Moves to decarbonise and use cleaner energy across the globe should galvanise Sims as a high-grade processor of scrap

-Strong prices and intake somewhat offset by freight volatility and emerging inflation
-Could a carbon premium emerge for scrap versus pig iron?
-The prospects from decarbonisation key to the medium term outlook as steel markets peak
 

By Eva Brocklehurst

Sims ((SGM)) is riding a wave of industry trends including decarbonisation and cleaner energy, which have positive implications for scrap usage. Moreover, as countries currently spend money to boost their economies the demand for steel-intensive infrastructure remains high.

The company has guided to underlying first half earnings (EBIT) of $310-350m while scrap intake in the first quarter was up 10%, albeit still below comparable 2019 levels. Strong trading margins in ferrous and non-ferrous scrap in the first quarter were helped by robust pricing.

Citi observes strong market prices and sound margin management across all the company's businesses in the first quarter, which have been partially offset by volatility in freight pricing and emerging inflationary pressures.

North America was the highlight while Australasian margins were affected by weaker sales volumes given the impact of lockdowns. In the UK, margins and tonnage remain strong but affected by closures caused by the pandemic.

There may be a promising outlook for Sims structurally, yet Macquarie warns the risks in the ferrous complex are high, amid moderating prices, energy constraints on output and unreliable trading regimes.

Still, management remains positive about the continued expenditure to stimulate economies, particularly on steel-intensive infrastructure and Macquarie agrees the backdrop is favourable although success depends very much on the company's ability to capitalise on the trends.

Credit Suisse notes global scrap prices have rebounded by 15% to their June highs which is counter to a -4% drop in US steel prices. As a result, the broker increases the margins modelled for Sims in FY22 and upgrades earnings estimates by 9%, pushing out a reversion to the mean to FY24.

The value in securing scrap supply is evident in a number of US transactions, the broker points out, which provides a positive view for Sims. Credit Suisse questions whether a carbon premium for scrap over pig iron could emerge in 5-10 years.

On the broker's calculations: with 1.5t of carbon dioxide emissions avoided for each tonne of scrap used, EUR50/t for carbon would imply a EUR75/t premium and up to $240m in operating earnings (EBITDA) for Sims if it retains its FY21 gross profit margin of 21%.

Morgan Stanley updates ferrous and non-ferrous scrap prices and increases intake estimates while incorporating the acquisition of PSC Metals into SA Recycling and the $150m buyback. As a result estimates for earnings per share increase 27% in FY22 and 13% in FY23.

The broker points out the stock has traded at a -13% discount to the ASX200 industrials ex financials over the past three years and considers a -30% discount in its FY24 estimates appropriate, based on a lack of visibility regarding the earnings outlook.

Morgan Stanley believes steel markets will peak in 2022 and execution on the prospects from decarbonisation is critical to the outlook. UBS is more confident and expects Sims will emerge in front.

The broker asserts Sims is benefiting from its proactive approach as a high-grade processor of scrap material and this will be increasingly important as restrictions on lower-quality scrap imports, such as quality controls in Malaysia and India, are tightened. Restrictions are also likely to increase on scrap exports, with the potential EU waste shipment regulations.

FNArena's database has four Buy ratings and two Hold for Sims. The consensus target is $18.32, suggesting 25.5% upside to the last share price.

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The current recovery in Australian business as the country emerges from lockdowns augurs well for National Australia Bank although interest margins could tighten further

-Further compression in net interest margins still likely in FY22
-NAB re-commits to a CET1 target range of 10.75-11.25%
-AUSTRAC investigation ongoing, contributing to uncertainty
 

By Eva Brocklehurst

An improved operating performance and balance sheet momentum has set National Australia Bank ((NAB)) apart during the recent bank reporting season. The main weakness was markets income, although peers were similarly affected.

Credit Suisse considers the bank's "simple" strategy is working well making it well-positioned for a rebound in the economy, while Jarden believes the current environment is the most favourable for business credit - the bank's strength - since the GFC.

Jarden is positive about the upside potential in business credit growth given business investment intentions are the highest in more than ten years. The broker is also encouraged about the skew in investment expenditure towards growth.

Business confidence has rebounded to pre-pandemic levels, boosted by low rates, readily available credit and government incentives.

FY21 cash earnings of $6.56bn were underpinned by a write-back of bad debts. The final $0.67 dividend reflected a pay-out ratio of 68% while the CET1 capital ratio was a healthy 13% in the second half.

Citi believes the bank has established the best core earnings outlook across the sector. Interest margins appear more resilient compared with peers while there is momentum in the mortgage and business lending books.

