It was not a great year for floats on the ASX in 2018, with 77% of companies that listed finishing the year below their issue price.
The year’s three largest listings — Coronado Global Resources, Viva Energy and Coles – all encountered difficulties: at their lowest points, their share prices were down by 28%, 31% and 9% respectively. Let’s look at how the big three are travelling
1. Coronado Global Resources (CRN, $2.97)
Market capitalisation: $2.9 billion
Estimated FY19 (December) dividend yield: 20.2%, franking level not yet known
Analysts’ consensus target price: $4.05 (Thomson Reuters), $3.95 (FN Arena)
The world’s fifth-largest coking coal miner, Coronado Global Resources, made an underwhelming debut on the stock exchange in October, ending its first day of trading 10% lower than the issue price of $4 – and that was only the start of the slide, which has taken the stock to levels below $3.
The market appeared to be wary of what it thought was a case of Coronado’s private equity owner, Energy & Minerals Group (EMG), selling when coking coal prices were poised to fall on declining demand from China. Although the coal price picture has not panned out that way – current pricing, at US$195–US$205 a tonne, is significantly higher than the US$176 a tonne price used in the prospectus – the market has not yet given Coronado the benefit of the doubt.
In the FY18 (calendar 2018) result, revenue came in slightly higher than forecast in the prospectus, at US$2.297 billion, while (EBITDA) came in US$17.6 million higher, at US$595.3 million, and underlying net profit was 1.5% higher than the forecast, at US$279.8 million. The realised metallurgical coal price, at US$133.20 a tonne, was US$2.90 higher than forecast.
In presentations to investors, Coronado clearly sees prices coming down to the US$170 a tonne–US$180 a tonne range in FY20 and FY21, although it expects steady growth in steel production to continue drive demand for metallurgical coal. The company also sees FY19 (calendar 2019) earnings before interest, tax, depreciation and amortisation (EBITDA) rising by 27.5%, to US$737 million, on the back of selling 21.5 million tonnes of coal, versus 20.9 million tonnes in 2018.
The driver of this will be export coal sales, from its Australian and US operations, delivering higher realised pricing, increasing from 68% of total sales in 2018 to 79% in 2019. In the FY18 result, Coronado upgraded its prospectus guidance figure for FY19 production from 21.6 million tonnes to a range of 21.6 million tonnes–22 million tonnes, and for FY19 EBITDA from $737 million to a range of $737 million–$807 million. Production in FY19 will be 79% metallurgical coal, but from completion of FY19 on, Australian production will be wholly metallurgical coal.
This production is expected to deliver strong free cash flow, which opens up a highly attractive income scenario from Coronado. The company intends to pay out 100% of free cash flow. In its 2018 results presentation, in February, Coronado gave a forecast FY19 dividend yield of 21.5% (unfranked), based on a share price of $3.35 as at 15 February. This implies a dividend expectation of 72 Australian cents a share: at the current price of $2.97, that expected yield is now 24.25%. (Thomson Reuters’ estimates collation shows analysts expecting a 20.2% FY19 yield). But the level of franking cannot be estimated at this point and it should be pointed out that a material component of the dividend is classified as a “special” dividend..
In addition, analysts view the poor share price performance of Coronado since listing as an opportunity: Thomson Reuters has an analysts’ consensus target price of $4.05 on CRN, while FN Arena’s collation is only slightly less bullish, at $3.95.
2. Viva Energy Group (VEA, $2.42)
Market capitalisation: $4.7 billion
Estimated FY19 (December) dividend yield: 4%, fully franked
Analysts’ consensus target price: $2.70
Fuel refiner and retailer Viva Energy’s $4.9 billion share market float last July was the largest IPO on the ASX since 2014, but it did not go well. Issued at $2.50, the shares hit the screens at $2.43, and closed their first day at $2.40. By late December, the shares were $1.72, and float subscribers were down 31%.
Viva supplies about one-quarter of Australia’s liquid fuel requirements. It is the exclusive supplier of high quality Shell fuels and lubricants in Australia through an extensive network of more than 1,200 service stations across the country. It also owns and operates the Geelong Refinery in Victoria.
Viva warned investors in November that the volumes sold through the more than 1150 service stations it operates had been weaker than expected. It blamed the softer trading conditions on a lower Australian dollar and higher oil prices flowing through to pump prices, crimping demand from drivers filling up their cars. The company also said that its alliance partner, supermarket giant Coles, needed to change its premium prices to boost demand.
