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Sunset Strip - Baillieu Holst

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Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Sunset Strip
Market Snapshot at close and 30 day chart of S&P 200 at 4:20pm
Major Global Indices
S&P/ASX 200
US - DOW
US - S&P 500
Canada
UK
Germany
France
China
Japan
Hong Kong
NZ
Last
5399.7
17647.75
2041.32
14882.5
6671.97
9306.35
4226.1
2458.34
17338.05
23555.41
5505.028
Daily
Change
-12.80
13.01
1.50
39.40
17.6
53.41
23.64
-15.67
364.25
-241.67
14.799
% Daily
Change
-0.24
0.07
0.07
0.27
0.26
0.58
0.56
-0.63
2.15
-1.02
0.27
Gold
1187.26
Daily
Change
0.93
US 10 Year T-Bond
US 30 Year T-Bond
2.3284
3.0523
0.007
0.004
0.31
0.12
$A/$US
$NZ/$A
STG/$A
Euro/$A
$US/YEN
$US/CAD
0.8721
0.9104
1.7947
1.43
116.58
1.1277
0.0011
0.0017
-0.0010
0.0005
-0.0130
-0.0030
0.12
0.18
-0.06
0.04
-0.01
-0.27
Categories
Last
% Daily
Change
0.08
XKO .A [email protected]: 5 3 38.8
5 480
5 460
5 440
5 420
5 400
5 380
5 360
5 340
5 320
5 300
5 280
5 260
5 240
5 220
5 200
5 180
5 160
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5 100
5 080
8
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O ctober '14
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24
27
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29
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November '14
5
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MARKET SUMMARY
Summary: Aussie market maintained the negative trend on low volume similar to yesterday despite China FTA and potential
Indian FTA next year. FTA with number of the major trading partners will continue to be positive for corporates while opening
up of our economy will deliver upward pressure on food prices, energy prices and unemployment while delivering downward
pressure on currency, consumer spending and economic growth in the next few years. The New Year is setting out to be a year
of living frugally for consumers while for corporates its setting up as a year of improving margins through more cost cutting,
price inflation, better margins and expansion regionally. Big miners are on the fast track to killing the smaller players with
government subsidies and FTA. Despite expecting the largest volume of commodities to leave Aussie shores next year, we
expect to see the biggest decline in resources workforce. G20 growth plans credibility did not even last 24 hours before the
Japanese and European economies flagged substantial risk to global growth….anyway most if not all of the world leaders at
G20 will not be around in 5 years…accountability never existed. It is always amusing that leaders who have been working on
growth strategies in their own country for years can turn up for a speed date and suddenly come up with growth rate
upgrades…this only happens in fairy tales and budget updates. We continue to trade with budget measures, financial sector
inquiry and commodity price collapse hanging over the markets. We see this low volume negative trend continuing well into
next week….hence we suggested to take profit on Nov 6th….buckle up….this could get bumpy in the short term as 3mth moving
average moves below 12mth moving average on technical basis with rising volatility….remain positive long term. RBA changed
tune today….now they don’t see rising house prices as a risk. Reality is that we now have a housing bubble, but have no means
of fixing it without a bit of pain….so we are going to do the American thing….kick it down the road. It is not going anywhere, it is
just going to get bigger and bigger in certain areas….like the unemployment.
Market Movers: The positive trends were mainly related to bargain hunters in small cap mining…esp. gold stocks like IAU, OGC
and SAR. We are turning positive on gold with global growth risk rising and spot gold just below key support level of $1190…we
like NCM, NST and BDR. PBG had a good day on selling all their shoe brands to private equity to clean up their balance sheet
issues. Expect private equity to flip back on the market in 2 years with 3 times what they paid for today. The negative trends
were dominated by Iron Ore stocks….FAQ…NO, it is not the time to pick the bottom of Iron ore small caps…better to be late
than early. Despite uranium stocks doing well of late, PDN saw some profit taking today…worth a look for the long term
punters. AGI got hammered again….we like it long term…quality gaming stock with US exposure.
For more portfolio details…look at our Quant Strategy Model Portfolio on page 20. Further macro views are on page 10.
If you need more information or customised advice, please contact Baillieu Holst.
Trading idea of the day: CarSales.com (CRZ) – CRZ is a global online car classified business model now moving into
related financial services. It was trading below $10 and we see the stock re-rating to $12.50 in the near term as the market’s
search for growth in global growth downgrades. The free cashflow generation of this model allows CRZ to keep acquiring and
growing globally. Positive momentum since the AGM is being maintained with share price bouncing from below $9.50.
Market Move: Aussie market was down 0.24% with turnover was just above $3.6b.
Macro Events: Tonight – US producer prices, housing market index; UK CPI. Tomorrow – Australia skilled vacancies; US
housing starts, building permits; UK Bank of England minutes.
WHAT WE LIKE AND WHAT WE DON’T LIKE
Tuesday’s Retail Therapy Pick: Woolworths
Current Best Buy Ideas: AGI,
WOW (Details on page 16)
Current Best Sell Ideas:
(WOW) – Rating: Quant Buy – Quant Price Target: $44 (Details on page 27)
ALL, APN, CRZ, FLT, IPP, HGG, LLC, PRT, RFG, SWM, SXL, SPK, TLS, VED,
AMP, HVN, JBH, LEI, MND, MYR, TRS (Details on page 18)
Page 1
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Long/Short Ideas: Resources:
Long BHP/ Short RIO; Banks: Long ANZ / Short WBC; Construction: Long
LLC / Short LEI; Telco: Long IIN / Short TPM (Details on page 20)
Quant Strategy Model Portfolio: BHP, ILU, RIO, SEK, SYD, TCL, TOL, ALL, FLT, APN, SWM, SXL, PRT, BRG,
KMD, WES, WOW, ANN, ANZ, NAB, MQG, HGG, PPT, BTT, LLC, SGP, CPU, CRZ, TLS, SPK (Details on
page 20 and 25)
SHIELD (Sustainable High Yield) Top 20 Picks: LARGE
CAP (CBA, WBC, BHP, ANZ, NAB); MID CAP (PPT);
SMALL CAP (IMF, NST, MRM, PTM, WEB, HIL, SKE, TRG, MOC, BKN); MICRO CAP(FRI, HFA, NCK,
DDR) (Details on page 24)
GARY (Growth At Reasonable Yield) Picks: LARGE
CAP (AGK, ORI, WOR and BHP); MID CAP (PRY and BOQ);
SMALL CAP (EPW, NEC, AHE, HIL, IDR, FXL, RKN, CCV, BKN, MRM and PRG); MICRO CAP (HFA, CMG
and ENE). (Details on page 25)
LONG TERM MARKET CALL => Bull market to 6500 in 2 years on May 2013
SHORT TERM MARKET CALL => Take Profit call on 6th Nov 2014
PREFERRED THEMATIC => REDUCE Big Banks, ADD Big Miners, ADD Big Retailers and SHORT Domestic Cyclicals and
Discretionary since 27th Jun 2014
WHAT WE LIKE => QUALITY, YIELD, BIG MINERS, EARNINGS CERTAINTY, MOMENTUM, CONSTRUCTION, FOOD, ONLINE,
MEDIA, TELCO, HEALTHCARE, STAPLE, GLOBAL EARNERS
WHERE WE SEE RISK => INSURANCE, DISCRETIONARY RETAIL, MINING SERVICES, LOCAL CONSUMER CYCLICALS
CHART OF THE DAY
Prime Media (PRT) – Heading back to $1.00…moving towards 12 week MA from an oversold position…TEN M&A potential
and restructure plans in SXL and APN are getting interest back in the media sector with 3 state elections to drive media
advertisement cycle. Cyclical stock with a solid fully franked yield.
[email protected]: 0.88
MA ([email protected]): 52 0.9807, 12 0.9042
1.15
1.1
1.05
1
0.95
0.9
0.85
0.8
0.75
0.7
0.65
0.6
0.55
RSI (100.000000): 14 35.1212
75
70
65
60
55
50
45
40
35
30
25
N
2009
J
F
2010
M
A
M
J
J
A
S
O
N
D
J
F
2011
M
A
M
J
J
A
S
O
N
D
J
F
2012
M
A
M
J
J
A
S
O
N
D
J
F
2013
M
A
M
J
J
A
S
O
N
D
J
F
2014
M
A
M
J
J
A
S
O
N
SPORTING BITES
NRL: Australia’s lack of forward power and NZ’s willingness to push the pass under pressure was the difference. NZ deserved
to win and Australia was lucky to stay close.
RUGBY: France deserved to win and should have won by more. Wallabies lacked forward penetration and the error rate was too
high as usual. They lacked any confidence in risk taking even when they were chasing the game.
Page 2
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
EPL: Chelsea remains the best and could blow away the competition if the key players remain free of injury. Football is a fickly
game and momentum can change with an injury or two….well, that’s all the rest can hold onto while chasing the boys in blue.
CRICKET: Australia was lucky with Bailey getting dropped so many times in the first game while the second game was simply
Morkel dominated. The tied series now has Clarke injured while Mitchel is being rested. Not sure that the competition actually
matters much with so many player changes. CA once again shows how badly they treat their customers. No wonder there are
more people turning up for A-league games than Cricket.
A-LEAGUE: Perth and Sydney leads the ladder while Victory still has the experience and the track record. Roar finally got a win
while Wanderers are still at the bottom.
GLOBAL ECONOMIC EVENTS (All times GMT)
08:30 UK CPI mm for Oct: Forecast 0.10 pct
08:30 UK CPI yy for Oct: Forecast 1.30 pct; Prior 1.20 pct
08:30 UK RPI mm for Oct: Forecast 0.10 pct; Prior 0.20 pct
08:30 UK RPI yy for Oct: Forecast 2.30 pct; Prior 2.30 pct
08:30 UK RPI-X Retail Prices mm for Oct: Prior 0.20 pct
08:30 UK RPIX yy for Oct: Forecast 2.30 pct; Prior 2.30 pct
08:30 UK PPI Input Prices mm NSA for Oct: Forecast -1.60 pct; Prior -0.60 pct
08:30 UK PPI Input Prices yy NSA for Oct: Forecast -8.30 pct; Prior -7.40 pct
08:30 UK PPI Output Prices mm NSA for Oct: Forecast -0.20 pct; Prior -0.10 pct
08:30 UK PPI Output Prices yy NSA for Oct: Forecast -0.20 pct; Prior -0.40 pct
08:30 UK PPI Core Output mm NSA for Oct: Prior -0.10 pct
08:30 UK PPI Core Output yy NSA for Oct: Forecast 0.80 pct; Prior 0.80 pct
09:00 Germany ZEW Economic Sentiment for Nov: Forecast 0.50; Prior -3.60
09:00 Germany ZEW Current Conditions for Nov: Forecast 1.80; Prior 3.20
LOCAL VOLATILITY MEASURE AND MARKET INDEX
[email protected]: 13.46
MA ([email protected]): 52 12.5275, 12 13.9264
39
36
33
30
27
24
21
18
15
12
9
[email protected]: 5338.8
5700
5400
5100
4800
4500
4200
3900
N
2009
J
F
2010
M
A
M
J
J
A
S
O
N
D
J
F
2011
M
A
M
J
J
A
S
O
N
D
J
F
2012
M
A
M
J
J
A
S
O
N
D
J
F
2013
M
A
M
J
J
A
S
O
N
D
J
F
2014
M
A
M
J
J
A
S
O
N
Page 3
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
TODAY’S BEST 20 AND WORST 20 IN S&P 300
Code
CDU
IAU
OGC
SEH
PBG
LNG
MRM
SAR
UGL
IRN
ORE
AQG
ALU
MOC
RRL
SRX
EWC
MLX
TWE
FET
Company Name
Cudeco Limited
Intrepid Mines
OceanaGold Corp.
Sino Gas Energy
Pacific Brands
Liquefied Natural
Mermaid Marine
Saracen Mineral
UGL Limited
Indophil Resources
Orocobre Limited
Alacer Gold Corp.
Altium Limited
Mortgage Choice Ltd
Regis Resources
Sirtex Medical
Energy World Corpor.
Metals X Limited
Treasury Wine Estate
Folkestone Edu Trust
Market Cap ($m) Price ($) Change (%)
284.86
1.43
17.77
105.95
0.21
10.53
660.33
2.34
6.85
285.39
0.20
5.41
454.03
0.52
5.05
1,589.02
3.61
4.94
582.49
1.66
4.75
178.38
0.24
4.44
879.18
2.36
3.97
336.88
0.29
3.57
343.31
2.69
3.46
202.50
2.25
3.21
409.79
3.27
3.15
310.54
2.57
2.80
732.18
1.51
2.73
1,461.31
26.55
2.71
641.64
0.38
2.70
306.33
0.19
2.70
2,943.70
4.64
2.65
395.51
1.97
2.60
Newsflash
N/A
Results of Meeting
N/A
N/A
PGR: New Brand Licences
N/A
N/A
N/A
Appendix 3Y - Directors Monthly Plan
N/A
Tincalayu Upgraded to JORC Compliant Resource
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Code
SLX
BCI
PDN
FMG
LYC
PRU
AGI
MGX
AWE
DCG
IFN
MYX
CAJ
SXY
DLS
ARI
HIL
AAC
MIN
BRU
Company Name
Silex Systems
BC Iron Limited
Paladin Energy Ltd
Fortescue Metals Grp
Lynas Corporation
Perseus Mining Ltd
Ainsworth Game Tech.
Mount Gibson Iron
AWE Limited
Decmil Group Limited
Infigen Energy
Mayne Pharma Ltd
Capitol Health
Senex Energy Limited
Drillsearch Energy
Arrium Ltd
Hills Ltd
Australian Agricult.
Mineral Resources.
Buru Energy
Market Cap ($m) Price ($) Change (%)
111.66
0.58
-11.45
139.93
0.66
-10.27
405.26
0.39
-7.14
9,901.88
2.97
-6.60
202.25
0.06
-5.00
160.63
0.29
-4.92
921.58
2.72
-4.90
447.23
0.39
-4.88
825.60
1.51
-4.14
277.44
1.58
-3.95
199.65
0.25
-3.85
461.54
0.76
-3.82
291.27
0.65
-3.70
465.61
0.39
-3.70
500.30
1.05
-3.69
837.13
0.28
-3.51
271.42
1.13
-3.42
828.00
1.51
-3.22
1,438.24
7.45
-2.99
183.60
0.53
-2.78
Newsflash
Results of Annual General Meeting
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Mayne Pharma announces US Paragraph IV Challenge
N/A
Hornet gas field pre-commissioning for first gas sales
N/A
Appendix 3Z - Dean Pritchard
N/A
N/A
N/A
N/A
Page 4
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
CHECKING S&P 300 BY THE SECTOR
Energy stocks were negative. The preferred pick OSH (i.e. is the best energy growth story…target $11). Despite the market
loving WPL, buying an energy company for yield is fraught with danger in the long term. Bargain hunters will come for OSH,
ORG, WPL and STO after recent pullback due to falling energy prices. Between slowing global growth, US Shale production and
OPEC production, it looks like low energy prices are here for the short term. We have not had any energy stocks in the Quant
Strategy Portfolio for a number of months due to valuation and global growth risks. Recent outperformer PDN was not immuned
to profit taking as the market tested negative technical levels.
Code
SEH
LNG
CTX
KAR
WOR
SEA
ORG
WPL
WHC
OSH
STO
COE
HZN
BPT
ERA
BRU
DLS
SXY
AWE
PDN
Company Name
Sino Gas Energy
Liquefied Natural
Caltex Australia
Karoon Gas Australia
WorleyParsons Ltd
Sundance Energy
Origin Energy
Woodside Petroleum
Whitehaven Coal
Oil Search Ltd
Santos Ltd
Cooper Energy Ltd
Horizon Oil Limited
Beach Energy Limited
Energy Resources
Buru Energy
Drillsearch Energy
Senex Energy Limited
AWE Limited
Paladin Energy Ltd
Market Cap ($m) Price ($) Change (%)
285.39
0.20
5.41
1,589.02
3.61
4.94
8,491.50
32.13
2.16
645.22
2.63
1.94
3,021.56
12.55
1.46
488.79
0.90
1.12
14,846.58
13.38
-0.30
32,214.91
38.84
-0.66
1,389.90
1.34
-1.11
12,333.81
8.01
-1.11
11,777.43
11.85
-1.17
134.99
0.41
-1.22
351.53
0.27
-1.85
1,388.32
1.05
-1.87
722.23
1.36
-2.51
183.60
0.53
-2.78
500.30
1.05
-3.69
465.61
0.39
-3.70
825.60
1.51
-4.14
405.26
0.39
-7.14
Newsflash
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Annual General Meeting and Webcast 2014
N/A
N/A
N/A
Hornet gas field pre-commissioning for first gas sales
N/A
N/A
Material (Ex Mining) stocks were slightly negative. DLX is a good long term pick on the housing thematic pick while
AMC/PGH/ORA are good defensive investments that should be added to your portfolio on pullbacks. Chemicals have global
competition, falling growth outlook and falling commodity price risks….but after recent pullback ORI has turned up on our
GARY screen…NUF had a solid result and IPL is best quality exposure. ABC after a pullback looks a good play on domestic
concrete demand….need a lot of concrete to build those roads….going to $3.80.
