Insights

Woodside Petroleum (ASX:WPL) is set to break away from industry norms, steering its capital toward New Energy ventures, including renewables and green energy resources. The company aims to invest US$5 billion by 2030, contingent on the successful completion of the BHP Petroleum merger.

New Energy Investment Initiatives

If the merger proceeds, Woodside Petroleum plans to allocate funds to four primary projects: H2Perth (hydrogen/ammonia), H2OK (hydrogen), H2TAS (hydrogen), and Heliogen (solar). The move reflects a shift in focus towards Environmental, Social, and Governance (ESG) considerations.

Evaluating New Energy's Potential

While the company anticipates an ESG boost, concerns arise over the efficiency of early capital deployment in emerging markets. Woodside's transition away from traditional hydrocarbons poses challenges, with uncertainties around achieving targeted returns for New Energy projects.

Analysis of Aggressive New Energy Push

Woodside's aggressive push into New Energy signifies a substantial business transformation. Diversifying from well-established hydrocarbons to renewables and green energy introduces competitive pressures and potential hurdles in achieving return profiles.

Impact of BHP Petroleum Merger

The impending merger with BHP Petroleum promises to enhance hydrocarbon production and geographical diversification. The Trion field in the southern Gulf of Mexico is expected to reach the final investment decision (FID) around the merger completion, contributing to new growth.

Forecast and Valuation Considerations

Woodside Petroleum's New Energy initiatives are yet to be factored into valuation, awaiting project sanctions and more detailed information. The company's commitment to ESG, coupled with strong fundamentals, supports a positive investment view, maintaining an Add rating.

Insurance Australia Group (ASX:IAG) recently provided a comprehensive business update, highlighting its 5-year strategy. This update maintains the medium-term targets, focusing on achieving a cash ROE of 12%-13%. In this analysis, we delve into key takeaways, emphasizing IAG's strategy, its drivers, and the scepticism surrounding certain targets.

Medium-Term Targets and Strategy

IAG's medium-term objectives remain consistent, targeting a cash ROE of 12%-13%, an insurance margin of 15%-17%, and a growth profile. The recent business update reaffirms the FY22 guidance, projecting a 10%-12% reported insurance margin and low single-digit GWP growth.

Key Drivers for Profitability Improvement

IAG outlined three primary drivers for expected profitability improvement in the medium term:

1. Customer Growth

IAG aims to add 1 million customers over the next 5 years. The major portion (750k) is anticipated from Direct Insurance Australia (DIA). Strategies include expanding the NRMA brand nationwide, targeting younger customer segments through the digital business 'Rollin,' and digitizing IAG’s small business offering.

2. Profit Improvement in IIA

Anticipated profit improvement in Intermediated Insurance Australia (IIA) is expected to reach A$250 million. This improvement is attributed to the remediation of the IAL personal lines portfolio, pricing enhancements, improved underwriting practices, and a reduction in the management expense ratio.

3. Other Productivity Improvements

Primarily focusing on claims improvements in DIA and NZ, IAG targets A$400 million of value improvement over 5 years. This includes enhancing claims efficiency, reducing wastage, streamlining processes, and consolidating suppliers.

Additional Insights

IAG aims to maintain a flat expense base over time (A$2.5 billion) with planned reductions in "maintenance" expenses offsetting higher costs tied to "transformation." The natural hazard allowance is expected to continue rising, and a capital return may be likely if Business Interruption court cases favour IAG.

Morgans Thoughts

While IAG's overall strategy appears logical, historical challenges in maintaining improved margins raise scepticism. The ability to grow customer numbers by 1 million is a key concern, especially considering recent losses in personal lines market share. Despite scepticism, there is acknowledgment of positive steps in executing plans in FY22.

Forecast and Investment Outlook

Earnings and valuation remain unchanged, considering IAG's challenging FY21 and the weather-affected FY22. The stock appears attractively priced at ~13x FY23F earnings, and the expectation of continuing insurance price increases, coupled with management’s performance improvement strategy, positions IAG for improved profitability over time. The ADD rating is maintained.

