Ords Monthly
Ord Minnett Research August 2015
Reporting Season Update
Mixed messages
To date, reporting season has been patchy. Companies
broadcasting good news stories include Amalgamated
Holdings, Magellan, Medibank Private, Suncorp, Tabcorp
and Wesfarmers.
Companies sending a weaker message include Ansell,
Computershare, Crown, Origin Energy, Seek, Seven West
Media and most of the mining services sector.
On balance, profit expectations appear to have slipped,
thereby contributing to the market pullback. Admittedly,
background events have been unhelpful; major banks have
announced large capital raisings to satisfy regulatory
requirements for more prudential capital; concerns about
the implications of China’s currency depreciation and stock
market volatility; all while the prospect of the US Federal
Reserve raising its cash rate looms.
This latest bout of volatility supports the notion of
portfolio diversification as a means to reduce the impact
of an asset class falling, i.e. an allocation across all asset
classes – domestic equities, international equities,
interest rate securities, property and cash – in line with
an appropriate risk-based assessment.
In principle, a weaker renminbi is unfavourable for
commodity-linked assets and economies linked to China
as commodity imports become more expensive and
demand softens. Recent disappointing activity data from
China exacerbates this position, which helps explain the
weakness in resource sectors. We remain wary of
resource stocks, as the longer this commodities rout
continues the longer-term the effects it creates,
especially for companies with a lack of resource
diversification and/or elevated gearing.
Profit expectations have slipped
15
10
Change in EPS (%)
Among Australian stocks, we retain a preference for
companies with sustainable profit and dividend growth,
as well as those generating earnings in US dollars.
The Investment Strategy article on the following page
provides details of these stock preferences.
Further on the devaluation of the Chinese renminbi, while
the adjustment was small, it surprised global markets. This
triggered a reduction in risk exposures in portfolios, with
equities down, bond prices up and credit spreads wider.
Investment Strategy
The liberalisation of the currency’s tightly managed
trading band is ostensibly aimed at satisfying the
International Monetary Fund’s requirements for the
renminbi’s inclusion in its Special Drawing Rights,
the IMF’s unit of account. Inclusion would signal the
renminbi’s emerging role as a reserve currency; less
about prestige, this would support centralist reforms
aimed at reducing economic distortions.
FY15
FY16
5
0
-5
Aug-13
Apr-14
2
Goodman Group
Logistics on a global scale
Transurban4
Coca-Cola Amatil
Accelerating
Losing its fizz
In good health
Aug-15
Source: Datastream. Consensus forecasts through time for the ASX200
Engage your core
CSL Limited Dec-14
Weekly
5
ANZ Banking Group
6
7
8
A capital idea 2
Ord Minnett
Investment Strategy
Engage your core
Reporting season provides a good opportunity to review your portfolio
Blue-chip companies often represent core holdings
Our Australian core equities portfolio is a good starting point for investment ideas
The reporting season provides a good opportunity to
revisit a stock portfolio as companies confirm if they
remain on track to generate the returns you expect or if
you should consider other opportunities. Of course, each
investor’s idea of an appropriate return differs according
to factors such as income requirements, desire for
long-term capital growth and their aversion to volatility.
Ord Minnett manages several investment portfolios,
including a core Australian equities portfolio. The portfolio
provides a starting point to formulate and maintain a
portfolio of blue-chip Australian companies on a regular and
rigorous basis. It combines Ord Minnett’s strategic thinking
behind sector preferences (top-down) and our preferred
stocks in each sector (bottom-up). These stocks are chosen
on their potential to outperform over the longer term and
their ability to form a stable long-term core holding.
The benchmark we use as a reference for portfolio
construction is the ASX 50 index, which contains the
50 largest stocks trading on the ASX.
The portfolio currently holds 17 stocks. On a weighted
basis it is forecast to yield 4.7% (73% franked) in the 2016
financial year, while it’s valued on a price/earnings ratio
of 15.3 times 2016 forecast earnings.
The financials allocation is the engine that drives
a large part of the income generation for the portfolio.