Furthermore, costs continue to be well-managed. The broker compares this with peers which have been unable to achieve success across revenue and cost lines simultaneously.

As NAB is the largest in terms of business banking, Goldman Sachs suggests it will benefit more from the continued economic recovery. The weakest point was markets and treasury income which the broker notes was well below the typical run-rates in the second half.

The bank has signalled that volatility has increased recently so opportunities should emerge in that segment. Markets income was soft but no worse than peers, Ord Minnett asserts, and anticipates increased volatility should mean improvement is forthcoming.

Margins

The main issue, Jarden suggests, is how much further net interest margins can fall. The drag from lower lending margins has been offset by lower funding costs and deposit rates, yet further compression is expected amid competition and low interest rates.

Net interest margins were flat to end FY21, ex the impact of markets and treasury, and are likely to remain so, the bank points out, in the low interest rate environment in prospect for FY22. Competitive pressures are expected to continue affecting house lending margins.

Still, Morgan Stanley is now more confident loans can expand at an improving rate to reflect the better environment and assumes Australian housing and non-housing loan growth of 5.5% and 6%, respectively.

The broker calculates a margin decline in the fourth quarter of FY21 of up to -10 basis points, largely stemming from higher liquid assets and lower treasury income. The margin is expected to decline to1.64% in FY22 while net interest income increases by 3.5%.

Valuation

Going forward, demonstrable returns on equity are critical to drive the share price, Citi asserts, anticipating earnings growth of 8% in FY22. Nevertheless, the broker believes the stock is fully priced and already allows for stronger future growth.

Credit Suisse agrees the valuation appropriately captures the bank's relative positioning, noting the mortgage market is holding up well while the business bank remains the highlight. Non-housing lending annualised 12% in the second half.

Macquarie considers the stock no longer relatively cheap compared with peers, although the improved franchise performance deserves a premium. Revenue growth is expected to be underpinned by better markets income and an improving outlook for rates.

Management remains committed to expense targets, yet the broker does highlight the risk that some catching up may be required in terms of disclosure compared with its peers, or the latter will appear to have more scope in reducing expenses.

Ord Minnett notes NAB also has the strongest capital position, with a return on equity profile that is second only to Commonwealth Bank ((CBA)), and yet trails by -6 PE (price/earnings ratio) points.

Management has recommitted to a CET1 target range of 10.75-11.25% despite impending capital changes. Macquarie considers excess capital provides scope for a return to shareholders while Morgan Stanley assumes buybacks totalling $7bn occur out to FY24, although this will still mean the share count is around 7.5% above FY19 levels.

AUSTRAC

The AUSTRAC investigation is ongoing and Jarden notes this contributes some uncertainty to the outlook, particularly in the form of any fines and/or higher compliance-related costs going forward.

Morgans agrees the investigation is an overhang although, because of the highly contingent nature of the issues, does not include a penalty in any forecasts. Macquarie notes there is still a provision of $1.19bn for remediation in the bank's accounts, with 82% relating to customer payments. Major remediation is expected to be completed in 2022.

Among the stockbrokers that are not monitored daily on the FNArena database, Jarden reiterates an Overweight rating with a $31.00 target while Goldman Sachs has a Buy rating and $31.15 target.

The database has two Buy ratings and four Hold. The consensus target is $29.47, signalling -2.1% downside to the last share price. The dividend yield on FY22 and FY23 forecasts is 4.6% and 5.0%, respectively.

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Renovations and sturdy housing markets have kept momentum going for James Hardie which continues to deliver on its its high-value product strategy.

-Competition likely to remain constrained for several quarters
-Highly favourable operating environment should allow for a higher multiple for James Hardie shares
-Adjacent products appear yet to gain desired traction
 

By Eva Brocklehurst

James Hardie Industries ((JHX)) continues to benefit from strong housing markets, particularly renovations, across Europe, Asia-Pacific and the US, where the company provides wallboards and exterior cladding.

Citi assesses, ultimately, the success of the company's strategy will not be known until the building environment normalises, although strong demand and shortages of materials are keeping momentum heading in the right direction.

Moreover, competition in the US should remain constrained over the next three quarters, at least, and Citi points to supply chain initiatives which have enabled the company's transformation. Louisiana Pacific over the next quarter will have to reduce capacity for maintenance, so the broker expects a strong result from James Hardie in what is usually a quiet period.

Supply chain constraints have persisted across the US for new building but it appears to Macquarie James Hardie has been more successful than its competitors, and there are fewer constraints in the renovations segment.

