Income Report / Income Report: Bottom Feeding for Income (CSR, URW, PTM, ING)

By Market Matters 04 September 19

Income Report: Bottom Feeding for Income (CSR, URW, PTM, ING)

Market Matters Income Report 4th September 2019

The market has opened on the back foot this morning tracking weakness overseas, the more defensive sectors like utilities and healthcare off more than 1% while the cyclicals are doing better, materials for instance are down however there are pockets of strength with the likes of Fortescue (FMG) and Western Areas (WSA) trading ~2% higher. A choppy decline into a good buying opportunity remains our preferred scenario.

Overall, the ASX 200 is currently trading down -50pts or -0.75% to 6524. 

ASX 200 Chart

The Income Portfolio was up +0.46% on the week against the backdrop of a reasonably strong market, while the portfolio saw distributions paid for MXT, NBI and MQGPD. Rio Tinto (RIO) and Perpetual (PPT) were the strongest contributors to the performance for the week, adding +5.24% & +4.46% respectively. The portfolio is up +0.4% financial year to date, versus its absolute return benchmark of +0.88%. Since inception the portfolio is up +18.23% vs the benchmark of +11.80%.

For those interested in investing for income in a low rate environment, Market Markets does run an Separately Managed Account (SMA) which is open for investment. The portfolio is based on the MM Income Portfolio below. The SMA has now passed its first anniversary and performance has remained sound.  The July update can be viewed - Click Here.

CSR Limited (CSR) $3.72 – trading down 6% on a broker downgrade from JP Morgan today, they moved to a sell equivalent and $3.50 price target. I’m yet  to see the note however will cover when we do.

CSR Chart

Bottom Feeding for Income

There’s a common saying in the market about picking bottoms, and the visual is not that appealing, however today we’ll look at 3 yield opportunities that have been under pressure despite offering investors a forecast yield of more than 6%, clearly attractive in the current interest rate environment.

1 Unibail-Rodamco Westfield (URW) $9.70

Last year, Unibail-Rodamco completed the takeover of Westfield,  Sir Frank Lowy’s retail empire with many at the time musing that Lowy was selling at the top, hard to argue with that view given the direction of the share price since which has fallen over ~30%. Unibail is a large French shopping centre operator and after buying Westfield has become a global superpower in the development and operation of high end shopping destinations around the world.

URW caught my eye a few months ago when they were the first Real-Estate Investment Trust (REIT) to issue 30 year bonds in the Euro Bond market at an astonishing rate of just 1.75% fixed. They raised  €500m  in a senior bond offering at that rate, locking in capital at just 1.75% for the next 30 years – unbelievable.

There are 3 main issues playing out for URW:

- Balance Sheet: URW has gearing of 37.5% which is high. The company is looking to address this through asset sales however until this plays out, the market is likely to remain cautious
- Earnings:  Their earnings have been weak, Europe is particular has been a struggle and that trend could well continue given the issues facing the region
- Structural decline of shopping malls: The concern being that online market places like Amazon mean shoppers use destinations to look and feel products, to meet socially, but when it comes to the crunch, more purchases are happening through online market places.  

The headwinds here are real, however the stock is priced on just 9.95x forecast FY20 earnings while yielding more than 8% (unfranked). Bond investors are happy to lend the company money at just 1.75% for the next 30 years implying a high degree of confidence in the business.

We think this is a stock worth keeping on the radar, and when they address gearing through asset sales the share price performance should improve.

MM is neutral URW at current levels despite its attractive yield.

Unibail-Rodamco Westfield (URW) Chart

2 Platinum Asset Management (PTM) $3.80

While Hamish Douglas and the Magellan team have been garnering all the attention of late, Australia’s original global funds management firm Platinum Asset Management (PTM) has been doing it tough, the share price down 28% over the past 12 months at a time when the MFG share price has rocketed by ~80%. PTM now trades on an estimated P/E of 14x with a projected yield of 8% for the next 12 months, while MFG trades on 23x with a projected yield of 4.45%.

As at June 30, PTM had $24.8bn Assets Under Management (AUM) and recorded both a decline in AUM and  a decline in earnings over the 12 months to June 30. They now have a market capitalisation of $2.2b. MFG on the other hand showed growth in AUM of 28% on the year and now manages $75.8bn underpinning their considerable growth in market capitalisation to $9.2b – astonishingly,  MFG now more than 4 times the size of PTM.

PTM is a value orientated fund manager and value has clearly been trumped by momentum in recent years, weak performance has led to outflows amplified by the founder Kerr Neilson, major shareholder and main driver of PTM stepping down from the chief executive roll, and selling down a tranche of 60m shares in the process to ‘diversify his interests’.  

At some point, value over momentum will come back into favour and PTM is a strong way to play that change. The market is universally bearish PTM with 0 buys, 4 holds & 7 sells which implies the direction of most pain is up.  

MM is considering accumulating PTM into current weakness for yield.

Platinum Asset Management (PTM) Chart

3 Inghams (ING) $3.17

Agricultural stocks generally had a difficult 2019 as drought caused higher input costs such as feed and water, while a number of companies had specific production issues that hurt earnings. Poultry producer Inghams (ING) had both and as a consequence their share price has fallen from above $4.80 to be languishing at $3.17, a decline of more than ~30% since January pleasing the large volume of shorts on the stock (ING is the most shorted stock on the ASX with 19% / 72m shares short sold).

The issues for Inghams have not been in terms of demand for product – quite the opposite. They produced and sold a staggering ~415k tonnes of poultry in FY19 however because demand was stronger than expected, and they’d recently closed a processing facility to ‘streamline production’, the excess demand could not be serviced profitably. The relative attractiveness of chicken versus other more expensive proteins makes sense in the current economic backdrop  however meeting demand profitably is now the main driver of the stock.

While they should be able to control production issues over time, feed costs are a variable which they have less influence on – and they remain near historic highs thanks to drought. If it rains, feed costs should decline benefitting ING, however that’s a reasonably big variable for now.

On a forecast P/E of 13x and an expected yield over the next 12 months of 6.15% fully franked, this is a stock worth looking at for yield, but not yet. ING needs a positive catalyst to prompt short covering and that could see a sharp rally in the share price, however the catalyst is the key. A strategy day on the 22nd October is the first opportunity.

MM is keen on ING for yield, although a catalyst is needed before purchase.

Inghams (ING) Chart


We are neutral URW however this is a deep value stock paying a very strong yield  

We like PTM into current weakness

ING needs a catalyst to prompt short covering

James & the Market Matters Team


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