Code
TFC
ABC
DLX
FBU
AMC
IPL
NUF
ORA
CSR
PGH
BLD
ORI
JHX
Company Name
TFS Corporation Ltd
Adelaide Brighton
Duluxgroup Limited
Fletcher Building
Amcor Limited
Incitec Pivot
Nufarm Limited
Orora Limited
CSR Limited
Pact Group Hldgs Ltd
Boral Limited
Orica Limited
James Hardie Indust
Market Cap ($m) Price ($) Change (%)
435.86
1.37
2.24
2,249.49
3.51
1.15
2,231.99
5.85
0.52
5,262.09
7.68
0.39
14,395.75
11.97
0.34
5,031.19
3.05
0.33
1,297.81
4.90
0.00
2,135.83
1.77
-0.28
1,771.00
3.48
-0.57
1,188.16
4.00
-0.99
4,023.26
5.07
-1.36
7,320.68
19.25
-1.99
5,454.89
12.00
-2.12
Newsflash
TFS Continues Board Refresh and Expansion Program
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Mining (Ex Gold) stocks were negative. We maintain our preference in the big miners BHP and RIO for Iron Ore exposure and
have added ILU for Mineral Sands. We continue to expect more industry consolidation in the overall resources sector. We need
to see other emerging markets like India and Indonesia kick into growth gear to drive this sector to the next phase. Supply
demand dynamic and margin pressure is beginning to point to BHP/RIO buying opportunity, given the low commodity price
outlook driven by lower global growth. BHP back flipping to list NewCo in UK should help the share price in the short term. The
market is getting used to lower commodity prices with slowing China growth…don’t expect big improvements to previous highs
till global growth outlook improves dramatically.
Code
CDU
IRN
ORE
MLX
PNA
SDL
ILU
AWC
SGM
JAC
SFR
BHP
IGO
OZL
RIO
MDL
SYR
WSA
SIR
BSL
IMD
AGO
TGS
ARI
MGX
LYC
FMG
BCI
Company Name
Cudeco Limited
Indophil Resources
Orocobre Limited
Metals X Limited
PanAust Limited
Sundance Resources
Iluka Resources
Alumina Limited
Sims Metal Mgmt Ltd
Jacana Minerals
Sandfire Resources
BHP Billiton Limited
Independence Group
OZ Minerals
Rio Tinto Limited
Mineral Deposits
Syrah Resources
Western Areas Ltd
Sirius Resources NL
BlueScope Steel Ltd
Imdex Limited
Atlas Iron Limited
Tiger Resources
Arrium Ltd
Mount Gibson Iron
Lynas Corporation
Fortescue Metals Grp
BC Iron Limited
Market Cap ($m) Price ($) Change (%)
284.86
1.43
17.77
336.88
0.29
3.57
343.31
2.69
3.46
306.33
0.19
2.70
1,063.12
1.71
2.40
138.69
0.05
2.22
2,901.59
7.06
1.88
4,826.71
1.73
0.29
2,197.77
10.76
0.19
0.00
0.00
0.00
834.34
5.35
0.00
106,692.38
33.18
-0.12
1,007.30
4.29
-0.23
1,092.49
3.58
-0.56
26,101.95
59.47
-0.72
127.52
1.22
-0.81
590.89
3.57
-0.83
1,048.94
4.46
-1.11
969.68
2.80
-1.41
2,874.43
5.05
-1.75
117.83
0.54
-1.83
202.28
0.22
-2.27
222.99
0.19
-2.56
837.13
0.28
-3.51
447.23
0.39
-4.88
202.25
0.06
-5.00
9,901.88
2.97
-6.60
139.93
0.66
-10.27
Newsflash
N/A
N/A
Tincalayu Upgraded to JORC Compliant Resource
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Change of interests of substantial holder
N/A
N/A
N/A
MOX:Aeromagnetic Survey Commenced
N/A
N/A
N/A
N/A
N/A
Appendix 3Z - Dean Pritchard
N/A
N/A
N/A
N/A
Page 5
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Gold stocks were positive with spot gold just below the support line of US$1190. We turn positive on gold equities with spot
gold below $1190 support level…global growth risk rising and will be a drag on US…our preference in order are (1) NCM (2) NST
(3) BDR…not a long term investment, but a technical short term trade option.
Code
IAU
OGC
SAR
AQG
RRL
NCM
TRY
SLR
MML
KCN
NST
BDR
EVN
RSG
PRU
Company Name
Intrepid Mines
OceanaGold Corp.
Saracen Mineral
Alacer Gold Corp.
Regis Resources
Newcrest Mining
Troy Resources Ltd
Silver Lake Resource
Medusa Mining Ltd
Kingsgate Consolid.
Northern Star
Beadell Resource Ltd
Evolution Mining Ltd
Resolute Mining
Perseus Mining Ltd
Market Cap ($m) Price ($) Change (%)
105.95
0.21
10.53
660.33
2.34
6.85
178.38
0.24
4.44
202.50
2.25
3.21
732.18
1.51
2.73
7,159.21
9.54
2.14
97.63
0.51
2.00
128.32
0.26
1.96
108.05
0.53
1.92
149.80
0.68
0.75
684.06
1.16
0.43
191.68
0.24
0.00
378.91
0.53
0.00
160.30
0.25
0.00
160.63
0.29
-4.92
Newsflash
Results of Meeting
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Industrial stocks were positive. We maintain our preference in SEK. We continue to see high risk in mining service companies
due to China risk, commodity price volatility and resource sector capex decline from 2015, but the potential M&A brings them
back into the picture… ANG, BKN, CDD, WOR and UGL as potential targets…but earnings will struggle while short covering
gives protection. QAN continues its positive run on low fuel cost…continues to be a trading stock…not one I would be jumping
on…prefer FLT and SYD for the tourism exposure. VED looks like recovering from the selling pressure post PEP trying to
offload shares…partial offload done…long term big fan…going to $3. Outlook for energy and iron ore related mining service
stocks keeps getting tougher with falling commodity prices. CCP started to move after AGM comments…best in class…going to
$11. MRM had a great day….SHIELD pick. UGL performance is post capital return…no need to be here now.
Code
MRM
UGL
ASB
TOX
REC
TSE
ALQ
TOL
SPO
RCR
CAB
SEK
QAN
TPI
BKN
SGF
AZJ
NWH
EHL
SAI
AIA
TCL
BXB
QUB
LEI
SYD
CCP
SVW
AIO
MMS
VED
MLD
ASL
GWA
DOW
CLH
PRG
MND
MXI
CDD
MQA
SKE
MIN
DCG
Company Name
Mermaid Marine
UGL Limited
Austal Limited
Tox Free Solutions
Recall Holdings Ltd
Transfield Services
Als Ltd
Toll Holdings Ltd
Spotless Grp Hld Ltd
RCR Tomlinson
Cabcharge Australia
Seek Limited
Qantas Airways
Transpacific Indust.
Bradken Limited
SG Fleet Group Ltd
Aurizon Holdings Ltd
NRW Holdings Limited
Emeco Holdings
SAI Global Limited
Auckland Internation
Transurban Group
Brambles Limited
Qube Holdings Ltd
Leighton Holdings
SYD Airport
Credit Corp Group
Seven Group Holdings
Asciano Limited
McMillan Shakespeare
Veda Group Ltd
MACA Limited
Ausdrill Limited
GWA Group Ltd
Downer EDI Limited
Collection House
Programmed
Monadelphous Group
MaxiTRANS Industries
Cardno Limited
Macq Atlas Roads Grp
Skilled Group Ltd
Mineral Resources.
Decmil Group Limited
Market Cap ($m) Price ($) Change (%)
582.49
1.66
4.75
879.18
2.36
3.97
464.15
1.37
1.87
312.98
2.38
1.71
1,841.32
5.97
1.53
971.11
1.92
1.32
1,917.38
4.88
1.24
3,902.86
5.50
1.10
2,092.24
1.93
1.05
346.11
2.51
0.80
556.39
4.65
0.65
5,922.40
17.40
0.58
3,953.39
1.81
0.56
1,437.48
0.92
0.55
643.06
3.78
0.53
458.69
1.90
0.53
10,194.85
4.78
0.21
172.91
0.62
0.00
113.94
0.19
0.00
870.20
4.11
0.00
4,369.08
3.67
0.00
15,670.53
8.19
-0.36
15,143.97
9.63
-0.41
2,477.91
2.34
-0.43
7,057.80
20.73
-0.58
9,817.84
4.40
-0.68
466.67
10.01
-0.69
1,959.76
6.50
-0.76
6,008.38
6.11
-0.81
833.40
10.66
-0.84
1,970.41
2.32
-0.85
265.25
1.13
-0.88
168.63
0.54
-0.93
852.16
2.75
-1.08
1,941.88
4.41
-1.12
276.54
2.09
-1.42
321.55
2.67
-1.48
1,004.38
10.64
-1.48
120.30
0.64
-1.54
851.40
5.08
-1.93
1,611.35
3.08
-2.22
528.09
2.19
-2.23
1,438.24
7.45
-2.99
277.44
1.58
-3.95
Newsflash
N/A
Appendix 3Y - Directors Monthly Plan
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
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N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Daily share buy-back notice - Appendix 3E
N/A
Half Year Report 30 September 2014
N/A
N/A
N/A
N/A
SKILLED Group moves to 100% ownership of OMSA
N/A
N/A
Page 6
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Consumer stocks were positive. We maintain our preference in ALL, FLT, APN, SWM, SXL and PRT while remain a fan of other
media stocks like FXJ and TEN with M&A appeal. We see big risk to discretionary retail stocks like HVN, JBH, MYR, SUL and
TRS in falling consumer sentiment. Despite the downgrade FLT looks good value long term for global tourism exposure with
recent pullback…expect the stock to move up with improving market sentiment on the global business model…now delivering
over 4% yield. SWM at current levels pays over 7% fully franked yield (i.e. 10% grossed up) while you wait for cyclical recovery.
Despite the solid result from HVN, the lack of guidance shows forward risks with house price bubble worries. Media stocks
have been sold down and offer a good mix of growth and yield with cyclical recovery NEC, SWM, APN, SXL and PRT
…downgrades expected….more M&A interest in Ten will flow through. ALL continues to be the best of the gambling stocks
while PBG got interest as it plans to divest all the shoe brands to private equity.
Code
PBG
MTR
SXL
TRS
SUL
SGH
SWM
RCG
VET
SKC
TGA
REA
SKT
RFG
IVC
DSH
SGN
TTS
TME
APN
PMV
KMD
NWS
GEM
JBH
CWN
DMP
PRT
BAP
HVN
AHE
VRL
BRG
ARP
ALL
TAH
GUD
FXJ
FLT
EGP
NEC
CTD
MYR
TEN
WEB
CCV
NVT
ISU
BBG
AAD
DNA
AGI
Company Name
Market Cap ($m) Price ($) Change (%)
Pacific Brands
454.03
0.52
5.05
Mantra Group Ltd
658.60
2.70
2.27
Sthn Cross Media
724.01
1.01
2.02
The Reject Shop
216.33
7.65
2.00
Super Ret Rep Ltd
1,518.08
7.85
1.82
Slater & Gordon
1,286.31
6.36
1.76
Seven West Media Ltd
1,673.59
1.70
1.49
RCG Corporation Ltd
178.07
0.69
1.48
Vocation Ltd
165.60
0.73
1.39
Skycity Ent Grp Ltd
2,179.52
3.76
1.35
Thorn Group Limited
411.23
2.76
1.10
REA Group
5,849.45
44.88
1.06
Sky Network
2,272.58
5.90
1.03
Retail Food Group
907.75
5.94
1.02
InvoCare Limited
1,307.16
12.00
1.01
Dick Smith Hldgs
527.42
2.25
0.90
STW Communications
473.20
1.17
0.87
Tatts Group Ltd
5,016.79
3.50
0.86
Trade Me Group
1,416.98
3.60
0.84
APN News & Media
699.75
0.69
0.74
Premier Investments
1,646.30
10.61
0.47
Kathmandu Hold Ltd
549.60
2.74
0.37
News Corp..
397.72
17.15
0.29
G8 Education Limited
1,658.81
4.70
0.21
JB Hi-Fi Limited
1,535.71
15.53
0.06
Crown Resorts Ltd
10,321.35
14.17
0.00
Domino Pizza Enterpr
2,315.14
26.87
0.00
Prime Media Grp Ltd
322.37
0.88
0.00
Burson Group Ltd
387.70
2.37
0.00
Harvey Norman
4,026.18
3.79
0.00
Automotive Holdings
1,201.24
3.92
0.00
Village Roadshow Ltd
1,135.71
7.11
-0.14
Breville Group Ltd
901.56
6.92
-0.14
ARB Corporation
843.96
11.60
-0.34
Aristocrat Leisure
4,303.05
6.80
-0.44
TABCORP Holdings Ltd
3,246.37
4.22
-0.47
G.U.D. Holdings
517.86
7.26
-0.55
Fairfax Media Ltd
1,834.53
0.78
-0.64
Flight Centre Travel
4,004.33
39.50
-0.65
Echo Entertainment
3,277.92
3.94
-0.76
Nine Entertainment
1,955.81
2.05
-1.44
Corp Travel Limited
902.46
9.82
-1.50
Myer Holdings Ltd
1,033.74
1.74
-1.70
Ten Network Holdings
710.37
0.27
-1.85
Webjet Limited
250.90
3.10
-1.90
Cash Converters
450.89
1.03
-1.91
Navitas Limited
1,947.88
5.08
-1.93
Iselect Ltd
360.86
1.35
-2.17
Billabong
643.74
0.64
-2.31
Ardent Leisure Group
1,346.71
2.99
-2.61
Donaco International
336.73
0.71
-2.74
Ainsworth Game Tech.
921.58
2.72
-4.90
Newsflash
PGR: New Brand Licences
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Half Year Accounts
REA Group completes Move Inc. acquisition
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Delay in delivery of Notice of Meeting and Proxy form
REA: Completes Move Inc. acquisition
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
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N/A
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N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Staple stocks were negative. We maintain our preference in WES and WOW. SHV looks interesting with Asian low fat protein
demand despite recent crop issues…buy on any pullback. We continue to like GNC after it was sold down below $8 after the bid
was blocked by ACCC. We feel such a unique asset will get taken over with government unable to put up the cost of
infrastructure upgrades needed for the industry. WOW is beginning to recover on yield support after sales result not living up to
expectations…not for the first time….target $44…will recover due to the quality, yield, diversity, free cash generation and store
rollout….good buying opportunity. WES is a cashed up beast with government connections…M&A option, but likely to see
some selling given recent outperformance compared to WOW. CCL is beginning to look a decent turnaround story…but not one
without risks…management restructuring the business model with US parent to get Indonesia story moving…cost cutting and
new products on the way…trending up since strategic changes…going to $10. AAC has been running on the China FTV
deal…from $1.10 to now over $1.50 in the past few months. RIC looks very interesting with beef upside….could see another 1020% bounce very quickly. Food inflation coming with FTA and potential energy cost rebounding with OPEC….get some
supermarket exposure….WOW is cheaper than WES.
Code
TWE
RIC
FSF
GFF
BGA
WES
SHV
GNC
CCL
AHY
TGR
WOW
MTS
AAC
Company Name
Treasury Wine Estate
Ridley Corporation
Fonterra Share Fund
Goodman Fielder.
Bega Cheese Ltd
Wesfarmers Limited
Select Harvests
GrainCorp Limited
Coca-Cola Amatil
Asaleo Care Limited
Tassal Group Limited
Woolworths Limited
Metcash Limited
Australian Agricult.
Market Cap ($m) Price ($) Change (%)
2,943.70
4.64
2.65
280.11
0.92
1.10
675.51
5.65
0.89
1,261.34
0.65
0.78
802.69
5.30
0.76
50,052.58
43.67
-0.25
478.14
6.70
-0.59
1,846.86
8.01
-0.74
7,162.48
9.29
-0.96
1,188.83
1.95
-1.27
571.43
3.84
-1.29
42,260.64
33.00
-1.37
2,592.50
2.81
-2.09
828.00
1.51
-3.22
Newsflash
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
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Page 7
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Healthcare stocks were negative. We maintain our preference in ANN…solid result in tough times…long term stock holding.