Our preferred banks appear in this section: ANZ,
Commonwealth and Westpac. Recent capital raisings,
the proceeds of which are being used to bolster
prudential capital levels, have negatively impacted
bank share prices. However, with the raisings close
to completion, share prices should see some support.
Profit growth from the banks will be lacklustre though,
as credit growth remains muted. This is the main reason
we hold a weighting of 41%, slightly less than the 44%
weighting the sector has in the ASX 50 benchmark.
Other stocks that round out financials include AMP, which
should benefit from improving wealth protection markets
in Australia and New Zealand. Suncorp’s 2015 result beat
our expectations, boosted by releases in general insurance.
The general insurance division does face headwinds to
margins, but the bank and life company offer prospects
for growth, and there is scope for further capital
management. Medibank Private offers the opportunity
for improving margins as costs are removed and other
efficiencies are targeted.
We hold an overweight position in the property sector
and tilt this towards certain themes. The first is
residential construction. Lend Lease and Mirvac are
two of the largest residential property developers and
so continue to benefit from the demand in Sydney and
Melbourne. Lend Lease is also one of the country’s
largest infrastructure contractors and should continue
to participate in large infrastructure builds, especially
in eastern states. It also offers diversification away
from Australian dollar-denominated profitability.
Following its separation from Scentre Group, Westfield
continues to build a pipeline of potentially very profitable
development projects (returning more than 50% of their
cost), with a focus on premium shopping malls in
premium locations globally.
We hold an underweight position in consumer sectors
with a concern that margins for major supermarket retailers
will come under increasing pressure from offshore
competitors such as Aldi. This leads us to Tabcorp – its
2015 result showed the strength in wagering and media
activities. The company also increased its dividend
payout ratio, which signals management’s confidence
in the outlook for the company.
Industrials and other materials also have a slight
underweight position to the benchmark sector weighting.
Over coming years, packaging company Orora should
be able to achieve earnings growth through clear cost
reduction opportunities at its new manufacturing
facilities. The stock will also benefit from the weakening
Australian dollar.
Brambles is as a well-managed company focused on
the management of returnable pallets and containers
around the world. Now that Recall has been demerged,
management has been able to concentrate entirely on
expanding its operations in its targeted new regions and on
broadening its penetration into other product categories.
Holding a larger-than-benchmark weighting in healthcare
is based on the expectation that long-term growth will
be delivered as breakthroughs occur and spending is
maintained through economic cycles. We have chosen
CSL for its ability to unlock the value in its research and
development portfolio, thereby delivering further
valuation growth. Geographical and label expansions
across its product portfolio, as well as positive
momentum in its breakthrough medicines portfolio,
should contribute to strong growth in CSL’s earnings.
Dividend support for Telstra is strong, but we maintain
a slightly lower weighting as the stock trades above our
valuation. Our forecasts do incorporate a significant
fade in mobile margins and take a conservative view
of retail fixed margins in an NBN world. However,
on balance the stock tends to provide a stabilising
influence in volatile markets.
Ords Monthly
Given the backdrop of weak commodity prices, it should
be no surprise that we have a low weighting in resource
sectors – metals and mining, and oil and gas.
Among mining stocks, we maintain exposure to the larger,
diversified miners, BHP Billiton and Rio Tinto, which do
not have balance sheet pressures and operate at the lower
end of the cost curves of their respective commodities.
We are currently avoiding oil and gas producers within the
energy sector and instead focus on Caltex. The business
repositioning at the company is ongoing and is expected to
deliver significant benefits in the medium term. Share price
drivers include sourcing upside, premium diesel growth,
cost savings and the potential for capital management.
Finally, we hold a small allocation in cash for the short term
so as to act on any other opportunities that might appear
through volatile periods, such as in reporting season.
Australian Core Equities Portfolio
P/E (times)
FY16E
Div. Yield
FY16E
Franking
FY16E
AMP
15.3x
5.4%
80%
ANZ Bank
10.4x
6.5%
100%
Commonwealth Bank
13.7x
5.6%
100%
Medibank Private
19.1x
3.8%
100%
Suncorp
13.9x
6.7%
100%
Westpac Bank
12.4x
6.0%
100%
Lend Lease
12.2x
4.5%
50%
Mirvac Group
14.2x
5.4%
0%
Westfield Group
21.0x
3.5%
0%
Financials
Property
Consumer
Tabcorp
23.0x
3.9%
Brambles
17.6x
3.0%
30%
Orora
21.0x
3.5%
100%
Health Care
23.0x
1.8%
16.1x
4.8%
BHP Billiton
25.0x
6.7%
100%
Rio Tinto
12.3x
6.3%
100%
Energy
Cash
Source: Bloomberg. Weightings as at 19 August, 2015.