In the September quarter, lower volumes in North America were offset by better prices while there was momentum across Asia Pacific, with earnings (EBIT) margins of 30.8%, ahead of the guidance range. Around 40% volume growth occurred in European fibre cement, which Citi points out has positive implications for the future business in this region.

Credit Suisse too, was impressed with the first quarter which revealed margins grew despite cost inflation. Net profit guidance has been raised to US$580-600m for FY22 as margins prove resilient.

James Hardie has also retained its cost inflation guidance and reported a 70 basis points expansion in the EBIT margin, absorbing a 480 basis points increase in North American costs.

Outlook

James Hardie has signalled a price increase of 5% across its North American products which Macquarie believes is indicative of the company's pricing power. FY23 volume estimates for the US are likely to be reached as Prattville ramps up and Summerville is re-started.

James Hardie is adding capacity in all three of its regions including fibre gypsum and fibre cement in Europe and a greenfield fibre cement facility in Victoria. Morgan Stanley notes capital expenditure for the expansions is included in management's -US$250-350m budget for FY22-24.

The strong performance in the year to date is balanced, in Credit Suisse's view, by the limited upside for volumes and margins, which are at the top end of both the company's targets and historical levels.

Yet, Citi considers the operating environment, being highly favourable, means the stock can achieve a higher multiple compared with historical levels, amid increasing exposure to renovations, which in turn will reduce the structural cyclicality.

The broker is less optimistic on adjacencies, noting the company's mixed track record. There is evidence adjacent products are yet to gain desired traction, with Citi noting fine textured panels are an example where James Hardie has had a product domestically for a number of years with little fanfare.

Despite the re-branding and re-launch of EasyTex, the broker believes traction is still in doubt. Nevertheless, the contribution of this product is considered relatively small in the scheme of things. Macquarie expects these textured panels will be slower to garner scale, but should start to impact volumes in FY23/24.

Strategy

James Hardie is targeting a 66% "high-value" product strategy, centred on substituting Cemplank with Hardiplank, although the benefit of the substitution is likely to ease over time, UBS suggests.

Nevertheless, the broker believes the focus on high-value and high-quality leads is the right approach. UBS expects volume growth of 13% in the second half of FY22 and a FY22 US EBIT margin of 28.9%. Citi also hails the “value over volume” strategy, noting the shift in capital away from volume growth in the north-east of the US, an area which has proven difficult in the past.

Morgan Stanley observes internal initiatives are driving both top-line growth and strong margins. James Hardie stock offers attractive margins and access to attractive end markets, and the broker asserts there is plenty of upside in terms of market share growth.

In this way, the company provides a direct and quality opportunity for investors to access exposure to low interest rates, government stimulus and favourable demographics.

There is 90% share of the US fibre cement market already and, with fibre cement at an estimated 22% of new cladding, Morgan Stanley envisages plenty of opportunity for James Hardie to reach its 35:90 target (which involves fibre cement being 35% of new house cladding in the US and the company holding a 90% share).

FNArena's database has five Buy ratings and one Hold (Credit Suisse). The consensus target is $58.43, suggesting 7.3% upside to the last share price. Targets range from $51.20 (Credit Suisse) to $62.00 (Morgan Stanley).

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Stockland plans to reshape its portfolio, reducing the weighting of the retail and retirement segments. Is the timing right?

-Increased weighting of portfolio to office/logistics and away from retail/retirement
-Scaling of capital partnerships should allow more funding of developments
-Stockland will seek to divest -$2bn in net assets over the next 12-24 months
 

By Eva Brocklehurst

Amid uncertainties on the retail/retirement front, Stockland ((SGP)) plans to weight its portfolio towards the office and logistics segments, putting more capital into these areas while accelerating developments and focusing on capital partnerships.

UBS believes the market will welcome the strategy, but questions whether the capital could not be reallocated faster than planned, and with less dilution to earnings and growth.

Moreover, is this the right time to move out of retail/retirement and into logistics/apartments? Credit Suisse asserts the strategy is in the “if only this had been done sooner” category, but accepts it is now a case of being able to deliver successfully.

Stockland is targeting 60% of income from recurring streams and 40% from developments, which the broker notes is unchanged. Also, there are no firm external funds under management (FUM) targets so the main focus is on repositioning the portfolio.

The company has also provided, for the first time, a target of 6%-9% as a return on invested capital (ROIC) for recurring income business, and 14%-18% for developments. The target is "bold" and UBS calculates an overall return on invested capital of 12%-15% should be achieved.

Portfolio Reweighting

The major change includes downgrading retail as a proportion of the portfolio, to 20%-30%, and retirement to 0%-5%. While the strategy for selling down retirement has not been clearly outlined, UBS assesses the capital target implies a full sale or joint venture is on the cards.

