Alpha POWER Shares (Lonsec) Portfolio - August 2008
Alpha POWERS Portfolio – August 2008
Note: Recommendations made within Lonsec Model portfolios may differ from other research published by Lonsec.
Lonsec comments on major out-performers:
WPL (+17.2%) Woodside recently reported 1H08 revenue of $2.6bn (up 45% on pcp), EBIT of $1.7bn (up 97%) and NPAT of $1.0bn (up 67%) Production for the first half was 36.5m barrels of oil equivalent and sales were 36m barrels. Woodside has a strong balance sheet with net debt of $1.8bn and net assets of $5.4bn representing a gearing level of 25% and interest cover (EBIT/int) of 11.3x.
WPL outlook
- 2H08 expected to be stronger production
- WPL on track for targeted production of 80-86 mmboe
- NWS Train 5 in commissioning stage
- Pluto LNG project 25% complete
- WPL increasing gearing to fund Pluto
- DRP reactivated to increase funds
The strong 1H08 result was primarily driven by much higher oil and gas prices and slightly higher production which far outweighed the negative impacts of a strong AUD and higher production costs. 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 (Sunrise) that can be commercialised in the future. If you’re wondering why Australia stepped in to intervene in East Timor, Sunrise gas is a large part of the reason.
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 Sunrise. This sort of major gas production upside is the reason that WPL always looks expensive on current earnings.
Based on the 1H08 result, WPL looks on track to deliver on market expectations of $3.50 in EPS for CY08, subject to WPL meeting production targets and the oil price holding firm. The oil price has retreated from US$144 to US$103 since early July 08, a fall of 28%, but at the same time the AUD has fallen against the USD from 97 to 80, a buffer of 18%. If the oil price continues to firm up, then WPL is likely to realise a similar AUD oil price as in the 1H08.
WPL currently trades on a CY08 P/E of 16.8x (assuming EPS of $3.50) and a yield of 3.4% ff (assuming DPS of $2.00). WPL production should significantly increase from 86mmboe to over 100mmboe in the next few years. It has potential to reach 120mmboe as the Pluto trains are built and commissioned. If the oil price remains firm and LNG prices continue to rise, WPL could well be earning the $5.00 in EPS that the market expects by 2011. With Government’s around the world getting more serious about carbon emission taxes, it is likely that gas fired electricity (with about 1/3 the emissions of thermal coal) will become more competitive against coal. 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 production and expectations that oil and gas prices will continue to rise.
WOW (+12.5%) Woolworths recently reported its FY08 results.
Highlights
| Sales | $47bn, up 10.7% |
| EBIT | $2.53bn, up 19.8% |
| NPAT | $1,63bn, up 25.7% |
Cash Flow from operations $2.7bn, up 15.7%
Australian Supermarket Division increased EBIT margins to 5.52% from 5.16%
| EPS | 135cps |
| DPS | 92cps |
| ROE | 26% |
Balance Sheet
| S&P Credit rating of A- | |
| Debt reduced by $262m to $2,181m | |
| Net Debt | $2,181m |
| Net Assets | $6,235m |
| Gearing (D/D+E) | 26% |
| Interest Cover (EBIT/int) 13.2x | |
Outlook
- Continue to develop the core business and reinvigorate
- Continue to develop supply chain efficiencies across all businesses
- Invest in new product categories
- A disciplined and target strategy of acquisitions and partnerships
- Continued roll-out of gift cards and Everyday rewards program
- Share buybacks put on hold in the short-term
- International opportunities are being evaluated
- Key long-term performance targets: Sales growth ~ 8-9%
- Sales growth ~ 8-9%
- EBIT growth > Sales growth (due to cost savings)
- EPS growth > EBIT growth (due to capital management)
- CODB reduction of 20bps per annum
- Maintenance of targeted credit ratings
- FY09 NPAT expected to grow by 9-12%
Another quality result from WOW that ticks all the boxes in terms of sales growth, earnings growth, cash flow, return on equity and balance sheet strength. There was only one area of weakness in the result being consumer electronics (only 2.7% of EBIT) which suffered a decrease in EBIT due to a 76bps decrease in EBIT margins to 4.77%. This seems to be because of increased competition from JBH and goes someway to explaining the recent rumour that WOW had been looking at acquiring JBH a few months ago. (WOW says it is not interested anymore) WOW is conducting a strategic review of its Consumer Electronic business with a focus on repositioning of the brands, new product and service offerings and new store experiences (probably moving Dick Smith or Tandy towards JBH format).
