TOP 5 ASX High Yield Dividend Stocks Report

Veye Pty Ltd | 14-SEP-2023

1. BHP GROUP LTD

TEAM VEYE | 14-SEP-2023 ASX – BHP

BHP Group Limited stands as a prominent Australian resources corporation, specializing in the extraction and production of vital commodities such as iron ore, copper, nickel, potash, and metallurgical coal. The company’s extensive operations extend across multiple continents, encompassing regions in Australia, Europe, China, Japan, India, South Korea, and the Americas. BHP plays a pivotal role in supplying essential resources that serve diverse industries, including those focused on renewable energy, electric vehicles, sustainable farming, and steel production

Stock Performance Profile:

(Source: Trading View) Five-Year Performance of BHP compared with ASX-All Ordinary Index (XAO) and Basic Material Index(XMJ)

From the Company Reports:

Financial Matrices with Commentary:

In its FY23 financial report, released on 22 August 2023, BHP Group Limited demonstrated a resilient performance. Notable highlights include a 1% increase in iron ore production, a significant 9% uptick in copper production, and a 4% rise in nickel production, underlining its ability to meet growing demand for these crucial commodities. The company reported robust financials, with a total revenue of US$53.8 billion and a solid EBITDA of US$28.0 billion, maintaining a healthy EBITDA margin of 54%. BHP’s underlying attributable profit reached US$13.4 billion, indicative of a profitable year.

(Source: Company Reports)

While generating a substantial net operating cash flow of US$18.7 billion, the company allocated US$13.1 billion towards strategic investments, notably the US$5.9 billion acquisition of OZ Minerals. This activity contributed to a net debt position of US$11.2 billion, primarily attributed to the acquisition. BHP expects this debt level to remain within the range of US$5 billion to US$15 billion in the near term.

(Source: Company Reports)

Additionally, the company reported a robust Return on Capital Employed (ROCE) of 28.8%, highlighting efficient capital utilization and profitability.

Ratio Analysis:

(Source: Company Reports)

The company has improved its efficiency as it has generated more turnover relative to its asset value this year, compared to that of 2019. Currently the company generates revenues a little over half of the asset value. A current ratio over 1 indicates that the company had more current assets than current liabilities, BHP has maintained a current ratio over 1 consistently since 2019.

(Source: Company Reports)

The company despite seeing its book value decline in relation to its price, seen through the rising P/BV ratio, has shown good progress in its revenues & profitability in relation to the price, as can be seen through the substantially declining P/S & P/E ratios. The EV to EBITDA ratio also showed some good signs as it rose from last year but still fell from its 2019 level. This mix of declining and rising ratios when seen in a bigger picture, given their magnitude, indicate improved value for the stock over the 5 year period as well as over the last 3 year period.

Dividend Profile:

(Data Source: asx.com.au) (Graphic: Veye Research)

BHP Group has built a reputation for being a reliable choice for investors seeking consistent and low-risk investment opportunities due to its history of rewarding shareholders with regular dividends. Even during the challenging period of the Covid-19 pandemic, the company remained committed to its shareholders.In FY22, BHP Group declared a final dividend of $2.5518 per share, which was fully franked, showcasing its commitment to providing returns to its investors. In FY23, the company reported a final dividend of US$4.1 billion, bringing the total cash returns to shareholders announced for the year to US$1.70 per share, fully franked, with a fully franked final dividend of US$0.80 per share. This final dividend exceeded the minimum 50% payout requirement by a significant margin, with a 59% payout ratio.By issuing such a substantial interim dividend, BHP Group not only highlights its robust financial position but also its ability to generate ample cash flows. This not only reflects the company’s profitability but also underscores its dedication to rewarding shareholders for their investment.Investors who prioritize dividend income may find BHP Group’s dividend announcement highly appealing. The generous payout ratio and the size of the dividend payment exemplify the company’s commitment to providing attractive returns to its shareholders, solidifying its position as a dependable choice for income-focused investors.

Peer Analysis:

(Source: Refinitiv, Thomson Reuters)

BHP Group offers a compelling investment proposition, underpinned by a range of robust financial indicators. To start, its price-to-earnings (P/E) multiple of 11.38x is notably favorable when compared to major industry peers, suggesting an attractive valuation. This indicates that investors are willing to pay a reasonable price for the earning potential of BHP, enhancing its investment appeal.Furthermore, BHP’s debt-to-equity ratio stands at a healthy 46%, demonstrating a well-balanced mix of debt and equity in the company’s capital structure. This moderate debt level positions BHP well to effectively manage its financial obligations and mitigate risks, which adds to the overall attractiveness of the investment.BHP’s impressive return on equity (ROE) of 28.99% highlights the company’s efficient use of shareholders’ equity to generate profits. Moreover, BHP’s dividend yield of 5.84% significantly surpasses that of its industry peers. This suggests that shareholders can anticipate substantial returns on their investment through dividend payments, making BHP an especially appealing option, particularly for income-focused investors.

Industry Analysis:

The demand for commodities in the developed world has been substantially sluggish due to the impact of inflationary measures taken to tackle the risk of inflation and the energy crisis. While the energy crisis has faded, the lag effect of higher interest rates will suppress economic growth in the developed world in FY2024. Though, the demand has been in tact in China and India. The Chinese economy has been volatile since the Zero-Covid policy was eased in December 2022. The March quarter experienced a better than anticipated recovery in a range of sectors key to commodity demand, building expectations for a strong year overall. However, that momentum slowed down fully in the June quarter, particularly in the steel-intensive real estate sector, whereas copper-intensive sectors like automobiles, power machinery, consumer durables, and the electricity grid have realized strong growth. The demand in India has been more balanced, where investment momentum is in place and commodity demand has been robust. The Indian economy has healthy momentum as the country moves towards a general election, which is expected to be held in the first half of 2024.

