September, 2023
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.
Worley (WOR, overweight) – the leading provider of global engineering services outperformed during the period as the share price reached its highest level since 2020. We attribute this outperformance to increasing market awareness of the margin expansion opportunity that the company detailed at its recent investor day. We continue to like WOR as we expect margins will accelerate over the coming years as the company benefits from a more consolidated industry structure, operating leverage, and active mix management.
Incitec Pivot (IPL, overweight) – the fertiliser and explosives company outperformed during the period following a solid FY23 trading update. While the fertiliser division had a weak 2H23, explosives posted a strong recovery. The company announced stronger ammonia mining production volumes from Moranbah AN (30-40kt above guidance). The sale process for IPL’s fertilisers business is ongoing and the buyback remains on hold.
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/2021/01/Yarra-Ex-20-Australian-Equities-Fund-Sept-2023.pdfAugust, 2023
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.
WiseTech (WTC, underweight) – the logistics industry software solutions provider underperformed during the period following its full-year result, where earnings guidance for the next financial year fell well short of consensus estimates. The miss was driven by higher-than-anticipated investment expenses and margin dilution from recent acquisitions.
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.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Ex-20-Australian-Equities-Fund_Aug-2023.pdfJuly, 2023
Key Contributors
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.
Worley (WOR, overweight) – the leading provider of global engineering services outperformed during the month as the share price reached its highest level since 2020. We attribute this outperformance to the increasing market awareness of the margin expansion opportunity that the company detailed at its recent investor day. We remain attracted to WOR, and expect strong revenue growth and margin acceleration over the coming years as the company benefits from a more consolidated industry structure, operating leverage, and active mix management.z
Tyro Payments (TYR, overweight) – the payments terminal provider outperformed during the month following the exit of strategic holder Grok Ventures from the register. Grok’s 12.4% shareholding had been an overhang on TYR’s share price and the stock rallied post the selldown transaction.
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.
Tabcorp (TAH, overweight) – the wagering operator underperformed in the lead up to its August result, led by concerns that market turnover has remained soft (likely down 5-10% in 2H23). We continue to see an opportunity over the medium term, and view TAH as a net beneficiary of the upcoming Victorian wagering license tender and regulatory alignment between retail and digital operators. In our view, the company also remains well positioned to benefit from its refreshed TAB25 strategy and gradual consolidation in the sector, which we expect will assist in delivering on the company's medium-term 10% ROIC target.
Link Group (LNK, overweight) – the administration services provider underperformed during the month following the announcement of a major contract loss in late June in its Retirement & Superannuation Solutions (RSS) business. Whilst the revenue and earnings loss from this specific contract – which will roll off in FY25 – is manageable (approximately 4% of group revenue and 6% group EBIT), the loss in confidence around LNK’s ongoing major client renewal cycle has seen the stock de-rate further.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Ex-20-Australian-Equities-Fund-Jul-2023.pdfJune, 2023
Key Contributors
NEXTDC (NXT, overweight) – following the announcement of the data centre operator’s largest ever individual contract in April and subsequent regional expansion into Malaysia and New Zealand, NXT continued to outperform as the market’s conviction in Artificial Intelligence (AI) applications as a driver of demand growth grew. Most notably, global leading specialist chip maker Nvidia’s commentary around AI driven demand growth supported previous comments made by NXT management.
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 (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.
Importantly, personal insurance providers are continuing to demonstrate excellent pricing power this CYTD (with doubledigit premium rate increases y/y) which is offsetting increased cost inflation and supporting margin trajectory. This, in turn, is supporting an appealing stock valuation (16.0-times forward P/E).
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. James Hardie (JHX, underweight) – the leading fibre cement sheeting manufacturer to the housing industry outperformed in the period following the release of its FY23 financial results.
While the result was broadly in-line with expectations, the company provided forward profit guidance for the Junequarter that was 10% ahead of market expectations, underpinned by solid volume and margin outcomes. While JHX is a quality building materials name, we remain cautious of the sustainability in its end markets (a portion of discretionary renovation spend), making it difficult to support the stock at its current valuation of 20.9 times forward P/E. Instead, we maintain a preference for plumbing supplies company Reliance (RWC), which trades on 14.2 times forward P/E. 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/2021/01/Yarra-Ex-20-Australian-Equities-Fund-Jun-2023.pdfMay, 2023
Key Contributors
NEXTDC (NXT, overweight) – following the announcement of its largest ever individual contract the previous month, the data centre provider continued to outperform as the market’s conviction in Artificial Intelligence (AI) applications as a driver of demand growth grew. Most notably, global leading specialist chip maker Nvidia’s commentary around AI driven demand growth supported previous comments made by NXT management.
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
Tyro (TYR, overweight) – the domestic payments provider underperformed in May after prolonged takeover negotiations came to an end. During the nine-month period that TYR has been under takeover, the stock has delivered four upgrades to it FY23 earnings guidance, demonstrating strong operating leverage and allaying prior concerns on the ability of the business to grow profitably. The stock now trades on 13.4 times FY24 EV/EBITDA which we regard as relatively undemanding given the company’s growth profile.
James Hardie (JHX, underweight) – the leading fibre cement sheeting manufacturer to the housing industry outperformed in the period following the release of its FY23 financial results.
While the result was broadly in-line, the company provided forward guidance for the June-quarter that was 10% ahead of market expectations, underpinned by solid volume and margin outcomes. While a quality building materials name, we remain cautious of the sustainability in end markets for JHX (a portion of discretionary renovation spend) making it difficult to support the stock at current valuation of 20.3 times forward P/E. Instead, we maintain a preference for plumbing supplies company Reliance (RWC), which trades on 15.3 times forward P/E.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Ex-20-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.
Mineral Resources (MIN, underweight) – our underweight position in the mining services and lithium producer outperformed in April. Lithium prices continued to weaken during the month on excess supply chain inventories, with both lithium hydroxide and lithium carbonate prices falling around 50%. In addition, MIN's March quarterly report released during the period was below consensus expectations across all divisions. Our preferred lithium exposure is IGO, given the higher quality of the company's low-cost Greenbushes asset.
Northern Star Resources (NST, overweight) – our position in the gold miner was a positive contributor during the period, as gold prices rose 8.8% during April to close at US$1,988/oz. We see further support for the gold price given macro uncertainty, and an expectation that the current interest rate hiking cycle is nearing an 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 are achievable within the current portfolio, led by the Thunderbox mill expansion project and improving grades at Pogo (Alaska). In our view, NST remains the quality name in the gold sector.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Ex-20-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.
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.
Liontown Resources (LTR, underweight) – the lithium developer outperformed during the period, despite falling lithium prices, following a takeover offer from US-listed lithium producer Albermarle. The $2.50/share offer represented a 63% premium to last close, with the company trading above terms on expectations of a further bump in the bid following its rejection of the initial proposal. We continue to see further downside to lithium prices and prefer existing operator Pilbara Minerals (PLS) given its lower risk profile, strong balance sheet, and low capital intensity growth profile.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Ex-20-Australian-Equities-Fund-Mar-2023.pdfFebruary, 2023
Key Contributors
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.
Origin Energy (ORG, overweight) – the energy retailer outperformed during the month after updating the market on the proposed purchase of the business by suitors Brookfield and EIG. Despite speculation of the deal being repriced lower, the deal was recut only to include part of the consideration in US dollars. At the close of the month, the value of the deal was above the initial $9.00 offer. The company’s update increased the probability of a binding offer emerging in the near term.
