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Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
Sunset Strip
Market Snapshot at close and 30 day chart of S&P 200 at 4:20pm
XJO .A SX@AUX: 5 4 52.6
Major Global Indices
S&P/ASX 200
US - DOW
US - S&P 500
Canada
UK
Germany
France
China
Japan
Hong Kong
NZ
Last
5452.6
16817.94
1961.63
14469
6363.46
8902.61
4096.74
2319.74
15328.63
23355.65
5338.331
Daily
Change
-6.40
12.53
-2.95
-74.82
-25.27
-85.19
-32.16
29.31
-60.09
212.42
4.505
% Daily
Change
-0.12
0.07
-0.15
-0.51
-0.40
-0.95
-0.78
1.28
-0.39
0.92
0.08
Gold
1227.1
Daily
Change
0.62
US 10 Year T-Bond
US 30 Year T-Bond
2.2501
3.0291
-0.021
-0.014
-0.90
-0.47
$A/$US
$NZ/$A
STG/$A
Euro/$A
$US/YEN
$US/CAD
0.8817
0.896
1.8293
1.4407
107.87
1.1244
0.0015
-0.0006
-0.0019
-0.0019
0.0160
-0.0007
0.18
-0.06
-0.10
-0.13
0.01
-0.06
Categories
Last
% Daily
Change
0.05
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
5 140
17
18
September '14
19
22
23
24
25
26
29
30
1
2
O ctober '14
3
6
7
8
9
10
13
14
15
16
17
20
21
22
23
24
27
28
MARKET SUMMARY
Summary: Aussie market was held relatively flat by yield stocks (i.e. financials and telcos) while resources (i.e. mining and
energy) were under selling pressure. Commodity prices continue to be under pressure on rising supply and falling demand. We
continue to expect AUDUSD to move from 87 to 89 cents in the short term as global investors come back into Aussie markets
(i.e. reverse part of the September currency trade) and then gradually come down to 85 cent level as the domestic economy
deteriorates. We continue to feel that RBA is currently trying to curb asset prices (i.e. house prices, equity markets etc.) with
inflation under control, so that they can cut rates in mid-2015 to stimulate a stagnant domestic economy. More brokers are
pushing back rate rise in Australia well into 2015, but we see no rate rises till 2016. It is not hard to realise that the tidal wave of
unemployment, rising cost of living and falling living standards are going to make consumers save more and spend less.
Federation GST trap and mid-year budget update in mid-December should keep the foot on the throat of any Christmas retail
recovery. As a wise old man once said, you buy retail stocks when rates are going up….that means they are spending too
much. VET had a clanger of an update to drop 57% and close below $1…the signs were not good when it dropped from $3.40 to
$2.20 odd a few weeks ago…management better get educated on “how to deal with angry shareholders”…it could get messy.
There were short covering and selling to fund IPO’s muddling the market. Investor risk profile usually rises into Melbourne Cup
week….let’s hope that trend continues.
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. Good move today above $10 after AGM…more to come.
Market Move: Aussie market was down 0.12% with turnover was just above $4.4b.
Macro Events: Tonight – US consumer confidence, durable goods orders, Case Shiller home prices. Tomorrow – China
Westpac/MNI consumer sentiment, Bloomberg Oct China economic survey; US Federal Reserve meeting.
WHAT WE LIKE AND WHAT WE DON’T LIKE
Tuesday’s Retail Therapy Pick: Woolworths
page 26)
(WOW) – Rating: Quant Buy – Quant Price Target: $44 (Details on
Current Best Buy Ideas: AGI,
WOW (Details on page 16)
Current Best Sell Ideas:
Long/Short Ideas: Resources:
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
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)
Long BHP/ Short RIO; Banks: Long ANZ / Short WBC; Retail: Long SUL /
Short HVN; Construction: Long LLC / Short LEI; Telco: Long IIN / Short TPM (Details on page 20)
page 21 and 23)
SHIELD (Sustainable High Yield) Top 20 Picks: LARGE
CAP (WBC, CBA, NAB, ANZ, BHP); MID CAP (PPT);
SMALL CAP (NST, IMF, WSA, GDI, ALU, ASL, MFG, DSH, PTM, SKE); MICRO CAP(HFA, DDR, NCK,
CMG) (Details on page 24)
Page 1
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
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 23)
LONG TERM MARKET CALL => Bull market to 6500 in 2 years on May 2013
SHORT TERM MARKET CALL => Buy call on 17th Sep 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
Spark NZ (SPK) – Heading to $3…now 15 day MA about to go past 30 day MA…been a buy idea since mid-2013 (i.e. $1.80)
SPK.ASX@AUX:
2.8
MA (SPK.ASX@AUX):
200 2.4778, 30 2.666, 15 2.6567
2.8
2.7
2.6
2.5
2.4
2.3
2.2
2.1
2
1.9
1.8
1.7
RSI (100.000000):
12 66.9532
80
70
60
50
40
30
20
October
2012
December
January
2013
February
March
April
May
June
July
August
September
October
November
December
January
2014
February
March
April
May
June
July
August
September
October
SPORTING BITES
NRL: Australia – Four nations started with England getting home over Samoa and Australia losing to NZ. Australian team was
missing a number of players and few injuries early in the game did not help…expect them to come back hard.
RUGBY: Wallabies – The mess still continues with the northern series to start soon. Time will tell if the new coach can turn the
player power into performance power. Management did not help water down the media speculation that player power is too
strong despite below par performances.
EPL: Chelsea – Gunners and Man City are challengers while Man U is still WIP. Long season…it is all about staying in the race
till the last few rounds. Man U showing signs of recovery while Man City slipped.
CRICKET: Australia – Pakistan played perfect cricket while Australian batting was shocking for the conditions and the lack of
opposition bowling experience. They will come back to tie the series 1-1. Phil Hughes must have done something really bad to
get looked over after that batting performance.
A-LEAGUE: Melbourne Victory – Great start to the season with number of upsets….Wanderers and Roar at the bottom…no one
would have guessed that. Too early to say….but Victory remains the best performing team with experience in big games.
Wanderers have done well in game one…but the tough away game with one goal lead is not going to be easy.
Page 2
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
GLOBAL ECONOMIC EVENTS
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
(All times GMT)
07:00 Switzerland UBS consumption indicator for Sep: Prior 1.35
07:00 Germany Import prices mm for Sep: Forecast -0.10 pct -0.10 pct
07:00 Germany Import prices yy for Sep: Forecast -2.00 pct -1.90 pct
08:30 Sweden PPI mm for Sep: Prior 0.97 pct
08:30 Sweden PPI yy for Sep: Prior 2.68 pct
08:30 Sweden Retail sales mm for Sep: Forecast -0.20 pct Prior 1.90 pct
08:30 Sweden Retail sales yy for Sep: Forecast 3.20 pct Prior 4.70 pct
08:30 Sweden Riksbank rate for Oct: Forecast 0.10 pct Prior 0.25 pct
08:30 Sweden Trade balance mm for Sep: Prior -2.80 bln
09:00 Italy Business Confidence for Oct: Forecast 94.90 Prior 95.10
11:00 Ireland Retail Sales mm for Sep: Prior -2.92 pct
11:00 Ireland Retail Sales yy for Sep: Prior 6.80 pct
LOCAL VOLATILITY MEASURE AND MARKET
XVI.ASX@AUX:
13.458
MA (XVI.ASX@AUX):
52 12.5745, 12 13.681
39
36
33
30
27
24
21
18
15
12
9
XKO.ASX@AUX:
5391.5
5600
5400
5200
5000
4800
4600
4400
4200
4000
O
D
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
Page 3
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
TODAY’S BEST 20 AND WORST 20 IN S&P 300
Code
VOC
AMM
QAN
BBG
MSB
EWC
TFC
PNA
GXL
AQG
IMF
RIC
NWT
MYR
MMS
RKN
WEB
SEH
GUD
ERA
Company Name
Vocus Comms Ltd
Amcom Telecomm.
Qantas Airways
Billabong
Mesoblast Limited
Energy World Corpor.
TFS Corporation Ltd
PanAust Limited
Greencross Limited
Alacer Gold Corp.
