Portfolio Update – VanEck Vectors Australian Property ETF

By Portfolio

Within the portfolio, we have the purchase of the VanEck Vectors Australian Property ETF which is listed on the ASX and trades under the code “MVA”. MVA is designed to capture the performance of the broader Australian property sector with exposure to the industrial, office, retail and residential segments.

MVA incorporates a rules-based approach to holding a diversified portfolio based on market capitalisation with a maximum weight of 10% for any one position. This enhances the liquidity of the portfolio reducing exposure the larger cap names while ensuring proper diversification is maintained.

The attraction of the VanEck Vectors Australian Property ETF is that it:

  • provides a differentiated index exposure to the Australian listed property sector, reducing the concentration risk of the large-cap names that dominate the sector.
  • under the current backdrop of “lower for longer” in terms of bond yields – historically high and regular divided provides a stable income above the rate received from fixed income and cash.
  • valuation support – the AREIT sector not only trades at a material discount to local industrial companies also impacted by the recession, but where property concerns are most acute, investors appear to be pricing in very poor outcomes.
  • low on-going costs offer good value for money for a liquid investment to the sector. 

In summary, the extended outlook for the historically low rate environment will see investors again focus on higher-yielding defensive assets as income alternatives to cash and bonds as we adapt to life post-COVID. And REITs, with strong balance sheets, reasonable valuations and generally predictable distributions are well positioned for the long-term.

If you have any questions regarding any parts of your portfolio, please do not hesitate to contact your adviser as we are always happy to help.

Portfolio Update – Ardea Real Outcome Fund

By Portfolio

Within the portfolio we have added the Ardea Real Outcome Fund. The purchase was funded by a combination of reducing cash and the existing holdings being the Janus Henderson Tactical Income Fund and the Macquarie Income Opportunities Fund, both funds primarily exposed to high grade floating rate credit.

The attraction of the Ardea Real Outcome Fund is that it:

  • Prioritises capital preservation
  • aims to outperform both cash and inflation thus maintaining real purchasing power
  • does not rely on the direction of either interest rates or credit spreads to generate returns, as it employs a pure relative value approach aiming to exploit mispricings between closely related securities; and finally
  •  has historically exhibited low correlation to equities as the portfolio specifically includes ‘risk-off’ strategies designed to profit in periods of extreme adverse market movement
  • the strategy is implemented by a very experienced team via a well-established, repeatable process. The six portfolio managers have an average of 22 years’ experience and include 3 founding members of the firm.

In the current environment, we believe the Ardea Real Outcome Fund will be an excellent complement to the existing allocations.

If you have any questions regarding any parts of your portfolio, please do not hesitate to contact your adviser as we are always happy to help.

Reporting Season Update

By Portfolio

With the August reporting season now behind us, Elston Asset Management Portfolio Manager Justin Woerner discusses the major themes that emerged, how the portfolio fared, current portfolio positioning and a brief outlook.

If you have any questions regarding the latest reporting season or any parts of your portfolio, please do not hesitate to contact your adviser as we are always happy to help.

Portfolio Update – Purchase of Amcor (ASX:AMC)

By Portfolio

Across investor accounts, we have purchased Amcor (ASX:AMC). AMC is a global packaging company with operations across Australasia, North America, Latin America, Europe and Asia. AMC offers a range of packaging products for food, beverages, pharmaceutical and other consumer products.

We are positive on the medium-term outlook for Amcor for the following reasons:

  • AMC’s earnings are very defensive with the majority of its products used in the fast-moving consumer goods and healthcare segments. In addition, it is one of the world’s largest packaging companies whose revenues are diversified by product, client, and geography.
  • Although AMC’s top-line revenue growth is at a level similar to GDP, underlying earnings growth should be quite strong through the combination of strong operating leverage and ongoing capital management (buybacks). Strong cash generation also allows for a consistent dividend.
  • The acquisition of Bemis, a global manufacturer of flexible and rigid plastic packaging for food, consumer products, medical and pharmaceutical companies, should enable AMC to capture both cost and revenue synergies over the next 3 years. It also provided scale, with AMC now the largest packing company in both the US and Europe. This will allow AMC to attract and retain clients that benefit from a global solution.

