Macquarie Group (MQG)
MQG announced plans today to raise $1.0bn via a non-underwritten Institutional Placement (~8.4m shares to be issued, ~2.5% of total existing shares on issue). This is in addition to an associated Share Purchase Plan that is subject to potential scaling. MQG expects net capital investment of around $1.6bn in 2Q20: (a) $1.0bn within Macquarie Capital (renewables, technology and infrastructure) and significant wind farm investments; and (b) $0.6bn within Commodities and Global Markets to satisfy APRA’s ~$0.6bn capital requirement for counterparty credit risk exposures. The capital raising will enhance MQG’s flexibility to invest in projects with attractive risk adjusted shareholder returns and maintain appropriate regulatory capital levels.
MQG also provided a limited trading update. 1H20 result is expected to be up ~10% (~$1.44bn vs. BP previous forecast of ~$1.53bn) on the 1H19 result ($1.31bn), although down on the 2H19 result ($1.67bn) that benefited from higher markets-facing business contributions. However, MQG has reaffirmed its FY20 guidance of being “slightly down on FY19” (we take this to mean down by 1-2%, all else being equal and subject to the usual caveats) and the short and medium term outlooks. Today’s guidance implies MQG is still expecting FY20 statutory NPAT in the $2.90-2.95bn range (vs. $2.98bn in FY19) and this compares to our ~$2.97bn forecast.
Our estimates are broadly unchanged and we have maintained MQG’s $140.00 price target (with the expected capital dilution offset by valuation time creep). The buy rating is also maintained and our positive view is supported by the Group as a long term "Cash and Growth" story. MQG's other competitive advantages include a strong balance sheet, proven risk management framework and culture, expertise in annuity style and markets-facing segments, cost discipline, sector leading ROE, adaptibility to changing market conditions and access to value-adding global growth options.
Afterpay Touch Group (APT)
APT is onto a winning formula as the key innovator in the Buy Now and Pay Later space, dominating many of the high-value consumer areas with rapid growth across its key markets. The US has passed 2m active users, the UK is off to a flying start surpassing 200,000 users within a quicker timeframe than the US when it started. ANZ closed the period at 2.8m active users, with the segment breakdown showing the division delivered EBITDA of $87.0m, up $43.4m vs pcp.
APT confirmed a new partnership in the US, with VISA and Afterpay to jointly pursue the development of innovative new solutions to help with user experience, efficiencies and product. The company will provide more detail when they are closer to launch, but rather than working against Afterpay, VISA has decided to collaborate instead, highlighting how important a player Afterpay is becoming in the payments space.
The FY19 result delivered underlying EBITDA of $28.7m, vs our ~$25.0m estimate. Our EBTDA estimate was $14.1m, which includes the interest expense relating to the receivables book. Elsewhere in the result the key items appear to be moving in the right direction, with loss rates down, and the NTM improving. However we caution that with a changing business mix and heavy investment occurring, it is hard to forecast short-term earnings, but we remain confident in the overall trajectory of the business.
Following APT’s trading update, we have upgraded our underlying active customer estimates by between 13.5% – 26.7% over the forward estimates, while we have upgraded our underlying EPS by 7.2%, 4.2% and 8.2% for FY20, FY21 and FY22 respectively. The earnings revision is driven by higher customer growth and Total Transaction Value (TTV) estimates, and offset to a degree by higher cost estimates. We note that our CLV valuation methodology prioritises customer growth, particularly where gross margin and retention rates are healthy. Following these changes our revised price target is $38.41 per share (previously $31.76), with our Buy recommendation remaining unchanged.
IOOF Holdings (IFL)
IFL has bitten the bullet and joined the remainder of its peers with its first serious step at provisioning for client refunds. IFL has only gone back seven years, and used an estimate based on a spot review of files that went back three years. The company noted assumptions were made in determining its current provision figure. We believe it is a reasonable start, but anticipate more to come over the years ahead. Keep in mind some of IFL’s peers are refunding up to 10 years, and include advisers which have left, whereas IFL has started with a specific cohort.
Outside of the provisions, IFL hinted at a revamp of its advice business, but wouldn’t provide any cost or timing expectations. The problem for us remains the significant earnings gap being left by ANZ Notes winding down and our expectation the remaining P&I transaction won’t complete (we have ANZ related revenue and interest falling from ~$57m in 2H19 to ~$22m in 1H20). There is also an additional $10m in compliance costs, a remaining $8m impact from Stronger Super and $4m from BT Repricing all to hit FY20, and at some point $7m from Grandfathering Commission change coming as well (once legislation passes).
Following IFL’s FY19 update, we have downgraded our underlying EPS by -3.7%, -7.4% and -8.4% for FY20, FY21 and FY22 respectively. The revisions are primarily driven by lower revenue margin assumptions, higher costs and mark-to-markets. Following the changes our revised price target is $3.94 per share (previously $4.13 per share), with our Sell recommendation remaining unchanged.
