Best calls to action – Monday, 23 August
About the author:
- Author name:
- By Andrew Tang
- Job title:
- Analyst - Equity Strategy
- Date posted:
- 23 August 2021, 6:00 AM
- Sectors Covered:
- Equity Strategy and Quant
South32 Limited - Pulling the trigger on better entry
Our conviction on S32 was boosted when it completed its SAEC divestment, but at the time this was already priced in. We upgrade our rating to ADD now on what we consider to be a better entry point given the recent share price weakness.
FY21 was solid, ahead of our estimates, also leading to a stronger dividend. Cost pressures across its alumina smelters look like a key challenge heading into FY22, while this still looks well covered by strength in metal prices. FY22 guidance was mixed, leading to higher production assumptions across some operations while bringing higher costs with it. A strong balance sheet, healthy FCF, growth from Hermosa and room for extra M&A.
Read our full reports and latest price targets on ASX:S32 here.
Adairs - The story is better than what the multiple suggests
A very strong period of growth in FY21 (EBIT +97%) with heightened demand for ADH product, material GM expansion and opex leverage. ADH's early FY22 experience is in line with most retailers who have reported to-date, as store closures impact in-store sales, partially offset by online growth.
There remains a lot to like about this investment case: 80% of sales coming from loyal Linen Lover members; GLA growth via new stores and upsizing; DC cost efficiencies to flow from 2QFY22; and 37% of sales online (inflated in FY21 by lockdowns) combined with a highly profitable store network.
We acknowledge that earnings risk is more elevated currently given ST lockdown activity (and how long this persists for). However, we see enough safety in what is one of the cheapest valuations in the sector. Upgrade to Add (from Hold).
Read our full reports and latest price targets on ASX:ADH here.
Smartgrp Corp - Recovery underway, masked by vehicle delay
SIQ reported 1H21 NPATA of A$33.5m (+4.5% on pcp), in-line with expectations. Novated lease orders ended 2Q21 ~3% above pre-covid levels, however settlements lagged (~11% below pre-covid) given vehicle supply constraints.
This has resulted in an order book +19% on 2H20 and securing a solid 2H21. Activity levels have improved, however SIQ's short-term outlook was caveated with covid lockdown uncertainties. Medium-term growth relies on strategy execution to rejuvenate organic growth ('Smart Future' program). SIQ ended with A$4.5m net debt, allowing for another special dividend or acquisitions.
We think a ~14.5c special div in 2H21 is probable (not in forecasts). After an add-on insurance/covid earnings reset, we believe SIQ's earnings base is now more sustainable. Whilst we expect relatively low growth from SIQ, we think the FCF yield (~7%) and balance sheet strength is fairly attractive. Upgrade to Add.
Read our full reports and latest price targets on ASX:SIQ here.
TPG Telecom - Better than feared and delivered HoH growth
TPG reported its 1H21 result. This is the first time we've seen some runs on the board from the merged group. EBITDA of $886m was inline (-2%) versus our forecast. It was down 3% yoy but pleasingly up 2% from 2H20 to 1H21.
No formal FY22 guidance was provided but management noted there is no significant 1H/2H seasonality in the business. This suggests FY21 EBITDA of ~$1.7bn is in the ballpark. We have trimmed our EBITDA forecasts by ~4% and retain our Add recommendation.
Read our full reports and latest price targets on ASX:TPG here.
The Star Ent Grp - FY21 result: Against the odds
Good operating cost control allowed SGR to maintain flat earnings into FY21 despite the collapse of the International VIP business and assorted COVID-related challenges ranging from capacity limits to lockdowns. EBITDA of $430m was in line with estimates.
It gets considerably more difficult in FY22 due to the extended closure of the Sydney property and we expect a material drop in earnings. SGR indicated it is planning the sale of a number of valuable assets, including the sale and leaseback of The Star Sydney. If these go through, they will entirely de-lever the business and allow SGR to pursue purchase opportunities in the sector.
We think it's important to look past the next few months to the potential of the business coming out of lockdown and into the future. We retain an ADD rating.
Read our full reports and latest price targets on ASX:SGR here.
Pwr Holdings Limited - Opportunities galore
While PWH's FY21 revenue was below our forecast, stronger-than-expected margin expansion resulted in earnings growth slightly ahead of our expectations. The result overall however was slightly below Bloomberg consensus estimates.
Key positives: Strong margin expansion with EBITDA margin up 100bp to 36.6% and NPAT margin rising 130bp to 21.2%; Balance sheet remains very strong with net cash (incl. leases) of A$11.4m (FY20: A$2.8m); ROE increased to 26% (FY20: 24%); Cash conversion was strong at 115% (FY20: 94%). Key negatives: Motorsports (-6% vs MorgansF), OEM (-9% vs MorgansF) and Industrial & Other (-50% vs MorgansF) revenue was below our expectations; FY21 DPS was lower than expected; FX impact was negative.
FY22F/FY23F/FY24F EBITDA changes by +1%/+5%/+10%. We retain our Add rating. In our view, PWH is a high-quality business with a strong track record of growth. With a healthy pipeline of opportunities across all key segments, we expect this growth trend to continue over the medium term.
Read our full reports and latest price targets on ASX:PWH here.
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Disclaimer: Analyst may own shares. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.