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.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Ex-20-Australian-Equities-Fund-Feb-2023.pdfJanuary, 2023
The S&P/ASX 300 Ex-20 Index returned +5.8% for the month, taking its 12-month return to +4.7%. The broader ASX300 mirrored, gaining +6.3% for the month, as did global indices (MSCI World Index +7.1%). Most sectors delivered positive returns for the month, with Consumer Discretionary (+11.3%) the best performing sector, led by Kogan (KGN, +28.6%), JB Hi-Fi (JBH, +15.3%), Corporate Travel Management (CTD, 24.6%) reflecting resilient consumer spending patterns during the holiday season. Within Materials (+9.3%), Metals and Mining produced some of the top performers for the month with Sandfire Resources (SFR, +14.9%), Northern Star Resources (NST, +15.0%) and Sims (SGM, +16.6%) outperforming, aided by the Gold price rising 3% to US$1,928/oz and Copper rising ~10% over the month to close at US$4.17/lb. Conversely, the lagging sector was Utilities (-3.0%), which underperformed following strong sector performance in the December quarter, led by AGL Energy (AGL, -5.2%), Origin Energy (ORG, -3.2%) and APA Group (APA, -1.9%).
Portfolio review
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.
December, 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.
Northern Star Resources (NST, overweight) – our position in the gold producer was a positive contributor during the period, with the gold price rising to US$1,828/oz at quarter end. We continue to favour NST's ability to control costs in contrast with peers Newcrest (NCM) and Evolution Mining (EVN), with FY23 cost guidance implying inflation pressures are expected to remain lower than peers (+6% at the mid-point). We believe the company’s ownership of power assets in Kalgoorlie, coupled with a lack of exposure to Australia’s east coast power market – in contrast to NCM and EVN – remain key differentiators for NST.
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.
November, 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.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Ex-20-Australian-Equities-Fund-Nov-2022-1.pdfOctober, 2022
Key Contributors
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
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.
September, 2022
Australian equities gained 0.40% during the September quarter, with the Energy, Materials and Information Technology sectors recording positive returns. The S&P/ASX 300 Ex-20 Accumulation Index returned 0.64% for the quarter, taking its 12-month return to -12.63%. In comparison, the broader ASX300 gained 0.45% for the period and, globally, the MSCI World Index fell by 15.70%.
Within Energy (+14.3%), coal producers continued to rise in value amid the global energy crisis, with thermal coal reaching an all-time high of US$457/t during the quarter. Whitehaven Coal (WHC) climbed +95.6%, New Hope Corporation (NHC) lifted +81.8% and Paladin Energy (PDN) gained 30.1%. Within Information Technology (+2.8%), Tyro Payment (TYR, +116.7%) 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. Megaport (MP1, +42.9%) outperformed during the period after reporting a stronger than expected June quarter result across revenue growth (+10% q/q) and its first EBITDA positive quarter.
Conversely, the worst performing sectors included Utilities (-12.5%) and Real Estate (-4.8%). In particular, AGL Energy (AGL, -16.0%) and APA Group (APA, -14.9%) and Real Estate companies Dexus (DXS, -13.1%) and Centuria Office REIT (CIP, -12.3%) declined in response to constant hikes in interest rates. Elsewhere, Financials (-2.3%) also experienced widespread declines given the negative correlation to higher rates for several stocks (in particular fund managers) such as Challenger (CGF, -12.9%) and ASX (ASX, -10.8%).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Ex-20-Australian-Equities-Fund-Sept-2022.pdfAugust, 2022
Australian equities gained 1.2% during August reflecting a stronger than expected reporting season with 1.4 times more beats than misses to consensus earnings expectations.
The S&P/ASX 300 ex S&P/ASX 20 Accumulation Index returned 1.7% for the month, taking its 12-month return to -5.7%. In comparison, the broader S&P/ASX 300 Accumulation Index gained 1.2% for the month and global indices were negative (MSCI World Index -3.4%).