15.0x
3.7%
Sector Call
41%
44%
Underweight
11%
9%
Overweight
7%
8%
Underweight
8%
9%
Underweight
9%
6%
Overweight
7%
9%
Underweight
9%
10%
Underweight
3%
5%
Underweight
5%
0%
Overweight
100%
Metals & Mining
Caltex
ASX 50
Weight
0%
Utilities/Telecommunications/IT
Telstra
Sector
Weight
100%
Industrials & Other Materials
CSL
3
100%
4
Ord Minnett
Transurban
Accelerating
Sector: Transportation
Transurban share price
Recommendation: Accumulate
11
Risk rating: Medium
Share price: $9.77
2014A
2015A
2016E
Profit after tax ($m)
508
793
897
Earnings per share ($)
0.33
0.42
0.47
Price/Earnings (x)
29.3
23.5
20.8
Dividend ($)
0.35
0.40
0.45
Dividend Yield (%)
3.6
4.1
4.6
Franking (%)
20
18
20
$
Year to June
10
9
8
7
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Weekly
Source: Company report, Ord Minnett Research. Profits are on a normalised basis.
Source: IRESS
Transurban develops, operates and maintains toll roads
in Australia and the US. In Melbourne, Transurban owns
CityLink, which connects three major urban freeways
and links Melbourne's manufacturing hubs and the city
centre, port and airport.
Distribution guidance for the 2016 financial year was set at
44.5 cents per share based on expectations for “FY16 to
continue to deliver benefits for security holders from our
network positioning and operational efficiencies”. This
was also ahead of our estimate. Transurban has typically
provided conservative guidance, so we feel comfortable
moving our forecast ahead to 45.0 cents per share.
In Sydney, it owns Hills M2, Lane Cove Tunnel and Cross
City Tunnel. Its interest in the following roads are Eastern
Distributor (75.1%), M5 South West Motorway (50%) and
the Westlink M7 (50%).
In Brisbane, the firm owns 62.5% of Transurban
Queensland (formerly Queensland Motorways), which
owns and operates the Logan Motorway, the Gateway
Motorway, the CLEM7 Tunnel, the Go Between Bridge
and the Legacy Way. The remainder of Transurban
Queensland is owned by Australian Super and Abu
Dhabi sovereign wealth fund Tawreed Investments.
In the US, Transurban owns the 495 and 95 Express Lanes
in the state of Virginia, both in the Washington DC area.
Transurban and other Westlink M7 shareholders have
also commenced early work on the NorthConnex project,
which involves building a 9km tolled link between the M1
Pacific Motorway and Hills M2 in northern Sydney.
The group’s 2015 earnings (before interest, tax,
depreciation and amortisation) came in at $1,289
million. This was above our estimate thanks to higher
fees and other revenue. Margins were also up smartly
in Melbourne and Brisbane thanks to tariff growth,
operational efficiencies and the benefits of recent
capital expenditure.
We see plenty of growth options for Transurban, but
expect acquisition discipline to be maintained. The
group’s full year investor presentation highlighted the
myriad of growth options available across all its
networks. For example, it is interested in acquiring
Airportlink in Brisbane if a sale process were to occur,
noting that there would be obvious synergies stemming
from its adjacency to Queensland Motorway’s network.
However, with investor appetite for infrastructure assets
boiling over, we were pleased to hear the Airportlink
asset does not fall into a ‘must have’ category.
The group’s sustainable growth trajectory cash flow
reflects contracted toll rate increases and a relatively
stable, albeit low, growth rate in traffic volumes.
This is especially the case for the integral CBD orbital
roads in Melbourne and Sydney.
