Research Notes

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Research Notes

Capital strength vs persistent core hurdles

Magellan Financial Group
3:27pm
February 21, 2025
MFG reported adjusted NPAT of A$84.1m, down 10% on the pcp. The headline result was ahead of expectations, however earnings composition was weaker. Management fee margin fell meaningfully in the half (63bps from 70bps), with mgmt fee revenue down 4.7% HOH. Whilst the compression was largely FUM mix, overall fee pressure (rebates) and legacy pricing in retail vehicles remains an issue. Surplus capital of ~A$407m (>A$2.25/share) will be retained to support strategic initiatives. Further associate acquisitions are likely medium term. MFG’s near-term risk is outflows in the Infrastructure business (PM departure); and medium-term fee pressure (particularly ‘legacy’ retail pricing to work through). Whilst there is arguably value, we believe these fundamental risks need to dissipate before taking a more positive view.

Capital raise to fund data centre developments

Goodman Group
3:27pm
February 21, 2025
GMG has announced it will raise additional equity to fund the first stage of its data centre pipeline – the first capital raise in twelve years. The company has outlined a near-term pipeline of 0.5GW (of a total 5GW powerbank), with an end value of +$10bn (c.$20m/MW) and a GMG share of development cost of c.$2.7bn. Whilst the 1H25 result beat both Consensus and Morgans forecasts by c.10%-15%, forward guidance was reaffirmed (reflecting the earnings impact from the capital raise), with this slight downgrade drawing into question prior consensus expectations for further upgrades in FY25 and growth of c.12-13%. Whilst many unknowns remain, we (like many investors) believe in GMG’s capacity to take its industrial knowledge, institutional partnership and land/power bank to grow the data centre business. Valuation, however, remains a limiting factor hence our Hold rating and $38.00/sh target price. We would note that the target price reflects a 14.3% TSR on the issue price and as such encourage retail shareholders to participate in the SPP which closes c.13-Mar.

Strong across the board

MA Financial Group
3:27pm
February 20, 2025
MAF’s FY24 EBITDA (A$87m, +7% on the pcp) was broadly in-line with consensus ($86.5m), with the result also largely per Morgans expectations at NPAT. This was a strong result overall, in our view, with arguably the key highlight being a positive 2H24 EBITDA for MA Money, reflecting the company’s success in building out this new earnings stream. Our MAF FY25F/FY26F/FY27F EPS forecasts are altered by -2%/-4%/+5%, reflecting slightly more conservatism with near term margins, but also factoring in greater asset growth across the entire business medium term. Our PT is set A$8.92. We think MAF management are building a strong, differentiated franchise. We maintain our ADD recommendation, with ~10% upside to our target price

Better than expected, albeit costs skewed to 2H

Transurban Group
3:27pm
February 20, 2025
1H25 earnings and cashflow beat expectations, albeit were distorted by the skew of costs to 2H25. FY25 DPS guidance remained unchanged. TCL remains leveraged to population and economic growth trends in its regional markets. At current prices, TCL offers a c.4.9% cash yield with mid-single digit compound growth in DPS over coming years. However, long-term valuation is constrained by concession lives, interest rates, asset capacity, and debt retirement requirements. Hence, DCF-based 12 month target price set at $12.65. HOLD retained.

Flows acceleration flows through

Netwealth Group
3:27pm
February 20, 2025
NWL reported 1H25 Revenue +26%; EBITDA +33%; and NPAT +46.5% on pcp. The underlying result beat expectations on higher revenue (primarily trading/ancillary), with NPAT also benefitting from a favourable tax rate. NWL’s outlook remains very strong. Exceptional FUA and revenue growth is allowing NWL to continue to invest and still deliver margin improvement. NWL noted several new client wins are supporting ongoing strong flows. NWL’s opportunity runway remains long and we expect the business to continue to execute. However, we view the valuation as full. Hold recommendation.

