The Atlas High Income Property Fund declined by 0.5% during September, avoiding much of the carnage that saw the wider Listed Property sector fall close to 3%, as the share prices of those trusts with development earnings were sold off aggressively due to concerns that the property cycle has peaked for these trusts.
The benchmark Australian 10-year government bond yield rallied to 1% in September, though this strength in the bond yield has was reversed in early October with the RBA cutting rates to +0.75%. Rising bond rates were attributed to the news that Australia posted its first current account surplus (courtesy of rising iron ore prices) since the Whitlam government in June 1975!
The Fund declared a quarterly distribution of $0.042 per unit, a slight increase over the June quarterly distribution. The distribution will be paid to investors in early October
Go to Monthly Newsletters for a more detailed discussion of the listed property market and the fund’s strategy going into 2020.
“The thesis that all shopping malls are ruined and are going down doesn’t account for the changing composition of tenancies,” says Hugh Dive, chief investment manager at Atlas Funds Management. The better shopping centres are changing their tenancy mix to include more services and experiences.
CYBG has been a popular pick for value-style fund managers since listing in 2016 under the assumption that the spun-off bank will do better under a focused management team based in England rather than Melbourne and that the English bank will avoid the fall-out from Australia’s Financial Services Royal Commission.
CYBG has been a popular pick for value-style fund managers since listing in 2016 under the assumption that the spun-off bank will do better under a focused management team based in England rather than Melbourne and that the English bank will avoid the fall-out from Australia’s Financial Services Royal Commission. Hugh Dive from Atlas Funds Management unpacks the complicated ASX-listed, UK-based bank to understand the company and whether it’s a viable investment through the Quality Filter Model (QFM). Last week CYBG PLC announced a downgrade to its earnings due to an increase in provisions for legacy payment protection insurance (PPI) costs of between £300m and £450m, a substantial increase from what was assumed in July. This saw CYBG fall -12% so far in September. Clydesdale Bank (CYBG) is a mid-sized UK Retail and SME banking group, established in 1838 in Glasgow, it was bought by Nab in 1989 and includes Leeds-based Yorkshire Bank (founded in 1859). CYBG was spun off from NAB in 2016 after a troubled previous decade which had generated a range of write downs and provisions for mis-selling of products dating back to CYBG’s push into Southern England prior to the GFC. In 2018 CYBG acquired Virgin Money (the rebranded failed building society Northern Rock which was acquired by Virgin) for £1.7 billion in an all-stock deal. CYBG is dual-listed on the ASX and LSE.
The Atlas High Income Property Fund gained by +1.7% during August in a month where all of the Trusts held by the portfolio reported their profit results for the first six months of 2019. Due to our positioning towards higher-yielding rent collectors with recurring income and away from Trusts relying on development profits, the August reporting season provided few surprises.
Over the past year, a new source of volatility has crept into the market – outrageous Trump tweets, often designed to influence ongoing trade negotiations. Atlas believes that trying to manage a portfolio based on expected Trump tweets would surely result in poor outcomes for investors. What we can control is building a portfolio with trusts that are growing their dividends at a rate both greater than inflation. We were pleased to see that the companies owned by the Fund on average grew distributions by 3% compared with the first six months of 2018.
Go to Monthly Newsletters for a more detailed discussion of the listed property market and the fund’s strategy going into 2020.
Earnings wrap: profits, dividends and disappointments
Hugh Dive Sep 2, 2019 — 7.50am
During
the months of February and August, the majority of Australian listed
companies reveal their profit results, and most provide guidance as to
how they expect their businesses to perform in the coming year.
While
we regularly meet with companies between reporting periods to gauge how
their businesses are performing, during reporting season companies open
up their closets to enable investors to have a more detailed look at
their financials and ask management probing questions.
Until this
happens, investors cannot know with certainty whether skeletons will
jump out or if they will see the expected row of neatly ironed shirts.
In general, company profits have been
better than expected, and in this piece we are going to run through the
key themes that have emerged over the last three weeks.
