Income Report / Income Report: Current thoughts on the equity positions in the portfolio – Video

By Market Matters 28 August 19

Income Report: Current thoughts on the equity positions in the portfolio – Video

Market Matters Income Report 28th August 2019

A quieter day on the reporting front although Afterpay (APT) was out with full year results and showed strong growth in users, adding more than 12,000 per day, the stock trading up +7%. Oz Minerals (OZL) provided a first half update with headline numbers weak, however that was a result of delayed shipments rather than anything more sinister, they’re on track to meet their full year guidance, the stock +5%. The woes facing Virgin (VAH) continue, the share price languishing at 15c down another 9% on the day.  

Adelaide Brighton (ABC), now trading at $3.14 also released results (which were due tomorrow), however no surprises here given they released updated guidance at the end of July expecting full year underlying NPAT, excluding property to be in the range of $120 - $130m. As discussed in an update yesterday, we are looking to cut this position however reasonable buying yesterday and again from the lows today has us holding fire for now, looking to cut into further strength if it prevails.

Macquarie (MQG) also hitting the news this morning, announcing a surprise $1bn capital raise through an institutional placement and share purchase plan (SPP), the bulk of the funds used for an increase in regulatory capital. It’s a big placement, about 2.5% of the company  which would be sapping some liquidity from the market this morning. They also re-confirmed full year guidance for their FY20 result to be slightly down on FY19, no surprises there. The placement has been covered at $118, a 4.46% discount to the last traded price.

 Overall, the ASX 200 is currently trading up +14pts or +0.22% to 6485. 

ASX 200 Chart

The Income Portfolio was flat on the week with both Woodside (WPL) and Tabcorp (TAH) trading ex-dividend. Flight Centre (FLT) and Tabcorp (TAH) were the strongest contributors to the portfolio adding +6.9% & 7.58% for the week respectively. The portfolio is flat financial year to date, versus its absolute return benchmark of +0.78%. Since inception  the portfolio is up +16.19% vs the benchmark of +11.70%.

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.

Market Matters Income Portfolio – Video Update

This morning, I reviewed the equity positions in the MM Income Portfolio. Ultimately we’re  comfortable with current positioning with the portfolio very marginally higher financial year to date  thanks largely to the allocation to more defensive income securities, although like any portfolio, there is opportunity for optimisation / tweaks from here.  The 15 minute video can be viewed here

Summary of portfolio commentary

Abacus (ABP) $3.98: Diversified property group which is the newest addition to the portfolio. Moving more towards self-storage and office. Not expecting significant capital growth however the recent oversubscribed placement at $3.95 signals valuation support at that level. Buy

ANZ Bank (ANZ) $26.38: Bank with sustainable earnings and thus sustainable dividend which becomes more appealing in a low interest rate environment. Forecast 12 month yield of 6.07% fully franked. Buy

Stockland (SGP) $4.47: Property company exposed to the wrong parts of the sector (residential / retail) however they’re priced for these challenges and are doing a good job in a difficult period. 6.40% fully franked supports the yield objective of the MM Income Portfolio. Buy

Tabcorp (TAH) $4.63: A typical defensive earnings stream offering a strong yield against a backdrop of difficult economic conditions. Concerns around competitive pressures in their wagering business has held the stock back. Forecast yield of 4.75% fully franked. Buy

Whitehaven Coal (WHC) $3.33: Weak coal prices putting pressure on this holding. Ex-dividend start of September, strong free-cash flow however coal price headwinds our concern. The weakest link in the portfolio. Forecast yield of 6.31% partially franked. Hold

Flight Centre (FLT) $47.88: Recent result was reasonable while guidance for FY20 was stronger than downbeat market expectations. Corporate travel the main driver for optimism here. We bought on higher yield dynamics however at current forecast yield of 3.3% fully franked makes it questionable for income. Hold

Rio Tinto (RIO) $83.76: Iron Ore prices have come under pressure on global growth concerns which has weighed on the price of RIO. We expect Iron Ore to trade between $90-$110 implying Iron Ore stocks are at the bottom of their range. Forecast yield of 6.96% fully franked. Buy

CSR (CSR) $3.96: It’s hard to reconcile that a building products company is our second best performer in the MM Income Portfolio however CSR fits that title, up more than 20% since purchase. While the business seems to be performing reasonably well, the re-rate of the sector down is a concern. Forecast yield of 7.03%. We are monitoring closely. Hold

Estia Health (EHE) $2.72; A tough environment for aged care stocks domestically however outlook over the coming year relative to last should improve. Forecast yield of 5.9% fully franked remains appealing. Buy

Woodside (WPL) $30.96; A difficult half from an operational perspective which meant production was down. A reduced payout on the dividend a disappointment although this should be transient with a better 2H expected. Buy

IVE Group (IGL) $2.10: Slight miss (-3%) on FY19 financials however a big year of transition now behind it. On 8x and yielding ~8% it’s a fitting candidate for the income portfolio. Buy

Perpetual (PPT) $34.75; A tough year for all financial services businesses and PPT has certainly not been immune. On 14x & a forecast yield of 7.14%, PPT’s more diversified  offering (Funds Management, Trustee Services, Wealth) remain reasonably attractive.

Genworth (GMA) $3.08; We covered GMA in more detail last week (click here) however excess capital and valuation support (due to Canadian sale) should see the stock supported. Expected yield of ~13% in FY19 (December year end) dropping to 9% from then on.  Hold  

NAB (NAB) $27.30; Similar story to ANZ above, Bank with sustainable earnings and thus sustainable dividend which becomes more appealing in a low interest rate environment. Forecast 12 month yield of 6.15% fully franked. Buy

Conclusion

No changes for now, however stocks close to an exit include: CSR & WHC

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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