stronger-than-expected production results more than offset the lower Fe price (-15%). Other contributors were miners leveraged to the electric vehicle theme, including Mineral Resources (MIN, +17.3%), Lynas Rare Earths (LYC, +28.5%), IGO Limited (IGO, +22.0%) and Pilbara Minerals (PLS, +22.1%).
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Jul-2021.pdfJune, 2021
Australian equities shrugged off new COVID-19 outbreaks across the country to deliver strong returns in the June quarter.
The S&P/ASX 200 Accumulation Index increased by 8.3% in the three months to 30 June 2021, taking its 12-month return to 27.8%. The ASX outperformed global indices, with the MSCI World Index returning 7.7%, despite all major cities going into lockdown at one point during the quarter in response to COVID-19 cases.
Information Technology (+12.1%) rebounded in the period as the Australian 10-year bond yield retraced -26 bps to 1.5%, supporting the sector’s valuation (given long-dated cash flows). Top contributors to the benchmark included Afterpay (APT, +16.4%), Altium (ALU, +38.6%) and Megaport (MP1, +66.2%).
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Jun-2021.pdfMay, 2021
Australian equities rose in May as Financials and Consumer Discretionary stocks more than offset weakness across Utilities and Information Technology. The S&P/ASX 200 Accumulation Index rose 2.3% during the month, taking its 12-month return to 28.2%. The benchmark outperformed overseas Indices (with the S&P500 returning 0.7%), supported by the major banks on the back of the federal government’s big spending federal budget – with $96bn of stimulus announced over 5 years – and Australia’s strengthening housing market.
Within Banking (+7.3%), the Commonwealth Bank (CBA, +12.0%) and Westpac Bank (WBC, +8.2%) delivered betterthan-expected updates. CBA’s 3Q21 update revealed revenue growth, slightly higher net interest margins (NIMs) and significantly lower than expected bad and doubtful debts. WBC announced 1H21 cash NPAT of $3.537mn, 9% ahead of consensus, and announced an ambitious cost-out program. Elsewhere, Consumer Discretionary (+3.5%) was led by Aristocrat Leisure (ALL, +10.8%) as its 1H21 results highlighted its leverage to the re-opening US economy and strong competitive position. Other top performers included Crown Resorts (CWN, +5.4%) and JB Hi-FI (JBH, +4.9%).
Conversely, Utilities (-6.6%) weighed on the benchmark due to AGL Energy (AGL, -9.1%) and APA Group (APA, -8.0%). The former declined amid ongoing lower wholesale electricity prices, while the latter underperformed despite reiterating FY21 EBITDA guidance and outlining its growth outlook at its Investor Day, including by shifting the business to renewables and transmission.
Within Information Technology (-9.9%), Afterpay (APT, -21.1%) underperformed over concerns its momentum was slowing across key markets as competition increased, while Xero (XRO, -6.3%) delivered a disappointing FY21 result.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-May-2021.pdfApril, 2021
Australian equities continued to generate strong returns in April, rising above pre-pandemic levels for the first time. The S&P/ASX 200 Accumulation Index returned +3.8% for the month, taking its 12-month return to +30.7%. The index lagged global indices, with the MSCI World Index climbing +4.1% and the S&P500 returning +5.3%.