Risk Analysis:

Investing in BHP Group carries risks related to geological factors, regulatory changes, and geopolitical uncertainties that can affect its operations and financial performance. Commodity price fluctuations, operational challenges, and environmental considerations are also key risk factors.

Outlook:

Copper: BHP Group Limited’s acquisition of OZL has affirmed the copper-rich South Australia province. The addition of the Prominent Hill and Carrapateena operations, in conjunction with Olympic Dam and the potential Oak Dam development is anticipated to unleash the potential for an increase in volumes and value in the province. Antamina has applied for environmental approval for a project life extension until 2036, from 2028.

Iron ore: At WAIO, the company places a high emphasis on ramping up annual production to greater than 305 Mt over the medium term. Currently, the company is undertaking studies’ for the further growth target of the WAIO business to 330 Mtpa and expects to accomplish these studies in CY2025.

Coal: The Company’s strategic goal is to focus on producing higher-quality metallurgical coal. The company’s retained NSWEC in their portfolio will seek the relevant approvals to continue mining beyond the current consent that expires at the end of FY2026.

Nickel: To support growing demand for nickel in the battery market, Nickel West is assessing options for a major smelter renewal project, which could potentially process more nickel from northern mining operations. The additional drilling and the addition of West Musgrave have led to a 36% increase in nickel resources.

Potash: The Company expects that potash stands to benefit from the intersection of global megatrends such as rising population, changing diets, and the need for a more sustainable intensification of agriculture on finite arable land.

Production Guidance:

Production Guidance for Copper: FY2024e: 1,720–1,910 Mt

Production guidance for iron ore: FY24e: 254–264.5 Mt

Production guidance for nickel: FY24e: 77–87 kt

Technical Analysis:

The stock has displayed several bullish signals across different time frames:

Monthly Chart:

The stock price has consistently remained above the $42.75 level, indicating strong support at this price point.

A double bottom formation at $42.75, followed by a bullish candle, suggests a reversal pattern with bullish momentum.

Trading above the previous month’s close is another positive sign for bullish sentiment.

The stock is trading above its Exponential Moving Averages (EMAs), which is often considered a bullish signal.

Various indicators are pointing upwards, further supporting the bullish outlook.

Weekly Chart:

On the weekly chart, the stock price is trading above the 14-day and 50-day EMAs, which is typically seen as a bullish indication.

Being above the middle Bollinger Bands on the weekly chart is also seen as a bullish sign.

Indicators are turning upwards, reinforcing the bullish momentum.

Overall, both the monthly and weekly charts suggest a bullish trend for the stock, with various technical indicators aligning in favor of further price appreciation. This analysis indicates a positive outlook for the stock in the medium to long term.

Veye’s Take:

BHP Group Limited has continued to strengthen its portfolio for future-facing commodities through high-potential exploration projects, equity investments, joint ventures, and farm-in agreements. Greenfield mineral exploration was undertaken during the year to advance copper targets in Chile, Ecuador, Serbia, Peru, Canada, Australia, and the United States. Nickel targets were advanced in Canada and Australia. The company seamlessly progressed activity at Ocelot, BHP’s recently identified copper porphyry mineralized system in the Miami-Globe copper district of the United States. BHP also signed a sales and purchase agreement for Ragnar Metals’ Sweden operations, gaining access to drill-ready nickel programs. These will be further advanced during FY 2024. The company also continued its strategy of partnering with mining companies focused on early-stage copper and nickel projects, with additional investments made during the year in Brixton Metals, Midland Exploration, Filo Mining, and Kabanga Nickel. At Copper South Australia, the companies published an exploration target at Oak Damxiv and have initiated the next phase of drilling. The company has a set target of increasing the number of drilling rigs and establishing core processing facilities. The balance sheet and capital position remain sound, providing the company with important financial flexibility with adequate cash and cash equivalents. The company has maintained healthy margins and a profitable track record. The valuation metrics remain favorable, such as a ROE of 29%, a P/B of 3.37 times, and P/Sales of 2.79 times. Other fundamentals are also quite justifiable. Veye recommends a “Buy” on “BHP Group Limited” at the closing price of $44.140 (As of 14 September 2023).

*All Data has been sourced from Company announcements and Refinitiv, Thomson Reuters.

2. METCASH LIMITED

TEAM VEYE | 14-SEP-2023 ASX – MTS

Metcash Limited is an Australian-based company specializing in wholesale distribution and marketing. The company’s primary focus is on supplying and providing support to various businesses within the food, liquor, and hardware sectors. Metcash operates through three distinct segments: Food, Liquor, and Hardware. The Food segment involves the distribution of a wide range of products and services to independent supermarkets and convenience retail establishments. The Liquor segment is responsible for distributing liquor products to independent retail outlets and hotels. Lastly, the Hardware segment is involved in distributing hardware products to independent retail stores, as well as managing company-owned retail locations. Under its Independent Brands Australia (IBA) business, Metcash manages national independent retail brands such as Cellarbrations, The Bottle-O, IGA Liquor, Duncans, Thirsty Camel, Big Bargain, and Porters. Across its operations, the company oversees approximately 1,612 supermarket retail stores, 3,035 liquor retail outlets, and 734 hardware retail stores.

Stock Performance Profile:

(Source: Trading View) MTS Five-Year Performance Compared With ASX-All Ordinary Index (XAO).

