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  • Writer's pictureMarcus Bogdan

Portfolio Changes #1 - December 2018

Recent changes to the Blended Australian Equities Portfolio & Australian Equities Income Portfolio

Sold Coca-Cola Amatil Ltd (CCL) We have sold Coca-Cola Amatil (CCL) following an updated trading statement that downgraded earnings per share growth for 2019.

The most disappointing aspect of the operational update was the acknowledgement that Australian Beverages ( CCL's largest division) was experiencing weaker than expected volume growth despite a $40m investment in price, marketing and equipment. Concurrently, Indonesian volumes remain subdued due to weak consumer spending.

The poor operating trends in Australian Beverages and Indonesia over shadowed the more promising trends in its New Zealand,  Alcohol and Coffee businesses. Yet the operational challenges facing CCL's two largest divisions suggest that earnings per share growth will remain below the company's target (of mid single digit growth) for the foreseeable future.  Purchased Orora Ltd (ORA) We have added packaging products manufacturer and distributor, Orora Ltd (ORA) to the portfolio, to replace Coca-Cola Amatil which has been sold. Orora was demerged from Amcor Ltd in late 2013 and has strong industry positions in Australia in fibre (paper), glass and aluminium packaging products. Its industry leading B9 paper plant is a relatively new, low-cost facility and its wine bottle and beverage can businesses are backed by well structured long term contracts. It has a clear strategy of undertaking earnings accretive capital projects in its facilities in Australia while growing its US packaging distributions business by making acquisitions into new regions and adjacent markets.

Orora's recent acquisition of Pollock in the US for AUD110m is a good example of its acquisition strategy. It expands the Orora Procurement Solutions (OPS) division's exposure to the Texas market while the balance of the business will allow for some site rationalisation and cost synergies. Operationally the business is very close to OPS's core while geographically it diversifies from California to fast-growing Texas and adds to Orora's box manufacturing capacity. 

The company's 20% return on funds employed hurdle is expected to be met in the third full year after completion. The acquisition will be debt funded will take its net debt/EBITDA ratio to around 1.6x at the end of FY19, which still leaves capacity for further activity. The fragmented market in which Orora operates in the US allows the company to expand with modest acquisitions such as Pollock while remaining financially and strategically disciplined.

Increased Macquarie Group Limited (MQG) Blackmore Capital has added to the position in Macquarie Bank after its strong 1H19 result on November 2 was followed by the second down-swing in the broader share market, leaving the stock down by almost 7%. Macquarie’s cash profit of $1.3b for the first half was ahead of market consensus while earnings guidance for FY19 was lifted from “broadly in-line" to more than 10% growth. The “market-facing” divisions were the reason for the positive surprise, however the Macquarie Asset Management and Corporate Asset Finance businesses had timing issues around performance fees and asset realisations which will come in the second half. Normally the cancellation of a buy-back indicates an unanticipated decline in a company’s financial position whereas here it was due to growth opportunities in its existing businesses. Likewise the retirement of a long-standing CEO often leads to an earnings rebase but in this instance there is considerable conservatism in the accounting of equity holdings and recognition of revenue.


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