Ords Monthly
5
CSL Limited
In good health
Sector: Healthcare
CSL Limited share price
Recommendation: Accumulate
110
Risk rating: Medium
Share price: $92.00
2014A
2015A
2016E
1,428
1,827
1,866
Earnings per share (A$)
2.94
3.86
4.00
Price/Earnings (x)
31.3
23.8
23.0
Dividend (A$)
1.20
1.62
1.64
1.3
1.8
1.8
-
-
-
Profit after tax (A$m)
Dividend Yield (%)
Franking (%)
$
Year to June
100
90
80
70
Aug-14
Nov-14
Feb-15
Weekly
May-15
Aug-15
Source: Company report, Ord Minnett Research. Profits are on a normalised basis.
Source: IRESS
CSL is a biopharmaceutical company that researches,
develops, manufactures and markets products to treat
and prevent human medical conditions including
coagulation disorders, viral and bacterial diseases,
bleeding disorders and other diseases. CSL has
manufacturing operations in Australia, Germany,
Switzerland and the United States.
increase in US collection capability augurs well for
the future as CSL needs to allow time for centres to
ramp up their capability. Expectations of ongoing
growth in Hizentra, a plasma-derived therapy used
to treat patients who need replacement of antibodies,
supports this investment. This product offers the
convenience of self-administration at home and we
believe this will be a key factor that drives growth
for this product.
CSL reported FY15 net profit of US$1,434 million, up
9.7% on a constant-currency basis, silencing fears over
its ability to deliver a particularly large second-half
result to achieve guidance of 10% growth in net profit.
CSL’s guidance for 2016 slows somewhat, with 5%
constant-currency earnings growth. But this slower
growth should be temporary as the outlook for 2017
and beyond is extremely encouraging with products
such as Hizentra, rFIX, SC (Berinert) and rFVIIa all
underpinning strong growth.
The company’s $950 million on-market buyback, which
was announced in October 2014, was completed in
June with CSL buying back and cancelling around
2.2% of shares on issue. Management indicated that
the board is likely to approve another share buyback
programme, similar to the recently completed
programme. This would add further support to the
share price.
In what is an indication of the company’s growth
prospects, CSL indicated that during the 2015 financial
year it added 21 collection centres to increase its
capacity to source its own plasma. It now has a
portfolio of 119 US centres and 128 globally. A 20%
Capital expenditure is at an all-time high for CSL,
climbing to around $500 million in FY16 in order
to deliver further productive capacity. This includes
the building of fractionation capability in Kankakee
in the US state of Illinois, an albumin facility in
Broadmeadows in Victoria and a new recombinant
manufacturing facility in Lengnau in Switzerland.
We maintain that the positive investment thesis for
CSL is its ability to unlock the value in its research
and development portfolio, thereby delivering further
valuation growth. Geographical and label expansions
across its product portfolio, as well as positive
momentum in its breakthrough medicines portfolio,
should contribute strong growth to CSL’s earnings.
6
Ord Minnett
Goodman Group
Logistics on a global scale
Sector: Real Estate
Goodman Group share price
Recommendation: Hold
7.00
Risk rating: Higher
Share price: $6.29
2014A
2015A
2016E
601
653
698
Earnings per share ($)
0.35
0.37
0.39
Price/Earnings (x)
18.1
16.9
15.9
Dividend ($)
0.21
0.22
0.24
3.3
3.5
3.8
-
-
-
Profit after tax ($m)
Dividend Yield (%)
Franking (%)
$
Year to June
6.50
6.00
5.50
5.00
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Weekly
Company report, Ord Minnett Research. Profits are on a normalised basis.
Source: IRESS
Goodman Group is an integrated commercial and
industrial property group that owns, develops and
manages real estate globally including warehouses,
large-scale logistics facilities, business parks and offices.
For its portfolio management activities, Goodman sold
$1.9 billion of assets from its managed funds in 2015,
including its Coles distribution facility in Eastern Creek
for $253 million on a 5.6% yield. The group expects a
similar amount of sales in 2016, taking advantage of very
strong transactional markets to improve asset quality.
Goodman also offers a range of investment property
funds, giving investors access to specialist fund
management services, and commercial and industrial
property assets.
