Superannuation

Across this disparate group of businesses, we continue focus on those alternative asset managers growing FUM (RPL, QAL) and the materials businesses growing earnings (in what remains a shrinking investable universe). The more cyclically exposed construction linked stocks of MGH, JHX and QAL saw a positive price response, despite EPS declines as investors look through any short-term ‘air-pocket’ of demand to a potentially improved housing market (both domestically and in the US) on the back of lower interest rates. Within the context of recent trading performance, implied multiples, and estimated TSR, we call out RPL, QAL and MGH our key picks post results.

Regal Partners (RPL)

Normalised 1H24 NPAT of $59.0m was 23% above our forecasts and 15% above consensus. The key area of outperformance was other income at $28.4m (vs our forecasts of $15.5m), a function of co-investment mark-to-market gains and cash received as dividends. The key to earnings growth remains FUM growth, with 1H24 seeing net inflows of +$0.7bn and a further +$1.2bn of growth via investment performance - we factor in something similar for 2H24. Average management fees (both $ and %) should increase in 2HCY24, as RPL receives full contributions from the higher fee businesses of Merricks and Argyle.

Investment view:

• Strong investment performance, fund inflows and acquisitions have seen the business grow FUM 133% pa since Jun-22, when Regal Funds Management merged with VGI Partners.  
• RPL can continue to grow FUM as performance persists and the alternative managers reach scale.

Qualitas (QAL)

FY25 guidance for NPBT of $49-$55m reflects growth of c.26% to 41% (vs pcp), with base management fees and balance sheet co-investments to deliver the bulk of the growth. Management commented that its current cash balance should be sufficient to see it reach the aspirational target of $18bn FUM by FY28. Deployments should continue to grow, albeit at a slower pace, with the proportion of net to gross loans likely to remain similar.

Investment view:

• QAL is well-positioned to increase market share in debt funding for affordable multi-unit metro developments.
• Management’s FY28 FUM target of $18bn, the reduced reliance on performance fees and a build-to-rent portfolio which remains a future growth driver.

MAAS Group (MGH)

Underlying EBITDA (equity share) was up 27% to $207.3m, at the top end of guidance ($190m-$210m) and in line with consensus. Underlying result included $30m revaluations gains and a $10m of gain on sale. Construction Materials, the highest multiple segment in the MGH business, grew 58% (vs pcp), with existing businesses (acquired pre Jul-22) driving approximately half of the increase. The quarry business continues to grow volumes, along with ASP increases and COB reductions. Residential real estate remains a challenge, with allotment sales volumes to be muted in FY25.

Investment view:

• Management expecting continued revenue and profit growth in FY25.
• The business continues to demonstrate a transition away from real estate towards a construction materials, namely quarry, lead industrial business – construction materials grew FY25 EBITDA 54% (existing businesses grew 44%).

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For the last couple of months, I've been putting the view that I think the beginning of a new up move in commodity prices. There are two ways you can approach that.

One is the simple argument that we're at the beginning of an extended period of rate cuts by the Federal Reserve. That period of rate cuts has already started. We will have a further 25 basis point rate cut in November and another 25-basis point rate cut in December. Those rate cuts will continue as we go through next year. As a result of that, the U.S. dollar will fall. You'll see the DXY index of U.S. dollars continue to decline.  Then after the lag, what you will see is that fall in the $US will really start to bite, and commodity prices will go up. That's the simple argument in terms of the world trade cycle.

But this morning what I want to look at, is the structure of demand and where I think the structure of demand will be coming from. For that, what I want to do is look at not just the Chinese steel industry. It is not the domestic economy that I'm interested in. What I'm interested in is the very rapid growth of Chinese steel exports and where those exports are going to.

For the discussion on Chinese domestic demand, which is like I say, I rely on paper that's published by BHP. But for the discussion on Chinese steel exports, I'm relying on the US International Trade Administration and their statistics that they've got on Chinese exports.