From the Company Reports:

(Source: Company Reports) Group Performance
(Source: Company Reports) Segment Performance

Metcash Limited (ASX: MTS) has unveiled robust financial outcomes for the fiscal year that concluded on 30 April 2023. Despite grappling with the complexities associated with escalating interest rates and the mounting cost of living, the company has achieved remarkable sales and earnings figures. The aggregate revenue of the group surged by 6.2%, soaring to $15.8 billion. This figure extends to $18.1 billion when accounting for charge-through, indicating a 5.7% escalation compared to the preceding year.

The company’s fundamental Earnings Before Interest and Taxes (EBIT) exhibited a growth of 8.1%, reaching an impressive $500.8 million, showcasing a steady expansion trend over the past three years. The Food division showcased commendable performance by registering a 3.8% elevation in EBIT during the year, contributing to a cumulative expansion of 11.7% over the span of three years. The Hardware segment stood out with exceptional earnings advancement, recording an additional 16.8% increase in EBIT, culminating in an extraordinary 160.3% cumulative growth over the same three-year duration. The Liquor sector likewise surpassed expectations, presenting an 8.9% surge in EBIT and a cumulative growth of 43.0% over three years.

The underlying profit after tax experienced a 4.6% uptick, amounting to $307.5 million, whereas the statutory profit after tax witnessed a 7.6% climb, reaching $259.0 million.

(Source: Company Reports) (Graphic: Veye Research)

The underlying earnings per share showcased a 6.4% elevation, now standing at 31.8 cents, a testament to the company’s consistent expansion over the past three years. Impressively, Metcash demonstrated a robust operating cash flow of $372.7 million, particularly bolstered by a resilient performance in the second half of the fiscal year.

In terms of financial health, the net debt at the conclusion of the fiscal year reached $349.6 million, representing an increase from the prior year’s $189.0 million. The company boasts considerable untapped resources, including fresh Sustainability Linked Finance facilities amounting to $525 million, signifying flexibility for prospective investments and avenues for growth.

(Source: Company Reports) (Graphic: Veye Research)

MTS has shown remarkable progress in its financial performance, evident through its enhanced Return on Equity (ROE) and Return on Invested Capital (ROIC) metrics. From 2022 to 2023, the company’s ROE surged from 20.8% to an impressive 24.1%, indicating a substantial improvement in profitability and efficient utilization of shareholders’ equity. Additionally, the ROIC saw growth, climbing from 11.7% in 2022 to 12.0% in 2023, signifying the company’s commitment to optimizing its capital utilization and generating better returns on its invested resources. These advancements highlight MTS’s effective capital management and strategic approach to achieving enhanced financial performance, making it an appealing option for investors seeking sustainable growth and positive returns on their investments.

Metcash Limited has announced encouraging sales growth in the initial seven weeks of the fiscal year 2024. Specifically, within the Food segment, there was a notable uptick of 6.8% in sales (excluding tobacco), which can be attributed to robust demand observed in both Supermarkets and Convenience businesses. Furthermore, Wholesale sales in Supermarkets displayed a commendable increase of 6.9% (excluding tobacco).

Turning to the Hardware division, there was a substantial rise of 5.0% in total sales, primarily propelled by a sturdy demand observed in IHG (Independent Hardware Group) and Total Tools.

The Liquor segment also witnessed growth, with sales experiencing a 1.2% upswing. This increase was driven by heightened retail sales, though it was partially counterbalanced by a marginal decline in on-premise sales.

These positive sales metrics reflect Metcash’s ability to tap into strong consumer demand across various sectors, paving the way for promising prospects in the ongoing fiscal year 2024.

Dividend History:

(Source: Company Reports)

Metcash’s commitment to delivering value to its shareholders is underscored by its recent announcement of an approximately 5% increase in dividends for the entire fiscal year. This upward trajectory has culminated in a cumulative dividend of 22.5 cents per share, reflecting the company’s dedication to rewarding its investors. Impressively, this dividend growth trend over the past three years has been remarkable, showcasing an impressive 80.0% increase.

Supporting this commitment is Metcash’s prudent dividend payout ratio, which stands at around 70% of its Underlying Net Profit After Tax (NPAT). This strategic approach ensures that a substantial portion of the company’s earnings is returned to shareholders in the form of dividends, aligning with the interests of investors seeking consistent returns.

Forecasted Matrices:

(Source: Refinitiv, Thomson Reuters)

Metcash Limited’s outlook for the forecasted period from FY24 to FY26 presents promising advancements across various financial metrics, enhancing its attractiveness to potential investors. The projected decreases in key valuation ratios, including EV/Revenue, EV/EBITDA, and PE multiples, signify positive shifts in the company’s valuation and the potential for increased revenues and earnings. This favorable outlook could make the stock more appealing to investors seeking growth opportunities.

Specifically, the EV/Revenue ratio is expected to improve from 0.29x in FY24 to 0.28x by FY25. This suggests that for every dollar of revenue generated, the company’s enterprise value is expected to decrease slightly, indicating potential growth in both revenue and overall valuation. Similarly, the projected improvement in the PE multiple to 11.59x by FY26 indicates that investors are willing to pay a higher price relative to the company’s earnings, reflecting positive expectations for earnings growth.

Furthermore, the forecasted increase in Free Cash Flow Yield from 1.17% in FY24 to 8.42% in FY25 points to improved cash generation in relation to the company’s market value. This signals a positive shift in the company’s ability to convert its operations into free cash flow, which can be reinvested or returned to shareholders.

Additionally, the anticipated lower Price-to-Sales, Price-to-Cashflow, and Price-to-Book Value ratios underscore a more favorable valuation compared to the company’s sales revenue, cash flow generation, and book value. These lower ratios suggest that investors may find the stock’s current price to be relatively attractive in relation to these metrics.

