BENEFITTING FROM A LOWER AUD
Top Ideas to Benefit from a Falling AUD
Last week’s inflation numbers printed well below expectations (-0.2% headline CPI) which has caused the
RBA to cut its benchmark interest rate to 1.75%. Interest rate expectations are a key driver of currency
moves and a cut to the benchmark interest rate should pressure the AUD lower.
Accordingly, we have outlined a number of ways investors are able to play a falling AUD. The focus of these options relate to companies that have a significant exposure in the form of offshore earnings or report in USD terms. Under both of these scenarios, the shares can benefit from translation and transaction gains.
(1) Translation benefits – a lower AUD results in higher AUD earnings when the company’s offshore earnings are translated back to AUD. Similarly, when assets denoted in USD are translated back to AUD terms, they are now worth relatively more.
(2) Transaction benefits – a lower AUD relative to foreign currencies improves the competitive position of
the company in offshore markets. Essentially, Australia produce is now effectively cheaper for foreign
buyers.
Below we review the invest case for:
- Westfield
- Amcor
- Ansell
- Macquarie Bank
- Treasury Wines
- Ardent Leisure
WESTFIELD CORPORATION
Westfield Corporation is a global retail property group with interests in shopping
centres in the US, the UK and Europe. It is engaged in the ownership, development,
design, construction, asset management, leasing and marketing activities with respect
its retail focused property portfolio.
Whilst its assets and income are generated offshore, it listed on the ASX and therefore
is a direct beneficiary of a lower AUD (via a translation gain). Given Westfield’s
exposures it should benefit from a lower AUDUSD and lower AUDGBP exchange rate.
Westfield It was created as part of the global restructure of the Westfield brand in
2014. Westfield Corp is now home to the brand’s U.S. and U.K. stores while Scentre
Group Ltd (SCG.AX) is the owner and operator of the brand’s Australian and New
Zealand centres.
Source: Westfield Corporation 2015 Full Year Results Presentation
Westfield has divided its portfolio into ‘Flagship’ and ‘Regional’ assets. Its primary focus
is on the development of the centres that fall into its ‘Flagship’ category, which make
up 82% of the total portfolio, as these are the ones expected to generate the strongestreturns over the coming years.
We like WFD for its USD and GBP exposure, property fundamentals and M&A
optionality. We believe the company has a strong brand image and is set to benefit
from their ambitious growth pipeline. It presently has 34 shopping centres and almost
6,500 retail outlets. WFD has planned a further US$11.8bn of spending for its growth
pipeline to further enhance the quality and prominence of its portfolio.
Current Projects
Future Projects
Source: Westfield Corporation 2015 Full Year Results Presentation
Westfield’s future developments include a heavy investment focus on the US, UK and Italian markets, with a current US$6.8 billion worth of projects in the pipeline.
Management expect the development program to generate yields in the range of 7% to 8%, which will assist in delivering higher returns to shareholders and have been earmarked as the driver of future growth for the business.
It has ample balance sheet capacity to undertake these ambitious developments with $1.2b of cash at $3.3b of undrawn debt facilities available to it. The company’s financial gearing stands at 33% (Net debt / Tangible assets or 30% debt to EV & interest coverage of 4.7 times). Total development capex over the next 5 years is expected to be circa US$5b and would see gearing increase to 40% and still in an acceptable range, in our opinion.
28 April 2016
Source: Westfield Corporation 2015 Full Year Results Presentation
Westfield’s 2015 financial result were the first full year results published after the
restructure in June 2014 (split with Scentre Group Ltd as mentioned above). The company reported strong net property income of US$861.4 million, while funds from operations (FFO) came in at US$783.4 million. This was largely in line with both the markets and management expectations.
The strong operating performance was driven by solid productivity utilization of its portfolio with annual specialty retail sales coming in at US$726 price per square foot (PSF) in 2015, up 6.4% from the previous year. This corresponded to an 8% increase in its Flagship portfolio (which accounts for 82% of the Group’s asset under management). It Regional portfolio also performed reasonably well with 3.2% uplift in
in sales to US$454 per square foot.
Occupancy rates across both its Flagship and Regional portfolios reminded high at
around 96% percent in 2015 and up about 0.1% from 2014.
