Research notes

QAN has announced one of the biggest ever expansions of its Frequent Flyer program with the launch of a new flight rewards product called Classic Plus. This new program will give Qantas Frequent Flyers access to over 20m more reward seats and is in addition to its current Classic Reward seats which offers 5m seats. Reflecting the launch of Classic Plus Flight Rewards, QAN has downgraded Loyalty’s FY24 guidance and FY25 guidance was also below consensus. We note that overall, the downgrades at a group level are only minor (1-3%). While this move will impact Loyalty earnings in the near term, Classic Plus will address customer pain points with redeeming points on flights which QAN expects will drive a substantial improvement in member engagement and increased member growth. We also view this as an important step in restoring QAN’s brand health. Importantly, Classic Plus will likely see Loyalty growth materially accelerate from FY26 and will also support the future long term growth of Loyalty with QAN targeting to grow EBIT to A$800-1000m by FY30 (10% CAGR).

ANN is acquiring the PPE business of Kimberly-Clark for US$640m in cash, representing a reasonable 9.7x EV/EBIT multiple, with third year synergies/tax benefits improving the attractiveness (7.8x). The transaction is being funded via a A$400m private placement (at A$22.45), US$377m new debt bridging facility and up to A$65m SPP. The acquisition is expected to enhance ANN’s global position in attractive, complementary segments, enrich its service capacity, and generate economies of scale, with mid-to-high single digit EPS accretion (ex -synergies; low-teens post-synergies) from close (1QFY25) and ROIC gains in 3 to 5 years. While the multiple appears reasonable and strategic rationale sound, integration is not without risk, especially on the heels of an organisational re-design and ongoing productivity improvements, despite manufacturing being fully outsourced. We raise FY25-26 EPS estimates up to 10.1%, with our DCF/SOTP PT increasing to A$25.61. Hold.

SUN has announced the sale of its NZ Life insurance business (Asteron Life) to Resolution Life for NZ$410m. Analysing the sale is complicated by the recent change in life insurance accounting standards and its impact on earnings. Broadly we think the sale price on a price-to-book multiple basis (~2x) appears reasonable, whilst the earnings multiple of 11x-14.5x (depending on earnings measure) is arguably less full. Nevertheless we remain fans of the continued simplification of SUN’s business. We make relatively nominal earnings changes on the back of this update with SUN FY25F/FY26F EPS lowered by 1%-2%. Our PT rises to A$17.30 on life sale impacts (lost earnings versus additional capital) and a valuation roll-forward.

ORA’s trading update was disappointing with group FY24 earnings guidance downgraded. The updated guidance mainly reflected continued volume softness and price deflation in North America (particularly in Distribution) and ongoing customer destocking in Saverglass. Updates to earnings forecasts and slight adjustments to FX assumptions see FY24-26F group EBIT decrease by 9-13% and underlying NPAT decline by 13-18%. Our target price falls to $2.30 (from $2.70) and we maintain our Hold rating. While ORA’s trading metrics are undemanding (13.6x FY25F PE and 4.1% yield), the operating outlook remains weak with the timing of any rebound in demand uncertain. In addition, the performance of Saverglass since acquisition has been underwhelming. We hence maintain our cautious stance until management can show an improvement in the group’s underlying performance.

We update for the Nuvisan, York and Wessling acquisitions and for the slightly softer trading update. We agree with ALQ’s strategic rationale for the acquisitions, we like their complimentary portfolio fit and think they set ALQ up well in the medium term. However they are skewed toward business turnarounds short-term, diluting group margins and bringing integration risk which may take time to digest. We lift our blended valuation/ target to $13.70ps (from $13.35). We rate ALQ very highly but move to Hold as price strength has narrowed capital beneath 10%.

HPI has announced four divestments for $.6m to its major tenant Australian Venue Co. The assets have been sold in line with Dec-23 book values with proceeds to be recycled into development on existing assets within the portfolio (rentalised at 7.5%). HPI has previously successfully undertaken capex programs with AVC (22/61 assets refurbished since 2020) so we expect this next phase to deliver positive benefits to the overall portfolio as well as enhanced rental income. FY24 DPS guidance of 19cps has been reiterated which equates to a distribution yield of 5.8%. We retain an Add rating with a revised price target of $3.71.

SOL released its 1H24 result, which in our view, highlighted a broadly resilient performance of the investment portfolio. Management were active in the period, with ~A$2.4bn worth of transactions being conducted and net investing activity across SOL’s portfolio’s seeing net cash decline by ~A$658m. Key contributions from its core strategic holdings and the Credit portfolio helped grow SOL’s net cash from investments 7% on pcp to ~A$263m. A 40cps fully-franked interim dividend was declared (24 consecutive years of dividend increases). Our DDM/SOTP-derived price target is A$35.60 (from A$34.75). Our changes to forecasts are overleaf. We continue to like the SOL story, particularly its track record of growing distributions and history of uncorrelated and above market returns. We maintain our Add recommendation.

ARX’s US marketing partner TelaBio reported an in line CY23 result and provided CY24 revenue growth guidance of ~30% which was in line with consensus. This is a positive read through for ARX and gives us confidence that average revenue growth of 20% pa can be achieved for the next three years. No changes to forecast or valuation. Add maintained.

The key takeaway from the WebBeds Strategy Day is that management is confident of delivering A$10bn of TTV by FY30 via organic means. Importantly, this will be achieved while delivering an industry leading EBITDA margin of 50% and strong cashflow conversion of 90-110%. Whilst we have only made slight upgrades to our forecasts reflecting WEB’s FY30 targets, the potential upgrades for consensus will be much more material. The next update from WEB is likely at its FY24 result on 22 May when we expect it to release its capital management policy given its strong balance sheet. With a double-digit earnings growth profile out to FY30, we maintain an Add rating.

BKW continues to paint a relatively sanguine picture, with building products expected to see some short-term weakness. The property portfolio has declined in value as a result of a 100bps increase in cap rates to 5.1%, despite continued strength across the underlying operating markets. Longer term, management remains firmly of the opinion that Australia is on the cusp of a property boom, with record immigration levels and population growth exacerbating an already chronic housing undersupply issue. The industrial portfolio is expected to continue growing rental income, with the business outlining a path to double rent through continued development and passing rental growth. Our view remains largely unchanged, with the short to medium outlook remaining relatively soft, which will see the group strategy shifting from investment to cashflow generation. This sees modest earnings growth through FY25, hence our Hold recommendation.