Taking all these positive forecasts into consideration, Metcash Limited’s financial performance appears promising and poised for growth, which has the potential to capture the interest of investors seeking opportunities in the market.

Industry Analysis:

In a constantly evolving market, distributors are feeling the heat to reset and recalibrate and adapt the latest wholesale distribution trends. The distributors are undergoing intense pressure to transform. Uncertain economic conditions, an influx of new competitors, and a talent shortage is driving them to find new ways to remain competitive and drive growth. Distributors are now reporting e-commerce sales accounting for 20% to 30% of total revenues, the trend that is likely to continue and even expand. Most wholesale distributors after overcoming their conventional ways have accelerated investments in technologies like data analytics and artificial intelligence to grow their business. Another disruption to the wholesale industry has come from online giants like Amazon, which have been instrumental in the growth of B2B marketplaces. Metcash, though having sound business fundamentals, is further supported by high employment, growing population and immigration and continued government investment in infrastructure and housing.

Risk Analysis:

Investing in MTS carries inherent risks that potential investors should carefully weigh. These risks encompass factors such as market volatility, competitive pressures within the wholesale distribution sector, regulatory changes affecting industries like food, liquor, and hardware, and potential disruptions in supply chains. Additionally, shifts in consumer preferences, economic fluctuations, and technological vulnerabilities could impact MTS’s financial performance.

Outlook:

Metcash Limited has a positive outlook as it has a significantly broader earnings base and a balanced portfolio of businesses, with Hardware now becoming largest EBIT contributor. Its outstanding three-year growth rates along with the company’s target network size of 130 stores by 2025 reflects its ambition to expand its retail footprint and further strengthen its market position. Metcash witnessed solid sales growth continuing in first seven weeks of FY24 reflective of demand across its segments. With sharp increase in interest rates and cost of living beginning to impact consumer confidence and the behaviour of some shoppers, the company is now sharpening its focus on ensuring that retailers remain competitive, and with options that provide the right value for shoppers.

Technical Analysis:

On the monthly chart, the stock has found support at the 200-day Exponential Moving Average (EMA), indicating a potential reversal point. Additionally, there is a recovery underway from the lower Bollinger Band, which suggests a potential rebound in prices. The key resistance level at $3.74 holds significant importance; a breach of this level could trigger further upward movement in the medium to long term. The Relative Strength Index (RSI) is recovering and positioned around 45, implying room for upside movement and supporting a bullish outlook.

Looking at the weekly chart, the stock has established a support level at $3.58, and for two consecutive weeks, it has rejected further downside movement. The current week’s candle is forming with downside rejection, indicating that bullish momentum is gaining strength to propel the price higher. The Moving Average Convergence and Divergence (MACD) is transitioning into a positive zone, adding further support to the bullish potential.

In both the monthly and weekly timeframes, the price pattern coupled with the upward positioning of indicators suggests a continuation of the upside momentum in the medium to long term.

Veye’s Take:

Metcash Limited, while maintaining strong sales is continuing with its earnings momentum. The company’s disciplined capital management supported strong returns through its period of investment. It offers an attractive investment proposition based on its robust performance, strong financial position and solid fundamentals in all pillars. The company has consistently achieved sales growth across its Food, Hardware, and Liquor segments, highlighting its market strength and ability to meet customer demand. It’s All pillars have continued to perform well with strong demand, fine execution of strategic initiatives and successful acquisitions. With a focus on expanding operational capabilities and distribution centers, Metcash is well-positioned for continued growth with larger, more diversified, and stronger platform. It has significant and growing pipeline of opportunities. Metcash has a track record of improving profitability and increasing dividends. showcasing its commitment to generating sustainable returns for shareholders. With a positive outlook supported by its strong market presence, and ability to adapt to changing market dynamics, Metcash has the potential to deliver long-term growth and sustainable returns. Veye recommends “Buy” on “Metcash Limited” at the closing price of $3.720 (As of 14 September 2023).

 

*All Data has been sourced from Company announcements and Refinitiv, Thomson Reuters.

3. WESTPAC BANKING CORP

TEAM VEYE | 14-SEP-2023 ASX – WBC

Westpac Banking Corporation is a prominent financial institution that operates across multiple sectors, offering a diverse range of financial services to its clientele. The company’s business is divided into distinct segments, each catering to specific customer needs. The Consumer Banking and Wealth segment predominantly serves individuals, providing services such as personal banking, investment advice, and wealth management. On the other hand, the Institutional and Business Banking segment caters to a wide spectrum of clients, including commercial, corporate, agricultural, and government customers, offering services like business loans, corporate banking solutions, and treasury management. The Financial Markets division specializes in trading and investment services, encompassing foreign exchange, interest rate derivatives, commodities trading, and energy trading. Additionally, the International Trade and Payments unit focuses on international trade solutions and cross-border payment products for businesses and institutions engaged in global transactions. Complementing these offerings, Westpac also provides telephone banking services, allowing customers to conveniently conduct transactions over the phone.

