Research notes

RWC’s 1H24 result was ahead of expectations with Americas the key standout. Key positives: Americas EBITDA rose 19% in a subdued trading environment; Group EBITDA margin declined by only 10bp despite lower volumes in EMEA and APAC, helped by cost reduction initiatives. Key negative: EMEA external sales in FY24 are now expected to decrease by low double-digit percentage points vs down high single-digits previously. We make minimal changes to FY24-26F underlying EBITDA but increase underlying NPAT by between 9-10% due to lower net interest and tax expense following updated FY24 guidance. Our target price increases to $5.25 (from $4.20) on the back of changes to earnings forecasts and an increase in our PE-valuation multiple to 17x (from 15x previously). Following the strong 1H24 result with momentum from the introduction of new products and cost reduction initiatives, we think RWC is well-placed to benefit when lower interest rate expectations translate into stronger demand.

ORA's 1H24 result was below our forecasts but broadly in line with Visible Alpha consensus. Key positives: Group EBIT margin increased 130bp to 8.6% with higher margins in both Australasia (+50bp) and North America (+100bp); Cash conversion (ex-Saverglass) of 92.7% was a big improvement on the pcp (75.2%) due to increased earnings and improved working capital management. Key negatives: ND/EBITDA of 2.6x was above management’s target range of 2-2.5x due to the Saverglass acquisition; ROFE (ex-Saverglass) fell 30bp reflecting increased investment in Australasia. Management has maintained guidance for higher earnings in FY24, excluding the contribution from Saverglass. We decrease FY24-26F underlying EBIT by 3% while underlying NPAT falls by between 7-12% due mainly to higher net interest expense (following updated management guidance), partially offset by lower tax expense. Our PE-based target price remains unchanged at $2.70 with reductions to earnings forecasts offset by a roll-forward of our model to FY25 forecasts. Hold rating maintained.

A2M reported the 1H beat and guidance upgrade we were hoping for. The interest income tailwinds on its large cash balance will see material consensus earnings upgrades. A2M’s execution continued to impress reporting modest growth in a market that fell double digit. Its transition to the new GB standards for its China Label (CL) has gone materially better than most could have imagined 12 months ago. Earnings growth should accelerate in FY25 and FY26. After strong share price appreciation (+33% YTD), we move to a Hold recommendation with a new price target of A$6.05.

The most interesting element of the Q1 trading update was the moderation in the decline of the Core NIM. Reflecting this contributed to a material upgrade to our earnings forecasts. Cash yield at current prices is 5.7% (fully franked). We lift our 12 month target price by 9% to $23.54/sh. HOLD retained.

1H was pre-released, with >10% top and bottom line growth and strong OCF. Cochlear Implants (CI units +14%; sales +22% cc) and Services (+29% cc) drove the result, on strong global demand and solid uptake of the Nucleus 8 (N8) sound processor, while Acoustics was down (-9% cc) on lower overall demand. An “abnormal” ASP increase and “unusual” strength in children supported CI growth, most likely due to COVID catch-up surgeries and better audiology capacity. These likely one-offs, along with slowing CI growth, limited GPM expansion and ongoing elevated opex, portend modest near term operating leverage, in our view. We make no changes to FY24-26 estimates or A$290.45 price target. HOLD.

MQG’s 2024 investor day lowered outlook expectations for the year, mainly on reduced transaction activity in Macquarie Asset Management (MAM) and Macquarie Capital (MC). The investor day itself focused on MQG’s operations in Asia and Banking and Financial Services (BFS - our key points are below). Broadly we see both these areas as having good growth pathways going forward. We downgrade our MQG FY24F/FY25F EPS by ~-7%/-2% respectively on softer deal flow activity. Our target price is set at ~A$189 with our earnings changes offset by a valuation roll-forward. With upside to our valuation reduced, we move MQG to a HOLD call, with the stock trading at fair value, in our view (-21x FY24F EPS).

We update for 2Q production and trimmed NEWC price forecasts. We think dividend expectations should be moderated at the 1H Result March 19th. NHC’s defensive attributes – cash margins, balance sheet, steady dividends - appear to have supported a recent premium relative to more leveraged peers. Maintain Hold as NHC trades near to fair value. Our forecast 7-8% yield looks like sound compensation as investors await the next upswing.

GMG continued its upgrade trend, with FY24 EPS growth guidance increasing from +9% to +11%, implying what appears to be a conservative sequential decline of 23% (hoh). The 1H24 result beat VA consensus EPS expectations by 13%, with the standout being the development division, supported by a larger proportion of developments being undertaken on balance sheet (higher margin). The business continues to benefit from the structural demand drivers of the digital economy, namely increased investment in technology and tenant’s need to maximise productivity. This has seen data centre projects rise to 37% of WIP. At $28.5/sh, the stock is trading c.1 standard deviation expensive and at a 12 month forward PER of 27x. For a business growing mid to high double digits, the stock isn’t cheap. Offsetting this is the quality: a portfolio of global assets spanning the most attractive subsectors of the real estate market and a management team capable of delivering EPS growth. Weighing this up, we see GMG as a great business and an essential part of any real estate allocation but too expensive to be a buyer at these prices, despite the earnings upside.

QBE’s FY23 NPAT (A$1.36bn) was -2% below consensus (A$1.383bn), with FY24 guidance also slightly softer than expected. While headline numbers were marginally weaker than hoped, fundamentally we saw this as a good FY23 result delivering a 16% ROE, and with a very strong balance sheet (PCA capital ratio of 1.82x versus 1.6x-1.8x target). In our view, the QBE investment thesis still remains very much intact, with the company on track to deliver ~25% EPS growth in FY24, whilst trading on a sub 10x PE multiple. This is too cheap in our view. We lower our QBE FY24F/FY25F EPS by ~-2%-3% on slightly softer GWP and margin assumptions. Our PT rises slightly to A$17.96 (previously A$17.56) with our earnings changes offset by a valuation roll-forward.

1H24 delivered the strong EBIT growth required to contribute to management incentive targets in FY26. However, there were headwinds to EPS and cashflow tracking at the same pace. Our target price lifts 14 cps to $2.54, from forecast upgrades (+4 cps) and valuation roll-forward (+10 cps). HOLD retained. At current prices we estimate a 12 month TSR of -3% and a five year IRR of c.7% pa.