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When it comes to investing for yield in the Australian market, investors typically focus on a small number of heavyweight stocks – the big four banks, BHP and Rio Tinto, Telstra, Woolworths and Wesfarmers. Together, these stocks alone make up around 40% of the S&P/ASX 300, and around 50% of the index’s weighted average yield.
However, investing in these ‘blue chip’ stocks has not been without its pitfalls. Notwithstanding a June rally, the Royal Commission weighed heavily on the performance of the banks for much of this calendar year. The miners have been strong performers of late, but are cyclical in nature, and Telstra’s share price and dividends have been under pressure for some time now from increasing competition in the telecommunication space.
Opportunities do exist outside of these well-covered stocks for the income investor to achieve both an attractive dividend yield, and importantly, experience some capital growth as well. Below we discuss three stocks held in the Pengana Australian Equity Income Fund that are outside the top 50. These stocks typically carry a very low weighting in the market index and, as a result, are unlikely to feature materially in an index-oriented portfolio. However, much like the individual investor, our benchmark unaware perspective at Pengana means we can hold these stocks at a more meaningful weighting in our portfolio.
IVE Group is a lesser known stock, whose business activities touch virtually every household in Australia every week of the year. It is a printing company that has transformed itself into an integrated marketing services and print and communications provider to a large and diverse range of blue chip Australian and global companies, such as ANZ, Westpac, Coles, Woolworths, Tabcorp, Vodaphone, and L’Oreal.
Despite this impressive list of well-known customers, its overall revenue base remains highly fragmented, both across individual customers and by industry exposure.
Given its origins as a print company, it is easy to consider its business as participating in a sunset industry, however, that would underestimate the breadth of essential ongoing services and capabilities in print, online, in-store, and including the necessary supporting logistics behind its service portfolio.
IGL has led industry consolidation, which is improving the operating environment, with now fewer market participants (of which IGL is the dominant player), and substantial new contract wins have underpinned investment in what is now an unrivalled production capability in Australia.
We think the business is well run, and with the shares trading on a FY19 PE of 8 times and offering a fully franked FY19 dividend yield of 8.7%, believe it is a solid investment opportunity for the yield investor.
When it comes to investing in Australian real estate investment trusts (A-REITs), investors typically focus on large cap names such as Charter Hall, Mirvac or Stockland, but there are a number of characteristics that we like in particular of Viva Energy REIT that make it our preferred exposure to the sector.
VVR holds a portfolio of over 430 service stations across Australia valued at circa $2.3 billion. The vast majority of these service stations are leased to the recently-listed Viva Energy Australia and operated by Coles Express.
VVR offers a quality portfolio with 100% occupancy and a highly defensive income stream. The portfolio is largely de-risked with over 95% of its income derived from properties on triple net leases (meaning minimal capex requirements), fixed annual rent reviews (typically 3%), and a lengthy weighted average lease expiry of around 14 years.
The portfolio is internally managed, resulting in lower management costs that have averaged 0.24% since the IPO.
There is concern over the impact of electric vehicles on the business model of traditional petrol stations. However we think if/when such an issue arises, it will be a longer-term dynamic and VVR’s WALE of 14 years to highly-rated counterparties provides security well into the foreseeable future. Furthermore, VVR’s portfolio is underpinned by a substantial land bank of 1.86 million square metres of real estate, 76% of which is located in metro areas, providing the opportunity to monetise alternative use of that land, should demand for petrol stations decline.
The shares are currently offering a FY19 distribution yield of 7%, with prospects for growth from ongoing property acquisitions, underpinned by Viva Energy Australia’s own growth ambitions.
FlexiGroup is a finance business that operates primarily in the consumer space. Consumers borrow for a range of different products, for different tenors and with varying risk characteristics. FlexiGroup lends across this spectrum via point-of-sale finance, credit cards, instalment loans and leases. It also participates in SME and commercial lending but to a lesser degree.
Unlike its fintech competitors, FlexiGroup actually makes money. Since listing in 2016, FlexiGroup has been profitable every year (including the GFC where FXL actually increased its profits), attesting to the strength of the business.
Fintech competitors are showing impressive loan growth (albeit off a much smaller base) but that has yet to translate into profits, with revenues eaten up by customer-acquisition costs and high funding costs. FlexiGroup’s funding infrastructure is a real competitive advantage, allowing it to fund its receivables book at much lower interest rates than those competitors.
CEO Symon Brewis-Weston was appointed in early 2016 with a mandate to instigate change to re-focus the group after a period in which it appeared to lose its way. He has completely overhauled senior management, exited unprofitable businesses, introduced internal initiatives to simplify operating processes and rejuvenated the group’s sales focus.
Flexigroup currently offers a fully franked dividend yield of 4.1% for FY19 – which is at the low end of what we would target for income investors. But importantly it trades at 8.9 times FY19 PE, so we believe it offers investors the opportunity for substantial capital growth as well. The current valuation appears to extrapolate recent difficulties, giving no credit for changes that have been implemented.