Bentham IMF Ltd
Ridley Corporation
Newsat Limited
Myer Holdings Ltd
McMillan Shakespeare
Reckon Limited
Webjet Limited
Sino Gas Energy
G.U.D. Holdings
Energy Resources
Market Cap ($m) Price ($) Change (%)
570.13
5.90
8.46
556.77
2.25
7.66
3,294.50
1.61
7.33
648.69
0.69
5.34
1,241.75
4.06
5.18
632.97
0.38
4.11
522.05
1.66
3.43
1,069.49
1.74
3.27
967.36
8.96
3.23
186.74
2.05
3.02
338.16
2.09
2.96
261.64
0.88
2.94
110.38
0.19
2.78
1,063.03
1.87
2.75
793.09
10.50
2.64
212.96
1.95
2.63
274.72
3.55
2.60
300.63
0.20
2.56
502.25
7.25
2.40
660.10
1.31
2.35
Newsflash
N/A
N/A
N/A
N/A
N/A
N/A
Corporate Governance Statement and Appendix 4G
N/A
N/A
2014 Third Quarter Financial Statements
US Case Result
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Chairman's and Managing Director's Addresses
N/A
Code
VET
BDR
BCI
MVF
ASL
AGO
BPT
PBT
EVN
KAR
MML
VRT
OZL
BRU
SLX
TRY
NST
RRL
ARI
TGS
Company Name
Vocation Ltd
Beadell Resource Ltd
BC Iron Limited
Monash Ivf Group Ltd
Ausdrill Limited
Atlas Iron Limited
Beach Energy Limited
Prana Biotechnology
Evolution Mining Ltd
Karoon Gas Australia
Medusa Mining Ltd
Virtus Health Ltd
OZ Minerals
Buru Energy
Silex Systems
Troy Resources Ltd
Northern Star
Regis Resources
Arrium Ltd
Tiger Resources
Market Cap ($m) Price ($) Change (%)
526.70
1.00
-56.55
255.57
0.28
-14.06
253.99
1.14
-13.96
365.11
1.38
-12.66
224.84
0.66
-8.33
335.61
0.34
-6.85
1,719.18
1.24
-6.79
110.01
0.21
-6.67
471.85
0.62
-6.06
779.15
2.90
-5.84
142.34
0.65
-5.11
649.16
7.73
-4.92
1,195.67
3.75
-4.82
249.90
0.70
-4.76
107.39
0.60
-4.76
126.92
0.62
-4.62
722.55
1.17
-4.51
734.68
1.41
-4.42
998.68
0.33
-4.41
291.60
0.25
-3.92
Newsflash
Vocation announces settlement with DEECD
September 2014 Quarterly Report
BC Iron September 2014 Quarterly Activities Report
N/A
N/A
N/A
Quarterly Activities Report
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 4
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
CHECKING S&P 300 BY THE SECTOR
Energy stocks were negative with global energy outlook downgrades. The preferred picks are CTX (i.e. is becoming a much
cleaner energy retailer….target $30) and OSH (i.e. is the best energy growth story…target $11). Despite the market loving WPL,
buying a pure energy company for yield is fraught with danger in the long term. Bargain hunters will come for OSH, ORG, WPL
and STO are recent pullback. Between slowing global growth, US Shale production and OPEC production, it looks like low
energy prices are here for the short term. We have not had any energy stocks in the Quant Strategy Portfolio for a few months
on valuation and global growth risks.
Code
SEH
ERA
LNG
CTX
WHC
ROC
STO
SXY
WPL
PDN
ORG
SEA
HZN
OSH
DLS
COE
WOR
AWE
BRU
KAR
BPT
Market Cap ($m) Price ($) Change (%)
300.63
0.20
2.56
660.10
1.31
2.35
1,416.57
3.10
0.98
8,340.30
30.76
-0.42
1,569.41
1.52
-0.65
474.46
0.69
-0.72
12,700.73
12.82
-0.85
574.83
0.50
-1.00
33,080.01
39.54
-1.52
313.59
0.32
-1.54
16,074.57
14.30
-1.58
645.32
1.16
-1.70
377.57
0.29
-1.72
13,201.74
8.51
-1.85
548.46
1.17
-2.10
131.69
0.39
-2.50
3,324.44
13.25
-2.65
949.18
1.75
-3.32
249.90
0.70
-4.76
779.15
2.90
-5.84
1,719.18
1.24
-6.79
Newsflash
N/A
N/A
N/A
N/A
AGM Results
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
AWE's 2014 Sustainability Report
N/A
N/A
Quarterly Activities Report
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 $3.80.
Code
TFC
ORA
CSR
NUF
AMC
DLX
JHX
ABC
PGH
BLD
IPL
ORI
FBU
Company Name
Sino Gas Energy
Energy Resources
Liquefied Natural
Caltex Australia
Whitehaven Coal
ROC Oil Company
Santos Ltd
Senex Energy Limited
Woodside Petroleum
Paladin Energy Ltd
Origin Energy
Sundance Energy
Horizon Oil Limited
Oil Search Ltd
Drillsearch Energy
Cooper Energy Ltd
WorleyParsons Ltd
AWE Limited
Buru Energy
Karoon Gas Australia
Beach Energy Limited
Company Name
TFS Corporation Ltd
Orora Limited
CSR Limited
Nufarm Limited
Amcor Limited
Duluxgroup Limited
James Hardie Indust
Adelaide Brighton
Pact Group Hldgs Ltd
Boral Limited
Incitec Pivot
Orica Limited
Fletcher Building
Market Cap ($m) Price ($) Change (%)
522.05
1.66
3.43
1,954.83
1.65
1.85
1,705.22
3.40
0.89
1,292.76
4.93
0.82
13,901.01
11.55
0.26
2,044.08
5.33
0.00
5,365.90
11.99
-0.58
2,158.73
3.31
-0.60
1,132.28
3.82
-0.78
3,866.72
4.90
-0.81
4,799.49
2.87
-1.03
7,313.22
19.39
-1.17
5,207.06
7.48
-1.19
Newsflash
Corporate Governance Statement and Appendix 4G
Change of Director's Interest Notice
N/A
Notice of General Meeting/Proxy Form
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Mining (Ex Gold) stocks were negative. We maintain our preference in the big miners BHP and RIO for Iron Ore exposure and
have added ILU for Mineral Sands. We continue to expect more industry consolidation in the overall resources sector. We need
to see other emerging markets like India and Indonesia kick into growth gear to drive this sector to the next phase. Supply
demand dynamic and margin pressure is beginning to point to BHP/RIO buying opportunity, given the low commodity price
outlook driven by lower global growth. BHP back flipping to list NewCo in UK should help the share price in the short term. The
market is getting used to lower commodity prices with slowing China growth…don’t expect big improvements to previous highs
till global growth outlook improves dramatically.
Code
PNA
IMD
AWC
MDL
MLX
FMG
SIR
SGM
SFR
RIO
BSL
BHP
SDL
IRN
ILU
MGX
IGO
SYR
CDU
LYC
WSA
ORE
TGS
ARI
OZL
AGO
BCI
Company Name
PanAust Limited
Imdex Limited
Alumina Limited
Mineral Deposits
Metals X Limited
Fortescue Metals Grp
Sirius Resources NL
Sims Metal Mgmt Ltd
Sandfire Resources
Rio Tinto Limited
BlueScope Steel Ltd
BHP Billiton Limited
Sundance Resources
Indophil Resources
Iluka Resources
Mount Gibson Iron
Independence Group
Syrah Resources
Cudeco Limited
Lynas Corporation
Western Areas Ltd
Orocobre Limited
Tiger Resources
Arrium Ltd
OZ Minerals
Atlas Iron Limited
BC Iron Limited
Market Cap ($m) Price ($) Change (%)
1,069.49
1.74
3.27
130.80
0.61
0.83
4,630.27
1.66
0.30
146.70
1.42
0.00
356.00
0.22
0.00
10,431.22
3.35
0.00
971.82
2.83
-0.70
2,203.90
10.64
-1.21
882.48
5.60
-1.23
26,054.01
59.03
-1.27
2,857.65
5.04
-1.37
108,587.28
33.32
-1.45
175.68
0.06
-1.75
336.88
0.28
-1.79
3,123.51
7.31
-2.01
512.68
0.46
-2.13
1,028.39
4.29
-2.28
592.53
3.52
-2.49
309.58
1.28
-2.66
242.70
0.07
-2.78
976.84
4.06
-3.33
381.60
2.79
-3.46
291.60
0.25
-3.92
998.68
0.33
-4.41
1,195.67
3.75
-4.82
335.61
0.34
-6.85
253.99
1.14
-13.96
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
N/A
N/A
N/A
N/A
N/A
Annual Report to shareholders
N/A
N/A
N/A
N/A
N/A
N/A
BC Iron September 2014 Quarterly Activities Report
Page 5
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Gold stocks were negative with spot gold below support level $1240. We remain negative on gold equities with spot gold below
$1240 support level…buy signal when it recovers on US growth worry…likely again near $1200…our preference (1) GOOD –
NST (2) BAD – BDR and (3) UGLY – NCM…not a long term investment, but a technical short term trade option.