Gold (+9.6%) and Information Technology (+9.7%) were among the top performing sectors as the ‘reflation trade’ partially reversed, with the Australian 10-year bond yield falling 10 bps to 1.69%. Within the former, Newcrest Mining (NCM, +8.6%), Northern Star (NST, +10.9%) and Evolution Mining (EVN, +13.5%) partially recovered declines from prior periods. Within tech, Afterpay (APT, +15.9%) announced +100% sales growth in 3Q21, largely driven by strong momentum in its US business.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Apr-2021.pdfMarch, 2021
Australian equities rose in the March quarter as stronger-thanexpected earnings more than offset rising bond yields globally. The S&P/ASX 200 Accumulation Index increased 4.3% for the quarter, taking its 12-month return to +37.5%. The local market lagged overseas indices, with the MSCI World Index and S&P500 returning 6.3% and 6.2% respectively. Returns had been stronger as companies delivered one of the best reporting seasons on record, with 3.2 times more beats than misses1 . However, performance stalled midway through the quarter as the Australian 10-year bond yield rose 82 bps to 1.79%.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Mar-2021.pdfFebruary, 2021
Key Contributors
Vocus (VOC, overweight) – the telco outperformed during the period after receiving a takeover bid and delivering a betterthan-expected 1H21 result. A consortium comprising Macquarie Infrastructure and Real Asset Holdings (MIRA) and Aware Super made a non-binding, indicative offer of $5.50 per share. Subsequent to month-end the consortium finalised the bid after four weeks of due diligence. Meanwhile, the result highlighted positive momentum in the Networks division, with VOC taking share from competitors following a large number of deals in 1H21 and management talking to a strong pipeline for the full year. The result and takeover bid supported our investment thesis on the stock; namely that the combination of good management, improving fundamentals and quality of the asset base will result in significant upside. We remain overweight on the grounds VOC trades at a discount to the takeover offer and, given the appeal of its assets, a competitor bid could emerge.
BHP Group (BHP, overweight) – the miner outperformed as the iron ore price increased by 11% to $US176 per tonne and after announcing a dividend of $US1.01 per share at its 1H21 result – well ahead of consensus for US84 cents – which equated to an 85% payout ratio and nearly 100% of free cash flow. We continue to believe the company’s valuation is attractive in the context of firm iron ore prices and China returning to production following COVID-19. BHP still trades on a 12-month forward P/E of 13.5 times, an EV/EBITDA of 6.1 times, and generates a FCF yield of >10%. Its balance sheet is robust (gearing ~15%), with management carrying out a welldefined capital allocation strategy. More broadly, we view BHP as a relatively defensive Metals & Mining exposure, with a diversified portfolio and clear strategy of capital allocation
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Feb-2021.pdfJanuary, 2021
Key Contributors
Westpac Bank (WBC, overweight) – the bank outperformed alongside its peers as the market began to factor in dividend and earnings recoveries for the sector, including the potential for capital management, after APRA removed its payout ratio limit at 50% of earnings and deferred loans resumed repayments. We remain overweight WBC on the grounds that challenges to its outlook – including higher costs relating to risk compliance and mortgage processing – are more than reflected in WBC’s valuation, particularly relative to other banks such as NAB and CBA (which the portfolio is underweight). The stock trades at 14.0 times forward earnings, a significant discount to CBA at 18.9 times and National Australia Bank (NAB) at 14.8 times. In our view COVID-19 represents an earnings issue – not a balance sheet issue – with bank capital ratios more than double those leading into the GFC and strong liquidity levels.
Afterpay (APT, underweight) – the payment solutions company continued to outperform following its entry into the ASX20 in December, with no company-specific news during the period. Our more cautious view of APT is premised on several factors. In the short term, we believe APT’s valuation (at 33.0 times forward sales) does not reflect the uncertainty associated with COVID-19 despite the company’s strong balance sheet position. While APT’s loss rates are low so far, it remains extremely early in the bad debt cycle (where APT is exposed as an unsecured consumer lending business). In addition, APT’s long-term risks remain, including heightened regulation (e.g. expense verification), increased competition (such as from PayPal) and the sustainability of the company’s attractive margins.