Propel Funeral Partners (PFP)
PFP announced operating FY19 EBITDA of $23.8m, up 10.6% on pcp and in line with our $23.7m estimate. FY19 revenue of $95.1m was up 17.6% on pcp. Excluding $13.8m in acquired revenue, FY19 organic revenue edged up 0.5% vs pcp. This follows a market induced ~6% contraction in 1H19, implying a return to solid growth in 2H19. FY19 revenue was supported by a 2.8% increase in like-for-like average revenue per funeral (ARPF) and an improvement in death volumes in 2H19 (2H19 volumes up 3.6% vs -7.8% fall in 1H19). Including acquisitions, group ARPF was up 1.4% vs pcp. Between 1 May 2019 and 31 July 2019 PFP’s comparable funeral volumes lifted 8.5%, with July materially higher vs pcp. PFP’s operating EBITDA margin improved slightly from 24.8% in 1H19 to 25.3% in 2H19. We estimate PFP’s normalised margin to be ~27% based on current business mix and therefore see opportunity for further margin gains in FY20 if volumes continue to normalise.
In FY19 PFP announced the acquisition of Newhaven Funerals (QLD), Manning Great Lakes Memorial Gardens (NSW), Morleys Funerals (QLD) and multiple acquisitions in New Zealand including Dils Funeral Services (completion expected FY20), Martin Williams Funeral Directors, Waikanae Funeral Home/Kaitawa Crematorium and Howard & Gannon Funerals. Also post-FY19 PFP announced the acquisition of Gregson & Weight, the largest funeral services provider on the Sunshine Coast in Queensland.
Updating our forecasts for the result (including allowing for higher margins) and the Gregson & Weight acquisition increases our FY20/FY21/FY22 EPS by 12%/15%/11%. Including capex adjustments, our price target is revised to $3.56 (previously $3.54). We believe PFP remains well placed to consolidate the death care industry and hence retain our Buy rating.
Bega Cheese Ltd (BGA)
BGA reported FY19 underlying NPAT in line with expectations at $38.3m. Revenue of $1,420m was up +21%% YOY (vs. BPe $1,732m). Underlying EBITDA of $115.4m was up 5%% YOY (vs. BPe of $114.7m and guidance of $113-117m). Underlying NPAT of $38.3m was down 12% YOY (vs. BPe of $38.0m). Operating cashflow of $100.3m compared to $6.0m in FY18. Net debt of $287.3m compares to net debt of $245.4m at FY18 and guidance of ~$300m. BGA commenced utilising a recently opened receivable securitisation in 2H19 and this contributed $188m to operating cashflows.
There is no formal FY20e earnings guidance. However, management did note that margin pressure was likely to remain in place through FY20e due to ongoing drought induced competition for milk. Milk collections rose +41% YOY to 1.06BnL. Koroit contributed 308mL in FY19, with the organic milk pool held static at 750mL in a market that contracted 8-9% across BGA’s key catchments. In our view, winning milk supply at the bottom is critical to gaining operating leverage when seasonal conditions improve.
Following the result we have downgraded our NPAT forecasts by 7% in FY20e and 5% in FY21e. The changes principally reflect movements in commodity prices relative to our previous forecasts and updated milk flows by plant. We don’t believe current operating earnings of BGA are reflective of what the business is capable of generating under more normal seasonal conditions (BPe Normalised EBITDA $155-165m, inclusive of expanded lactoferrin capacity) upon which we base our target price of $5.50ps. We retain our Buy rating and see BGA as a key play on a normalisation of rainfall activity in eastern Australia and in particular the MDB.
MSB met with the FDA in late July’19 to discuss a definitive pathway for approval for Revascor for reduction of GI bleeding in LVAD patients with end stage heart failure. The meeting was positive and MSB has provided the key outcomes from it today. FDA has advised that MSB can conduct a single Phase 3 trial to confirm the benefits of Revascor in reducing mucosal bleeding events in LVAD patients (as demonstrated in the recently completed Phase 2b trial), to support marketing approval of the product. FDA has also confirmed MSB’s assertion that ‘reduction in major mucosal bleeding events’ is an approvable end point, allowing it to be the primary endpoint for this trial. ‘Improvement in various parameters of cardiovascular function’ will be key secondary endpoints.
In our view, FDA has provided MSB with a clear path to full approval, which also allows MSB time to scale up manufacturing in parallel to the Phase 3 program. Importantly, MSB has FDA agreement on the primary endpoint of reduction in bleeding, on which the Phase 2b trial demonstrated strong benefit and MSB can conduct a single pivotal trial to meet approval requirements (in line with other orphan indications).
We also note that MSB already has funding arranged for this trial. Recall, MSB has signed a MoU with InCHOIR, to run and fund this confirmatory trial. InCHOIR served as the central co-ordinating and data management arm (effectively like a CRO) for the NIH run and funded Phase 2b LVAD trial with Revascor. We expect the Phase 3 trial to be only slightly larger than the 159 patient Phase 2b trial and it could start by end of CY19, depending on how fast MSB signs the formal agreement with InCHOIR. Furthermore, MSB is in partnering discussions on Revascor and the clarification of path forward for the LVAD program and the upcoming results from the ongoing Phase 3 trial in advanced heart failure patients due to report in 1HCY20, will be key drivers of an outcome to these discussions.
No change to earnings pending MSB’s FY19 results (due on 30th Aug’19). We retain Buy (spec) and valuation of A$4.13/sh.