With all of Westfield’s earnings generated offshore, believe that it is an attractive
option to gaining exposure to a declining AUD. Business fundamentals are solid and the company has a number of areas it is targeting for further growth.
Westfield currently offers a dividend yield of 3.4% and is trading on a forward P/E of
22.1x.
Positives:
- Benefits from Declines in AUDUSD & GBPUSD exchange rates
- Strong growth pipeline
- High occupancy rate circa 96%
- Growth property income US$861.4 millionNegatives:
- Investigating long term listing options. This which may result in shares listing
in either the US or UK and its ASX listing becoming a secondary listing. This may
result in lower liquidity for Australian shareholders (update this month) - Susceptible to consumer sentiment which may wane if equity markets struggle
to perform or interest rates rise materially
AMCOR LIMITED
Amcor is a global packaging solutions provider, supplying a range of packaging products
into the food, beverage, healthcare, home and personal care and tobacco packaging
industries.
It is considered a fairly defensive stock given it operates in an industry with sticky
demand and long term outlooks.
The company operates in more than 43 countries, in more than 180 sites and has
leading positions in its incumbent markets, with 70% of sales from developed market regions and 30% from emerging markets.
It has two business segments:
1. Flexibles business: supplies flexible packaging and folding carton packaging
2. Rigid Plastics: producers of polyethylene terephthalate (PET) packaging as well
as containers using other plastic resins
Source: Amcor 2015 Full Year Results Presentation
Amcor’s earnings are reported in USD and therefore falls in the AUDUSD are beneficial to the company’s share price performance. Essentially a lower AUDUSD exchange rate results in a higher earnings when translated back to AUD’s from USD’s. 31% of the company’s total sales in 2015 where from North America alone.
Source: Amcor 2015 Full Year Results Presentation
Amcor holds a diversified geographical portfolio via location and by product. This helps
to reduce earnings volatility and therefore lowers the risk of the stock. No single
product or location dictates the performance of the company’s operations.
One limitation to a falling AUD however relates to the company’s debt profile.
Approximately 44% of its borrowings are dominated in USD and therefore as the USD
appreciates, the company’s borrowings also increase when viewed in AUD terms.
Source: Amcor 2015 Full Year Results Presentation
Furthermore, because of Amcor’s global diversity it is exposed to a range of currency
moves relative to the USD. Whilst a in the AUDUSD exchange rate is generally a positive
for the company’s share price, the depreciation of non-USD currencies (which comprise
of around 50% of AMC’s total earnings) can create a drag on reported earnings because
it reports its accounts in USD.
The company generates both consistent and strong cashflow given the stable nature
of the business. With excess cash available, the company is able to support both large
end and small end industry acquisitions. With the company constantly looking to
expand, its balance sheet and cashflow generation gives it the financial flexibility to
dictate its growth path. The company has a rich history of successful takeovers and has
been a large contributor to its growth in the past. The recent acquisition of Alusa, is
evidence that the business continues to execute on its strategy of supplementing its
organic growth with acquisitions. Alusa is the largest flexible packaging business in
South America (the company paid US$435 million for the business).
Amcor currently offers a dividend yield of 3.4% and is trading on a forward consensus
P/E of 27x.
Positives:
- Benefits from a decline in the AUDUSD exchange rate
- Amcor’s shares offers investors exposure to a company with a good mix of defensive earnings and positive organic growth prospects
- Strong balance sheet to support acquisitions (net debt to EBITDA 2.3x)
- Strong history of successful acquisitions
Negatives:
- Operates in reasonably mature markets that offer growth modestly in excess
GDP - Debt also dominated in foreign currencies (mainly USD)
- Must actively continue to seek acquisitions to maintain its strong growth
profile
ANSELL LIMITED
Ansell provides a range of protection solutions. It is a leading glove and condom
manufacturer and also designs, develops and manufactures a range of hand and arm
protection solutions and clothing.
The company is divided into 4 segments
1. Industrial – engaged in manufacturing multi-use hand, foot and body
protection solutions for industrial worker environments and specialty
applications
2. Medical – provides surgical and examination gloves, healthcare safety devices
and infection prevention products for healthcare professionals and patients
3. Single Use – provides single-use industrial application gloves. food prep &
military
4. Sexual Wellness – manufactures condoms, lubricants and devices
The more defensive side (58% of sales) of the business pertains to its medical, sexual
wellness, life science and food processing products. These segments tend to be more
stable in nature and have constant demand despite the state of the economy.