RHC is a buy on any pullback with population ageing and government cutting healthcare budgets…pulled back to mid $40’s as
funding vehicle for Healthscope IPO…now $52…expensive at $30 and at $40 and at $50…see you at $60. BNO has delivered the
big deal and expect this to continue to recover back to 70-80 cent range with potential new deals (Disclaimer – I own BNO
shares). Falling currency brings interest back to this sector…RHC, CSL, RMD, ANN and COH. There may be some selling
pressure to fund Medibank Private IPO. Big fans of SRX…upside as front line treatment could be multiples of current share
price…buy on any pullback…now hitting all time high…and going higher….targeting above $30.
Code
SRX
API
RMD
ANN
MSB
PRY
JHC
PBT
CSL
SHL
RHC
BNO
GXL
COH
VRT
HSO
MVF
ACR
SIP
SPL
CAJ
MYX
Company Name
Sirtex Medical
Australian Pharm.
ResMed Inc.
Ansell Limited
Mesoblast Limited
Primary Health Care
Japara Healthcare Lt
Prana Biotechnology
CSL Limited
Sonic Healthcare
Ramsay Health Care
Bionomics Limited
Greencross Limited
Cochlear Limited
Virtus Health Ltd
N/A
Monash Ivf Group Ltd
Acrux Limited
Sigma Pharmaceutical
Starpharma Holdings
Capitol Health
Mayne Pharma Ltd
Market Cap ($m) Price ($) Change (%)
1,461.31
26.55
2.71
427.10
0.89
1.71
8,189.48
5.92
1.02
3,107.21
20.43
0.69
1,280.35
4.00
0.50
2,360.92
4.61
0.00
649.73
2.47
0.00
90.45
0.19
0.00
37,412.90
78.47
-0.32
7,425.69
18.45
-0.32
10,591.08
51.93
-0.92
227.46
0.54
-0.92
899.38
7.99
-0.99
4,078.49
70.59
-1.20
571.18
7.06
-1.26
4,364.88
2.47
-1.98
326.98
1.39
-2.12
171.52
1.01
-2.43
853.23
0.75
-2.60
173.86
0.53
-2.75
291.27
0.65
-3.70
461.54
0.76
-3.82
Newsflash
N/A
N/A
QUOTED: Ex Dividend
N/A
N/A
N/A
N/A
The Lancet Neurology publishes Prana's HD Trial
N/A
N/A
N/A
Change of Director's Interest Notice
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Mayne Pharma announces US Paragraph IV Challenge
Bank stocks were negative. We maintain our preference in ANZ and NAB as they offer best global exposure out of the big four
and the least likely to be affected by the inquiry. Falling currency, RBA on property price bubble, Financial Sector Inquiry and
Iron Ore worries continue to weigh on the sector…..but value emerging now with yield support as currency stabilises. BOQ
came up on our GARY screen yesterday…continues to be a leading recovery story. Regionals should see more support with
financial sector inquiry expected to favour them.
Code
MOC
WBC
BEN
CBA
NAB
ANZ
BOQ
GMA
Company Name
Market Cap ($m) Price ($) Change (%)
Mortgage Choice Ltd
310.54
2.57
2.80
Westpac Banking Corp
101,728.06
32.76
0.12
Bendigo and Adelaide
5,735.50
12.72
0.00
Commonwealth Bank.
131,310.64
80.95
-0.05
National Aust. Bank
76,628.11
32.37
-0.06
ANZ Banking Grp Ltd
87,936.43
31.83
-0.22
Bank of Queensland.
4,470.03
12.22
-0.65
Genworth Mortgage
2,268.50
3.45
-1.15
Newsflash
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Diversified Financials / Insurance stocks were negative. We maintain our preference in MQG, HGG, PPT and BTT for the market
exposure. Another one to pay attention to is OFX…pulled back to value levels after post IPO excitements. If we see QE from
ECB, global players like MGQ, HGG and BTT will start to move fast with other global asset managers like MFG and PTM. Global
players got another free kick with government trading super rise for mining tax repeal. QBE is running on the potential of US
rates showing signs of improvement, but it still remains a science project at the best of times and you never know what is going
to come and hit it next. FXL has bounced from the lows….keeps coming up on our SHIELD and GARY screens. Local asset
managers like PPT and IFL looks good after pullback….prefer them over AMP with insurance/planners mess attached despite
the good result and China play. HGG delivered a solid result…substantial underperformer in the sector…going to $5. MQG
continues to benefit from market recovery and government asset sales….going to $65. Beware OFX….20m shares come off
escrow in a few weeks…track record of IPO shares coming off escrow is not good.
Code
CVO
FXL
PPT
TRG
PTM
IFL
HGG
SDF
EQT
IMF
MFG
ASX
AMP
SUN
MQG
QBE
IAG
OFX
CGF
Company Name
Cover-More Grp Ltd
FlexiGroup Limited
Perpetual Limited
Treasury Group
Platinum Asset
IOOF Holdings Ltd
Henderson Group
Steadfast Group Ltd
Equity Trustees
Bentham IMF Ltd
Magellan Fin Grp Ltd
ASX Limited
AMP Limited
Suncorp Group Ltd
Macquarie Group Ltd
QBE Insurance Group
Insurance Australia
Ozforex Group Ltd
Challenger Limited
Market Cap ($m) Price ($) Change (%)
705.41
2.25
1.35
1,040.01
3.45
0.88
2,209.03
47.75
0.67
255.70
10.86
0.65
3,933.65
6.81
0.59
2,704.21
9.06
0.55
3,046.31
3.96
0.51
802.85
1.60
0.31
377.68
19.65
0.26
349.82
2.10
0.00
2,293.40
14.34
-0.07
7,017.82
36.13
-0.33
16,918.26
5.70
-0.35
18,822.97
14.55
-0.55
19,185.70
59.39
-0.57
15,260.09
11.08
-0.89
15,056.60
6.36
-1.09
568.80
2.34
-1.27
3,896.92
6.72
-1.75
Newsflash
N/A
N/A
N/A
N/A
Change of Director's Interest Notice
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Page 8
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Property stocks were positive. We maintain our preference in SGP and LLC to get housing and construction exposure while
MGR and micro caps NCK and DVN look interesting with housing exposure. LLC now over $15…going to $17….go long on the
back of the government’s road build-a-thon outlook. Market is beginning to get worried about house prices…switch options are
LLC, ABC and DLX with construction upside. House prices just keeps going up….RBA now changing tune…fine with it…may
have no choice.
Code
FET
ABP
GDI
GOZ
CHC
TIX
BWP
SCP
IDR
SGP
ANI
DXS
MGR
CMW
FDC
NVN
AOG
CWP
GPT
IOF
SCG
CQR
LLC
GMG
WFD
INA
HPI
NSR
ARF
AJA
Company Name
Folkestone Edu Trust
Abacus Property Grp.
GDI Property Grp
Growthpoint Property
Charter Hall Group
360 Cap Indust Fund
BWP Trust
Sca Property Group
Industria REIT
Stockland
Aust Industrial REIT
Dexus Property Group
Mirvac Group
Cromwell Prop
Federation Cntres
Novion Property Grp
Aveo Group
Cedar Woods Prop.
GPT Group
Investa Office Fund
Scentre Grp
Charter Hall Retail
Lend Lease Group
Goodman Group
Westfield Corp
Ingenia Group
Hotel Property
National Storage
Arena REIT.
Astro Jap Prop Group
Market Cap ($m) Price ($) Change (%)
395.51
1.97
2.60
1,435.31
2.84
1.79
505.14
0.90
1.12
1,508.41
2.75
1.10
1,576.27
4.48
0.90
283.93
2.34
0.86
1,612.11
2.54
0.79
1,157.80
1.80
0.56
247.50
1.99
0.51
9,723.81
4.16
0.48
206.06
2.15
0.47
6,465.50
7.15
0.14
6,507.07
1.76
0.00
1,691.92
0.98
0.00
3,911.74
2.74
0.00
6,344.74
2.08
0.00
1,039.04
2.08
0.00
509.97
6.51
0.00
6,994.66
4.14
-0.24
2,155.31
3.50
-0.28
18,315.58
3.43
-0.29
1,528.86
4.08
-0.49
9,134.44
15.68
-0.51
9,704.76
5.52
-0.72
16,998.77
8.11
-0.86
391.09
0.44
-1.12
362.34
2.45
-1.21
433.34
1.47
-1.34
319.52
1.48
-1.99
312.47
4.55
-2.15
Newsflash
N/A
N/A
N/A
N/A
Change of Director's Interest Notice
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
IT stocks were negative. We maintain our preference in CPU and CRZ while remain big fan of ALU, IFM and IPP in the long term.
IPP has bounced from below $2.30 to as high as $3.76 with announcement that REA has taken 17% stake …now over
19%…going to $4…now $2.42…more upside in the long run. CRZ is the sleeper in the online space that we see delivering 3040% in the next 12mths. REA and CRZ are following the SEK playbook….don’t look back in anger when CRZ takes off after
market realising it’s a global business now. CRZ heading to $12.50…got hammered 10% on result and rebounded right
back….bouncing from $9.50 levels…don’t miss this quality ride to global growth.
Code
ALU
TNE
IRE
CPU
IPP
NXT
UXC
CRZ
RKN
SMX
IFM
ISD
CSV
HIL
SLX
Company Name
Altium Limited
Technology One
IRESS Limited
Computershare Ltd
Iproperty Group Ltd
Nextdc Limited
UXC Limited
Carsales.Com Ltd
Reckon Limited
SMS Management.
Infomedia Ltd
Isentia Group Ltd
CSG Limited
Hills Ltd
Silex Systems
Market Cap ($m) Price ($) Change (%)
409.79
3.27
3.15
991.24
3.28
2.18
1,590.97
10.10
1.00
6,351.84
11.51
0.79
439.72
2.43
0.41
417.21
2.16
0.00
244.00
0.74
0.00
2,568.71
10.73
-0.19
204.55
1.81
-1.10
239.41
3.40
-1.45
395.97
1.27
-1.55
584.00
2.86
-2.05
328.59
1.15
-2.55
271.42
1.13
-3.42
111.66
0.58
-11.45
Newsflash
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Results of Annual General Meeting
Telco stocks were positive. We maintain our preference in TLS and SPK while remain big fan of IIN and TPG in the long term.
Booming NZ economy should help SPK. NXT looks like it has turned the corner after over 12mth decline on earnings growth
worries…now being dragged on VOC/AMM M&A. TLS…going to $6.40 on our quant view. SPK recovered to 6 year high before
recent selloff…turning pessimist to optimist one at a time…most analyst have missed the recovery from $1.80 range from the
past 18mths. Keep an eye on CNU…NZ regulatory risk remains…favourable outcome will see this stock pop 50%....has started
to move from $1.50-1.60 range…now $1.87…expect it to trade around $1.90 till they get regulatory risk clarified. M&A coming to
this sector….there is history of TPM bidding on IIN….TPM expanding AMM holding to substantial.
Code
IIN
MTU
SPK
VOC
NWT
SGT
TLS
TPM
CNU
AMM
Company Name
iiNet Limited
M2 Grp Ltd
Spark New Zealand
Vocus Comms Ltd
Newsat Limited
Singapore Telecomm.
Telstra Corporation.
Tpg Telecom Limited
Chorus Limited
Amcom Telecomm.
Market Cap ($m) Price ($) Change (%)
1,328.12
8.37
2.20
1,549.83
8.70
2.11
5,412.57
2.99
1.36
614.15
5.88
0.34
115.78
0.18
0.00
427.36
3.49
0.00
70,419.78
5.76
0.00
6,120.26
7.70
-0.13
745.18
1.87
-0.80
634.03
2.35
-1.26
Newsflash
AGM Presentations of the Chairman and CEO
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Utility stocks were slightly negative.
Code
EWC
APA
AST
DUE
AGK
EPW
SKI
IFN
Company Name
Energy World Corpor.
APA Group
AusNet Services
Duet Group
AGL Energy Limited
ERM Power Limited
Spark Infrastructure
Infigen Energy
Market Cap ($m) Price ($) Change (%)
641.64
0.38
2.70
6,644.22
8.00
0.63
4,795.34
1.40
0.00
3,398.96
2.56
0.00
8,974.08
13.30
-0.23
458.81
1.90
-0.26
2,808.08
1.91
-0.52
199.65
0.25
-3.85
Newsflash
N/A
N/A
N/A
N/A
AGL announces Andrew Vesey as new CEO
N/A
N/A
N/A
Page 9
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Macro Views – big picture in small bits
Euro Growth Worries: ECB has talked a good game and even delivered some steps towards structural changes for bail-outs.
The continued austerity mode is stifling growth and keeping unemployment high. The turnaround in US is getting Euro to look
at similar QE to stimulate their economy. Germany now showing signs of decline…ECB has more ammo, but needs Germany to
let them print. Germany is happy to wait and watch Euro devaluate despite taking some heat. Once you start seeing Euro
members at the bottom starting to make noise about breaking away….that will force the German hands. They need the
underperformers to keep Euro down.
Ebola Worries: The world continues to act very slowly to health related humanitarian suffering compared to war related. US,
Canada, UK and other Euro nations have realised that sticking your head in the sand will not make the problem go away. Sadly
the talkfest that is G20 cost nearly 50% of the total cost to control Ebola….but that would be logical and saving lives etc etc…
also something called humanitarian, but can’t expect that from world leaders.
Ukraine / Russia: European economic growth is heavily reliant on Russian money and hence unlikely to do anything substantial
to change the balance while US is involved to maintain the overall strategic balance in their favour. We are now in stand-off
mode with sanctions from both ends and no real actions. Russia has had a decent harvest period and Putin has used that to
block food sales coming in. Putin also knows that Europe is going into winter and they need his gas to keep warm, so any
chance of a big move on Russia is very unlikely. Putin will continue to push the envelope as he is holding all the cards.
Israel / Gaza: Irrespective of which side of the argument you come from, the basic fact is that any peace deal with no clarity on
settlement and access will fall apart over time. Expect this to drag on and feed into the already melting pot of “Middle East
hatred of the West”…not that there isn’t enough of that already. Each side has its reasons to keep pushing, but this is not
leading to any form of co-existence or peace for either party. The mess continues to further fuel the fire that has been burning
for decades.
Iraq war – the next generation: Unless you were hiding under a rock, Iraq was a basket case waiting to blow up after the war of
the last generation (i.e. “weapons of mass/no destruction” war). Trying to measure non-western countries and cultures based
on western standards are fraught with danger. Taking spin aside, Iraq will remain a mess for a number of years, if not decades,
till it reaches a new equilibrium between all the domestic non-western parties. The best case scenario for equity markets is for
US and its allies to talk tough, move on and let nature take its course. US are again trying to solve a problem they can’t solve.
Time will tell how it unfolds, but history does not show a positive trend going forwards. Australia is once again getting caught
in a web of contradictions by cherry picking humanitarian situations to fit the rhetoric. The latest plans are pointing to a
protracted multi-year affair with no real conclusion in sight.
Infrastructure projects: Looking at the road projects in Sydney, I am amazed at the lack of any cost-benefit analysis done to
justify linking M4 and M5 (two roads that lock up with bumper to bumper traffic after 7am and 5pm) by a tunnel while the westlink still remains mainly 2 lanes to the city. If you live in Western Sydney, get ready for more traffic, more toll gates and cost
blow outs. History shows infrastructure projects always bites the majority and benefits the minority. Developers will rake in the
profits and the rest of us will pay for years on these “roads to nowhere” infrastructure designed to serve a minority while rail
network that can serve the majority is getting cosmetic changes….buy some LLC.
M&A and Share Buybacks Cycle: Businesses with strong cashflow and solid balance sheet in a falling consumer sentiment and
low interest rate environment prefer to chase growth through cost cutting, share buy backs and M&A. Cost cutting cycle is
coming to an end with further improvements requiring wage reduction or M&A. Wage cuts will take time to work through
structurally and also will have political implications for the government. This leaves corporates either buying back shares or
consolidating industries to drive better earnings per share growth. Private equity is sitting on the side lines with substantial war
chest built up by floating number of stocks over the past 6-12 months. M&A candidates are media sector (i.e. TEN, SXL, PRT
and APN), retail sector (i.e. JBH, MYR, PBG, BBG and SFH) and mining services sector (i.e. ANG, BKN, CDD, WOR, UGL).
Consumer Confidence: Tidal waves of unemployment coming in the next few years, rising cost of living pressures, falling real
wages and budget worries have slammed consumer confidence down to multi year low. Recent Job Ads and Employment data
further strengthens our argument that unemployment is going to get worse in the next 12-18mths. We continue to be negative
on local cyclicals with slowing economy. Continued bickering, party politics, lack of long term planning and real policy reform
will keep sentiment low. We expect the unions, pensioners and students to continue to keep the media fuelled for months to
come. We expect the government to further hurt sentiment with new welfare streamlining, work place relations, federation
changes, climate change policies, tax reform and countless committees of inquiry into just about everything. Atleast these will
keep the media 24hr cycle filled with slogans like “Kevin 24/7” never could.