The reduced emphasis on retail and retirement is designed to enhance the quality of earnings, Morgan Stanley asserts, as these segments face uncertainties around returns.

The broker estimates gearing will rise to about 25% from 21% and the targets imply growth in free funds from operations of up to 12% to FY27, suggesting the update is about improving the portfolio rather than accelerating earnings.

Moreover, while Stockland wants to scale up the apartments business; the pipeline of 300 lots looks like a medium-term prospect to Morgan Stanley, rather than a contributor to short-term profits.

The option for redeploying proceeds from the disposal of assets is substantial, Citi notes, as well as the opportunity to grow capital partnerships. The scaling of capital partnerships should provide funding for developments which will, in turn, generate fees and recurring earnings.

Capital Allocation

Stockland will explore a capital partnership for more than $1bn of its essential retail portfolio and emphasises the $33bn development pipeline: commencements of more than 80% are planned within five years.

Morgan Stanley says the five-year earnings trajectory is unclear given it depends on the timing of divestments and the ramping up of major commercial projects.

Yet changes to capital allocation should generate better growth opportunities, in Macquarie's view. The company plans to divest $2bn in net assets over the next 12-24 months.

Divestment to third parties should reduce the drag on earnings as Stockland receives earnings from funds under management, says the broker. The new funds will have leverage, increasing the return on equity.

The new funds are also likely to carry cheaper debt and Stockland should realise development profits from the sell-down. 

Adjusting for development expenditure, and completions, and assuming a 50% sell-down, Macquarie estimates Stockland could face  outstanding development costs of $3.7bn, which compares to a best case scenario of roughly $4bn in balance-sheet capacity.

Other sources of capital could include retaining future cash flow and additional sell-downs, the broker highlighting the co-ownership target of 25%-50%.

Risks? A timing mismatch, possibly significant, between divestment and deployment could ensue and result in a greater drag on earnings in the early years before being recovered eventually.

Macquarie also suspects the transition in capital allocation could offset the upside risk stemming from residential settlements in FY23, given the uptick in residential sales in October.  The broker remains cautious about the transition out of retail and retirement exposures, particularly as the business is entering sub-sectors where it has less experience.

UBS questions whether Stockland has the capability to deliver across a broad range of sub-sectors, and suspects the market will only fully reward the strategy once signs of execution emerge.

It is tough to gauge the earnings impact from asset recycling and reinvestment but Credit Suisse emphasises this will need to be managed as Stockland transforms the business to a sustainable growth target.

FNArena's database has three Buy ratings and three Hold. The consensus target is $4.88, signalling 7% upside to the last share price. The dividend yield on FY22 and FY23 forecasts is 5.9% and 6.2%, respectively.

See also, Stockland Ups Exposure To Land Lease Sector on July 21, 2021.

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Credit Corp is diversifying earnings while continuing to expand its share of debt purchasing in the US.

-Credit Corp's US debt purchasing share increases substantially
-Weakness in Australasian PDLs evident
-Several pilots underway to diversify earnings spread
 

By Eva Brocklehurst

Credit Corp ((CCP)) has hit the ground solidly in FY22, with US debt purchasing share increasing to 8-9% from 3-4%. The business has several pilots underway in both Australasia and the US in order to diversify its earnings stream.

Macquarie points out the opportunity for growth has increased in the US as greater consumer activity will lead to more debt sales in the medium term. Yet Australasian growth is likely to be affected by shrinking credit card balances, low arrears and banks withholding debt sales.

Canaccord Genuity suspects this is why the company has maintained its earnings outlook at the AGM - net profit guidance is unchanged - rather than delivering an upgrade.

Weakness in Australasia is evident and Morgans estimates $100m in debt purchasing is required to sustain earnings, which looks difficult. Moreover $130m in purchasing is required for FY23. That said, the broker expects PDL supply will improve.

Net profit guidance is $85-95m with lending volumes noted at 94% of pre-pandemic levels. Debt purchases have been upgraded slightly, to $220-240m from $200-240m. The company has secured $210m in PDLs for FY22, including $150m in the US. Morgans suggests a sustaining $200m in US PDLs is required in order to be confident in the growth path.

First quarter collections were down -3% on the prior comparable quarter albeit up 20% on Q1 FY20. Morgans notes collections efficiency has improved, underpinned by lower numbers in the US. A return to normal labour markets in the US is also supported by operating capacity.