Stock Performance Profile:

(Source: Trading View) Three-Month Performance of WBC compared with ASX-All Ordinary Index and Australian Financial Market Index (XFJ)

From the Company Reports:

(Source: Company Reports)

During the third quarter of 2023, Westpac Banking Corporation’s Group net interest margin (NIM) was recorded at 2.06%. However, when excluding Notable Items, the NIM was slightly lower at 1.96%, a decrease of 2 basis points compared to the first half of 2023 (1H23). The deposit to loan ratio showed improvement, rising from 83.7% in March 2023 to 84.1% in the third quarter. This improvement was supported by significant customer deposit growth amounting to $8.7 billion. The loan portfolio also experienced growth, with an increase of $6.4 billion, primarily attributed to growth in owner-occupied mortgages and business lending.As of June 30, 2023, Westpac’s Level 2 common equity Tier 1 (CET1) capital ratio was 11.86%, which reflected a decrease of 42 basis points compared to March 31, 2023. This decline was primarily influenced by the payment of the 2023 interim dividend, an increase in total risk-weighted assets (RWA), and higher capital deductions, particularly related to capitalized software and other expenditures.In a year-over-year comparison, Westpac’s Level 2 CET1 capital ratio as of June 30, 2023, increased by a substantial 111 basis points compared to June 30, 2022. This positive change was attributed to factors such as earnings growth, reduced dividend payments, benefits from divestments, and a decrease in total risk-weighted assets. Total risk-weighted assets notably decreased by $18.0 billion or 3.8% since June 30, 2022. A significant portion of this reduction stemmed from a decline of $19.5 billion in credit risk-weighted assets, primarily due to the implementation of APRA’s revised capital framework. This framework led to a reduction of credit risk-weighted assets by $23.7 billion, contributing to a subsequent increase of 62 basis points in the CET1 capital ratio. Nevertheless, total risk-weighted assets increased by 1.6% since March 31, 2023, reaching a total of $460.0 billion.Westpac’s leverage ratio stood at 5.36% as of June 30, 2023, representing a 10 basis point decrease from March 31, 2023. The average Liquidity Coverage Ratio (LCR) for the quarter ending June 30, 2023, was 138%, reflecting an increase compared to the 135% reported on March 31, 2023. This increase was driven by higher average holdings of liquid assets, partially offset by an increase in net cash outflows. The Net Stable Funding Ratio (NSFR) for Westpac decreased from 123% in June 2022 to 118%, signifying an adjustment in the bank’s stable funding balance. The ratio of customer deposits to net loans showed a slight increase, rising from 83.7% in March 2023 to 84.1%, indicating a slightly higher reliance on customer deposits for funding relative to the bank’s lending activities.

Dividend Profile:

(Data Source: Asx.com.au) (Graphic: Veye Research)

Westpac Banking Corporation has established a commendable history of prioritizing dividend distribution to its shareholders, making it an attractive option for investors seeking consistent and increasing dividend income. The bank’s commitment to rewarding its customers is evident through its long-standing practice of offering annual cash dividends, comprising both interim and final dividends.In recent years, Westpac has demonstrated its dedication to maintaining and enhancing its dividend program. For instance, in the first half of the fiscal year 2022, the bank declared an interim dividend of 61 cents per share, followed by an increase to 64 cents per share in the second half of the same year. Impressively, this upward trajectory continued into the first half of 2023, with the bank declaring an interim dividend of 70 cents per share, showcasing an impressive growth rate of 15% compared to the previous year’s first half.Moreover, Westpac’s commitment to a sustainable dividend policy is evident in its targeted payout ratio range of 65% to 75%. This range indicates a balanced approach to distributing profits to shareholders while ensuring the bank retains an appropriate level of earnings for its operations and growth initiatives. The bank’s efforts to align dividend payments with sustainable earnings reinforce its reliability as an investment choice.

Peer Analysis:

(Source: Refinitiv, Thomson Reuters)

Westpac Banking Corporation stands out from its peers with notable financial metrics. With a P/E ratio of 12.21x, Westpac’s valuation is reasonably moderate compared to ANZ’s slightly lower P/E ratio of 10.6x. Macquarie Group Limited (MQG) demonstrates a slightly higher P/E ratio at 12.82x, while National Australia Bank Limited (NAB) maintains a P/E ratio of 12.2x.Westpac’s particularly appealing P/B ratio of 1.06x suggests potential undervaluation, indicating an opportunity for investors. Additionally, Westpac offers a healthy dividend yield of 6.29%, though slightly below ANZ’s 6.32%. Notably, both Westpac and ANZ surpass the dividend yields of MQG and NAB, underlining their commitment to providing attractive returns to investors.Taken together, these metrics present a compelling view of Westpac as a financially robust choice, offering competitive dividend yields. For investors seeking stable returns, Westpac’s financial stability and dividend potential make it an appealing option to consider.

Industry Analysis:

The Australian banking industry is consistently undergoing significant transformation. The emphasis is on providing convenience to the customer through Digitalization. Besides opening up further opportunities create value and improving customer experiences this is helping in optimising operational efficiency of the banking industry. With single click banking now the norm, banking industry is regularly going for technological advancements to efficiently implement their core strategies and introduce new products. There is increased focus on cybersecurity/cybercrime and personalisation and innovation.

Risk Analysis:

Wetpac Banking Corporation faces certain risks given as under:

Interest rate risk, since WBC is exposed to interest sensitive assets and liabilities any change can impact bank and/or its customers.

Credit Risk, Banks can face loan defaults from its customers due to economic downturns or unforeseen circumstances.

Regulatory Compliance. Banks must comply with certain rules and regulations. Failure to adhere to these can result in levying financial penalties and cause reputational damage.

Financial crime & Cyber Crime can result in data breaches and disrupt operations. Fluctuations in foreign currency

Outlook:

While Westpac Banking Corporation remains well-positioned to address challenges, its expenses for second half 2023 were up about 5% in comparison to 1H23. Surge in expense was driven by inflationary pressures, led by increased supplier costs, wages and salaries. It also included the investment in the Group’s technology and customer simplification agenda. The Group is carrying out to cost discipline with recent cost reset actions resulting in a full time equivalent employee reduction of approximately 2% for the second half 2023.

