Research notes

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.

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.