Stronger beat than expected

Bega Cheese
3:27pm
February 20, 2025
BGA’s 1H25 result beat consensus expectations (both earnings and balance sheet strength). Strong earnings growth was led by Bulk returning to strong profitability. Pleasingly, Branded proved resilient despite a more difficult operating environment. FY25 earnings guidance was upgraded to the higher end of its previous range, however we think it looks conservative. BGA’s near-term trading multiples are full and we maintain a Hold rating. However, we note there is upside taking a medium-term view if BGA delivers its FY28 targets.

Base metals catch earnings

Rio Tinto
3:27pm
February 20, 2025
On balance a slightly softer 2024 result, although still impressive given RIO delivered roughly flat earnings in a weakening iron ore market. Greater operating cash flow mix, with iron ore falling to 65% (from 82%), while copper increased to 17% (from 14%) and aluminium 14% (from 3%) of group. Key Pilbara replacement projects are progressing to plan. We maintain an ADD rating, with a A$126ps target price (was A$125).

Finding a base

IPH Limited
3:27pm
February 20, 2025
On a like-for-like basis, IPH reported 1H25 revenue +4% and EBITDA -3% on pcp. ANZ delivered incremental growth (+2% LFL); and Asia marginally down (-1%). Canada results were mixed, although impacted by some temporary issues. LFL EBITDA was down 2% on pcp; and reported EBITDA down ~11% HOH. Whilst organic growth is still challenged, the outlook for each division looks to have either stabilised or incrementally improved. A positive turn in Asian filings; incremental acquisition contribution; and currency support growth in 2H25. IPH’s valuation is undemanding (~10.8x FY25F PE), however investor patience is required given the delivery of organic growth looks to be the catalyst for a re-rating.

1H25 Result: It’s no longer a steal

The Reject Shop
3:27pm
February 20, 2025
TRS achieved a better gross profit margin than we had expected in 1H25. A 125 bps lift in the margin to 41.6% sets it up well, in our opinion, to meet or exceed its full year target of 40.5% despite the seasonally weaker second half. The margin improvement is especially impressive in the context of an unchanged mix in sales between consumables and general merchandise. Sales growth continues to be hard to come by, but TRS continues to stay in positive territory in LFLs (the third consecutive half year) and we think it will do so again in 2H25. We have slightly trimmed our sales estimates, and no change to margins takes forecast NPAT down 4% in FY25 and 3% in FY26. After a strongly positive reaction to the result today, the share price has hit our $3.50 target and at a FY25F PE of 17x, we downgrade from ADD to HOLD.

1H in line- Turning the post pandemic corner

Sonic Healthcare
3:27pm
February 20, 2025
1H results were inline, with strong organic revenue growth and good cost control supporting margins and OCF. Underlying Pathology performed well, with growth across all key geographies, while Radiology also showed strength on the continuing trend towards higher value modalities, but Clinical Services remains soft on lower GP attendances. Promisingly, after years of trying to right-size the cost base to better reflect the post-Covid-19 world, labour costs are “just about there”, with operating leverage returning and profitability improving. Given the likelihood for continued strong underlying revenue growth and a cost base approaching steady state levels, not to mention normal seasonality, we view FY25 EBITDA guidance (A$1.7-1.75bn) as achievable, if not conservative, with acquisitions/contract gains lending additional support over the medium-term. We adjust FY25-27 underlying estimates modestly, with our target price decreasing to A$31.36. Add.

News & Insights

From Houthi attacks on Suez Canal shipping to Trump’s Operation Rough Rider and Iran’s nuclear facility strikes, explore how these events shape oil prices.

At the beginning of the week, I was asked to write something about Iran. When I started looking at what had been happening , I realised that what we were talking about begins with an action by a proxy of Iran back in November 2023. How  that was initially handled with the Biden regime, and how then it was dealt with  deftly by Trump this year,   in turn led to  the need for an attack on Iran's nuclear facility.

Winston Churchill noted in his first volume of his history of the Second World War that it was important to understand that the United States is primarily a naval power. Indeed, the US remains the world dominant naval power. As such, two major strategic concerns remain for the US : the control of the Suez Canal and the Panama Canal .

