Income Report / Income Report; 3 income stocks under the microscope

By Market Matters 13 September 17

Income Report; 3 income stocks under the microscope

Income Portfolio 13/09/17

The MM Income Portfolio had a strong week courtesy of some love coming back into the beaten down banking space, particularly CBA which had been the big underperformer over recent weeks.

We added another +2.5% into the stock around $74.00 taking our total holding in the Income Portfolio to 7.5%. Other notable performances played out in Centuria, a stock we’ll cover below, while Alumina also ticked higher – above $2.20 resistance which looks encouraging. Genworth is recovering after paying out 14cps in dividends since we entered the stock rallying from a weekly low of $2.86 to be trading above $3.00 at time of writing.

Big 4 Bank Performance – CBA in White the big mover!

In terms of portfolio performance, the return now sits at ~+2% in the past 2 months (since the portfolio inception).

3 income stocks under the microscope

Vita Group (VTG) -  $1.69 P/E of 7 Yield of 9.8%

This is a stock we’ve traded once in the past very successfully in the MM Platinum Portfolio and after a very tough year, it’s now back on the radar in terms of the Income Portfolio. Clearly, this is a cheap, high yielding stock if we take historical numbers on face value however metrics like that should have us asking a few very obvious questions. For those that don’t know, VTG is an Australian electronics and telecommunications retailer comprising six brands: Fone Zone, One Zero,Next Byte, iConcierge, Vita Networks and Sprout Accessories along with selected Telstra Shops and Telstra Business Centres.

The recent heartache for the company stemmed from a renegotiation of terms with Telstra – or in more accurate terms , TLS cut the commissions they would pay VTG for sales made in Telstra retail stores by 10% from 1 July 2017, with further cuts of 10% in each of FY19 & FY20. Clearly a massive impact for the retailer however it also highlights the susceptibility of their business model to changes by ‘big brother’. These shortcomings clearly need to play into ones thinking here.

Thinking about the stock, consensus earnings per share expectation for FY18 is 17.9cps. The company gave no outlook in terms of earnings though, when they reported on the 18th Aug, and very few analysts actually cover the stock so consensus is not sourcing a big pool. Last year they had earnings per share of 25.62cps and will pay 16.6cps as a divi = 65% payout. Tomorrow the stock will go ex-dividend for 7.4cps fully franked.  

Based on consensus earnings, and applying last year’s payout of 65%, looking forward  they’ll have FY18 dividend of 11.63cps which puts it on 7.6% yield fully franked  - however buying now you could get 19cps over 13 months or 12.4% fully franked = 17.76% grossed for franking.  Technically the stock looks reasonable on the daily chart, but less convincing on the weekly chart.  In the back of my mind is also this concern about their reliability on a bigger company / brand that is also under a lot of pressure to improve performance.

Overall, its an interesting proposition for income, however the sustainability of that income has a few question marks on it. Overlay our existing position in the other retailers, namely Nick Scali and Harvey Norman – and to a lesser degree AP Eagers, leaves us with the view not to add VTG to the portfolio at this stage. Should we lighten our existing holdings in the retail space, VTG will come into the equation.

Vita Group (VTG) Weekly Chart

Genworth Mortgage (GMA) - $3.00 P/E of 9.8 Yield of 8.67%

This is a current holding in the MM Income Portfolio and we’re sitting on a slight profit at current levels. For those that don’t know, GMA provides mortgage insurance to borrowers on highly geared properties and has enjoyed a strong run in property over the past few years. Delinquencies have been low and therefore earnings have been strong, however the real story here is around excess capital on their balance sheet, and importantly their ability to return excess capital to shareholders. As it stands, GMA is holding around $1 per share excess capital plus they recently announced an on market share buyback, of up to $100m of stock. The buyback is taking place on market at prices below book value which currently sits at $3.89.

The buyback has now been underway since the 22nd August and the share price, reluctantly at first, has started to grind higher. On market buy-backs are supportive of price, however it does give the opportunity initially for reluctant holders to offload stock, so in some instances the share price treads water for a period, as was the case with GMA. On our numbers, the company has bought back $11.2m worth of stock thus far, which is a tad more than 10% of the buy back. We like this stock at current levels, will continue to hold while the buyback plays out which should provide share price support while we collect a very good yield! We remain content holders.

Genworth Mortgage Insurance (GMA) Weekly Chart

Centuria Capital (CNI) - $1.355 P/E of 10.51 Yield of 5.54%

Another current holding in the MM Income Portfolio that is doing well - with the 7% holding showing a +10% profit in the last 2 months. Again, for those not familiar with the company they’re a diversified funds management business largely exposed to property. They recently acquired a 9.3% strategic stake in listed property play Propertylink (PLG) for $53m. Its common knowledge that CNI hopes to increase their funds under management and this will involve acquiring others. What’s also interesting is that one of the funds managed by CNI – the Centuria Industrial REIT,  has acquired a 7.7% stake in PLG  as well, so combined, Centuria entities have a 17% investment in PLG.

They’ve already announced that they will initiate discussions with PLG regarding potential strategic initiatives – however is a takeover of PLG on the cards? PLG owns 30 industrial assets with a book value of ~$695m and also has $1.2b of external funds under management so it’s the sort of exposure CNI would like to have. As a holder of CNI, any takeover may involve the issuance of new shares, which is probably not a good thing and something we should be conscious of. PLG on the other hand, is clearly in their sites it would seem. A strong yielding stock with good assets and takeover to boot. If we were not holding CNI, we would consider PLG.

Centuria Capital (CNI) Weekly Chart

PropertyLink Group (PLG) – $0.9175   P/E 10.31 yield 6.89%

Conclusion (s)

Although VTG is trading on an attractive fully franked yield, there are significant risks to the business and we currently have enough exposure to the retail space.

GMA continues to perform well as the share buyback takes place, and we are happy to hold while this plays out.

CNI is executing its plan while still providing income to investors, however be mindful of a possible capital raise as they look at takeover targets.

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Wednesday.

Disclaimer

All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 13/09/2017. 12.00pm

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