Within Energy (+7.7%), the sector has lifted strongly on the back of elevated energy prices (oil, gas and coal), led by Cooper Energy (COE, +20.0%), Whitehaven Coal (WHC, +28.2%) and Paladin Energy (PDN, +14.9%) Materials was a strong performer (+7.5%) led by 29Metals (29M, +33.1%), Sayona Mining (SYA, +51.3%) OZ Minerals (OZL, +36.6%), with commodities exposed over the medium to long term to an increased uptake in electric vehicles and renewable energy generation the strongest performers.
Conversely, the worst performing sector was Real Estate (-2.8%), Centuria Capital (CNI, -11.8%), Arena REIT (ARF, -12.7%) and GDI Property (GDI, -7.6%), as companies downgraded dividend outlooks due to the rising cost of debt impacting cashflow growth.
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/2021/01/Yarra-Ex-20-Australian-Equities-Fund-Aug-2022.pdfJuly, 2022
Key Contributor:
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.
Key Detractor:
Atlas Arteria (ALX, overweight) – the toll road operator underperformed during the month after IFM, which had built an approximate 15% stake in the company at above market levels the prior month, announced they were not in a position to make a bid at this time. We maintain an overweight position as we see a path towards significant value creation for ALX through concession extensions at APRR, achieved as a means of funding expansion projects, and settling the Dulles Greenway tolling regime. With IFM having put ALX into play, we do currently believe a privatisation transaction of some form remains a likely outcome.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Ex-20-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. 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 consensus forward earnings, a sharp discount to the Industrials ex-Financials at 25.5 times.
Key Detractors Nine Entertainment (NEC, overweight) – the media company underperformed despite delivering a solid trading update during the period, with the market more focused on the deteriorating macro environment. Management expects FY22 EBITDA to be up 22% y/y, unchanged versus its previous guidance, supported by slightly stronger underlying metrics. Our positive view remains premised on a supportive valuation, its high-quality digital assets (Stan, 9Now and Domain), and a number of cost saving initiatives in the short term. We believe the ad market’s recovery is only partially factored into NEC’s valuation, with the stock trading at 9.1 times forward earnings. At these levels, we also do not believe sufficient value is attributed to its subsidiaries when considering their long-term growth profile.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Ex-20-Australian-Equities-Fund-Jun-2022.pdfMay, 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, it is our view 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 ex-Financials at 25.5 times.
Atlas Arteria (ALX, overweight) – the toll road operator outperformed without any materially positive news during the period. 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 on less than 11.0 times normalised EV/EBITDA, which, in our view, more than 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
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
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Ex-20-Australian-Equities-Fund-May-2022.pdfApril, 2022
Key Contributors
Block (SQ2, underweight) – the digital payments company underperformed as the outlook for higher real rates pressured the tech sector’s premium valuation. We are underweight on the grounds that its valuation (at a 12-month forward P/E of 80.2 times) more than captures the company’s attractive
Key Purchases
Chalice Mining (CHN) – we established a position in the palladium project developer during the period. Following its announcement of a maiden Julimar Resource last year, CHN has de-risked its world-class project based in Western Australia. The project comprises one of the few, large scale and high-grade deposits outside of Russia, which historically produced around 40% of global supply. In regard to the market more broadly, we acknowledge demand is set to weaken in the long term for its traditional use to make catalytic converters (and reduce emissions) for internal combustion engine (ICE) vehicles. However, palladium also has a unique ability to absorb hydrogen (can absorb >900x its own volume under suitable conditions), providing a range of potential future facing demand applications.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Ex-20-Australian-Equities-Fund-Apr-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 this was more than offset by wage inflation and increased investment spending. While the result was still disappointing, we believe the stock was oversold and remain overweight. Short-term headwinds are more than reflected in TYR’s valuation, with the stock trading at 2.2 times forward sales – a significant discount to technology peers. 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.
