ASX Weekly Wrap 13/08 - 17/08

It was another solid gain for the XJO this week despite some early weakness in overseas markets. Later in the week our markets were strengthened by the news China and the USA would head to the trade negotiation table again in late August to restart talks. For the week the XJO finished up 60.80 points or 0.97%. Our markets finished at 10.5 year highs as our high was 6,348.1 on Friday and our low was 6,239.20 on Monday.

We have a lot of corporate news to discuss this week so I will breeze over what little economic data there was. China released their monthly dump of figures as retail sales (+8.8%), industrial production (+6.0%) and fixed asset investment (+5.5%) all came in softer than expected for July. It is thought the possibility of larger US tariffs is starting to have a real impact on the Chinese economy now as business starts to adjust. Back home our Q2 wage index came in bang on the money at +2.1% still showing a very slow and sluggish wage market. Growth for Q2 was slightly faster than Q1 coming in at +0.6% vs +0.5%. Finally jobs numbers for July came in weaker than expected with the economy losing 3,900 jobs vs the expected +15,000. The unemployment rate fell to 5.3% due to a lower participation rate of 65.5%. Full time employment rose 19,300 whilst part time employment fell 23,200. The figures for June were revised up thought, to +58,000 jobs added.

The first stock we will cover is the much maligned Telstra (TLS). Their FY18/19 earnings were a case of not being as bad as everyone expected as they beat consensus numbers right across the board. Albeit downgraded earnings consensus numbers. The final summary can be seen below:

As you can see the competitive nature of the telco industry and the NBN is hurting TLS as key metrics such as NPAT, EBITDA and the final dividend were all down on 2017’s results. However consensus NPAT was $3.41bill, revenue $28.64bill and EBITDA $10.06bill which TLS beat across the line. This saw the stock jump back over $3 for the day with strong buying that continued throughout it.

Behind the headline numbers were some very encouraging figures for TLS. Net post paid subscribers increased 174,000, which was the best figure in 5 years. Their ARPU (avg, revenue per user) fell 3.4% yoy to $65.09, but also met or beat most consensus estimates. Mobile customer margins increased from 39% to 39.9% in what was an unexpected outcome. Also to surprise the market were their fixed broadband additions which came in at +80k vs +50k expected the their ARPU +4.7% yoy to $52.95 vs $50.81. Overall there were a lot more upbeat surprises in the numbers than there were disappointments.

Looking forward TLS has printed a slightly better than expected guidance following on from their investor day in June. Revenue is expected to be $26.5-$28.4bill, EBITDA $8.8-$9.5bill, Capex $3.9-$4.4bill and free cash flow $3.1-$3.6bill. No FY19 dividend guidance was given, but if EBITDA were to come in the higher end of the range it would give TLS an EPS of 22cps, which means they could match FY18 dividend of 22cps on a 100% payout basis. Most are forecasting around 18cps, but there is a thought that NBN duct access payments of $1.9bill are too conservative for next year which means if TLS were to get an extra $200-$300mill from that dividends could easily be maintained. It also must be noted that TLS final dividend this year was 7.5cps + 3.5cps special dividend. So is a 15cps (2 x 7.5cps) an eventual target for TLS when it comes to dividends? They do have an excess amount of franking credits at the moment which could force them to keep paying a higher payout ratio in dividends to help clear them.

On the earnings conference call it was noted that where earnings ended up in FY19 depended on the NBN migration, mobile ARPU and hardware margins. It is noted the ARPU falls in FY18 were mostly put down to larger hardware subsidies on hardware throughout the year. This is why dividend guidance was not given as on the 31/8 the NBN will detail their rollout plan for the near future. I feel TLS are waiting on this to determine their FY19 dividend guidance.

