Income Report / Income Note: Sniffing around reporting season ‘dogs’ (SUL, TLS, SCG, SUN, IAG, TCL)

A strong day for stocks with the market recovering the majority of yesterday’s aggressive sell-off. The buying is broad based with most sectors up more than 1.5% with industrials seeing most of the love. The BNPL space remains fairly chaotic and as I just said to a client on the phone a few minutes ago, they could do anything intra-day and are being thrown around by the traders.  

Local GDP Data was out at 11.30am this morning and it was worst on record as economic growth fell 7% in the June quarter - bringing the annual rate to negative 6.3%.

Overall, the ASX 200 is currently trading up +98pts/+1.65% to 6051.

ASX 200 Chart

The Income Portfolio fell last week down by -1.31% with CBA the biggest drag. A number of positions went ex-dividend including MQGPD, NBI, MXT, SIQ & SUL.

The portfolio is up +2.77% FY21 to date with the benchmark (RBA + 4%) sitting at 0.72%.

Sniffing around the reporting season ‘dogs’

As a refresher to new subscribers, the MM Income Portfolio is designed obviously to provide tax effective income through listed securities, but with lower volatility than the market. That’s achieved in two main ways 1. asset allocation meaning that we target around a 40% weighting towards income securities like hybrids and fixed income (via listed structures) to combine with equities to smooth returns from both a capital and income perspective & 2. Being active investors, not simply buying and holding over time, or in other words, adding alpha through our calls – we’ll focus on the latter today.

The last couple of income notes have focussed on reporting, so today we’ll cycle back looking at potential income opportunities, with a focus on out of favour household names. Using serial disappointer Telstra (TLS) as an example since the market bottomed on the 23rd March, TLS has underperformed by ~30%.

TLS are not alone with poor performance and today we’ll look at the largest ASX stocks (top 20) that have been shunned by the market in recent times, posing the question of whether or not we should be moving funds from our outperformers into some laggards.

Two key outperformers in the portfolio are currently Super Retail Group (SUL) and Wesfarmers (WES), the former up more than 70% since purchase in April. Both have strong upside momentum, however they’re trading at the top of their range, they’re no longer cheap and the trends that have supported strong sales growth over the past few months, namely travel bans, stimulus, more love for the home, will at some point taper off, it’s just difficult to determine when.

Super Retail Group (SUL) Chart

Let’s first think about the dogs…

1 Telstra (TLS) $2.89 - forecast yield for FY21 of 5.5% fully franked

Was clobbered over 8% on the day of their result and has fallen away since, today the first session where some reasonable buying has become obvious into weakness. Overall, we felt it was a “mixed result” although the market clearly didn’t like it. The positive for income investors was obviously the dividend although that was more than offset by a big miss at the earnings line, however in MM’s view TLS, have made some hard decisions (in the short term) that should benefit the sustainability / outlook for the business in the future.

Their FY21 guidance given was about 8% below expectations and that’s the reason for the sell-off, however given the big underperformance of the stock since they reported, this now looks priced in.

Digital transformation is a thematic we believe will continue to grow as companies move to support a more remote workforce, TLS should be well positioned to take advantage of this evolution which COVID-19 has clearly accelerated.

TLS is back on MM’s radar for income

Telstra (TLS) Chart

2 Scentre Group (SCG) $2.20 - forecast yield for FY21 of 7.73%

The operator of Westfield in Australia & New Zealand just makes it in the ASX Top 20 in last place. Clearly shopping centres have taken a hit and that caused a massive headline loss of $3.613m for the half thanks to a revaluation of their properties down by $4,079m. Post revaluation, their NTA dropped to $3.66 at 30 June down from $4.46 at Dec-19. With the share price currently at $2.21, it represents a 40% discount to asset value, clearly some future pain is being priced in.

The key issue is around gearing which sits at an uncomfortable 38.4%. So far this year, they have raised or extended $5.8 billion of additional funding, including $3.4 billion of bank facilities and $2.4 billion of long-term bonds and while they have a lot of available liquidity, enough to cover all maturities to January 2023, an equity raise we think is a very strong possibility.

SCG’s ~80% rally from the lows presents a selling opportunity.

MM are neutral / negative SCG

Scentre Group (SCG) Chart

3 Suncorp (SUN) forecast yield for FY21 of 2.69% Fully Franked

SUN is more interesting at current levels, having reported a very strong result in August driven by strength in their general insurance business which saw a big expansion in margins.

The result was clearly a positive however we can’t help but think that SUN is operating in two areas that have headwinds, banking and insurance and while they produced a good result and the stock is cheap trading on 14x FY21 projected earnings, it’s not cheap enough in MM view for now.

MM in neutral SUN

Suncorp (SUN) Chart

4 IAG Insurance (IAG) $4.89 forecast yield for FY21 of 4.09%

IAG didn’t enjoy the same uplift in margins that SUN did with the results showing the business getting hit on a few fronts from falling bond yields hurting its ROI on cash held to cover premiums to the significant negative impact from COVID-19 on many levels from customers, suppliers and staff. The stock is now cheap and is a real ‘bottom fishing’ sort of candidate.

While the chart pattern is neutral now, when picking bottoms its best to let the market tell you when its bottomed.

We are looking for a weekly close above $5.00 as a sign of this.

MM is neutral IAG for now, however it is on our radar

Insurance Australia Group (IAG) Chart

5 Transurban (TCL) $13.75 forecast yield for FY21 of 2.47%

Transurban (TCL) made a change to how they’ll pay dividends into FY21 and most likely beyond that. The short of it being that dividends will be paid out of free cash flow and won’t be topped up with any capital return that has helped bolster the yield for the stock over recent years. The capital will instead be used to strengthen the balance sheet and fund further developments as they come up.

There were no new negative surprises in the recent result, and while the backdrop for TCL remains a challenging one, we are positive on the stock for income at current levels.

If we didn’t own the stock, we would be a buyer here. Nb we have a 4% weighting in the income portfolio from $11.82

MM remains bullish TCL

Transurban (TCL) Chart

Conclusion (s)

For now, we’ll stay with SUL and WES expecting further upside in the short term.

Of the others, we like Telstra (TLS) into recent weakness, and this is now a strong candidate for the MM income portfolio

We remain bullish TCL, neutral IAG & SUN, and bearish SCG

Have a great day!

James, Harry & the Market Matters Team


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