Code
AQG
IAU
KCN
NCM
PRU
RSG
SAR
OGC
SLR
RRL
NST
TRY
MML
EVN
BDR
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
Company Name
Alacer Gold Corp.
Intrepid Mines
Kingsgate Consolid.
Newcrest Mining
Perseus Mining Ltd
Resolute Mining
Saracen Mineral
OceanaGold Corp.
Silver Lake Resource
Regis Resources
Northern Star
Troy Resources Ltd
Medusa Mining Ltd
Evolution Mining Ltd
Beadell Resource Ltd
Market Cap ($m) Price ($) Change (%)
186.74
2.05
3.02
128.26
0.23
0.00
164.33
0.73
-0.68
7,511.81
9.70
-1.02
179.06
0.34
-1.47
211.59
0.33
-1.52
253.69
0.32
-1.56
708.57
2.30
-2.13
158.52
0.31
-3.17
734.68
1.41
-4.42
722.55
1.17
-4.51
126.92
0.62
-4.62
142.34
0.65
-5.11
471.85
0.62
-6.06
255.57
0.28
-14.06
Newsflash
2014 Third Quarter Financial Statements
N/A
N/A
N/A
N/A
N/A
N/A
N/A
September 2014 Quarterly Report
N/A
N/A
N/A
N/A
N/A
September 2014 Quarterly Report
Industrial stocks were negative. 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 and short covering…continues to be a trading stock. VED
looks like recovering from the selling pressure post PEP trying to offload shares…long term big fan…going to $3. Outlook for
energy related mining service stocks like WOR and MND keeps getting tougher.
Code
QAN
MMS
TPI
SAI
BKN
VED
AIA
SKE
SGF
QUB
CAB
TOL
MQA
BXB
LEI
SEK
MLD
TOX
AIO
ALQ
TCL
SPO
SYD
SVW
ASB
AZJ
CCP
TSE
UGL
NWH
CLH
DOW
MND
REC
GWA
RCR
EHL
PRG
MXI
MIN
CDD
MRM
DCG
ASL
Company Name
Qantas Airways
McMillan Shakespeare
Transpacific Indust.
SAI Global Limited
Bradken Limited
Veda Group Ltd
Auckland Internation
Skilled Group Ltd
SG Fleet Group Ltd
Qube Holdings Ltd
Cabcharge Australia
Toll Holdings Ltd
Macq Atlas Roads Grp
Brambles Limited
Leighton Holdings
Seek Limited
MACA Limited
Tox Free Solutions
Asciano Limited
Als Ltd
Transurban Group
Spotless Grp Hld Ltd
SYD Airport
Seven Group Holdings
Austal Limited
Aurizon Holdings Ltd
Credit Corp Group
Transfield Services
UGL Limited
NRW Holdings Limited
Collection House
Downer EDI Limited
Monadelphous Group
Recall Holdings Ltd
GWA Group Ltd
RCR Tomlinson
Emeco Holdings
Programmed
MaxiTRANS Industries
Mineral Resources.
Cardno Limited
Mermaid Marine
Decmil Group Limited
Ausdrill Limited
Market Cap ($m) Price ($) Change (%)
3,294.50
1.61
7.33
793.09
10.50
2.64
1,342.70
0.87
2.35
810.91
3.89
1.57
624.25
3.70
1.37
1,869.36
2.24
0.90
4,071.46
3.45
0.88
542.23
2.32
0.87
436.85
1.82
0.83
2,551.72
2.44
0.83
594.93
4.98
0.81
3,988.29
5.58
0.36
1,555.08
3.05
0.33
14,799.43
9.47
0.21
7,166.12
21.21
0.19
5,597.18
16.36
0.06
314.11
1.35
0.00
326.36
2.44
0.00
6,018.13
6.16
-0.16
2,207.77
5.53
-0.36
15,441.77
8.07
-0.37
2,064.79
1.87
-0.53
9,618.38
4.31
-0.69
2,047.50
6.76
-0.73
455.49
1.31
-0.76
9,788.76
4.54
-0.87
449.08
9.61
-0.93
978.79
1.89
-1.05
1,090.65
6.47
-1.22
200.80
0.71
-1.39
275.24
2.08
-1.42
2,063.80
4.67
-1.48
1,185.73
12.50
-1.96
1,825.66
5.71
-2.06
839.90
2.67
-2.55
380.86
2.67
-2.55
113.94
0.19
-2.63
309.68
2.54
-2.68
123.08
0.65
-3.01
1,588.05
8.21
-3.18
919.03
5.41
-3.39
702.31
1.84
-3.41
290.09
1.66
-3.49
224.84
0.66
-8.33
Newsflash
N/A
N/A
N/A
N/A
N/A
Change in substantial holding
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
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Ceasing to be a substantial holder from IFL
N/A
N/A
Page 6
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Consumer stocks were positive with improving sentiment. 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 below $41 after a solid result and acquisition…expect the stock to move up with
improving market sentiment. SWM at current levels pays over 7% fully franked yield (i.e. 10% grossed up) while you wait for
cyclical recovery. Despite the solid result from HVN, the lack of guidance shows forward risks with house price bubble worries.
Media stocks have been sold down and offer a good mix of growth and yield with cyclical recovery NEC, SWM, APN, SXL and
PRT…downgrades expected. There are 3 state elections coming soon and they will deliver media stimulus. TEN and FXJ up on
M&A chatter…but that has been going for a while since government opened up media ownership chatter….will drive more short
covering. There seems to be decent amounts of short covering given the top performers are highly shorted stocks.
Code
BBG
MYR
WEB
GUD
MTR
HVN
IVC
ALL
CTD
FXJ
TTS
SWM
TME
FLT
TAH
NEC
ARP
SKT
DSH
JBH
CWN
REA
AGI
EGP
SXL
APN
BAP
RCG
TGA
CCV
TRS
PMV
WTF
GEM
DNA
RFG
SKC
BRG
PRT
SGN
SUL
SGH
AHE
ISU
NWS
AAD
VRL
TEN
PBG
DMP
KMD
NVT
VET
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
Company Name
Market Cap ($m) Price ($) Change (%)
Billabong
648.69
0.69
5.34
Myer Holdings Ltd
1,063.03
1.87
2.75
Webjet Limited
274.72
3.55
2.60
G.U.D. Holdings
502.25
7.25
2.40
Mantra Group Ltd
578.77
2.36
1.72
Harvey Norman
3,866.83
3.70
1.65
InvoCare Limited
1,285.15
11.87
1.63
Aristocrat Leisure
4,202.25
6.77
1.50
Corp Travel Limited
788.41
8.83
1.38
Fairfax Media Ltd
1,822.77
0.79
1.29
Tatts Group Ltd
4,754.06
3.33
1.22
Seven West Media Ltd
1,658.61
1.68
1.20
Trade Me Group
1,357.44
3.46
1.17
Flight Centre Travel
4,239.75
42.54
1.05
TABCORP Holdings Ltd
3,054.95
4.03
1.00
Nine Entertainment
1,889.99
2.03
1.00
ARB Corporation
938.79
13.07
0.93
Sky Network
2,163.62
5.61
0.90
Dick Smith Hldgs
496.67
2.11
0.48
JB Hi-Fi Limited
1,456.50
14.77
0.34
Crown Resorts Ltd
10,357.77
14.25
0.21
REA Group
5,809.94
44.13
0.05
Ainsworth Game Tech.
