Worth Holding

Shopping mall owner Scentre Group (ASX.SCG) shares advanced and continue to trend higher after releasing robust underlying results and upbeat distribution guidance of at least 17.2 cents per stapled security in 2024, above consensus.

Turning to the charts, Scentre Group has confirmed a topside breakout from a multiyear primary downtrend which is encouraging. An advance above $3.20 at the top of the range, would confirm an inflection and raise scope for additional upside to the next resistance level at $3.80.

With that out of the way, we turn our attention to the group’s FY23 trading update:

Trading Update – FY23 Results Review

Scentre Group’s Westfield shopping centres reported record retail sales of $28.4 billion in 2023, marking a $1.7 billion increase compared to the previous year. An interesting result despite a slowdown in consumer spending, perhaps this reflects resilience in the group’s tenant categories.

The surge in sales, up by 6.4%, likely influenced by both organic growth and inflationary effects on goods sold, contributed to a 5.2% rise in funds from operations (FFO) to $1.09 billion for the fiscal year ending December. So far, full year distribution amounted to 16.6¢ per security, up 5.4%.

Increased foot traffic, up by 6.7% across Scentre’s centres, and high demand for retail space drove occupancy rates to 99.2%, up from 98.9% the previous year.  We also note a worthy improvement in leasing spreads, which went from -3.6% 12 months ago to +3.1%. This indicates a notable positive shift in the rental rates achieved on new leases compared to expiring leases within its portfolio of shopping centres and malls.

Throughout the year, Scentre completed 3,273 leasing deals, adding 307 new brands to its portfolio, comprising 42 Westfield retail centres in Australia and New Zealand.

Expansion projects, like the completion of the final stage of Westfield Knox in Melbourne and ongoing developments at Westfield Sydney, aim to enhance retail offerings and customer experiences.

Strategic partnerships with brands like Disney, Live Nation, and Netball Australia, along with initiatives like the Westfield membership program, contributed to increased customer visitation, reaching 512 million for the year, up 6.7% from 2022.

Scentre Group anticipates continued growth, with a focus on creating exceptional retail destinations and experiences, supported by a $4 billion pipeline of retail development opportunities.

The group targets a FFO range of 21.75¢ to 22.25¢ per security for 2024, reflecting a 3 to 5.4% increase over the previous year, and expects distributions of at least 17.2 cents per security for 2024.

Write-Downs

That aside, management brought attention to the fact that there was almost $1.1 billion in write-downs, representing a -1.9% valuation decline. This significant figure indicates a downward adjustment in the value of the company’s assets, primarily its portfolio of shopping centres and malls.

The write-downs were primarily driven by an average 42 basis point softening of capitalization rates. Capitalization rates, also known as cap rates, are used to determine the value of income-producing properties based on their expected income. A softening of these rates were due to a decrease in property values, which necessitated the write-downs.

The substantial write-downs contributed to a decline in Scentre Group’s statutory net profit, which dropped by -41.8% year-on-year to $174.9 million. Though this metric is not as important for SCG as it functions more like a REIT in a portfolio providing income but this development is still worth tracking.

After all, write-downs reflect broader trends in the commercial real estate market, where shifts in economic conditions, investor sentiment, and property market dynamics can lead to fluctuations in asset values. In this case, the softening of capitalization rates may be attributed to factors such as changing market expectations, interest rate movements, or specific challenges within the retail sector.

Summary

Scentre Group’s record-breaking retail sales in 2023 underscore the resilience and adaptability of its shopping centre portfolio, marked by increased foot traffic, high occupancy rates, and strategic leasing initiatives. Despite the challenges posed by the pandemic and inflationary pressures, the company’s focus on creating compelling retail experiences and forging partnerships with leading brands has paid off, driving growth in both sales and funds from operations. Expansion projects and ongoing developments further demonstrate Scentre’s commitment to enhancing its retail offerings and meeting evolving consumer preferences.

Looking ahead, the group’s robust pipeline of retail development opportunities positions it for continued growth, supported by a targeted increase in funds from operations and distributions for 2024.

