Author: therawinformant

The Qantas Airways Limited (ASX: QAN) share price is dropping lower today after an update from its rival Virgin Australia.

At the time of writing the airline operator’s shares are down 1% to $3.23.

What did Virgin Australia announce?

This morning Virgin Australia announced its plan for a stronger, more profitable, and competitive business. This plan aims to secure approximately 6,000 jobs as it prepares to exit voluntary administration under the ownership of Bain Capital.

Virgin Australia revealed that its plan is anchored around six key points. They are as follows:

Overhaul the cost base and simplify everything, starting with the fleet.

The company believes that to build a successful airline, it will need to align costs with a depressed and uncertain revenue outlook. This includes simplifying its fleet to realise cost efficiencies and remove operational complexity. This will see the airline transition to a single Boeing 737 fleet for domestic and short-haul flying and discontinue the Tigerair brand.

Focus on customer value.

Virgin Australia wants to be the best value carrier in the market and not a low-cost carrier. It intends to offer exceptional experiences at great value, regardless of purpose of travel. It will also continue to focus on delivering the best on-time performance and maintain an exceptional safety record and safety culture.

Harness culture.

Management believes the company’s culture is unique and the heart and soul of both the airline and Velocity Frequent Flyer. As such, it will continue to “reinvigorate the Virgin Australia brand and its passion for customer service, while embracing the diversity, talent and strength of its people.”

Investment in world class digital and data technologies.

Virgin Australia plans to invest significantly in the comprehensive digital re-platforming of both the airline and Velocity Frequent Flyer program. It expects this to accelerate its vision for the future. Which will not only improve its commercial capability and guest experience, but significantly enhance the employee experience and increase the pace of profitable revenue growth.

Strong balance sheet and investment capital for both transformation and growth.

Management expects the company to emerge from its voluntary administration with a strong balance sheet that is worthy of an investment grade rating. This is expected to provide resilience and future growth potential.

Jobs and future growth.

As a result of the changes announced today, Virgin Australia expects 3,000 jobs to be impacted. This will be primarily across the operations functions and corporate roles which directly support the operation. Management commented: “While devastating for our people, making these changes now will secure approximately 6,000 jobs once market demand recovers, with potential to increase to 8,000 jobs in the future.”

“Continued uncertainty.”

Virgin Australia Group CEO and Managing Director, Paul Scurrah, commented: “Our aviation and tourism sectors face continued uncertainty in the face of COVID-19 with many Australian airports recording passenger numbers less than three per cent of last year and ongoing changes to government travel restrictions.”

“Demand for domestic and short-haul international travel is likely to take at least three years to return to pre-COVID-19 levels, with the real chance it could be longer, which means as a business we must make changes to ensure the Virgin Australia Group is successful in this new world,” he added.

Mr Scurrah concluded: “Virgin Australia has been a challenger in the Australian market for 20 years, and as a result of this plan and the investment of Bain Capital we are going to be in a much stronger position to continue that legacy.”

More reading

• Earnings season: What to expect from the CSL FY 2020 result
• Afterpay and Qantas were among the most traded shares on the ASX last week
• Earnings season: What to expect from the Qantas FY 2020 result
• Why the Qantas share price is experiencing severe turbulence
• Why IOOF, IGO, Janus Henderson, & Qantas shares are dropping lower

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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ASX property stocks have been on the nose with asset write downs and dividend cuts forced on the sector from the COVID-19 meltdown.

But there’s one that’s promising a 9% yield for the current financial year. This is the Centuria Office REIT (ASX: COF) share price.

The office trust reported its FY20 full year results this morning and went to great pains to point out its relatively more defensive properties compared to its peers.

Big jump in earnings and revenue

Centuria reported a 38% surge in total revenue to $149.3 million as funds from operations (FFO) jumped $85.4 million in the latest financial year compared to FY19.

The trust even recorded an upward revision in the value of its office properties, although I think some of this could be unwound this year.