Technical Analysis:

On a monthly chart, the stock of Westpac Banking Corporation (WBC) is currently trading below its Exponential Moving Averages (EMAs) and also positioned below the middle Bollinger Band. Despite this, there appears to be a reliable support level holding steady at $18.72. This support level has proven effective in preventing further downward movement in the stock’s price.Examining the stock’s behavior on a weekly chart, a pattern of “lower lows” is evident, suggesting that the stock has been forming progressively lower troughs. This pattern, combined with indicators showing a downward turn, indicates the possibility of encountering minor dips before a potential trend reversal occurs. This implies that the stock might experience further downward movement before a shift in momentum leads to a potential change in trend direction.Transitioning to a daily chart, it becomes apparent that the stock’s price is approaching the oversold zone, a condition highlighted by the Relative Strength Index (RSI). This implies that, despite the signs of potential minor dips on the longer time frames, the oversold conditions on the daily chart point toward a possible upcoming reversal in the stock’s price.

Veye’s Take:

Westpac Banking Corporation delivered unaudited net profit of $1.8 billion for the third quarter 2023. The period was marked by resilient operating revenue, supported by continuing disciplined margin management. Expenses were impacted because of inflation leading to higher supplier costs and salary and wages. The deposit to loan ratio improved to 84.1% in the third quarter, boosted by customer deposit growth of $8.7 billion. Loans grew $6.4 billion primarily in owner occupied mortgages and business lending. Credit impairment provisions were $5.1 billion as at 30 June 2023, $1.5 billion higher than the expected losses of the base case economic scenario. The Group had resilient credit quality during 3Q23 while remaining well provisioned. It is in a strong financial position with capital, funding, and liquidity well above regulatory minimums. Veye maintains a “Buy” on “Westpac Banking Corporation” at the closing price of $21.620 (As of 14 September 2023).

*All Data has been sourced from Company announcements and Refinitiv, Thomson Reuters.

4. Kelsian Group Limited (ASX: KLS)

Kelsian Group Limited (ASX: KLS) (“Kelsian”), on 15 March 2023 announced having entered into a binding agreement to acquire 100% of All Aboard America! Holdings Inc. (“AAAHI”). AAAHI is a prominent provider of passenger motorcoach services to corporate, government, education, Liquefied Natural Gas, and tourism sector customers in the USA.

The Acquisition Enterprise Value was US$325 million (A$487 million), in addition to the assumption of US$26 million (A$39 million) of lease liabilities. This corresponds to about 6.9x, EV / pro forma normalised EBITDA for the 12 month period ending 31 December 2022.

For Kelsian, the Transaction is expected to be upper single digit EPSA accretive in pro forma CY22 before any bonus adjustment for the Entitlement Offer and prior to the impact of one-off transaction costs.

On 23 February 2023, Kelsian Group Limited reported its half year results for the six months ended 31 December 2022 (1HFY23).

The group reported revenue increasing by 6.2% to $678 .3 million. This was driven by a rebounding domestic tourism which eventually led to strong growth in the Marine and Tourism business.

Its underlying NPAT at $26.5 million grew by 21.6%, while the underlying Net Profit After Tax and before Amortisation of $35.0m, was up 5.1% on the prior year

The group’s underlying EBIT (after adjustment for one-off costs related to M&A) surged by 17.8% to $44.9 million in spite of a prevailing inflationary environment. The company maintains a strong balance sheet regularly and cash flows, have supported the release of a fully franked interim dividend of 7.5 cents per share, (1HFY22: 7.0 cents per share);

Outlook:

Kelsian Group’s recent result has demonstrated the highly defensive nature of its contracts, with most of these providing a natural hedge in an inflationary environment with indexation for fuel prices, wages, and CPI. Domestic tourism is rebounding leading to a growth in revenue for the Marine and Tourism division to $167.5 million. This further reflects the benefits of its diversified businesses. The acquisition of AAAHI offers the group an entry point into the large and attractive USA market. AAAHI being an established, highly regarded, customer-centric operator with a multi-state footprint provides Kelsian with a head start.

Value Proposition:

In terms of profitability, Company Kelsian has seen ROE increase from 6.95% in 2H 2021 to 9.28% in 2H 2022. The valuation multiples P/E improved from 48.97 in 2H 2021 to 20.96 in 2h 2022 and P/B improved from 3.40 in 2H 2021 to 1.95 in 2h 2022 to be in the desired range, demonstrating the improvement in the financial performance of the company.

Technical Analysis:

The stock, reversing from lower Bollinger band has gained good momentum. Moving above its EMAs (Exponential moving average) on both daily and monthly charts it is in the process of completing inverse H & S formation on the monthly chart, indicating further bullishness. Since it is well protecting its supports on both daily and monthly time frame with MACD (Moving average convergence and divergence) getting ready to crossover, it can have the potential of accelerating its momentum.

Veye’s Take:

Kelsian Group delivered a solid result exhibiting the benefits of long-term, low-risk government-backed service contracts, providing a consistent predictable earnings base. The acquisition of AAAHI, which is likely to be completed before 30 June 2023 could provide an immediate advantage to Kelsian as it is the 4th largest motorcoach operator in the USA, with a decentralised operating model servicing corporate, government, education, LNG, and tourism sector customers. AAAHI, which comes with a platform of six geographically diversified, highly regarded brands with strong cultural alignment operating in seven states has a diversified revenue mix. Having a loyal customer base of over 2,000 customers, it achieves high levels of contract renewals and recurring revenue. Besides diversifying Kelsian’s multi-modal operations across four countries, it has an attractive financial profile with around 85% in recurring revenue, a track record of earnings growth and strong cash flow conversion. Kelsian can get a natural advantage and continue to grow at an accelerated pace even in the short term. Veye maintains “Buy” on “Kelsian Group Limited” at the closing price of $6.000 (As of 14 September 2023).