In the meantime, despite the positive results, we maintain our HOLD rating on Scentre Group (ASX.SCG) for now. We believe that it is crucial for the broader monetary policy to change before we adjust our view on the group.

A catalyst around the corner?

China’s Ministry of Commerce (MOFCOM) has issued an interim draft proposing the removal of tariffs on Australian wine exports. Although not a final determination, we would be very surprised if the removal of tariffs didn’t go through after reaching this advanced stage. Speaking at The Australian Financial Review Business Summit, the Chinese ambassador indicated this would be the likely outcome.

The AFR quoted Xiao Qian as saying, “Currently, Chinese authorities are reviewing and investigating our tariffs on Australian wine and things are moving on the right track, in the right direction.”

After punitive tariffs were imposed in late 2020, devastating Australian wine exports to China, relations between the two countries have been distinctly cool for much of that time. We have seen signs of thawing over the past year and placed a significant probability that a review kicked off in late 2023 would result in a positive outcome for TWE, although we considered this a ‘bonus’ rather than a necessity for our buy recommendation on the stock. We noted a China ‘reopening’ would be a welcome growth opportunity, though the company has already executed well by filling that hole by increasing sales in Southeast Asia, materially strengthening the business.

We continue to see value at current levels, given the solid outlook for luxury wines, the addition of DAOU Vineyards products, and a possible nadir for the Treasury Americas business in 1H24. We are encouraged by the ongoing shift in sales strategy, focusing more on the high-end premium and luxury segments, with the Penfolds brand being a key differentiator and ‘crown jewel’ asset.

Additionally, we foresee more strategic divestments and refined internal investments, as previously indicated. This includes cutting costs in the Treasury Premium Brands segment and minimising the impact of soft demand for lower-tier wines, enhancing the business quality at the group level. As the company integrates DAOU, it is positioning to create a separate sales and marketing focus between luxury and premium product portfolios within the laggard Treasury Americas segment from the beginning of FY25. We rate Treasury Wine Estates a buy.

Treasury Wines has bounced off the primary uptrend and appears technically to be headed towards a retest of the major resistance level at $14. A breakout above $14 would significantly raise the scope for further upside and another run at the record highs. It is encouraging that TWE has held above the primary trendline since the pandemic lows and the introduction of Chinese tariffs.

An imminent outcome. The final determination from MOFCOM is now expected within the coming weeks, and we are firmly optimistic the outcome will be favourable.

Treasury Wine has kept its options open for this possible outcome. The company opted to keep some luxury premium Penfolds volume in reserve in 1H24, which was a headwind for the financials. The Chinese market accounted for roughly 30% of group earnings before the imposition of sky-high tariffs. TWE expects only a minimal incremental EBITS benefit from renewing Australian country of origin exports to China in FY24 should the tariffs soon be removed. We would expect this contribution to lift in FY25, although certainly aren’t expecting a return to the ‘old days’ anytime soon. Positively, TWE was able to successfully pivot to ASEAN sales, which has strengthened the business. Meanwhile, Penfolds’ buyers should brace for global price rises for the high-end Penfolds range if the Chinese tariffs are removed.

In the 1H24 results, group net sales revenue (NSR) of $1,284.3 million was flat on a reported basis and 2.3% lower in constant currency. Positively, luxury NSR increased by 4.3% as the premiumisation strategy continued. Penfolds was the only segment that posted an increase, with sales rising 9.2% to $448.1 million. The Penfolds segment remains the key earnings driver, with EBITS increasing 2.9% to $186.9 million. Group EBITS for the six months came in at $289.8 million, matching market expectations. This marked a 5.8% decrease, hampered by a 17.5% fall in Treasury Americas’ EBITS to $93.1 million. Treasury Premium Brands EBITS was down a more modest 3.2% at $45.8 million.

In summary, Treasury Wine Estates looks poised to benefit from the removal of China tariffs, which we expect to begin benefiting the financials from FY25. TWE delivered to market expectations overall in 1H24 despite a lacklustre performance from the Treasury Americas segment. A strategic shift away from the lower-tier market is ongoing. For investors with a mid-term perspective, Treasury Wine offers an attractive proposition in our view. The company is committed to a premiumisation strategy, eyeing sustainable growth and margin expansion, with a strategic game plan in place should Chinese tariffs ease. TWE has significant scope to expand the distribution of the DAOU luxury range. We retain a buy rating.