In 2023, China produced, over a billion tons of steel. I mean, you know, imagine how much that would hurt if you dropped it on your foot. Domestic demand was 911 million tons, and that's up 50% from the 609 million tonnes 13 years ago.

Now, what's interesting about that, and I'm referring to this BHP paper, is that the structure of domestic demand has changed. We think of all that steel going into buildings. Back in 2010, 42% of the steel was going into the buildings. That has fallen, pretty much reversing those numbers from 42% falling to 24%. So, building demand is a much smaller proportion of steel demand in China. What has changed dramatically is there's a lot more building of machines and machinery in China, and that has generated a change of demand from 20% of total production, 13 years ago to 30% now. Steel demand for infrastructure has changed from 13 % then to 17% now.

It is true that the Chinese economy is slowing down this year. The Chinese government said that we're going to grow at 5%. But the International Monetary Fund in April said that that wasn't going to happen, that we're going to grow by 4.6%. The International Monetary Fund was the closest to it. Then that number that the International Monetary Fund is forecasting drops a year by year through to the end of the decade to about 3%.

But what's interesting, as that's happening, there's still a growth in demand for Chinese steel. That's because there's been a quite remarkable increase in exports of steel. Where I want to look at now. I want, to look at is the top ten markets for Chinese steel exports. Now, these are not countries you would think of. You would think of, you know, big demand with going to places like The United States or maybe, Germany or, you know, France or someplace like that.

That's not where the growth in the world economy is. The growth the world economy is, is in a place north of us called the Indo-Pacific. The Indo-Pacific name came from Shinzo Abe, who was the longest serving prime minister, Japanese prime minister since World War two. Sadly, he is no longer with us.

So, the fastest growth, in last year's was a country called Vietnam. Vietnam absorbed 9.2 million tonnes of Chinese steel, which is 10% of total exports. South Korea absorbed 8.4 million tonnes, which was 9% of exports. Thailand absorbed 4.9 million tonnes, which was 5.3% of exports. And the Philippines 4.8 million tonnes. That's not the United States. It's not Germany, it's not France. It's countries north of us which are using all that steel because the growth rate is so good, is so strong. The Philippines absorbed 4.9 million tonnes. Indonesia absorbed 4.2 million tonnes. Turkey, not north of us, but to the west absorbed 4 million tons, the UAE 3.7 million tonnes. And India, even though it has its own steel manufacturing industry, which is growing incredibly rapidly, absorbed 3 million tonnes.

What I want to do now is go out in some of those countries where we saw that rapid demand and look at GDP growth. I want to look at four of them and what the GDP growth is and what the size of those economies are.

Vietnam, which had the strongest growth. The point about Vietnam is that Vietnam is where a lot of what's happened. In China is wages have gone up so much that they've been priced themselves out of the manufacturing business. A lot of that manufacturing is now going to Vietnam. So, it's now moving to Vietnam. So, what you're having is the roll out of factory building in Vietnam as manufacturing moves there from China now.

What's interesting is that if Vietnam has 100 million people, the size of its economy is $US 0.5 trillion, and that economy grew by 6.9% this year. That's the kind of growth rate that China used to have. The IMF thinks it's going to grow by 6.9% next year as well.  Another country is the Philippines. The Philippines has 117 million people in it. It also has an economy of just over $US 0.5 trillion dollars. It's growing at 5.7% this year. The IMF thinks it's going to grow by 5.9% next year.

Indonesia is an enormous country. 280 million people, almost as many, as many people as the United States. It's income of $US1.5 trillion U.S. dollars and it grew at 5% this year, a touch faster than China annual growth, 5.1% next year and keep growing at that because its populations continue to grow, unlike China.

India, of course, the which is the big guy in the Indo-Pacific, it grew by 6.9% this year. It'll grow by 6.7% next year, according to the IMF. It of course, has a population of 1.4 trillion people bigger than China. And its economy this year was $US3.9 trillion. I compare that to a little country in the South Pacific, a small open economy, as economists say, which has only 27 million people in it. You're right. Australia. And we have an economy of $US1.8 trillion.

