Blended Australian Equities Portfolio change
Add to Cleanaway Waste Management (CWY)
We have recently added to our holdings of Cleanaway (CWY) in both the Blended and Concentrated Portfolios.
During 1H23, CWY reported underlying net income of $67m, a decline of 12% compared to the prior corresponding period, due to a significant drop in the price of Old Corrugated Containers (OCC), the temporary closure of New Chum and the residual effect of floods, as well as the Health Services business network inefficiencies from the hammer mill loss. Over the last twelve months, CWY’s share price has fallen by 22.7% vs ASX 200 down -2.7%.
However, in 2H23 CWY has experienced a partial recovery in OCC margin due to higher index price and lower rebates, a normalisation of health waste collection volume, and the anticipated return of new autoclaves at the end of this quarter to improve waste processing efficiency. Furthermore, we expect CWY to generate incremental benefits in FY24/25 from its successful tender for the Victorian Container Deposit Scheme (CDS) and other infrastructure asset investments in areas such as Food Organics Garden Organics (FOGO), Energy from Waste, and soft plastic recycling, which will help pave the way towards a circular economy.
Excluding one-off events, we believe that CWY’s underlying business is robust and improving, and the short-term headwinds have been excessively priced into the share price. The stock is currently trading at a forward EV/EBITDA of 9.4x, below the five-year average of 10x. We expect that the combination of an attractive valuation, improvements in the operating environment, and the defensive nature of the business will result in upside potential for FY24.
Reducing Woodside Energy (WDS)
We recently reduced our position in Woodside Energy amid uncertainty over the regulatory and fiscal environment in Australia for existing and future energy projects. A raft of policy changes and interventions have increased the risk profile for new and brownfield developments, from the anticipated step up in tax receipts from the Petroleum Resource Rent Tax (PRRT), the Australian Domestic Gas Security Mechanism, the Natural Gas Price Cap, the “reasonable price” regulation and a more aggressive approvals process under the National Offshore Petroleum Safety and Environmental Management Authority.
The impact of this uncertainty is felt throughout the industry, with the most significant impact on projects approaching their Final Investment Decision (FID) that require foreign capital or those which have made FID but on pre-existing fiscal terms. Note that even pipeline and drilling approval delays caused by NOPSEMA can derail life of project economics after FID has been reached, regardless of the difficult construction inflation and scheduling environment. The most acute risk may lie in the potential changes to the PRRT, which could increase the existing tax take through amending the gas transfer price but also pull forward taxation revenues through changes to deductions.
We have therefore lowered our sector and stock exposure by reducing Woodside, which has relatively higher exposure to the fiscal and regulatory changes through its US$12b Scarborough/Pluto Train 2 project which is under construction, as well as other brownfield developments. WDS has achieved a total return of 27% over the past year, which compares with the S&P/ASX 200 4.5%.
Add to James Hardie (JHX)
In January this year we initiated a position in James Hardie as the company was experiencing a sharp deterioration in line with residential construction markets in the US during the second half of 2022. JHX posted a 2022 annual return of -51.7%, compared with the ASX 200 return of -1.1%. We anticipate a trough and recovery to commence in the second half of 2023.
Since then, the housing activity level has shown incremental improvement, with the average Freddie Mac mortgage rate gradually falling from near 6.7% at the beginning of March to 6.3% in mid-April. Sales of US newly built, single-family homes in March increased 9.6% from a downwardly revised reading in February. The NAHB Remodelling Market Index (RMI) posted a reading of 86 for 1Q 2023, same as 1Q 2021 and indicated positive trajectory in residential remodels’ confidence. The latest quarterly update and remarks from US homebuilders have been largely constructive about the future prospects of the housing market. We have increased our holdings in James Hardie on the basis of seeing a growing evidence of an impending recovery.