Continued focus on research and development is absolutely critical for AMC. With the focus on the removing single-use plastics and the ability to recycle goods, AMC will need to evolve its products to firstly maintain market share, and potentially generate a first-mover advantage in cost-effective responsible packaging. This is an enormous opportunity if management can execute upon it.

To fund the acquisition of AMC, we have sold Wesfarmers. Even though it is an excellent business, we believe it has benefited from a pull forward in sales due to Covid-19 and is also achieved our 3yr forward target price.

In summary, we view Amcor as a high-quality business that we have acquired at a sensible price, a combination that is not common in the current environment.

Portfolio Update – Purchase of Sydney Airport Limited (SYD)

By Portfolio

Within investor portfolios, we have bought Sydney Airport Limited (SYD). Sydney Airport Limited has the concession to operate Australia’s largest airport, Sydney’s Kingsford Smith Airport until 2097. In 2019, the airport was used by 44 million passengers and connected Sydney to more than 90 destinations around the world. Revenue is generated by aeronautical charges largely based on a per passenger basis, rent from the hotel, logistics, office & retail tenants as well as parking and ground transport fees.

We are positive on the medium-term outlook for Sydney Airport Limited for the following reasons:

  • The airport has a monopoly position for both domestic and international airline passengers in Sydney and is a key freight hub given its proximity to the city and major road networks;
  • A weaker A$ makes Australia an attractive destination for international travellers which are more profitable for the airport. The pace of travel recovery across both international and domestic segments could be quicker than we anticipate;
  • It owns some of the most productive retail space in the country underpinned by fixed escalating rental revenue streams and it’s logistics and office portfolios are almost fully let and deliver solid annual increases;
  • Expiry of the Qantas Jetbase lease on 30 June 2020 (a 30 hectare site adjacent to the domestic airport with direct access to airside areas), gives SYD full operational control of the entire airport site for the first time and offers some attractive medium-term development opportunities.

Obviously the Covid-19 pandemic and associated travel restrictions present a significant short-term headwind. We are not expecting any real improvement in activity until the 2nd half of this year, and even then anticipate that it will be gradual. Furthermore, we expect the recovery in international travel to take longer than the domestic recovery as governments have to reopen borders which will likely be a staggered process and airlines assess existing routes – a recovery to pre-crisis levels is not expected until 2022. With the reduction in passengers, we also expect that the airport will have to provide some level of rent relief to its tenants such as retailers, car hire companies and hotels. This has been factored into our forecasts, but for long term investors, the current crises provide an opportunity to acquire a critical monopoly infrastructure asset at an attractive valuation.

Portfolio Update – Purchase of Beach Energy (BPT:ASX)

By Portfolio

Across investor portfolios, we have bought Beach Energy (ASX: BPT), an oil and natural gas exploration and production company with interests in five producing basins across Australia and New Zealand. Via its interest in the Western Flank of the Cooper Basin, it is Australia’s largest onshore oil producer and supplies approximately 15% of Australian east coast domestic natural gas demand.

We are positive on the medium-term outlook for Beach for the following reasons:

· Firstly it has a strong balance sheet (net cash position), combined with growing operating cash flows, allows for self-funding of the significant investment in organic production growth at very high rates of return.

· High certainty of revenues and cash flow – Beach has limited exposure to lower domestic spot gas prices with almost all volumes contracted and by 2022, more than 70% of east coast sales are expected to be via higher-priced market offers versus current.

· Beach Energy is a well-managed low-cost producer with a diversified portfolio of quality assets and;

· Management continues to guide the market towards substantial production upside over the next 5 years and has demonstrated significant exploration and development success in allocating capital in the past.

Furthermore, at Elston Asset Management (EAM), we are focused on both value and growth when selecting businesses for investment. We believe Beach Energy meets both of these criteria with the material production and free cash flow growth over our 3 – 5-year investment horizon whilst trading at approximately 5 times this year’s EBIT we believe the business is inexpensive. In the short term, the coronavirus outbreak has clouded the outlook for global energy demand and production; this has provided a long-term opportunity to invest at a significant discount to our intrinsic value giving investors a margin for safety given obvious short-term uncertainties. EAM focus only on the top 100 companies enabling us to act decisively when market dislocation occurs, these dislocations present opportunities to invest in businesses that we understand well.

We have funded the purchase of Beach Energy from the sale of Tabcorp which we believe may take longer to turn around it’s waging business than initially anticipated.