The next steps

Sonic Healthcare shares took a hit after the recently reported 1H24 results, interrupting a fledging recovery that began playing out in late 2023, as top-line growth was overshadowed by a sharp fall in earnings. The collapse in pandemic-related revenues made for a stiff headwind in what CEO Colin Goldschmidt calls a “transition” year. Still, some notable cost increases squeezed margins, and net interest expense picked up.

Sonic maintained the FY24 EBITDA guidance range of $1.7 to $1.8 billion provided in August 2023, though it is now expected to lean towards the lower end of this range​. A Belgian fee cut and FX headwinds were drags. Even at the lower end, this implies management is anticipating a material improvement in 2H24, given the $737 million in 1H24 EBITDA only constitutes roughly 43% of the lower bound.

Whether this is achieved remains to be seen; we don’t think it will be easy. However, given the lower bar, we anticipate a material improvement in the second half and beyond. We certainly back the senior management at Sonic, who has grown the business explosively over three decades from humble beginnings. Sonic now command a dominant share in the Australian market, followed by a leading share in Germany, the UK and Switzerland, while achieving a commendable third place standing in the competitive US market.

Despite the waning of the Covid-related business, Sonic remains well-positioned to capitalise on the favourable growth prospects inherent in the healthcare sector. The diagnostic imaging segment typically showcases resilience across economic cycles. The company is advancing sophisticated digital and AI capabilities. These should dramatically improve efficiency in the years ahead, alleviating the recent cost pressure, as should the bedding down of the recent acquisitions. On that note, the windfall from the pandemic left Sonic with a robust balance sheet, providing a platform for a pipeline of bolt-on acquisitions.

While Sonic’s debt levels rose over the past six months due to ~$0.9 billion in acquisition spending, the balance sheet remains healthy, with around $1.5 billion in available headroom.

Source: Sonic Healthcare

Given Sonic’s current market valuation, we perceive these attributes to be overlooked, presenting a robust investment opportunity for those seeking a steady dividend grower. Stocks like Sonic and the broader healthcare sector should attract more interest as the market anticipates looming rate cuts from the RBA. As a defensive sector, healthcare has been vulnerable to elevated bond yields.

Meanwhile, the compression in the valuation and downward revisions from the brokerage community have significantly lowered the bar for future outperformance. Along with some other company-specific elements we view positively, we rate Sonic Healthcare a buy.

Despite the pullback, support from the primary uptrend looks solid for Sonic Healthcare, which should hold and drive a rebound over the coming year. [subscribe_to_unlock_form]Only a breakdown below the primary support level would raise the scope for further corrective downside. The shares have tested and held above the primary uptrend numerous times, as evidenced by the 20-year monthly chart below.

 1H24 headline numbers

Total revenue increased 5.5% year-on-year to $4.3 billion in the six months ended December 2023. A headwind was the plunge in Covid-related revenue to just $37.4 million from $378.6 million a year earlier. This masked the robust 15.2% increase in base revenue to $4.09 billion. This Covid-related headwind is now primarily a spent force and won’t have a (material) drag from FY25. Base organic growth in the half year was 6.2% (with this pace continuing in January), while some $500 million in revenue stemmed from acquisitions and new contract wins. Management noted that they are running the ruler over more acquisition opportunities. Organic revenue growth was strong in the core Australian business (+9%), the UK (+13%), Germany (+8%) and the Radiology division (+11%).

EBITDA fell 20% to $737 million, notably below consensus expectations. The typical weighting towards more robust 2H performance is expected to be enhanced in FY24. Statutory NPAT almost halved (-47%) to $202 million as there were hefty increases in labour (and related costs), consumables, transportation, utilities, borrowing costs expenses and others. Earnings per share fell 47% to 42.6 cents. Still, the interim dividend was given a 2.4% bump to 43 cents per share, reflecting management confidence.

