UBS Asset Management For professional / qualified / institutional investors only.

June 2020

Australian Equity Large Cap Insights Finding value in ‘through the cycle’ balance sheets COVID-19 has caused a large and unexpected shock (I am avoiding using the buzzwords of ‘unprecedented’ and

‘black swan’) that, among other things, Dion Hershan has called into question how many of Portfolio Manager & Head of the ‘lessons learned’ from the GFC were Australian Equities Yarra Capital Management actually committed to long-term memory.

While on average most ASX-listed companies have managed 1) via discounted, dilutive transactions totalling more than the crisis reasonably well, it’s remarkable just how many of $17bn: them came into this pandemic with insufficient liquidity or 1. 14% had actually undertaken share-buy backs in the last financial flexibility to see the business ‘through the cycle’. three years; and It’s quite revealing that out of the 28 companies in the ASX 2. The median dividend payout ratio of those that raised 200 which have raised equity from shareholders (refer Table was 70%.

Table 1: Australian equity raises through COVID-19 Equity raising Total return since Div payout ratio announced ($mn) market peak (%) last FY (%) Invocare 274 -12 79 United Malt 165 0 N/A Breville 104 1 71 Ingenia Communities 175 -20 53 Incitec Pivot 675 -32 51 Southern Cross Media 169 -62 81 National Storage REIT 330 -27 103 Qube Logistics 500 -16 77 Newcrest Mining 1,100 4 31 Credit Corp 150 -55 51 Lend Lease 1,150 -33 51 QBE Insurance 1,308 -42 76 Charter Hall Retail REIT 300 -33 93 National Australia Bank 3,500 -33 94 Ramsay Health Care 1,400 -12 53 Metcash 330 -6 58 Bapcor 210 -13 51 G8 Education 301 -38 64 SCA Property Group 300 -25 90 Oil Search 1,160 -43 50 Flight Centre 700 -61 117 NEXTDC 672 18 N/A Webjet 275 -55 34 IDP Education 190 -30 72 oOH! Media 167 -52 69 Cochlear 850 -22 68 Blackmores 117 11 70 Atlas Arteria 495 -20 81 Total 17,067 Source: ASX Company Announcements (20 Feb 2020 – 27 Mar 2020), FactSet 2 In a world which is becoming increasingly volatile and The medium term outlook for dividends is clearly unpredictable, a strong case can be made for more challenged. The ASX yields 4.2% based on trailing conservative settings. Over the last decade, Australian 12-month dividends and 3.4% based on consensus companies had the opportunity to binge on ‘cheap debt’ forecasts for the next year. With dividend payout ratios and ‘abundant liquidity’ and many did, successfully avoiding likely to step down, we do not see a ‘V’ shaped recovery in the ‘lazy balance sheet’ tag. dividends. Post COVID-19, we can expect to see lower dividend payout Through this period, we have been a ratios and lower gearing, in particular for volatile businesses. buyer of a number of cyclical businesses Chart 1: Dividend payout ratios - FY19 with ‘through the cycle’ balance sheets, including Ansell, GPT, QBE and Bluescope Steel. We see these companies as being well positioned to re-rate alongside the

90% recovering global economy and, more 74% 73% 63% importantly, withstand any future potential shocks.

ASX 200 Banks Resources Industrials

Source: FactSet, May 2020

Table 2: Four stocks for the current environment Dividend payout Trailing dividend Forecast dividend Balance sheet strength ratio (%) yield (%) yield (%) Ansell 42 2.1 2.4 5% net debt/equity GPT 82 6.2 5.5 22% net debt/total assets QBE Insurance 76 6.1 3.3 Total capital >1.9x PCA Bluescope Steel 8 1.2 0.9 1% net debt/equity Source: FactSet, May 2020

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