Research notes

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.

PME produced another record half result which met expectations although key for us was progress in the cardiology business. Commentary along with further external investments in the field suggests work still to do done to gain market traction, although commerciality sounds just around the corner. Our view was that given the valuation and strong run up into the results, PME needed to produce a convincing beat to move the dial. It didn’t this time. Nevertheless, it’s a company far from ex-growth with a strong pipeline and customer volume growth well above industry averages. We think we were a little light in our customer volume growth assumptions, and saw enough in the result to prompt an upgrade to our assumptions, yet continue to see valuation risks. Our target price increases to A$85 p/s but retain our Hold recommendation. Valuations still appear a bit too rich, and happy to wait for better entry prices closer to $80 p/s.

We identified nothing in the 1H24 result to justify CBA’s recent strong share price. CBA is trading on elevated multiples. Given the declining earnings outlook (at least until volume growth returns and NIM and cost inflation pressures subside), these multiples seem unjustified. Limited buyback activity implies CBA may think so too. Our revised target price is $91.28/sh. At current prices, we estimate a 12-month potential TSR of -16% (including c.4% cash yield) and five year IRR of c.2% pa. These potential returns are too compressed. Downgrade to REDUCE.

GNC’s FY24 earnings guidance was well below consensus estimates. The bigger issue was that despite benefiting from well above average carry-in grain, the mid-point of guidance was below GNC’s ‘through-the-cycle’ earnings guidance due to material losses from its Canadian JV. While the seasonal outlook for FY25 has improved significantly since our last report, there is still a long way to go. However, we expect these conditions should underpin a large upcoming east coast winter plant. We are prepared to look forward and if favourable conditions continue, GNC’s share price could easily retrace the ~A$1.00 it lost today and regain its recent momentum. We upgrade to an Add rating with an A$8.55 price target.

GUD delivered a broadly in-line result, with underlying EBITA (cont. ops), up 11.6% to A$98m (A$87.8m in pcp); and NPATA up 10.5% to A$59.1m (A$53.5m in pcp). The group announced a second bolt-on acquisition for FY24 (~4% of FY23 EBITA in aggregate); delivered strong cash conversion (~93.5%); further deleveraged the balance sheet (~1.7x leverage); and pointed to a robust Automotive outlook. Despite the otherwise solid result, GUD lowered 2H24 APG expectations (guiding to a hoh decline) and introduced increased uncertainty into the group’s ability to realise acquisition business case targets in FY25 (~A$80m). While near-term APG uncertainty will be a focus for the market, we view the core investment case for GUD (entrenched market position; structural industry tailwinds; accretive M&A; offshore organic growth) intact and compelling at ~12x FY25 PE.

IEL reported 1H24 adjusted NPAT of A$107m, +23% on the pcp. Result dynamics were in line with expectations: strong student placement (SP) volumes (+33.5%) offsetting weaker IELTs volume (-11.5%). Pricing improvement featured across both IELTs (test fee +7%); and SP (average SP fee +11% on pcp). 1H24 showed positives that will continue to drive long-term growth: fee increases; SP market share gains; and geographic expansion (scaling in USA). However, tightening government policies create a variable near-term outlook. IEL has a strong long-term outlook (five-year horizon) but near-term earnings outcomes have relatively high variability. Potential further policy tightening creates short-term forecast risk: combined with a premium valuation, we maintain a Hold.

CPU’s 1H24 EPS (US54.8cps) was +23% on the pcp and broadly in line with Visible Alpha consensus (US55.37cps). Overall we saw this as a solid result, with FY24 guidance re-affirmed despite some softer Margin Income (MI) expectations. In our view, the key to the CPU story from here is CPU’s strengthening balance sheet, which provides significant flexibility in the near term. We make relatively nominal changes to our CPU FY24F/FY25F EPS of ~-1%-2%. Our price target rises to A$28.65 (previously A$27.21) on a valuation roll-forward and a lift to our long-term EBIT margin forecasts. ADD maintained.

SEK’s 1H24 result was a miss versus consensus on most key headline metrics. Whilst the downgrade to FY24 guidance was disappointing, and saw the stock trade down ~5% on the day, we note a key driver of the downgrade was the continuation of the seasonally softer volume environment into early 2H24. We lower our FY24F-FY26 EBITDA by ~2-6% on the result and change to guidance. Our DCF-derived valuation is lowered to A$27.30 (from A$27.80) with near term downgrades offset to a degree by less conservatism in our outer year margin assumptions. Add maintained.

VSL is a cyclical business, which we believe is close to its earnings nadir. As largely expected, the 1H24 result was weak, with revenue slowing further in the final two months of 1H24. However, commentary was incrementally more positive, with sales activity showing early signs of stabilising and increased customer inquiry levels in certain segments throughout Jan/Feb-24. Our investment thesis has never been about FY24 earnings, rather we believe that through the cycle VSL is a low double digit PER business, with the upside really an earnings story in FY25/26/27 – resurgent demand restoring historical volumes and prices. To this end, our thesis centres on buying cyclical companies on high PERs at their earnings nadir, an investment thesis which remains largely unchanged despite our forecast for a weaker than expected 2H24 earnings contribution. Add rating retained, with an A$8.60/sh target price (previously $9.00/sh).

1H24 saw the Healthscope private hospital transaction further bedded down alongside the Unlisted Healthcare Fund which added four institutional investors in addition to HCW ($1.3bn first close with $650m in total equity commitments). The focus now turns to unlocking the development pipeline. Portfolio metrics remain stable (cash collection 100%; occupancy 99%; and WALE +12 years). Asset recycling has been a focus with further asset sales targeted in 2H24. Current gearing 34%. NTA $1.65. FY24 guidance comprising FFO and DPS of 8cps was reaffirmed. Retain Add with a revised $1.61 price target.