Gross lending was down -6.5% in the first quarter yet this is a seasonally quiet period and lockdowns impinged on the numbers. The company is confident a solid recovery in volumes will occur post the end of lockdowns.

Macquarie also expects a recovery as restrictions ease and raises long-term growth assumptions to reflect momentum in the US as well as the potential from new products. The broker also points out the balance sheet positions the business to increase its investment in PDLs as supply recovers and there is a funding advantage relative to competitors in Australia.

Pilots

The US consumer lending pilot, with the potential to provide depth to the market, is expected to be developed carefully. Macquarie notes this is an amortising product with a cap of 36% APR (cost of credit as a percentage of the total loan amount).

The automotive lending product was re-launched in Australia and Canaccord Genuity will be observing just how this resonates, given this operating space is increasingly crowded.

The product has been offered via brokers rather than directly. Morgans notes this pilot, launched in the fourth quarter of FY21, has hit record monthly volumes although it is early days and the business is sub-scale.

The company has also launched the BNPL product, wizpay, which the broker considers is more of a "customer acquisition" proposition rather than a serious competitor in the segment. Macquarie agrees this product is partially defensive, with the potential to feed into consumer lending.

Canaccord Genuity, not one of the seven brokers monitored daily on the FNArena database, has a Hold rating and $28.80 target. The database has three Buy ratings. The consensus target is $34.17, suggesting 2.4% upside to the last share price.

See also, Credit Corp Charts A Growth Path For US Debt on August 4, 2021.

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Incitec Pivot will run out of gas bought at the “right” price by the end of 2022 and is now considering options for its Gibson Island site including green ammonia.

-Gibson Island closure to mean ammonia will need to be sourced offshore
-Feasibility study on producing green ammonia from the site
-High fertiliser prices add upside risk for Incitec Pivot's FY21 results
 

By Eva Brocklehurst

Incitec Pivot ((IPL)) has failed to secure a viable long-term gas supply agreement for its Gibson Island ammonia plant in Brisbane and will eventually have to source around 20,000tpa of ammonia offshore to supply its Queensland explosives operations.

The Gibson Island plant produces ammonia, urea and ammonium sulphate and will cease manufacturing at the end of 2022 when the current supply agreement for gas ends.

In the absence of a gas contract below $9/gigajoule, Credit Suisse assesses the plant would probably be operating in the negative in terms of operating earnings, using five and 10-year average urea prices.

The cash costs of the closure are estimated at -$83.5m. Macquarie calculates stranded corporate and insurance costs are likely to be around -$10m per annum and there will be -$15-20m in additional operating costs for insurance and alternative arrangements.

The company points out there could be a potential for $45m in proceeds from land sales, depending on a final decision relating to the future use of the site.

Macquarie had suspected Gibson Island could close, although the decision has been made earlier than anticipated as there is still one year to run on the current gas contract. The plant is breaking even at long-term urea prices based on the existing gas contract while profitable at current urea prices.

While the closure will reduce the long-term leverage to the urea price, Incitec Pivot will be able to take advantage of strong urea prices over the next 12 months. The company remains committed to being a leading supplier of fertilisers and soil health services to the agricultural sector.

Urea, sulphate of ammonia and other specialty products will be sourced from existing international supply chains and replace manufactured products. The Brisbane fertiliser distribution centre will continue to operate.

Credit Suisse was also not surprised by the prospect of closure, assessing a continuation of manufacturing would have required expenditure of -$60m on plant turnaround in 2022 with an assumption that prices will hold up sufficiently to ensure profitability through to the following turnaround in 2025-26.

The knock-on effect of reduced ammonia availability will also lead to a slight tightening of the east coast ammonium nitrate market. Morgan Stanley points out the facility has been in doubt for some time, yet estimates it comprises only a low proportion of Incitec Pivot's earnings.

Green Ammonia

A feasibility study into industrial-scale production of green ammonia at Gibson Island will be brought to the fore, to potentially re-invigorate the facility. The study is expected to be completed by the end of 2021 and closure costs should be much less if the plant can be re-purposed. To this end, an MOU has been signed with Fortescue Metals' ((FMG)) Fortescue Future Industries.

While it is early days regarding green ammonia it could place a higher, more sustainable value on what is a well-located plant with existing infrastructure, Macquarie asserts, although a project will take time to be developed.

Pricing

Credit Suisse is of the view that ammonia prices will fall by the middle of 2022, contingent on a resumption of European ammonia manufacturing and a return to China's phosphate exports.

The broker forecasts Black Sea ammonia pricing around US$776/t at the end of 2021 and falling to US$675/t by the March quarter of 2022. Tampa prices are expected to remain at a premium to Black Sea.

