MQG.ASX & PDN.ASX | 2 stocks to add to our order pad!

Candice: [00:00:12] Welcome to Talk Money To Me. This is your Financial Need to Know podcast. I'm one of your co-hosts, Candice Bourke. [00:00:17][5.7]

Felicity: [00:00:18] And I'm the other one, Felicity Thomas. And today we're super excited to bring you one of our favourite episodes, our order pod. Now, in these episodes, Candice and I discuss listed companies which have caught our eye. Maybe they're companies displaying impressive growth numbers we can't ignore. Perhaps that business recently reported solid financial figures. Maybe they're in an interesting sector with lots of potential. Or has the market oversold these shares, leading us to the conclusion that now is an ideal time to buy these businesses? [00:00:49][30.9]

Candice: [00:00:50] That's right. And for my stock pick, it falls in the category of strong financial figures that I can't personally ignore. It hasn't been sold off, actually, lately. It's rallied. But I'm going to tell you why I think we should add it to the portfolio. Before we get into this episode, though, please remember if you're new to the podcast, here comes the disclaimer. What we chat about today is not considered personal advice, even though we are registered financial advisors at shore and partners. As always, please note this podcast and the content discussed does not constitute financial advice, nor is it a financial product. In fact, the content on this podcast is genuine nature, and you should always go out and seek appropriate professional advice before you make any of your investment decisions. That's right. [00:01:32][41.8]

Felicity: [00:01:32] You can actually seek professional advice through us if you wish. That's right. [00:01:35][3.8]

Candice: [00:01:36] Now, in this episode where we go into companies' panels, we're going to talk a lot about the facts and figures which are known at the time. And Felicity and I will also talk about relevant information in respect to the financial products to which they relate. [00:01:49][12.9]

Felicity: [00:01:49] Correct. So it's based on facts known at the time, which is the 15th of November 2022. And we know that things move very quickly in this market. So with that Candace, what company are you bringing to the order today? [00:02:01][12.0]

Candice: [00:02:02] Alrighty, we'll roll up. Roll up. Here it is. Okay. This is my stock for the week. I'm going to go into the financial aspect of our market. So the ASX and I like Macquarie Group at the moment. The code is M, Q, G, they're everywhere. You can't seem to walk around the streets and not see an ad from Macquarie Group. So it's a diversified financial services company with business operations across funds, management, banking and services. That's their bread and butter equities, capital markets and commodity trading. Bitter history because I do love it. Established back in 1969 as the Australian subsidiary of the UK Merchant Bank, Macquarie then diversified its shareholding structure in 1985. Fast forward and it assumed the present name as we know today, Macquarie Group and obtained an Australian banking licence. So then fast forward again, it started trading on an Aussie market in 1996. [00:02:54][52.0]

Felicity: [00:02:55] So you get another little blue chip and another little blue chip, a big large blue chip for us. [00:03:01][5.4]

Candice: [00:03:01] That's right. The top end of Napoli bought Mayfair, right. The winning property on the streets. [00:03:06][4.9]

Felicity: [00:03:06] It is the one that everyone wants. So obviously a huge player on the ASX huge global presence. Is that why you like it? [00:03:13][6.6]

Candice: [00:03:13] Yes, one of the reasons is that it is a giant so the market cap sits around 69 billion depending on the day. Right. With the volatility we see. But what's important is it makes up about 3% weighting of the ASX top 200. It's a big financial player in the Aussie market. So it's true that the company is well diversified, which is another reason why I like it. It's got a large proportion of revenues here in Australia, about 30% and in the Americas about 35%, followed by about 25% from Europe, Middle East and Africa and 10% from the Asia-Pacific region. 

Felicity: [00:03:45] So it's everywhere.

Candice: [00:03:46] So really it's everywhere, yeah. On the buses, on the trains, but globally. Right. And that's one of the reasons why I do like the business because over the years it's really diversified its geographical reach and its revenue stream. So these days about 50% of net profits is attributed from their kind of bread and butter, which is their banking and financial services, and then their Macquarie Asset Management Department. So that's where their funds and their products are. 

Felicity: [00:04:13] Okay. And so where does a lot of the net profits actually come from that Candace. 

Candice: [00:04:17] The net profits, if you break down those two segments, really comes from their loan book, their deposits, their bread and butter kind of financial services and banking, right. But what's interesting in my opinion is that the balance, the other 50% of the net profits come from the more exciting part, right? The more that's involved in the day to day market operations and future activities within the market. So that's the commodities and the global markets trading side of the business and then Macquarie Capital business activity. So the corporate institutional raising the structure, the advisory infrastructure that the whole thing. So if we break down these four brands within the global brand, I'm not going to go into all of it too much. But let's stick to knitting as the saying that I love. Within their banking and financial services arm that attributes to about 13% of the recent first half year result that we saw. So they dominate the retail banking space, right? They've got 116 billion in deposits. So the balance sheet looks really healthy. The loan book is about 121 billion and the funds on the platform is about 111 billion. 

