Research notes

BHP has flagged two large impairments ahead of its upcoming 1H24 result to be released on the 20th February. A US$2.5bn (post-tax) impairment against its Western Australia Nickel carrying-value (Nickel West and West Musgrave) and a US$3.2bn (post-tax) impairment for an increase in the Samarco Dam Failure provision. These impairments will be recognised as exceptional items in the 1H24 result and will not impact BHP’s underlying results, although could still add to BHP’s interim dividend considerations. We maintain our Hold rating with an unchanged Target Price of A$ps.

A largely in-line 1H24 result, while the surprise came in the form of updated numbers for the Hermosa Project with S32 reaching FID on the Taylor’s Deposit. 1H24 underlying EBITDA of US$708m (+5%/+2% vs MorgansF/consensus). Despite assuming a zinc price 28% above consensus, S32 still estimates an expected IRR on Hermosa of just 12%. Not leaving much margin for error. We expect S32 will be able to self-fund the Hermosa development out of operating cash flow and debt, although weighing on FCF until FY28. Hermosa looks difficult from a value perspective, but could help S32 gain earnings power. Further expansion through Clark/Peak/Flux could unlock better value. We maintain an Add rating, with a reduced valuation-based 12-month Target Price of A$4.00ps (was A$4.75ps).

MGH delivered a good 1H24 result, beating VA consensus expectations and reiterating full year guidance for EBITDA of $190m-$210m. Furthermore, the business announced the acquisition of a further $80m of construction material assets in Victoria and additional industrial land purchases in NSW. So while these assets lay the foundation of future earnings growth, it has seen net debt remain broadly unchanged and gearing at 2.3x Net Debt to EBITDA (excluding leases). With MGH trading on an FY25 PER of 12.6x, the business offers more growth and a lower multiple than many of its peers, with the discount likely attributable to the continued contribution of acquisitions in driving EBITDA growth and the expectation that the business will remain geared at 2-3x EBITDA (excluding leases) over the near term. On this basis, we retain our Add rating, upgrading our target price to $4.35/sh (previously: $4.05/sh).

As we expected, TWE reported a weak 1H result, particularly from Treasury Americas (TA). Full year guidance for the base business was revised marginally however the DAOU acquisition remains on track. We have made minor revisions to our forecasts. With greater US Luxury supply, the addition of the DAOU acquisition and the potential removal of China’s tariffs, earnings growth should accelerate in FY25. Trading on a FY25 PE of 17.4x, TWE is trading at a material discount to its 5-year average of 25x and we maintain an Add rating. The key near term catalyst is China removing the tariffs on Australian wine imports.

An acceleration in the growth of Beacon Lighting’s (BLX) Trade business offset a reduction in Retail sales in 1H24, underpinning a record top line performance and causing it to beat our NPAT estimate by 6%. Despite the higher proportion of lower margin Trade sales in the group revenue mix, gross margins stepped up 140 bps as BLX secured better prices from its suppliers and benefitted from lower freight rates. We see these gains as largely sustainable. We expect LFLs to move up over the rest of FY24, supported by less demanding comps. Although inflation in operating costs is inescapable, we believe BLX can minimise the reduction in net income this year and return to growth in FY25. When Retail reverts to a cyclical upswing, the leverage to the bottom line will be meaningful. With its strong market position and compelling growth strategies, BLX is a stock to have in your portfolio.

WES’s 1H24 result was above our forecasts and Visible Alpha consensus. Kmart Group was the key highlight with EBIT jumping 25% as customers become more value conscious with the business also benefitting from improved availability and productivity. For the first five weeks of 2H24, management said Kmart Group sales have remained strong, while sales growth in Bunnings was broadly in line with 1H24 and Officeworks sales were in line with the pcp. We increase FY24-26F group EBIT by between 1-2% with upgrades to Kmart Group earnings largely offset by reductions in the other divisions. Our target price increases to $62.30 (from $55.15) mainly due to a roll-forward of our model to FY25 forecasts. With a 12-month forecast TSR of 4%, we downgrade our rating to Hold (from Add). We continue to see WES as a core portfolio holding but think there will be opportunities for a better entry point in the near term.

CIP’s 1H result reflected the ongoing strength in the industrial leasing environment with releasing spreads +51% (vs +30% across FY23) underpinned by strong tenant demand and low vacancy rates in key infill markets. FY24 FFO guidance was upgraded to 17.2c (from 17.0c) on the back of 6% growth in net operating income. DPS guidance retained at 16c. The portfolio is currently valued at $3.8bn with the weighted avg cap rate 5.64%; weighted avg lease expiry 7.5 years; and 97.2% occupancy. CIP has also identified a $1bn development pipeline over the next 5 years which will help drive returns. We retain a Hold rating with a revised price target of $3.57.

MFG reported in-line with expectations: 1H24 underlying NPAT (pre realised gains from fund investments) down 29.6% to A$67m. MFG outlined plans for its ~A$813m capital base, primarily focused on deploying capital into growth strategies (seed capital; equity stakes in boutique managers). Organic growth priorities include launching new funds and backing Barrenjoey. Inorganic growth centres on investing in MFG’s US distribution presence and taking multi-boutique equity stakes; and other wholly owned acquisition opportunities. Whilst mild net outflows continue, the core MFG business has largely stabilised. Effective use of the ~A$511m of excess capital towards growth plans is key to delivering higher earnings. At this stage and valuation, we don’t see enough upside. Hold maintained.

Key 1H24 financials were closely in line due to quarterly disclosure. We now fully incorporate the BMA assets through our forecasts from April 2. The re-basing of dividend expectations after a bumper 2023 and perhaps some confusion around deal closure funding explains today’s weakness in our view. WHC does look cheap again however we retain our Hold to reflect some caution around BMA guidance and met coal realisations.

HPI’s result saw portfolio metrics remain stable. The refurbishment program undertaken over the past few years has seen portfolio quality increase and enhance rental income. The portfolio is valued at $1.26bn across 61 assets with the weighted average cap rate 5.47% (+5bps vs Jun-23). Occupancy 100%. FY24 DPS guidance of 19c was reiterated (+2.2% on the pcp) which equates to a 6.6% distribution yield. We retain an Add rating with a revised price target of $3.65.