Key Detractors South32 (S32, underweight) – the base metals miner outperformed alongside higher commodity prices and after delivering a better-than-expected 1H22 result. The company announced EBITDA of $US1.87bn, roughly 10% ahead of consensus, mostly driven by higher metallurgical coal and aluminium prices. At spot commodity prices, S32 is set to generate 140% higher earnings in FY23 with a free cash flow yield in excess of 30%. Nevertheless, we maintain a negative medium to longer-term view towards the company: in our view S32’s key commodity prices are unsustainable, with the prices of manganese and coking coal – around 50% of S32’s earnings – skewed to the downside, based on supply and demand fundamentals. S32 appears devoid of growth opportunities, with short mine lives, no active exploration, increased capital intensity and material geopolitical risk from its South African operations.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Ex-20-Australian-Equities-Fund-Feb-2022.pdfJanuary, 2022
Key Contributors
Worley (WOR, overweight) – the engineering services company outperformed as oil prices increased, with Brent Crude rising 18% to US$92/bbl during the period. We remain overweight WOR, which we believe is in a strong position to withstand a lower-than-expected recovery in its traditional work. 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
Key Detractors
Santos (STO, underweight) – the oil & gas producer outperformed as oil prices increased – with Brent Crude rising 18% to US$92/bbl during the period – and in response to a strong 4QFY22 result. While production of 22.9mmboe and sales volumes of 26mmboe were in line with expectations, the company delivered record revenue as realised LNG prices increased by 32% to US$13.64/mmbtu. We remain positive towards the company on a fundamental basis, premised on its resilient low-cost base business, a diversified asset base across multiple basins, customers and products (with 60% oil exposure) and latent value in its midstream infrastructure. However, we note its emissions reduction strategy relies heavily on scaling carbon capture and storage (CCS) and hydrogen – two unproven technologies at scale – without committing significant capital to shifting the business to a low carbon world. We view the recently completed merger with Oil Search (OSH) as logical from a financial perspective, however at this stage it is unclear how the merger affects the group’s climate change strategy.
December, 2021
Australian equities rose modestly in the December 2021 quarter as strong performances from the miners and defensive sectors offset weakness elsewhere. The ASX 300 Ex-20 Accumulation Index rose 3.3% during the quarter, outperforming the broader ASX300’s 2.2% return and taking its 12-month return to 17.8%.
Key Contributors
Link Administration (LNK, overweight) – the share registry company outperformed after receiving several takeover offers during the period and giving a positive trading update. The highest offer came from Canadian-based group Dye & Durham at $5.50 per share, representing a 28% premium to its closing announced that the Liquor and Gaming Authority’s regular review of The Star Sydney would now also incorporate public hearings. We exited our position following extensive engagement with management and after undertaking independent validation in relation to media allegations that the company enabled suspected money laundering, fraud and foreign interference. 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).
Alumina (AWC, overweight) – the alumina producer partially retraced prior outperformance without any materially negative news during the period. We remain overweight the company. We expect global aluminium demand to continue to improve as the Transportation sector recovers and, more broadly, the drive to decarbonise increases demand for the lightweight metal. More broadly we continue to hold a positive view of AWC’s high-quality assets and strong earnings, cash flow and capital management potential. As a result, we see its valuation (at a forward P/E of 10.6 times with a 9.3% forecast dividend yield) as attractive.
Key Detractors
TPG Telecom (TPG, overweight) – the telecommunication services company partially retraced outperformance from prior months as its founder sold a block of shares during the period. Our positive view is premised on the improving outlook for the mobiles market, recovery in volumes post COVID and the recently completed Vodafone merger, which in our view will unlock significant synergies. The combined entity is well placed to harness its infrastructure, scale and balance sheet to disrupt incumbents Telstra (TLS) and Optus through its lowercost structure, as well as new products such as Fixed Wireless.