986.03
3.06
0.00
Echo Entertainment
2,914.62
3.53
0.00
Sthn Cross Media
574.78
0.82
0.00
APN News & Media
787.22
0.77
0.00
Burson Group Ltd
395.88
2.42
0.00
RCG Corporation Ltd
163.56
0.62
0.00
Thorn Group Limited
373.57
2.48
0.00
Cash Converters
470.31
1.09
0.00
The Reject Shop
235.37
8.14
-0.25
Premier Investments
1,569.61
10.05
-0.30
Wotif.com Holdings
645.57
3.02
-0.33
G8 Education Limited
1,706.62
5.10
-0.39
Donaco International
431.30
0.93
-0.53
Retail Food Group
774.05
5.27
-0.57
Skycity Ent Grp Ltd
2,092.79
3.51
-0.57
Breville Group Ltd
911.97
6.97
-0.57
Prime Media Grp Ltd
311.38
0.85
-0.59
STW Communications
465.01
1.13
-0.88
Super Ret Rep Ltd
1,474.76
7.42
-0.93
Slater & Gordon
1,286.96
6.20
-0.96
Automotive Holdings
1,161.40
3.75
-1.06
Iselect Ltd
361.33
1.37
-1.08
News Corp..
407.04
17.14
-1.32
Ardent Leisure Group
1,522.17
3.41
-1.73
Village Roadshow Ltd
1,114.97
6.86
-1.86
Ten Network Holdings
631.44
0.24
-2.08
Pacific Brands
412.75
0.44
-2.22
Domino Pizza Enterpr
2,495.22
28.27
-2.38
Kathmandu Hold Ltd
553.63
2.68
-2.55
Navitas Limited
2,094.53
5.42
-2.69
Vocation Ltd
526.70
1.00
-56.55
Newsflash
N/A
N/A
N/A
Chairman's and Managing Director's Addresses
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
N/A
N/A
SKY Television Results of Annual Meeting
N/A
N/A
N/A
N/A
N/A
Queen's Wharf Brisbane Proposal lodged
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Appendix 3B
N/A
N/A
N/A
N/A
Ceasing to be a substantial holder from IFL
N/A
Change in substantial holding
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Change of Directors Interest Notice
N/A
Vocation announces settlement with DEECD
Staple stocks were positive. 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 a beast in a cage….watch this space….target $44…came back on the
result with Masters/Big W worry as expected…. good buying opportunity…. continues to divest non-core to release more
capital. WES is a cashed up beast with government connections…going places. Despite all the problems and new management
restructure plans to clear the deck; CCL at mid $8 is beginning to look a decent turnaround story…but not one without
risks…management in US trying to restructure the business model…cost cutting and new products on the way.
Code
RIC
SHV
AHY
TWE
WOW
GNC
BGA
GFF
WES
AAC
CCL
MTS
TGR
Company Name
Ridley Corporation
Select Harvests
Asaleo Care Limited
Treasury Wine Estate
Woolworths Limited
GrainCorp Limited
Bega Cheese Ltd
Goodman Fielder.
Wesfarmers Limited
Australian Agricult.
Coca-Cola Amatil
Metcash Limited
Tassal Group Limited
Market Cap ($m) Price ($) Change (%)
261.64
0.88
2.94
439.83
6.25
0.81
1,200.90
2.00
0.50
2,989.29
4.61
0.44
44,445.15
35.29
0.28
1,997.91
8.73
0.00
782.85
5.13
0.00
1,251.56
0.64
0.00
49,229.42
43.02
-0.09
772.09
1.44
-0.69
6,627.96
8.61
-0.81
2,475.07
2.71
-1.09
544.99
3.66
-1.35
Newsflash
N/A
N/A
N/A
N/A
N/A
N/A
2014 Annual General Meeting Voting Outcome
N/A
N/A
N/A
N/A
N/A
N/A
Page 7
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Healthcare stocks were positive. 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 $60. BNO has delivered the
big deal and expect this to continue to recover back to 70-80 cent range with potential new deals (Disclaimer – I own BNO
shares). Falling currency brings interest back to this sector…RHC, CSL, RMD, ANN and COH. There may be some selling
pressure to fund Medibank Private IPO. Big fans of SRX…upside as front line treatment could be multiples of current share
price…buy on any pullback…now hitting all time high. Biotech sector has been erratic with retail punters pulling money out for
Medibank IPO after reality check from ACL’s 80+% drop on trial result update. GXL is also now back in value territory.
Code
MSB
GXL
SRX
CSL
PRY
SIP
COH
ANN
RHC
RMD
CAJ
JHC
SHL
MYX
API
SPL
BNO
ACR
VRT
PBT
MVF
Company Name
Mesoblast Limited
Greencross Limited
Sirtex Medical
CSL Limited
Primary Health Care
Sigma Pharmaceutical
Cochlear Limited
Ansell Limited
Ramsay Health Care
ResMed Inc.
Capitol Health
Japara Healthcare Lt
Sonic Healthcare
Mayne Pharma Ltd
Australian Pharm.
Starpharma Holdings
Bionomics Limited
Acrux Limited
Virtus Health Ltd
Prana Biotechnology
Monash Ivf Group Ltd
Market Cap ($m) Price ($) Change (%)
1,241.75
4.06
5.18
967.36
8.96
3.23
1,395.58
25.19
2.03
36,195.09
77.38
1.44
2,299.47
4.53
0.89
864.31
0.79
0.64
4,138.43
72.72
0.30
3,004.05
19.67
0.25
10,607.24
52.61
0.23
8,207.82
5.85
0.00
276.17
0.64
0.00
652.36
2.48
0.00
7,461.79
18.57
-0.16
443.66
0.75
-0.66
378.29
0.76
-1.94
200.80
0.63
-2.34
231.64
0.54
-2.70
188.17
1.10
-3.10
649.16
7.73
-4.92
110.01
0.21
-6.67
365.11
1.38
-12.66
Newsflash
N/A
N/A
Results of Meeting
N/A
Change in substantial holding
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Bank stocks were positive. We maintain our preference in ANZ and NAB as they offer best global exposure out of the big four
and the least likely to be affected by the inquiry. Falling currency, RBA on property price bubble, Financial Sector Inquiry and
Iron Ore worries continue to weigh on the sector…..but value emerging now with yield support as currency stabilises. BOQ
came up on our GARY screen yesterday…continues to be a leading recovery story. Regionals should see more support with
financial sector inquiry expected to favour them.
Code
WBC
BEN
CBA
NAB
ANZ
BOQ
GMA
MOC
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
Company Name
Market Cap ($m) Price ($) Change (%)
Westpac Banking Corp
107,448.71
34.89
0.95
Bendigo and Adelaide
5,478.28
12.24
0.74
Commonwealth Bank.
129,737.96
80.19
0.21
National Aust. Bank
81,690.76
34.60
0.20
ANZ Banking Grp Ltd
91,919.75
33.41
0.19
Bank of Queensland.
4,557.25
12.50
-0.32
Genworth Mortgage
2,392.00
3.63
-1.36
Mortgage Choice Ltd
335.71
2.61
-3.69
Newsflash
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Diversified Financials / Insurance stocks were positive. We maintain our preference in MQG, HGG, PPT and BTT for the market
exposure. Another one to pay attention to is OFX…pulled back to value levels after post IPO excitements. If we see QE from
ECB, global players like MGQ, HGG and BTT will start to move fast with other global asset managers like MFG and PTM. Global
players got another free kick with government trading super rise for mining tax repeal. QBE is running on the potential of US
rates showing signs of improvement, but it still remains a science project at the best of times and you never know what is going
to come and hit it next. FXL had another good day….this stock keeps coming up on our SHIELD and GARY screens. Local asset
managers like PPT and IFL looks good after pullback….prefer them over AMP with insurance/planners mess attached despite
the good result.
Code
IMF
MFG
TRG
FSF
FXL
ASX
SUN
IAG
CVO
AMP
EQT
PTM
SDF
MQG
PPT
QBE
HGG
IFL
CGF
OFX
Company Name
Bentham IMF Ltd
Magellan Fin Grp Ltd
Treasury Group
Fonterra Share Fund
FlexiGroup Limited
ASX Limited
Suncorp Group Ltd
Insurance Australia
Cover-More Grp Ltd
AMP Limited
Equity Trustees
Platinum Asset
Steadfast Group Ltd
Macquarie Group Ltd
Perpetual Limited
QBE Insurance Group
Henderson Group
IOOF Holdings Ltd
Challenger Limited
Ozforex Group Ltd
Market Cap ($m) Price ($) Change (%)
338.16
2.09
2.96
2,144.64
13.58
1.04
234.84
9.99
0.81
665.81
5.59
0.72
1,076.50
3.56
0.56
6,859.08
35.61
0.51
18,475.59
14.43
0.49
14,471.20
6.21
0.49
686.34
2.17
0.46
16,859.11
5.71
0.18
376.14
19.50
-0.10
3,785.65
6.50
-0.31
724.83
1.44
-0.35
19,368.54
60.07
-0.38
2,141.96
45.80
-0.41
15,451.18
11.27
-0.44
2,699.81
3.60
-0.83
2,695.20
8.90
-0.89
3,868.44
6.72
-1.03
621.60
2.54
-1.93
Newsflash
US Case Result
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
Ceasing to be a substantial holder for MRM
Results of 2014 AGM
N/A
Page 8
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
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 $17….go long on the
back of the government’s road build-a-thon outlook. Market is beginning to get worried about house prices…switch options are
LLC, ABC and DLX with construction upside.
