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  • Writer's pictureMarcus Bogdan


Updated: Sep 12, 2023

Blackmore Capital Blended Australian Equities Portfolio

We have recently made some changes to the Blended Australian Equities portfolio following the recent FY23 result releases for many of the Australian corporates. In summary, these changes reflect our intention to lower the gearing of the portfolio by exiting some positions with high finance cost in an environment where cost of capital is likely to remain high.

Sell Healius (HLS)

  • For FY23 Healius (HLS) reported underlying EBITDA of $376m which was in line with guidance. Improvement was evident HLS’s base pathology and imaging businesses in 2H23.

  • Nevertheless, leverage remains uncomfortably high with Net Debt to EBITDA ratio (ND/EBITDA) sitting at at 3.5x, well above its long-term target of 1.7-2.0x. Interest costs of $62.3m for FY23 were ~+27% higher than FY22, driven primarily by an increased average cost of debt.

  • Balance sheet deterioration is one of the major reasons for our decision to sell HLS. ND/EBITDA has increased from 1X in FY22 to 3.48x as of Jun-23. Although HLS has made swift progress with costs, finance costs jumped 33% at 2H23. Management expects interest costs to increase by a further 12% in FY24 to $70 million. The increasing interest expense and high leverage is diluting the quality of HLS’s earnings recovery.

Sell Endeavour Group (EDV)

  • At its FY23 result, Endeavour Group (EDV) reported higher than expected interest and tax expense. We expect the higher cost associated with finance expense and tax would remain elevated and pose a challenge for the company's future eanrings

  • EDV reported a +22% increase in its finance cost to $250m in FY23 with this cost being the biggest negative contributor to the FY23 profit. The management expects that the interest costs in FY24 to be in the range of $280m-$310m, higher than consensus. The higher finance cost reflects increased interest rates and higher average net debt.

  • EDV’s net debt increased by A$706m to A$1.9bn as of 30 June. Borrowings were $2.2bn at the end of FY23, $703 million higher than the last year of which $402m relates to higher tax payments and trade working capital.

  • We expect the profit growth potential to be relatively constrained given both the higher cost pressure from the inflationary operating environment and the higher debt profile for the Balance Sheet.

  • The overhang of the regulatory uncertainty is likely to contribute to the downside risk of some discounts on the multiple EDV trades on, particularly given the relatively shorter track record.

Buy Treasure Wine (TWE)

We initiated a portfolio position in Treasury Wine Estates (TWE) post the release of its FY23 result.

Treasury Wine Estates (TWE) is an international wine company with a portfolio of luxury, premium and commercial wines. The company was demerged from Fosters Group in May 2011. TWE is a vertically integrated wine business engaged in grape growing, sourcing third party grape production, wine marketing and distribution. TWE’s business segments include: Penfolds, Treasury Americas, & Treasury Premium Brands.

TWE delivered an 11% uplift in EBIT for FY23, underpinned by strong growth in Penfolds that continued to benefit from favourable premiumisation trends across the wine category. Overall, Net Sales Revenue (NSR) per case improved 12.7%, reflecting a positive mix shift and price increases across several key luxury brands. TWE’s EBIT margin rose 2.9ppts to 24.1%, progressing towards its long-term Group target of 25%+. TWE reported cash realization of 61%, well below its target of 90% due to higher inventory build, however, the company does expect cash conversion to return to its long-term target in FY24. TWE’s balance sheet remains conservatively leveraged with Net Debt to EBITDA at ~1.9x in line with its through the cycle target.

While growth was driven by demand for luxury wine, this was partially offset by declines in volumes in the Americas and Treasury Premium brands segments. Volume declines were exacerbated in the commercial wine segment by destocking from retailers and distributors.

For FY24, TWE is well positioned to deliver high single digit growth, supported by further growth in Penfolds both in volume and price. A global supply chain optimization program should also deliver cost savings in FY24.

The potential relaxing of wine tariffs in China could provide a further catalyst to a re-rating in TWE’s valuation. TWE is trading on ~21x FY24, a discount to its 5-year average of ~23 times.

Buy SkyCity Entertainment (SKC)

  • SkyCity Entertainment (SKC) owns hotel and casino based integrated entertainment complexes in Auckland, Hamilton and Queenstown NZ and in Adelaide, Australia. The Group is dual listed on ASX and NZX.

  • SKC’s operational and financial recovery from COVID-19 shutdowns has progressed strongly. FY23 EBITDA at the high end of the guidance range with group operating earnings now exceeding like-for-like trading performance in FY19.

  • SkyCity’s balance sheet remains well-placed with ND/EBITDA at 1.5X and ample liquidity headroom of $593m. SKC trades on FY24 PE ratio of 11.8X and dividend yield of 5.9%.

Blackmore Capital Australian Equities Income Portfolio

We have also included SKC, PMV, and TWE in the Income Portfolio. In addition, we have sold our position in Integral Diagnostics (not a position held in the Blended portfolio)

Sell Integral Diagnostics (IDX)

Integral Diagnostics (IDX) recorded organic revenue growth of ~7.0% in FY23 supported by improving trends in both volume and positive price mix. However, the quality of the result was diluted by higher debt levels combined with higher net interest costs of $18.4m. For FY23 Net Debt was $194m compared with $101m in FY22. The material rises in both Net Debt and interest expense impacted Net Profit After Tax (-17.6%) and Earnings Per Share (-26%). IDX expect that leverage will reduce to 2.5x (FY23 2.9x) by the end of FY24 as result of improved earnings. While IDX remains well placed to grow its underling earnings, the ongoing impact of higher finances costs will limit the upside in dividend growth.


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