Income Report / Income Report: 5 yield stocks in tough sectors (CSR, GEM,SGP, WBC, WHC)

By Market Matters 08 May 19

Income Report: 5 yield stocks in tough sectors (CSR, GEM,SGP, WBC, WHC)

Market Matters Income Report 8th May 2019

Local stocks have opened down this morning – around 1% following on from trade related weakness in the US overnight . Most markets down ~1.70% so local outperformance for those with the a glass half full attitude - US Futures are trading fairly flat since re-opening at 8am our time this morning. In terms of sectors, banks are holding up well while growth sectors are struggling.

Below we look at 5 yield stocks that look interesting at various price points, CSR the most interesting of these after reporting FY19 earnings this morning.

The ASX 200  is trading down -40points / -0.63% at time of writing  

ASX 200 Chart

Over the past week saw the Income Portfolio up 0.17% with Bank of QLD (BOQ) trading ex-dividend for 34cps. In the current financial year, the portfolio is up +5.00% vs the benchmark (RBA + 4%) which is tracking slightly below at +4.65%, while the ASX 200 accumulation index is now up ~5.27%.  The income portfolio has been operational for ~2 years and has delivered in line with its target of cash +4%, but importantly, with substantially lower volatility than an equity only portfolio.

5 yield stocks in tough sectors  

The MM income portfolio is positioned fairly defensively, holding 43% in stocks, 40% in income securities  & cash of 17%. Given the high cash levels we’re looking for opportunities to buy stocks into weakness. Below we look at 5 ideas.

1 CSR Limited (CSR) $3.39

Building products company CSR trades on an Est P/E below 10x and an expected yield above ~8%, clearly priced for ongoing headwinds in the local construction market. This morning they reported FY19 results booking a 14% decline in profit from continuing operations to $181.7m and a final dividend of 13cps franked at 50%, taking the full year dividend to 26cps. The market is clearly expecting very little from the company and while todays result was weak, it was within 2% of downbeat market expectations. At the top line, revenue was up 4% across the group with growth in all businesses.

MM like CSR around $3.20

CSR Limited (CSR) Chart

2 G8 Education (GEM) $2.86

After the childcare operator GEM reported its full year numbers the stock has been sold off hard, and is now down 20% from its recent high. On an Est P/E of ~14x and a forecast dividend yield of ~5% the stocks is starting to look interesting from a yield perspective. At their AGM in late April, GEM confirmed that occupancy levels across their centres had continued to improve and should meet the upper end of their previously guided target range for growth of 1-2%, however they also said that earnings would be slightly skewed to the 2nd half which has spooked the market, hence the sell-off in the stock.

A Labor Government is viewed as a positive for the broader childcare sector.

MM is interested in GEM around $2.60

G8 Education (GEM) Chart

3 Stockland (SGP) $3.71

Stockland is clearly in the vortex of housing negativity with exposure to residential housing along with retail. SGP trades on an Est P/E of ~14x while yielding ~7.4% – clearly an attractive return for income investors if the housing market stabilises.

Stockland provided a quarterly update at the end of April confirming they are on track to settle 6000 residential lots in FY19, in line with market expectations, however more recent trends in sales rates have weakened. The conference call that went with the results was very downbeat, particularly around the trends playing out in Australian retail, although negativity is generally the highest at inflexion points.

Stockland is cheap and an interest rate cut next month could provide a near term catalyst.

MM is looking to add a property stock into weakness, SGP looks interesting around $3.60 as an accumulation play.

Stockland (SGP) Chart

4 Westpac (WBC) $26.94

WBC was the last bank in this cycle to report 1H19 earnings on Monday with profit down 22%, although stripping out the one offs, on an underlying basis earnings fell by a more modest 1%. The result was poor on face value, however not entirely unexpected.

While NAB cut their dividend aggressively WBC maintained their dividend at 94cps with an ex-dividend date of the 16th May, but more importantly, a payment date for its dividend this financial year. This means that WBC is the  only bank dividend (out of the 3 majors in this cycle) not exposed to the impacts of a potential change in government policy around franking while the franking benefit can be claimed straight away given the payment date of the 24th June 2019.

Technically WBC looks great value close to $26.

Westpac (WBC) Chart

5 Whitehaven Coal (WHC) $4.19

Thermal coal prices have been under pressure for the last 12 months and stocks in the sector have followed suit, with WHC down ~30% from its 12 month high, however coal prices have now looked to have bottomed. While its dangerous to buy resource stocks for yield, WHC is all about cash generation in the shorter term with no real meaningful capex and a big end of year dividend likely.

On forecasted numbers for FY19, WHC trades on a P/E of 7x while it is expected to pay a big final dividend of at least 15cps taking the full year yield to over 8% - with the risk being to the upside in September.

Technically WHC looks very interesting around the $4 area.

Whitehaven Coal (WHC) Chart

Conclusion (s)

We like CSR, ideally around $3.20
We like WHC, ideally around $4.00
We are looking to accumulate SGM into further weakness

Have a great day!

James & the Market Matters Team

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 Friday, or after the session when positions are traded.

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