Management has set out cost-reduction programs across the company to tackle elevated costs resulting from the rapid growth seen during the pandemic and recent acquisitions. In addition, there are synergies to flow through from those acquisitions. Combined with digitisation efficiencies to come, we see the scope to fatten up margins materially from the levels seen in 1H24.

In summary, aside from the top-line momentum for base revenue, there wasn’t much to like in Sonic’s 1H24 numbers on the surface. However, there were more favourable underlying elements when digging below the surface, with the EBITDA performance being more heavily weighted to 2H24. Meanwhile, there is significant scope to lift margins from these levels, which, combined with top-line growth, could see a step-up in FY25 earnings growth. The company is well-placed to continue with accretive M&A due to the robust balance sheet, while favourable structural trends support the core business. The valuation is moderate, with catalysts on the horizon that could drive a re-rating. We rate Sonic Healthcare a buy.[/subscribe_to_unlock_form]

What we’ve been waiting for

Suncorp (ASX.SUN) surged to a 5-year high after booking a major win where the Australian Competition Tribunal overruled anti-competition watchdog, the ACCC, after authorising ANZ’s proposed $4.9 billion acquisition of Suncorp Bank. At this point, the takeover will still need approval from the Treasurer, Jim Chalmers, and an official sign-off from the government of Queensland.

Before reviewing the update, a detour to the technicals and Suncorp has inflected above historic resistance after breaking out above the primary downtrend at $15 on the 20yr monthly chart below. This is a bullish technical development and raises scope for additional upside in the coming year. In time Suncorp should challenge the record highs near $20.

Trading Update – Overruled!

Yesterday, the Australian Competition Tribunal has approved ANZ Group’s A$4.9 billion acquisition of Suncorp’s banking business, readily overruling the anti-competition watchdog, Australian Competition and Consumer Commission’s (ACCC), earlier decision that blocked the deal due to concerns about reduced competition in the banking sector. The tribunal’s decision is significant for both ANZ and Suncorp while less relevant to the deal, we expect to see increased discussion on current merger laws.

First, a recap on the journey thus far. The ACCC initially rejected ANZ’s proposed acquisition of Suncorp Bank in August 2023. ANZ had announced its intention to purchase Suncorp Bank in 2022 to enhance its retail presence, specifically its loan book and the larger home lending market, where it has trailed its larger rivals. On the other hand, Suncorp intends to focus on its insurance business after selling its banking unit, aiming to become a dedicated Trans-Tasman insurance company

Originally, the ACCC’s rejection of the deal was based on concerns about the impact on competition within the banking sector in Australia – a view we do not concur with considering that any market share gain for ANZ would not be as material as feared.

ANZ and Suncorp subsequently appealed the ACCC’s decision to the competition tribunal.

Interestingly, we note that despite the positive outcome of the decision for both parties, ANZ shares did not surge higher. Upon closer inspection of other banking analysts, the consensus view is that the acquisition is not likely to significantly increase ANZ’s market share in home lending – hence why we believed that the deal will be pushed through by regulators. Do note that the merger will still be important for ANZ (more on this later when we update coverage of the bank).

Moving on and from this point, the final approval for the acquisition rests with Australian Treasurer Jim Chalmers and the government of Queensland, where Suncorp is headquartered. If the merger is ultimately approved, completion is expected around “mid-2024”.

Commenting on the development, Suncorp Group CEO, Steve Johnston, notes that the sale would now allow Suncorp to dedicate efforts fully to insurance (without distractions from the banking arm) and will transform Suncorp into “a dedicated Trans-Tasman insurance company at a time when the value of insurance and the need for continued investment in a vibrant private insurance sector had never been greater.”

Summary

The approval of ANZ’s acquisition of Suncorp’s banking business represents a significant development for both parties. The decision by the Australian Competition Tribunal to overturn the ACCC’s rejection of the deal is the development we’ve been waiting for. This also confirms our initial view that the deal will ultimately get approval by regulators.

ANZ’s strategic rationale for the acquisition aligns with its long-term growth objectives, aiming to strengthen its market position and capitalize on emerging opportunities. Suncorp’s successful divestment of its banking division underlines the importance of strategic agility and can now focus exclusively on running a Trans-Tasman insurance company (and without the distractions of a banking arm).