Property Prices: We continue to expect areas where substantial unemployment, middle to low income earners live and new high
density dwelling built locations to see property price decline in the next 12-18 month time frame while middle to higher income
areas should trade sideways. The top end should continue to rise with overseas investors from Europe and Asia continuing to
look at Australia as a safer location to park wealth despite housing bubble worries. Recent housing finance data is beginning to
show signs of affordability and consumer confidence taking effect. In a longer term thematic, we expect future generations to
prefer renting than buying property and also prefer apartment living to houses. We also expect substantial job cuts in Canberra
to affect property prices in that area…pullback in 12-18 month time frame. Over supply of units being built in major cities in the
next 12-18 month will drive down unit prices and force the new home buyers with middle to low income to high density living
due to the unaffordability of the house prices. We expect the London/UK property price paradigm is likely to come to Australia.
We expect inner suburbs to major cities like Melbourne and Sydney will support stretched house prices with China inflow while
the outer suburbs will suffer with affordability and unemployment worries. After a number of parties raising alarm, RBA has
also now joined the band to warn against property bubble forming….they are now working on macro prudential tools to pull
back house prices…bubble or not…it’s a problem. Rising unemployment, falling real wages, rising costs and oversupply of
units are headwinds RBA can’t avoid, but they can buffer the risk to banks. The only real structural solution is to only allow
negative gearing on new dwellings and take the heat off the existing dwellings for low income and first home buyers. Taxing
overseas buyers will over complicate the process and force them to buy under different names to bypass the tax.
Unemployment Outlook: The accumulated unemployment tidal wave from car industry, airline industry, telco industry, finance
industry, manufacturing industry, M&A job cuts, outsourcing to Emerging Markets, government job cuts and the ever shrinking
Page 10
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
mining industry cuts will create a vacuum for jobs and drive unemployment to 6.5% in the next 12mths. We do not see any
government policy or global macro changes that can create jobs in the short term to limit this damage. The infrastructure job
creation will only start in 2016 and will only deliver jobs that will pay much less than the jobs being lost over the past few years.
Similar to US, the jobs we are losing are high paid high skilled full time jobs while majority of the jobs being created are low
paid low skilled part time jobs. Recent data points have been erratic, but the market better get used to the numbers getting
higher well into 2015. There is no macro change or government initiative to drive job growth in the near future.
Taxation Outlook: Due to the current fiscal policy of the government, we expect overall taxation to increase in the next few
years to cater for falling overall tax revenue on federal and state levels. We expect GST to be raised once the state elections and
asset sales are out of the way. The structural decline in the budget has not been addressed as it is a revenue problem. The
current policy solutions are no more than nipping at the edges with minor spending cuts. The federal government has started to
talk changes to federation with PM doing a complete backflip on his views. This clears the way for GST rise while majority of the
balanced views would suggest some form of income tax cut to balance out the effects on the low income. Given the track
record of the budget plans in the first 12mths, the public are not going to support the GST hike without details. The cuts to
education and health will always starve the states into doing a deal with federal government on tax changes. Recent history
does not hold well for the middle to low income earners and consumer sentiment as a whole. The petrol tax move, despite being
irrelevant, will feed the lack of trust and low sentiment by the consumers.
Currency Outlook: We maintain our view that AUDUSD will settle around 85-88 cents in the short term and then track down to
low 80s in the medium term. We need to see substantial US or China growth risk for currency to break the recent trading
pattern.
Interest Rate Outlook: We maintain our view that our rates will not move up till 2016 and very likely to see rate cut in 2015 with
economy falling into a hole. More and more brokers are now realising the economic slowdown coming in 2015 and questioning
the risk of rate cut in 2015. The consumer spending is in decline due to the employment outlook and lack of any initiatives from
the government and/or business to change it. Consumers are aware that the rates will go up in the long term with rising cost of
living pressures, declining standard of living and rising unemployment.
Financial Sector Inquiry: We expect this will be another fluff piece to drive the industry changes the government already has in
play. Any regulatory cost added to the banks will get transferred into fees for the consumer and will not affect bank profits or
improve competition. The banks have become too big to fail and you don’t need a report to tell you that. The government has
enough on its plate with the budget and will not have the stomach to take on any big corporates…esp. the big four banks. If you
take the conspiracy theorist view, this may be used as a vehicle to pull in SMSF and smaller Financial Planners back into big
super funds predominantly run by the banks under the banner of efficiency and removing bias. Never underestimate the power
of spinning a story.
Budget: Commission of Audit (aka H&R Block) report has been proven to be nothing more than an overpaid fluff piece to justify
a conservative budget. The budget lacks consistency, innovation, long term planning, trust and even coalition narrative. The
two key policies of the government (i.e. direct action and PPL) were not included in the budget due to lack of detail. As we have
been expecting pre budget, the structural long term cut backs are almost completely targeting middle to low income earners
and foreign aid while corporates and the wealthy are untouched. The new revelations in the budget are health research fund
and $80 billion of cuts in healthcare/education to state budgets. It is still murky on how the health fund gets to $20 billion in six
years despite all the cuts, while the transfer of the education/health will force the state governments to come back to the table
to raise GST. Public are not surprised by the cuts but the disparity in the level of pain carried by the wealthy and corporate
compared to the middle to low income will hurt the majority. The environment of real wages growing slower than cost of living
(i.e. falling living standards) will accentuate the problem even more. We expect consumer sentiment to remain subdued till all
the “horse trading” is finalised and some form of clarity returns to public policy making. The logic states that the government
has chosen a much harder line than needed to bargain down to a middle ground, but in the meantime they have not missed a
trick in nailing consumer sentiment. The ideological bickering between the major parties will not make this process any faster
given the track record of negotiations in previous government. The clear big picture move is that the corporate debt that moved
to government debt during GFC is being moved to public debt over time. The disparity in the distribution will force the middle to
low income earners to borrow to maintain living standard and take on risk to drive credit growth.
Higher Education Deregulation: We expect the college system below the elite universities to charge atleast private high school
fees while universities to charge on average in the middle of private high school and US elite university fees. If you look
through a four year engineering degree, a college graduate will come out with over $130,000 loan while an elite university
graduate will come out with over $200,000 loan growing around 10year bond yield (i.e. 5%). This will cause a number of
structural changes in the society (1) parents will chose to not send their kids to private schools in order to save the funds for
university – we will have more pressure on public system (2) wealthy parents will be able to buy their kids a university degree
while low income kids will be pushed to college degree – we will not get the smartest students coming through (3) university
graduates will come out with substantial debt – we will price the future generations out of owning their own home for atleast a
decade (4) university graduates will leave Australia to avoid repaying the HECS – we lose the smartest candidates to other
countries (5) transfer of debt from government to next generation via education – we risk further widening of the inequality gap
as seen in US with student debt blow outs.
Page 11
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Market Valuations – Nov 2014 Update
Market (S&P 300) – Forward PE and PB bands below…Reduce band 5820 Fair Value band 5170
9000
9000
8000
8000
7000
7000
6000
6000
5000
5000
4000
4000
3000
3000
2000
2000
1000
1000
0
Market (S&P 300) – Yield differential maintains support for Equities while Earnings Revision showing recovery
20.00
9000
15.00
8000
10.00
7000
5.00
6000
0.00
5000
-5.00
4000
-10.00
3000
-15.00
2000
-20.00
1000
0
3mth Avg Earnings Revision
3mth Price Momentum
Market (S&P 300) – Signs of stabilising in Earnings Growth and ROE
30.00
26.00
25.00
24.00
20.00
22.00
15.00
20.00
10.00
18.00
5.00
16.00
0.00
14.00
Market (S&P 300) – Cost of Growth and Cost of Yield are not demanding after recent pullback
4.50
7500
4.00
7000
3.50
6500
3.00
6000
2.50
5500
2.00
5000
1.50
4500
1.00
4000
0.50
3500
0.00
3000
Cost of Growth
Cost of Yield
GARY (Growth At Reasonable Yield)
Price Index - RHS
Page 12
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Global Perspective – Nov 2014 Update
300.00
280.00
260.00
240.00
220.00
200.00
180.00
160.00
140.00
120.00
100.00
MSCI EUROPE (US$)
MSCI WORLD (US$)
MSCI CHINA (US$)
MSCI AUSTRALIA (US$)
MSCI US (US$)
20
7000
6000
15
5000
10
4000
5
3000
0
2000
-5
1000
US Real GDP QOQ SA Change (%)
China Real GDP QOQ SA Change (%)
Australia Real GDP QOQ SA Change (%)
S&P 300
Euro Real GDP QOQ SA Change (%)
8000
140
130
7000
120
6000
110
100
5000
90
4000
80
3000
70
2000
60
1000
50
US Consumer Sentiment
China Consumer Sentiment
Australia Consumer Sentiment
S&P 300
Euro Consumer Sentiment
Page 13
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Macro Charts
Market (S&P 300) – Looking at the daily trading pattern, we see short term risk rising while long term trend remains
positive. 12 week MA about to break below 52 week MA….history shows a lower low….risk rising.
[email protected]: 5338.8
MA ([email protected]): 52 5356.9767, 12 5358.4728
6900
6600
6300
6000
5700
5400
5100
4800
4500
4200
3900
3600
3300
3000
RSI (100.000000): 14 47.5469
80
70
60
50
40
30
20
Jan
2004
Apr
Jul
Oct
Jan
2006
Apr
Jul
Oct
Jan
2007
Apr
Jul
Oct
Jan
2008
Apr
Jul
Oct
Jan
2009
Apr
Jul
Oct
Jan
2010
Apr
Jul
Oct
Jan
2011
Apr
Jul
Oct
Jan
2012
Apr
Jul
Oct
Jan
2013
Apr
Jul
Oct
Jan
2014
Apr
Jul
Oct
Currency (AUDUSD) – After the recent pullback to 85 cents, we expect it to recover and remain in the 85-88cent range with
global yield chase.
[email protected]: 4:14:03:
0.8719
MA ([email protected]): 4:14:03:
52 0.9094, 12 0.8826
1.08
1.04
1
0.96
0.92
0.88
0.84
0.8
0.76
0.72
0.68
0.64
RSI (100.000000): 4:14:03: 14 35.1763
80
70
60
50
40
30
20
10
Jan
2004
Apr
Jul
Oct
Jan
2006
Apr
Jul
Oct
Jan
2007
Apr
Jul
Oct
Jan
2008
Apr
Jul
Oct
Jan
2009
Apr
Jul
Oct
Jan
2010
Apr
Jul
Oct
Jan
2011
Apr
Jul
Oct
Jan
2012
Apr
Jul
Oct
Jan
2013
Apr
Jul
Oct
Jan
2014
Apr
Jul
Oct
Page 14
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
GOLD (Spot Gold) – Improving US economy and stimulus from Japan have driven spot gold below $1200…waiting game
till positive momentum above $1190…now $1187…getting close…global growth risk rising…bottom pickers will move.
[email protected]: 1186.46
MA ([email protected]):
52 1271.4104, 12 1215.6492
1800
1600
1400
1200
1000
800
600
400
RSI (100.000000):
14 36.0846
90
80
70
60
50
40
30
20
Jan
2004
Apr
Jul
Oct
Jan
2006
Apr
Jul
Oct
Jan
2007
Apr
Jul
Oct
Jan
2008
Apr
Jul
Oct
Jan
2009
Apr
Jul
Oct
Jan
2010
Apr
Jul
Oct
Jan
2011
Apr
Jul
Oct
Jan
2012
Apr
Jul
Oct
Jan
2013
Apr
Jul
Oct
Jan
2014
Apr
Jul
Oct
Bond Yield (10 year Bond) – Yield has been in decline over the past year…recovery loses steam with global growth
worries
[email protected]:
0.0329
MA ([email protected]):
52 0.0378, 12 0.034
0.068
0.064
0.06
0.056
0.052
0.048
0.044
0.04
0.036
0.032
0.028
RSI (100.000000):
14 41.3848
70
65
60
55
50
45
40
35
30
25
20
Jan
2004
Apr
Jul
Oct
Jan
2006
Apr
Jul
Oct
Jan
2007
Apr
Jul
Oct
Jan
2008
Apr
Jul
Oct
Jan
2009
Apr
Jul
Oct
Jan
2010
Apr
Jul
Oct
Jan
2011
Apr
Jul
Oct
Jan
2012
Apr
Jul
Oct
Jan
2013
Apr
Jul
Oct
Jan
2014
Apr
Jul
Oct
Page 15
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Current Best Buy Ideas
BUY AGI (Ainsworth Game Technology) – We added AGI to the best picks after March pullback below $3.70 with
market despite a very credible result. Given continued positive data flow from US, we should get the market paying
attention to this double digit gaming growth story. We expect AGI to bounce back above $5. M&A in the sector will keep
the stock in play despite missing earning expectations in the result.
BUY ALL (Aristocrat Leisure) – We added ALL to the best picks after May pullback below $5 before the result. Given
online gaming upside to this credible gaming recovery growth story, we expect ALL to bounce back above $6 in the next
12mths. The online upside has the potential to make substantial multi-year growth story. M&A in the sector will keep the
stock in play.
BUY APN (APN News & Media) – We added APN to the best picks after it was sold down to $0.70 on profit taking after a
great recovery. We see M&A in media sector and mid cycle valuation nearly 20-30% higher over 1-2 year time frame.
Quant Buy with Quant Target Price of $1.00 despite sell off in the result.
BUY CRZ (Carsales.Com) – We added CRZ to the best picks after it was sold down below $8.80 post result in Feb
despite their online model’s cash generation and global growth outlook. CRZ’s proven management, solid balance sheet,
free cashflow generation and global growth plans through acquisitions should see this stock move above $15. Despite
recent sell off on the result, we continue to see global growth upside coming through a diversified model.
BUY FLT (Flight Centre) – We maintain our Quant BUY (since late Nov 2013) on quality travel growth story with global
expansion. We changed our quant call from Quant Sell to Quant Buy with $55 quant target price in late November after
the share price pulled back with WEB and WTF downgrades. FLT is a heavily shorted stock that provides good risk/return
profile at current share price with exposure to the tourism recovery. Despite the downgrade today, FLT remains a quality
growth global stock after announcing further acquisition on the pre-guided result.
BUY IPP (iProperty Group) – We added IPP to the best picks after it was sold down below $2.30 on Asian growth
worries. The growth strategy for IPP has 3 streams being: 1) Real Estate Advertising Business; 2) eCommerce; and 3)
penetration of related industries. We see the IPP with new CEO recovering from recent weakness with comparable Euro
listing to stimulate interest and reach $3.45. REA taking over 17% stake shows the quality of the business model and the
growth option.
BUY HGG (Henderson Group) – We added HGG to the best picks after it was sold down below $4.10 on post result sell
off. We believe the result issues are one-off and the underlying business is in very good shape. Solid result and potential
ECB stimulus should further help the recovery step and drive the stock towards $5.
BUY LLC (Lend Lease) – We maintain our Quant BUY (since late Jul 2013) on the construction growth story with yield.
Governments around the world are forced to initiate large infrastructure projects to create jobs to stem the growth in
unemployment. LLC continues improve earnings clarity with more projects moving to higher level of the construction cycle.
We maintain Quant Buy call with $14 quant target price since late September with the result further supporting more
upgrades to support $17 new target price.
BUY PRT (Prime Media) – We added PRT to the best picks after it was sold down below $0.90 despite the growth and
yield media recovery potential. Despite the retail recovery being pushed back, PRT will be potential target for M&A post
Media Regulatory Changes. We maintain our Quant Buy call with $1.20 Quant Target Price.
BUY RFG (Retail Food Group) NEW – We added RFG to the best picks after the takeover bid for Gloria Jean. Despite
headwinds to consumer spending, food retail and global expansion on an already performing model will see improving
returns. BH analyst Josh K sees the stock trading to $6.
BUY SWM (Seven West Media) – We added SWM to the best picks after it was sold down to $2 despite the growth and
yield media recovery story which remains the market leader. Despite the retail recovery being pushed back, SWM will
remain a quality cyclical recovery story with good yield. We maintain our Quant Buy call with $2.40 Quant Target Price
with the result further supporting our view.
Page 16
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
BUY SXL (Southern Cross Media) – We added SXL to the best picks after it was sold down on the downgrade cycle. We
see M&A in media sector and mid cycle valuation nearly 50% higher over 1-2 year time frame. Quant Buy with Quant
Target Price of $1.30 with result removing uncertainties.
BUY SPK (Spark NZ) – We maintain our Quant BUY (since late Jun 2013) on the recovering Telco stock due to the data
super cycle, booming NZ economy, divestment of non-core businesses and restructure plans. The online/mobile
transitions of multiple sectors like retail, education, health care, entertainment and government services as well as
proliferation of mobile devices are continuing to drive up data usage at never before seen levels. We maintain our Quant
Buy call with $3.00 Quant Target Price.