Morgan Stanley believes the benefit from higher fertiliser prices without corresponding input pricing pressure for Incitec Pivot should bring on margin expansion. Including spot prices for fertiliser in modelling implies a 50% upgrade to group earnings forecasts for FY22 and Morgan Stanley thus believes the risk lays to the upside.

As a result, the focus is to the upside in the outlook when the company reports its results on November 15. Citi notes the company will take a pre-tax non-cash writedown of $102.5m in its FY21 financials and forecasts FY21 underlying net profit of $369m, up 3% on tweaking fertiliser price assumptions.

The broker reduces its estimates for FY23, affected by the closure of Gibson Island, with underlying net profit reduced -6% to $338m. The full impact of the closure is expected to be felt in FY24.

Macquarie notes Incitec Pivot is trading at a large discount to Orica ((ORI)) on FY21 and FY22 multiples, yet the former is expected to benefit from higher fertiliser prices and a more normal production year going forward, as FY21 was affected by turnarounds and other issues.

FNArena's database has six Buy ratings and one Hold (Credit Suisse). The consensus target is $3.24, suggesting 4.8% upside to the last share price.

See also Lofty Prices Stand Incitec Pivot In Good Stead on September 15, 2021.

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Despite some looming headwinds, REA Group is reflecting a strong Australian real estate market and the main issue for brokers is the valuation

-Integration of Mortgage Choice and REA India going well
-Depth penetration and add-on products key to the outlook in FY22
-Is valuation support for REA waning?
 

By Eva Brocklehurst

Australia's real estate industry remains resilient and REA Group ((REA)) has been a beneficiary. The company is also deriving a benefit from its financial services division, having recently incorporated the Mortgage Choice brand, as well as REA India (formerly Elara).

Ord Minnett observes the quarterly update had a conservative tone as the company remains mindful of a number of potential headwinds. These include potential regulatory action to address surging house prices as well as the impact of the federal election in the fourth quarter of FY22.

While cautious on valuation, the broker would not be surprised if management upgrades the outlook when operating conditions become clearer after Sydney and Melbourne emerge from lockdowns.

Morgans highlights the strong revenue growth for Mortgage Choice under REA Group's leadership along with an increase in broker numbers, which the former entity was struggling to obtain. REA will incorporate the SmartLine brand into Mortgage Choice and a full integration is expected in around 18 months.

The quarterly result was underpinned by residential listings and the impact of price rises in July. Depth uptake was also better than expected. Listings grew 11% in the first quarter while prices were 8% higher. Cost growth is expected to be in the high single digits, yet Credit Suisse believes this will be more than offset by higher revenue.

Higher depth penetration is key along with add-on products. The company did not provide specific growth rates for each of its divisions but indicted depth growth for residential was well above 20% in the first quarter.

The Premiere product had record take up in the first quarter and, with additional products such as Connect and Ignite, Morgans finds growth has been impressive. Given debt facilities are been refinanced and gearing remains low the broker would not be surprised if further acquisitions were made, either domestically or internationally.

Valuation

Morgans continues to believe REA is one-off the highest quality businesses on the ASX with its dominant market position and enhanced ability to broaden its reach. On the downside, there were some slight reductions to developer revenue and lower associate earnings during the quarter.

Furthermore, the broker considers some of the current strength is simply the pulling forward of listings, which means longer-term upgrades are likely to be more muted.

Despite a positive outlook, Morgans retains a Hold rating on valuation and would look to accumulate the stock below its target ($165.70). Macquarie's view, too, is unchanged, believing the shift to more value products and depth penetration is now factored into expectations.

As a result, valuation support is believed to be waning. The broker retains an Outperform rating and has become slightly more positive about the outlook for listings, although the looming federal election may prove a dampener.

Indeed, management has signalled volume comparables will become tougher in the second half and that the timing of the federal election may also have an impact. Still, Credit Suisse expects listings will be strong in the second quarter at the very least, because of the re-opening of Sydney and Melbourne.

Morgan Stanley also believes the first quarter result supports its investment thesis, and hails a potential "super cycle" for REA earnings over FY22-23. This should stem from the rebound in Sydney and Melbourne listings, higher churn as Australians review work/living priorities as well as price increases and margin expansion.

While the company provided no explicit guidance, the broker anticipates, since operating earnings (EBITDA) grew 28% in the first quarter, that growth over the rest of the financial year of 11% is required to achieve full year consolidated EBITDA of $645m.

Combining higher yield growth and domestic expenditure assumptions, Goldman Sachs, raises FY22-24 EBITDA estimates by 1-5%. The broker, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and $193 target.

