Page 2 - Private Wealth Specialist Income SMA (Assertive) PDF Factsheet

Sell Aurizon Holdings Ltd (AZJ)
The continued coal exposure risk presents challenges to capital growth given the significant weight of
sentiment against the energy source. The transition from a coal and bulk haulage operator into a
container freight transporter amplifies risks of an earnings hole over the next 2-3 years, with limited
earnings growth through this period given likely slow bulk container business earnings initially.
Earnings remain heavily dependent on coal, where volumes are flat in the short term and likely
negative over the longer term. Business changes have put downward pressure on distributable income
and yield, which has been a tipping point for the action here. The key risk here is additional earnings
dilutive mergers and acquisitions as AZJ attempts to shift away from coal, rather than returning capital
to shareholders. Despite still trading cheaply, the yield dilution as described above means we don’t
have higher yield to offset the earnings risks ahead.

Sell Suncorp Group Ltd (SUN)

The stock has performed extremely well as insurance margins continue to increase helped by a
favourable industry backdrop and operating environment. The sale of Suncorp Bank has also been well
received by investors as it makes Suncorp a pure-play insurer in an oligopolistic industry structure.
With that, valuations are no longer supportive and the dividends forecast ahead drop off materially
(~3.5% for the next 2 years, well below market) due to the sale of the banking assets. Therefore,
limited justification for retaining in the income portfolio with better opportunities elsewhere.

Buy Origin Energy Ltd (ORG)
Origin Energy Limited (ORG) is an integrated energy retailer and power generation company. Origin
operates the coal-fired Eraring Power Station, Australia’s largest power station, which is expected to
close in August 2027 once this capacity is replaced by renewable options. Power is also generated
using a large portfolio of gas-fired plants, as well as hydropower and solar plants. Origin has a gas
exploration and production business, has minority interest in Australia Pacific LNG. The business is
investing in and using new technologies to enhance their business and increase their exposure to
renewable energy supply. This includes battery and hydrogen investments, as well as a minority
ownership in Octopus Energy, a British renewable energy company.

Our View

- Demand for energy increasing as a rapid pace, however the market is not making strong
improvements to supply, therefore supporting electricity prices.
- Increase 50% free cash flow payout policy begins in FY25, which is supportive of the strong
yield forecast.
- ORG has a structurally lower cost base than peers, although cost guidance has increased
materially of late (cost to serve, bad debts very high). We view these cost pressures as
temporary.
- Australian Pacific LNG asset has a low-cost base and reserves far exceeding contracted sales.
- Valuation is below market and looks attractive.
- Large pipeline of renewable energy projects and growth initiatives.
- Focussed on shareholder returns (e.g. payout ratio change, cashflow focus and management
incentives).