Portfolio Update – Purchase of Treasury Wine Estates (ASX: TWE)

By Portfolio

Across investors portfolios, we have bought Treasury Wine Estates (ASX: TWE). TWE is a vertically integrated global wine company focused on growing & sourcing grapes, winemaking and marketing & sales of its expanding portfolio of brands. The business has established a global footprint operating over 13,000 hectares of vines across 127 vineyards, 17 wineries and sales networks across more than 100 countries throughout Australia & New Zealand, the Americas, Asia and Europe.

We are positive on the medium-term outlook for Treasury Wine Estates for the following reasons:

  • A growing portfolio of valuable brands, led by Penfolds, from multiple countries-of-origin enables the targeted regional premiumisation strategy based on local tastes which increase average selling prices and margins
  • Asia is a material opportunity with wine consumption significantly below developed market averages but growing solidly particularly at premium price points. China, in particular, offers substantial opportunity via a growing middle-class and underpenetrated Tier 2+ cities in terms of wine consumption
  • The shift to Luxury and Masstige segments away from the Commercial segment over recent years leaves the company less susceptible to inventory write-downs since the cheaper wines do not store as well as premium wines
  • Changes to the US distribution model that provides the opportunity to capture a portion of the distributor margin combined with the consolidation of the Commercial segment provides scope to increase profitability over time

With the aim of maintaining a style neutral exposure within the portfolio, we are constantly balancing value against growth. We think TWE offers both. Softer conditions in the USA market followed by short term concerns around the CoronaVirus and Asian based sales has seen TWE’s share price fall substantially from close to $18 down to current levels around $9. We have forecast a CoronaVirus lead pullback in revenues within our modelling however we view this as a short-term cyclical event and not structural in nature. We also note TWE’s strong balance sheet which should allow the business to withstand any earnings decline. We see the market reaction as a short term disconnect between price and value providing an opportunity to longer-term investors such as ourselves. With regards to growth, TWE maintains a robust outlook. The business has a track record of generating earnings growth and with the exception of lower earnings forecast for the current year, the business is expected to continue to achieve robust levels of earnings growth going forward.

We have funded the acquisition of TWE through selling our position in Fortescue Metals. Our main investment thesis for holding Fortescue was the narrowing of the pricing discount applied to Fortescue’s lower quality ore. This thesis has played out which combined with iron ore prices currently well above our expectations going forward means we see limited long term upside for the miner.

UK banks move into Virgin territory

By Blog, Portfolio

The stock in focus this month is CYBG (CYB). CYBG is a full service UK bank previously owned by NAB. After years of underperformance CYB was demerged in 2016.

It operates under the brands Clydesdale Bank, Yorkshire Bank and more recently B Brands. Despite serving nearly three million customers and having a branch network of over 200 branches and business banking centres, CYB struggled to grow its footprint nationally and has been largely confined to Scotland and the north and midlands of England.

This led to a major strategy shake-up. In June 2018 CYB purchased Virgin Money, an iconic brand with strong credit card and mass mortgage product capability in different geographical markets. The combination with CYB’s retail and SME customer base made strong strategic sense.

The complementary nature of the business means that substantial cost savings are targeted with expectations of annual net cost savings of 200 million pounds by 2022, enabling the Bank to significantly reduce their cost to income ratio.

The other exciting opportunity for management is to lever the other aspects of the Virgin group to enhance the experience for Bank customers and to begin to build an ecosystem which incorporates the other Virgin brands that UK consumers are using including Virgin Atlantic, Virgin Mobile and Virgin Media.

However, in the short term there are macro factors impacting the UK economy, specifically regarding Brexit and the political and economic uncertainty this is creating.

After talking to CYB and other UK focused firms, most businesses in the UK are in a holding pattern until this situation is resolved. With the new PM in place, this resolution, while still unknown, is closer to happening.

While any solution will probably lead to short term volatility, the long runway for the process means that authorities and policy makers are prepared to provide the support the system needs to overcome these short term issues. We therefore see this as an opportunity to purchase businesses at a good level for the longer term.

Quick Snapshot

  • CYB will change its name and branding to Virgin Money from late 2019.
  • The newly combined entity will have 9 billion pounds of deposits and 7 billion pounds of lending.
  • The flagship product, the Virgin Money personal account, will launch in the third quarter of this financial year.