Code
GDI
INA
ANI
SCP
CQR
FDC
SGP
ARF
CMW
DXS
MGR
ABP
AJA
CHC
GOZ
BWP
IOF
FET
HPI
LLC
GMG
CWP
AOG
CFX
WFD
NSR
SCG
TIX
GPT
IDR
Market Cap ($m) Price ($) Change (%)
490.95
0.88
1.16
399.88
0.46
1.10
196.43
2.06
0.98
1,131.86
1.76
0.86
1,469.20
3.97
0.76
3,797.53
2.68
0.75
9,700.32
4.16
0.73
300.32
1.43
0.70
1,698.47
0.99
0.51
6,546.90
1.21
0.41
6,488.58
1.76
0.28
1,378.72
2.68
0.00
289.01
4.30
0.00
1,530.12
4.31
0.00
1,552.77
2.80
0.00
1,580.12
2.47
0.00
2,161.45
3.52
0.00
383.15
1.86
0.00
330.93
2.30
0.00
8,989.55
15.51
0.00
9,582.58
5.48
-0.18
548.35
6.98
-0.29
1,044.19
2.08
-0.48
6,314.24
2.06
-0.48
16,292.22
7.79
-0.64
404.26
1.38
-0.72
18,315.58
3.41
-0.87
276.59
2.24
-0.88
6,859.83
4.03
-0.98
252.50
1.99
-1.49
Newsflash
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Q1 2015 operational update
N/A
Ceasing to be a substantial holder
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Company Name
Reckon Limited
Infomedia Ltd
Technology One
Hills Ltd
IRESS Limited
CSG Limited
UXC Limited
Carsales.Com Ltd
Altium Limited
Computershare Ltd
Isentia Group Ltd
Iproperty Group Ltd
SMS Management.
Silex Systems
Market Cap ($m) Price ($) Change (%)
212.96
1.95
2.63
372.95
1.24
1.65
1,031.38
3.38
1.20
308.54
1.34
0.75
1,584.61
10.03
0.70
307.61
1.11
0.45
278.62
0.85
0.00
2,498.23
10.44
-0.19
391.70
3.02
-0.33
6,730.06
12.04
-0.50
584.00
2.90
-0.68
463.34
2.52
-1.18
283.82
3.97
-2.93
107.39
0.60
-4.76
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
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 turning the corner after over 12mth decline on earnings growth worries.
Cracker result from 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 $1.501.60 range…now $1.86…expect it to trade around $1.90 till they get regulatory risk clarified. VOC and AMM keep moving up on
M&A while NXT gets dragged along on brand by association.
Code
VOC
AMM
NWT
TPM
IIN
MTU
SPK
SGT
NXT
TLS
CNU
Company Name
GDI Property Grp
Ingenia Group
Aust Industrial REIT
Sca Property Group
Charter Hall Retail
Federation Cntres
Stockland
Arena REIT.
Cromwell Prop
Dexus Property Group
Mirvac Group
Abacus Property Grp.
Astro Jap Prop Group
Charter Hall Group
Growthpoint Property
BWP Trust
Investa Office Fund
Folkestone Edu Trust
Hotel Property
Lend Lease Group
Goodman Group
Cedar Woods Prop.
Aveo Group
CFS Retail Trust Grp
Westfield Corp
National Storage
Scentre Grp
360 Cap Indust Fund
GPT Group
Industria REIT
IT stocks were positive. We maintain our preference in CPU and CRZ while remain big fan of ALU 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 $2.55 level. CRZ is the sleeper in the online space that we see delivering 30-40% 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….now bouncing from below $10…don’t miss
this quality ride to global growth.
Code
RKN
IFM
TNE
HIL
IRE
CSV
UXC
CRZ
ALU
CPU
ISD
IPP
SMX
SLX
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
Company Name
Vocus Comms Ltd
Amcom Telecomm.
Newsat Limited
Tpg Telecom Limited
iiNet Limited
M2 Grp Ltd
Spark New Zealand
Singapore Telecomm.
Nextdc Limited
Telstra Corporation.
Chorus Limited
Market Cap ($m) Price ($) Change (%)
570.13
5.90
8.46
556.77
2.25
7.66
110.38
0.19
2.78
5,667.79
7.27
1.82
1,297.31
8.13
1.63
1,435.13
8.05
1.51
5,082.31
2.80
1.08
382.26
3.31
0.30
374.72
1.95
0.26
67,730.13
5.55
0.18
735.27
1.86
0.00
Newsflash
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Utility stocks were positive.
Code
EWC
IFN
EPW
DUE
SKI
APA
AGK
AST
Company Name
Energy World Corpor.
Infigen Energy
ERM Power Limited
Duet Group
Spark Infrastructure
APA Group
AGL Energy Limited
AusNet Services
Market Cap ($m) Price ($) Change (%)
632.97
0.38
4.11
215.01
0.29
1.79
366.06
1.54
0.99
3,226.36
2.44
0.41
2,742.09
1.86
-0.53
6,502.14
7.73
-0.64
9,196.25
13.56
-0.73
4,606.95
1.33
-1.49
Newsflash
N/A
N/A
EGO: EP 389 JV Granted PPL L 18 & L19
N/A
N/A
N/A
N/A
N/A
Page 9
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 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 of the food chain start making noise about breaking away….then German hands will be forced. 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.
Australia still holding on to the logistic issues while offering token financial support (i.e. less than 2 week spent in Iraq).
Ironically the argument is that we are prepared to act when/if it gets to Asia Pac. But basic logic would suggest that if it ever
gets to Asia, the damage will be astronomical. The death toll by Jan is expected to hit over 1 million in West Africa.
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.
