Recent changes to the Blended Australian Equities Portfolio & Australian Equities Income Portfolio
Purchased Healius Ltd (HLS)
Healius (formerly trading as Primary Health Care) is a leading Australian healthcare company that operates medical centres, diagnostic imaging and pathology services. Healius’ footprint in Australia’s healthcare system is significant with its Bulk Billing medical centres processing over eight million GP visits annually, the diagnostic imaging business providing three million exams each year, and the pathology business testing one in every three pathology samples in Australia.
In recent years HLS has undergone significant restructuring of its operations. Under the stewardship of Chief Executive Dr Malcolm Parmenter (appointed in November 2017) HLS has recapitalised its balance sheet and restructured its underperforming GP and pathology businesses. The turnaround in HLS has been challenging, with HLS reducing its FY19 earnings guidance. Nevertheless, HLS remains well positioned to lift its returns into FY20 as market conditions in medical centres benefits from additional Federal Government funding of primary healthcare and productivity programs in its diagnostic and pathology operations are implemented.
Australia’s appealing demographics of an ageing population has underpinned a growing interest in Australia’s healthcare providers, with recent corporate activity in Healthscope and Healius. In January 2019 the Healius Board rejected a conditional cash offer of $3.25 per share (current share price is c.$2.68) from its existing China based shareholder Jangho. On an Enterprise/EBITDA of 8.9 times, Healius’ valuation remains undemanding and trades at a significant discount to its listed healthcare peers.
As equity markets have rebounded strongly from their December 2018 lows, we are actively tilting the portfolio towards stocks exhibiting more defensive earnings characteristics.
Reduced BHP Group (BHP)
BHP has been a stand-out performer on the ASX over the last 12 months, delivering a total return (share price appreciation + dividends) of 34%, compared to 7% for the ASX Accumulation Index. A combination of buoyant commodity prices generating strong cash-flows, disciplined capital expenditure and the divestment of US shale energy has underpinned BHP’s ability to return excess capital shareholders.
BHP’s returns are now tracking well above long-term cycle levels. Indeed, BHP’s EBITDA margins are currently over 50%, a level rarely achieved in its operating history. With BHP enjoying a period of elevated returns we feel it is prudent to take advantage of cycle highs and reduce our overweight position in the company. We retain a holding in BHP as its balance sheet remains in exceptional shape and there is the potential for further capital management if current iron ore prices remain high.
Recent changes to the Blended Australian Equities Portfolio
Sold Lifestyle Communities Limited (LIC)
Lifestyle Communities has been very successful in developing a business model that has catered for a growing number of ‘baby boomer’ Australians looking for ways to release equity in their family home and downsize into an affordable housing option.
The favourable industry dynamics that have underpinned LIC’s rise over the last decade are now showing tangible signs of deterioration. A broad range of property indicators are progressively weakening, namely: residential property prices, new housing commencements, clearance rates and tighter bank credit.
Yet, at a time of deteriorating property conditions, LIC 1H19 earnings announcement registered a 48% increase in net debt as the company actively funded land settlements and developments. At this point in the property cycle we feel it is prudent to reduce our exposure to companies that are increasing their leverage to the residential housing market.