Key Purchases Tyro Payments (TYR) – we took recent underperformance as an opportunity to establish a small position in the payments company. TYR underperformed following a terminal outage that affected 30% of its merchants for several weeks. In our view the outage is a one-off issue that doesn’t materially impact the long-term growth opportunity. While challenges such as higher churn and lower front book additions are inevitable in the short term given the extensive outage and lack of lock-in contracts, we do not believe they will persist in the longer term. As the lead provider of software that allows payment terminals to be integrated into point-of-sale (POS) systems, TYR remains in a defendable position versus peers such as the banks which rely on a clunky intermediary. Moreover, short-term headwinds are more than reflected in TYR’s valuation, with the stock trading at 4.4 times forward sales – a significant discount to technology peers.
Aristocrat Leisure (ALL) – we increased our position in the poker machine company during the period. Our investment thesis is premised on ALL’s strong growth profile following the resolution of the COVID-19 crisis. ALL has a dominant position in land based games (65% of EBIT) and is set to benefit from significant opportunities from Digital (35% of EBIT), which offers a wide range of outcomes. Lastly, the stock screens as undervalued at 25.4 times forward earnings when considering the Industrials Ex-Financials trades at 28.3 times and ALL’s superior long-term growth potential.
Carsales.com (CAR) – we increased our position size in the automotive online classifieds company during the period. In the short term we expect demand for second-hard cars to remain elevated in both Australia and South Korea, driving upside to earnings versus consensus forecasts. In the long term our positive view is premised on the belief CAR should benefit from attractive earnings growth, conservative accounting (with low capitalisation of research and development investment) and undervalued international businesses.
Key Sales
QBE Insurance (QBE) – we reduced our position in the insurer following the negative trading update. Strong premium growth (~10%) was more than offset by deteriorating claims relating to COVID-19, losses in its US crop business from fires and hurricanes and materially negative reserve increases. Nevertheless, we remain overweight the company. Part of the update was one-off in nature, the reserve build on long tail lines and there is upward pressure on catastrophe allowances – which will dampen operating leverage from premium rate growth – we believe this is more than captured in QBE’s valuation. We continue to see upside to its relative valuation, with the stock trading on 13.2 times forward earnings and offering a 4.5% dividend yield, with strong underlying fundamentals remaining intact (global commercial hardening cycle).
Incitec Pivot (IPL) – we reduced our position in the explosives and fertiliser maker following recent outperformance, but remain overweight. Our positive view remains premised on key commodities (urea and DAP) reverting to mid-cycle levels. Furthermore, other factors which had weighed on performance throughout FY19 and FY20 – weather-related issues, plant outages and COVID-related disruption – are now largely behind the company. Lead indicators suggest higher demand for the commodities and the explosives business is experiencing more stable pricing as mining demand normalises in North America. At 16.1 times two-year forward earnings, IPL trades well below the wider Industrials sector (at 25.0 times).
ResMed (RMD) – we modestly trimmed our position following recent outperformance. We continue to believe RMD’s core sleep apnea division will rebound strongly on the grounds that demand for its products has been deferred, not lost. Our longterm investment thesis remains intact, with benefits accruing from a positive product cycle in the flow generator and mask segments. New software and integration with the customer is supporting device sales versus competitors.
Key Active Overweights
ANZ Bank (ANZ) – we are overweight ANZ on the grounds that the bank is positioned strongly for an earnings and dividend recovery post-COVID, with capital management initiatives likely as debts turn out to be more benign than feared. While there are challenges to its outlook – including persistent topline pressures from lower interest rates – the bank is able to offset these pressures by cutting costs at a superior rate to peers, and management remains committed to its $8bn expense target (requiring a $600mn cost reduction exinvestment). We see ANZ’s valuation as attractive at 13.5 times forward earnings, particularly relative to NAB and CBA (at 14.8 and 18.9 times respectively).