According to WOW its market share of Food Liquor and Grocery is 31% with independent grocers and specialty stores holding just under 50%.It believes it still has plenty of room to grow in Australia and NZ leveraging its core strengths in world class supply chain capabilities, low cost culture and management talent.
WOW balance sheet is strong but it has put on hold any further plans for share buy-backs which suggests it is lining up some more acquisitions over FY09. WOW now trades on a current P/E of 19.6 and a dividend yield of 3.5% and is forecasting 9-12% growth in FY09 EPS. Lonsec retains a BUY under $26.20.
CBA (+10.5%) CBA recently reported its FY08 profit results.
Highlights
Cash NPAT up 5% to $4.7bn (in-line with market)
Reported NPAT up 7% to $4.8bn
Final Dividend up 3% to $1.53
EPS $3.57 up 3%
DPS $2.66 up 4% (payout 75%)
ROE 20.4%, down 1.3%
Cost to income 48.9%, down from 49.3%
Earnings by division
Loan impairment charge increased from $434m to $930m ($718m was deemed prudent but management added an extra $212m to the loan impairment expense as an extra measure)
Net interest margin decreased from 2.06% to 1.98%
WM represents 16% of operating income (22% if insurance is included)
Capital Position
| AA credit rating, stable outlook | |
| Adjusted Common Equity | 6.5% |
| Tier 1 Capital | 8.2% |
| Total Capital | 11.6% |
| | |
| Peer group Tier 1 Capital | 6.9% |
| | |
| Strong funding and liquidity position | |
| | |
| Retail funding | 58% |
| Diversified wholesale funding | 37% |
| Structured and Securitisation | 5% |
| Total | 100% |
Outlook
- Cautious outlook
- Uncertainty and volatility in global credit markets expected to continue putting pressure on funding costs
- Domestic economy resilient but credit growth to slow
- Capital position strong
- Well provisioned with total provisions for impairment losses of $1.7bn
- Opportunity to increase market share both organically and by acquisition
- Cost to income expected to fall due to increased investment in back office systems
This is a very solid result given the volatility in global financial markets during FY08. The result could have been stronger but management chose to more than double the loan impairment expense to $930m which took away most of the profit growth for the year. CBA believes that it is now well provisioned for a slowing economy.
The key messages from the result are:
- The group is well provisioned
- CBA has a strong capital and liquidity position
- Banks are picking up market share from non-bank lenders (see chart below)
- Well positioned in Australian Wealth Management – Commsec, Colonial/First Choice, Comminsure – generate 22% of operating earnings
- CBA is investing to improve business processes and customer service (Core Banking Modernisation Project)
Lonsec expects that CBA will be able to generate above system credit growth over FY09. Over time, the increased investment in back office systems should deliver a lower cost to income ratio.
This result confirms that CBA and WBC are the best positioned major Banks in terms of profitability, liquidity and capital position. This puts them in a good position to grow organically by increasing market share against Banks and Non-Banks and to pick up good assets from distressed sellers. Investors should accumulate CBA for yield and long-term growth prospects.
No major under-performers this month.
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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.
Disclosure as at the date of publication: Lonsec does not hold the product(s) referred to in this document. Lonsec’s directors, officers, representatives, and their associates, may hold the product(s) referred to in this document, which may change during the life of document, but none receives or gains any other benefit as a consequence of the recommendation or advice presented in this, this document. Lonsec considers such holdings not to be sufficiently material to compromise the recommendations or advice, and the Analyst at the time of publication is not aware of any holdings. Lonsec receives brokerage or other benefits (e.g. application fees) for dealing in financial products and its associated companies or introducers of business may directly share in the brokerage or benefits
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