Throughout reporting season we will highlight companies we are happy to buy following our assessment of results. Here are our four of our top picks from results this week: Inghams, South32 Limited, Bapcor Limited, and Magellan Financial Group Limited.
Result of the week: Inghams Group
Inghams Group is our pick of results this week. Despite a challenging New Zealand market due to market oversupply and a weak wholesale market in Australia, ING's interim result beat expectations. Solid earnings growth (EBITDA +9.1% on pcp) reflected strong demand for poultry driven by consumer preference for healthier (leaner) white meat and efficiency (Project Accelerate) benefits which saw margins rise (EBITDA margin was 7.8% vs 7.4% the pcp). 1H17 EBITDA represented 50% of ING’s full year guidance.
However the prospectus said that FY17 EBITDA would be weighted 45-48% in the 1H17 and 52-55% in the 2H17 due to the timing of Project Accelerate benefits. We therefore believe that full year guidance is conservative, with risk to the upside.
ING is on its way to transitioning from a family-run business to a modern, efficient FMCG business and is one of our key picks in the Ag/Food sector. Our positive view is based on ING being the market leader of a domestic protein growth story in an industry where there are clear barriers to entry, its scale gives it bargaining power with customers, Project Accelerate should underpin solid EPS growth and it has a well-respected management team.
ING offers investors both yield and growth. Trading on an FY17F PE of 12.8x and an annualised dividend yield of 5.3% fully franked, we believe that ING is undervalued. The next catalyst for the stock is ASX300 and possibly ASX200 index inclusion with the March review.
South32 Limited (S32) – building a big ship
S32's first half result saw a further building of its already solid balance sheet, with net cash of US$894m. S32 reiterated that adding new growth was not a necessity, but we can't help but notice the large war chest is building. We continue to hold the view that S32 will prioritise the flexibility to pursue growth over dividends, consistent with the 1H'FY17 result.
S32 posted a solid underlying NPAT in 1H'FY17 of US$479m (vs Morgans estimate of US$424), with the second half looking stronger as S32 catches up on tonnes at Cannington and South African coal. We have upgraded our numbers further on S32 following a better-than-expected cost performance in some divisions.
We retain our Add recommendation.
Bapcor Limited (BAP) – consistently exceeding targets
BAP's 1H17 result was c2% ahead of our EBITDA/EBIT forecasts with stronger than expected margins across the board offsetting softer Same-Store-Sales growth within Retail. Pleasingly, guidance for the base business (excluding the Hellaby acquisition) was upgraded to c31-35% NPAT growth in FY17 (from +25-30% previously); while the EPS accretion from Hellaby was confirmed at c12% annualised).
We were reassured by the flow-through of material synergies from the ANA and the strong performance of recent, smaller, acquisitions. Importantly, we believe that further material synergies will materialise from the Hellaby acquisition in FY18/19 (quantification of which provides a key upcoming catalyst).
Yesterday's result provides us with further confidence in BAP's growth profile, management execution and their consistent ability to outperform targets.
We retain our Add recommendation.
Magellan Financial Group Limited (MFG) – clear horizon
MFG reported 1H17 NPAT of A$87m, down 20% on the previous corresponding period (lower performance fees) and in-line with our forecast. A 38.4cps interim dividend was declared. Net inflows across both retail and institutional remain strong. We expect both will remain in solid positive territory but they will taper over the next 24 months.
MFG announced its next generation of strategies (three Low Carbon funds), targeting the US institutional market. Although meaningful inflows are not expected for around three years, theoretical capacity of US$30bn provides a material long-term opportunity.
We note a 12-month forecast Total Shareholder Return (TSR) of 15% and upgrade to an Add recommendation.
Contributed by Andrew Tang, Analyst - Equity Strategy and Quant: Original blog here: (VIEW LINK)