Views at a Glance / Income Report; Taking a look at 4 of our holdings

By Market Matters 09 August 17

Income Report; Taking a look at 4 of our holdings

Income Portfolio Update 9/08/17

The Income Portfolio added +0.26% over the course of the week versus the ASX 200 which was unchanged, with the portfolio now having increased by 1.092% since inception (5th July 2017). The gain is all capital growth given no security has paid a dividend, however this starts shortly with Genworth (GMA) going ex-dividend for 14cps on the 15th August, Suncorp on the 16th for 40cps along with CBA for $2.30. Overall the portfolio is performing in line with our expectations, and importantly, the expected grossed up yield is now 6.67%, with a balance of Equities (63.5%), Hybrids (27.5%) and importantly cash of 9%. Clearly we have some ammunition left however this has been reduced given opportunities during reporting season.

Once again, for those new to the service, it may be worthwhile revisiting our initial Income Report – available here – which outlines our desired approach for the portfolio.

Today we’ll review a number of our holdings which have reported, or in the case of Nick Scali (NCK), are about to report.

Commonwealth Bank  (CBA)

A tough week for CBA with the shares down around $4 in the last week or so and we’ve covered the AUSTRAC investigation and potential financial impact in our general reports throughout the week. In better news today, they reported full year earnings that were above expectations with a 1% beat across most headline numbers – and this was taken well by the market – shares trading up +1.4% at time of writing.  Another solid result from CBA with better operating income, lower bad debts and a strong capital position. Thinking about CBA going forward, the key is now managing the volume margin trade-off in a lower growth environment – and this is clearly front and centre for all banks. Do they grow their books through aggressive pricing, or simply charge existing customers more?

We think they’ll balance the two and we assume loan growth of around 5% with some slight margin expansion which should drop down to low single digit revenue growth. If costs are flat and bad debts stay well behaved then we get something like 4% earnings growth. With a 5.5% and 4% earnings growth getting near 10% from CBA should be available in the next 12 months. We remain comfortable with CBA despite the obvious negative attention.

Commonwealth Bank Weekly Chart

Suncorp (SUN)

Suncorp’s report last week was a disappointing one in terms of their top line result, however under the surface, the main businesses within the group, namely general insurance and the bank seem to be running well. Their earnings missed by 4% - the market hit them hard on the day  and they’re yet to recover.  We added to our existing 6% with another 5% below $13.80  and this is clearly an aggressive position size for the income portfolio. Our maximum exposure to one stock across the MM portfolios is 12%, so clearly we have very little room to average any further.

Looking at the two biggest parts of the company, General insurance & the bank, results were broadly in line but importantly, they’ve taken measures to get those businesses in better shape for medium term growth. It was the non-core businesses that hurt the result the most – 15% short on NZ insurance and a 71% miss in the wealth arm, dragging the full year profit down below expectations.

Importantly for our income portfolio, Suncorp raised its full year dividend to 40c FF, up from 38c last year, matching the streets expectations and showing that they understand the importance of returning capital to investors. More reserve releases are expected and we think special dividends from FY18 are likely.

Suncorp Weekly Chart

HFA Holdings (HFA)

The hedge fund manager that is clearly a smaller proposition than the two stocks covered above delivered a reasonable result this morning, however they talked up a big game for the future – which the market seemed to like. They outlined a full year net profit after tax of $US17.7m and a final dividend of $US8c, which was smack on expectations. They also said they will change their name to Navigator Global Investments and deliver a “broader business strategy which seeks to grow and diversify the Group’s key operations beyond the traditional fund of hedge fund industry”. The mkt liked this!

On the negative side, cost growth was higher than expected as they increased headcount  from 73 to 80 over the past year. Costs will continue to rise next year, but higher net FUM inflows look set to offset the extra costs. This is clearly a cheap stock, with not a lot of good news priced in – we saw that ‘less bad news’ got buyers interested today and we think this theme will continue.  On a low FY18e PE of 10.1x with a yield of 8.2%, MM remain positive on the holding for the income portfolio.

HFA Holdings Weekly Chart

Nick Scali (NCK)

Nick Scali has been one of the better performing stocks in the MM Income portfolio, up 6.6% on capital since inception, and they report earnings tomorrow. There will be plenty in the result with outlook commentary being just as important as top line numbers. We expect earnings to come in at the higher end of prior guidance. NCK has been in an upgrade cycle lately, with NPAT growth outdoing expectations and delivering high but manageable dividends. What the numbers may not, but the commentary will show is guidance on FY18 sales and what they plan on doing with the cash on the balance sheet. This is a very strong company, with great trends, however downside of that is the mkt likes it already, and a lot of smaller cap fund managers already own it.

We expect a more subdued FY18 sales outlook and we may see a slowdown in sales due to reduced churn through the housing market, however this is already factored in. The commentary around this is more of a risk (unknown) however we see new store openings targeted for FY18 as an offset and sales should continue to rise, albeit at a slower pace.

The cash on the balance sheet provides NCK with plenty of options. The view is that the cash will be used to pay down debt or continue the expansion – with the latter being more likely. NCK has flagged expansion into NZ and cash will be put to good use there. Commentary on how they plan to progress, along with plans for land acquisition across NSW should be met positively in the market. On a PE of ~15x and expected dividend of 6.57% for the year, we remain comfortable with NCK ahead of their result.

Nick Scali Weekly Chart

Conclusion (s)

Reporting season has dealt some hits and misses, unfortunately Suncorp has been one of our misses although we do remain comfortable here.

In terms of CBA, the result was good with a strong capital position and better dividend.

We will start to see some dividends flow into the portfolio shortly.

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 Wednesday.

Disclaimer

All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 09/08/2017.  11.30AM.

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