Income Report / Income Report; Portfolio Rejig (NCK, AWC, ALF, ECX, AXLHA)

By Market Matters 24 October 18

Income Report; Portfolio Rejig (NCK, AWC, ALF, ECX, AXLHA)

Market Matters Income Report 24th October 2018

The ASX 200 has opened marginally higher this morning with some reasonable buying being targeted towards  the banking stocks. As suggested in the AM report this morning, it seems likely that the US has now formed a low, in the short term at least.

Today we’re again rejigging the Income Portfolio to get better exposed to market upside from here. For the week, the portfolio dropped by -0.61%. For the financial year to date, the portfolio has just has turned negative down  -0.29% versus its benchmark of RBA cash rate +4% which sits at 1.72%. Since inception (5th July 2017) the portfolio has added 5.6% versus its benchmark of 7.16%.    

Nick Scali (NCK) – sell out or buy more?

Yesterday NCK held their AGM and the stock fell more than 5% as a result to close the day at $5.64, the lowest level since just before we added the stock to the portfolio in July of 2017. The obvious question- do we buy more of sell out based on what we heard yesterday?  

What they said;

-          1Q19 written sales orders have grown by 12% with comparable sales orders up 2% - an excellent result given many retailers are printing negative LFL comps.

-          Company reiterated that LFL sales growth will be challenging in this volatile trading environment, particularly given the significant slow-down in residential sales, a key driver and catalyst for furniture sales

-          A lower AUD will also impact gross margin in the short term as market forces generally take time to make the price adjustments in line with a lower dollar

We’ve previously discussed the impact a weak housing market could have on Nick Scali and it is a clear negative, however it does seem the company is doing a good job in driving sales growth where it can while also opening new stores to drive earnings. The company expects to add another 25 stores across ANZ, with “the possibility of further off-shore expansion.” There wasn’t a lot of detail in the address by the CEO or the Chairman, and the market seems to be focussing on small comments made despite some positive data points splattered throughout the presentation.

The market expects profit growth in NCK of ~10% and the company has a history of under promising and over delivering. Of the last 11 earnings reports, they’ve beaten expectations 10 times and missed once with an average beat of 3.73% and an average share price reaction of 6.62%. We like Nick Scali for a number of reasons. Firstly it is a quality, specific and brand name retailer – all of which should see it supported in a significant deterioration in retail sales. It is also driving margin expansion – up 20bps in FY18, cost control will be key for long term retail survival.  Thirdly, it still has many untapped markets both from a location – increasing store numbers by 45% in the long term - and an offering standpoint – in January they will launch a bedroom and bedding range. On ~10x estimated forward PE, it’s cheap considering earnings growth of 10% and  we are using this recent weakness to up weight by 2% in the MM Income Portfolio, taking the position to 5%. Watch for alerts 

-          We remain bullish on Nick Scali (NCK)

Nick Scali (NCK) Chart


Alumina (AWC) – Increasing commodity exposure

We’re bullish on the ‘late cycle’ resources trade and Alumina is a stock that has commodity price tailwinds and pays a healthy dividend. Its’ been a volatile ride for AWC in recent times thanks to supply disruptions which forced a squeeze higher in the Alumina price, however that has now largely played out. Alumina (AWC) has been in the MM Income portfolio in the past – we bought at $1.96 and sold at $2.17 plus we picked up an 8cps dividend along the way. The stock is clearly trading above that level now however markets are fluid and we’re again looking at AWC from an income perspective.  AWC is one of only a handful of mining sector names that have stock specific tailwinds offsetting to a large extent the sector headwinds of tariff’s and USD strength.

The stock is expected to yield 6.9% fully franked in FY19, trading on an estimated P/E of 8.5x.

·         MM are bullish AWC targeting ~$3.20, adding it back into the portfolio

Alumina (AWC) Chart

Australian Leaders Fund (ALF) – Reallocating capital  elsewhere

ALF is a market neutral listed invested company trading at an ~18% discount to the value of its assets (NTA) – so it’s cheap. We originally added ALF into weakness after they cut their dividend due to poor performance, which does seem odd for an income portfolio.  Our expectations at the time was that depressed prices would not last as performance improved in a choppy market environment (given they are long-short) and the eventual reinstatement of their dividend would see the LIC trade back up towards their NTA.

Performance has improved, although not by enough in our view while they did reinstate the dividend paying 2c fully franked in August. However, our thesis hasn’t really panned out and the share price has stayed subdued. Ultimately, we see better opportunities to deploy these funds into the current market weakness.

-          MM are cutting ALF from the MM Income Portfolio, taking a small loss.

Australian leaders Fund (ALF) Chart


Eclipx (ECX) – Cutting for a loss

Back at the start of August, ECX downgraded earnings and dropped sharply, trading to a low of $1.67 before recovering strongly thanks in part to a conditional offer from rival SG Fleet. We view that offer as an opportunistic play given the issues faced by ECX at the time. The proposed deal was for $2.00 cash plus 0.15 SGF shares per ECX share. On the close price yesterday, that values the deal at $2.54 versus $2.56 close. Independently to the offer, we expect ECX to tread water around current levels while the SGF share price looks like testing the $3.30 region – another ~8% lower providing a negative influence on ECX.  

-          MM are cutting ECX from the MM Income Portfolio, taking a  loss

Eclipx (ECX) Chart

Axsess Today Bond (AXLHA) – Update

The AXL stock and the AXLHA bond were due to come out of voluntary suspension on the 22nd October, however they requested  a continuation of that voluntary suspension as they finish a business review. They should be back trading no later than the 30th November.

A few important points;

-          Waivers to the technical and covenant breaches (3 primary reasons given in a previous announcement) to lending agreements with senior bank lenders have been granted.

-          Business is continuing to operate throughout suspension (inference being writing further new business volumes) and a revised FY19 guidance will be provided at the end of the review

-          They plan to simplify the business, returning to core products and market segments where they had most traction. They say that involves the funding of business critical equipment (equipment finance) in hospitality and transport businesses – its about 95% of their business anyway

-          They plan to wind up two loan books – a Canadian operation with a $2m book and business loan funding with a ~$15m book. That will have an impact on earnings & the balance sheet.

The announcement was light on detail however from what we can see, the company seems to have the support of senior lenders. We’ll provide more detail when it comes to light


We plan to add Alumina  (AWC) to the portfolio & increase Nick Scali (NCK) into weakness
We are cutting ALF & ECX, both for a loss

Watch for alerts.

Have a great day!

James, Harry & the Market Matters Team


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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