Following the results of this, we believe the likelihood of the Suncorp Bank/ANZ deal pushing through has improved dramatically. In light of that development, we have now adjusted our rating on Suncorp (ASX.SUN) back to a BUY for Members without exposure. We will continue to monitor developments here as the merger gets closer to reality.[/subscribe_to_unlock_form]

Solid foundations despite a setback

Even though Evolution Mining faced a challenging December quarter, marked by crimped production at the Red Lake mine in Canada and Mungari in Western Australia, higher gold prices boosted underlying earnings and net mine cash flow metrics. The balance sheet remains rock-solid with an increase in the cash position and lower gearing, while there has been a substantial boost to resources.

The acquisition of the 80% stake in the Northparkes copper-gold mine located northwest of Parkes, in the central west of New South Wales, Australia, looks to be a good one for Evolution. Copper production for Evolution is set to jump, with copper revenues to make up about 30% of Evolution’s total revenue mix going forward. However, this, of course, will be influenced by the pricing of the two metals. Management reported the first two months of Northparkes operation had generated cash and delivered to plan.

The stock tumbled in December and January following the Northparkes announcement and equity raise, followed by the rough December quarter activities report. Gold production was lower than anticipated, and the all-in-sustaining cost (AISC) did not decrease as expected.

We have a bullish outlook on gold and copper. Evolution has high-quality assets in attractive jurisdictions (Australia and Canada), with the scope for existing resources to grow further with more exploration. We view the correction in the shares as an overreaction, with the current valuation appealing to investors seeking gold and copper exposure. We rate Evolution Mining a buy.

Turning to the technical picture, since breaking out of a primary downtrend in the second quarter of 2023, Evolution followed through on the upside. The bullish technical setup has since suffered a setback, with a fair bit of damage on the charts incurred following the disappointing quarterly production update.

However, despite the setback, EVN looks to be finding support at the key $2.90 level, which could drive a recovery in the coming year. It’s important to keep incumbent bearish sentiment around the stock in perspective, with the A$ gold price likely headed for new record highs this year that will continue to drive cash flow.

1H24 headline numbers (in A$ unless otherwise noted)

In the first half of FY24, Evolution Mining produced 319,377 ounces of gold at an all-in sustaining cost of $1,615 per ounce, leading to a 53% surge year-on-year in its underlying net profit after tax to $158.1 million. [subscribe_to_unlock_form]The financial improvement was propelled by a 16% hike in gold prices, reaching $3,000 per ounce.

Source: Evolution Mining

Underlying earnings before interest, taxes, depreciation, and amortisation (EBITDA) climbed by 28% to $572.6 million. Evolution maintained its interim dividend at 2 cents per share, fully franked, which was somewhat disappointing but understandable given the context.

The net mine cash flow increased 136% to $203 million after $231 million of investment in growth projects. Operating mine cash flow increased by a more modest 30% to $618 million, while group cash flow improved by $169.3 million to $52.4 million, swinging from the $116.9 million outflow in the prior corresponding quarter. Decreased capital intensity and improved margins thanks to higher gold prices have driven the cash flow improvement. Evolution Mining concluded the quarter with a cash reserve of $191 million and a reduced gearing ratio, down from 32.8% to 29.7%.

Ongoing exploration at Ernest Henry, Mungari, and Cowal, along with the acquisition of the Northparkes copper-gold mine in New South Wales, has led to an 8% increase in Evolution’s gold mineral resources to 32.7 million ounces and a 134% increase in copper to 4.1 million tonnes. Consequently, gold and copper reserves have climbed by 15% (net of depletion) and 100% year-on-year to 11.4 million ounces and 1.3 million tonnes, respectively. CEO Lawrie Conway noted regarding Northparkes, “The feasibility study for the E22 orebody is progressing and we anticipate the outcomes of that study to be available early in the June 2024 quarter, which will inform future mining options at the asset.”

Despite a substantial production shortfall at its Red Lake mine in Ontario in the December quarter, Evolution maintained its annual production targets of 789,000 ounces of gold and 62,500 tonnes of copper at an AISC of $1,340 per ounce, plus or minus 5% for each of those metrics. In our view, at the current valuation level, the market is pricing an expectation these targets will not be achieved.

