Portfolio Changes #2 - November 2018
Recent changes to the Blended Australian Equities Portfolio & Australian Equities Income Portfolio
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.
Increased Cleanaway Waste Management Ltd (CWY) Blackmore Capital has added to its position in Cleanaway Waste Management (CWY). We recently attended the CWY investor day which further supported our investment thesis that the company is well placed to deliver consistent earnings growth over the medium term.
As an industry leader in waste management CWY’s vertically integrated model across collections, resource recovery, treatment and landfill afford the company with high barriers to entry in an essential industry. The TOX integration remains on track to deliver $35m in synergies and provides exposure to the health care waste industry.
Cleanaway Waste Management retains a conservative balance with a net Debt/Ebitda ratio of c.1.3 times coupled with an undemanding dividend pay-out ratio of c.50%.
Purchased Ramsay Health Care Limited (RHC) Blackmore Capital has added Ramsay Health Care (RHC) to its portfolio. RHC’s share price has undergone a significant de-rating over the last 18 months with its price earnings ratio falling from c.27 times in FY17 to c.19 times in FY19. Growing pressure on government tariffs and concerns around health care affordability have resulted in markedly slower earnings per share growth. Nevertheless, we believe that the medium and long-term thematic of chronic disease and ageing demographics remain supportive drivers for health care providers. We believe, as one of the world’s largest private hospital operators, RHC remains well placed to a beneficiary of the irreversible ageing of populations.
RHC’s recent acquisition of Capio (a vertically integrated European health care provider) highlights RHC recognition of the potential benefits in broadening its revenue base across ageing populations in Europe. The acquisition provides valuable scale to its existing European business and exposure to new adjacent revenue streams in primary and specialist care. It is our belief that RHC’s recent de-rating of its share price now adequately captures concerns over health care funding and affordability. Moreover, RHC reiterated its FY19 guidance at its recent Annual General Meeting.
Recent changes to the Blended Australian Equities Portfolio
Increased Xero Limited (XRO) Xero’s stock price is down more than 15% since we reduced the holding in August and is trading at levels last seen in April. With the re-emergence of some value after its participation in the broader tech sell off, we bought back the position. In the meantime Xero released its 1H19 result on November 8, which showed 12 month subscriber growth of 380,000 to 1.58m (+24%) and annualised monthly recurring revenue of NZD589m, up 28%. The rate of enhancements to the company’s cloud-based small business accounting and software platforms has been impressive and it made a well-timed USD300m convertible notes offering to fund ongoing growth.
A full update can be found HERE