November, 2021
The ASX 300 Ex-20 Accumulation Index rose 0.5% during the month, outperforming the broader ASX300’s -0.5% return and the MSCI World Index’s taking its 12-month return to 15.0%. 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
Key Contributors
Link Administration (LNK, overweight) – the share registry company outperformed after receiving several takeover offers during the period and giving a positive trading update. USbased Carlyle group returned with a $5.38 per share offer, which included a cash component for the base business and a pro-rata distribution of LNK’s PEXA stake. Meanwhile, LNK received two bids for its Banking and Credit Management (BCM) business. The second offer – at €65m – came from Ireland-based LC Financial Holdings.
Key Detractors
Worley (WOR, overweight) – the engineering services firm underperformed during the period alongside the oil price, with Brent Crude declining 15% to US$71/bbl as Omicron sparked concerns around global growth. We remain overweight the company, which we believe is in a strong position to withstand a lower-than-expected recovery in its traditional work. 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. We believe WOR’s valuation provides significant support at current levels, with the stock trading on 13.5 times forward earnings, a sharp discount to the Industrials ex-Financials at 28.6 times
October, 2021
Australian equities were flat in October, underperforming global equities as Australian bond yields rose sharply in response to higher inflation expectations. The ASX 300 Ex-20 Accumulation Index lifted 0.2% during the month, taking its 12-month return to 26.0%. 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 (+9.7%) was the top performer during the period, with the sector seen as a beneficiary of stronger inflation. At a stock level, Northern Star (NST, +8.7%), Silver Lake Resources (SLR, +26.5%) and West African Resources (WAF, +34.0%). Information Technology (+2.8%) also delivered a solid return, with the sector supported by lower real yields. The best performing stocks included Xero (XRO, +7.6%), Appen (APX, +20.0%) and Nearmap (NEA, +16.6%)
Key Contributors
Northern Star (NST, overweight) –the gold miner outperformed during the period alongside the gold price (+2% to $US1,784) and as the gold sector was seen as a beneficiary of higher inflation. The macro-environment outweighed NST’s slightly softer-than-expected 1Q21 result. Production came in at 373,000 ounces, 6% below consensus forecasts, while costs were 5% above at $1,594 per ounce. 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 in February
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
September, 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.
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
August, 2021
Key Contributors
Star Entertainment (SGR, overweight) – the casino operator outperformed following a better-than-expected FY20 result. Investors appeared to look through the impact of NSW’s latest lockdown restrictions and FY21 earnings of $430mn, which were flat (y/y) and met consensus forecasts, and instead rewarded the company for several value-accretive initiatives. SGR is investigating dividing its business into its operating and property divisions, additional slots in Sydney and selling an interest in the Brisbane Treasury buildings for $220mn. While the latest outbreak delays SGR’s recovery, we remain overweight the company. In our view SGR has available liquidity and debt headroom to withstand further disruption from the COVID-19 crisis, with net debt to EBITDA now standing at 2.7 times (from 3.2 times at FY20) and an extremely flexible cost base that is phased in line with revenue and demand. Moreover, SGR is a significant beneficiary of the post-COVID recovery once restrictions ease. In the long term, our overweight position is premised on the belief that the market underestimates SGR’s ability to enhance asset performance through operational improvements and capex programs
Key Detractors
Link Group (LNK, overweight) – the share registry company underperformed in response to a disappointing FY21 result. While operating NPATA of $113.2mn was only 2% below consensus, management guided to broadly flat operating EBIT in FY22 – well below consensus for 15% growth. The market was anticipating an earnings recovery in FY22, but this appears to have been pushed out to FY23 due to further investment in operations and higher costs. We remain overweight the company because we continue to see compelling value in its base share registry business and electronic conveyancing business PEXA. Notwithstanding the PEP/Carlyle consortium walking away from its takeover proposal, we continue to see value in PEXA (with the company retaining its 45% stake in the IPO subsequent to month-end). Our positive view of PEXA is premised on infrastructure like characteristics of the property settlement exchange upon maturity supplemented by numerous growth opportunities in immediate adjacencies. Excluding PEXA, LNK trades at a forward P/E of less than 10-11 times, a substantial discount to peer Computershare (CPU) at 22.3 times
July, 2021
Australian shares rose modestly in July despite ongoing lockdowns across the east coast of the country. The S&P/ASX 300 Ex-20 Accumulation Index returned 0.9% for the month, taking its 12-month return to 24.6%. 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 (+10.3%) was the top contributor to the index, supported in most part by miners leveraged to the electric vehicle theme. Top stock performers included Mineral Resources (MIN, +17.3%), Lynas Rare Earths (LYC, +28.5%), IGO Limited (IGO, +22.0%) and Pilbara Minerals (PLS, +22.1%). Corporate activity increased during the period, with Sydney Airport (SYD, +34.9%) and Spark Infrastructure (SKI, +23.8%) receiving takeover bids during the period. The SYD board rejected the bid on the grounds that it was opportunistic and not in the best interest of shareholders.