In summary, we have a bullish outlook on gold and copper. Evolution has high-quality assets in attractive jurisdictions (Australia and Canada), with the scope for existing resources to grow further with more exploration. We view the correction in the shares as an overreaction, with the current valuation appealing to investors seeking gold and copper exposure. We rate Evolution Mining a buy.

Disclosure: Interests associated with Fat Prophets hold shares in EVN. 

New Directions?

Shares in Alliance Aviation Services dipped lower despite 1H24 results revealing a three-fold jump in statutory profit before tax of $37.7 million. Alliance Aviation is the biggest independent aviation training centre in the United States and Latin America.

Turning to the technicals, listed on the ASX, Alliance Aviation has corrected sideways since 2020 in a primary downtrend. While the stock is holding above support at $2.70, only a breakout above $3.30 and price action follow through would confirm a topside inflection.

Company Overview

Alliance Aviation Services (ASX.AQZ), founded in 2002, is a leading provider of contract, charter, and allied aviation services in Australasia. With a focus on safety, reliability, and customer satisfaction, Alliance has established itself as a trusted partner for clients in the mining, energy, government, and aviation industries.

Alliance offers a diverse range of aviation services, including contract and charter flights tailored to the specific needs of its clientele. Its offerings also extend to wet lease services, providing support to other airlines. The key point here is that Alliance provides essential transportation (personnel, equipment, and cargo) and logistics for miners especially towards remote and challenging locations.

One of Alliance’s distinguishing features is its ownership of the entire fleet, comprising 37 Fokker 70/100 aircraft and 41 Embraer E190 aircraft. Additionally, the company has firm purchase commitments for an additional 26 E190 aircraft until mid-2026. This diverse fleet enables Alliance to cater to various operational requirements efficiently.

We find Alliance appealing largely due to its strategic role in providing contract and charter aviation services to essential industries like mining, energy, and government. With a diversified client base and ownership of its entire fleet, Alliance ensures operational flexibility and efficiency, making it a preferred partner for clients in safety-critical sectors.

Aligned with the positive outlook for the commodity and mining sector, Alliance stands to benefit from the increasing demand for reliable aviation services in remote and challenging locations. As mining activities expand globally, driven by population growth and infrastructure development, Alliance’s market position and growth potential are poised for further enhancement.

That aside, the company also recently appointed a new CEO. Mr. Stewart Tully, who currently serves as the Chief Operating Officer (COO) of the company, will be promoted to the position CEO effective March 1st, 2024. Mr. Tully has been with Alliance since 2015 when he joined as the General Manager – Operations in Brisbane. He brings with him extensive experience in the aviation industry, accumulating 34 years of direct or indirect involvement in the sector.

We like this development as [subscribe_to_unlock_form]Mr. Tully has demonstrated the necessary experience and leadership in running Alliance. With the company leaning heavily on operational excellence, a CEO with background in operations should keep the company in the right direction.

In addition to Mr. Tully’s promotion, Alliance has initiated a search process for two additional Directors as part of its Board renewal strategy. This process aims to ensure Board stability while bringing in fresh perspectives and expertise. The company plans to manage this renewal in an orderly manner.

1H24 Results Review

With that out of the way, a brief review of the 1H24 results. First off, Alliance Aviation reported total revenue from operations of $299.4 million for 1H24, showing an increase of $64.0 million from last year. Growth in revenue was driven by significant expansion in contracted wet lease operations.

While in terms of profitability, the Statutory Profit Before Tax (PBT) for 1H24 was $37.7 million, a significant increase from $9.5 million in the previous corresponding period (1H23). This represents a substantial growth of $28.2 million or 296% year-on-year.

Source: AQZ 1H24 Presentation

The solid growth in Wet Lease operations has resulted in a substantial bump in record flight hours of 50,793 for 1H24, representing an increase from 32,365 flight hours in HY23.