Show me the money
Capital
management was again prevalent and understandably popular with
investors, especially following significant falls in term deposit rates
over the past year. Qantas, AGL Energy, Aurizon, Amcor, Link Admin and
Brambles announced new share buy-back plans.
Special dividends
were announced by the ASX, Suncorp, BHP, Coles and Medibank Private.
Several companies also increased their dividend by a greater rate than
their earnings per share, thus increasing their payout ratio.
Across the industrial companies, the dividend payout ratio remains high and is now approaching 80 per cent.
Spending more than expected
Going
into the August results season we were concerned that company results
would show a dramatic pull-back in retail sales due to falling house
prices and political uncertainty.
The financial results for large listed retail property trusts such as Scentre Group give a good insight into consumer spending.
Across
Scentre’s portfolio of 41 shopping centres and 11,500 retailers, sales
were up 1.3 per cent. Weakness in department stores was offset by sales
growth in food, personal services, supermarkets and even fashion.
Elsewhere
in retail, JB Hi-Fi saw sales grow 3.5 per cent as consumers opened
their wallets to buy phones, gaming consoles and Fitbits; similarly,
Tabcorp showed the continued willingness of Australians to bet on horses
and play lotteries.
Coles and Woolworths both showed approximately 3 per cent sales growth in supermarkets and liquor.
The areas where consumer spending was weaker than expected included domestic travel, with Flight Centre
reporting a decline in Australian leisure travel, though this could be
attributed to weakness in the Australian dollar over 2019 which has
reduced the attractiveness of foreign spending.
Coca-Cola also saw declining volumes which may be due to overall diminishing consumer appetites for carbonated soft drinks.
Shorts getting burned
While
most of the market looks to own stocks that will report a good result
and increase their dividends, some fund managers look to capitalise on
bad results by short selling.
Of the 10 most shorted stocks at the
end of July, only one – A2 Milk – has been profitable for the short
sellers. The two largest short positions – Domino’s Pizza and JB Hi-Fi –
would have been painful shorts as their prices have rallied over
August.
Domino’s Pizza delivered a result that was around market
expectations, with sales in Japan and Europe offsetting weakness in
Australia.
The last thing a short seller would want to see on
results day is a headline saying that the targeted company has delivered
net profits above their guidance, which is what JB Hi-Fi did last week.
JB
Hi-FI confirmed our view that the company is a world-class electrical
retailer, growing sales and profits against a challenging consumer
backdrop.
As good as it gets for diggers?
The miners (mainly the iron ore producers) reported strong profit growth in August driven by elevated commodity prices.
Iron
ore went from $US71 a tonne at the start of 2019 to peak at $US125 a
tonne at the end of June due to the failure of a tailings dam in Brazil
that killed 248 people.
This accident resulted in the miner Vale
shutting down 40 million tonnes of iron ore production, tightening up
the global market for iron ore.
Rio Tinto, BHP and Fortescue
all reported solid growth and increased dividends, but this was
overshadowed by the 30 per cent fall in the iron ore price since the end
of the financial year.
Looking ahead, planned mine expansions
(and resultant increased supply), the impact of trade tensions between
China and the US, as well as a moderating Chinese demand should see the
price of iron ore continue to drift downwards.
On conference
calls, management teams from the miners promised to maintain capital
discipline, increase returns to shareholders and pay down debt; all
sound strategies given the weakening of commodity prices.
What
concerned us was the evidence of rising costs apparent in the results of
BHP, South32 and Rio Tinto. In 2020, the mining companies could face
costs moving higher (particularly labour) at a time when commodity
prices are weakening and demand is diminished.
Hugh Dive is the chief investment officer of Atlas Funds Management.
Capital management was again prevalent and understandably popular with investors, especially following significant falls in term deposit rates over the past year. Qantas, AGL Energy, Aurizon, Amcor, Link Admin and Brambles announced new share buy-back plans. Special dividends were announced by the ASX, Suncorp, BHP, Coles and Medibank Private.