Felicity: [00:05:28] And look, we have a lot of our clients on Macquarie Cash Management, so surely we're contributing to that. 116.7 billion. 

Candice: [00:05:35] Yeah, just a tiny piece of contribution for us here. Took money to me, but that's right. Right. So like it's, it's a bit of a no brainer. And then just touching quickly on the Macquarie Asset Management arm, that's their funds and their offering, that's about 31% of the recent net profit figure. And then the Macquarie Capital segment, which accounts for about 13%. But this is where I think not only is the market now really benefiting, you know, this particular department for Macquarie's groups, but also going forward. So within their commodities and global market trading segment, that's actually the highest contributor to the recent net profit figure, 31%. This department is really in the market facing activity, so it offers capital structuring and financing, risk management, market access, and then the physical execution, logistics. So commodity trading, derivative trading effects, the whole thing not only for retail clients but for institutional clients as well. And it's an important arm to the rest of their businesses in their products and services. Right. So the bank is benefiting from the strong risk management and demand in the gas and power businesses and resource segments that they're involved with. Plus the Global Oil Department, due to the backdrop we've seen playing out in 2022, that's because the clients within Macquarie and their products and the in-store corporates that they represent, they're wanting to hedge activity that they're seeing the increased levels of volatility in the commodity market. In a nutshell, Macquarie has established itself as a leading market position within the certain global sectors that stand out, you know, for the future facing commodities that we all are talking about at the moment, they're really involved heavily in the transport contracts, infrastructure, green energy solutions, more importantly, gas and power storage as we go into a North American and Northern Hemisphere winter, I should say, and they've got the ESG side figured out with renewable energy and, you know, green solutions. But they're also not ignoring the old economy in traditional resources of commodities like gas, oil. 

Felicity: [00:07:43] That's it. So it's not really your average bank. And they've got their hands in all of the little honeypots, don't they? So I guess if you're going to choose finance at the moment, Macquarie Bank is the one to go for. So 37% of underlying profits, that's super impressive, I guess. What are the highlights you've taken from the recent results? 

Candice: [00:08:02] Yes, like I said at the start for me, you know, we do a couple of things as advisors and we look at interesting companies or businesses that we want to add to the portfolios of our clients. The first thing I like to screen for is fundamentals, and I can't ignore the strong figures that Macquarie recently reported, which was a beat from consensus. So Pat increased 13% well above street consensus of 8%, EPS growth gained about 7%. They're paying out a really nice healthy dividend these days, 50% a payout ratio. So the full year's declared at $3, which is about 3.6%. We're not bad. 

Felicity: [00:08:40] We love a dividend, don't we?

Candice: [00:08:41] Yeah, I'm actually. 

Felicity: [00:08:42] Even starting to really like dividends now, which is just like floored, right? Completely. 

Candice: [00:08:47] I'm so shocked.

Felicity: [00:08:49] No. 

Candice: [00:08:50] Well, look, you'll like this one because you get top line growth in this company. It's nearly 40% exposed to those infrastructure commodities, you know, parts of their very important to play that we just spoke about. But the top line revenue was also 11% and before profit tax impressive also 11%. What we look at for banks when we look at the balance sheet is their cash levels and their cash ratios and their T to cash threshold is sitting at about 13%. So that's looking very healthy and a tick from the regulator's perspective.

Felicity: [00:09:23] It definitely is. And you've mentioned this before as well with regards to their capital levels for why it's so important. So a super impressive report before we get into valuations and the risk. So if we are in a bear market rally, which some are saying we are, what should we really be looking out for I guess as a risk for Macquarie Bank? 

Candice: [00:09:43] Yeah. I mean I'm in the camp that I think this is a bear market rally. Like I don't think we've seen the floor, you know, the bottom yet. There's still a lot of uncertainties to play out. Now, if I'm right in that prediction, what we need to remember is that a bank is obviously in this one in. Tequila offers products and services that is closely linked to the market. So obviously valuations as a market falls and drops, Macquarie's share price will do the same. Inflows and outflows are also important for Macquarie, so we have to remember that and that's going to impact their assets under management. Equity impairments is also a significant risk for the Macquarie Group because they do utilise their balance sheet often and an increasing risk that we're all talking about is not only the regulators, they do love to get heavily involved in this space because here in Australia obviously the banking system is one of the pillars to our economy, but there's a credit risk also we've seen in recent time, given that there is an increase in the exposure to both the lending and leases within Macquarie's business. So there's definitely some risks that we all need to keep at our forefront when we invest into this market in any market really. 

