Research notes

Portfolio fundamentals remain solid and properties continue to re-weight towards higher growth Daily Needs assets vs Large Format Retail. One acquisition and four divestments to settle in 2H24. LFL income grew 4% which is in line with guidance and the active development pipeline remains on track to complete in 2H24 which will assist in valuation uplifts. Planning on new developments valued at +$530m is underway. NTA $1.44. FY24 guidance reaffirmed comprising FFO of 8.6c and DPS of 8.3c. We retain an Add rating with a price target of $1.37.

GQG reported a strong and in-line FY23 result: mgmt fees +16.8%; operating profit +15.7%; NPAT +18.7%. 2H23 earnings were up 19.7% half on half. Investment performance has been solid/strong across all strategies. This supports flows, which have commenced strongly (US$2.9bn CY to-date vs US$2.2bn pcp). Recent FUM growth provides near-term earnings growth visibility. Starting FUM is +18% on avg FY23; current FUM ~30% above. GQG still has meaningful growth based on the current fund offerings; with the longer-term requiring effective management of the eventual CIO transition and adding new growth avenues to the business. We view the recent re-rate as warranted and valuation still attractive (~11.5x FY24 PE). Add maintained.

CU6 has released initial findings from its Phase 1/2 diagnostic trial in detection prostate cancer (PC) lesions in patients with biochemical recurrence (BCR). The results showed the treatment was broadly safe with only one treatment-related adverse event which resolved, and detected significantly more potential lesions than standard of care imaging. The results have given CU6 confidence to push for a Phase 3 trial, although likely requiring a change in design needed to more accurately validate the volume of positive lesions detected over standard of care.

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.