Continuing our Talking Top Twenty series, this week we take a look at a pair of retailers, Woolworths (WOW.ASX) and Wesfarmers (WES.ASX), and a biotech giant in CSL (CSL.ASX).
Talking Top Twenty: Commonwealth Bank (CBA.ASX) & Westpac (WBC.ASX)
Talking Top Twenty: National Australia Bank (NAB.ASX) & ANZ (ANZ.ASX)
Talking Top Twenty: BHP (BHP.ASX) & Fortescue (FMG.ASX)
Talking Top Twenty: Rio Tinto (RIO.ASX), Woodside (WPL.ASX) & Newcrest (NCM.ASX)
CSL Ltd (CSL.ASX)
CSL continues on the mixed results train though broadly in line with guidance and expectations. What has been pleasing is the return of plasma collections to pre-covid levels (up +18%). Longer term, the number to watch is the immunoglobulin portfolio and diversification of revenue streams. Plasma alternatives will act as secular headwinds for the business’ traditional revenue streams and, in our view, higher margin speciality and niche verticals will be where the next generation of growth is. The recent acquisition of Swiss headquartered Vifor Pharma for a price tag of about $16.5bn (pending regulatory approvals) fits nicely within this broader move, Vifor being crucial in building a significant renal franchise (i.e. kidney disease related).
Getting to the numbers, group revenue was up +4% to $6.041bn while NPAT declined -5% to $1.427bn over 1H22. Looking closer, of particular concern was declines in albumin (immunoglobulins) in the EU and less then stellar numbers in the US, though China has seemingly offered some respite. This is one number we will continue watching. On the other hand, specialty was rather pleasing with sales up +2% and hospital products back to pre-pandemic levels.
Overall, while results are mixed, we think that management has been doing a competent job on delivering in an increasingly competitive environment with added supply constraints (Covid-related). With that in mind, CSL presents as a good allocation in any portfolio over the long run with forecasted high single to double digit revenue growth along with a stellar R&D pipeline, the most interesting being a licence agreement for a late stage haemophilia B gene therapy candidate.
Red Flags & Risks: At the time of our previous notes, our biggest red flag was the rate of plasma collection. This time around we move to the competitive landscape, Roche’s (ROG.SIX) Hemlibra in haemophilia for example. The business faces significant headwinds and uncertainty in its primary plasma market. CSL’s historic investment in this infrastructure could leave it vulnerable to newer treatments and alternatives. Even on the collections front, CSL’s main competitor, Grifols (GRF.BME), is set to substantially increase its own collection centres to 520 by 2026 (compared to CSL’s 306).
Expectations: The company continues to be a long-term hold in our view. Target: AU $280.
Dividend Yield: 1.11% assuming a share price of AU $262. Expectation remains that dividends continue to grow at double digits over the long-term.
Despite management patting themselves on the back after the results, the market (as holders may be aware) wasn’t having it. The security was down almost -7% on announcement. So, what were the numbers? Revenue down -0.1%, NPAT down -12.7% to AU $12.7bn and EPS down -14%. This business has been a rather disappointing watch. Particularly interesting was the lack of disclosure around Target's performance (it was consolidated into Kmart Group), Target, as we have said before, is the problem child. Add in the fact that very little detail was given in terms of the core Bunnings business and the intrigue levels get higher.
While the Covid-related operating environment has been a little messy for brick and mortar retailers, we still didn’t expect the results that were put forward. The one upside was the CEF business; this is one positive aspect of having a conglomerate structure (if done well). Fertilizer revenue in particular growing +35.6% to a AU $183m. On the positive side, we do expect the numbers to stabilise given a rather buoyant consumer propelled by generous stimulus and a still expansionary monetary policy. That said, the business does seem overvalued at 27x earnings despite the sell off.
Red Flags & Risks: The biggest issue for us was the nature of the earnings presentation, the lack of insight into the specifics of divisions and a rather self-congratulatory tone. Target remains a problem for the business while supply chain disruptions and a softening housing market also doesn’t necessarily bode well for the flagship Bunnings business.
Expectations: Disappointing overall, at the time of our previous examination we were particularly positive on management’s vision. The business seems to be a little shaky and the lack of disclosure and self-congratulatory nature in which a less then pleasing result was couched didn’t help. In any case the business remains overvalued in our view.
Dividend Yield: 3.36% assuming a share price of AU $48.51. Expectation is that this will stay stable on a nominal basis.
Woolworths Group (WOW.ASX)
WOW continues to please with its recent announcement of the demerger of Endeavour Group. WOW now represents a pure-play food retail exposure. While the Covid-related supply chain issues and inflation have presented a challenge, management has shown the capacity to move forward. We expect that the business offers a uniquely defensive proposition given their much more localised supply chain and ability to pass on price increases, which been reflected in the results.
Getting to the numbers, EBIDTA down -6% to AU $2.485bn while sales was up +8% to $31.814bn. This may seem less than stellar but it showcases the nature of the issues faced by the business; it would be rolling off a particularly high comparable half in 2020 (Covid-related hoarding and short term spike) as well as major supply chain disruptions. What was pleasing is the reduced inventory turnover and clear strategy on the part of management in terms of omnichannel.
All that said, food retail remains a competitive business in Australia, especially given the Coles-Ocado deal along with increased market share taken by the likes of Aldi. We feel that the wiser focus would be in regional and sub-regional along with a focus on convenience. This will be especially hard for pure-play online retailers and newer entrants to replicate.
Overall, management continues to deliver on its outlined strategy and we remain convinced that it has a better investment thesis/case than Coles.
Red Flags & Risks: Having exited liquor and fuel, WOW is now a pure-play food business and with that comes the risks associated with a less diversified revenue stream. The cost pressures from the likes of Aldi and Coles (COL.ASX), as well as the potential entry of global giants like Amazon, could continue to exert significant margin pressure going forward.
Expectations: Top notch management that continues to deliver and offers a considerable inflation hedge for a portfolio. Strong earnings stability while future upside will be contingent upon cost efficiencies in logistics and supply chain.
Dividend Yield: The current yield stands at 2.6%, assuming a share price of AU $48.51.
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.