GrainCorp (ASX:GNC) has outperformed expectations in FY21, driven by a record east coast grain crop, strong demand, stellar Processing results, and strategic initiatives. The outlook for FY22 remains optimistic with another anticipated above-average crop.

FY21 Financial Results

In FY21, EBITDA soared to A$330.8m, surpassing the guidance range of A$310-330m. NPAT stood at A$139.3m, within the A$125-140m guidance range. The company declared a final dividend of 10cps ff and initiated a A$50m on-market share buyback.

GrainCorp's success is attributed to a record east coast grain crop, robust global demand, and the outstanding performance of strategic initiatives, notably in Processing (EBITDA A$77.7m, up 71%). The company improved market share, enhanced grower engagement, and optimized its supply chain.

Despite net debt rising to A$599.2m, core debt remained minimal at A$1.2m. Investments continued in areas like animal nutrition, alternative protein, and AgTech.

FY22 Outlook

Anticipating an above-average 2021/22 crop, GrainCorp expects significant benefits from the 4.3mt carry-over grain from FY21. This positions the company to commence high-margin grain exports immediately in FY22. Fee increases and sustained strong margins are forecasted, supported by robust demand and elevated crush margins due to high vegetable oil prices.

Investment View

Earnings forecasts for FY22 have been upgraded by 15.9% for EBITDA and 24.3% for NPAT. The positive crop outlook may also contribute to stronger FY23 earnings.

With the SOTP valuation rising, reflecting earnings upgrades, and a favourable operating environment, an Add rating is maintained. The upcoming ABARES Crop report on November 30 is expected to be a pivotal event for the stock.

Explaining ETFs

ETFs are primarily passive investments as they replicate indices with no active management value-add. The themed ETFs may be semi-active in that they may apply an independently-compiled index but with differing rules on how to define the theme.

While most ETFs available to Australian investors today track an index, some active managers also see an ETF as an attractive structure for growth and have made their strategies available as an actively managed ETF.

They are open-ended (i.e. they can create more units as demand requires) so in that regard they are similar to managed funds but ETFs have the advantage of greater transparency and liquidity through trading on the stock exchange.

ETFs also have an advantage over listed investment companies (LICs) in that they can be bought and sold for close to the value of the underlying asset (i.e. index) and do not suffer the discount/premium that being subject to demand places on LIC share prices. This usually results in the ETF price very closely matching the performance of the asset.

However, a buy/sell spread of prices does exist for ETFs. It can be quite narrow for large, liquid funds but wider when the underlying asset is less liquid (for example, some commodities), or if the market for its assets trades in a different time zone (i.e. international indices) meaning there is a risk premium paid to the ETF trader to cover unknown pricing outcomes.

If the ETF’s underlying assets produce income, investors will receive regular income distributions. Like managed funds, ETFs pass on this income untaxed and franking credits can also be passed through.

Management expense ratios (MERs) are quite low compared to managed funds, ranging from as little as 0.15% to 1.0% for some international share offerings.

Given the strong growth in ETFs, the range of products on offer has become very wide. New ETF providers entering the market are providing different choices to suit all types of investors, providing an opportunity to access new "themes" such as ESG, Climate Change, Cloud Computing, Robotics, etc. Importantly, prior to investing into any type of ETF it is imperative the investor understands the nature and risks of that ETF product.

Investment strategies using ETFs

The benefit of investing in ETFs is that it gives the investor access to markets that are not easily accessible in Australia and/or are not cost efficient such as international shares (particularly region or theme specific), currencies and commodities.

Diversification is gained across sectors in a cost-efficient manner (i.e. you like the outlook for Energy but don’t have the funds to buy more than one or two companies and don’t want the risk of picking an underperformer).

An investor can invest small amounts in a broadly diversified basket ETF as a low cost way to get exposure to the Australian sharemarket, or in addition to the Australian sharemarket to enhance diversification.

Use limit orders rather than market orders to better ensure a more favourable execution from a price perspective (speak to your broker or adviser about this).