To the US The idea that another country might block access to either of these must be intolerable. Yet what began happening, beginning on the 19th November 2023, was that , Houthi rebels that controlled a the northern part of a small country in southwestern Arabia, began to act. These Houthi rebels were acting as a proxy for Iran. They were funded by Iran, and armed with Ship-killing rockets, by Iran.

By February 2024, they had attacked 40 ships which had been attempting to sail northwards towards the Suez Canal. By March 2024, 200 ships had been diverted away from the Suez Canal and forced to make the longer and more expensive voyage around the Cape of Good Hope of South Africa. At this point, I think The Economist magazine said that this was the most severe Suez crisis since the 1950s.

The U.S. did respond. On the 18th December 2023, the U.S. had announced an international maritime force to break the Houthi blockade. On the 10th January, the UN National Security Council adopted a resolution demanding a cessation of Houthi attacks on merchant vessels.

As of the 2nd January 2024, the Houthis had already recorded 931 American and British airstrikes against sites in Yemen. Then Trump came to power. To Trump, the idea of the proxy of Iran blockading the Suez Canal could not be tolerated.

From the 15th March 2025, Trump began "Operatation  Rough Rider". This was named for the cavalry commanded by the then-future President Theodore Roosevelt, who charged up San Juan Hill in Cuba during the Spanish-American War of 1898. The U.S. then hit the Houthis with over a thousand airstrikes. So they were bombing at ten times the rate they previously had been. The result of that was that by the 6th March 2025, Trump announced that the Houthis, these proxies of Iran, had capitulated as part of a ceasefire brokered by Oman. This directly led to the main game.

It was obvious that the decision to do the unthinkable, and block the Suez Canal, had come from Iran.
What other unthinkable things was Iran considering?

It is obvious that Trump now believed that the next unthinkable thing that Iran was considering was nuclear weapons. As Iran's other proxies collapsed, Iran's air defence collapsed. In turn, this gave Trump the room to act, and he took it. He launched a bombing raid which severely disabled Iran's nuclear capacity. Some say it completely destroyed it.

Iran retaliated by launching 14 rockets at the American base in Qatar, warning the Americans this was going to happen, and this had no other effect than allowing Iran to announce a glorious victory by themselves over the Americans. Iran had thought the unthinkable and had achieved what was, to them, as a result, an unthinkable reverse.

The ceasefire that has followed has been interpreted by markets as a relief from major risk. Now, the major effect of this on markets has been a dramatic rocketing in the oil price, followed by a fall in the oil price. So I thought I’d look at the fundamentals of the oil price, from running two of my models of the Brent price, using current fundamentals.

Now, the simplest model that I’ve got explains 63% of monthly variation of the Brent oil price. And it’s based on two things. One is the level of stocks in the U.S., which are published every week by the Energy Information Administration .  Those stocks are  down a bit in the most recent months because this is the summer driving season where oil stocks are being drawn down to provide higher demand for gasoline. So that’s a positive thing. And the other thing that I’ve been talking about this year is that I think  we’re going to see a steady fall in the U.S. dollar, and that’s going to generate the beginning of a recovery in commodities prices. So if I also put the U.S. dollar index into this model, it gives me an equilibrium model now of $78.96. And that’s about $US12  higher than the oil price was this morning.

If I strengthen that model by adding the U.S. CPI, because, you know, the cost of production cost of oil raises over time, that increases the power of the model . And that lifts the equilibrium price very considerably to $97 a barrel, which is $30 a barrel higher than it currently is. So I regard that as my medium-term model, and the first one is my short-term model.

What’s really interesting is that the U.S. dollar  has continued to fall.  That puts further upward pressure  on the oil price. So in spite of this crisis having been solved, I think we’re going to see more upward price action on the oil price by the end of the year.

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The US economy is growing strongly at 2.34% in Q2 2025 but is expected to slow to 1.4% in 2025, with falling interest rates and a weaker US dollar likely to boost commodity prices, benefiting Australian markets. Michael Knox discusses.