BHP Group (BHP) – we believe the company’s valuation is attractive in the context of firm iron ore prices and China returning to production following COVID-19. BHP still trades on a 12-month forward P/E of 12.5 times, an EV/EBITDA of 5.5 times, and generates a FCF yield of >10%. Its balance sheet is robust (robust (gearing ~15%), with management carrying out a welldefined capital allocation strategy. More broadly, we view BHP as a relatively defensive Metals & Mining exposure, with a diversified portfolio and clear strategy of capital allocation. Aristocrat Leisure (ALL) – our investment thesis is premised on ALL’s strong growth profile following the resolution of the COVID-19 crisis. ALL has a dominant position in land based games (65% of EBIT) and is set to benefit from significant opportunities from Digital (35% of EBIT), which offers a wide range of outcomes. Lastly, the stock screens as undervalued at 25.4 times forward earnings when considering the Industrials Ex-Financials trades at 28.3 times and ALL’s superior long-term growth potential.
Key Active Underweights CSL (CSL) – we remain underweight CSL based on its forward valuation (39.7 times P/E and 27.5 times EV/EBITDA on a 12- month forward basis), which we believe appropriately captures the earnings outlook at this time. The growth outlook for CSL’s key plasma products remains robust, with the company continuing to strengthen its relative market position through long-term investment in capacity, product innovation and collection centres.
National Australia Bank (NAB) – we remain underweight the bank. While NAB has strengthened its capital position through a highly dilutive, discounted $3.5bn capital raising and has increased collective provisioning, the bank is yet to take an AUSTRAC provision unlike its peers. As a result, we see less scope for surplus capital compared to Westpac Bank (WBC) and ANZ Bank (ANZ), both of which trade at more appealing valuations (at a 5 and 10% discount to NAB based on forward earnings) and are our preferred banking exposures at this time. Wesfarmers (WES) – our underweight position remains premised on the view its divisions, outside Bunnings (62% of operating income), face significant earnings headwinds. Officeworks (7% of operating income) and the department store industry (including discount department stores Target and Kmart, 17% of EBIT) face increasing competition and excess physical store capacity. Furthermore, the company’s Industrials segment (14% of EBIT) comprises cyclical, lower quality businesses. As such, we don’t find the valuation attractive at 29.0 times forward earnings, above the wider Industrials ex-Financials’ 28.3 times.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Jan-2021.pdfDecember, 2020
Key Contributors:
CSL (CSL, underweight) – the biotechnology company underperformed after abandoning its COVID-19 vaccine and as COVID-19 continued to disrupt plasma collection (with volumes still down around 15%).We remain underweight CSL based on its forward valuation (42.0 times P/E and 29.0 times EV/EBITDA on a 12-month forward basis). Link Group (LNK, overweight) – the share registry company outperformed after receiving two takeover offers from a consortium comprising Pacific Equity Partners (PEP) and Carlyle Group and, subsequently, a competing takeover offer from US company SS&C Technologies. ANZ Bank (ANZ, overweight) – the bank outperformed in response to improving economic data domestically and a solid 2H20 result. Though revenue declined 1.2% h/h as low interest rates impacted net interest margins (NIMs), pre-provision profit was flat h/h with ANZ offsetting the top line pressure through cost-out initiatives. Newcrest Mining (NCM, underweight) – the gold miner underperformed during the period alongside its peers as positive vaccine news buoyed the wider market and after announcing soft production and higher costs for the September quarter due to a number of planned maintenance shutdowns. Nine Entertainment (NEC, overweight) – the media company outperformed as it upgraded 1H21 guidance on recovering ad markets. Management now expects Metro TV ad revenues to grow +1% y/y (from +0%) and 1H21 EBITDA to increase by more than 40% y/y (from +30%).
Key Detractors:
National Australia Bank (NAB, underweight) – the bank outperformed after delivering a solid 2H20 result. Revenue increased by 5.3% for the half, underpinned by a turnaround in market income. Even normalising for markets income NAB recorded a best of peer group revenue result at +1% h/h, with less NIM pressure than evident elsewhere (-3bps h/h). APA Group (APA, overweight) – the gas pipeline owner underperformed during the period without any materially negative news. The company announced the construction of a $460mn pipeline that connects gas fields in the Perth Basin to the Goldfields Region in Western Australia, which we view as positive for its growth outlook. We remain overweight APA, as we believe its valuation – at an EV/EBITDA of 12.5 times and with a 5.7% forecast dividend yield – is attractive when considering its exposure to increasingly important gas markets and dominant market share position.