Goodman’s FY15 operating profit was $653.5 million,
up 8.7% on a year ago. The company guided to 6%
earnings per share growth in the current financial year,
while gearing continues to fall. We believe its outlook
remains very healthy, with strong development
margins and Sydney residential conversions
continuing to boost asset values and cash flows.
At 30 June, the group had work-in-progress of $3.1
billion, up 18.7% on the previous corresponding period.
Goodman Group has 76 active projects across 11
countries, with a forecast average yield on cost of
8.8%. We expect development will continue growing
at around 10% per annum. The company believes
work-in-progress can reach $4 billion in three years
if the current cycle continues.
Development activity is likely to accelerate in the U.S.,
Brazil and Hong Kong, slow in New Zealand, and remain
steady in Australia, China, Europe, Japan and the U.K.
Goodman’s development leasing track record is solid,
as evidenced by its $2.5 billion completions in 2015,
being 91% committed upon completion.
In addition, Goodman expects around $900 million
in proceeds from sold-but-unsettled urban renewal
projects over the next three years. The bulk of
Goodman’s balance sheet assets have some urban
renewal component and, when sold, will provide future
growth funding, potentially leaving the balance sheet
with net cash over time.
Goodman has identified 35,000 potential apartments
that could be built on 140ha of its existing owned and
managed assets in Australia. For example, it sold Euston
Business Park in Alexandria in June for $140 million to
Chinese-based Hailiang Group, equating to $225,000 per
approved apartment. This was its sixth urban renewal
sale in Australia.
In the longer term, we estimate Goodman could realise
a further $3.25 billion from selling other sites, which
could provide apartments in South Sydney, Homebush
and Macquarie Park in Sydney, and Fishermans Bend
and Clayton in Melbourne.
Ords Monthly
7
Coca-Cola Amatil
Losing its fizz
Sector: Consumer Staples
Coca-Cola Amatil share price
Recommendation: Lighten
13
Risk rating: Medium
Share price: $8.55
11
2014A
2015E
2016E
Profit after tax ($m)
372
373
375
Earnings per share ($)
0.49
0.49
0.49
Price/Earnings (x)
17.5
17.5
17.4
Dividend ($)
0.42
0.42
0.42
Dividend Yield (%)
4.9
4.9
4.9
Franking (%)
75
75
75
Source: Company report, Ord Minnett Research. Profits are on a normalised basis.
Coca-Cola Amatil manufactures and distributes carbonated
soft drinks, water, sports and energy drinks, fruit juice,
flavoured milk, coffee and packaged ready-to-eat fruit
and vegetable products. The company is the principal
Coca-Cola licensee in Australia and independently
manufactures its own soft drinks and mineral waters.
It also operates in New Zealand, Fiji, Indonesia and
Papua New Guinea.
We recently downgraded Coca-Cola Amatil to Lighten
following a review of its core Australian beverages
division. This division will generate around two-thirds
of this year’s operating profit and represents a larger
proportion of our valuation.
Significant product and channel issues exist that we
expect will weigh on earnings growth and undermine
valuation support:
Product challenges – Poor category exposure
(skewed to cola, which is in decline and losing share
in water); health concerns weighing on volumes;
customer concentration risk with a focus on a
smaller number of larger customers; increasing
competition for “share of throat”; and a water offer
that has been unable to halt market share losses.
Channel challenges – The route trade, which includes
its cooler network and field sales force, has been
central to Coca-Cola Amatil’s core competitive
advantage. But the trade is subject to consolidation,
with the number of unaligned, higher gross-margin
customers falling, and larger operators growing.
This brings into focus the risk of contract losses within
$
Year to December
9
7
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Weekly
Source: IRESS
the route trade and the risk that the margin pressure
that supermarket retailers are facing could be could
be passed onto Coca-Cola Amatil. The rationalisation
of product ranges is also a risk as retailers reduce the
number of items they stock.
Management have embarked on what appear to be
sound strategies to address some of these issues and
which should deliver $100 million in cost savings over
the next three years, However, the outlook for volumes
is such that revenue and case growth is modest and that
most of the cost savings will be need to be reinvested.