What you've got here are two stories for recovery in commodities. First, you have a financial story, which is obvious. The Fed is going to cut rates. The U.S. dollar will fall, after a lag commodity prices will go up. But what's really important is that this commodity market has strong structural demand, and that strong structural demand is coming not from strong growth in China anymore, but from very strong growth in the Indo-Pacific, particularly strong growth in Vietnam, particularly strong growth in the Philippines, strong growth in Indonesia. And of course, the big guy in the block, strong growth in India.

In this sector wrap, we highlight our key takeaways from the recent Insurance and Diversified Financials reporting season. Overall, it proved to be a strong reporting season across the board, with most company results meeting or beating expectations. While there were some disappointments—most notably NHF’s challenging results and slightly softer guidance from QBE and PXA—our focus remains on several standout picks: QBE, SUN, and CGF.

QBE Insurance Group (QBE)

QBE’s 1H24 result was broadly in-line at both Gross Written Premium (GWP) and NPAT, with the company delivering a solid 16.9% ROE (10.1% in the pcp). Overall we saw this result as largely as expected, with the negative being slightly lowered FY24 top-line guidance, and the positive being an improved overall North America business performance. We lower our QBE FY24F/FY25 EPS by 9%/5% reflecting; restructuring charges, reduced top-line growth expectations, higher tax rate forecasts and a change in QBE’s definition of adjusted NPAT. We continue see QBE as too cheap, trading on 10x FY24F PE.

Outlook commentary:

FY24 guidance is now for constant currency GWP growth of 3% (previously mid-single-digit), and a combined operating ratio of 93.5% (which is unchanged).

Suncorp Group (SUN)

SUN’s FY24 cash NPAT (A$1,372m) was ~-5% below consensus (A$1,425m), mainly due to a softer General Insurance result than expected. FY25 guidance points to solid earnings momentum continuing into this year, and we see SUN’s unveiled FY25-FY27 business strategy as uncomplicated and focused on driving the insurance business harder (which should be well received). We lift our SUN FY25F/FY26F EPS by 5-6% on an increase in insurance margin forecasts and lower “other items” forecasts.

Outlook commentary:

• GWP growth expected to be in the mid to high single digits, primarily driven by increases in AWP albeit with moderating premium rates as the reinsurance market stabilises and inflationary pressures ease slightly in some portfolios.
• Investment yields are expected to reduce as market expectations for interest rates decline in anticipation of a stabilisation in inflation. For FY25, prior year reserve releases in CTP are expected to be around 0.4% of Group net insurance revenue, with releases in other portfolios expected to be neutral over the year. An UITR towards the top of the 10% to 12% range is target.

Challenger Financial Svcs (CGF)

CGF’s FY24 normalised NPAT (A$417m) was in-line with consensus and +14% on the pcp. Overall, we saw this as a positive FY24 result highlighted by a strong improvement in Life business margins/returns, good group cost control and an upward step change in CGF’s capital position. We lift our CGF FY25F/FY26F EPS by 4%-6% on higher Life business margin expectations, and a reduction in our cost-to-income ratio forecasts. With CGF having good earnings momentum, and trading on an undemanding 12x FY25F PE multiple, we see further upside.

Outlook commentary:

• In FY25, Challenger is targeting a normalised net profit after tax guidance between $440 million and $480 million, with the mid-point of the range representing a 10% increase on FY24.
• Based on Challenger’s assumed FY25 effective tax rate of 31.3% this equates to a normalised NPBT guidance range of between $640 million and $700 million.
• Challenger has also lowered its cost to income ratio target range to 32% to 34% from FY25 (previously 35%-37%). Challenger is on track to achieve its ROE target in FY25, which represents the mid-point for the FY25 earnings guidance range.

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