We think the US economy is currently experiencing solid growth, with data from the Chicago Fed  National Activity Index indicating an annual growth rate of just above  2%. This aligns with projections from other parts of the Federal Reserve System, such as the New York Fed. The New York Fed’s weekly Nowcast, updated every Friday, estimates that for the second quarter of 2025, the US economy is growing at an annualised rate of 2.34%, surpassing the 2% mark. This robust growth is consistent with our model’s view that the US economy is now performing strongly. However, we anticipate a slowdown in the second half of 2025.

On 18 June the Fed released its Summary of Economic Projections  with the Federal Reserve’s  forecasting US GDP growth to drop to 1.4% in 2025, down from their March estimate of 1.7%. Looking further ahead, growth is expected to pick up slightly to 1.6% in 2026 and 1.8% in 2027, aligning with the long-term trend growth rate of around 1.8%. We believe this recovery trend could be even  higher,  driven by reduced regulation under the second Trump administration and aggressive tax write-offs for companies building factories in the US, allowing 100% write-offs for equipment and buildings in the first year. This policy should foster stronger systemic growth.

Economic Projections of the Federal Reserve

The Fed expects that as the economy slows,  unemployment is projected to rise to 4.5% from the current level of 4.2%. Inflation, measured by the Consumer Price Index (CPI), is running at 3.5% this year, approximately 50 basis points higher than the Personal Consumption Expenditures (PCE) index of 3.0%, with 1.6% of this  inflation  attributed to tariffs. The Fed expects PCE Inflation  to ease to 2.4% in 2026 and 2.1% in 2027. The Federal Reserve anticipates cutting the effective  federal funds rate, currently at 433 basis points (according to the New York Fed), by 50 basis points by the end of 2025, followed by an additional 25 basis points in each of the next two years. This aligns with our own Fed Funds rate  model’s current equilibrium federal funds rate of  3.85% . The Fed Outlook  supports our scenario of a slowing US economy and rate cuts in the second half of 2025 and beyond. A falling US dollar is then expected to exert upward pressure on commodity prices, benefiting Australian Equity markets.

Taking questions during the Press Conference after releasing the Fed statement  ,Federal Reserve Chair Jay Powell,   addressed the certainty and uncertainty surrounding the inflationary effects of tariffs. Initially, at the start of 2025, the inflationary impact of tariff policies was unclear, but three months of favourable inflation data have provided this clarity, indicating that the inflationary effects are less severe than anticipated. Powell noted that the Feds own uncertainty on the inflationary effects of  tariffs  peaked in April 2025, and the Federal Reserve now has a clearer understanding that  the inflation effects, are lower than initially expected.

The Fed view  supports our own scenario of a slowing US economy in the second half of 2025, allowing for Fed rate cuts  . This in turn should then lead to  a falling US dollar, which we in turn  expect to drive rising commodity prices.

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The Your Wealth publication is our half yearly scrutiny into current affairs for wealth management. Our latest Issue 29 is out now.

The second half of 2025 will be an interesting time for everyone. Geopolitical uncertainty prevails. How will all of this impact the Australian investor and in particular, their wealth and retirement savings? Whether you are an accumulator, saving for short- and long-term goals, or a retiree, hoping for a comfortable retirement, the ability to manage this uncertainty will be key.

When we published the previous Your Wealth – First Half 2025, the Division 296 Bill (Div296) was also facing uncertainty. The Bill was eventually blocked in the Senate prior to the Federal Election. The Labor Party succeeded in winning so it’s Ground Hog Day for Div296. The Government doesn’t have the numbers in the Senate to pass the Bill without support from other parties. The Greens are the likely negotiating party but will undoubtably have their own agenda. Regardless, there is a high probability this legislation will be passed once Parliament resumes.

Our message to our clients is to wait until we know more details and to not act in haste.

In addition to our Feature Article which provides further insights on Div296, this edition also Spotlights the Aged Care changes due this year, with the start date pushed back to 1 November.

We hope readers enjoy this edition of Your Wealth.


Morgans clients receive exclusive insights such as access to our latest Your Wealth publication. Contact us today to begin your journey with Morgans.

      
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