This week, Sasol, AVI, Ascendis and Aspen are topical stocks. Here’s what you need to know to profit.
Take a listen to Mark's thoughts here.
Share price: R370,30
Net shares in issue: 610,6 million
Market cap: R226,1 billion
Exit PE ratio 9,3x; forward PE 10,9x; dividend yield 4,0%
Fair value: R440
Target price: R580
Trading Buy and Portfolio Buy
Annual earnings are out and, as expected, are down. For a number of months now I’ve forecast a 21% drop in earnings per share, from 4976 cents to 3912 cents. The trading statement on the 6th of June indicating a 10% to 30% drop squares with this expectation, so no surprises. In practice, HEPS is down by 17% to 4140 cents. Earnings per share is 56% down, largely due to a shale gas impairment of R10 billion, of which R7,4 billion came through in H1. I currently estimate earnings will be down again in F2017 by 18% to 3400 cents before recovering in F2018 to 3865 cents. This is subject to revision following analysis of the F2016 result and management feedback. Sasol declared a final dividend of 910 cents (higher than my estimate of 830 cents) making for a full year dividend of 1480 cents, down 20%.
Whilst earnings are down this is no reason to panic. Sasol’s earnings can be all over the place because of the ups and downs of oil, currency and chemicals prices and volumes produced. This is a complex beast. The monster Lake Charles project in Louisiana and the implications of that aside, the stock is fundamentally on the cheap side even allowing for a soggy earnings picture. Cash flow is positive, the debt to equity ratio is 14% and the balance sheet can take the big capex strain for the next two years with debt to equity peaking at below 50%.
I have kept Sasol a trading Buy with the caveat of selling the rallies into strength, as the catalysts for a sustained bull phase are not there. Weakness below R400 remains an opportunity.
Fair value at R440 with target price maintained at R580 on a positive fundamental longer run outlook.
Here are a few things to take note of in the official figures.
The average rand dollar exchange rate for F2016 is R14,52/$ compared with R11,45/$.
The oil price is 41% lower at an average of $43,37/bbl.
Earnings are affected by the reversal of a tax provision in Nigeria worth R2,3 billion or 377 cents per share and a R1 billion currency translation gain.
Refining margins are lower in dollars but petrol crack spreads are higher on average whilst diesel crack spreads are lower.
Petrol prices were 15% lower in F2016 in ZAR whilst diesel prices are 25% lower.
Refining margin for F2016 are slightly higher at $14/bbl.
Polymer prices are down sharply in USD with propylene down 33%, polypropylene down 25% and low density polyethylene and linear low density polyethylene down 15% each. Coal is about 17% lower on average.
A $1/bbl change in the petrol crack spread has about a 65 cents per share impact on EPS whilst a $1/bbl change in the diesel crack spread has a 50 cents EPS impact for a combined 115 cents impact.
Energy is the largest contributor at 43% of clean operating profit even though profits are down by 28%.
Base Chemicals profits are down by 44%. However, both Performance Chemicals and Mining are above their 2015 level.
The decline in the group operating profit, before translation gains/losses and remeasurement items, is limited to 23%.
The approval by the National Energy Regulator of increased tariffs on the Transnet liquid fuel pipeline will positively affect Sasol earnings by R200 million in year one and R500 million thereafter.
On balance, not a bad result in the conditions.
A few thoughts on Lake Charles, which I visited on my trip to Houston last year.
The Lake Charles Chemical Project in Louisiana will cost more than originally projected with the capital costs moved out by 20% to about $11 billion or an extra $2 billion. However, in an earlier note I observed that “cost-creep is a common feature of such mega-projects and I have little doubt that over the build horizon we should prepare for that to edge up.”
The economics of Lake Charles are much more sensitive to chemical prices than capital costs – in other words oil, gas, ethane, and ethylene spreads, inter alia. An abundance of low-cost feedstock will make Sasol less sensitive to the traditional oil and currency dynamics - earnings diversification results in those old correlations becoming far less pronounced.
The NPV of Lake Charles in a static modelling scenario would reduce but I’ve been conservative and at this point keep the PV unchanged at R65 per share with additional EPS at around R12. IRR of around 8,5% is in line with cost of capital. Time will tell – the chemicals project will start to contribute materially to earnings only from F2019/F2020.
Whilst oil and the rand/dollar exchange rate are the two key variables driving earnings, this sensitivity is less pronounced should the Lake Charles chemicals project realises its anticipated benefits.
