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  • Writer's pictureMarcus Bogdan

Portfolio Changes #2 - October 2018

The ASX 200 index has fallen over 10% since reaching its year high on the 29th August. We are taking advantage of the current volatility to add to companies that remain well positioned in their perspective industries and are supported by robust balance sheets.

The Blended Equity Portfolio has increased its equity exposure by a net c.175 basis points. The Australian Equity Income Portfolio has increased its equity exposure by a net c.150 basis points. 

Cognisant that volatility could remain elevated, the portfolio retains a strong cash balance to provide ongoing ballast and future capital to deploy when buying opportunities emerge.

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

Reduced Washington H. Soul Pattinson and Co (SOL)

SOL reached an intraday record high price on 22 October, representing a year-to-date gain of more than 70%. This was remarkable, particularly considering the ASX200 hit a year-to-date low three days later. Whilst we hold the investment company and its management in high regard, we believe this price performance has outstripped the value accretion of its underlying investments. Notwithstanding one of its three major holdings, New Hope Group was up as much as 60% year-to-date through early October it has since surrendered half the gain and Brickworks (+13% year-to-date) and TPG (+14% year-to-date) have not experienced anything like the move of the head stock. Given these three investments comprise circa 70% of the SOL portfolio we thought it prudent to take some profits and reduce the size of the position. Increased Alumina Limited (AWC)

Alcoa’s third quarter earnings release revealed slightly lower alumina production from the AWAC joint venture (40% owned by AWC) in part due to contractual disputes in WA, offset by higher realised pricing. With the stock having retraced 12% since the end of September, we took advantage of the price weakness to add to the position. While alumina spot pricing remains elevated due to US sanctions on Rusal and production curtailment at the Alunorte refinery, the share price is not factoring this market to be sustained and AWC is in a strong position to continue to distribute these excess profits to shareholders. In the medium term, China is expected to increase the proportion of imported bauxite refined into alumina from around 30% now to more than 50% by 2025 and should lift its imported alumina utilisation to more than 10%. We expect low quality Chinese domestic bauxite to be substituted by high quality imported ore over time, in a pattern akin to that of high grade iron ore imports for steel production.

Increased Brambles Limited (BXB)

Brambles reported first quarter constant currency revenue growth of 6% and reaffirmed FY19 guidance. Encouragingly, management confirmed that two-thirds of cost increases in the quarter were recovered through pricing initiatives. CHEP EMEA remains a standout generating 8% revenue growth over the quarter. Importantly, pricing conditions in the US are gaining traction, helping offset inflationary pressures in lumber and transport. We retain an overweight position in Brambles given its strong industry position and expectation of margin improvement over the forecast period.

Increased Cleanaway Waste Management Ltd (CWY) 

Cleanaway Waste Management (CWY) reiterated its FY19 earnings guidance at its Annual General Meeting. CWY also confirmed that the TOX integration was progressing in line with expectations. Valuation metrics look more attractive given recent share price weakness, with CWY trading on a c.9.5 times EV/EBITDA multiple. We are adding to our position in CWY based on its high level of earnings visibility and growth optionality across each of its operating businesses.

Increased Event Hospitality and Entertainment Ltd (EVT)

We have added to our position in EVT following its announcement of the sale of its German Cinema business to Vue International for up to A$358m. The sale price consists of upfront consideration of A$210m, and variable consideration of up to A$148m based on “German market admissions for CY19.” The sale of its German Cinema business is encouraging on three levels. First, it reduces exposure to Cinema earnings that are both volatile and under structural threat. Second, the sale materially improves EVT’s balance sheet optionality, moving to a net cash position. And third, EVT is in a stronger position to expand its hotel & property portfolio in Australia, which has provided solid momentum to its earnings base.

Increased Woolworths Group Ltd (WOW)

We are further increasing our exposure to the consumer staples sector, with industry supermarket trends supportive of easing deflationary pressures in fresh food. Both Coles and Woolworths should be beneficiaries of an improving pricing environment. Our investment thesis for Woolworths is further supported by the potential divestments of its Hotel and Petrol Station interests, providing further support for capital management initiatives.


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