Alpha POWER Shares (Lonsec) Portfolio - September 2008
Alpha POWERS Portfolio – September 2008
Note: Recommendations made within Lonsec Model portfolios may differ from other research published by Lonsec.
Lonsec comments on major out-performers:
AMP (+3.7%) has retreated from $10 to the $6.50 level since the bear market started in November 2007. AMP reports on a calendar year and current expectations are for EPS of 36cps and DPS of 46cps implying that the stock trades on an earnings multiple of 18x and yield of 7.0%. The dividend appears unsustainable if earnings remain below 40cps during 2009 so investors should expect the dividend brought back to around 36-38cps, if equity markets remain weak. Longer-term, EPS is expected to rise to 48cps (CY10).
AMP is in the Core portfolio because it is the largest superannuation provider in with more than $129bn in assets under management. Notwithstanding short-term equity market weakness, the long-term outlook for the retirement savings market is positive due to bi-partisan support for a superannuation system that is attractive and acts as a tax effective savings vehicle for Australians. AMP expects the market to triple in size over the next decade, with expected average growth rates of more than 10% per year.
AMP is well positioned in the Wealth Management industry with two core business units being AMP Financial Services (operations spanning financial planning advice and various financial products) and AMP Capital Investors (investment management). AMP is the leading superannuation provider in and is number 2 in the retirement incomes market.
AMP is well placed to ride out the current volatility in financial markets because it is now in good shape operationally and has a strong balance sheet. While earnings may dip in current bearish market conditions there will also be numerous opportunities for AMP to grow organically (by growing planner numbers, increasing productivity and gaining new investment mandates) and by acquisition. AMP has a growth strategy that aims to invest in distribution and enhanced products and services to drive long-term growth. Management aim to double the value of an investment in AMP every five years. Investors should look to buy AMP on equity market weakness.
GPT (+2.9%) managed to rise a little after going ex-distribution during September. GPT recently forecast DPU of 20cpu which implies the stock offers an above average yield of 11.4% (at $1.75). Given the stock trades at a 52% discount to its last NTA of $3.68, GPT looks to offer good value and an attractive yield. The yield and recent volatility in GPT’s unit price made it a good candidate for the Alpha POWERS portfolio because it would generate significant income from option writing and distributions. Capital downside seemed limited from the $2.00 level.
However, at the time of writing GPT has gone into a trading halt to apparently raise over $1bn in equity capital to pay down debt. This is certainly a surprise to Lonsec as by all accounts its gearing levels seemed manageable given it has debt of $5.2bn versus assets of $13.9bn and operating income of about $700m. GPT had also flagged about $1.7bn in non-core asset sales to reduce debt levels. Obviously with the global credit crisis taking a turn for the worse, GPT has struggled to sell down non-core assets and is now seeking to reduce debt levels via a capital raising. GPT units have fallen to the low $1.00 level on news of the capital raising. Lonsec will re-assess the GPT holding in conjunction with Alpha post further detail on the capital raising.
Comments on major under-performers:
BHP (-24.0%) retreated as increased talk of global recession sparked a sharp fall in commodity prices. The key commodities for BHP are copper, oil, iron-ore, coal and aluminium. Since 30 June 2008, the copper price has fallen 42%, oil has fallen 47%, aluminium is down 33% while coal and iron-ore contract prices are yet to be rolled over but the expectation is that they too will fall in upcoming negotiations. Mitigating some of the weakness in commodity prices is the fall in the AUD from 96 to 70 US cents – a decline of 27%.
If current prices are sustained over FY09, it is estimated that BHP’s EPS could fall from US$2.75 to US$2.00 (a more modest 27% decline to recognise that coal and iron-ore prices are locked in for most of the year). At the current exchange rate that is equivalent to A$2.85 which suggests that BHP has already been discounted for this scenario given it now trades around $28.80 or 10x forecast FY09 earnings.
From a balance sheet point of view, BHP is in a strong capital position with net debt of $8.5bn and modest gearing (D/D+E) of 18%. This compares favourably to which has net debt of $42bn and gearing (D/D+E) of 57%. ’s acquisition of Alcan last year now looks badly timed and has put the company in a weakened position to fight off BHP. With RIO’s proposed $10bn in asset sales now looking a major task, RIO’s Board should be re-considering their hostility to BHP’s 3.4:1 scrip offer which is currently worth 25% more than ’s share price. Apart from RIO Board approval, BHP still has to gain South African and European regulator approval. If the BHP bid is successful there could be substantial upside to come from economies of scale across iron-ore, coal, copper and aluminium.
Lonsec also believes that Asian demand for natural resources and energy will continue to grow over the medium to long-term which should make this commodity cycle less severe than in the past. Countries with net savings will soon have to decide whether they will continue to invest in the or whether they will invest in themselves and their future needs. If they decide on the latter, it is likely that increased investment in natural resources and energy will return in due course. Investors should HOLD their BHP shares.
WPL (-17.8%) has weakened as global recession concerns have knocked the oil price down over 50% from its high to US$70bbl. Woodside’s 3Q08 production report was in-line with expectations with 2008 production likely to meet its target 81-84m barrels of oil equivalent.
Woodside is investing substantial capital into a major LNG project called Pluto situated offshore WA, near the North West Shelf. 2008 Capex will be close to A$5.5bn of which Pluto accounts for $3.3bn. Woodside also has other significant gas reserves offshore WA (Browse) and in the Timor Sea ( ) that can be commercialised in the future. Pluto is about 30% complete, Browse site location is expected to be announced before Christmas and development concept selection is expected in the 1H09. Woodside is expected to announce an update on these three important projects in November 2008.
Chart: Woodside’s potential production upside
As you can see from the chart, Pluto once commissioned, will lead to a substantial lift in production and will be followed by Browse and/or . This sort of major gas production upside is the reason that WPL always looks expensive on current earnings.
WPL production should significantly increase from 86mmboe to over 100mmboe in the next few years as Pluto comes on-line. It has potential to reach 120mmboe as the Pluto trains are built and commissioned.
Lonsec/AH currently expects WPL to generate CY08 EPS of $3.94 and CY09 EPS of $4.90, your model portfolio manager expects that the recent retreat in the oil price to US$70bbl will make these numbers difficult to achieve, if the oil price stays at these levels. It is likely WPL will now achieve about $3.00 in EPS this CY suggesting that the stock could trade in a $30-40 range until the oil price finds a base. Lonsec remains positive on the medium to long-term outlook for oil and gas, particularly LNG, due to declining global production of oil and gradual transition over to gas fired energy due to lower carbon emissions (1/3 the carbon emission of coal per MW of electricity produced). Demand for LNG is likely to increase significantly in the years ahead – the recently announced ConocoPhillips CSG to LNG JV with Origin Energy is clear evidence of that.
Investors should look to BUY WPL for exposure to rising gas production and expectations that oil and gas prices will continue to rise over the long-term.
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Warnings: Past performance is not a reliable indicator of future performance Any express or implied recommendation or advice presented in this document is limited to "General Advice" and based solely on consideration of the investment and/or trading merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision based on the recommendation or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness.
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