I estimate Lake Charles could reduce the oil price sensitivity by about at least 15% and the currency sensitivity by at least 25%. The proportion on non-South Africa earnings will rise, with the US potentially over 30%, South Africa at around 50% and with Europe, Middle east, Asia and Africa the balance.
Profitability beyond 2019/2020 seems encouraging from this vantage point.
Share price of Sasol in ZA cents
Share price: R92,71
Net shares in issue: 320,8 million
Market cap: R29,7 billion
Exit PE ratio 19,6x; forward PE 18,4x
Dividend yield 4,0%
Fair value: R92
Target price: R100
Trading Buy and Portfolio Buy
AVI has reported annual earnings in line with my expectation. My earnings estimate has been maintained for some months at 463,4 cents per share, a rise of 10,4%, with earnings of R1 488 million estimated versus R1 339 million. In practice, EPS has come out at 464,1 cents, up 10,6%, with rand earnings at R1 492 million.
My three-year forecast CAGR on EPS remains at 10,2%.
Revenue for the year is up 8,4% to R12,2 billion compared with a rise of 6,5% to R6,4 billion at the interim stage. Operating profit margin is higher at 17,7% with the result that operating profits are up 12,4%.
The interim dividend was up 13,6% to 150 cents and the final dividend is 220 cents, slightly higher than my forecast of 217 cents, which therefore makes for an annual dividend of 370 cents.
In a note called “Divergent paths” dated 28 July, I analysed AVI and Tiger Brands as comparative investments. The title pretty much sums up why AVI has been a preferred exposure. Tigers is now having to panel beat itself in to shape whilst AVI is a humming machine.
AVI is not cheap. The EV/EBITDA ratio exceeds 12x and the exit PE ratio is 19,6x. But the yield on an annual dividend of 370 cents is 4,0%, which is nice. AVI offers a substantially higher dividend yield due to the fact that the cash flow profile enables a far more generous dividend than Tiger Brands without compromising capital expenditure.
Trading Buy and Portfolio Buy maintained with a fair value maintained at R92 with the target price R100.
AVI and Tiger Brands based to 100
AVI and Tiger Brands share price in ZA cents
Share price: R28,66
Net shares in issue: 432,2 million
Market cap: R12,4 billion
Exit PE ratio 23,7x; forward PE 21,5x
Dividend yield 0,8%
Fair value: R26
Target price: R30
Trading Buy and Portfolio Buy
Ascendis reports annual results on Wednesday. This is a company I know quite well as I was engaged in late 2013 to undertake the pre-listing assessment and valuation. Much has changed since listing on 22 November 2013.
There’s been a flurry of corporate activity and capital raising, including a recent rights offer to raise R1,2 billion and issue of shares to vendors. The result is shares in issue are now 432 million compared to 229 million at listing. Weighted shares in issue will be about 280 million for 2016 compared with 261 million in 2015, which in turn compared with 212 million in 2014.
EPS of 118 cents is expected, up over 20%, whilst earnings in rand should be up by 35% to R330 million. Normalised earnings were R153 million in F2014 so the business has more than doubled through a mix of organic and acquired growth.
Take note that the geographic mix is changing and thus a better forex match when it comes to hard currency denominated pharmaceutical ingredients relative to soft currency sales in rand. It is feasible for Ascendis to have 30% of sales external to South Africa in the foreseeable future.
The mix of business includes health and personal care products sold to via retail channels, prescription and OTC pharmaceuticals sold through dispensaries, doctors, wholesalers, pharmaceutical retailers, medical devices sold to private and government hospitals, and health and care products to the plant and animal markets.
Even allowing for the additional shares to service, my three-year forecast CAGR on EPS is 18%. The likelihood is that planned acquisitions and potential acquisitions, together with scope to improve trading margin, will boost this number.
Pre-listing I priced Ascendis as a growth stock. At that time, in November 2013, the stock was listed at R11 but my fair value was R14 and the target price R16.
Of late, the stock has shot above my fair value of R26 and closed at just below R29 on Friday the 9th of September. Nevertheless, there will be some more rabbits to pull out the hat in future so a premium rating is likely to be maintained.
The dividend is small but the company is committed to paying regular dividends and with a cash conversion ratio of almost 100% Ascendis is very cash generative with ample scope to investment for growth.
Given the premium rating the dividend yield of 0,8% is minimal and similar to stablemate Aspen.
