This week we continue our march through the Talking Top Twenty series, looking into Transurban (TCL.ASX) and Goodman Group (GMG.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)
Talking Top Twenty: CSL (CSL.ASX), Wesfarmers (WES.ASX) & Woolworths (WOW.ASX)
Talking Top Twenty: Macquarie Group (MQG.ASX) & Telstra Corporation (TLS.ASX)
The first of these two companies may be a great reflation trade and it seems that the market has broadly been in agreement, the security offering some reprieve from a broadly messy market YTD. On the Goodman front, we have seen the business take a considerable hit which we would attribute more to the sigificanlty high PE rather than business specific factors.
Simply put, Transurban is in the business of owning and operating toll roads (a business with high capex which nevertheless benefits from exceptional barriers to entry). So, what matters to investors? First, traffic volumes and, second, growth tailwinds. Margins, aside from cost efficiencies, are largely a regulated beast. As you could imagine, this is one security that sits front and centre when dialling back restrictions in the wake of Covid and we have seen this reflected in the share price. Nevertheless, the 2020 calendar year has left significant scarring and distributions are not likely to be reset till 2023 in our view. This is because traffic volumes in its major geographies, namely Sydney (accounting for 51% of revenue), still remain muted at 26% lower than pre-pandemic levels. Melbourne also continues to be messy. This could remain the case for another twelve months; despite the various headlines indicating otherwise, the recovery at least insofar as inner city travel and back-to-work seems to be slower than expected.
What has is rather interesting though is the still negligible but highly prospective growth markets in North America (i.e. Washington and Canada). The company continues to have significant pipeline in new developments headlined by the Westgate Tunnel Project in Victoria and Maryland Express Lanes projects in North America. For those that are more looking for defensive attributes, this is one business that could behave as a staple for inflation-proofing the portfolio; 68% of the revenues are CPI indexed with a further 99% of debt hedged out (acting as a buffer for normalisation in monetary policy). With that context, let’s turn to the numbers.
EBITDA for 1H22 down -4% to $805m, primarily driven by lower volumes in Sydney. But, as can be seen by the more recent quarterly update, traffic volumes continue to stabilise though certain left field events, including severe rainfall in NSW and QLD, have provided headwinds. This should stabilise over the coming quarters and eventually turn to growth. Looking further ahead, the North American division continues to grow rapidly, increasing +161%. Although it still contributes a negligible $61m to EBIDTA, we should see this grow substantially in the coming years. Gearing continues to be stable at 35% while interest cover remains about 3.0x. Looking to the all important distribution, we expect a pleasing 8.5-9.5% distribution growth over the coming 24 months.
Red Flags & Risks: At the time of last examination, our biggest risk was around government policy, specifically around Covid related measures. As this continues to normalise we no longer expect it to be a significant factor. We are surprised at the slower than expected pace of traffic volume normalisation across its inner city and metropolitan exposures though. This will be one area investors should seek to pay close attention.
Expectations: The business will focus on expanding its North American footprint going forward. The Biden Administration’s focus on infrastructure does create some tailwinds alongside increased spending in Australia. TCL may be a buy despite a significantly healthy premia built into the share price but, given the inflationary headwinds and the potential for a more aggressive central bank policy, the business presents as a potentially good diversifier.
Dividend Yield: 2.7%, assuming a share price of $14.77.
Goodman Group (GMG.ASX)
Despite the price action since the beginning of the year, the business continues to deliver. WIP (Work in Progress) coming through at $12.7bn (compared to $8.4bn at the time of last writing), showcasing significant prospects for continued earnings growth. Revaluation gains as of today stand at a comfortable increase of +15% (i.e. feeds through to FUM and NTA across the various vehicles) which, though likely to face some headwinds in an increasing rate environment yet, gives the company substantial buffer while completions (our previously highlighted problem) continue to normalise. Basically, the business is increasing work in progress while at the same time getting back on track with completions.
The market seems to be discounting (for the moment at least) the likely slowdown in e-commerce with the opening up of economies. The business’ USP, for those of you that aren’t aware, is within the distribution and industrial segments. We have a different perspective when it comes to the future of omnichannel though. Our contention being that while brick-and-mortar retail may see some normalisation, if the supply bottlenecks have proven anything, the new economy creates substantial tailwinds and a rethink of distribution and warehouse capacity. Something which puts GMG in good standing.
Looking to the numbers, operating earnings continues to grow at a double digit pace, up +21% with guidance suggesting upwards of another +20%. Occupancy continues to remain high at 98.4% while gearing remains low at 7.2%. While the group remains sensitive to interest rate rises by way of downward revaluations for assets, we think this has largely been overdone by the market given the substantial EU footprint while GMG’s partner focused growth strategy and bluechip tenant profile effectively means that, despite lower bargaining power, the business should have a buffer in terms of its overall WALE. Combine this with a significantly low debt burden (management learned its lesson from the GFC) as well as significant hedging, it may not be as vulnerable to rate rises as the market seemingly expects.
Red Flags & Risks: Our biggest risk when we last visited GMG was the likely impact of Covid. This (somewhat surprisingly) appears to have been misplaced. Revaluations remain the biggest risk factor while the bargaining power prevalent within the e-commerce dynamic may mean that tenants prefer to focus on building their own capabilities. This could at the very least lessen the bargaining power for the business.
Expectations: Personally, we remain optimistic about Goodman. Management has delivered according to expectations and their portfolio looks fantastic, including the logistics business.
Dividend Yield: 1.4%, assuming a share price of $21.41.
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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.