Going forward, Alliance Aviation expects growth in earnings for the 2H24. Management plans to continue deploying capacity to meet increasing demand for wet lease and FIFO (fly-in-fly-out) operations. The delivery of seven E190 aircraft in the 2H24 should also add to the momentum. That aside, management expressed that their focus remains on cost control and maintaining profitability margins in a high inflation economy.

Despite its niche appeal, we do recognise the high-risk nature of this business with it subject not only to fuel prices – typical vulnerability of airline services – but also to commodity prices. Lower prices of minerals can impact demand for services though contractual nature may reduce impact.

That said, at this point, we believe it more prudent to issue a Traffic Light on Alliance Aviation Services (ASX.AQZ). We will track it as part of our watchlist and, when a better buying opportunity presents itself, we will revisit the company as a potential addition to the Fat Prophets portfolio.[/subscribe_to_unlock_form]

Passing the Baton

Shares in National Australia Bank (ASX.NAB) inched slightly lower after CEO Ross McEwan announced his retirement with plans to fully step down at the start of April. McEwan was appointed CEO back in 2019 during a difficult time for the bank and has since steered the ship in the right direction with the shares up some 20% during his tenure. McEwan will be replaced by Andrew Irvine, the bank’s group business and private banking lead. Today, we take a look at the update and what this could spell of NAB.

Update – CEO Retires

As noted above, NAB CEO Ross McEwan announced his intention to retire from his role as CEO – expressing his desire to spend more time with family. McEwan was appointed CEO back in July 2019 in a difficult time for the bank which faced years of underperformance not to mention the aftermath of the Hayne Royal Commission that lead to then-chairman Ken Henry and then-CEO Andrew Thorburn.

McEwan eventually stabilised the bank and won over stakeholder support through strategic reforms, organizational realignment. The result was a bank focussed on simplification, customer service, and talent development – and so far has been paying dividends (real and figurative).  McEwan’s retirement marks the end of an era but, we believe, he won’t be gone for good considering that he did express desire to explore Board positions.

That said, Andrew Irvine the Group Executive of Business and Private Banking has now been appointed as the Group CEO. Mr Irvine has an impressive background having a long tenure in the Financial and Management Consulting industries. Before Joining NAB, Irvine was the Head of Canadian Business Banking in the Bank of Montreal – one of Canada’s largest financial institutions – as well as previous experience with McKinsey & Company, Lycos Europe, and Credit Agricole.

Irvine definitely has big shoes to fill and inherits a bank poised for further expansion – at least the foundation laid by McEwan is very strong. Under Irvine, we believe that NAB will continue its transformation and, likely, see continued efforts to strengthen the business banking and may even take top spot from CBA in this category. Irvine will take over the CEO role from McEwan on April 2.

There are also other challenges which include further improving the digital experience – a key area given that product distribution has become more complex for banks in a market that is already intensely competitive.

On the compensation package, we believe that this is a fair mix of fixed ($2.5mn/year) and variable components with the latter linked closely to the bank’s overall performance and long-term success. We reviewed the terms and believe this would align Irvine well with shareholders.

Overall, we’re pleased with this appointment and look forward to how Irvine will shape NAB.

Summary

The announced retirement of Ross McEwan marks the end of an era having stabilised the bank as well as placed reforms that form a strong foundation for incoming-CEO Andrew Irvine. Irvine inherits a bank poised for expansion. We believe that Irvine is the right choice, though, considering his customer-centric focus – highly important in the business banking market – not to mention his strong track record in banking and management consulting.

In the meantime, we maintain our HOLD rating on NAB (ASX.NAB). It will remain firmly held in the Fat Prophets portfolio.

A Nickel Thorn on the Side

Shares in the Big Australian, BHP (ASX.BHP), announced lower full-year production guidance in the Queensland coal operations after a “tough six months” for the 1H24 period. Another headache for management is the substantial dip in nickel prices – falling nearly 50% – following an increase in nickel exports from Indonesia, fuelled by Chinese investment. The weakness in nickel prices has pushed management to evaluate options at the Nickel West operations in WA; we expect an update next month.

Before moving on to the quarterly update, a quick look at the technicals and after encountering resistance at $50, BHP has corrected back toward the primary uptrend that has been in place since 2020. Whilst the stock could go lower, the primary uptrend should hold. Below $45, BHP is in buying territory. Iron ore prices should soon find a floor.