Fortescue Metals Group (FMG, underweight) – the iron ore miner outperformed as the iron ore price increased to >US$150 per tonne over supply disruption and greater demand from China. We remain underweight FMG based on its stretched valuation metrics and our view that current iron ore prices are unsustainable. TPG Telecom (TPG, overweight) – the telco underperformed as its Mobile business continued to be impacted by COVID-19, with the low-priced carrier most exposed to tourists, migrants and students versus peers. Afterpay (APT, underweight) – the payment solutions provider outperformed after announcing a strategic partnership with Westpac Bank (WBC), under which APT will be able to offer transaction and savings accounts from FY21 to its Australian customers. The company also announced a 1Q20 business update ahead of consensus expectations, with gross merchandise volume (GMV) up 155% y/y to $4.1bn and customer net adds up 1.3mn to 11.2mn. Lastly, the stock was promoted to the S&P/ASX 20 Index during the period, effective 21 December.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Yarra-Australian-Equities-Fund-Dec-2020.pdfOctober, 2020
Australian shares rose sharply in October as euphoria around global economic growth and political initiatives drove the asset class higher. The S&P/ASX 200 Accumulation Index rose 4.0% in October – its best month in 2017. After lagging in recent months, the index finally outperformed overseas indices with the MSCI World Index returning 2.6% and the S&P500 returning 2.3%. However, much of the excitement was overseas. Economic conditions continued to improve in Europe despite political tension in Spain, the US quarterly reporting season was better than expected and confidence grew that President Trump can enact his tax cut initiatives. Domestically the environment was mixed: labour force data was strong with total employment rising by 3.1% year-on-year in September (its strongest rate since 2008) but retail sales for August were weaker than anticipated, rising 2.1% year-on-year. Nevertheless, all sectors made positive returns in the month. Information Technology (+8.7%) delivered the highest returns with strong performances from Computershare (CPU, +7.7%) and NextDC (NXT, +18.3%). In contrast, Real Estate was the worst performer (+1.3%) as soft retail conditions continued to weigh on the retail sub-sector (+0.9%). The banks (+2.8%) underperformed the market as a modestly disappointing FY17 result from ANZ Bank (ANZ, +1.1%) weighed on the sector, though Commonwealth Bank (CBA), Westpac (WBC) and National Australia Bank (NAB) all rose more than 3%. Elsewhere, Metals & Mining returned 3.9% with BHP Billiton (BHP, +2.9%) and Rio Tinto (RIO, +4.4%) rising despite the iron ore price falling $US3 per tonne to $58.50. Gold miners (+6.8%) also outperformed despite the gold price falling 1% to $US1,270 per ounce during the month.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/82411349.pdfticker: JBW0009AU
commentary_block: Array
factsheet_url:
https://www.yarracm.com/australian-equities/yarra-australian-equities-fund/
Quarterly (or the latest month needed)
release_schedule: Monthly
fund_features:
The Yarra Australian Equities Fund offers investors exposure to a differentiated, high conviction portfolio of ASX listed companies that we believe have strong capital-growth potential over the medium to long-term.
- By leveraging our fundamental, long-term and balanced approach to investing, the Fund aims to outperform the S&P/ASX 200 Accumulation Index over rolling three-year periods.
- The Fund typically invests in between 30 and 55 stocks which we select based on our active and independent proprietary research.
manager_contact_details: Array
asset_class: Domestic Equity
asset_category: Australia Large Blend - Core / Style Neutral
peer_benchmark: Domestic Equity - Large Cap Neutral Index
broad_market_index: ASX Index 200 Index
structure: Managed Fund