Work-from-home restrictions during the coronavirus pandemic is expected to lead to a drop in demand for office space even after the crisis passes.

Risk of write-downs

We have already seen a number of listed property stocks cut the value of their portfolios. This includes Mirvac Group (ASX: MGR) and GPT Group (ASX: GPT), although it relates mainly to their retail properties. I suspect their office portfolios will be next.

However, Centuria’s office properties may not be as badly impacted as these are outside of CBD areas.

It’s high-end central offices charging premium rents that are facing the most pressure. Centuria’s offices are instead in Fortitude Valley in Queensland and Chatswood in New South Wales.

Centuria rents are typically 47% to 77% below what equivalent offices in Sydney CBD charge. Government agencies make up around a quarter of its tenant base.

But Centuria isn’t immune. In fact, it took a $3.2 million hit before June 30 this year from credit losses and rent waivers.

WALE splash or crash?

The trust reported a weighted-average lease expiry (WALE) of 4.7 years and occupancy stands at around 98%.

However, I would take these numbers with a slight pinch of salt in this volatile environment. There are reports that some tenants still in contract are aggressively pushing to cut their rents or renegotiate terms.

Further, 15.2% of rents (based on WALE) expires in 2021 and another 6.8% matures in 2022. These are reasonably small numbers but if most of these tenants do not renew, it can have a big impact on Centuria’s FFO.

Should you be tempted by yield?

However, management will be hoping investors will be tempted by its forecast dividend yield. While the trust is guiding for a lower distribution in FY21 at 16.5 cents a unit (a 7.3% cut from FY20), this still works out to a 9% yield based on yesterday’s close of $1.83.

But in a sign that things remain in a state of flux, management isn’t providing guidance on its FY21 FFO at this point. This makes me wonder how much confidence we can have in the 16.5 cents forecast distribution.

More reading

• 7 ASX shares to watch this reporting season
• Reliable ASX dividend shares still exist
• 2 top ASX shares to buy for reporting season
• What would deflation mean for your ASX shares?
• Value stocks to rise on strong A$ and broker picks the cheapest ASX stocks to buy today

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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If you are looking for two quality S&P/ASX 200 Index (ASX: XJO) shares to buy this month, my pick would be ResMed Inc (ASX: RMD) and  Transurban Group (ASX: TCL).

Here’s why both of these shares are in my buy zone right now:

Global leaders

ASX 200 share ResMed may not be as well-known as other leading Australian healthcare shares such as CSL Limited (ASX: CSL).

However, ResMed has evolved over the past 30 years to be a global leader in its healthcare niche and is now one of the world’s top sleep treatment companies.

The company manufactures devices and cloud-based software solutions for the treatment of sleep apnoea and other chronic respiratory illnesses.

ResMed’s strong revenue growth story continues. ResMed achieved an impressive 47% increase in net income during the third quarter of FY 2020. This strong revenue growth is reflected in ResMed’s recent share price growth. Despite the challenges of the coronavirus pandemic, the ResMed share price has risen from $21.90 at the beginning of this year, to now be trading at $28.79. That’s more than a 30% increase.

I believe that ResMed is well-positioned to grow over the next decade, as it further expands its global reach. The international market for sleep apnea remains largely untapped.

Strong futures

Transurban is the largest toll road operator in Australia, and has an expanding overseas presence. This ASX 200 share now has a market capitalisation of $38 billion. In Australia, Transurban has a virtual monopoly on the toll road systems in both Sydney and Melbourne.

The Transurban share price took a hit during the early phase of the coronavirus pandemic from late February to mid-March. Since then its share price has made only a partial recovery.

The Transurban share price is currently  trading at $14.01, compared to $16.34 in late February. I believe this offers astute investors with a long investment horizon a good buying opportunity. Revenues are no doubt likely to be further impacted in the short-term, especially in Melbourne, where stage 4 restrictions have just been introduced. However, traffic levels will eventually return to normal as the crisis eventually eases.

I believe that Transurban is well-placed to tap into growing revenues from growing populations in both its local and overseas operation over the next decade.

Foolish Takeaway

ResMed and Transurban are both high quality ASX 200 shares that I believe could make good additions to your ASX share portfolio this month. Both have strong market positions and an expanding overseas presence.

More reading

• This is the only ASX sector tipped to report earnings growth this reporting season
• Why I would buy NEXTDC and these stellar ASX growth shares
• Is the Transurban share price a buy right now?
• 7 ASX shares to watch this reporting season
• I would buy ResMed and these ASX blue chip shares in August

Motley Fool contributor Phil Harpur owns shares of ResMed Inc. The Motley Fool Australia owns shares of Transurban Group. The Motley Fool Australia has recommended ResMed Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Telstra Corporation Ltd (ASX: TLS) share price will be one to watch on Wednesday after the release of an announcement.

What did Telstra announce?

This morning Telstra announced that it has entered into an agreement to sell its data centre complex in Clayton, Victoria, to Centuria Industrial REIT (ASX: CIP) for a total of $416.7 million.

The 3.2 hectare complex is 25km from the Melbourne CBD and incorporates 10 buildings. This includes the telco giant’s newest 6.1MW data centre and its adjacent 6.6MW data centre and associated energy centre.

According to the release, the sale includes a triple-net lease-back arrangement. This means Telstra will retain ownership of all IT and telecommunications equipment, as well as ongoing operations and responsibility for building upgrades and repairs, future capex requirements, and security.

The lease is for an initial period of 30 years, with two 10-year options for Telstra to extend the lease. Importantly, the sale has no impact for Telstra customers.

T22 strategy progressing well.

Telstra’s CEO, Andrew Penn, notes that the sale is part of the company’s T22 strategy which is cutting costs and simplifying its business.

He commented: “As part of T22, we have an ambition to monetise up to $2 billion worth of assets to strengthen our balance sheet. This deal means we have now reached over $1.5 billion. Data centres are an incredibly important part of the digital ecosystem and we continue to own and operate world-leading facilities in Australia and overseas.”

The company advised that transaction is expected to be completed by the end of August and will generate $416.7 million in proceeds.

However, due to the long tenure of the lease-back, the transaction will not be treated as a sale under accounting standards. As a result, no accounting gain will arise from the transaction.

The acquirer, Centuria Industrial REIT, has placed its shares in a trading halt this morning while it raises funds to complete the transaction.

More reading

• 3 high quality blue chip ASX 200 shares to buy
• Earnings season: What to expect from the CSL FY 2020 result
• Earnings season: What to expect from Telstra in FY 2020
• Will outages make the Telstra share price a buy?
• Buy these ASX dividend shares before the RBA meeting

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Coronavirus restrictions are tightening and, as a result, I’m watching ASX retail shares.

I think non-discretionary retailers like Coles Group Ltd (ASX: COL) could benefit from tightening restrictions across the company.

However, there are some question marks around those with discretionary products.

Here’s what I think might lay ahead for ASX retail shares in the coming months.

Which ASX retail shares to watch this month

Clearly, the August earnings season will be a big factor for ASX retail share prices.

It’s been a strong year so far for the likes of JB Hi-Fi Limited (ASX: JBH). The JB Hi-Fi share price is up 15.5% in 2020 while the S&P/ASX 200 Index (ASX: XJO) has fallen 9.8% lower.

Given its heavy reliance on electronics, I think JB Hi-Fi is one of those non-discretionary shares to watch.

The retailer is set to release its FY20 results on 17 August. I think the numbers will be strong, but investors may be worried about the impact of restrictions weighing down sales.

I can see a couple of headwinds for the ASX retail share in 2020. One is that government stimulus money is starting to slow which could impact discretionary spending.

The other is that many Aussies already loaded up on their electronics in March. That means recurring customer revenue may be lower in the year ahead.

It’s not just JB Hi-Fi I’m watching this month. An article in Monday’s Australian Financial Review (AFR) also got me thinking about other ASX retail shares.

Many stores owned by JB Hi-Fi, Super Retail Group Ltd (ASX: SUL) and Wesfarmers Ltd (ASX: WES) all stayed open during the first lockdown in March.

However, that’s set to change which could mean a different impact this time around. A strong online presence may help some stores weather the impact but nothing is certain.

If Aussies are willing to bunker down, some of these top ASX retail shares could see an earnings slump. That won’t, however, be reflected in their FY20 results, which means we will have to wait for more trading updates.

Foolish takeaway

There’s no doubt that the coming weeks will be challenging for Victorian and Australian businesses.

I think the safe play here is to stick to non-discretionary ASX retail shares. Supermarket sales should be more resilient than most in the coming months.

That means a supermarket retailer like Coles or Metcash Limited (ASX: MTS) may be worth a look.

More reading

• Leading fundie says the ASX gold share boom is just beginning
• Reporting season metrics to watch for JB Hi-Fi
• 3 ASX shares with generous dividend yields to buy today
• This is the only ASX sector tipped to report earnings growth this reporting season
• Should you buy ASX gold shares or FAANG stocks in August?

Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Super Retail Group Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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2020 has been a good year for investors in ASX gold shares.

The Saracen Mineral Holdings Limited (ASX: SAR) share price has rocketed 83.1% higher this year. Similarly, shares in St Barbara Ltd (ASX: SBM) and Northern Star Resources Ltd (ASX: NST) are 26.0% and 39.8% higher, respectively.

That’s largely been driven by gold prices rocketing to new record highs in 2020. Market volatility and economic uncertainty have created a surge in demand for the precious metal.

Many investors would think this means the buying opportunity and bull market are over. However, one leading fund manager says it’s just beginning.

Why one leading fundie sees an ASX gold share boom

That fundie is Paragon Funds Management Chief Investment Officer, John Deniz.

In a market update yesterday, Mr Deniz pointed to 6 key factors supporting a further ASX gold share boom. These were:

1. Low US 10-year bond yields
2. Low US real rates
3. A ballooning US budget deficit
4. Strong US fiscal and monetary stimulus
5. Deep global liquidity and money supply
6. A weakening US dollar

Mr Deniz says that all of these signs point to a further increase in demand for gold. For context, gold is often seen as a ‘safe haven’ asset with good inflation hedging properties.

But rather than stick to the qualitative factors, Mr Deniz backed up the ASX gold share bull case with some numbers.

In particular, he highlighted some of the biggest gold bull cycles in recent years. Notably, the most significant one occurred when US real interest rates went negative and gold exchange-traded funds (ETFs) saw strong inflows (shown in dark blue below).

How should I position my portfolio?

Before you go all-in on ASX gold shares, it’s important to take a step back. While this paints a convincing picture, there’s no such thing as a free lunch in investing.

There is still the risk that we’ll see a strong economic bounce back in 2020. That could ease the demand for gold and mean the S&P/ASX 200 Index (ASX: XJO) surges higher.

Given the strong gains in ASX gold shares already this year, much of this growth may also have already been priced in.

More reading

• Coronavirus: What does lockdown mean for ASX retail shares like JB Hi-Fi?
• 5 things to watch on the ASX 200 on Wednesday
• This is the only ASX sector tipped to report earnings growth this reporting season
• Should you buy ASX gold shares or FAANG stocks in August?
• 3 high quality blue chip ASX 200 shares to buy

Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Investors expect JB Hi-Fi Limited (ASX: JBH) to deliver strong results this reporting season. In fact, in the company’s most recent guidance on 11 June, it estimated FY20 revenue of $7.86 billion. This is an 8.4% increase on the initial FY20 revenue forecast. Clearly this is an an outstanding result if accurate.

The company attributes much of the increase to the work-from-home period necessitated by coronavirus lockdowns during which consumers flocked to create home offices and purchase home furnishings. Moreover, in the company’s Q3 update, it also mentioned increased volumes through online sales and the introduction of contactless delivery. However, no quantified figures have yet been provided.

While it may be a bit much to say there are dark clouds on the horizon, there are definitely a few metrics worth watching to see if the company’s performance is sustainable.

Issues impacting reporting season

Notably, JB Hi-Fi’s New Zealand stores reported a 19.3% reduction in sales for 2H20. The company was at pains to point out the small revenue contribution of the NZ operations, and rightly so. However, the NZ lockdown for JB Hi-Fi was from 28 April until 14 May. A period of about 2 – 3 weeks impacting 14 stores. The Victorian closure is for 46 JB HI-FI stores and 21 The Good Guys stores for a full 6 weeks, at least.

Any guidance the company provides on 17 August, its nominated reporting date, will need to balance this against other factors likely to impact sales and net profits.

Online sales

The absolute impact of the 6 week lockdown in Victoria may be tempered by a large-scale increase in online sales. FY19 saw growth of Australian online sales by 23% to reach 5.5% of total sales. We know that the move to online shopping has been accelerated by the coronavirus pandemic. In fact, Australia Post data shows that eCommerce growth rose by 80% in the 8 weeks following the World Health Organization’s (WHO) initial announcement regarding the pandemic. Australia Post believes that this year, online sales will reach 15% of all retail sales. That is 3–5 years ahead of previous forecasts.

JB Hi-Fi doesn’t provide a revenue breakdown per state within Australia. Nevertheless, it is safe to assume the 6 week lockdown will have a large impact. A figure currently floating around quotes Victoria as contributing just under 25% of Australia’s GDP. Using that broad brush, if JB Hi-Fi is to counteract the impact of the Victorian closures, then online sales will have to at least double.

JB Hi-Fi does not report on active users or engagement statistics like pure online companies such as Kogan.com Ltd (ASX: KGN). So we are left only with the growth in online sales. In addition, look for any phrasing that may imply repeatability. If the online sales boost is purely due to the work-from-home phenomenon, then that will have a shelf life. There are only so many desks and filing cabinets a person needs.

Financial statistics

While JB Hi-Fi’s total net profit will rise with revenues, the net profit margin declared in reporting season will say a lot about future sustainability.

I am expecting the company to see an increase in its cost of doing business, or CODB. In FY19, this increased by 0.03% due to the sale of lower margin products. For example, when the company sells a lot of software, the cost of doing business is less due to the high margins. I am expecting most products sold to have relatively lower margins this FY. These include white goods from The Good Guys and laptops and accessories from JB Hi-Fi.

Lastly, I will be looking to see if there will be a lingering impact from a lower depreciation percentage on the net profits after tax (NPAT). The company saw a 23.5% reduction in depreciation after a significant pre-acquisition IT investment became fully amortised.

Foolish takeaway

The factors above may show a squeezing effect on FY21 earnings during this reporting season for JB. First, forced closure of 22.9% of Australian stores across both brands for 6 weeks. Moreover, this doesn’t include stores already closed in low traffic areas like airports. Second, a likely increase in CODB due to higher percentage of lower margin sales, and increased cleaning. Third, the potential impact of ongoing reductions in depreciation.

The ability for JB Hi-Fi to lessen this blow will predominantly come from the the growth of Australian online sales. In addition, investors should look for any indications as to the repeatability of that performance, or whether this was a one-off event. This information, as well as the above metrics, is likely to weigh on the JB Hi-Fi share price in the months following reporting season.

Lastly, the company saw a growth in its dividend per share by 7% in FY19. I will be very interested to see what happens with the dividend this year given the uncertainty in the national economy.

More reading

• This is the only ASX sector tipped to report earnings growth this reporting season
• ASX 200 jumps 2% higher, Afterpay soars
• How will Victoria’s stage 4 lockdowns impact ASX shares?
• Why Crown, Fortescue, Kogan, & Nearmap shares are storming higher
• Why the JB Hi-Fi share price is dropping lower today

Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd. The Motley Fool Australia has recommended Kogan.com ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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