Ansell reports in USD but is an Australia based company and its shares are listed on the
ASX. Therefore it is positively leveraged to a decline in the AUDUSD exchange rate. The
values of the company’s assets increases in AUD terms as the exchange rate falls.
Source: Ansell 2015 Full Year Results
The majority of the company’s sales and costs are denoted in USD. Hence as the
AUDUSD declines both its sales and costs increase in AUD terms. ANN also has a
material exposure (25% of sales) to the EURUSD exchange rate which has had a
material impact on the company’s profits in the past.
Source: Ansell 2015 Full Year Results
Ansell has a rich history of constant and solid growth. Its profits (EBIT) have almost
doubled over the course of the past 5 years, however the business has faced a
number of headwinds recently. Mainly the slowdown in US manufacturing and the
commodities cycle slow down have negatively impacted on the firm’s sales. Despite
this, remain positive on both the outlook of China and the US and therefore see business improving in the later part of 2016.
ANN continues to grow its business organically and also through acquisitions. Over the past 24 months, ANN has made a number of material acquisitions to expand its product portfolio (Comasec, Hercules, Midas, and Barrier Safe). We think this makes sense as a business strategy given the large amount of synergies and cost cutting Ansell is able to achieve by tying multiple related business together. We believe the company will continue to actively pursue this initiative and with a solid balance sheet and moderate amounts of debt (Net Debt to EBITDA 1.86x), we believe the business is well place to
take advantage of the opportunities as they arise.
Source: Ansell 2016 Half Year Results
Ansell holds a diversified portfolio of products and offers both high growth (higher risk)
and stable (lower returns) products. Overall this lowers the risk profile of the company
while still maintain growth elements.
Its demand/macro-economic sensitive products (42% of sales) include its chemical,
auto, oil & gas and mining focused products. These segments are leveraged to a
recovery in global economy.
Ansell currently offers a dividend yield of 2.8% and is trading on a forward consensus
P/E of 19.7x.
Positives:
- Benefits from a decline in the AUDUSD exchange rate
- Shares offer exposure to both demand sensitive and stable counter cyclical
earnings drivers. The diversified portfolio offers good mix of growth and
stability - Exposure to healthcare sector and sexual wellness which are both
demonstrating solid growth trends globally - Strong balance sheet to support acquisitions
- Strong history of successful acquisitions
Negatives:
- Current dividend yield is low
- Recent earrings were disappointing which were driven by unfavourable moves
in the EURUSD exchange rate and slowing China growth
MACQUARIE GROUP LIMITED
Macquarie Group is a global provider of banking, financial, advisory, investment and
funds management services. Its strategy focuses on offering a full service investment
banking operation in Australia.
Source: 2015 Annual report Macquarie Group
Offshore income now accounts for more than half of the group profits (approx. 70%),
with the performance of the business levered to the recovery and performance of
financial markets.
A significant portion of Macquarie’s income is now generated outside Australia.
Accordingly, the fall in the AUD is providing upside momentum to the company’s
profits. ’s base case is for further declines in the AUD as global interest rate policies
normalise. This should result in further benefits to MQG’s performance. We estimate
that a roughly 10% decline in the AUD equates to a 6% increase in profits.
Due to the nature of Investment Banking, MGQ is heavily exposed to global financial
market conditions. Although market volatility is set to increase over the coming
months, we believe that the company should benefit from an increase in deal flow and
pick up in market activity as financial markets continue normalise. Management has
highlighted that it continues to see improvements in global M&A and ECM which will
lead to increased fees from advisory roles which we believe will continue to drive
strong earnings momentum for the company.
Macquarie Group offers investors a diversified earnings streams across a range of
businesses where it has competitive positions with distinctive product offerings. This
significantly lowers the firm’s exposure to disruptions with in a business line. In
addition to this MQG has a strong balance sheet, boasting a Tier 1 capital ratio of 11%
(its ability to absorb losses on risky assets) which puts it in a much stronger positon
relative to its competitors.