Ord Minnett asserts, on a range of metrics REA trades at a premium to competitor Domain Group (((DHG)) which is wholly justified. The business differs in terms of operating metrics and characteristics such as margins, operating cash conversion and free cash flow. Still, the broker retains a Hold rating on valuation grounds.

FNArena's database has two Buy ratings and four Hold. The consensus target is $169.03, suggesting -4.4% downside to the last share price. Targets range from $145 (Ord Minnett) to $192 (Macquarie).

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Will Domino's Pizza be one of those food services that suffers a hangover after enjoying a surge in demand during a year of widespread restrictions on eating out?

-Labour constraints could mean a difficult year ahead in terms of expanding the network
-Cost pressures appear to be building, with food inflation materialising earlier than anticipated
-Weakness in Japan could continue over the Christmas trading period
 

By Eva Brocklehurst

Takeaway pizza and home delivery have been hugely popular across the globe as lockdowns were endured, yet Domino's Pizza Enterprises ((DMP)) has sustained a uneven performance over the September quarter and customer behaviours appear to be in a state of flux.

Inflation pressures are mounting and there was no new commentary on acquisitions at the company's AGM. Same-store sales rose 4.3% and network sales increased 8.0% the first 18 weeks of FY22, accelerating from the first seven weeks.

Food inflation is now expected to materialise in the second half, which Citi observes is ahead of prior expectations for the first half of FY23. This is also consistent with the recent results reported by brand owner Domino's Pizza Inc in the US.

Inflation poses a risk to margins over the short term but the broker asserts those operators with smaller scale will sustain a greater impact and, therefore, this will allow operators such as Domino's Pizza to take share.

UBS considers labour to be the major stumbling block for the quick service restaurant industry, although notes Domino's is confident its franchise can attract staff. The company has indicated FY22 will be a record year for expanding the network, forecasting 365 new stores in FY22 or as Macquarie comments: one for each day of the year.

Japan

In Japan, as restaurants and bars re-opened the company's network sales have been negative, although on a 2-year basis there was growth. Still, Macquarie notes uncertainty prevails about whether FY22 sales in Japan will surpass FY21.

The main issue, therefore, is whether Domino's benefited more so from lockdowns in Japan than previously anticipated, and Credit Suisse asserts the reversion of sales in Japan shows the difficulty of forecasting what is normal going forward.

Goldman Sachs found the update largely negative, homing in on weak trading in Japan and noting management has observes significant changes in behaviour since the end of a state of emergency in Japan.

This implies a higher-than-expected benefit from pandemic restrictions in Japan and if this continues into Christmas, the broker considers the outlook will remain weak over the next 12 months as the region cycles lockdowns. Goldman Sachs downgrades its estimates for the region by -13.4% to reflect this risk.

Citi also expects the current negative momentum may impact the Christmas trading period and forecasts first half same-store sales to decline by -1% in Japan.

What will be key, Jarden believes, is the company's ability to use its data capability to re-engage, and the outcome of this will not be known until the second half. The broker reduces overall revenue forecasts by -5% to reflect the impact of the contraction in Japan, the skew to the second half for store openings and the FX headwind.

Europe

In Europe it was another story, as management observed new customers were retained even as social restrictions eased. The roll-out of stores in Europe is on track, albeit weighted towards the second half.

Yet Credit Suisse is not sure that labour availability will not become a greater constraint in Europe. Higher food and energy costs could also have a negative impact on profitability.

Meanwhile, lockdowns in Australasia affected the ability of workers to commute and resulted in changes to delivery. Citi suspects Australasia was also weak over the first quarter, particularly New Zealand.

New Zealand contributes a higher proportion of group earnings compared with its store numbers because of the low overheads, with support services derived from Australia.

Nevertheless, the broker does expect New Zealand will improve after lockdowns are lifted. The company's Project Ignite will entail expenditure of $10-12m which Macquarie notes will lower earnings in the first half albeit lift store numbers over FY22 and beyond.

Jarden believes Europe and Australasia are performing well, and in Europe there is a benefit from re-opening as "carry-out" returns. In Australasia there is also a benefit from the labour challenges being experienced by aggregators.

Among those stockbrokers not monitored daily on the FNArena database, Goldman Sachs maintains expectations for longer-term growth and reiterates a Buy rating with a $147 target while Jarden, although assessing the valuation is full, retains an Overweight rating and $113 target.

The database has four Hold ratings and one Sell (Credit Suisse). The consensus target is $130.08, suggesting 4.2% upside to the last share price. Targets range from $77.73 (Credit Suisse) to $150.00 (UBS).