Felicity: [00:10:52] So Candace, that's all great, but I know what everyone's here to listen to. What is the price target? I mean, what kind of upside are we going to get on Macquarie Bank if we buy it now? 

Candice: [00:11:02] The good news is that the street places the consensus of around $194, so that's about 10% upside for where we are today. It's trading around 177 levels. The most bullish call out there is about 214 points. And UBS, who I've referenced in this order pad today, has about 190. But bearing in mind right as we're recording this in mid-November, in the last 30 trading days, the Aussie financial sector or the ASX financial index has rallied quite a lot. It's up about seven and a half per cent but the stock Macquarie has actually increased 15%. So I'm a big believer that the market is a really clever investor that is forward looking and I believe it always rewards and favours the strong leaders and companies within its peer group. And that's where I placed Macquarie. So it's outperformed its financial index in the last 30 days. So a company in my opinion that is clearly delivering on the fundamentals, clearly delivering on the balance sheet, the important metrics well-diversified in their revenue streams. This is one that you want to own in your portfolio, I think for the next ten years at least. And you know, if I am right with this bear market rally, it'll come off again and then you'll have even more upside. 

Felicity: [00:12:20] That's right. And I think that because we've had such large swings, right. Really over the last two years or so, people are expecting, you know, 20, 30/% returns, but 10% upside is still huge. Right, that right, 10% upside is very, very attractive. 

Candice: [00:12:37] And don't forget the dividend on top. So really it's 13% above that. Yeah. All right. That's a wrap for me on Macquarie. Felicity, before we jump into your stock, which I'm excited to hear about and the assessment of why you think it's a buy. We're just going to take a quick break. And we're back. All right, Afterpay For those of you who don't know, that's your nickname. And I've just said the whole world is great. What happened? Let's get into it. What are you all about?

Felicity: [00:13:04] Story Original. Felicity Thomas Right.

Candice: [00:13:08] And what's mine? 

Felicity: [00:13:09] CB So yeah. 

Candice: [00:13:11] We are so original. We work in finance. We love our acronyms. 

Felicity: [00:13:14] That's it. I'm not that creative. All right, so my stock on the order pad is Paladin Energy. Now, the code is PETN. It's not as big as Macquarie Group, but it's not my small microcap stocks that I usually pick. 

Candice: [00:13:28] Which means it's at least in the billion. Right. What's the market cap?

Felicity: [00:13:30] 3.5 billion.

Candice: [00:13:32] I'm impressed. Well done. Right. What is it? What does it do?

Felicity: [00:13:37] If you're not actually head of Paladin, essentially, I engage in the development and operation of uranium mines. Okay, so we're coming back to that green energy play, which I really, really like. And I've already pitched it previously with Silex. So its flagship asset is the Lengua Heinrich Mine in Nambia, which is placed in care and maintenance in 2018 due to low uranium prices. But obviously that's turning around, right? So we're needing to get all of these uranium mines into production as soon as possible. So Paladin is actually currently readying the lung of Henrik for a restart, which will depend on an improvement in the uranium market, which is happening. Langer Heinrich will produce approximately 3% of the global supply of uranium. I've chosen this stock because it's another investment in the way to green energy and our decarbonisation goals. Now we've spoken about it before, that we're heading into a commodity supercycle because we're unlikely to actually meet the Paris 2030 goals. So that's why I think it's a good idea to get into a stock like Paladin earlier. 

Candice: [00:14:46] Yeah, I agree 100%, and so does the rest of the market. You know, also this morning, right, I remember Martin Crabb, our chief investment officer, who was on the podcast roughly this time last year. And we're going. It was so exciting. We're going to sit down, we're going to sit down with him again very soon. He did mention that we're in an energy crisis. That's a no brainer. But we will continue to be in the energy crisis due to a reduction in drilling because of the ESG concerns flooding the market. So we have this issue where we want to go green, but we're so focussed on it that we have to come back to basics that we still need certain commodities to get there. 

Felicity: [00:15:22] Correct. So we don't have enough uranium mines in production yet. So. Right, this is why. Boom, uranium. That is my pick today. 

Candice: [00:15:30] Boom. That's a sound effect for uranium boom time. Okay. 

Felicity: [00:15:34] But not in the way of uranium. Not in the way that people used to. 

Candice: [00:15:37] To close. 

Felicity: [00:15:37] Up. But yeah, people used to think uranium bad uranium can be good in this instance. 

Candice: [00:15:44] So a good boom. Okay. Another thing I know you look for is certain events or catalysts and that's why you're kind of bullish. So is that correct? 