The November update said Viva’s underlying earnings before interest, tax, depreciation and amortisation (EBITDA) for FY18 (calendar 2018) would be $543 million, $62.1 million below its July forecast. Most of those losses came from the company’s refining business which, according to the prospectus, was expected to deliver underlying EBITDA of $216.7 million for 2018: the company said its forecast had dropped to $150 million. It added that the tough operating environment had not been helped by a blackout at its Geelong refinery, which had halted production for a week.
The full-year results came out in February and were broadly in line with the November guidance. Underlying net profit came in at $293 million, down 9.6% on the prospectus forecast. Viva declared a maiden dividend of 4.8 cents, fully franked, for the six months ending 31 December 2018, representing a payout ratio of 60%.
One thing that did cheer investors up was the signing in February of a new deal between Viva and Coles, under which Viva will pay $137 million to renew the fuel partnership with Coles and gain the right to set fuel prices. The deal was widely viewed as much more advantageous to Viva than Coles: Viva shares surged almost 14% on the announcement, to $2.19. The shares have moved higher, to $2.44.
As with Coronado, the slippage under the IPO price opens up an opportunity for investors to take another look at Viva – although not as much opportunity as existed prior to the renegotiated Coles deal. Thomson Reuters’ collation of analysts’ estimates has a consensus target price of $2.70: FN Arena’s collation is very close, at $2.68. And there is also a healthy yield on offer: the expected FY19 dividend of 9.6 cents implies a yield of 3.9%, fully franked, a grossed-up yield of 5.6%.
3. Coles (COL, $12.12)
Market capitalisation: $16.2 billion
Estimated FY20 dividend yield: 4.6%
Analysts’ consensus target price: $12.21 (Thomson Reuters), $11.93 (FN Arena)
Although not technically an IPO, the demerger of supermarket chain Coles – announced in March 2018 by the company’s owner, Wesfarmers, and which took effect in November – created an $18 billion stand-alone company, a supermarket giant holding about 34% of Wesfarmers’ earnings, with about $39.2 billion in revenue and EBIT (earnings before interest and tax) of $1.6 billion. Wesfarmers shareholders received one Coles share for each Wesfarmers share they owned: Wesfarmers now owns just 15% of Coles.
Coles started its first day of trade on the share market at $12.49 a share, which beat analysts’ expectations, and the shares rose above $13 during the first day, before closing at $12.75. But the Coles listing ran headlong into a declining outlook for supermarkets; the company’s profit slid by 5.8% in the six months to December, and by March, the shares had fallen to $11.23, despite its strong market position giving it, seemingly, all the defensive qualities an investor would need in a nervous market.
Coles announced last month that it will spend up to $150 million open warehouses in Sydney and Melbourne run mostly by robots, to meet the growing demand for home-delivered groceries, and make its online business profitable (it is only break-even as this stage.) This will roughly double online capacity and boost margins, but the new centres won’t be fully operational until FY23.
In the meantime, the environment is tough, despite Coles reporting its 45th consecutive quarter of same-store sales growth, for the December 2018 quarter, and a 2.6% lift in total sales. Analysts feel it is closing the gap with Woolworths. However, another German entrant – supermarket heavyweight Kaufland – has announced plans to enter the Australian market; and Coles is also copping investor flak for the poor deal (from a Coles perspective) that it signed with Viva Energy. The deal gives up the setting of the retail fuel price in the partnership to Viva, and will slash Coles’ earnings from its convenience-store division by 62 per cent: Coles will take a commission on every litre of fuel sold and will focus on running the convenience stores, increasing its range of ready-made meals, fresh food and coffee and using the 711 sites as pick-up points for Coles Online orders.
On balance, though, the stock market has begun to look on Coles more favourably, and the shares have recovered to $12.18 – but COL is still, like Coronado and Viva Energy, below its “issue” price. However, analysts largely see Coles as fairly priced: Thomson Reuters’ collation of analysts’ estimates has a consensus valuation of $12.21, while FN Arena’s consensus target price is actually bearish, at $11.93. (That is with the usual variance: from an unimpressed Ord Minnett, with a target price of $11, to Citi’s $13.40.)
Coles will pay an interim dividend in March, reflecting the five months of Coles earnings prior to the demerger, plus a final dividend for the year ending 30 June 2019, reflecting the seven months of earnings post-demerger.
On FN Arena’s collation of estimates, analysts expect a dividend of 37.8 cents for FY19, rising to 55.5 cents in FY20. On that basis Coles trades on a projected FY20 yield of 4.6%, presumably fully franked. If fully franked, that grossed-up yield of 6.6% would look very attractive, given the defensive earning from which it springs.
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