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Despite the challenges to raw materials supply in recent months, Amcor is being lauded for its ability to manage costs and deliver a robust outlook for FY22

-Support throughout FY22 coming from Bemis synergies, organic growth
-Amcor likely to exceed its original cost synergy target for Bemis
-Sustainable packaging considered the largest organic opportunity
 

By Eva Brocklehurst

Amcor ((AMC)) has managed to stave off the inflation that has been widely evident in resin pricing as well as deal with supply constraints, producing a robust view on the outlook for FY22.

Packaging volumes were fairly flat in the September quarter with comparable sales growth occurring largely on the back of optimising price and mix. First quarter underlying earnings per share (EPS) of US17.7c were up 12% and Amcor has reiterated guidance for growth of 7-11% in constant currency terms.

This is supported by organic growth, Bemis synergies and the benefits of the buyback. Price and mix had a favourable impact, reflecting growth across a range of high-value end markets, Macquarie notes.

Morgan Stanley commends Amcor for its ability to manage the widespread pressures on its supply chain, highlighting a meaningful recovery of costs in response to higher resin prices.

The company expects the supply chain constraints that are currently occurring in North America will improve yet UBS suspects volume growth will largely be skewed to the second half.

Morningstar expects minimal growth in volumes in both flexibles and rigids in FY22 and FY23 as at-home consumption normalises to pre-pandemic levels. Labour and raw material shortages in North America could influence volumes over the full year and this is taken into consideration.

Nevertheless, Morningstar forecasts growth in underlying EPS in FY22 of around 11%, at the top end of the guidance range of US79-81c.

The analysts believe benefits from the Bemis integration are continuing to transform the business and allowing Amcor to anticipating exceeding its original cost synergy target of US$180m by the end of FY22. Morningstar expects US$200m in total Bemis cost synergy realisation.

Flexibles

The flexibles business generally takes 3-4 months to pass through the lag in resin costs and emerging markets have been even longer at around six months, although Macquarie observes the gap is now closing, noting the company emphasised it was being more proactive in managing raw material volatility.

US petrochemical plants have started to catch up to demand, the broker points out, and supply should improve in the first half, which means resin prices should fall from current levels albeit remain elevated.

Amcor considers sustainability its largest opportunity organically, expecting its products will be fully recyclable or reusable by 2025. Macquarie cites the risk that sustainability may be constrained by lack of recycled resin and as a result delay the company's ambitions.

Credit Suisse believes Amcor has led the field in managing raw material inflation and a positive shift in mix in geography, customer and some product categories has assisted margins in the flexibles division.

Costs have been recovered via price increases and while raw materials such as aluminium have had limited allocation in the quarter the supply is improving. The broker asserts protein packaging remains the key growth opportunity. UBS also highlights the favourable product mix towards higher-margin medical, pet food and the coffee pod product.

Rigids

In rigids the business is operating at full capacity because of higher demand and the supply constraints. Credit Suisse assumes the tight conditions will moderate during the remainder of FY22, noting Amcor is adding capacity and building inventory.

UBS considers the challenges are more pronounced in the rigids division as quarterly earnings (EBIT) declined -14%. PET raw material shortages in North America meant customer demand was difficult to meet and this resulted in manufacturing inefficiency.

Defensive

The quarterly result was "dependable" with a combination of a strong dividend yield and active buyback, Morgan Stanley asserts. The fact Amcor has reiterated guidance is a positive and a vote of confidence in the outlook, the broker adds, assessing the stock is attractive at a meaningful discount to defensive Australian peers.

Macquarie, too, likes the defensive growth qualities, noting the stock is trading around -6% below its traditional earnings correlation. The PE of 0.81x relative to the market is below the 10-year average of 1.05x albeit similar to the 2-year average.

UBS remains attracted to the company's leading position in packaging markets globally as well as the significant scale that supports earnings growth and cash flow, despite the volatility in supply and pricing.

Cash generation should pick up in the second quarter and again in the fourth quarter, Jarden suggests, as these are the seasonal peaks. Overall, the broker forecasts US$1.1bn in free cash generation in FY22, in line with guidance for US$1.1-1.2bn. As a result scope is envisaged for further capital management or bolt-on acquisitions out to FY24.

The broker, not one of the seven monitored daily on the FNArena database, has a Buy rating and $18.10 target. The database has five Buy ratings and two Hold. The consensus target is $18.27, signalling 10.7% upside to the last share price. The dividend yield on FY22 and FY23 forecasts is 4.0% and 4.2%, respectively.

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FNArena is proud about its track record and past achievements: Ten Years On