Once again, we continue down the ASX. This week we examine Brambles Ltd. (BXB.ASX), Amcor Plc (AMC.ASX) and Insurance Australia Group Ltd (IAG.ASX).
Below are the previous articles in this series:
Talking Top Ten | Part 1: The Banks
Talking Top Ten | Part 2: CSL, BHP & Wesfarmers
Talking Top Ten | Part 3: Fortescue, Woolies & Transurban
Talking Top Twenty | Part 4: MQG, Telstra & Rio
Talking Top Twenty | Part 5: Goodman, Newcrest & Woodside
Brambles Ltd. (BXB.ASX)
All things considered, Brambles put out some stellar numbers. CHEP America delivered sales growth of 10%, Latin America (LatAm) at 15%, with the major impact of Covid being felt in the Eurozone area where the Kegstar and Container businesses, as was evident, reported a 7% decline in revenue in constant currency terms (12% if you take currency out of the equation). As a result, overall guidance remained on the conservative side going into 2021 with flat to 4% y-o-y growth in sales and flat to 5% of EBIT growth.
Management has broadly been rather disciplined in managing its costs, though the lockdowns did materially create some cost inflation. The business remains well capitalised with Net Debt/EBIT at 1.1x and a cash flow conversion for the FY2020 coming in at 106%. Across the board, the outperformer has been the resilient consumer stables segment which saw a surge in demand for pallet volumes though this was somewhat offset by higher costs (i.e. higher transport costs as a result of Covid related disruptions).
What was pleasing to see was the fact that close to 50% of the growth across North America came from increases in the price of related products, growing unit profitability. The current payout ratio stands at 53% (including share buy-backs).
We expect the company to stay consistent in the payout ratio and assuming no further lockdowns that the business progressively returns to pre-covid levels of growth in Europe.
Red Flags & Risks: Management has some consistency and is of a good enough pedigree when it comes to the business. The big risks come from external shocks especially with regards to the Eurozone business. The indicators to watch will be new car registrations and European automotive data, which seems to indicate some recovery within the broader segment. UK is probably a laggard due to uncertainty around lockdowns and Brexit.
The cost side of the business, when it comes to increased supply chain complexity and lockdowns, is a metric that the company will have to manage effectively going forward. Currency has also been a headache in terms of overall profitability and, again, I am more bullish on the AUD relative to the Euro and USD, which presents a hurdle for the company going forward.
My Expectations: Personally, I remain optimistic about Brambles assuming that governments across Europe and North America don’t insist upon further lockdowns. Numbers-wise, we have seen consistent growth across automotive sales and registrations as well as demand catching up in Europe (the main laggard). I remain positive on management and its focus on carbon neutrality as well as the ESG frameworks that should see the company trade at a decent valuation premium. BXB is also a good defensive to add to any portfolio (i.e. consumer staples), I would be surprised if the company doesn’t beat guidance through 2021.
Dividend Yield: A dividend yield of 2.4%, assuming a share price of $10.72 AUD.
We expect this to stay consistent through much of next year with further growth likely to be in second-half of 2020 on a nominal basis.
Amcor Plc (AMC.ASX)
Decent numbers from Amcor, sales growth came in at -1.6% in constant currency terms and EBIT growth was 6.7%. More importantly, management has seemingly integrated last year’s Bemis acquisition well with significant reductions in overhead and procurement costs feeding through into the bottom line ($80m USD). AMC reported adjusted EPS of 64.2c (an increase of 13%) and free cash flow of $1.2bn USD (an increase of 26%).
Drilling down further, the flexibles segment came in slightly lower (-0.9%) though volumes were largely flat indicating that this was a result of unfavourable raw material costs and product mix. Rigids continued to remain flat despite demand from broad-based pharmaceuticals (higher volumes but lower return due to currency and pricing mix issues).
Perhaps more surprising was the minimal impact of Covid-19 on the companies’ operations with plants continuing to operate at full capacity. Though this was somewhat offset by lower than expected demand across emerging markets in the Food & Beverage segments. While the business remains well capitalised, there is a concern (maybe a tad old-fashioned on my part) with debt coming in at close to $6.13bn USD and continuing to increase year-on-year. Guidance-wise, management has indicated continued EPS growth of 5-10% in constant currency terms.
