Brief Australia: Platinum Asset Management Placement –  Co-Founder Selling + Weak Earnings Momentum and more

In this briefing:

1. Platinum Asset Management Placement –  Co-Founder Selling + Weak Earnings Momentum
2. Wisetech Global Placement – Past Deal Did Well but Valuations Looks Stretched
3. Resetting the Compass: ASX Model Portfolio Update – March 2019
4. Aveo: Take Advantage of the Lull To Take a Second Crack
5. LNG: What Matters This Week? Prices Fall Further in Asia but New Projects Continue to Progress

1. Platinum Asset Management Placement –  Co-Founder Selling + Weak Earnings Momentum

The co-founder of  Platinum Asset Management (PTM AU), Kerr Neilson, and Judith Neilson are looking to sell 30m shares of the company at a fixed price of A$5.00. 

The deal scores poorly on our framework due to its poor track record, large deal size, weak earnings momentum and relatively expensive valuation. The selldown comes after the company weak 1H FY19 results last month which could put pressure on share price in the near term.

2. Wisetech Global Placement – Past Deal Did Well but Valuations Looks Stretched

Wisetech Global (WTC AU) plans to raise US$177m/AUD250m in order to shore-up its balancesheet for future acquistiions. 

The company has done exceedingly well since listing and even its past fund raising delivered good returns. However, the deal scores a mixed score on our framework as valuations appear strecthed with the stock trading above analysts target price. Thus, the deal might warrant a large discount.

3. Resetting the Compass: ASX Model Portfolio Update – March 2019

• Tracking Benchmark during the Correction and Now looking for Alpha. Our model portfolio has performed in line with the benchmark over the past couple of months, with strong outperformance in January giving way to modest underperformance in February and March.  Our tilt towards Growth drove the outperformance as the Fed announced it would keep policy on hold.  The US yield curve remains positive showing the cycle is not at its end.  Value’s rebound in February and March has been unconvincing and driven by beaten up Consumer Discretionary stocks such as HVN and SUL and low PE defensive plays.
• We Move Overweight Resources and Pull our Banks Exposure Back to Underweight: Key bulk commodity prices are holding up against the Chinese economic slowdown.  But policy is mobilising to reduce the risk of a further sharp slowdown in growth.  The prospect of a rate cut by the RBA is providing a timely boost for the sector via a weaker currency that could be in a sweet spot if global growth has bottomed.
• Cutting Exposure to the Banks. Some uncertainty has now been removed following the release of the Final Report from the Banking Royal Commission and there is some anecdotal evidence that the Banks are returning to the lending business after withdrawing last year, but it’s early days.  Consequently, there seems little upside to low-single-digit EPS growth over the medium-term.  Auction clearance rates in both Sydney and Melbourne remain low and consistent with smaller price declines than last year.  However, the labour market has remained resilient and provides a more positive assessment of economic conditions than the GDP data. 
• Trimming Industrials. We are not trimming our exposure to industrials because we are overly bearish on the domestic economy but because we think it’s best to make room in this sector to build up our Resources barbell.  We remove ABC, DLX, IPL, and ORA and include BIN. 
• Opportunities in the Consumer Space. We add BAL in Consumer Staples and WES in Consumer Discretionary.  There is a risk including BAL into the portfolio, but we think it is positioning itself for strong longer-term growth.  The share price has rallied strongly in the past couple of weeks, but it will need to be supported by approval from China to sell its product.  The performance of A2M shows the opportunity that is on offer.  WES Bunnings business is performing well, despite a weak consumer.  K Mart seems to be performing better than its Big W. 
• Keeping our raised Property Weighting. Property worked well as bond yields rallied last year and while we don’t expect strong returns to be repeated, it is good practice to have an overweight to the sector, given the global economic cycle is mature.  It should continue to provide protection to the portfolio in the event of raised uncertainty.

4. Aveo: Take Advantage of the Lull To Take a Second Crack

Back in August, I argued a case for the privatisation of Aveo Group (AOG AU), which at the time was trading at a P/B of 0.6x versus ~2x for peers. Also in late August, Aveo announced a strategic review to examine all options to close the gap between Aveo’s market capitalisation and the value of the underlying retirement properties.

Aveo’s steep discount to peers was/is ostensibly due to the presence of Mulpha International (MIT MK)‘s large stake (22.5%), crowding out institutional ownership; Mulpha and Aveo sharing the same chairman, inferring (yet categorically denied) Aveo’s absence of independence; and the ongoing class action lawsuit. 

That was a brutal recommendation, and lacking a hard catalyst, shares declined to $1.55 in January, recovering to $2.05 today, still ~12% shy of the price at the time of my last note.

This time is different.

Aveo announced in early February a number of indicative non-binding bids were received for a “whole of company transaction” with AFR reporting (paywalled) that Lone Star had joined the fray. Other interested parties are believed to include Blackstone and Cerberus Capital Management.

Aveo’s share price is up ~20% since announcing the receipt of the indicative bids, having drifted down from a (recent) closing peak of $2.14 earlier this month.

Aveo is currently trading at an attractive 0.52x P/B vs. 1.8x for its peer group, with the next closest peer valuation at 0.7x P/B. An offer of >0.7x, a level last traded as recently as June 2018, appears reasonable with ~92% of assets in investment property. 

Further afield, Mulpha trades at a P/B of 0.25x, while the stake in Aveo accounts for 104% of its market cap, and around 25% of NAV. It’s discount to NAV has significantly narrowed since February, but Mulpha continues to trade at a discount to 76%.

Timeline of Events 

5. LNG: What Matters This Week? Prices Fall Further in Asia but New Projects Continue to Progress

LNG prices have dropped to a seasonal low, as we flagged in our outlook piece for this year (2019 Energy Market Themes & Stocks with Exposure: Focus on Oil, Refining, LNG, M&A & Renewables) but this hasn’t dampened enthusiasm to push new projects forward (see A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies). We continue to see this as positive for the LNG contractors and negative for the LNG developers. We discuss recent LNG prices, European LNG demand and the FID outlook including project updates from Venture Global, Alaska and Cyprus.