BUY TLS (Telstra) – We maintain our Quant BUY (since late Oct 2010) on this quality yield Telco stock due to the data
super cycle. The online/mobile transitions of multiple sectors like retail, education, health care, entertainment and
government services as well as proliferation of mobile devices are continuing to drive up data usage at never before seen
levels in Australia. New NBN will be another positive for TLS due to the government’s mantra of outsourcing maintenance
of infrastructure/assets to private companies. We maintain our Quant Buy call with $5.75 Quant Target Price. Recent
result further supports our view on this stock moving from a pure Telco to global TMT stock.
BUY VED (Veda Group) – We added VED to the best picks after it was sold down to $1.85 post a great run to $2.50 after
IPO. We see VED’s value emerging as the economy moves towards online models drives the need for credit worthiness.
Quant Buy with Quant Target Price of $2.30 with the result further supporting our view.
BUY WOW (Woolworths) – We maintain the Quant BUY (since late July 2012) call on WOW with Quant Target Price
(QTP) $40.00 due to its dominant track record of delivering growth, earnings certainty, market share, private labels, cost
reduction, innovation, reward programs, cross selling and defensive yield. The latest sales update and Masters fear
subsiding further solidifies the quality free cashflow generating retail giant as a great long term buy. The food retail
strength held up underperforming Big W and Masters in the result.
Consensus Outlook and Multiples
Code
Share Price ($)
Issued Shares (mn)
Market Capital ($mn)
Price Target ($)
Exp 12-Mth Total Return (%)
Rating
Revenue
FY2013
($mn)
FY2014
FY2015
FY2016
EBITDA
FY2013
($mn)
FY2014
FY2015
FY2016
NPAT
FY2013
($mn)
FY2014
FY2015
FY2016
EPS
FY2013
(Вў)
FY2014
FY2015
FY2016
EPS Growth
FY2013
(%)
FY2014
FY2015
FY2016
DPS
FY2013
(Вў)
FY2014
FY2015
FY2016
PB
FY2013
(x)
FY2014
FY2015
FY2016
PE
FY2013
(x)
FY2014
FY2015
FY2016
ROE
FY2013
(x)
FY2014
FY2015
FY2016
Yield
FY2013
(%)
FY2014
FY2015
FY2016
AGI
2.72
322
876
4.10
54.96
BUY
199.5
251.5
275.3
305.1
69.9
95.7
100.4
112.8
48.0
68.5
68.7
76.6
14.9
21.2
21.3
23.7
-17.4
42.6
0.5
11.3
7.1
10.7
11.5
13.0
4.4
3.5
3.2
2.9
18.3
12.8
12.8
11.5
25.6
30.6
27.3
26.9
2.6
3.9
4.2
4.8
ALL
6.80
630
4,284
6.85
3.78
BUY
823.9
885.9
1286.1
1436.2
192.0
209.5
429.6
507.3
107.6
120.1
206.2
253.9
19.5
21.0
32.6
40.4
N/A
7.9
55.2
23.9
14.8
16.2
20.7
24.0
11.1
5.2
4.0
3.6
34.9
32.4
20.9
16.8
35.2
22.1
23.4
24.2
2.2
2.4
3.0
3.5
APN
0.69
1,029
705
0.73
7.59
HOLD
877.4
832.1
829.6
818.6
144.3
156.3
159.6
156.5
46.4
75.4
82.5
85.1
6.5
7.9
7.9
8.2
-13.8
20.7
0.0
3.8
0.0
0.0
1.2
3.2
1.0
1.3
1.2
1.1
10.5
8.7
8.7
8.4
10.9
16.0
14.4
13.3
0.0
0.0
1.8
4.7
CRZ
10.73
239
2,564
11.75
12.95
BUY
216.4
238.5
290.5
321.9
118.1
139.4
165.5
185.6
83.1
96.0
110.9
126.7
35.4
40.6
46.6
53.2
22.8
14.9
14.7
14.2
28.3
32.4
37.2
43.4
17.9
14.0
12.8
11.1
30.3
26.4
23.0
20.2
61.6
57.6
55.2
54.6
2.6
3.0
3.5
4.0
FLT
39.50
101
3,978
50.89
33.13
BUY
2066.2
2205.0
2373.4
2531.8
380.1
425.8
455.9
488.4
238.3
265.9
282.3
306.9
237.4
264.0
279.8
304.2
19.8
11.2
6.0
8.7
134.2
153.1
169.5
185.1
4.2
3.6
3.4
3.1
16.6
15.0
14.1
13.0
26.1
24.6
24.4
24.0
3.4
3.9
4.3
4.7
IPP
2.43
182
442
3.03
24.86
BUY
19.7
24.2
34.0
45.7
-2.3
1.5
8.0
14.8
-2.6
1.0
6.1
11.4
-1.6
0.7
3.4
6.4
-30.4
-144.7
385.7
88.2
0.0
0.0
0.0
0.0
14.8
13.5
11.0
8.4
-155.1
347.1
71.5
38.0
-9.3
3.4
18.9
27.0
0.0
0.0
0.0
0.0
HGG
3.96
773
3,062
4.59
20.65
BUY
916.2
960.8
1063.2
1227.5
363.2
352.7
410.6
470.1
279.2
302.5
328.4
367.1
27.0
26.1
30.0
33.3
45.6
-3.5
15.1
11.0
15.0
17.1
19.0
19.4
2.8
2.5
2.4
2.2
14.7
15.2
13.2
11.9
17.0
18.2
17.9
19.8
3.8
4.3
4.8
4.9
PRT
0.88
366
322
1.07
29.89
HOLD
279.1
259.6
264.5
270.7
69.3
66.2
65.3
66.9
35.8
33.7
34.5
35.9
9.6
9.1
9.2
9.8
20.2
-5.2
1.5
6.5
7.5
7.1
7.2
7.5
2.0
1.9
1.9
1.8
9.2
9.7
9.6
9.0
22.2
20.7
20.6
20.2
8.5
8.1
8.2
8.5
RFG
5.94
154
917
5.62
-1.30
BUY
143.0
157.2
185.8
221.4
55.1
59.7
73.9
85.2
33.6
37.4
46.6
55.8
27.6
27.2
31.9
37.7
-2.2
-1.6
17.4
18.2
19.2
21.8
24.3
27.6
3.2
2.8
2.5
2.4
21.5
21.9
18.6
15.8
16.2
13.6
14.2
15.8
3.2
3.7
4.1
4.6
SWM
1.70
999
1,699
2.08
28.82
BUY
1894.1
1850.5
1829.8
1835.8
483.9
460.9
425.1
421.1
218.0
228.1
215.9
217.1
19.9
20.5
19.4
19.5
-38.9
3.2
-5.4
0.5
10.7
11.6
11.2
11.6
0.6
0.6
0.6
0.6
8.5
8.3
8.8
8.7
7.9
7.8
7.3
7.1
6.3
6.8
6.6
6.8
SXL
1.01
731
739
1.02
6.73
HOLD
642.8
640.3
609.4
625.1
206.9
188.4
163.9
171.1
90.9
80.1
68.3
75.1
13.0
11.3
9.5
10.2
-10.8
-12.7
-16.0
7.4
8.9
7.3
6.3
6.8
0.5
0.4
0.6
0.6
7.8
8.9
10.6
9.9
5.8
5.1
5.5
5.8
8.8
7.3
6.2
6.7
SPK
2.99
1,835
5,486
2.13
-23.32
REDUCE
3658.7
3312.7
3175.4
3150.4
909.8
845.7
855.1
866.9
281.7
287.7
304.9
309.2
15.4
15.6
16.6
16.8
24.2
1.2
6.4
1.6
14.0
14.6
16.0
16.1
4.0
3.8
3.5
3.4
19.4
19.2
18.0
17.8
19.9
21.6
19.8
19.8
4.7
4.9
5.3
5.4
TLS
5.76
12,226
70,420
5.51
1.01
HOLD
25732.2
25391.6
25321.9
26001.2
10694.7
10753.9
10708.2
11073.1
3770.9
4045.2
4118.0
4337.7
30.2
32.8
33.4
35.6
5.7
8.5
1.9
6.6
28.1
29.3
30.8
32.0
6.0
5.4
5.2
5.1
19.1
17.6
17.2
16.2
32.1
32.0
30.6
32.1
4.9
5.1
5.3
5.6
VED
2.32
842
1,954
2.49
9.96
BUY
N/A
295.0
336.1
370.2
N/A
128.5
146.0
163.4
N/A
66.4
77.6
89.0
N/A
8.1
9.2
10.6
N/A
N/A
13.6
15.2
N/A
2.0
5.8
6.6
N/A
2.8
2.6
2.4
N/A
28.6
25.2
21.9
N/A
10.4
10.4
11.4
N/A
0.9
2.5
2.8
WOW
33.00
1,263
41,679
34.76
9.72
HOLD
58795.1
61150.7
63182.2
66141.6
4547.3
4767.6
4933.7
5235.4
2344.7
2467.6
2599.1
2755.9
189.3
195.9
205.0
216.7
6.0
3.5
4.6
5.7
132.7
138.4
144.6
152.5
4.8
4.2
3.8
3.5
17.4
16.8
16.1
15.2
28.0
26.0
24.4
23.7
4.0
4.2
4.4
4.6
Page 17
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Current Best Sell Ideas
SELL AMP (AMP) – AMP has been a perennial underperformer in the asset management sector while benefiting from the
scale, the insurance arm continues to underperform. AMP with current price above $5.70 looks very stretched on multiples
for the risk. We expect AMP to get down below $5 with market sentiment turning negative and risk to insurance sector
remains despite a solid result based on cost cutting.
SELL HVN (Harvey Norman) – We maintain our negative view on discretionary retail in an environment of high
competition, lower currency, rising unemployment, rising cost of living pressures, declining real wages and falling
consumer sentiment with budget woes. We expect HVN to get down to $3.00 with market already pricing in all the positive
property related upside.
SELL JBH (JB Hi-Fi) – We maintain our negative view on discretionary retail in an environment of high competition, lower
currency, rising unemployment, rising cost of living pressures, declining real wages and falling consumer sentiment with
budget woes. We expected JBH to get down below $15 with store rollout growth strategy hitting macro headwinds despite
positive flow effects from new Apple products. We expect JBH to trade lower to test $10 technical support line.
SELL LEI (Leighton Holdings) – We maintain our negative view LEI with resource capex decline and cost blow outs
continuing while the Spanish major shareholder continues to restructure and pay down debt. We expect LEI to get down to
$18 with more write downs and divestments.
SELL MND (Monadelphous Group) – We maintain our negative view on mining services in an environment of high
competition, falling resource capex and falling commodity prices. We turned negative on MND at $18 with growth outlook
getting less certain despite the relatively good share price performance compared the sector. We expect MND to get close
to $13 with market prices in risk to growth. Result further shows the growth risk in the sector and the stock.
SELL MYR (Myer) – We maintain our negative view on discretionary retail in an environment of high competition, lower
currency, rising unemployment, rising cost of living pressures, declining real wages and falling consumer sentiment with
budget woes. We expect MYR to get down to $2 with competition from online, big retailers and global brand shops. Result
further shows the lack of growth outlook with competition continuing to hurt.
SELL TRS (The Reject Shop) – We maintain our negative view on discretionary retail in an environment of high
competition, lower currency, rising unemployment, rising cost of living pressures, declining real wages and falling
consumer sentiment with budget woes. We changed our quant call from Quant Buy (since late Jun 2012) to Quant Sell
with TP $15 in early Jan and then further downgraded expectations to TP $8. Result further shows that the model is still
under threat.
Consensus Outlook and Multiples
Code
Share Price ($)
Issued Shares (mn)
Market Capital ($mn)
Price Target ($)
Exp 12-Mth Total Return (%)
Rating
FY2013
Revenue
FY2014
($mn)
FY2015
FY2016
FY2013
EBITDA
FY2014
($mn)
FY2015
FY2016
FY2013
NPAT
FY2014
($mn)
FY2015
FY2016
FY2013
EPS
FY2014
(Вў)
FY2015
FY2016
FY2013
EPS Growth
FY2014
(%)
FY2015
FY2016
FY2013
DPS
FY2014
(Вў)
FY2015
FY2016
FY2013
PB
FY2014
(x)
FY2015
FY2016
FY2013
PE
FY2014
(x)
FY2015
FY2016
FY2013
ROE
FY2014
(x)
FY2015
FY2016
FY2013
Yield
FY2014
(%)
FY2015
FY2016
AMP
5.70
2,958
16,859
5.69
4.75
HOLD
1774.6
998.2
1076.9
1145.7
1051.2
1370.3
1494.5
1758.5
808.2
989.6
1080.5
1181.5
27.5
34.5
36.8
40.1
-9.5
25.4
6.7
9.0
22.6
26.0
28.4
30.4
2.1
2.1
2.0
1.9
20.7
16.5
15.5
14.2
10.1
12.0
13.7
13.7
4.0
4.6
5.0
5.3
HVN
3.79
1,062
4,026
3.58
-1.48
HOLD
2304.1
2537.9
2626.7
2704.5
370.7
385.6
460.8
494.3
188.0
207.8
244.7
265.2
17.6
19.4
23.1
25.1
5.6
10.4
19.1
8.7
9.1
11.8
15.6
16.9
1.7
1.6
1.6
1.5
21.6
19.5
16.4
15.1
8.3
8.6
9.7
10.0
2.4
3.1
4.1
4.5
JBH
LEI
15.53
20.73
99
339
1,537
7,017
18.76
19.92
26.32
1.33
BUY REDUCE
3295.6 22766.7
3499.3 23659.7
3621.1 23047.8
3836.9 22739.7
208.6
1972.1
224.8
1748.8
233.6
1757.4
246.9
1753.8
115.4
530.1
127.8
574.4
131.5
571.1
140.7
574.8
116.1
157.9
126.4
172.6
130.7
170.3
138.7
172.3
11.6
17.9
8.9
9.3
3.4
-1.3
6.1
1.2
70.9
95.7
79.3
107.7
85.9
108.3
91.4
109.9
6.7
2.2
5.3
2.0
4.7
1.9
4.1
1.8
13.4
13.1
12.3
12.0
11.9
12.2
11.2
12.0
55.8
18.0
47.5
16.8
41.9
15.4
39.4
15.1
4.6
4.6
5.1
5.2
5.5
5.2
5.9
5.3
MND
10.64
93
990
14.96
50.75
HOLD
2582.5
2324.5
2115.1
2032.7
249.9
214.9
194.2
180.4
158.5
137.5
120.8
111.8
174.7
148.9
130.1
120.2
30.7
-14.8
-12.6
-7.6
148.5
119.0
108.0
99.8
3.3
2.8
2.6
2.5
6.1
7.1
8.2
8.9
58.7
41.3
32.6
29.0
14.0
11.2
10.2
9.4
MYR
1.74
586
1,016
1.94
19.60
HOLD
3066.5
3149.6
3242.3
3322.3
307.3
262.5
251.5
257.2
131.8
101.0
93.8
98.2
22.4
17.2
15.8
16.6
-4.7
-23.2
-8.3
5.1
18.3
14.2
13.2
13.7
1.2
1.1
1.1
1.1
7.7
10.1
11.0
10.5
14.6
11.2
10.3
10.7
10.6
8.2
7.6
7.9
TRS
7.65
29
221
8.93
21.25
HOLD
621.6
705.8
768.3
815.3
43.8
40.5
45.6
49.7
19.7
15.8
17.7
20.3
73.4
54.6
61.7
71.0
-5.8
-25.5
13.0
15.1
39.5
31.2
34.8
40.8
1.8
1.7
1.7
1.6
10.4
14.0
12.4
10.8
20.3
12.3
13.5
14.5
5.2
4.1
4.5
5.3
Page 18
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Current Best Long/Short Ideas
LONG ANZ & SHORT WBC – We remain positive on Yield over Cyclicals driven by low global growth outlook and
increasing risk to commodity prices and consumer sentiment. CBA is the best quality diversified bank trading ex-dividend.
Budget outlook and housing prices worry will weigh on WBC while Asian exposure in ANZ with relative lower margin
pressure will see it outperform. Despite the underperformance of ANZ post result, we still prefer it on the macro view of it
superior exposure to the higher growth Asian markets.
LONG BHP & SHORT RIO – We remain positive in the short term on Yield over Cyclicals. Given the substantially high
revenue driven by Iron Ore in RIO compared to BHP, the safe approach to reducing the Resource exposure would be via
long BHP and short RIO. Tapering continues to drive uncertainty in Emerging Markets and Iron Ore prices have finally
gone below $120. BHP demerger potential and diversified business model continues to be better option to RIO.
LONG IIN & SHORT TPM – We remain positive on Telco sector due to overall economy in transition to online. Given the
substantial outperformance of TPG over IIN and recent departure of IIN founder and previous bid by TPM, we see better
risk/return profile in IIN over TPM in the near term.