Felicity: [00:15:52] Correct. So Paladin has released its September Quarterly Activities report. Now, the key news that I've taken out from this is that Paladin has actually secured four additional tender awards for the supply of uranium to the US and European utilities, and it's working towards finalising contract terms which will be really interesting when they come out. So with the Lang Heinrich Restart project being well underway, first production is actually expected Q1 of 2024. So Paladin and I think what's also important here is Paladin has cash of USD 163.4 million. So it's actually fully funded for its first production, which I think is a very, very key point. 

Candice: [00:16:32] Yeah, that's one of the biggest risks for, you know, early exploration or any kind of small resource company is they're going to have too much of a burn rate. So what else did you kind of take from a highlight from the recent report? Because it was a big report from memory. Correct. 

Felicity: [00:16:46] So I think another thing to point out here is that Paladin actually has all the necessary permits and licences to restart because that's generally a risk when it comes to these mining companies. The company has also confirmed an estimated project execution timeframe of 18 months from Project Commencement to first production. So essentially the full production will be achieved after a further 15 months, which is very promising. 

Candice: [00:17:13] Yeah. Not too long for investors to wait for. That's great. Any other kind of key points as well that we should be aware of, do you think? 

Felicity: [00:17:19] Yes. So back on the tenders. So I guess an interesting point here is we're kind of heading into a world of deep globalisation. So I believe that companies that can actually secure these tender wallets and contracts, you know, with the US and European counterparties who are going to be very big on these green energy and decarbonisation goals is very key. So essentially the company is going to provide guidance on price and volume terms once the contracts are executed. So that's a key catalyst to actually look out for. We also expect additional of. Agreement to be signed with the US and European utilities as Paladin layers in contracts of sufficient duration and value. 

Candice: [00:18:00] That's important to note. And let's jump to the fundamentals. Right. Like for me, the forecasts for the production are important for this name. So what do you see there, you know, in terms of the return on capital or the return on investment? Yeah. 

Felicity: [00:18:14] So again, this is also really important to look at mines when they're not in production yet. On our forecast, the project has a one year payback. So when I have 168% and an NPV, ten of us over 1 million now we also assume a multi-year price strike of US $85 before actually settling on our long term use. 308 realised the price assumption of US $65 in 2028. I think what's also really important about this mine in particular, it's expected to operate at an all sustaining cost in the mid US $30, which actually places the operation at the lower end of the second quartile of uranium producers. So I guess the combination of low capital intensity to restart and low operating costs means that this mine is actually well positioned relative to other assets. I think another point that's important, this is something that we've said earlier is the cash position, you know, 163 million, which means they're probably not going to do another capital raising unless they find another asset. Yeah, because all of these funds are obviously going to watch the El Hage restock, but that's. 

Candice: [00:19:24] Not the only mine. Right? Like we know that I was beating the drum on diversification for Macquarie. So what else is in their playbook and their assets. 

Felicity: [00:19:33] Their LH mine isn't the only one they actually own and operate a large global portfolio of uranium exploration and development assets. So you've got the Marshall and Mount Isa, the many Engie. Each asset is actually underpinned by high grade resources in very favourable jurisdictions being Australia and Canada when it comes to resources in mining. We also think that's a very exciting part of their portfolio and actually provides Paladin with optionality as uranium markets do tighten. Yeah. Have I convinced you yet? Have I convinced you to buy Paladin? 

Candice: [00:20:06] I'm still on the fence, so you got to sell me now on the valuation, right? 

Felicity: [00:20:09] This will get you. Paladin is an absolute buy. It is a very premium and one of the most liquid names in the sector. Okay. It remains a preferred exposure to an improving uranium market. So it's trading around 85, $0.86 at the moment. Azure and Partner's price target is a dollar 30 and it's actually based on one and a half times valuation multiple. So it's not an inflated price target. And another point that you will like, although further away it'll be free, it'll have a free cash flow yield around 14% by FY 25. So we're assuming they'll also start paying a lovely dividend by then. So it's about 60% upside from current levels. 

Candice: [00:20:52] Well, that's a wrap. So we've gone uranium futures facing commodities through Paladin and you're a global diversified financial company with Macquarie, so we hope you enjoyed that order pad. Please remember before we sign off, although we have registered financial advisors at Shoring Partners, as always, what we chatted about just now do not consider that as personal advice because we don't know your situation, but we can do it if you reach out to us. We do love hearing from our listeners. We have created the order pad episodes to really have a bit of fun and back and forth on why we're buying or selling certain positions for our clients and our own portfolios as well. 

Felicity: [00:21:31] And both of these ideas have a strong energy tailwind. So I definitely want to start watching. Do your own research though, but feel free to check us out on www.cftgroup.com.au. You can also reach out to us on our social media channels and follow us at Talk Money To Me podcast for daily market updates. Until next time. 

Candice: [00:21:54] See you then.