*All Data has been sourced from Company announcements and Refinitiv, Thomson Reuters.

5. South32 Limited

TEAM VEYE | 14-SEP-2023 ASX – S32

South32 Limited is a mining and metals company with a diverse range of operations across multiple segments. These segments include Worsley Alumina, Brazil Alumina, Brazil Aluminium, Hillside Aluminium, Mozal Aluminium, Sierra Gorda, Cannington, Hermosa, Cerro Matoso, Illawarra Metallurgical Coal, Australia Manganese, and South Africa Manganese. The company’s activities span various regions, including Australia, Brazil, South Africa, Mozambique, Chile, the United States, and Colombia. South32 is involved in bauxite mining, alumina refining, aluminum smelting, copper mining, silver, lead, and zinc mining, base metals exploration and development, nickel production, metallurgical coal mining, and manganese mining. With its extensive portfolio of operations, South32 plays a significant role in the mining and metals industry, contributing to the global supply of key commodities.

Stock Performance Profile:

(Source: Trading View) One-Month Performance of S32 compared with Australian-All Ordinaries Index (XAO) and Basic Materials Index (XMJ)

From the Company Reports:

On 8 May, 2023, South32 Limited (ASX / LSE / JSE: S32; ADR: SOUHY) (South32) delivered a confirmatory statement, reporting that the 100% owned Hermosa project, situated in Arizona, United States, has been confirmed by the US Federal Permitting Improvement Steering Council, which is an independent federal agency body, as the first project to be added to the FAST-41 process and scored well in recognition of the project’s potential to supply critical minerals in the local provinces of the US.

Later, to qualify for the FAST-41 process, the project must undergo several tests to justify its worth to the nation, while the Premier Hermosa project currently has enough strength to accommodate two critical minerals: zinc and manganese. Updates from the quarterly report of March 31, 2023

Copper equivalent production surged by 7%, following the investment made in achieving strong growth and additionally comprising an increasing share of low-carbon aluminum in the portfolio.

The resurgence in commodity prices drove materializing price realization benefit Q-O-Q for the hard coking coal and manganese products in the given market demand; Manganese ore production has risen by 6% Y-O-Y, with Australia achieving its highest ever manganese production.

Aluminum production ramped up by 15% from the combined realization benefit received by ownership in ‘Mozal Aluminium’ and ‘Brazil Aluminium’ mainly contributed to a 6% production hike.

Financial Matrices with Commentary:

(Source: Company Reports)

During the first half of the financial year 2023 (H1 FY23), S32 faced a challenging business environment, witnessing a decline in revenue to US$3,696 million, which represented an 8% decrease compared to the previous corresponding period (PCP). The company’s profitability was significantly impacted, as evidenced by a notable 34% decrease in profit after tax, resulting in a total of US$685 million.

Despite the difficulties, S32 was able to maintain a commendable group operating margin of 31.5%. The company reported underlying EBITDA figures of US$1,364 million. Furthermore, the underlying earnings amounted to US$560

In terms of cash flow, S32 generated US$127 million in free cash flow during H1 FY23. However, the company also had a net debt of US$298 million as of 31 December 2022, indicating its existing financial obligations.

Despite the challenges faced, S32 prioritized its shareholders’ interests, as evidenced by returning US$927 million to them during the first half of the financial year 2023. This return suggests the company’s commitment to rewarding its investors amid the uncertain market conditions.

Dividend Profile:

(Data Source: asx.com) (Graphic: Veye Research)

The Company has exhibited a positive dividend performance over the past five years, indicating a commitment to returning value to its shareholders. In the fiscal year FY22, the company declared a final dividend of 257 US cents per share, fully franked. This dividend payout represents ~54% of the underlying net profit after tax (NPAT), highlighting the company’s profitability and ability to distribute earnings to shareholders. With a full-year dividend yield surpassing 8%, South32 Limited demonstrates its dedication to delivering attractive returns to shareholders while also maintaining a strong balance sheet.

Forecasted Matrices:

(Source: Refinitiv, Thomson Reuters)

S32 foresees a decline in EV/Revenue from 1.5x in FY24 to 1.48x by FY25, while EV/EBITDA is projected to decrease from 4.8x in FY24 to 4.26x in FY25. The company expects an improvement in its PE multiple from 10.46x in FY24 to 8.38x by FY25. Additionally, S32 aims to increase its FCF yield from 10.66% in FY24 to 12.5% by FY25. Furthermore, the company plans to enhance its profitability metrics, with ROA anticipated to rise from 9.12% in FY24 to 10.33% and ROIC from 12.2% in FY24 to 13.5% by FY25. These projections demonstrate the company’s positive outlook and potential for growth in the specified fiscal years.

Peer Analysis:

(Source: Refinitiv, Thomson Reuters)

S32 stands out among its peers with a significantly lower PE ratio of 5.46x compared to PLS at 9.14x, MIN at 19.24x, and IGO at 14.72x. This suggests that S32’s stock is relatively undervalued compared to its industry counterparts, potentially making it an attractive investment option. Moreover, S32 exhibits a conservative Debt to Equity ratio of 17.6%, which is lower than MIN’s high ratio of 88.9% but slightly higher than PLS at 12.6% and IGO at 18.8%. This indicates S32’s relatively lower reliance on debt to finance its operations compared to MIN but also implies it has a slightly higher debt burden compared to PLS and IGO.