An investor can also transition funds into the market without having to pick individual company exposure. This may be useful if you have large amounts to invest and want to do this over time and/or if you are uncertain which sectors may perform going forward but still want exposure to the sharemarket.

This has been a relevant strategy during the period when resources have outperformed but many investors were uncomfortable investing in them directly given their cyclical nature. An investment in the broader index would have meant not missing out on one sector’s significant contribution.

In summary, ETFs are a useful investment vehicle for:

• Transparency – you know what companies and/or exposure you have through a published index.
• Cost efficiency – low MERs compared to unlisted managed funds.
• Tax efficiency – passed through dividends and franking credits. Often low turnover usually only based on index changes so that forced capital gains are not a feature of ETFs.
• Liquidity – ETFs trade on a T+2 basis and are required to always have a buy/sell price on screen when the market is trading (achieved through a market maker).
• Diversification – allowing you more options to invest in baskets or specific themes/sectors.

However, you should also be aware of some of the risks:

• Structure – there are many different structures used by ETFs and some of these may expose investors to third party default risk. Investors need to examine the security of the issuer, whether the fund is physically-backed by assets, the custodial arrangement for the assets, the use of derivatives or security lending, and other issues.
• Passive investment – while many ETFs will provide broad or specific market returns they are still a passive investment. An astute investment adviser should add value to your portfolio returns through the active management of your investments.

Feel free to speak with your Morgans adviser to learn more about Exchange Traded Funds (ETFs) and whether they might be an appropriate investment choice for you.

^{Reference: Morningstar Australasia Pty Ltd, 2015}

The third quarter of 2021 saw Viva Energy Australia (ASX:VEA) navigating through challenges, albeit slightly softer than anticipated. However, the company stands resilient, poised for growth as New South Wales (NSW) and Victoria (VIC) embark on the path to reopening. Let's delve into the details.

Performance Overview

Despite facing a marginally softer quarter, Viva Energy Group maintained a robust position. Retail volumes and margins may have trailed slightly behind expectations, while commercial performance remained steady. The refining sector experienced a mix of outcomes, reflecting the complex landscape of the period.

Anticipated Recovery

The imminent reopening of NSW and VIC presents a promising outlook for Viva Energy. As lockdown measures ease and 55% of the population resumes typical travel patterns, the company anticipates a robust fourth quarter in 2021. With this resurgence in retail fuel volumes, VEA stands primed for a significant rebound.

In conclusion, Viva Energy Australia emerges from the challenges of the past quarter in a favorable position. As lockdown restrictions diminish and consumer behavior normalizes, the company's trajectory toward recovery appears promising. Maintaining our Add recommendation, we foresee a period of growth and resilience for VEA.

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Perpetual (ASX: PPT) has released its 1Q22 business update, showcasing a solid performance and positive prospects.

Key Highlights

Perpetual Asset Management (PAM) Growth

AUM growth of 3% in Perpetual Asset Management (PAM) to A$101bn. Return to positive PAM inflows, totalling +A$0.1bn.

Corporate Trust and Perpetual Private Expansion

There has been 5%-9% FUA growth in Corporate Trust. Perpetual Private experiences 9% growth in FUA, reaching A$18.5bn.

Financial Outlook

Upgrade of PPT FY22F/FY23F earnings by 2%/4%. Our price target increased based on this outlook. Relatively undemanding valuation at ~16x FY22F PE.

1Q22 Update Details

In the 1Q22 update, PAM's total AUM reached A$101bn, with notable improvements in net inflows, particularly in Perpetual Asset Management Australia (PAMA). Corporate Trust and Perpetual Private also demonstrated substantial growth.

Despite mildly positive PAM fund flows, the overall trend is encouraging, and the recent acquisitions of Barrow Hanley and Trillium position PPT for a robust global investment management platform. With CEO Rob Adams leading the way, the company's valuation remains undemanding, presenting an attractive investment opportunity.

Investment Outlook

The recent acquisitions lay the foundation for PPT's global expansion, potentially driving significant share price upside. Trading at ~16x FY22F PE, the valuation is seen as undemanding, warranting an "ADD" recommendation.