LONG LLC & SHORT LEI – We remain positive on Construction sector due to overall global need for job creation and
infrastructure shortage. Given the Spanish partial bid and restructure of LEI with substantial debt while LLC keeps winning
contracts and remains relatively clean, we see better risk/return profile in LLC over LEI in the near term. LEI management
changes will continue while their debt level will not allow the Spanish major shareholder to proceed to a complete bid.
Consensus Outlook and Multiples
Code
Share Price ($)
Issued Shares (mn)
Market Capital ($mn)
Price Target ($)
Exp 12-Mth Total Return (%)
Rating
FY2013
Revenue
FY2014
($mn)
FY2015
FY2016
FY2013
EBITDA
FY2014
($mn)
FY2015
FY2016
FY2013
NPAT
FY2014
($mn)
FY2015
FY2016
FY2013
EPS
FY2014
(Вў)
FY2015
FY2016
FY2013
EPS Growth
FY2014
(%)
FY2015
FY2016
FY2013
DPS
FY2014
(Вў)
FY2015
FY2016
FY2013
PB
FY2014
(x)
FY2015
FY2016
FY2013
PE
FY2014
(x)
FY2015
FY2016
FY2013
ROE
FY2014
(x)
FY2015
FY2016
FY2013
Yield
FY2014
(%)
FY2015
FY2016
ANZ
31.83
2,757
87,743
34.65
14.68
HOLD
18288.5
19386.3
20522.7
21686.9
8959.3
9726.0
10036.4
10601.3
6411.4
7043.0
7543.7
7996.8
230.4
254.8
266.0
278.8
4.6
10.6
4.4
4.8
159.0
177.0
185.5
193.4
2.0
1.8
1.7
1.6
13.8
12.5
12.0
11.4
15.5
15.5
15.2
15.0
5.0
5.6
5.8
6.1
WBC
32.76
3,109
101,852
34.77
11.91
HOLD
18877.2
19988.7
20877.7
21986.5
10358.0
11201.5
11599.0
12273.5
7017.7
7612.6
7963.7
8347.6
223.7
242.6
251.4
260.2
8.4
8.4
3.6
3.5
188.0
184.5
189.7
197.5
2.2
2.1
2.0
1.9
14.6
13.5
13.0
12.6
16.0
16.5
16.3
16.0
5.7
5.6
5.8
6.0
BHP
33.18
3,212
106,564
42.64
32.96
BUY
73996.1
73676.9
76886.7
80526.4
30587.1
34574.2
34987.4
37551.7
14034.5
15028.5
14159.5
14934.1
261.1
279.4
269.2
292.4
-14.1
7.0
-3.7
8.6
128.5
132.2
147.6
154.7
2.2
2.1
1.8
1.7
12.7
11.9
12.3
11.3
17.6
18.2
14.3
14.9
3.9
4.0
4.4
4.7
RIO
59.47
436
25,915
74.43
29.58
BUY
56312.6
53986.9
55277.3
58395.5
21388.7
21253.5
21951.7
23787.6
10392.4
10354.5
10440.9
11574.7
577.6
562.1
549.6
607.6
19.8
-2.7
-2.2
10.6
203.4
244.8
263.6
283.5
1.9
1.8
1.6
1.5
10.3
10.6
10.8
9.8
17.4
17.6
16.3
15.9
3.4
4.1
4.4
4.8
IIN
8.37
162
1,357
8.24
1.60
HOLD
945.8
1001.2
1063.0
1095.6
182.2
195.3
210.6
214.9
57.4
67.2
77.1
85.4
35.9
41.5
47.6
53.1
34.6
15.6
14.8
11.6
17.8
22.2
26.2
29.6
4.2
3.8
3.5
3.2
23.3
20.2
17.6
15.8
19.0
19.6
20.4
20.7
2.1
2.7
3.1
3.5
TPM
7.70
794
6,112
6.55
-13.38
HOLD
715.0
971.4
1287.8
1380.2
282.4
354.3
463.9
507.0
140.3
178.0
226.0
267.4
17.9
22.4
28.7
33.8
24.9
25.3
28.0
17.8
7.3
9.1
11.6
13.7
9.1
7.5
6.4
5.5
43.0
34.3
26.8
22.8
22.1
22.8
24.9
25.5
1.0
1.2
1.5
1.8
LLC
LEI
15.68
20.73
580
339
9,088
7,017
14.56
19.92
-3.74
1.33
BUY REDUCE
12545.8 22766.7
13403.8 23659.7
13765.9 23047.8
15287.0 22739.7
736.0
1972.1
922.4
1748.8
902.5
1757.4
1051.6
1753.8
545.4
530.1
618.6
574.4
618.4
571.1
709.9
574.8
94.9
157.9
93.9
172.6
105.4
170.3
120.2
172.3
12.6
17.9
-1.0
9.3
12.2
-1.3
14.0
1.2
41.6
95.7
63.3
107.7
53.2
108.3
62.9
109.9
2.3
2.2
2.0
2.0
1.9
1.9
1.7
1.8
16.5
13.1
16.7
12.0
14.9
12.2
13.0
12.0
13.7
18.0
16.6
16.8
12.8
15.4
13.5
15.1
2.7
4.6
4.0
5.2
3.4
5.2
4.0
5.3
Page 19
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Quant Strategy Model Portfolio
Last Update – 22nd October 2014
Materials – large (BHP, ILU, RIO)
Commercial & Professional Services – mid (SEK)
Transport – large (SYD, TCL, TOL)
Consumer Services – mid (ALL, FLT)
Media – small (APN, SWM, SXL), micro (PRT)
Retailing – small (BRG, KMD)
Food & Staples Retailing – large (WES, WOW)
Health Care – mid (ANN)
Banks – large (ANZ, NAB)
Diversified Financials – large (MQG), mid (HGG, PPT), micro (BTT)
Property Trusts – large (LLC, SGP)
IT – large (CPU), mid (CRZ)
Telecommunications – large (TLS), small (SPK)
Quant Strategy Model Portfolio Performance
400.00
Benchmark Index
350.00
Portfolio Market Cap Weighted Index
300.00
Portfolio Equal Weighted Index
250.00
200.00
150.00
100.00
Portfolio Market
Portfolio Equal
Cap Weighted
Weighted Index
Index
Perform ance Analysis
Benchm ark
Index
Perform ance since inception (May 2009)
41.22%
135.95%
247.43%
Average perform ance per m onth
0.58%
1.92%
3.50%
Standard Deviation (w eekly)
2.04%
2.14%
2.34%
Perform ance over the past 1 m onth
-1.75%
-0.80%
-3.26%
Perform ance over the past 3 m onths
-4.01%
-2.52%
-4.08%
Perform ance over the past 12 m onths
-1.13%
5.43%
5.96%
Page 20
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Baillieu Holst Stock Calls
Bentham IMF (IMF) – Rating: BUY - Price Target: $2.60
Update: IMF’s AGM and recent announcements highlights the increasing geographic diversification of its buisness, particularly into
the US market. IMF established a new US subsidiary in 2011 with an office in New York. IMF has since opened an office in Los
Angeles and funded cases in New York, California, Texas, Indiana, Nebraska, Virginia and North Carolina. The growing influence
of the US business is evidenced by the fact that of the 9 new matters entered in 1H15, 7 of these matters are in the US.
1H15 to date: Whilst it would be premature to revise our 1H15 (and subsequently FY15 forecasts) until the end of the current half,
it would appear that IMF is enjoying a strong 1H15. Since FY14, IMF has announced the conclusion of 6 matters (one matter
remains subject to appeal and two other matters are conditional settlements) totalling revenue of A$73m (IMF earned A$76m for
the full FY14 period) and NPBT from those cases of A$36m. No matters have been lost/written off thus far in 1H15.
Bank Fees Update: Whilst we don’t generally model individual matters, the “Bank Fees” case remains the swing factor in our FY15
forecasts. IMF has an outstanding case against ANZ in respect of excess bank fees – the matter is currently the subject of a twoway appeal which has been heard and is awaiting judgment. At the time of the ANZ action, simultaneous litigation was launched
against a number of other banks but these actions were stayed pending the ANZ case resolution. Also, IMF has since launched an
open class in addition to its existing closed class in respect of bank fees. Subsequent to a reported approach by NAB to enter
settlement discussions, an application has been made to the Court to have the stayed NAB matter re-opened to allow more parties
to join the class before again being closed and a negotiation possibly proceeding. No court approval is needed to conduct a
settlement negotiation, although any deal would have to be rubber stamped by the courts.
Regular dividends?: The recent IMF AGM also flagged that IMF would look at the introduction of a regular half yearly dividend
which reflects the cash at the time of the dividend and the likely demand for cash over the ensuing 12 months.
Investment view: BUY call maintained with revised DCF valuation of A$2.62 (prev. A$2.36) and price target of A$2.60 (prev.
A$2.35). In view of IMF’s case book now consistently reported above A$1.8bn (gross expected settlement) we have increased our
annual gross settlement value in our DCF valuation to A$500m (prev. A$400m) – assuming an average 3 year term to settlement,
this implies a gross rolling case book of A$1.5bn. Our BUY call is supported by: 1) valuation; 2) track record of case wins; 3) JV and
co-funding arrangement with Elliott Corp to assist in funding the start-up in Europe, bringing additional capital to the group; 4)
stronger balance sheet post a A$50m bond issue; 5) lack of correlation of earnings to general economic factors; and 6) growth
potential through US/Europe.
BigAir (BGL) - Rating: Buy - Price Target: $1.10
BigAir is acquiring Oriel Technologies. This provider of managed services to mid-market enterprises in Australia is expected to
increase the portfolio of telecommunication solutions which BigAir can offer alongside those it already provides. BigAir will pay
A$4.2m cash upfront as well as two annual earn-out payments of 2.25 times incremental EBITDA created over a baseline of
$0.84m, split equally between cash and shares. The Oriel acquisition continues the transition of the company from plain vanilla
fixed wireless operator to provider of value-added services.
BigAir (BGL) owns Australia’s largest national fixed wireless network for business use, with services in all Australian cities.
BGL also offers its fixed wireless customers Managed Services and Unified Communications. The company has developed a
strong niche in �community broadband’, providing broadband services to university residential campuses and other communities of
interest.
BGL’s symmetric high speed data capability is as good as the NBN. The NBN has raised demand for this kind of service and
BGL can provide it cost-effectively.
BGL has grown rapidly in recent years, with EPS increasing 30% pa from 1.2 cents in FY09 to 3.7 cents (underlying) in FY14.
We expect the momentum of strong demand in the Australian telecommunications market for Cloud-based services can continue to
fuel strong growth.
BGL has strong leadership. Jason Ashton, BGL’s CEO, has built the company more or less from scratch. Backing Ashton and
CFO Charles Chapman is a good board with experience in the telco industry.
Page 21
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
BGL is now expanding into new customer sectors and new products. In terms of new customers, the company is targeting
remote mining accommodation, retirement villages and shopping centres. For new products, BGL is now growing in Unified
Communications and Managed Services.
Relative capex is easing back. In FY14 BGL spent 15.5% of revenue on capex. We expect capex will hold ease back from this
level to around 14% by FY17.
BGL has a strong balance sheet. Up until recently BGL carried no debt. With the acquisitions of FY14 the company took on some
debt but net debt / net debt + equity was only 21% as at June 2014.
BGL is undervalued, on our numbers. We value BGL using a DCF at $0.92 base case and $1.31 optimistic case. Our $1.10
target price sits at the midpoint of our DCF range. We see BGL re-rating to our target price on the back of continued good earnings
numbers and other acquisitions in the fixed wireless space.
Smart Parking (SPZ) – Rating: BUY - Price Target: $0.20
Update: Post the release of SPZ’s most recent quarterly cash flow statement and AGM commentary, we update our forecasts and
investment view.
1Q15 cash flows: SPZ delivered positive net operating cash flow of A$620k. However this was boosted by the inclusion of A$2.3m
in client funds on behalf of the UK Services business. Therefore underlying net operating cash flow was an outflow of A$1.7m. SPZ
has stated that the cash flows included costs associated with the Westminster UK installation, with a cash receipt of A$0.3m
relating to this contract received after the end of 1Q15 and further receipts of A$0.25m expected in due course. A further cash cost
of A$343k was recognised for restructuring. Cash balance at end 1Q15 was A$9.6m excluding client monies.
AGM commentary: No formal guidance has been provided for FY15 deferring to over-arching comments for each division: 1)
Technology: “financial results for the full year are encouraging with new contracts and a growing recurring revenue line”; and 2)
Services: “financial results are below expectation but the SPZ Board and management team are focused on returning this business
to profit.”
Technology update: SPZ recently announced the successful finalisation of Phase 1 of the Westminster UK contract, involving the
installation of 3k sensors which provide real time data to the Council and parking app. SPZ now expects a brief evaluation period
before phase 2 of the contract involving a further 7k sensors. SPZ has announced further trials with Milton Keyes and Camden
Councils and has stated that it is negotiating with a further 10 UK councils and transport authorities. A key enhancement to the
buisness is the launch of SPZ’s Tag Payment portal which links the activity of a car through a RFID tag to a user’s account – this
will provide an additional revenue line for SPZ.
Services update: SPZ has stated that the division is now emerging from a “challenging” period after implementation of a new
strategy under a new management team, which has also rationalised the UK operations to one site. Existing contracts with Asda
and Matalan have been renewed and new contracts with M&S in Kent (80 spaces) and CBRE have been signed.
Changes to forecasts: We have incorporated a further A$300k in restructuring costs in our FY15 forecasts subsequent to the
recent 1Q15 cash flow statement.
Investment view: Upgrade from HOLD to BUY post recent price weakness. Valuation and price target of A$0.20 unchanged.
Rationale is: 1) Technology: the completion of Phase 1 of the Westminster contract has franked the technology and should
underwrite further municipal contracts in the UK and Australia/NZ – we expect scale to build quickly from here and have forecast
the sale of 12k/24k/34k sensors in FY15/16/17; 2) Services: the restructuring phase of the business would appear to be at an end
and we would expect the division to move into a nominal profit from here with upside from contract wins; and 3) balance sheet –
liquidity remains strong.
Page 22
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Wide Bay Australia (WBB) - Rating: BUY - Price Target: $6.80
AGM: No precise guidance has been provided at today’s AGM although the key points are that: 1) Loan book has grown to
A$2.263bn at end 1Q15 which implies annualised growth of 7.2% pcp; 2) net interest margins reported to have been steady in
1Q15 despite competition; 3) loan arrears continuing to trend down with total past due loans (30 days +) reducing to A$36m at
1Q15 versus A$43m at FY14; 4) Mortgage Risk Management – continuing to be reported as well provisioned; and 5) total capital
ratio at FY14 of 14.3% in excess of Board target of 13%.
View: No real surprises here. Recent month resumption of growth looks to have been sustained into 1Q15 despite competition. We
continue to view WBB as a very sound turnaround story with an attractive yield which continues to trade roughly at book value.
Financial System Inquiry outcome could well serve to level the competitive playing field between the big four and second/third tier
banks.
Page 23
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Baillieu Holst Macro Calls
SHIELD – Sustainable High Yield
Good Yield Hunting – the saga continues
Published – 17th Nov 2014
We maintain our long term positive view while expecting short term pullback on Financial Sector Inquiry risk to financials, and
commodity price risks to resources, baring structural risks like the housing bubble. Equities will continue to benefit from major
global economies maintaining low rates of interest for longer as countries struggle with growth and unemployment. Despite the low growth
outlook, we expect increasing demand for Australian dividend yield in a global environment of older demographic looking for sustainable
income streams. The domestic baby boomers will be forced to invest in equities to maintain their income requirements due to the low
interest rates and rising cost environment.
Micro cap stock HFA and small cap MRM are the only low growth cheap yield pick from the SHIELD screen that has average earnings
and cash flow per share growth of below 10%, an average of price-earnings and price-cash flow below 10, a dividend yield above 5% and
a BUY rating.
SHIELD Top 20 picks are: large cap – CBA, WBC, BHP, ANZ and NAB; mid cap – PPT; small cap – IMF, NST, MRM, PTM, WEB, HIL,
SKE, TRG, MOC and BKN; and micro cap – FRI, HFA, NCK and DDR.
