Portfolio Changes - Buy NAB | Sell Qube Holdings (QUB) | Add to Oz Minerals (OZL)
Updated: Feb 10, 2022
Blended Australian Equities Portfolio & Australian Equities Income Portfolio Change
Buy National Australian Bank （NAB）
We have added NAB to the portfolio, increasing our exposure to the banking sector. This change reflects the evolving outlook for interest rates in developed countries including Australia, and the end of quantitative easing policies. The monetary and fiscal stimulus in response to the pandemic were positive for loan growth recovery and cushioning bad debts, but the impact of low interest rates on bank margins and the competitive environment have seen the sector de-rate. Costs have also weighed on bank performance and the market will be updated on these operating trends and the outlook for margins in the February result announcements.
Notwithstanding the risk of disappointment in the results in February, the medium- term outlook for rising interest rates and associated improvements to bank earnings warrant an increased exposure to the sector. NAB has been selected for its improving operating performance and execution of its strategy while its capital position will support strong dividends and further buybacks. NAB trades on a FY22 forecast PE multiple of 14.2x and 5.0% dividend yield, growing to 5.4% in 2023. This is in line with the average of the banks ex-CBA, which continues to trade at a considerable ~30% premium to the other banks.
Sell Qube Holdings (QUB）
We have sold QUB to (partially) fund the buying of NAB and OZL. The macroeconomic environment of tightening monetary policy and increasing interest rates is generally unfavourable for the valuation of long-duration assets such as QUB’s logistics and Patrick Terminals businesses and its remaining industrial land bank, which trade on an FY23 PE multiple of ~27x or an EV/EBITDA multiple of ~19x. The sale of its interest in the warehousing and property components of the Moorebank Logistics Park for c.$1.67b, subject to completion of the Interstate Rail Terminal, was announced in December. This marks the realisation of QUB’s long term value projects and leaves it with operating logistics businesses at the site. QUB’s logistics businesses have faced rising cost pressures from absenteeism caused by COVID-19 and it is one of a number of companies now charging additional levies to offset these costs, however the ongoing risk to financial results remains.
Blended Australian Equities Portfolio Change
Add Oz Minerals (OZL)
We have added to the existing position in OZL, after its 14% correction during January, following its strong December quarter performance. The share price followed copper prices lower, and the company reported higher than expected cash costs than anticipated at its December Quarterly Production report, due to mining, processing, and transportation costs. Industry cost escalation, lower expected gold production and some reallocation of development costs to operating costs at Carrapateena resulted in 2022 guidance for all in sustaining costs of USD1.35-1.55/lb, considerably above market expectations. Copper production was guided to 127-149kt and gold, 208-230koz for 2022.
These revisions had greater impact on earnings forecasts (c.-10%) compared to net present value estimates due to the long life of the company’s mines and the value attributed to growth projects at Prominent Hill, Carrapateena and West Musgrave. The role of copper exposure in the medium term as an inflation hedge, exposure to increased demand from electrification of transport and the prospect of supply deficits by mid-decade is intact. This is supported by the significant earnings upgrades that are implied by spot prices relative to market expectations in 2022 and 2023.