Market consensus for FY19 EPS now sits at 23.1cps or 13.4x PE. If you add in an 18cps dividend or 5.8% fully franked yield TLS still looks a value play. However at current levels ($3.10) I am holding off on grabbing more or opening new positions on TLS until we have more clarity on the NBN impact. For me TLS is not all doom and gloom and there is a lot of light at the end of the tunnel in 20/21. You can read my sentiments on TLS here where I wrote about it at length in a previous wrap. Most clients I was able to get in around $2.75 recently which means they are sitting on a healthy 13% gain at the moment with an 11cps (4% yield) dividend to come. It is tempting to chase TLS for the upcoming dividend (ex-29/8) but one has to remember that yes you will receive an 11c dividend but the share price will drop at least 11cps to account for that and if the NBN news is worse than expected then the share price probably falls another 5-10%. I feel the risk is to the downside here, because if NBN news is better than expected then TLS will more than likely only get a small lift in price as market conditions remain competitive, but you also have more clarity surrounding the stock and more than likely guidance on the FY19 dividend if you wait. I am also playing the long game in TLS so if I have to pay slightly more in price, whilst my risk falls I am happy to do that. Overall it was a more upbeat earnings report from TLS than expected and you could maybe see a case here that TLS is starting to try and under promise and over deliver.

One of my favourite health care stocks, if not my favourite, in Sonic Healthcare (SHL) also released their full year results last week. It was another solid report with no real surprises within it. SHL are just a very reliable earner and sit in most of my long term portfolios. The results below speak for themselves.

Not much to say about the above except that it looks strong across all key metrics. There are some headwinds with Germany reducing some of their fees awarded to SHL but it’s not expected to be material moving forward. Also debt costs are estimated to rise by 4% in FY19. NPAT grew 11% to $476mill and total dividends were increased 6.5% to $0.81cps for the year. This is on the back of an EPS of $1.12 thus a 72% payout ratio.

Pathology revenue grew across all regions from 4% in Belgium to 12% in Germany where SHL are very aggressively expanding their footprint. Other divisions such as Imaging (+7%) and clinical services (+3%) also saw solid growth. SHL business is made up mainly of pathology which accounts for 83% of their business whereas the other two divisions makes up the rest. Where SHL source their revenue from has also changed dramatically over the years with only 42% coming from Australia now. This sat at around 60% a few years ago. Their other major regions include the US (20%) and Germany (21%). This diversifications help mitigate legislative risk which could see the way SHL are compensated for their work by governments change. SHL has made it a focus to expand into other areas and dilute the Australian exposure.

Looking forward to FY19 SHL says it again expects EBITDA growth of 3-5% on a constant currency basis or 5-7% at current exchange rates. This obviously excludes any acquisitions which SHL have been doing consistently over the last few years. SHL has a forward PE of 20x at the current price and might seem expensive for a stock growing earnings at 11% this year. However if you look at the last decade SHL has seen a consistent 5-10% growth (on average) in earnings per annum in what are some of the most reliable earnings on the ASX. In 2009 NPAT was $171.4millI and it has grown to $475.6mill since then, a modest 277% growth. Also don’t forget in that time you would have also received $6.65 per share in dividends from a stock you could have paid as low as $10 for in 2009. I am happy to pay a premium for a stock that has a history of doing this with no indications it won’t continue in the near future. SHL spiked to $27 on the back of this but has since pulled back to approx. $25.60 since. I am happy to add to positions at current levels as I like any healthy pull back to do so on SHL.

Woodside Petroleum (WPL) released its first half earnings during the week which were very bullish in my opinion. Since the start of the year I have been bullish LNG and hence stocks like WPL and OSH and started entering clients in around $30-$32. Thus far it has reaped solid returns as WPL now trades close to $37. My position was due to the changing tide and clean up in China LNG demand would remain very strong, prices up and possibly entering a supply deficit in early 2019. From WPL’s recent earnings we are starting to see this reflect in their bottom line:

As you can see below NPAT for the half was +11% to $US541mill, whilst revenues were +27% higher to $2.251bill on the back of 44mboe. Costs were also higher by 25% as WPL brought on the second LNG train for their Pluto project. WPL was able to generate $US847mill in free cash flow and hence reduce net debt to $US3.0bill, down from $US4.7bill a year earlier. Their interim dividend climbed to $AUD0.7348 with an 85% payout ratio.

Looking forward to full year 2018 WPL upgraded its production guidance to 87-91mmboe from the previous target of 85-90mmboe. They also reiterated their target of 100mmboe by 2020. Costs were also lowered to $5.5-$5.8/boe from $5.7-$6.0/boe. First half costs were $5.2/boe but rising in the second half due to the commencement of both trains at Wheatstone. The only major downside to the report comes from $87mill in write downs from 6 exploration wells that did not produce commercially viable returns.