Positives:
- Benefits from a decline in the AUDUSD exchange rate
- Positively leveraged to global financial markets
- Macquarie offers investors a diversified earnings streams across a range of
businesses where it has competitive positions with distinctive product
offerings
Negatives:
- Australian housing market remains a major concern
- Banks stocks remain out of favour with investors
- Regulation remains a hurdle for the banking industry
TREASURY WINE ESTATES
Treasury Wine Estates Limited is a wine manufacturer and distributor catering to both
the premium and commercial segments of the market. The Company’s principal
activities are grape growing and sourcing; wine production and packaging, and wine
marketing and distribution. It operates in a number of geographical locations including
Australia and New Zealand; Europe, Middle East and Africa; Americas, and Asia.
Source: Treasury Wines Financial Statements FY14
The Company’s brands include Commercial, Masstige and Luxury wine brands, such as
Penfolds, Beringer, Lindeman’s, Wolf Blass and Rosemount. The Company owns and
leases approximately 9,424 planted hectares of vineyards in Australia and New
Zealand.
TWE sources over 75% of earnings from its offshore markets. We estimate a 1 cent fall
in either the AUDUSD or the AUDGBP contributing approximately A$2mn to group
EBIT. TWE achieves this in two ways. (1) Translation benefits – a lower A$ results in
higher A$ earnings when TWE’s offshore earnings are translated; and (2) transaction
benefits – a lower A$ relative to the US$ and GBP improves TWE’s competitive position
in offshore markets. We maintain our bearish stance on the AUD, hence TWE should
continue to benefit from a lower currency over the medium term.
We believe TWE will be a major beneficiary of the increased sophistication of Asian
palate with the growing popularity of wine in the region. There has been a clear trend
of impressive growth in Asia as the consumer becomes more familiar with wine as a
consumer product (Australian bottled red wine exports to Asia increased 44% in
2H15e). TWE is focused on capitalising on this movement by appealing to the luxury
Asian consumer via its premiumisation strategy. This allows TWE to maximise its sales
margins which are typically higher in Asia (circa 13%) and provide the future engine for
growth as the global transition to the dinning boom continues.
ARDENT LEISURE GROUP
Ardent Leisure Group (AAD) is an Australian company engaged in operating premium
leisure assets. Its domestic assets include Dreamworld, WhiteWater World, SkyPoint
theme parks and attractions and ten-pin bowling centres.
AAD also operates Health Clubs, branded as “Goodlife“. The Goodlife Health Clubs
chain is based in Queensland and South Australia, with operations in Victoria, New
South Wales and Western Australia.
AAD also has an offshore portfolio of assets specialising in family entertainment in the
United States called “Main Event”. Main Event operates indoor family entertainment
centres in the south west of North America. The Main event business is now the largest
division within ADD’s portfolio, making up 35% of operating earnings (EBITDA). We
believe this will continue to grow.
The Group can be viewed in two distinct geographical parts – Australia and the United
States. The Australian group is more mature, lower growth and has lower capital
expenditure requirements. The US group is a high growth, higher return business and
therefore has higher capital expenditure requirements.
We see AAD as a beneficiary of a lower Australian dollar, not only as it has significant
US operations, but a weaker Australian Dollar should increase tourism and benefit
AAD’s business. The US Main Event business is growing strongly, while at the same
time boosted by currency weakness as earnings are translated into Australian dollar
terms. We forecast this tailwind to remain for AAD over the medium term.
The company estimates that the above sensitiveity of its profits to movements in both
the AUDUSD and NZDUSD exhange rate. As indicated, a 10% fall in the AUDUSD
exhange rat is estimated a further AU$ 4m to the comapy’s profits.
Economic themes aside, AAD released a sound 2015 full year result. While earnings
were down, revenues were up strongly. This was driven by the US main event business,
which experienced an increase of 63.8% in operating earnings versus 2014 in USD
terms. The Main event business is expanding with 6 centres opened in 2015, with 7 and
8 mores centres planned for 2016/2017 respectively. We are encouraged by this high
level of growth, which does not factor in our forecasts for weakness in the Australian
dollar.
Positives:
- Benefits from a decline in the AUDUSD exchange rate
- Tourism exposure which benefits from a lower AUD
- Strong growth ambitions from its US “Main Events” business
- Sold its Marina’s business to invest proceeds into US growth
Negatives:
- Earnings are experiencing current headwinds
- US Main Events business is currently experiencing margin compression circa
1% - Oil price slide and closure of US oil rig closure appears to have negatively
impacted on US consumer sentiment