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
mining industry cuts will create a vacuum for jobs and drive unemployment to 6.5% in the next 12mths. We do not see any
Page 10
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
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 87 cents (i.e. remain in 87-89 cents band) in the short
term and then track down to mid 80s. 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 remain unchanged at the current low level till 2015Q3 when RBA
is hoping to cut rates to stimulate the economy. 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
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
Market Valuations – Oct 2014 Update
Market (S&P 300) – Forward PE and PB bands below…Reduce band 5820 Fair Value band 5170…now showing value
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
8.00
20.00
15.00
7.00
10.00
6.00
5.00
0.00
5.00
-5.00
4.00
-10.00
3.00
-15.00
2.00
-20.00
Forward Dividend Yield
10Year Bond Yield
Average DY
3mth Avg Earnings Revision
Average BY
3mth Price Momentum
Market (S&P 300) – Signs of stabilising in Earnings Growth and ROE decline
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
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
Global Perspective – Oct 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
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
Macro Charts
Market (S&P 300) – Looking at the daily trading pattern, we see risk priced in with yield chase coming back
Currency (AUDUSD) – From previous band of 87-94 cents, we now expect it to remain between 87-89 cents in the short
term and then trend down to 85 cents…now moving up
Page 14
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
GOLD (Spot Gold) – Weakness in US economy helped spot gold bounce from $1200…now below $1240 support level with
better US and trending down
Bond Yield (10 year Bond) – Yield has been in decline over the past month…now moving sideways
Page 15
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 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. Potential ECB stimulus
should further help the recovery step and drive the stock to $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
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 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
FY2013
Revenue
FY2014
($mn)
FY2015
FY2016
FY2013
EBITDA
FY2014
($mn)
FY2015
FY2016
FY2013
NPAT
FY2014
($mn)
FY2015
FY2016
FY2013
EPS
FY2014
(¢)
FY2015
FY2016
FY2013
EPS Growth
FY2014
(%)
FY2015
FY2016
FY2013
DPS
FY2014
(¢)
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
AGI
3.06
322
986
4.25
42.48
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
5.0
3.9
3.7
3.2
20.6
14.4
14.4
12.9
25.6
30.6
27.3
26.9
2.3
3.5
3.8
4.2
ALL
6.77
630
4,265
6.69
1.91
BUY
823.9
889.7
1267.7
1434.7
192.0
210.0
413.1
503.9
107.6
121.1
201.6
252.3
19.5
21.2
31.8
40.2
N/A
8.9
50.0
26.4
14.8
15.8
21.0
24.0
11.1
5.2
4.0
3.6
34.8
31.9
21.3
16.8
35.2
22.5
23.1
23.8
2.2
2.3
3.1
3.5
APN
0.77
1,029
787
0.72
-3.92
HOLD
877.4
832.1
830.7
819.8
144.3
156.3
159.6
156.5
46.4
75.4
83.0
85.4
6.5
7.9
8.0
8.2
-13.8
20.7
1.3
2.5
0.0
0.0
1.2
3.2
1.1
1.4
1.3
1.2
11.7
9.7
9.6
9.3
10.9
16.0
14.5
13.3
0.0
0.0
1.6
4.2
CRZ
10.44
239
2,493
11.75
16.08
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
17.4
13.6
12.5
10.8
29.5
25.7
22.4
19.6
61.6
57.6
55.2
54.6
2.7
3.1
3.6
4.2
FLT
42.54
101
4,284
51.35
24.70
BUY
2066.2
2205.0
2370.6
2529.1
380.1
425.8
457.0
489.8
238.3
265.9
283.1
307.9
237.4
264.0
281.3
306.2
19.8
11.2
6.6
8.9
134.2
153.1
169.9
186.1
4.5
3.9
3.6
3.3
17.9
16.1
15.1
13.9
26.1
24.6
24.5
24.0
3.2
3.6
4.0
4.4
IPP
2.52
182
458
3.61
43.41
BUY
19.7
24.8
34.9
47.8
-2.3
1.9
8.8
16.3
-2.6
-0.2
7.0
12.8
-1.6
-0.1
3.8
7.1
-30.4
-93.6
-3900.0
86.8
0.0
0.0
0.0
0.0
15.4
14.0
10.9
8.1
-160.9
-2520.0
66.3
35.5
-9.3
5.0
21.0
29.2
0.0
0.0
0.0
0.0
HGG
3.60
744
2,678
4.62
33.72
BUY
916.2
956.4
1077.6
1253.9
363.2
353.7
417.7
478.6
279.2
295.5
325.4
374.0
27.0
25.2
29.5
33.6
45.6
-6.7
17.0
13.9
15.0
17.1
19.2
19.6
2.5
2.3
2.2
2.1
13.3
14.3
12.2
10.7
17.0
18.5
18.7
20.0
4.2
4.7
5.3
5.4
PRT
0.85
366
310
1.07
35.27
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
1.9
1.9
1.8
1.7
8.8
9.3
9.2
8.6
22.2
20.7
20.6
20.2
8.8
8.4
8.5
8.9
RFG
5.27
146
770
5.30
5.18
HOLD
143.0
157.2
169.2
184.7
55.1
59.7
68.3
76.0
33.6
37.4
44.0
49.5
27.6
27.2
30.9
35.3
-2.2
-1.6
13.7
14.2
19.2
21.8
24.4
27.1
2.8
2.5
2.4
2.3
19.1
19.4
17.1
14.9
16.2
13.6
14.3
15.5
3.6
4.1
4.6
5.1
SWM
1.68
999
1,679
2.08
30.48
BUY
1894.1
1850.5
1835.5
1842.2
483.9
460.9
425.9
422.2
218.0
228.1
215.3
216.7
19.9
20.5
19.0
19.3
-38.9
3.2
-7.4
1.6
10.7
11.6
11.1
11.5
0.6
0.6
0.6
0.6
8.4
8.2
8.8
8.7
7.9
7.8
7.3
7.1
6.4
6.9
6.6
6.8
SXL
0.82
705
575
1.04
35.21
HOLD
642.8
640.3
609.2
624.0
206.9
188.4
164.4
171.2
90.9
80.1
68.6
74.9
13.0
11.3
9.6
10.2
-10.8
-12.7
-15.1
6.3
8.9
7.3
6.4
6.8
0.4
0.4
0.5
0.5
6.3
7.2
8.5
8.0
5.8
5.1
5.5
5.8
10.9
9.0
7.9
8.3
SPK
2.80
1,835
5,137
2.11
-19.02
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
3.7
3.6
3.3
3.2
18.2
18.0
16.9
16.6
19.9
21.6
19.8
19.8
5.0
5.2
5.7
5.8
TLS
5.55
12,443
69,059
5.49
4.40
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
5.8
5.2
5.1
4.9
18.4
16.9
16.6
15.6
32.1
32.0
30.6
32.1
5.1
5.3
5.5
5.8
VED
2.24
842
1,886
2.49
13.88
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
2.7
2.5
2.3
N/A
27.7
24.3
21.1
N/A
10.4
10.4
11.4
N/A
0.9
2.6
2.9
WOW
35.29
1,263
44,571
35.40
4.43
HOLD
58795.1
61150.7
63638.4
66672.3
4547.3
4767.6
4979.7
5290.3
2344.7
2467.6
2621.6
2781.8
189.3
195.9
206.7
218.8
6.0
3.5
5.5
5.9
132.7
138.4
145.4
153.8
5.2
4.4
4.0
3.7
18.6
18.0
17.1
16.1
28.0
26.0
24.6
24.0
3.8
3.9
4.1
4.4
Page 17
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 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 expect JBH to get down below $15 with store rollout growth strategy hitting macro headwinds despite
positive flow effects from new Apple products.
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
(¢)
FY2015
FY2016
FY2013
EPS Growth
FY2014
(%)
FY2015
FY2016
FY2013
DPS
FY2014
(¢)
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
5.71
2,958
16,889
5.69
4.62
HOLD
1774.6
998.2
1080.9
1156.3
1051.2
1370.8
1494.9
1758.7
808.2
986.5
1081.6
1183.4
27.5
34.0
37.0
40.3
-9.5
23.6
8.8
8.9
22.6
26.1
28.5
30.3
2.2
2.1
2.0
1.9
20.8
16.8
15.4
14.2
10.1
11.9
13.7
13.9
4.0
4.6
5.0
5.3
HVN
3.70
1,062
3,931
3.52
-0.65
HOLD
2304.1
2537.9
2632.6
2705.7
370.7
385.6
460.1
493.5
188.0
207.8
244.8
264.7
17.6
19.4
23.1
25.1
5.6
10.4
19.1
8.7
9.1
11.8
15.5
16.9
1.7
1.6
1.5
1.5
21.1
19.1
16.0
14.7
8.3
8.6
9.7
10.0
2.5
3.2
4.2
4.6
JBH
LEI
MND
14.77
21.21
12.50
99
339
93
1,461
7,180
1,162
19.28
19.92
15.33
36.37
-0.97
31.37
HOLD REDUCE REDUCE
3295.6 22766.7
2582.5
3499.3 23659.7
2324.5
3622.4 23047.8
2125.8
3835.4 22739.7
2021.9
208.6
1972.1
249.9
224.8
1749.1
214.9
234.7
1757.0
195.2
248.3
1753.8
182.0
115.4
530.1
158.5
127.8
574.4
137.5
132.2
571.1
122.0
141.4
574.8
112.9
116.1
157.9
174.7
126.4
172.5
148.9
131.6
170.1
131.3
140.3
172.3
121.3
11.6
17.9
30.7
8.9
9.3
-14.8
4.1
-1.4
-11.8
6.6
1.3
-7.6
70.9
95.7