2Q24 Trading Update

Starting from the top, BHP experienced a strong first half in copper, iron ore, and energy coal but faced challenges in metallurgical coal.

In terms of operational performance, the highlights are: [subscribe_to_unlock_form]WA Iron Ore production increased by 5% quarter-on-quarter, and first-half copper production rose by 7%. NSW Energy Coal had its best first half in five years. BMA (metallurgical coal) had a tough six months due to planned maintenance and low starting inventories. Nickel West is evaluating options to mitigate the impacts of a sharp fall in nickel prices.

Source: BHP 2Q24 Filing

On specific segment performance, starting with Copper. Total copper production increased by 7% to 894 kt. Escondida, Pampa Norte, and Copper South Australia contributed to the growth. Spence recorded a half-year production record, but Cerro Colorado entered temporary care and maintenance.

Next, Iron Ore. Total iron ore production decreased by 2% to 129 Mt. Lower production in WAIO due to tie-in activity for the Rail Technology Programme and ongoing ramp-up in the Central Pilbara hub. Samarco production increased by 13% due to higher concentrator throughput.

While for Coal, BMA production increased by 17% to 11.3 Mt but faced challenges, including a fatal incident at Saraji mine. NSW Energy Coal production increased by 36% to 7.5 Mt. Full-year production guidance for BMA lowered to between 23 and 25 Mt. NSW Energy Coal production guidance for FY24 expected to be at the upper end of the range of between 13 and 15 Mt.

Moving on, BHP also highlighted challenges in Nickel operations. While iron ore and copper prices have been impacting BHP’s revenue, nickel, a smaller percentage of its revenue, is causing additional concerns. There was the fact that Nickel fell 50% year-on-year. The nickel industry is experiencing structural changes, with increased supply from Indonesia contributing to a decline in nickel prices.

There is a call for a more transparent pricing mechanism that distinguishes between clean and dirty nickel, particularly as the environmental impact becomes a significant consideration, especially in the electric vehicle (EV) market.

For the quarter, BHP notes quarterly nickel production increased by 4% to 40,000 tonnes, but the average realized price dropped by 24% to US$18,602/tonne.  BHP acknowledged that the nickel industry is undergoing structural changes and is facing a cyclical low in realized pricing.

That and BHP is actively optimizing operations and evaluating options to counter the challenges posed by the sharp fall in nickel prices. Management is conducting a carrying value assessment of its nickel assets under existing market conditions, with further details expected in the financial results release next month on February 20.

Nickel West, a key part of BHP’s nickel operations, is actively exploring options to mitigate the impact of the significant decline in nickel prices. BHP Nickel West Asset president Jessica Farrell highlighted the tough operating environment, with rising costs and falling Nickel prices. Nickel West is described as a complex business involving underground mining, third-party supply, on-site smelting, downstream refining, and a multi-stage supply chain.

Meanwhile, BHP has decided to pause part of its Kambalda processing operations in Western Australia, following Wyloo’s decision to place several nickel mines under care and maintenance.

Going forward, management has kept production guidance for FY24 unchanged for most assets, except BMA, which lowered its production guidance. Unit cost guidance increased for BMA to between US$110/t and US$116/t due to lowered production guidance.

Summary

BHP’s operational review highlights a mix of strong performance and challenges across its key segments. While copper, iron ore, and energy coal showed positive results, metallurgical coal (BMA) faced difficulties. The fatal incident at Saraji mine is a tragic event, and BHP is committed to learning from it.

The growth agenda is progressing, with the ongoing construction of the Jansen mine and the sanction of Jansen Stage 2. Exploration drilling beneath Olympic Dam has identified promising copper mineralisation.

Financially, production guidance remains stable for most assets, except BMA, where production guidance was lowered. Unit cost guidance for BMA increased due to the lowered production outlook.

In the meantime, while we wait out further improvements to the commodity prices, we maintain our HOLD rating on BHP.

Disclosure: Interests associated with Fat Prophets hold shares in BHP.[/subscribe_to_unlock_form]