Red Flags & Risks: AMC is probably an unusually complex company for the everyday investor to assess, with operations across 39 countries and 180 plants. This makes it hard to determine what the impact of any single factor is on the overall numbers. Currency remains the biggest issue as are costs on a relative currency basis.
The geopolitical and inflationary risks across emerging markets are likely to create continued headaches for management, especially across LatAm following the acquisition of Bemis. China also continues to act as a buffer of sorts.
My Expectations: A complex business that will continue to behave as a defensive rather than a growth play. I do not see any catalysts for a rerating of the underlying price but there is a fairly established price-range so if you wished to trade it between the $14-16 AUD mark, good luck. A strong AUD should see a disproportionately negative impact for the Australian based investor. That said, we should continue to see sustainable EPS growth in the high single digits for the foreseeable future and the lack of a material impact from Covid indicates that the business is somewhat operationally Covid-proof in terms of cash flows.
Dividend Yield: Assuming a share price of $15.16 AUD, then the current yield stands at about 4.42%.
On a nominal basis, my expectations are that this will go up at a high single-digit rate over the coming decade or so.
Insurance Australia Group Ltd (IAG.ASX)
What a year for IAG... and not in a good way. We have a new CEO, Nick Hawkins, after the retirement of the previous one. It cannot be said that the chair looked for the replacement exhaustively seeing as Mr Hawkins has been a fixture of the company for more than a decade, acting as the CFO for much of that tenure. Mr Hawkins took up the reins and immediately set to work by backing the lockdowns as a policy along the east coast of Australia. Of course, the fact that auto claims might be avoided would have nothing to do with it. One must accept though, he has to get all the help he can.
Numbers-wise, the group has been buffeted by one headwind after the other. The FY20 reported margin fell by 10.1% with $53m AUD attributable to widening off credit spreads and an overrun of the net natural peril claims (Covid-19, bushfires etc. etc.) as well as deterioration of long-tail classes. To explain this concept briefly, these are liabilities of the business, claims incurred but not reported since they take a longer period to settle. Overall profit fell about 40% to around $435m AUD. Of concern in this overall NPAT number is the fat that if we strip out the sale of IAG’s stake in SBI (State Bank of India), which added approx. $326m AUD, then we have a grand total of $108m of profit. Compare this to the previous year which stood at $1.076bn AUD, a decline of close to 90%. Diluted EPS was down by 68.8% to 12.2c p/s. CET1 was down slightly to 1.23, though this is one thing not to be overly concerned with (finally!) since it is well above regulatory requirements.
The one upside for this year has been the slight increase in gross written premium (GWP) across both Australia and NZ, up 0.3% and 2.4% respectively.
Red Flags & Risks: From a risk perspective, CET1 stands well above requirements though there has been downward pressure. The biggest risks remain continued uncertainty in credit markets and long-tail liabilities as a result of both Covid and the related business continuity insurance segments. The sale of the SBI stake at precisely the bottom of the market was rather disappointing from a shareholder perspective but might have been required from a prudence standpoint. That is not even mentioning the optics/marketing side, seeing as the headline would have been profit decline of 90% without it.
Insurance margins continue to be concerning as does the general outlook for the insurance sector overall, a segment which was arguably blindsided by the market volatility. Credit spreads, though stable at this stage, are likely to see continued volatility going into Q4 and early next year. The business has withdrawn all guidance for 2021.
My Expectations: Former-CEO Peter Hammer, in my opinion, could not have chosen a worse time for retirement. That said, the business has been prudent in its balance sheet management and withdrawing guidance. Not a buy for me though as we will likely see stable GWP but declining profitability and insurance margins.
Dividend Yield: The current yield stands at 2.2% assuming a share price $4.54 AUD.
For me, there is total uncertainty and no expectations as to what the next financial year might look like. From a risk-return perspective for the yield based investor, the company remains prudently capitalised enough that a better option may be to buy the notes (IAGPD) which offer the BBSW+4.7%.
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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.