Equity Engineer – November 2014
No Country for New Economy
Published – 10th Nov 2014
Market Outlook: We maintain our call from May 2013 that the market will experience a bull market to 6500 in 2015 based on a low
growth global recovery and the global demand for yield. Equities will continue to benefit from major global economies maintaining low
rates of interest for longer as countries struggle with growth and unemployment. The current government policy mix continues to support
old sectors over new sectors despite headwinds like structural decline, weather uncertainties, global trade issues, scalability and limited
long term multiplier effect. Tidal wave of unemployment, falling real wages and rising cost of living in the next few years are expected to
take a substantial bite out of the local consumer spending. The policy makers are opening up our market to our competitors who are
artificially stimulating their economies through tariffs, subsidies, low currency, low interest rate and variety of stimulus packages. We
continue to back old economy engines that will not provide substantial employment improvement, while technology and free trade
agreements will further erode our manufacturing capabilities. We struggle to see the recovery path in the current policy mix without an
emerging economy delivering another commodity recovery cycle. We continue to expect unemployment to go past 6.5% in 2015 and
remain above 6% well into 2016. Recent downgrading of climate change policies and NBN will not raise confidence for new industries to
invest capex on long term growth projects. The mining, construction, housing, food and tourism industry recovery will not cover the
aggregate disposable income needed to maintain the consumer spending and economic growth. Despite the low growth outlook, we
expect increasing demand for Australian equity dividend yield in a global environment of older demographic looking for sustainable income
streams. The domestic baby boomers will be forced to invest in equities to maintain their income requirements in a low interest rate
environment. Despite short term downside risk in the Financial Sector Inquiry and falling commodity prices, long term prospects for
Australian equities are very positive baring structural risks like housing bubble.
Financials: We remain positive on the Bank sector but expect volatility with Financial Sector Inquiry, ex dividend period and Housing
Bubble worries. We continue to favour overseas exposure through diversified financials.
Industrials: We remain positive on the Big Retailers (i.e. WES and WOW) and see substantial risk in discretionary retailers. TMT (Tech
Media Telco) stocks (i.e. FLT, SEK, VED, CRZ, APN, SWM, SXL, PRT, TLS and SPK) provide growth, yield, value and global exposure in
some cases.
Resources: We remain positive on the Big Miners due to their ability to increase production at very low cost and suffocate the smaller
producers. BHP and RIO are now delivering better dividend yield than 10 year bond yield.
Currency Outlook: We continue to expect the AUDUSD see support around 85 cents in the short term and move higher on yield demand
from global investors.
Page 24
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Interest Rates Outlook: We expect the RBA to work towards a rate cut in mid-2015 to stimulate a stagnant low growth economy. We
expect central banks around the world to continue to keep interest rates at low levels in line with low growth rates. Even if the rates are to
increase (i.e. US); we expect that the rate of change will be a very slow and measured process.
Unemployment Outlook: The accumulated unemployment tidal wave from the Car industry, Airline industry, Telco industry, Finance
industry, Manufacturing industry, M&A job cuts, outsourcing to Emerging Markets, government job cuts and the ever shrinking Mining
industry cuts will create a vacuum for jobs and drive unemployment above 6.5% in the next 12-18 months. The infrastructure job creation
will only start in 2016/17 and unlikely to fill the decline in resource sector downturn.
Quant Strategy Portfolio
October update – Ride the recovery
Published – 22nd October 2014
Strategy outlook: We maintain our positive view that the market will recover from the recent profit taking on geopolitical, currency
and global growth worries. At these levels, we continue to expect US recovery to remain below trend, while China stabilises. Euro
continues to remain in decline mode while Japanese outlook is in the balance. We expect the domestic federal budget uncertainties
to remain unresolved in 2014 while multiple state elections in 2015 will drive more volatility. We expect domestic consumer
confidence to remain low and force RBA to cut interest rates in mid-2015 after curbing asset prices (i.e. house prices, equity
markets etc.). The continued global growth worries will drive global investors back to Australian high yielding equities with currency
stabilising and bond yields falling.
Portfolio changes: PPT was added while VED was removed.
Current model portfolio: Materials – large (BHP, ILU, RIO); Commercial & Professional Services – mid (SEK); Transport – large
(SYD, TCL, TOL); Consumer Services – mid (ALL, FLT); Media – small (APN, SWM, SXL), micro (PRT); Retailing – small (BRG,
KMD); Food & Staples Retailing – large (WES, WOW); Health Care – mid (ANN); Banks – large (ANZ, NAB); Diversified Financials
– large (MQG), mid (HGG, PPT), micro (BTT); Property Trusts – large (LLC, SGP); IT – large (CPU), mid (CRZ);
Telecommunications – large (TLS), small (SPK).
The best five performers in the model portfolio since last update were ALL, LLC, TCL, ANZ and BRG while the worst five
performers were HGG, SXL, ILU, VED and SEK.
GARY – Growth At Reasonable Yield
GARY spoilt for choice after pullback
Published – 16th Oct 2014
We maintain our positive view that the market will recover from the recent profit taking on geopolitical, currency and
global growth worries. At these levels, we continue to expect US recovery to remain below trend, while China stabilises. Euro
continues to remain in decline mode while Japanese outlook is in the balance. We expect the domestic federal budget uncertainties
to remain unresolved in 2014 while multiple state elections in 2015 will drive more volatility. We expect domestic consumer
confidence to remain low and force RBA to cut interest rates in mid-2015 after curbing asset prices (i.e. house prices, equity
markets etc.). The continued global growth worries will drive global investors back to Australian high yielding equities with currency
stabilising and bond yields falling.
GARY (Growth At Reasonable Yield) screen allows us to pick stocks with good yield, good growth and cheap value multiples
compared to the overall historical market trend. Resources and related Services carry higher risk due to global growth worries.
GARY Industrial picks are: large cap (AGK), mid cap (PRY and BOQ), small cap (EPW, NEC, AHE, HIL, IDR, FXL, RKN and
CCV), micro cap (HFA, CMG and ENE).
GARY Resource and related picks are: large cap (ORI, WOR and BHP), small cap (BKN, MRM and PRG).
Page 25
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Navigator – It pays to be mean
Billion dollar babies are the next big thing
Published – 16th Jul 2014
Market outlook: We maintain our bullish call from May 2013 for a multi-year bull market heading to 6500. Recovering global
macro, low interest rate environment, falling currency, better than expected commodity prices, potential stimulus from Europe/China
and better than expected corporate result season in US and Australia will help drive the markets above its recent sideways trading
band. As market optimism and risk appetite grows, we expect investors to step outside the consensus large cap market darlings to
the future market darlings.
The best risk/return size category overall are the Billion dollar babies (i.e. S&P 300 stocks with market capitalisation between
$1b to $5b) which covers the smaller end of the big caps and the bigger end of the small caps.
Size and Sector categories: The analysis aims to finds the best match in size to sector category for the current stage of the
market cycle through market cap weighted and equal weighted aggregation as well as ten year historical trends. The size
categories are big caps (S&P 100) and small caps (S&P 300 Ex 100); while sector categories are Resources, Industrials and
Financials.
Trend: Small cap fund managers have outperformed the benchmark by simply being short resources, while Index mandate funds
have had their resource exposure via the big diversified miners. Since the end of June, small cap resources have started to recover
and are now enjoying more attention on the back of improving data from China. Fund managers will be forced to pick outside the
big caps to deliver outperformance.
Preferred Materials Ex Metals & Mining: NUF, DLX, FBU, PGH and ORA.
Preferred Metals & Mining: IGO, ILU, PNA, WSA and SGM.
Preferred Services: CDD, UGL, TPI, DOW, SAI, VED, TOL and QUB.
Preferred Consumer: AGI, ALL, FLT, AAD, DMP, SGH, VRL, FXJ, SWM, PMV, AHE and SUL.
Preferred Staples: TWE and GNC.
Preferred Healthcare: ANN, GXL and SRX.
Preferred Financials: BOQ, CGF, FXL, HGG, IFL, PPT, ALZ and FDC.
Preferred Information Technology: CRZ and IRE.
Preferred Telecommunication Services: IIN, MTU, TEL and TPM.
Page 26
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Tuesday’s Retail Pick
Woolworths (WOW) – Published 30th Jul 2014
There is more to this beast…maintain Quant Buy ($44)
We maintain the Quant BUY (since July 2012) call on WOW with an upgraded Quant Target Price (QTP) of
$44.00 due to its dominant track record of delivering growth, earnings certainty, market share, private labels,
cost reduction, innovation, reward programs, discretionary retail, home hardware, processed food, financial
services, cross selling and defensive yield. We believe that WOW will continue to evolve into even more parts of
consumer retail offering gradually as the retail sector gets hit by the structural change of falling disposable income in
the next few years.
Forward PE band valuations shows that WOW is trading at fair value (i.e. below 18 PE) while pre GFC high
was above Sell band (ie: 2 standard deviations higher or forward PE above 26). Quality dominant diversified
retailer WOW has seen its share price appreciate from below $25.00 to above $38.00 in the past two years. WOW is
expected to deliver a fully franked yield of 4%, 17.3 PE, steady margins, stabilising ROE and EPS growth of 6.6% in
2015.
Consensus analysts have missed the last two year run in WOW and still remain relatively negative despite
pushing up the target price to post GFC high levels chasing share price. We see any share price pullback on the
result with Masters and macro worry as another buying opportunity.
[email protected]: 3:11:10:
33.065
MA ([email protected]): 3:11:10:
52 35.447, 12 34.6804
38
36
34
32
30
28
26
24
RSI (100.000000): 3:11:10:
14 37.1111
90
80
70
60
50
40
30
N
J
2009
2010
F
M
A
M
J
J
A
S
O
N
D
J
F
2011
M
A
M
J
J
A
S
O
N
D
J
2012
F
M
A
M
J
J
A
S
O
N
D
J
F
2013
M
A
M
J
J
A
S
O
N
D
J
F
M
A
M
J
J
A
S
O
N
2014
Page 27
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Expecting FTA's to deliver job growth when
you have limited bargaining power!!!
Minion Theory – 2015 will be positive for
corporates and negative for consumers!!!
Page 28
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
News Wrap
OVERNIGHT MARKET PERSPECTIVE
Global – Oil prices have fallen and global equity markets are mixed after news that Japan unexpectedly
slipped into recession in the third quarter renewed concerns about the world economy, but merger activity and
comment about European stimulus capped declines. The Japanese yen steadied against the US dollar,
pulling back from a fresh seven-year low, as the news set the stage for Prime Minister Shinzo Abe to delay an
unpopular sales tax hike and call an election two years before he has to. Japan’s economy shrank an
annualised 1.6 per cent, after a 7.3 per cent drop in the second quarter, when a sales tax hike hit consumer
spending. Analysts polled by Reuters had expected 2.1 per cent growth in the third quarter, but consumption
and exports remained weak, saddling companies with big inventories. Tokyo’s Nikkei index lost 3 per cent, its
biggest one-day drop since August, and Wall Street was mixed in choppy trade. Brent oil initially fell more
than $US1 toward $US78 a barrel, as Japan is the world’s No. 4 crude importer. “Concern about deceleration
of economic growth particularly in Asia” weighed on markets, said Chad Morganlander, portfolio manager at
Stifel, Nicolaus & Co in Florham Park, New Jersey. AFR
US – With just over an hour of trade to go, the Dow Jones was up by 20 points or 0.1%. The S&P 500 index
was up by 0.1% but the Nasdaq was down by 12 points or 0.3%. Halliburton said it will buy Baker Hughes for
about $US35 billion in cash and stock, creating an oilfield services behemoth to take on Schlumberger as
customers curb spending on falling oil prices. Allergan has accepted a $US66 billion takeover bid from
Actavis, closing the door on a hostile offer from activist investor William Ackman and Valeant Pharmaceuticals
International. Factory production increased 0.2 per cent last month, the Federal Reserve said. September’s
increase in factory output was revised down to 0.2 per cent from 0.5 per cent. Motor vehicle output fell 1.2 per
cent in October. That followed September’s 1.9 per cent drop and was the third consecutive month of
declines. Economists trimmed their forecasts for US economic growth in the fourth quarter but slightly raised
their expectations for the balance of 2014 on an improved outlook for the labour market. Analysts see the
economy growing at an annual rate of 2.7 per cent in the current quarter, according to the Philadelphia
Federal Reserve’s quarterly survey of 42 forecasters. In last quarter’s survey, growth for this quarter was
forecast at 3.1 per cent. AFR
Europe – The European Central Bank’s stimulus is gaining traction, but should it turn out that its current
efforts are not sufficient to accelerate the euro zone recovery, the ECB is ready to do more, ECB president
Mario Draghi said. Draghi said euro zone growth momentum had weakened over the summer, but the ECB’s
policy steps and euro zone countries’ reforms should still lead to a moderate recovery next year and in 2016.
European shares reclaimed early losses to close higher on Monday. London’s FTSE 100 index gained 0.26
per cent to 6671.97 points. In Paris the CAC 40 rose 0.56 per cent to 4226.10 points, while in Frankfurt the
DAX 30 climbed 0.58 per cent to 9306.35. Madrid jumped 1.59 per cent and Milan added 1.33 per cent. The
Bank of England said senior bankers’ salaries may in future be at risk if they or their staff break rules, firing a
warning shot to the City after the latest dealing room scandal cost six banks $US4.3 billion in fines. AFR
Asia – Japan’s economy unexpectedly slipped into recession in the third quarter, setting the stage for Prime
Minister Shinzo Abe to delay an unpopular sales tax hike and call a snap election just two years after he took
office. Gross domestic product fell at an annualised 1.6 percent pace in the July-September period, after it
plunged 7.3 percent in the second quarter following a rise in the national sales tax. The economy had been
forecast to rebound by 2.1 percent in the third quarter. The Nikkei 225 index at the Tokyo Stock Exchange,
which closed at its highest level in more than seven years on Friday, dropped 517.03 points, or 2.96 per cent,
to finish at 16,973.80, while the broader Topix index of all first-section shares fell 2.45 per cent, or 34.28
points, tot 1366.13. “The numbers really disappointed,” said Investrust chief executive Hiroyuki Fukunaga.
“The selling appears to be a mix of utter frustration at the government’s handling of the economy and moves
by hedge funds employing a �sell-on-the-news’ strategy that may have been in place regardless of the GDP
data.” AFR
China – Hong Kong stocks fell 1.21 per cent, in line with a regional sell-off, as mainlanders decided against
taking advantage of the launch of a new cross-exchange trading link-up with Shanghai. The Hang Seng Index
shed 290.30 points to 23,797.08 on turnover of HK$83.02 billion ($11.59 billion). The long-anticipated
Shanghai-Hong Kong Stock Connect allows international investors to trade selected stocks on Shanghai’s
tightly restricted exchange and let mainland investors buy shares in Hong Kong. In mainland China the
benchmark Shanghai Composite Index closed down 0.19 per cent, or 4.81 points, to 2474.01 on turnover of
199.3 billion yuan ($35.16 billion). The Shenzhen Composite Index, which tracks stocks on China’s second
exchange, gained 0.99 per cent, or 13.11 points, to 1335.73 on turnover of 150.8 billion yuan. AFR
Page 29
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Currency – The Australian dollar is trading at US87.11¢, compared with Monday’s local close of US87.86¢.