Incorporating these concerns around Australian beverages,
as well as lower estimates for its Indonesian business,
we have cut our earnings per share estimates by 3.7%,
9.6% and 16.5% in 2015, 2016 and 2017, respectively.
In the end, valuation support is lacking in the stock with
our sum-of-the-parts valuation settling at $7.89 per
share. Furthermore, the stock’s price/earnings multiple
is high for a company with a modest earnings growth
outlook. Even if the P/E multiple is adjusted to exclude
the Indonesian operations, the multiple for the stock is
not attractive, as softness in Australian beverages is the
key constraint.
ANZ Banking Group
A capital idea
Sector: Banks
The share purchase plan provides holders of ANZ
ordinary shares on the share register as at 5th August
with the opportunity to subscribe for up to $15,000
worth of ANZ shares. The pricing of ANZ shares in the
plan will be struck at the lesser of:
Recommendation: Accumulate
Risk rating: Medium
Share price: $29.63
ANZ’s third quarter trading update delivered few
surprises given the cash earnings figure of $5.4bn
was released at the time of the recent $2.5bn
institutional capital raising.
A soft domestic economy has increased provisioning
modestly from cyclical lows (consistent with trends
across the sector). However, a stabilising interest
margin (the difference between the rate at which
money is invested and lent out), healthy underlying
domestic growth and further efficiency gains sees
ANZ well positioned.
With respect to its capital position, following the
$2.5bn institutional placement, the June 2015 proforma APRA Common Equity Tier-1 ratio was 9.2%.
On the basis that $500 million is raised under the
share purchase plan, this would add a further 13 basis
points increasing the ratio to 9.3%. Importantly,
the capital raising has accommodated the known
regulatory changes and places ANZ’s capital position
within the top quartile of international peers.
the offer price under the institutional placement
($30.95); and
the volume weighted average price of ANZ
shares over the five trading days up to, and
including, the last day of the plan offer less a
2% discount. That is, five ASX trading days from
(and including) Wednesday 2nd September to
(and including) Tuesday 8th September.
Given the stock was trading below the institutional
placement price at the time of writing and that the
pricing period has yet to occur, we are unable to
provide a general recommendation about participating
in the plan. We suggest clients contact their Ord
Minnett adviser for advice suitable to their situation.
We retain an Accumulate recommendation on the
stock given the return potential from a December
2015 price target of $33.23 and a prospective
dividend yield of 6.6% (fully franked).
Adelaide
Level 5, 100 Pirie Street
Adelaide SA 5000
Tel: (08) 8203 2500
Caloundra, Sunshine Coast
79-81 Bulcock Street
Caloundra QLD 4551
Tel: (07) 5491 3100
Gold Coast
Level 7, 50 Appel Street
Surfers Paradise QLD 4217
Tel: (07) 5557 3333
Newcastle
426 King Street
Newcastle NSW 2300
Tel: (02) 4910 2400
Brisbane
Level 31, 10 Eagle Street
Brisbane QLD 4000
Tel: (07) 3214 5555
Canberra
101 Northbourne Avenue
Canberra ACT 2600
Tel: (02) 6206 1700
Mackay
45 Gordon Street
Mackay QLD 4740
Tel: (07) 4969 4888
Tamworth
Suite 3, 344–346 Peel Street
Tamworth NSW 2340
Tel: (02) 6761 3333
Buderim
Sunshine Coast
1/99 Burnett Street
Buderim QLD 4556
Tel: (07) 5430 4444
Coffs Harbour
Suite 4, 21 Park Avenue
Coffs Harbour NSW 2450
Tel: (02) 6652 7900
Melbourne
Level 23, 120 Collins Street
Melbourne VIC 3000
Tel: (03) 9608 4111
Wollongong
Level 1, 17 Flinders Street
Wollongong NSW 2500
Tel: (02) 4226 1688
Head Office
Sydney
Level 8, NAB House
255 George Street
Sydney NSW 2000
Tel: (02) 8216 6300
www.ords.com.au
International
Hong Kong
1801 Ruttonjee House
11 Duddell Street
Central, Hong Kong
Tel: +852 2912 8980
www.ords.com.hk
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