Stock isn’t easy to come by in size. The founders, Coast To Coast, retain 44% and there is a mix of other institutional holders.
Trading Buy and Portfolio Buy maintained. Fair value maintained at R26 with the target price R30.
Share price of Ascendis since listing on 22 November 2013 in ZA cents
Share price: R329,00
Net shares in issue: 456,4 million
Market cap: R150,1 billion
Exit PE ratio 23,8x; forward PE 17,4x
Dividend yield 1,1%
Fair value: R390
Target price: R427
Trading Buy and Portfolio Buy
South Africa’s pharma champion, Aspen Pharmacare, reports annual results on Thursday.
Let’s call this the Caracas headache result – whilst hardly a large market for Aspen, Venezuela’s Bolivar currency gyrations play havoc with reported results.
These will be tricky results to analyse as there a number of moving parts, both operationally and from an accounting point of view, that need to carefully unpacked.
What we do know is the following:
Per the trading statement on Wednesday, 7th of September EPS and HEPS will be down by around 20% whilst normalised EPS will be up around 9% and comparable normalised EPS up 13% or so. It’s take your choice stuff.
By the end of the trading week, the stock was down 9% to 10%.
The trading statement though is in line with my estimate – I have had an estimate of 1256 cents for normalised EPS for the past few months and this compares with what will likely turn out to be an actual EPS of 1255 cents.
Normalised EPS is the number management focus on. How it is arrived at is more important than the actual figure through.
In normalised earnings, profit arising from the divestments, currency devaluation losses out of Venezuela and hyperinflationary adjustments relating to Venezuela are excluded.
In the first half of the financial year, the difference between headline earnings and normalised earnings was a significant R1,08 billion, with normalised earnings almost R3 billion and headline earnings R1,9 billion.
If all this sounds rather confusing, one should point a finger at the basket case that is Venezuela.
Comparable normalised EPS includes Venezuela income at the so-called DICOM rate, which is partially free-floating at VEF645/$ and closer to the black market rate of VEF1000/$. This compares with the fixed government rate used for pharma (a priority category) at VEF10/$.
In other words, there is a 100-fold difference between the all-but unusable DIPRO government rate and the black market parallel rate and a 64,5-fold difference between DIPRO and DICOM.
Fair value gains and losses and net foreign exchange gains and losses are notoriously volatile items and impossible to forecast with any accuracy.
On my estimate, underlying earnings are estimated to be R5,7 billion versus R5,2 billion in 2015. This is growth of 9,5% and suggests a broadly flat H2 result following the 14,5% growth in H1.
A few other things to take note of include the following:
The pharma company closed a significant new funding package in June. This debt refinancing will solve a mismatch between dollar borrowing and euro earnings. On EBITDA of R10 billion for the year ended June 2016 I estimate EBITDA interest cover of 5x with net debt at R32 billion. On assumed cash flows, I expect EBITDA interest cover to improve to 12,5x by 2018 at which time EBITDA is estimated at R16,6 billion.
Aspen has signed an agreement with AstraZeneca to acquire the exclusive rights to commercialise AstraZeneca’s global anaesthetics portfolio outside of the USA. The latest Glaxo deal too, announced 12 September, is earnings accretive and in line with its anaesthetics strategy.
The company has also closed a deal that aligns with its strategy to pursue commercial opportunities in the United States.
As Navamedic ASA isn’t renewing a distribution agreement from May 2017, this opens up new avenues for Aspen in the Nordic and Benelux markets.
Whilst the 2016 result may seem a bit weak on the surface, this is not an indication of any slowdown – quite the contrary. Revenue of around R38 billion in F2016 is estimated to grow to over R50 billion in F2017 whilst earnings are forecast to grow by over 50% to 1891 cents per share. Three year compound growth is estimated at 25%.
Whilst the stock reacted negatively to the recent trading statement, down to R329 at the time of writing from R362, this represents opportunity, as the investment case is unaltered. Even after the correction, APN is 37% up on the low in February.
My fair value is R390, a level almost reached in the past month when the stock exceeded R380.
Aspen does to range quite widely within a fiscal year. In 2013, for example, the difference between the lowest price and the highest price recorded was 85% whilst this past year it has ranged in a 65% band. This is partly a function of investors waxing hot and cold on whether or not this is a growth stock.
Trading Buy and Portfolio Buymaintained with a fair value maintained at R390 with the target price R427.
Share price of Aspen Pharmacare in ZA cents
Aspen Pharmacare and JSE All Share Index based to 100