SKI granted due diligence after receiving a third takeover bid – at $2.95 per share up from $2.80 per share previously – from a consortium comprising KKR and OTPP.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Ex-20-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 300 Ex-20 Accumulation Index increased by 7.4% in the three months to 30 June 2021, taking its 12-month return to 24.9%. 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 (+10.4%) 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/2021/01/Yarra-Ex-20-Australian-Equities-Fund-Jun-2021.pdfMay, 2021
Key Contributors
Aristocrat Leisure (ALL, overweight) – the gaming company outperformed as its 1H21 results highlighted its leverage to the re-opening US economy and strong competitive position.
Normalised profit after tax and before amortisation of acquired intangibles (NPATA) grew 12% y/y to $411.6mn, beating consensus by 42% and rising to just 2.5% below pre-COVID-19 levels. While earnings were strong across the board, Digital (45% of group EBIT) was the standout as social casino and social casual growth experienced a step change in growth from COVID.
Our thesis remains 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 26.9 times forward earnings when considering the Industrials Ex-Financials trades at 28.0 times and ALL’s superior long-term growth potential.
Key Detractors
Incitec Pivot (IPL, overweight) – the explosives and fertiliser maker underperformed during the period as ongoing operational issues and a soft 1H21 result overshadowed stronger fertiliser prices. Management reported EBIT of $110mn for the period – 35% below consensus forecasts – as unplanned manufacturing outages, import constraints and flooding caused lower volumes, outweighing the benefit from higher commodity prices. Notwithstanding the disappointing operational issues, we remain overweight the company as we believe the risk is skewed to the upside at current levels (at 14.2 times forward earnings). Lead indicators suggest higher demand for key commodities (urea and DAP) will sustain current spot prices, resulting in consensus upgrades.Meanwhile, the explosives business is experiencing more stable pricing as mining demand normalises in North America.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Ex-20-Australian-Equities-Fund-May-2021.pdfApril, 2021
Key Contributors
Carsales.com (CAR, overweight) – the online automotive classifieds company outperformed during the period without any material news. Our positive view remains premised on the belief CAR should benefit from attractive earnings growth, conservative accounting (with low capitalisation of research and development investment) and undervalued international
earnings, IPL trades well below the wider Industrials sector and at a discount to key competitor Orica (ORI) at 19.8 times. Origin Energy (ORG, overweight) – the company underperformed after downgrading EBITDA guidance by 8% in its Energy Markets business during the period. Management lowered its range from $940-1,020mn (from $1,000-1,040mn) due to an adverse ruling on a gas dispute with Beach Energy (BPT) and ongoing electricity market weakness. However, at a group level APLNG partially offset this weakness, with ORG announcing it expects a FY21 cash distribution of more than $650mn from the plant amid higher-than-expected production and gas prices. We remain overweight the stock. Following its initiatives, ORG is now in a stronger position to withstand lower electricity wholesale prices, which we view as being at unsustainably low levels. The company has >$4bn of liquidity – which can cover all debt maturities in the next 36 months – while APLNG has a lower distribution breakeven of US$27-31 per barrel and $1.2bn in cash (as at 30 June 2020).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Ex-20-Australian-Equities-Fund-Apr-2021.pdfMarch, 2021
Key contributors
Vocus Group (VOC, overweight) – the telco outperformed during the period after receiving a takeover bid and delivering a better-than-expected 1H21 result. A consortium comprising Macquarie Infrastructure and Real Asset Holdings (MIRA) and Aware Super made an offer of $5.50 per share following due diligence on the business during the period. 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. The management team remains focused on integrating and simplifying the various acquired businesses, unifying its product offering and increasing customer product penetration. We remain confident in the longer-term revenue and margin opportunities that will come from successfully implementing these improvements.
