Income Report / Income Report; GMA – problem or opportunity? Woodside raise & results (GMA, WPL)

By Market Matters 14 February 18

Income Report; GMA – problem or opportunity? Woodside raise & results (GMA, WPL)

Market Matters Income Update 14th February 2018

As we wrote this morning, a degree of stability has returned to global stocks over the last few days with the Dow trading ~1300-points above last week’s low while the ASX200 is now trading at 5864, up from the 5786 low we saw on Friday morning. The main focus this week comes tonight in the US with the inflation print due for release, we suspect the market will be reasonably subdued ahead of this number notwithstanding stocks specific moves coming from reporting. As I tap away, Dominoes is getting slammed after missing first half numbers, although they did re-affirm full year guidance. The issue with that is it implies an exceptional second half and frankly, the market (and us) simply doesn’t believe they’ll deliver. For those who love a Domino’s Pizza, I suspect prices will be edging higher from here as they look to for margin growth to meet guidance. Anyway, not an income stock but one that captures the markets attention!

Focussing on income stocks, we’ve seen a deterioration in Genworth (GMA) shares since they reported last week, with the stock now in the low $2.60’s – we’ll cover this shortly, while Woodside this morning reported results + they announced a planned acquisition and entered a trading halt – with a pending capital raise.  

In terms of the MM Income Portfolio over the week,  the portfolio was down -0.49% which is another  good result considering the volatility - since inception (5th July 2017), the portfolio is up by ~5.612% while the market return over that period has been 1.25% for the ASX 200 and 3.59% on an accumulation basis, while the benchmark for this portfolio is the RBA cash rate + 4%, which equates to 3.36% over the period.  

GMA – problem or opportunity?

GMA is our worst performing position in the MM Income Portfolio and as we often say, look after the underwhelmers and the rest will take care of themselves – not quite but you get the gist. In terms of Genworth, we’re showing a ~10% paper loss on a 4% weighting meaning it’s subtracting 0.40% from overall portfolio performance. Last week we wrote…. while we’ve only had a brief look at the result, all looks okay with a few offsets. Underlying NPAT was $171m and net earnings of $149m which was below the $159m expected which is obviously a tad light on however their capital positon was better . This is a capital return story / big yield, a share buy-back which should underpin share price however we are conscious that the stock looks weak technically…

In terms of the markets take on GMA, there are some very polarising views on the mortgage insurer – we’ve had the more positive view thinking that the huge amount of excess capital, share buyback and the markets overly pessimistic views around the impending implosion of Australian property rendered the stock cheap, with upside potential on the back the above mentioned factors. To date, that hasn’t been the case. UBS analysts hate the stock, have a sell and a $2.50 PT – clearly, they’re views have been proven more accurate in the market to date. On the flipside, Macquarie are the big bulls on the stock and to date have been wrong.

The main issue with the recent result wasn’t about the operational outcomes, they remain fine, premiums are going up, they’re having fewer deliquesces (mainly in non-mining areas) and overall they saw a ~10% decline in claims. The main issue was around the timing of how they recognise premiums already paid. In simple terms, they model claim payouts and hold capital against these ‘liabilities’. If claims are taking longer to be made (or not), then they have to hold capital for longer which obviously plays into valuation metrics and the like. Without going into too much detail, we were hoping for no 2H17 special dividend which didn’t happen + management only committed to complete the remaining $49m of the current $100m buyback during FY18. So although this is a capital return story – one that should give us good income in time, the timing of that has been pushed out and that’s prompted selling in the stock. To give some comfort here into the recent weakness,  GMA do hold ~$1.07 per share in capital above the top end of the target range according to MQG, which right now  is ~40% of the share price.

Looking forward, the risk events are around LMI contracts with WBC initially (Q2) then NAB (Q4) later in the year. GMA go ex-divdend on the 1st March for 12cps fully franked, which grossed up equates to 6.5% for the half – which is clearly massive. We’ll continue to hold for now, with the expectation of picking up the dividend – so in answer to the initial question, it’s as opportunity here, however a higher risk one.

Genworth Daily Chart

Woodside – results + cap raising

We hold WPL in the MM Income Portfolio with a 3% initial weighting – the position is around about even however we’ll have the opportunity to increase it slightly into this capital raise. Firstly, the stock will likely be under pressure when it comes back after the institutional raise even though the results released today were good. The 1 for 9 raise at $27.00 is a 10% discount to the last price, however it’s a big issue ($2.5bn), and the money is being raised to buy assets that won’t produce earnings for a number of years. All up, I like the rationale for the transaction which will give them greater control and ‘synergies’ between assets, however it also shows their hand in terms of growth. These guys will now have a big pipeline of projects that need funding, and therefore dividend expectations will need to change. We’ll need to do some work here however it may no longer be suitable for this portfolio – but we’ll make that call when more information is available.

In terms of the result, briefly, NPAT was US$1024M vs expectations of US$1013M and the Final DPS us 49c, vs expectations of 48c. The only real surprise, and it is a big one,  was the acquisition of Exxon’s 50% (potentially subject to BHP pre-emptive for half) interest in the Scarborough gas field offshore WA. This is the rationale from the company

Woodside Daily Chart

Conclusion (s)

At this stage, we’ll hold GMA for the dividend on the 1st March

Woodside will be in a trading halt while the institutional raise is completed – we’ll asses once the dust settles however we’d expect the stock to trade down as a result of the deal

Although not covered today, we are considering a sale of NCK and a switch into Wesfarmers.


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