148.5
79.3
107.7
119.0
86.4
108.3
108.9
92.5
109.9
100.7
6.4
2.3
3.9
5.0
2.0
3.2
4.5
2.0
3.1
4.0
1.9
2.9
12.7
13.4
7.2
11.7
12.3
8.4
11.2
12.5
9.5
10.5
12.3
10.3
55.8
18.0
58.7
47.5
16.8
41.3
42.2
15.4
32.9
39.9
15.1
29.3
4.8
4.5
11.9
5.4
5.1
9.5
5.8
5.1
8.7
6.3
5.2
8.1
MYR
1.87
586
1,092
2.08
19.03
HOLD
3066.5
3149.6
3256.9
3341.0
307.3
262.5
256.5
263.7
131.8
101.0
97.1
103.0
22.4
17.2
16.3
17.4
-4.7
-23.2
-5.4
6.7
18.3
14.2
13.9
14.2
1.2
1.2
1.2
1.2
8.3
10.8
11.4
10.7
14.6
11.2
10.6
11.2
9.8
7.6
7.5
7.6
TRS
8.14
29
235
9.12
16.46
HOLD
621.6
705.8
770.9
817.3
43.8
40.5
46.7
50.8
19.7
15.8
18.5
21.1
73.4
54.6
64.7
73.7
-5.8
-25.5
18.5
13.9
39.5
31.2
36.2
42.2
1.9
1.8
1.8
1.7
11.1
14.9
12.6
11.0
20.3
12.3
14.3
15.2
4.9
3.8
4.4
5.2
Page 18
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 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
(¢)
FY2015
FY2016
FY2013
EPS Growth
FY2014
(%)
FY2015
FY2016
FY2013
DPS
FY2014
(¢)
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
33.41
2,757
92,099
34.42
8.54
HOLD
18288.5
19386.3
20398.6
21500.1
8959.3
9726.0
10153.7
10716.7
6411.4
7043.0
7474.5
7925.1
230.4
254.8
266.4
277.0
4.6
10.6
4.6
4.0
159.0
177.0
184.5
192.7
2.1
1.9
1.8
1.7
14.5
13.1
12.5
12.1
15.5
15.4
15.3
15.1
4.8
5.3
5.5
5.8
WBC
34.89
3,109
108,475
34.71
4.95
HOLD
18877.2
19994.4
21083.1
22123.9
10358.0
11201.5
11852.3
12383.8
7017.7
7626.0
7950.7
8314.5
223.7
243.0
251.4
260.1
8.4
8.6
3.5
3.5
188.0
184.5
190.4
198.4
2.4
2.3
2.2
2.1
15.6
14.4
13.9
13.4
16.0
16.5
16.5
16.4
5.4
5.3
5.5
5.7
BHP
33.32
3,212
107,013
41.57
29.16
BUY
73996.1
73676.9
76683.8
80196.6
30587.1
34574.2
35229.6
37605.0
14034.5
15028.5
14238.3
14986.1
261.1
279.4
269.7
293.0
-14.1
7.0
-3.5
8.6
128.5
132.2
146.6
153.7
2.2
2.1
1.8
1.7
12.8
11.9
12.4
11.4
17.6
18.2
14.4
14.9
3.9
4.0
4.4
4.6
RIO
59.03
436
25,723
75.81
32.94
BUY
56312.6
54225.2
55567.1
58994.6
21388.7
21057.6
21711.4
23674.9
10392.4
10464.9
10184.6
11445.1
577.6
564.3
542.7
614.8
19.8
-2.3
-3.8
13.3
203.4
246.4
266.3
291.6
1.9
1.8
1.6
1.5
10.2
10.5
10.9
9.6
17.4
17.7
16.2
15.9
3.4
4.2
4.5
4.9
IIN
8.13
162
1,318
8.12
3.04
HOLD
945.8
1001.2
1061.6
1093.1
182.2
195.3
210.3
214.5
57.4
67.2
76.9
85.2
35.9
41.5
47.5
53.0
34.6
15.6
14.5
11.6
17.8
22.2
26.1
29.6
4.1
3.7
3.4
3.1
22.7
19.6
17.1
15.3
19.0
19.6
20.4
20.7
2.2
2.7
3.2
3.6
TPM
7.27
794
5,771
6.48
-9.31
HOLD
715.0
971.4
1287.7
1379.8
282.4
354.3
463.0
505.9
140.3
178.0
225.4
266.4
17.9
22.4
28.6
33.6
24.9
25.3
27.5
17.5
7.3
9.1
11.6
13.7
8.6
7.0
6.0
5.2
40.6
32.4
25.4
21.6
22.1
22.8
24.9
25.5
1.0
1.2
1.6
1.9
LLC
LEI
15.51
21.21
580
339
8,990
7,180
14.48
19.92
-3.20
-0.97
BUY REDUCE
12545.8 22766.7
13403.8 23659.7
13762.2 23047.8
15281.5 22739.7
736.0
1972.1
922.4
1749.1
902.2
1757.0
1051.2
1753.8
545.4
530.1
618.6
574.4
618.2
571.1
709.6
574.8
94.9
157.9
93.9
172.5
105.4
170.1
120.1
172.3
12.6
17.9
-1.0
9.3
12.2
-1.4
13.9
1.3
41.6
95.7
63.3
107.7
53.2
108.3
62.9
109.9
2.2
2.3
2.0
2.0
1.8
2.0
1.7
1.9
16.3
13.4
16.5
12.3
14.7
12.5
12.9
12.3
13.7
18.0
16.6
16.8
12.8
15.4
13.5
15.1
2.7
4.5
4.1
5.1
3.4
5.1
4.1
5.2
Page 19
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 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
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
Baillieu Holst Stock Calls
Bega Cheese (BGA) - Rating: HOLD - Price Target: $5.20
AGM guidance: Bega Cheese (BGA) has provided FY15F NPAT guidance at its AGM. The company expect normalised FY15F NPAT to be
broadly in line with the pcp ($29.8m). We were forecasting 4% NPAT growth to $30.9m and thus do not intend to change forecasts at this stage.
Key drivers: Dairy commodity prices have fallen ~45% over the past 6 months due to increasing production in key exporting regions and the effect
of the Russian sanctions. As noted in our post-result note, competition for milk supply remains high and thus farm-gate milk prices remain elevated
despite the drop in commodity prices. Whilst BGA is much better insulated than its peers from this revenue and cost disconnect, they are not
entirely immune and thus margin pressure is expected to offset the improved returns from business initiatives implemented over the prior year.
Our view: We maintain our Hold recommendation and $5.20 price target. We are comfortable long-term holders of BGA and expect a substantial
earnings uplift over the medium term as a result of capital project growth initiatives (FY14-FY17F EPS CAGR of 15.5%). Shorter-term we await a
more attractive entry point given the stock is trading on an FY15F PE of 24.6x with a dividend yield of 2%.
BC Iron (BCI) - Rating: BUY - Price Target: $2.82
Guidance downgrade. BCI has downgraded FY15 sales guidance to 5.2-5.6m wmt (previously 5.8-6.2m wmt), with the company applying an
operational slowdown during the September quarter, as the company worked to better accommodate high amount of clays being irregularly
encountered in its ores. BCI has stated that it expects to resume operating at previously guided levels from November. As a result of the change,
BCI expects total cash costs for FY15 to now range from US$64-$70/wmt (previously US$60-$68/wmt).
Volumes impacted. 0.95wmt of Bonnie Fines was shipped from the Nullagine JV project during the September quarter, BCI share was 0.65wmt,
representing just a 68% share for BCI versus its joint venture interest of 75%. Not the first time BCI has had a sub-equity share of sales, BCI
attributed the lower share of sales to individual offtake commitments, and expects it to normalise in the December quarter.
Price received. BCI received an average realised price of US$72/dmt CFR (versus an index price of US$90/dmt), versus total cash costs guidance
of $64-$70/wmt (FOB basis).
Balance sheet. With BCI finishing the acquisition of IOH, its cash balance post acquisition will be A$135.6m (currently $92.1m).
Beach Energy (BPT) - Rating: HOLD - Price Target: $1.22
First impression. A good result at first glance, with BPT producing 2.4mmboe during the September quarter (versus our estimate of 2.25mmboe).
Revenue declined as expected due to weakness in Brent oil prices, coming in at A$232.9m (down 12% on the previous quarter).
SACB/SWQ stronger. Improving production from SACB and SWQ JV assets during the September quarter underpinned significantly higher gas
production (+32% at 6.6PJ) that more than offset a 10% decline in oil production (1.59mmbbl). BPT completed 37 wells during the quarter, overall
drilling success recorded as 81%.
Balance sheet. BPT finished the September quarter with $343m (down $68m), undrawn debt facility of $300m, and net cash position estimated at
~$216m (convertible notes, etc.).
Final div. Final FY14 dividend of 2cps, taking full year dividend to 4 cents.
Silverlake Resources (SLR) - Rating: BUY - Price Target: $0.57
Result. Gold sales total 31,469oz of gold in the September quarter, down from 43,886oz the previous quarter as expected after SLR placed its
high-cost Murchison operation on care & maintenance, reacting to the weaker gold price.
Guidance unchanged. FY15 gold sales still expected to be in a range of 125-135koz gold.
