US economics, oil, Qantas, Evolution Mining, MA Financial
Companies discussed include:
Qantas Airways (ASX:QAN)
Evolution Mining (ASX:EVN)
MA Financial Group (ASX:MAF)
The following transcript was automatically generated:
Hello. This is Stock Watch with Chris Pedersen on Wednesday 13th of December 2023. All advice is general advice and might not be suitable for you. Always consult an advisor before making any investment decisions. All questions from viewers should be sent to email@example.com. Here are a few of my market observations this week. One of the big ones is oil continues to drop.
Is this due to record us supply or is it because of reduced demand from slowing global economies? Or is it because of an increase in green energy production? Another observation is long term interest rates keep declining right now. This is very good for equities. US economics. Well, what can I say? The US economy continues to power ahead. This is good for Australia and business confidence.
The US has low unemployment, IT high investment in new manufacturing facilities. Inflation is dropping faster than almost all other countries. This is all a recipe for a bull market. And by the way, the Dow Jones and the S&P 500 are currently at record levels. But be careful. Markets are never that easy to call. Here is a chart on oil production, as I said.
US production is amazing, followed by Russia, then Saudi Arabia. Now this is CETA. CETA stands for Commodity Trading Advisors, their fund managers specializing in futures. What you see is they've become very active in oil futures in the past year. And China property, well, we've been talking about this for a few years. It's been a problem. And this chart shows the extent of the problem.
It has slowed dramatically. Now, another thing that's been in the news a lot, at least for me I find this fascinating, is with Elon Musk buying Twitter, which is now X. How important is X? Well, the top line happens to be Instagram. The bottom line is x, formerly known as Twitter. In other words, it's not that significant of a company in the whole scheme of things.
Here is a chart showing housing investments as a percentage of GDP in Australia. The red line is the important one. What you see is the peak was in 2004 and then it trailed off and then another peak in 2016. Since 2016 it has continued to decline. This is not good when our population is growing at a record rate.
Obviously, on a supply and demand basis, there's a lot more demand. And as this chart shows, supply is shrinking. Three companies I wanted to cover today. One is Qantas. This has been in the news a lot all the time. Trades on the ASX, obviously under the code and it's trading at about $5.42 right now. I wanted to look at it because what is really going on with Qantas?
We look at a chart, it's up and sideways down. So what are the fundamentals? Now Qantas is an airline which makes it a unique type of company, which I'll get into. Here is a breakdown of EBIDTA for Qantas. As you can see, the international is not as big as I thought. And the benefits, which is like the Qantas Rewards program or frequent fliers, is a big part of their business.
Now here are the fundamentals. Market cap is around 9.4 billion. I have a 12 month price target right now, $7.30. What this is, is I'm using a PE based valuation and the PE I'm using is only 7.6 times. If it gets their total shareholder return this year of 34%. Now, that's not too hard for it to get there.
The revenue growth rate from 2023 to 2025 is estimated at only 2% per annum. The big growth this past coming out of COVID. That was off of an artificially low base. So with a revenue growth of only 2%. Well, how are they going to be making much profit? The earnings growth rate from 2023 to 2025 is estimated to be flat.
Zero growth and the dividend, while they're not paying a dividend yet, but they will start paying around 2025. The PE on the 2024 earnings estimate of $0.96 is only 5.6 times. This is amazingly cheap. The yield on the 2025 dividend because that's when they're starting to really pay a dividend I estimate is around $0.21 and that's 3.9%, which is attractive.
But you do have to wait a couple of years before you start getting it. Until then, zero dividend free cash flow. This is not good. It's only 2% When I smooth out over the next few years, the payout ratio when it starts paying a dividend. It's never been a huge dividend payer estimated around 22% payout. So as you know, Qantas is Australia's major airline.
The problem that I see in Qantas's, it's lost governments support and protection from overseas competitors. That can change though, from overseas companies. This is significant. However, how many overseas airlines really want to come in establish a huge base in Australia? We're not a big country. Another factor that plays to Qantas advantage is the planes, which Qantas is starting to buy.
A lot of are very fuel efficient going forward. This helps profitability. So overall, when you look at an airline, you have to realize that they don't own many things. They lease the slots, they lease the airplanes, but the only thing they own Qantas paying is they own the frequent flier program. Everything else is cash flow generated. Thus, it is a very risky type of investment.
This applies to all airlines around the world. It is capital intensive, needs cash all the time, and they don't own many of their assets. Accordingly, because it is so cheap, I think maybe it's worth a buy, but only a half wait. Under normal circumstances, if it wasn't so cheap, I would avoid Qantas at all costs. Next company is evolution mining, even trading right now on the ASX at about $3 of $0.56.
So what's the story with Evie? Is it good? Is it bad? As you can tell over the past few years, I don't cover a lot of mining companies because they're very cyclical. It's hard to predict the future. When will the cycle and when will it start? And as we've seen from iron ore that the analysts have been expecting the iron ore cycle to plummet for over two years now.
And last night, iron ore was like making new highs. So go figure on fundamental basis. Looking at the end has a market cap of 6.6 billion. That's a sizable company. I have a 12 month price target for evolution of $4.10. Revenue growth from 2023 to 2025 is 27% per annum. That's if these forward estimates come to fruition. The earnings growth estimate is 30% per annum and the dividend growth, while there is no real dividend growth because it's all over the place some years, zero, some years, $0.02, another year, maybe $0.30.
So buyer beware. This is not an income company that you buy for franking credits. The PE on the 2024 earnings estimate of $0.31 is only 11.5 times. You have to remember that companies like Evolution Mining will have a low p e, and that's because all mining companies have cyclical risk. Investors don't want to pay a big P premium.
The yield on the 2025 dividend estimate of $0.22 is 6.2%. However, because the dividend is all over the place, that is not necessarily a good number to hang your hat on. Free cash flow for evolution right now is around 8%. That's excellent. And payout ratio varies, of course. So it's a major gold producer and 25% of its business is copper.
They have a lot of debt on their balance sheet. Companies in cyclical industry with a lot of debt have a lot of risk. When things go bad, this company can start to tank real quickly as a consequence. If I owned Evolution mining, I would consider selling half of my position. Third company is M, a financial group and a F on the ASX.
Prices were at $5.63. This company also is known as Mollis. It's an investment banking firm, Mergers, acquisition, corporate finance lending. They're into asset management. They do institutional broking. So they're not like UBS or Merrill Lynch, one of those big organizations, but they're not that dissimilar from their growing. Now here is a chart. As you can see, it has been extremely higher than it currently is, and now it's flatlining.
Is it a good investment? Let's take a look. It has a market cap of almost 1 billion. It has a 12 month price target that I have a $6.25 if it gets their total shareholder return of 14.5% revenue growth 2023 to 2026. I estimated around 16% per annum and earnings growth 30% per annum and the dividend growth 27% per annum.
So this company is growing extremely well. But you have to remember mergers and acquisition business is also cyclical. P e on next year's earnings estimate of $0.40 is 14 times the yield on next year's dividend. That's when 19 and a half cents is three and a half percent. These are all decent numbers. Free cash flow of 5% and payout ratio of 50%.
All of this ticks all my boxes. It has strong management. It's cyclical, as mentioned, asset management, corporate advisory, M&A. I rated a buy as always, If you want more information on anything I cover today, send an email to firstname.lastname@example.org and address it to me, Chris Pedersen, and I will endeavour to get back to you.
I hope you're having a profitable week. Thank you for your time.