Incitec Pivot (IPL, overweight) – the company outperformed in response to improved fertiliser prices, with Tampa ammonia rising +102% q/q to $US545/t. Our positive view remains premised on key commodities (urea and DAP) reverting to midcycle 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 19.1 times forward earnings, IPL trades well below the wider Industrials sector (at 27.6 times).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Ex-20-Australian-Equities-Fund-Mar-2021.pdfNovember, 2020
Key Contributors:
Worley (WOR, overweight) – the engineering services company outperformed after Brent Crude increased by 27% during the period. We continue to believe WOR is in a strong position to withstand an economic slowdown and lower oil prices, with significant refinancing headroom and business diversification across different markets. We believe WOR’s valuation provides significant support at current levels, with the stock trading on 15.4 times two-year forward earnings – a cyclical low multiple despite its more resilient earnings base.
Origin Energy (ORG, overweight) – the energy company outperformed after Brent Crude increased by 27% during the period and following a well-received Investor Day, with guidance for higher production and lower costs at APLNG offsetting a more challenging outlook for the Energy Markets business. Our overweight position remains premised on our view that recent initiatives to simplify the business will unlock value (reducing debt, focusing attention on key assets Energy Markets and APLNG). Following its initiatives, ORG is now in a stronger position to withstand lower oil and electricity wholesale prices, which we view as being at unsustainably low levels. The company has >$4bn of liquidity – which can cover all debt maturities in the next 36 months – while APLNG has a lower distribution breakeven of $US27-31 per barrel and $1.2bn in cash (as at 30 June 2020).
Northern Star Resources (NST, overweight) – the gold miner underperformed as the commodity declined 6% to $US1,763 per ounce during the period. We were underweight NST based on its stretched valuation metrics (6.3 times forward EV/EBITDA), with our preferred exposures Regis Resources (RRL), Saracen Minerals (SAR) and diversified miner Independence Group (IGO). However, NST has announced a merger with SAR, with SAR shareholders receiving 0.3763 NST shares for every SAR share.
We see the business combination as logical, with highly complementary operations (the Superpit joint venture) and organisational cultures, and the synergy metrics as attractive (A$1.5-2.0bn pre-tax NPV). On valuation, we see the potential for the combined group to re-rate to peer Newcrest Mining (NCM, 6.6 times forward EV/EBITDA) given its comparable size and growing production profile in Western Australia and Alaska.
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asset_class: Domestic Equity
asset_category: Australian Small Cap
peer_benchmark: Domestic Equity - Small Cap Index
broad_market_index: ASX Index Small Ordinaries Index
structure: Managed Fund
fund_features:
The Yarra Ex-20 Australian Equities Fund provides investors with access to a diverse, balanced investment universe with lower stock and sector concentration. The Yarra Ex-20 Australian Equities Fund seeks superior returns, providing investors with access to a diverse and balanced portfolio offering strong growth potential over the medium to long-term. To achieve medium-to-long term capital growth through exposure to Australian Securities Exchange listed securities excluding those included in the S&P/ASX 20 Index. In doing so, the aim is to outperform the S&P/ASX 300 ex S&P/ASX 20 Accumulation Index over rolling three-year periods.
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