Furthermore, S32’s dividend yield is notably higher at 8.21% in comparison to its peers, with PLS offering a dividend yield of 2.16%, MIN at 3.03%, and IGO at 1.17%. S32’s generous dividend yield suggests a commitment to returning value to its shareholders and may attract income-oriented investors seeking higher dividend payouts.

Overall, when considering its low PE ratio, moderate Debt to Equity ratio, and generous dividend yield, S32 appears to be an appealing investment option with favorable valuation metrics and attractive returns for potential investors compared to its industry peers PLS, MIN, and IGO.

Industry Analysis:

South32 operates in the metal and mining industry; it produces commodities and develops natural resources. These critical minerals and metals are important for EV (Electric Vehicle) market’s growing demand. The global shift towards renewable energy and EVs affects the demand for South32’s coal and other fossil fuel-related products. It operates in a highly competitive market, competing with companies like RIO Tinto, Latin Resources, BHP, Glencore, Anglo-American, and Vale globally. It has diversified itself in North and South America, Australia, and South Africa and has partnerships with junior explorers around the world.

Australia is a leading global player in the metals and mining industry. The country is abundant in natural resources and metals and mining is a significant contributor to its economy generating export based revenues. Value added by the metal ore mining industry is $151.59 Billion and the total income of the metal ore mining industry is $222 Billion. The growth rate expected of the Mining and Metals industry in Australia is 3.7% till year 2025. The metals and mining industry faces increased scrutiny and regulatory challenges related to environmental sustainability, carbon emissions, and mining practices.

Risk Analysis:

Geopolitical events directly impact mining and metals companies as prices are impacted by such events. High inflationary pressures, changing global demand, environmental concerns, and rising commodity prices are some of the other risks South32 faces. This industry is highly sensitive to a shortage of labor or skilled workforce since it is a labor-intensive industry. Supply chain disruptions in recent years, though peaked but still pose a risk to the highly dependent segment. The higher capital required for exploration and development is a going concern for metals and mining companies.

Outlook:

The South32 is well poised, portraying a better outlook as the capital allocation is headed for the next generation of mines with over 25 more exploration opportunities ahead. The next phase of growth is expected to materialise from the development options available in North America.

The Hermosa project is the most advanced one and has the immense potential to produce two different critical minerals with differentiated development options: one is the Taylor zinc-lead-silver deposit with an objective of 20 years plus resource life in the first quartile of the cost curve. The feasibility study and FID are expected to commence in 2HCY23, and the other is the Clark battery-grade manganese zinc-silver deposit, where Pilot plant production commenced, started decline construction in 2H CY23, and is under discussion with potential customers to supply battery-grade manganese in North American markets.

The regional resource growth potential: highly prospective regional land package availability with copper and base metal targets

Guidance FY-2023

The production was downgraded in the March 2023 quarter because of adverse weather conditions and other temporary obstacles. The company is on track to achieve FY23 production guidance at the majority of their operations, FY2023 Operating unit cost guidance to remain as it is, and Capital expenditure guidance is unchanged. The company has been well directed to provide efficiencies to reduce cost pressures.

Mozal Aluminium reduced output; for FY 2023, the production guidance is revised to lower output by 8%.

Sierra Gorda resulted in strong volume growth in copper and affirmed that it was on track to achieve FY23 production guidance.

Cerro Matoso nickel production is unchanged, with FY23 production guidance lowered by 7%.

Cannington’s FY23 production guidance was revised down by 6%.

Australia Manganese produced 6% more year-to-date in volumes, underpinning a 3% increase under the FY23 production guidance.

South Africa’s manganese production level has increased by 5% year to date and is on track to achieve FY23 guidance.

Illawarra Metallurgical Coal’s: Downsizing by 7% in FY23 production guidance.

Technical Analysis:

The stock is exhibiting several bullish signals and showing signs of potential upward momentum. Here is a summary of the observations from each time frame:

Monthly Chart:

The stock had been trading in a negative zone since April 2023, but it has now shown signs of reversal.

It has completely rejected further lows and engulfed the previous month’s candle.

The stock is trading near its high, indicating strength in the upward movement. The indicators are turning upside, further supporting the bullish momentum.

Weekly Chart:

The stock has recovered from the lower Bollinger band, a potential sign of a bounce-back.

 

Support has been maintained at the 200-day Exponential Moving Average (EMA), indicating a strong underlying support level.

The stock is currently trading at the 14-day EMA, which can act as a dynamic support level.

The indicators are positioning upside, signaling a continuation of the bullish trend.

Daily Chart:

The stock is trading above the 14-day and 50-day EMAs, suggesting strength and positive momentum.

The indicators are well-supported, further bolstering the bullish potential.

Overall, the price movement in all time frames is rejecting the downside, and the indicators are supportive of a bullish scenario.

Veye’s Take:

The South32 augurs well for the higher production volumes anticipated to be accomplished in FY 2023, with operation costs and capital expenditure guidance largely remaining stable. A significant milestone has been achieved as the advanced Hermosa project contains immense potential to develop and supply two critical minerals in the local provinces of the US to benefit the nation. Currently, the company is pursuing an integrated permitting strategy for our Taylor and Clark deposits, which are both placed locally. The requisite need at the current juncture is only for the final approval, which is still awaiting state and federal approval. So far; the company has secured all required permits to finish the critical path dewatering activity, which will give access to both the Taylor and Clark deposits, and the second water treatment plant. The company demonstrated strong fundamentals through its buyback strategy to justify adequate cash on hand on the balance sheet. The company is committed to reorienting its portfolio towards commodities critical to a low-carbon future. Veye recommends a” Buy” on “South32 Limited” at the closing price of $3.250 (As of 14 September 2023).

*All Data has been sourced from Company announcements and Refinitiv, Thomson Reuters

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