The Japanese yen steadied against the US dollar, pulling back from a fresh seven-year low, as the news set
the stage for Prime Minister Shinzo Abe to delay an unpopular sales tax hike and call an election two years
before he has to. The Australian dollar has witnessed some surprising resilience over the past week with it
posting modest gains against most of its peers, says David de Ferranti, market analyst at FXCM. “The driving
force behind the small advance has likely been a general drive to yield. A commitment from G20 leaders over
the weekend to boost global economic growth is a positive for general risk appetite, and has lifted the Aussie
and Kiwi at the outset of trading this week. Meanwhile, regional economic data has once again proved
uneventful for the commodity currencies. This week brings the release of the RBA’s November Meeting
Minutes and a speech by governor Glenn Stevens. The November decision itself proved a non-event for the
AUD and given the fairly well broadcast views from the Board, the Minutes and Stevens’ address are unlikely
to deliver any revelations for traders, he said. Similarly, upcoming Chinese data may see another muted
response from the currency, since it would likely take a significant deterioration over an extended period to
generate a response from RBA officials. This could leave the AUD to continue to seek guidance from sources
outside of domestic monetary policy expectations. AFR
Commodity – Iron ore was down 0.5 per cent at $US75.08 a tonne. Copper and other base metals dipped on
news that Japan had slipped into recession, but nickel, aluminium and lead recovered and closed higher,
supported by forecasts of developing shortages. “On a fundamental basis, we continue to think that metals
with deficits will still be able to outperform,” said Nicholas Snowdon, metals analyst at Standard Chartered in
London. “But we remain in a period of heightened macro uncertainty, which is constraining the potential
upside to base metals prices.” Three-month LME copper slipped 0.01 per cent to end at $US6704 a tonne
after earlier climbing to its highest since November 4 at $US6734 a tonne. In the previous session it gained
0.8 per cent. Gold futures for December delivery fell 0.2 percent to settle at $1,183.50 an ounce at 1:37 p.m.
on the Comex in New York. Earlier, the price reached $1,193.60, the highest for a most-active contract since
October 31. “The next technical hurdle for gold will be its 50-day moving average, which has been acting as
its stubborn resistance in the last few months,” said Adam Sarhan, CEO of Sarhan Capital in New York. The
metal jumped 2.3 per cent on Friday, moving above the technical level of $US1180. Brent crude has fallen
after Japan, the world’s fourth-biggest crude importer, slipped into recession and as Saudi Arabia reiterated
the oil price should be left to supply and demand. Brent crude was down 73 cents to $US78.68 a barrel at
1455 GMT, after dipping as low as $US77.94 earlier in the session. The contract for January delivery had
closed $US1.92 higher on Friday. Top Russian oil producer Rosneft’s CEO Igor Sechin will fly to Vienna on
November 25, just two days before the Organisation of the Petroleum Exporting Countries meets in the city to
debate the plunge in oil prices. The surprise announcement from the state-backed firm raised speculation that
Sechin, a close ally of President Vladimir Putin, will discuss coordinating with OPEC to try stem the near 30
per cent drop in oil prices since June. Small thermal coal miners in Australia could be forced to shut after
China insisted its shock new tariffs on imports of the commodity remain for the next two years. AFR
Debt Market – Pacific Investment Management Co is favouring three- to five-year bonds in Australia, while
Mizuho Asset Management Co. shifts from longer maturities it says have gained too much. Bonds due in 10
years or more have returned 14 per cent this year, compared with a 6.3 per cent advance for the broad
market, the Bloomberg AusBond Composite indexes show. The rally cut the yield premium on 10-year
securities over two-year debt to 71 basis points, down from 158 at the end of last year. In the US, investors
get 179 basis points of extra yield for holding 10- year Treasuries instead of twos. “The relative attraction of
the longer end of the curve has diminished,” said Yusuke Ito, a senior fund manager in Tokyo at Mizuho
Asset, which oversees the equivalent of $US34.6 billion. “The spread has halved. We have been shifting to
the middle” of the maturity spectrum, he said. National Australia Bank recommends securities due in three
years and less. AllianceBernstein in its European Perspectives report says that a growing number of
forecasters do not think monetary policy will be loose enough over the next few years to return inflation to
target. Viewed this way, the longer the ECB procrastinates and focuses its efforts on inefficient ways of
expanding its balance sheet, the greater the risk that inflation expectations could slip further. “The best way to
address this risk would, of course, be for the ECB to signal a more aggressive increase in its balance sheet.
And the only way it can achieve this, in our view, is via sovereign-bond purchases which we continue to
expect early in the new year.” AFR
MACRO PERSPECTIVE
The following stocks will trade ex-dividend today – None. AFR
AGM – Valence Industries Limited (VXL), iiNet Limited (IIN), Mermaid Marine Australia (MRM), Gage Roads
Brewing Co (GRB). AFR
Property Market – The influx of Chinese money into the real estate market has given Australian buyers
access to properties that otherwise would not have been developed, says Christopher Carolan, NSW general
Page 30
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
manager of developer Grocon. In an interview with The Australian Financial Review, Mr Carolan said the free
trade deal would accelerate the flow of Chinese investment funds into the local property market. “It’s a supply
and demand scenario and part of that scenario is land availability. There’s a shortage of housing on the
eastern seaboard and that shortage is only going to free up on the basis that land is made available,” he said.
“That land availability relates to investment. And what we’re seeing is that Chinese investors have return
expectations that are lower than Australian investors. “This means that the paradigm on land price changes,
because the return expectations are lower, which means that land prices go up.” Mr Carolan said: “What we’re
seeing for major sites, for example, in Sydney, is that the major bidders are almost exclusively Chinese.” He
added: “Some sites that have been locked up for many years have now become available to the market
because of the different expectations on investment returns. And that’s been a good thing. There are a
number of sites that wouldn’t have been available to Australian buyers If it wasn’t for the Chinese investment.”
AFR
ECB – The European Central Bank's stimulus is gaining traction, but should it turn out that its current efforts
are not sufficient to accelerate the euro zone recovery, the ECB is ready to do more, ECB president Mario
Draghi said. Draghi said on Monday euro zone growth momentum had weakened over the summer, but the
ECB's policy steps and euro zone countries' reforms should still lead to a moderate recovery next year and in
2016. "We see early indications that our credit easing package is delivering tangible benefits," Draghi told
lawmakers in the European Parliament, adding that more time was needed for the latest measures to unfold.
The ECB is pumping more money into the banking system to unblock lending to households and companies
by offering banks new long-term loans and by buying securitised private debt off their balance sheets. Draghi
said the "credit trough seems to be behind us". ECB chief economist Peter Praet made similar comments
earlier on Monday in London, saying there were faint signs that euro zone credit dynamics had reached a
turning point. But the overall picture remains bleak. AFR
China FTA and Foreign Labour – Chinese companies will be able to bring skilled workers to Australia to
plug labour shortages on big infrastructure projects under the new trade deal. The deal, released by the
Abbott government on Monday, says Chinese-owned companies will be able to “negotiate similarly to
Australian business, increased labour flexibilities for specific projects”. The arrangements will apply to projects
valued above $150 million under the deal negotiated between the two countries. Projects will involve the
employment of foreign workers on 457 work visas. Firms will be required to conduct market testing to ensure
there are genuine skill shortages. Chinese workers are to be paid Australian wages and conditions. Trade
Minister Andrew Robb has been at pains to insist any concessions on labour arrangements in the China deal
will not trigger a flood of cheap Chinese workers into Australia. However, unions on Monday warned the China
deal could be a “fatal blow” to the local labour market. ACTU president Ged Kearney said the effect on
Australian jobs would be “disastrous” if the agreement allowed “Chinese contractors on Australian projects to
nominate Chinese workers for visas without having to advertise for jobs locally”. Maritime Union of Australia
WA branch secretary Christy Cain hit out at the visa concession and described the measure as “an absolute
disgrace”. AFR
Energy Prices – Top Russian oil producer Rosneft's chief Igor Sechin will fly to Vienna on November 25, just
two days before the Organisation of the Petroleum Exporting Countries meets in the city to debate the plunge
in oil prices. The surprise announcement from the state-backed firm raised speculation that Sechin, a close
ally of President Vladimir Putin, will discuss coordinating with OPEC to try stem the near 30 per cent drop in
oil prices since June. Venezuela said on Monday its Foreign Minister Rafael Ramirez and Russian Energy
Minister Alexander Novak had met in Moscow and discussed "the need to coordinate actions in defence" of
prices in the oil market. But Russia, the largest oil exporter outside OPEC, has so far made no statement
about joining any possible production cut, even as the price drop threatens to tip its sanction-hit economy into
recession. Previous overtures between the producer group and Russia have failed to produce results. Oil's
drop below $US80 a barrel has raised the focus on the OPEC meeting, with traders billing it as the most
pivotal since the 2008 financial crisis. Rosneft said the Vienna oil conference was initially scheduled to take
place in Venezuela on November 21 but was moved "due to the initiative of the Venezuela side". Still, traders
are not counting on any quick action, within OPEC or by other producers. Brent crude fell 23 cents a barrel to
$US79.18 by 1934 GMT on Monday, near four year lows hit last week. AFR
STOCK PERSPECTIVE
Pacific Brands – Two months after selling out of electronics chain Dick Smith following a $35 million profit
turnaround, Phil Cave’s Anchorage Capital Partners is closing in on its next target, the iconic Volley and
Grosby shoe brands owned by Pacific Brands. Socks and jocks maker Pacific Brands confirmed a report in
Street Talk on Monday that it is close to finalising a deal to sell its Brand Collective business, which owns
Volley and Grosby shoes and holds licences for Hush Puppies and Clarks and clothing brands Superdry and
Mossimo. “The company confirms that it is in discussions regarding a potential sale of its Brand Collective
business,” Pacific Brands said. “However, a transaction has not been agreed.” It is understood Anchorage, a
Page 31
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
private equity firm that focuses on turnarounds and special situations, is close to buying the entire Brand
Collective division and hopes to restore the ailing footwear and apparel brands to health, in the same way it
did at Dick Smith. Anchorage bought Dick Smith from Woolworths in 2012 for $94 million and floated it 15
months later, making a $264 million profit. Anchorage sold its remaining 20 per cent stake in September for
$105 million or $2.22 a share – 2¢ above Dick Smith's issue price – taking its total profit to $370 million. Under
Anchorage’s control, Dick Smith’s earnings rose three-fold as chief executive Nick Abboud – lured by
Anchorage from Myer – sold off $100 million of surplus stock, slashed head office and supply chain costs,
established a direct sourcing office in Hong Kong, and negotiated better deals with suppliers on $1.3 billion of
sales. AFR
AMP – AMP is shutting its troubled Genesys Wealth Advisers dealer group as it attempts to trim problematic
divisions and improve the profitability of its wealth business. The wealth management giant, which controls
Australia’s biggest financial planning work force, completed a strategic review of Genesys which began earlier
this year and said it would “rationalise the business”. The advice business is expected to close up shop in six
months. “Our priority now is meeting with Genesys firms to discuss their options and support their
decisions,” Genesys managing director Tim Steele said in a statement. “For firms who opt to stay with AMP,
our intention is to minimise disruption to their business, for the benefit of both advisers and their clients,” he
said. Industry sources say Genesys, which has more than 200 advisers across 92 firms around the country,
has been facing problems within the business due to disputes on product restrictions, among other problems.
AFR
TEN – Free-to-air and pay TV could do �interesting things’, Foxtel chief executive Richard Freudenstein says,
as the local pay TV monopoly weighs up a joint bid for Ten Network with Discovery Communications. But Mr
Freudenstein said anti-siphoning laws, which give free-to-air broadcasters a stranglehold over big sport
events, were unlikely to change if the Foxtel/Discovery bid is successful. He was speaking for the first time
about why the local pay TV monopoly is considering a joint bid for Ten Network with Discovery
Communications. Foxtel and Discovery – the $US22 billion ($25.12 billion) entertainment company behind the
Discovery Channel – met with Ten and its advisor Citi last week. “I really can’t comment too much on what we
may or may not be doing with Ten, only to say that if you look at the industry here, free-to-air is still a good
business,” Mr Freudenstein said at the Screen Forever conference in Melbourne. “Free-to-air and subscription
could do things in partnership that could be quite interesting.” Mr Freudenstein said the world’s big cable TV
companies were needing to find new “opportunities” to monetise their content, which is expensive to produce,
and free-to-air was part of that strategy. “A lot of the big media companies have a range of subscription and
free assets. AFR
AGL Energy – AGK has named Andrew Vesey, the chief operating officer of US utility AES Corporation as its
new chief executive, replacing Michael Fraser who advised in May he would step down in 2015. The surprise
appointment of the former Ernst & Young partner follows a six-month global search process that also
considered internal candidates. The New York-educated businessman has some Australian connections,
being a former chief executive of Melbourne network owner Citipower. AGL chairman Jeremy Maycock said
he was “very well credentialled” to manage AGL’s diverse portfolio of assets and vertically integrated
businesses, which has been expanded this year with the $1.5 billion takeover of NSW power generator
Macquarie Generation. Mr Maycock said Mr Vesey “brings a strong understanding of generation technologies
and operational excellence programs” across a variety of types of generation and “also has experience in
research, development and commercialisation of new technologies that are likely to shape the future of
electricity markets”. AFR
Medibank Private – The federal government has confirmed demand by retail shareholders for the $4.3
billion-plus Medibank Private float ballooned to more than $4.8 billion, as investors await pricing, stock
allocation and next week’s sharemarket debut. The retail offer, open to the general public, policyholders and
employees, closed on Friday. It drew “significant interest”, Finance Minister Mathias Cormann said in a
statement, noting that the processing of retail applications had yet to be completed. The estimated demand is
a big number but is eclipsed by demand from stockbrokers on behalf of clients at $12 billion. The broker firm
offer was scaled back to $1.5 billion. The composition of the Medibank register is, however, still unclear, with
the institutional bookbuild kicking off on Tuesday. “No decisions will be made on the overall split of share
allocations between the retail and institutional offers, nor between domestic and offshore institutions, until the
share offer has been completed,” Mr Cormann said. The government’s joint lead managers Deutsche Bank,
Goldman Sachs and Macquarie Capital will open the institutional books on Tuesday, before closing the ledger
at noon on Thursday. The health insurer’s shares are due to start trading on the local bourse on November
25, the final price and allocation to be determined in the next week. The shares were offered in a range of
$1.55 to $2 apiece, meaning the federal government would raise between $4.3 billion and $5.5 billion. The
strong demand coupled with the government – via its advisers – urging fund managers to bid for stock early
and high, has intensified pricing pressure. Offshore investors are a top priority too. “Pre-listing shadow
markets were already trading Medibank shares at $2.15 last week,” Citigroup told clients on Monday. Portfolio
Page 32
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
manager at Eley Griffiths Group Ben Griffiths said: “There hasn’t been as much hype around an IPO [initial
public offering] since the 2003 float of Promina. AFR
Perpetual – Perpetual chief executive Geoff Lloyd says the fund manager is ramping up global equities
capabilities in order to capitalise on the free trade agreement with China and the Asia Region Funds Passport,
which will liberalise investment management in the region. Mr Lloyd confirmed the launch of a new
international equities strategy to target Australian investors wanting exposure to overseas shares at
Perpetual’s full-year results in August. In an interview on Monday, he said Perpetual also wants to distribute
more global equities options to institutional investors in Asia, along with its suite of Australian products, which
are popular with Asian investors chasing yield. According to the new 2014 Australian Investment Managers
Cross-Border Flows Report, prepared by Perpetual and the Financial Services Council, total inflows to
Australian managed investment trusts from overseas doubled from $20.3 billion to $40.4 billion over the past
four years. More of those flows are invested in Australian managed global share funds (20 per cent) than
domestic share funds (17.5 per cent). “We have looked at our capability over the past three years to incubate
global [funds],” Mr Lloyd said. “Although our first priority is Australia, we have an eye to distribution globally,
and this report is very encouraging about that new product for us over the medium and long term as we seek
to distribute to offshore.” In 2013, one-third of the inflow of fund investment to Australia came from Japan,
where Mr Lloyd said “there is thirst for yield, which has brought a lot more attention to Australian equities”.
Following its takeover of The Trust Company, Mr Lloyd said Perpetual was servicing 15 new trustees of
managed investment trusts over the past 12 months, and asset allocation into property and infrastructure was
popular. AFR
Hastings Funds Management – Hastings Funds Management will have extra firepower for infrastructure
investments after signing a strategic partnership agreement with the investment arm of China Merchants
Group that will target deals up to $5 billion. Hastings Funds chief executive Andrew Day said Australia’s freetrade agreement with China had encouraged the funds group to extend a previous partnership with China
Merchants’ investment development company beyond a “one-deal relationship”. Hong Kong-based
conglomerate China Merchants made its first infrastructure investment in Australia in May when it teamed up
with Hastings to buy the Port of Newcastle in a $1.75 billion deal. “The free-trade agreement opens the door
for future investment in Chinese infrastructure,” Mr Day told The Australian Financial Review. “We have
investors in Australia and around the world who would like exposure to Chinese investments. In the future,
that’s the sort of thing we’d expect to do with China Merchants in China where they have known capability and
can help us in the same way that we can help them in Australia.” AFR
Leighton Holdings – China Communications Construction Co’s talks with Leighton Holdings over the
potential purchase of John Holland may pick up steam now the free-trade agreement with China has been
signed. The agreement allows for “increased labour flexibilities” for Chinese-owned companies undertaking
large infrastructure development projects above $150 million. If China Communications, which has seen off
rival bidders ATEC Rail Group and Samsung, does buy John Holland, it will be able to bring in Chinese
workers for its construction projects. Chinese workers will have to be paid Australian wages, and meet other
requirements of 457 visas, so will not necessarily be cheaper. But it does give China Communications the
option of choosing which workers it wants on its projects, and potentially avoiding some of the more tricky
negotiations with Australian building unions. AFR
SOURCE – AUSTRALIAN FINANCIAL REVIEW (www.afr.com), THE AUSTRALIAN (www.theaustralian.com.au), THE SYDNEY
MORNING HERALD (www.smh.com.au)
Page 33
Aussie Afternoon Institutional Market Wrap
18 Nov 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
[email protected] – 612 9250 8947
Weather forecast around Australia
Sydney looks the best spot!!!
Source – www.smh.com.au
Page 34
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Email [email protected]
Perth Office
Address Level 10, 191 St Georges Terrace
Perth WA 6000 Australia
Postal PO Box 7662, Cloisters Square
Perth, WA 6850 Australia
Phone +61 8 6141 9450
Facsimile +61 8 6141 9499
Email [email protected]
Sydney Office
Address Level 18, 1 Alfred Street
Sydney, NSW 2000 Australia
Postal PO Box R1797
Royal Exchange, NSW 1225 Australia
Phone +61 2 9250 8900
Facsimile +61 2 9247 4092
Email [email protected]
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