Like BHP/RIO, WPL is becoming a ‘cash cow’ with growing free cash flow due to lower capex requirements. It should be expected that a lot of this comes back to shareholders and I feel management’s decision to increase its payout ratio for dividends is evidence of this. Forecast EPS for WPL FY18 is $2.136 and increasing to $2.547 in FY19 in AUD terms moving forward. This puts WPL on a forward earnings of 17.1x and 14.3x, which to me looks cheap given the dynamics for LNG moving forward. It is also noted WPL has a forecast yield of 4.9% and 5.8% respectively at current prices, which may also have to be revised up given the payout ratio increase surprise. As I said before I am bullish LNG and WPL and am happy to add here if it can consolidate around these old highs. If it falls further I feel the next entry target is around $34.50. Once again the theme for WPL moving forward is growing free cash flow, falling capex, reducing debt and higher revenues.

The final stock I will cover this week is market darling CSL. Its rare CSL doesn’t exceed expectations and their 2018 full year results were no exception. Again CSL put in a stellar performance on the back of strong plasma and vaccine sales. Below are their results:

As you can see from the above CSL continued to surprise to the upside across every metric. NPAT was +29%, EBITDA +29%, Revenue +12% and a final dividend +1.6%, perhaps the only disappointing news to come from the report. CSL’s results were driven by an 11% increase in sales in its plasma division, 5% in Haemophillia, 7% in Albumin and 24% in specialty. They also saw 53% sales growth from vaccines with newer drugs like FLUCELVAX (+400%) and FLUAD (+142%) seeing extremely large kicks in growth.

In FY19 CSL expects NPAT to be $1.88bill-$1.95bill with 10-14% underlying growth on FY18. They expect over revenue growth to be around 9%. This growth is expected to come from growing margins from their plasma division, new products hitting the US and EU and growth from China and EM.

CSL is trading on 32x FY19 PE based on that guidance with a 1.2% forecast yield, however you are not entering CSL to pick up dividends. CSL always seems expensive to me, but I said that at $100 and it’s now more than doubled to $217 just 18 months later. Based on the chart above buying CSL when it touches the 50 day moving average has been a solid strategy the last 18 months. This would mean, at the moment, you would look for it to touch $200 again in order to enter. Having said that it’s been a long time since CSL tested the 200dma, around $170 at the moment, thus if they were to come up against any harsh regulatory hurdles or a rising AUD we may see that come into play. I guess if you are looking to invest in CSL you have to be comfortable with paying high multiples for such a high quality business and management.

Another busy week on the earnings from with some big hitters to come over the next week. BHP, WOW, ANN, AMC, OSH, CCL, NCM, AWC, FLT, QAN, IRE, STO, BXB, among others to report their earnings in what is the busiest week for it yet. There is no economic data to speak of next week, so much like this week, next will be all about those results.

On a personal note our youngest turns 8 months today and has just started crawling and got his first tooth all within the last week or so. It’s amazing how quickly they grow and develop before your own eyes. Our eldest, who is just over 2, continues to amaze us with new words he picks up and sentences he can put together. You can actually have a conversation with him now, when a few months ago that wasn’t possible. He’s also at the point he repeats a lot of what you say so now we have to be extra careful what we say in front of him. On a sad note footy season is almost over for me. Well actually for both SA teams now (insert smirk here). One can only ponder what could have been if it weren’t for those damn injuries. No use in staying grumpy about it because just like the markets having opportunities around every corner there is always another season next year. I hope you all have a wonderful week and stay safe. I will speak with you all soon. Go Crows!

heath@hlminvestments.com.au

0413 799 315

Important Notice

Any advice in this article should be considered General Advice only and does not take into account your personal needs and objectives or your financial circumstances. You should therefore consider these matters yourself before deciding whether the advice is appropriate to you and whether you should act upon it. I am happy to assist you in this process. To do so, I will need to collect personal and financial details from you before providing my recommendations. Please note the author may own shares in the companies mentioned in the above blog.