article 3 months old

ESG Focus: Morphic Explains Shorts in CCL, WOW

ESG Focus | Jun 27 2019


FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

This story was initially published on Friday, 21st June 2019. It has been republished to include it in the ESG Focus news section.

Morphic Explains Shorts For CCL, Woolies

By Rudi Filapek-Vandyck

It's a burgeoning industry, still, albeit incredibly fast growing and with increasing impact. Already there is a plethora in approaches, strategies and styles available for investors who like to see their money invested in non-traditional manner.

One of the better known domestic managers using responsible investment filters before selecting and researching stocks is Morphic Asset Management, soon to be acquired by Ellerston Capital. Morphic also provided the rough overview in styles below.

What makes Morphic unique in its style of responsible investing is that it can not own any companies that fail at the first hurdle of stringent ESG filters applied, but it can go short such companies. The fund managers explained during the recent investor tour their reasons for being short Woolworths ((WOW)) and Coca-Cola Amatil ((CCL)).

When funds managers like Morphic go short on a stock they are trying to benefit from a weaker share price at some point into the future.

While taking a short position on an ASX-listed stocks is not at every investor's disposal (I have never gone short on any stock myself), I suspect either or both stocks might be included in many portfolios, which is why investors may want to take notice.

Supermarket owner and liquor distributor Woolworths fails the ESG filter dismally at Morphic. Not only is Woolworths one of the largest owners of pokies in Australia, through its partial ownership of pubs and clubs, but the group is also one of the largest sellers of alcohol in the country given it owns and operates BWS and Dan Murphy's.

Morphic's negative view is above all inspired by a business model that is increasingly under pressure, while the stock's valuation is approaching the heady highs from pre-GFC days.

More German supermarkets entering the Australian landscape in 2020 cannot be a good thing for sales and margins, so goes the thinking, while changing shopping patterns are keeping the pressure on Big W and, increasingly, the liquor chains.

Woolworths' growth next year is predominantly based upon an improving picture at Big W, but Morphic clearly doesn't think of it as longer term sustainable.

Bottom line: Woolworths' EPS is today roughly equal to where it was ten years ago, but its valuation is again riding a peak in investor sentiment. Morphic thinks the future most likely involves a weaker share price, and is therefore positioned short.

Shares in Woolworths entered calendar 2019 around $29 and surged to near $35 in May, after which they settled around $32.

The negative view on Coca-Cola Amatil is even more intriguing, with Morphic identifying ESG negatives in fizzy drinks, alcohol, plastic waste and sugar.

Valuation is again considered too rich in light of the ongoing operational challenges and the long term decline for key products in key markets for the company.

Most importantly, the managers at Morphic are suspicious of the company's real growth rates in key countries New Zealand and Indonesia. They believe the company has failed to address their concerns when questions had been asked about a change in geographic reporting.

Coca-Cola Amatil now reports on the basis that New Zealand and Fiji combined are one region, while Indonesia and Papua New Guinea are also grouped together into one reporting region. It is Morphic's suspicion this is because Fiji and PNG are fast growing still, while New Zealand and Indonesia are likely not, or possibly not much growing at all.

Here the suspicion is that the chosen regional groups are designed to mask the lack of underlying growth in two key regions for the company.

As far as Morphic is concerned, this should ring alarm bells across the wider investment community (which it clearly is not to date judging from the share price), hence why the managers are positioned short Coca-Cola Amatil.

Investors should note Morphic has been short Coca-Cola Amatil shares in the past, and with rather mixed results.

Coca-Cola Amatil shares have rallied strongly in 2019 after bottoming around $8 in the first quarter, surpassing $10 in June.

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

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

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms