The Mesoblast limited (ASX: MSB) share price has been the best performer on the S&P/ASX 200 Index (ASX: XJO) on Friday.

In morning trade the biotechnology company’s shares rocketed as much as 57% higher to a record high of $5.30.

Why is the Mesoblast share price rocketing higher?

Investors have been fighting to get hold of the company’s shares after a very successful outcome from its meeting with the Oncologic Drugs Advisory Committee (ODAC) overnight.

That meeting was to discuss its remestemcel-L (RYONCIL) product candidate as a treatment for paediatric steroid-resistance acute graft versus host disease (paediatric SR-aGvHD).

The ODAC is an independent panel of experts that evaluates efficacy and safety of data and makes appropriate recommendations to the United States Food and Drug Administration (FDA).

What happened at the meeting?

This morning the company revealed that the ODAC voted overwhelmingly in favour that the available data supports the efficacy of remestemcel-L in paediatric patients with SR-aGvHD.

Mesoblast’s Chief Medical Officer, Dr Fred Grossman, commented: “Steroid-refractory acute graft versus host disease is an area of extreme need, especially in vulnerable children under 12 years old where there is no approved therapy.”

 “We are very encouraged by today’s outcome and are committed to working closely with the FDA as they complete their review of our submission regarding approval of RYONCIL for this life-threatening complication of an allogeneic bone marrow transplant.”

What now?

While the FDA will seriously consider the recommendation of the panel, the final decision regarding the approval of the product is made solely by the regulator. This means the recommendations by the panel are non-binding.

The RYONCIL product has been accepted for Priority Review by the FDA, with an action date of 30 September 2020. If approved, Mesoblast plans to launch RYONCIL in the United States in 2020.

Paediatric transplant physician Dr Joanne Kurtzberg appears hopeful this will go to plan. She sees a major need for a treatment for this condition.

Dr Kurtzberg commented: “This devastating condition has an extremely poor prognosis and there are no FDA-approved options for children under the age of 12. The clinical studies I have directed have demonstrated the potential for this treatment to fill a significant unmet medical need.”

More reading

• Mesoblast share price on watch after US regulatory approval
• 5 things to watch on the ASX 200 on Friday
• Broker reveals its expectations for the Mesoblast FDA meeting
• Down 37% in 2 days! Is the Mesoblast share price a buy?
• Why Mesoblast, Northern Star, SEEK, & WiseTech Global shares are sinking 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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Here at Motley Fool we’re always about long-term investing.

The idea is simple: Holding quality shares for a long time reduces your exposure to the wild short-term whims of the herd.

But authorities are worried that average Australians in COVID-19 lockdown this year have ignored that advice and have sought to make a quick buck via ASX shares.

The Australian Securities and Investments Commission (ASIC), for example, warned retail investors back in May that high-frequency “day trading” in volatile markets could see them lose their life savings. 

“Retail investors chasing quick profits by playing the market over the short term have traditionally performed poorly – in good times and bad – even in relatively stable, less volatile market conditions,” stated ASIC.

“For retail investors [it] is particularly dangerous, and likely to lead to heavy losses – losses that could not happen at a worse time for many families.”

COVID-19 ASX share trading dwarfs gambling

Astounding figures have been revealed about how new retail investors are diving in.

Corporate advisory firm Vesparum Capital found that between late February and middle of May, retail traders bought $9 billion of Australian shares.

Compare this with the first quarter of this year – before the coronavirus pandemic really took hold – when $4 billion was gambled on lotteries, poker machines and sports betting, according to Roy Morgan.

You might think diverting money away from gambling into shares is a positive outcome from the COVID-19 lockdown.

But high-frequency trading is just another form of punting.

“This is an alternative to gambling,” said UTS academics David Michayluk, Warren Hogan and Gerhard Van de Venter on The Conversation. 

“While it’s risky, it’s arguably no riskier than sports betting, casinos or poker machines.”

During the same period that retail investors were net buyers of $9 billion, institutional investors sold off $11 billion of shares. Yikes.

Small and mid-cap punting is rife

Not only is high-frequency trading among retail investors a worry, they are going for big wins (and big losses) with high-risk stocks.

A joint University of New South Wales (UNSW) and University of Melbourne study has shown amateur investors have been moving away from blue-chip shares to deliberately put their money on smaller cap companies.

UNSW professor Carole Comerton-Forde and University of Melbourne senior lecturer Zhuo Zhong reported that retail investors were not just buying up large-cap ASX shares such as BHP Group Ltd (ASX: BHP) and Commonwealth Bank of Australia (ASX: CBA), but diving into highly volatile shares such as AMP Limited (ASX: AMP) and Webjet Limited (ASX: WEB).

Retail investors were also buying “highly leveraged stocks” such as Domino’s Pizza Enterprises Ltd (ASX: DMP) and Seek Limited (ASX: SEK), as well as ASX shares that had seen their share prices falling before the lockdown such as Myer Holdings Ltd (ASX: MYR) and Flight Centre Travel Group Ltd (ASX: FLT).

Comerton-Forde and Zhong added that, in contrast, institutional investors were net sellers of these stocks.

Why are Australians gambling on small cap shares?

While Comerton-Forde and Zhong don’t have any academic evidence of the reasons behind the speculative purchases, they have an opinion.

“It may be due people looking for entertainment in the absence of usual leisure activities. This has been dubbed the ‘Boredom Markets Hypothesis’,” they wrote.

“It might also just be another form of gambling – ‘taking a punt’ in the absence of sports betting opportunities.”

Chief executive of US finance firm Omega Advisors, Leon Cooperman, told NBC in June that things would end badly for amateurs jumping in for a thrill.

“From my experience, this kind of stuff will end in tears.”

More reading

• Mesoblast share price rockets 57% higher on FDA breakthrough
• AGL share price fall a warning for the LNG sector
• Is the Telstra dividend in danger? This leading broker thinks it’s safe
• Sydney Airport share price down slightly after raising $1.3 billion
• Iluka share price on watch as half-year profit falls 17%

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Webjet Ltd. The Motley Fool Australia has recommended Domino’s Pizza Enterprises Limited, Flight Centre Travel Group Limited, and SEEK 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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The AGL Energy Limited (ASX: AGL) share price fell on Thursday after a disappointing FY20 result. Moreover, this was worst day for the AGL share price since 2007. In summary, the company saw its annual profit fall by 22% and expects a further fall in earnings during 2021. Managing Director and Chief Executive Officer, Brett Redman, commented various times that the company was starting to run into headwinds, and that the COVID-19 pandemic had hastened their onset. 

What moved the AGL share price?

On the same day, Woodside Petroleum Limited (ASX: WPL) published a half year report with a net loss of ~US$4 billion. However, it only saw a fall in share price of less than 1% because of forewarning. In contrast, the AGL share price saw a drop of 9.5%. While the company’s profit after tax, of $816 million, was within guidance, it was close to the lower end. Moreover, yesterday we learned that ‘headwinds’ means a drop in underlying profit after tax to between $560 – $660 million. At best, this is a reduction of 19.1%, at worst a reduction of up to 31.4%. 

The company suffered through a pretty dramatic year. Specifically, it has had to deal with the impacts of bushfires and drought as well as the coronavirus pandemic. In addition, there was a forced, unplanned outage at AGL’s Loy Yang power station.

Lastly, the company has had to deal with a pandemic-related reduction in gas volumes, as well as a collapse in wholesale gas prices. AGL provides approximately 5% of New South Wales’ gas requirements via its Camden Gas Project. However, it also had to write down renewable assets as part of the Powering Australian Renewables Fund. This has been attributed to the combined impacts of grid congestion problems, and falling prices accelerated by COVID-19. This congestion is part of the convergence of issues that have led to lower wholesale energy prices.

While this is only a $14 million dollar write down, there are many companies having difficulties in the renewables sector. Additionally, it is also likely to impact the company’s future plans for 850 megawatts of grid scale batteries, as well as a further 350 megawatts in renewables for demand response assets.

Guidance for FY21

In relation to the drop in earnings for FY21, Mr Redman said “FY21 will be a year of considerable uncertainty as we navigate the COVID-19 pandemic and its economic impact. Market and operating headwinds to AGL’s margin from the maturing of lower cost gas supply contracts and sharp falls in wholesale prices for electricity and renewable energy certificates have accelerated as a result of the pandemic.”

Both of these issues will weigh down the AGL share price, and are linked to the coronavirus pandemic.  Furthermore, they are caused in part by the Saudi/Russian oil feud, renewable energy, as well as the incoming recession. Additionally, the company expects to see increased customer hardship, and potentially increased operating costs at AGL’s generation plant.

However, all is not lost. The company saw an increase in its users across both its energy business, and its phone and broadband business. In addition, it has made a recurring saving of $135 million due to systems implementation. 

Foolish takeaway

While the AGL share price displays many characteristics of a company under strong management, as evidenced by its cost reductions, I believe it is in very serious trouble. Its dominant issue is that gas hedging is coming to an end, resulting in lower prices. This is at exactly the same time as wholesale prices for gas have almost collapsed. The company’s diversification into the telecommunications industry remains mysterious. AGL has spoken several times about energy and data converging, but has yet to lay out a concrete plan.

One of the pillars of the company’s strategy is transformation. To me personally, it seems to be transforming into a structurally smaller company.

More reading

• 5 things to watch on the ASX 200 on Friday
• Metcash share price and these ASX stocks just got upgraded by leading brokers
• Woodside share price edges lower on half year results
• Why AGL, Breville, CBA, & Telstra shares are dropping lower today
• ASX down 0.55%: Telstra maintains its dividend, Treasury Wine shoots higher, AMP’s special dividend

Motley Fool contributor Daryl Mather 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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The Telstra Corporation Ltd (ASX: TLS) share price has continued its post-results slide on Friday.

In morning trade the telco giant’s shares are down a further 1% to $3.07.

Why is the Telstra share price tumbling lower?

Telstra’s shares have come under pressure since the release of its results due to concerns over the sustainability of its 16 cents per share dividend.

This is because Telstra’s guidance for FY 2021 shows that its earnings will be impacted more than expected by the COVID-19 pandemic. This suggests that its current dividend could be at risk based on its current policy.

Telstra commented: “We remain clear that, adjusted for recent accounting changes, our EBITDA, post the nbn, needs to be in the order of $7.5 – 8.5 billion to pay a dividend around 16 cents under the 70 to 90 percent payout ratio in our capital management framework.”

This compares to its guidance for underlying EBITDA in the range of $6.5 billion to $7 billion.

Is the dividend in danger?

While the above doesn’t look good, it is worth noting that Telstra pointed out that its free cash flow is higher than its accounting earnings.

This means Telstra could shift its dividend policy to a free cash flow based one in order to maintain its current dividend. Which is arguably more appropriate at this point.

Goldman Sachs appears optimistic that this will be the case and continues to forecast a 16 cents per share dividend in FY 2021.

It commented: “Although 16cps is now unsustainable across FY21-22 on the existing payout policy, we note TLS further shifted its dividend focus to FCF ( i.e. TLS justified the 99%, out-of-policy EPS payout as this was well supported by cashflow). Hence we have not revised our 16c dps, believing Telstra will maintain this through FCF, if it believes that is on track for $7.5bn by FY23E.”

In light of this, the broker has held firm with its conviction buy rating, albeit with a slightly reduced price target of $3.90.

I agree with this view and feel it is worth taking advantage of the pullback in the Telstra share price to invest.

More reading

• ASX 200 drops 0.7%, Telstra falls 7.7%
• 2 blue chip ASX dividend shares to buy
• Metcash share price and these ASX stocks just got upgraded by leading brokers
• Telstra just announced its dividend! Are Telstra shares now a buy?
• Why AGL, Breville, CBA, & Telstra shares are dropping lower today

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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The Sydney Airport Holdings Pty Ltd (ASX: SYD) share price is edging lower after returning from its trading halt.

At the time of writing the airport operator’s shares are down 1.7% to $5.30.

Why was the Sydney Airport share price in a trading halt?

Sydney Airport requested a trading halt earlier this week while it launched a fully underwritten $2 billion equity raising.

Pleasingly, this equity raising has been going very well, with the company announcing the completion of the institutional component of its offer this morning.

According to the release, Sydney Airport has raised gross proceeds of approximately $1.3 billion from institutional investors. These funds were raised at $5.30 per new share, which was $0.74 above the offer price of $4.56 per share. It represents just a 1.7% discount to its last close price of $5.39.

Management advised that the institutional entitlement offer attracted strong demand from Sydney Airport’s institutional shareholders, with approximately 93% of entitlements available to eligible institutional securityholders taken up.

Sydney Airport Chief Executive Officer, Geoff Culbert, was very pleased with the success of the equity raising.

He commented: “We are delighted by the support shown by our institutional securityholders. The fact that the take up was well over 90% and that the renounced entitlements were placed at a price above TERP supports our decision to use a renounceable offer structure.”

“Participating securityholders haven’t been diluted and those renouncing securityholders who either couldn’t or chose not to participate will be compensated through the proceeds of the institutional shortfall bookbuild. We now look forward to our retail securityholders getting the same opportunity to invest on a pro-rata basis,” he added.

The chief executive believes that this strong demand shows that institutional investors have confidence in the airport’s long term prospects.

Mt Culbert said: “The strong demand from institutional investors demonstrates belief in the long-term fundamentals of Sydney Airport. This equity raising will strengthen our balance sheet, ensure we are well-positioned to meet any future challenges presented by the COVID-19 crisis, and gives us the flexibility to make the most of opportunities that arise through the recovery. We thank our investors for their ongoing support.”

Traffic update.

In addition to the above, the company also released a traffic update for the month of July. And as you might expect, Sydney Airport was a bit of a ghost town once again during the month.

According to the release, total passenger traffic in July was 317,000 passengers, down 91.8% on the prior corresponding period. This comprised 42,000 international passengers (down 97.2%) and 276,000 domestic passengers (down 88.5%).

Management notes that the modest recovery in domestic traffic in July was driven by a brief window where unrestricted travel was permitted between NSW, Victoria, and Queensland.

It believes the increased traffic during this short window shows there is pent up demand for interstate travel, which could be good news for the likes of Qantas Airways Limited (ASX: QAN) and Flight Centre Travel Group Ltd (ASX: FLT).

More reading

• Metcash share price and these ASX stocks just got upgraded by leading brokers
• Telstra just announced its dividend! Are Telstra shares now a buy?
• ASX travel shares stuck in suspended animation
• Up 30% in a week, is the Webjet share price a strong buy?
• ASX 200 rises 0.5%, Mesoblast plunges

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Flight Centre Travel Group 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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The Iluka Resources Limited (ASX: ILU) share price is one to watch this morning after the Aussie miner’s half-year earnings report. At the time of writing, just after today’s market open, the Iluka share price has edged 0.3% higher.

What did Iluka report this morning?

Total sales volumes fell 17.6% lower to 384.7 kilotonnes (kt). Zircon sales plummeted 41.2% to 78.4kt while rutile sales were down 9.9% to 74.7kt. The group’s synthetic rutile sales volumes jumped 3.4% to 88.5kt.

The Aussie miner reported a 16.3% drop in half-year mineral sands revenue to $456.6 million as revenue per tonne sold edged 0.5% higher to $1,689.

Mineral sands earnings before interest, tax, depreciation and amortisation (EBITDA) fell 23.9% to $177.0 million.

Underlying mineral sands EBITDA margin expanded by 16.5% to 48.0% during the half-year.

Underlying Group EBITDA slumped 17.8% lower to $225.1 million while profit was also down 17.5% to $113.2 million.

Receipts from Iluka’s Mining Area C royalty increased by 16% during the last six months to $48 million. That included an 11% increase in Aussie dollar-denominated iron ore prices while sales volumes climbed 3% higher.

Positively, Iluka turned a -$65.2 million free cash flow (FCF) in 1H 2019 into a $46.2 million FCF for the half-year.

Iluka management decided not to pay an interim dividend compared to a 5 cents per share payment in 1H 2019.

The group maintained a net cash position of $62.1 million despite net tangible assets per share slumping 19.8% lower to $1.82 per share.

Iluka did provide an update on its planned demerger, creating a new royalty business called Deterra Royalties. The shareholder vote is to be held in October 2020 with Iluka to retain a 20% stake in the new business.

COVID-19 update

The Aussie miner has implemented a number of health and safety measures in response to the coronavirus pandemic.

There were no major updates outside of Iluka’s focus on operational flexibility during the period.

The miner’s focus is on maintaining a strong financial position, aided by the $6 million received from the JobKeeper subsidy. Iluka has also deferred its $99 million final tax payment to the second half of the year.

How has the Iluka share price performed in 2020?

Shares in the Aussie miner fell 48.2% lower in just one month amid the March bear market. 

Despite the market volatility, the Iluke share price has managed to climb 5.1% higher in 2020.

That’s a strong outperformance over the S&P/ASX 200 Index (ASX: XJO) which has slumped 9.0% lower this year.

More reading

• Mesoblast share price on watch after US regulatory approval
• 5 things to watch on the ASX 200 on Friday
• Why Tabcorp is the latest “conviction buy” recommendation from this top broker
• ASX 200 drops 0.7%, Telstra falls 7.7%
• Metcash share price and these ASX stocks just got upgraded by leading brokers

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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The Newcrest Mining Limited (ASX: NCM) share price is dropping lower on Friday after the release of its FY 2020 results.

At the time of writing the gold miner’s shares are down over 1% to $34.08.

How did Newcrest perform in FY 2020?

Newcrest had a reasonably solid 12 months and produced 2.2 million ounces of gold at an all-in sustaining cost (AISC) of US$862 per ounce.

While the latter was an increase of 17% on the prior corresponding period, a stronger gold price helped to offset its rising costs. Newcrest reported a 21% lift in its average realised gold price to US$1,530 per ounce, which resulted in an AISC margin of US$668 per ounce.

This led to the gold miner reporting a 5% increase in revenue to US$3,922 million and a 10% lift in earnings before interest, tax, depreciation, and amortisation (EBITDA) to US$1,835 million.

And while Newcrest posted negative cash flow of US$621 million, this was due to major merger and acquisitions activities. If you exclude these, its free cash flow would have been US$670 million. This compares to US$804 million in FY 2019.

Despite its cash outflow, the Newcrest board has determined that a final fully franked dividend of 17.5 U.S. cents per share will be paid to shareholders on 25 September 2020.

Newcrest Managing Director and Chief Executive Officer, Sandeep Biswas, was pleased with the company’s performance in FY 2020.

He said: “FY20 was a year in which we invested in the future. We invested $1.3 billion to acquire Red Chris and increase our exposure to Fruta del Norte and a further ~$400 million to progress our organic growth options and on exploration. We further strengthened our balance sheet to ensure we are well positioned to deliver our near-term growth options of Havieron, Red Chris, and Wafi-Golpu.”

“Newcrest delivered a solid performance for the financial year, producing 2.2 million ounces of gold at an AISC of $862 per ounce. Our free cash flow generation (excluding major M&A activities) remained strong at $670 million and we report statutory and underlying profits of $647 million and $750 million respectively,” he added.

Outlook.

Newcrest has provided guidance for FY 2021, but acknowledges that this depends on their being no COVID-19 disruptions.

The company is guiding to gold production of 1.95 million ounces to 2,15 million ounces, which will be down from 2.2 million in FY 2020. This appears to have underwhelmed investors and put pressure on its shares today.

More reading

• 5 things to watch on the ASX 200 on Friday
• 5 things to watch on the ASX 200 on Thursday
• ASX 200 down 0.3%: CBA delivers $7.3bn cash profit, gold miners sink, SEEK’s outlook disappoints
• ASX gold miners on watch after gold price crashes lower
• 5 things to watch on the ASX 200 on Wednesday

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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The Premier Investments Limited (ASX: PMV) share price surged more than 12% immediately after opening on Thursday after the retail player provided an update to investors.

While Premier disclosed that sales were down 18% globally on the 2nd half of 2020 (falling $106.5 million), it was the positive earnings before interest and taxes (EBIT) news that drove the price rise. The announcement also stated that the online sales figures now accounted for more than a quarter of total sales, which is more than double that the previous year. An increase in online sales is consistent with what we are seeing across the retail space, as a response to the COVID-19 situation.

Is the Premier Investments share price still a buy?

Prior to the market crash in March this year, the Premier Investments share price was sitting comfortably around $19–$20. COVID-19 hit the retailer hard, with share prices plunging more than 60% in the space of one month. However Premier bounced back in a very positive way. After hitting lows of around $8.00 on 24 March, the share price rose to $17.90 over the following 3-month period, showing strong resilience. 

The Premier Investments share price previously reached $21.50 in March. Even with Thursday’s 12% price surge taken into consideration, investors are able to purchase shares at a 3.5% discount to those previous highs.

Historical performance

The Premier Investments share price has risen more than 180% over the last 10 years, or approximately 18% per year. This is a steady return by any measure, however isn’t the most impressive number. Since listing on the ASX in 1987, Premier Investments has delivered gains of around 1,800%.

Personally, I like to know the historical performance of a company I’m considering investing in. It’s easy to get caught up in the day-to-day news, however long-term performance is the ultimate winner. Premier Investments has certainly delivered strong returns for investors in the past.

Dividend

Growth aside, Premier Investments also offers a dividend to its investors, currently returning around 4.2% yield. This has been paid since 2009, however the dividend yield has been volatile over the years.

About Premier Investments

Premier Investments Limited wholly owns the Just Group. It also holds a 28.06% stake in Breville Group Limited. For those not familiar, the Just Group owns well-known brands such as Smiggle, Peter Alexander, Just Jeans, Jay Jays, Portmans, Jacqui E and Dotti. Investors will notice the attention to the retail industry. This is because Premier Investments has built its company around the retail, importing and distribution industries. It also has a focus on Australian companies in general.

Foolish takeaway

In this economy, we can’t expect companies to increase sales unless they are directly related to growing markets, such as technology. The next best thing is to increase profits. Premier Investments has done exactly that, which is why the market responded so positively yesterday.

Premier owns well known brands with loyal customers that will continue to shop online. I have no doubt the percentage of total sales attributed to online orders will continue to grow and this could very well be the saving grace in an uncertain market, and could bode well for the Premier Investments share price.

More reading

• Why AMP, Premier Investments, QBE, & Treasury Wine shares are storming higher
• Premier Investments share price zooms 12% higher on strong trading update
• How you can take advantage of the surging Australian dollar
• You probably shop at these 7 ASX retailers. Should you buy shares in them too?
• Leading brokers pick the latest ASX 200 stocks to buy today

Motley Fool contributor Glenn Leese has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Premier Investments 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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The Baby Bunting Group Ltd (ASX: BBN) share price will be one to watch this morning following the release of its full year results.

How did Baby Bunting perform in FY 2020?

Baby Bunting was a very positive performer in FY 2020 despite the pandemic. The baby products retailer posted an 11.8% increase in total sales to $405.2 million.

This was driven by strong online sales growth, five new store openings, and very positive comparable stores sales growth. In respect to the latter, it recorded comparable store sales growth of 4.9% for the year. Second half comparable store sales were the strongest, up 10.5% on the prior corresponding period.

Online sales (including click and collect) grew 39.1% in FY 2020, making up 14.5% of total sales.

Thanks to higher margin private label and exclusive product sales, Baby Bunting achieved a 120-basis point increase in its gross margin to 36.2%. This led to its earnings before interest, tax, depreciation, and amortisation (EBITDA) growing at an even quicker rate than its sales. The company reported a 24.1% increase in pro forma EBITDA to $33.7 million.

It was a similar story for its pro forma net profit after tax, which grew 34.1% to $19.3 million in FY 2020. On a statutory basis, net profit after tax was down 14% to $10 million. This includes the non-cash impact of employee equity incentive expenses, significant transformation project expenses, and the impairment of digital assets and the write-off of old branding assets.

It is also worth noting that unlike Premier Investments Limited (ASX: PMV), Baby Bunting’s profit growth has come without the support of JobKeeper. As its stores remained open and its sales were strong, it did not qualify or receive any support.

In light of its positive form, Baby Bunting declared a final fully franked dividend of 6.4 cents per share. This brings its full year dividend to 10.5 cents per share.

Outlook.

The good news for shareholders is that Baby Bunting’s positive form has carried over into FY 2021. Comparable store sales growth for the first 6 weeks of FY 2021 is currently an impressive 20%.

At the end of the period the company had 56 stores operating and is aiming to grow this to 100 stores in the future. It will start by opening 4 to 6 new stores in FY 2021, with 3 of these new stores due to open in first half.

No guidance was given for the full year due to the significant uncertainty caused by the pandemic.

More reading

• 3 ASX small cap shares with serious growth potential
• Fund managers have been buying these ASX shares
• Why the JB Hi-Fi share price is dropping lower today
• 3 top ASX shares to buy for growth investors in August
• ASX 200 drops 1.3%, Resolute Mining soars

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Premier Investments 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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After releasing its FY20 results yesterday, the Charter Hall Retail REIT (ASX: CQR) share price fell 2.9%. Nonetheless, the real estate investment trusts REIT‘s share price is still up 6.5% since last Friday.

Charter Hall Retail specialises in convenience retail properties, often in regional and sub-regional locations. Supermarkets are the anchor clients of these properties. Additionally, it has diversified to the point where 5 major tenants take up 53% of its portfolio.

In FY20, Charter Hall recorded $142.7 million in operating earnings, 11.3% higher than FY19. However, after booking a value reduction of $41 million from investment properties, it ended with a statutory profit of $44.2 million, down 16.8% on FY19.

Operational highlights

Charter Hall’s business mix includes convenience stores such as supermarkets and chemists, as well as speciality retail. During the initial lockdown convenience sales and footfall improved as customers shopped closer to home. In fact, the growth in moving average total for convenience was 5.2%, up from 4% in FY19. Nevertheless, this was offset by tenant assistance of $10.7 million in rent support for speciality retailers during the lockdown.

In December 2019, proceeds from the sale of shopping centre assets were used to purchase of a 30% stake in a portfolio of BP service stations. Charter Hall raised $100 million of equity in February 2020 to increase its stake to 47.5%. In total, the company’s property portfolio increased by $270 million. Lastly, post FY20, the REIT also purchased a 52% stake in a high quality distribution facility leased to Coles Group Ltd (ASX: COL) for 14 years. 

During the same period, most retail REITs were devaluing properties – by as much as 11% in the case of Vicinity Centres (ASX: VCX). Meanwhile, Charter Hall saw its shopping centres reduce in value by a mere 2.4%, which was then partially offset by a 6% increase in the valuation of BP assets. 

Capital management

Due to uncertainty around the impact of COVID-19, Charter Hall also raised $304.2 million in equity during April to reduce gearing and provide stability. Accordingly, the company has reduced its overall gearing to 32.3%, as opposed to 35.9% in FY19. Consequently, net borrowings stand at $750 million, as opposed to $946 million last financial year. Lastly, the company has cash and undrawn liquidity of $443 million.

The purchase of the BP portfolio of convenience petrol stations has helped the company to increase its weighted average lease expiry (WALE) from 6.5 years to 7.2 years. 

The future of the Charter Hall share price

At the close of business on Thursday, the Charter Hall share price was $3.30. This is 88% of the company’s net tangible asset value (NTA) per unit. So without considering any future performance, the company is selling at a discount to the assets it owns, minus debts. However, it is the future performance that is really interesting to me. 

The REIT has accumulated a portfolio of convenience shopping centres and petrol stations that are provably resilient to the impacts of the pandemic. In the report, the company stated that property worth approximately 2.5% of annual revenues was in lockdown in Victoria, which has the harshest lockdowns the country has seen to date. Moreover, it has started to purchase long WALE assets such as the Coles distribution centre and the BP portfolio. This gives the company more predictable earnings over a far longer period of time.

I think the decline in share price yesterday was due to a pullback in the distribution. This has reduced from a payout ratio of 92.4% of earnings to 80.2% of earnings to reflect reduced cash flow generated during the period. Personally, I think this is a financially wise move given the times we live in. 

Foolish takeaway

I think the Charter Hall share price remains a very good investment. Specifically, as it is currently selling at a discount to NTA per unit I think it is fair to expect capital growth over the next 2–3 years. The final distribution of 10 cents per unit in August provides a yield of 3% at the current price. When combined with the interim distribution, this raises the trailing 12 month distribution yield to 7%.

With such a resilient portfolio, I think it is very likely the dividend will either stay as it is, or increase further. All of these factors make this an excellent medium-term investment in my assessment.

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Motley Fool contributor Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET. 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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