Hedging. SLR maintains a hedge book of 20.4koz at an average forward price of A$1,542/oz (spread evenly from October 2014 to March 2015).
Balance sheet balanced. SLR finished the September quarter with A$16.8m of cash and nil debt. Its cash balance reduced from $34m the
previous quarter on a combination of capex items including $6.3m of care & maintenance costs following shelving of some higher-cost production
and $8.4m in working capital movements.
Lowering costs. All in sustaining cash costs averaged A$1,185/oz, rising on a combination of higher exploration spend, costs associated with
Wombola Dam, and one-off expenses related to Maxwells.
Page 21
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
Our view. We maintain the view that SLR is in a good position to increase profitability during FY15, with the effort to be spearheaded by incoming
MD Luke Tonkin (already a director at SLR, and previously MD of Mt Gibson (MGX)).
Vita Group (VTG) – Rating: HOLD - Price Target: $1.15
Overall: Vita Group (VTG) has released a plan to pay a series of special dividends over coming years aimed at utilising its material franking credit
balance (30.5cps enabling dividends of 71cps fully franked). The first special dividend has been declared at 3cps fully franked. The group’s
Dividend Reinvestment Plan (DRP) will be available and the DRP for the special dividend will be fully underwritten. We have moved to a HOLD
recommendation as a result of strong share price appreciation.
Special dividend: The first special dividend has been declared at 3cps fully franked. The underwritten DRP will be in use and shares will be issued
at a 2.5% discount to the VWAP for VTG shares for the period from 13 to 26 November 2014 for those investors electing to participate.
Key dates: The ex-dividend date will be 11 November 2014, thus shareholders on the register at COB 10 November will be eligible. Shareholders
will have until 12 November 2014 to elect to participate in the DRP and the new shares will be issued on 5 December 2014.
Strong dividends and material franking value: VTG has not given guidance as to the number and magnitude of future special dividends.
However, it does note the Board intends to review the position twice a year. We have modelled in two special dividends a year for FY15F and
FY16F, each at 3cps. Based on these assumptions, we expect VTG to pay 32.9cps in fully franked dividends between FY15-FY17F, thus
transferring a material 14.1cps in franking credits to eligible shareholders. Details are provided in the financial summary on page two.
Impact to EPS: As a result of the fully underwritten DRP we have reduced our FY15F-FY17F EPS by 2.3%, 7.4% and 9.6% respectively.
Shareholders are required to participate in the DRP if they intend to avoid dilution and maintain their relative ownership.
Investment view: We move to a HOLD recommendation as a result of strong share price appreciation since our initiation in March 2014. Our price
target reduces to $1.15 (prev. $1.20) as a result of the increased forecast number of shares on issue from the underwritten DRP. We remain
comfortable with VTG’s current valuation (FY15F PE of 11.6x) and expect a strong 1H15F result. We expect VTG to utilise its strong FCF and
balance sheet to accelerate growth in the business segment through bolt-on acquisitions or alternatively increase its 65% dividend payout ratio to
support further valuation rerating.
Page 22
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
Baillieu Holst Macro Calls
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 23
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
SHIELD – Sustainable High Yield
Growth worries to convert non-believers back to yield
Published – 13th 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, whilst China will stabilise. 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 house price growth. The continued global growth worries will drive the global
investors back to Australian high yielding equities with currency stabilising and bond yields falling. SHIELD analysis sieves the market for
the best high yield stocks with supporting mix of size, risk, quality, growth and value factors. At the end of June, we suggested to move
from an overweight Financials and underweight Resources portfolio to a balanced three pillar portfolio with equal weights in Resources,
Industrials and Financials.
Micro Cap stock HFA remains the only low growth cheap yield pick from the SHIELD screen that has average earnings/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 – WBC, CBA, NAB, ANZ and BHP; mid cap – PPT; small cap – NST, IMF, WSA, GDI, ALU, ASL,
MFG, DSH, PTM and SKE; and micro cap – HFA, DDR, NCK and CMG.
Equity Engineer – October 2014
Global Investor Pain, Local Investor Gain
Published – 07th Oct 2014
Market Outlook: We maintain our call from May 2013 that the market will experience a two year bull market to 6500 based on a US and
China led global recovery. Equities will continue to benefit from major global economies maintaining low rates of interest for longer, as
these countries struggle with growth and unemployment. Recently the market has been hit with global investors getting out due to
currency devaluation worries. This panic selling on top of the usual September (Banks trading ex-dividend) selloffs has seen the index
back at fair value and offers a good buying opportunity in quality growth and yield large caps. We turned positive in the short term on
September 17th with value emerging, market pricing in geopolitical risks, low commodity prices, RBA talking down house prices and
budget watering down. Given that the underlying global growth will remain subdued into 2015 in all regions excluding US, we see very
positive medium to long term dynamics for the equity markets. We expect to see domestic institutional investors buy back into the market
at current value levels while the global investors wait for currency to stabilise. Given the interest rates are going to remain relatively low in
2015, we expect global investors to come back to the quality yield in Australian markets as currency stabilises. RBA is moving to curb
house prices while showing signals that they prefer the currency around 85 cents. Geopolitical issues, domestic budget woes and lack of
corporate initiative have forced RBA to take the economic leadership role. Given the low inflation, real wages decline, rising cost of living,
rising unemployment and low growth outlook, we are of the view that the RBA is trying to cool house prices as a first step towards
delivering a rate cut in mid-2015 to stimulate the economy.
Financials: We remain positive on the Bank sector but expect volatility with Financial Sector Inquiry, global investor sell off and housing
bubble worries.
Industrials: We remain positive on the big Retailers (i.e. WES and WOW) after the recent pullback. We see substantial risk in
discretionary Retailers while continuing to add TMT stocks (i.e. FLT, SEK, VED, CRZ, APN, SWM, SXL, PRT, TLS and SPK) on any
pullback.
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 to settle around 87 cents in the short term and to pull back to the mid 80s in the
medium to long term.
Interest Rates Outlook: We expect the RBA to work towards a rate cut in mid 2015 to stimulate a struggling low growth economy. We do
not expect any major region around the world to experience above trend growth in the next 12 months. We expect central banks around
the world to continue to keep interest rates at low levels. 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 designed not hurt growth recovery.
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
Page 24
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
industry cuts will create a vacuum for jobs and drive unemployment to 6.5% in the next 12 months. We do not see any government policy
or global macro changes that can create jobs in the short to medium term to limit this damage. The infrastructure job creation will only start
in 2016/17.
Consumer Sentiment: We expect consumers to continue to spend less and save more with unemployment worries and declining real
wages. We continue to see the substantial wages drop between the jobs that are being lost to the jobs that are expected to kick start the
economy. The economy will not recover until real wages grow faster than the rising cost of living
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 25
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 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.
WOW.ASX@AUX: 2:18:01:
35.35
MA: 200 35.8709, 30 34.5672
38.5
38
37.5
37
36.5
36
35.5
35
34.5
34
33.5
33
32.5
32
31.5
31
30.5
30
29.5
29
28.5
28
27.5
27
26.5
October
2012
December
January
2013
February
March
April
May
June
July
August
September
October
November
December
January
2014
February
March
April
May
June
July
August
September
October
Page 26
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
Currency Wars - FOMC dominating
while ECB continues to play from
the sidelines!!!
Healthier Coca Cola…what will they
think of next…paint it green and get
a super model...tick and tick!!!
Page 27
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
News Wrap
OVERNIGHT MARKET PERSPECTIVE
Global – Europe’s equity markets slipped, hit by weak German business sentiment and another decline in oil,
while Brazil slumped after incumbent Dilma Rousseff narrowly won a second term over an opponent seen as
more pro-business. Wall Street stocks finished little changed as the market absorbed losses in petroleum
stocks while looking ahead to a two-day US Federal Reserve monetary policy meeting that begins Tuesday.
At the closing bell, the Dow Jones Industrial Average stood at 16,816.04, up 10.63 points (0.06 per cent). The
broad-based S&P 500 dipped 3.07 (0.16 per cent) to 1,961.51, while the tech-rich Nasdaq Composite Index
edged up 2.22 (0.05 per cent) to 4,046.02. Investors are looking to Wednesday’s Fed meeting to see if the
central bank will follow through on its plan to end its bond-buying program and offer any additional comment
on its expectations to raise benchmark interest rates in 2015. AFR
US – Energy shares dragged Wall Street mostly lower as crude prices fell further, while US and German data
weighed. At the closing bell, the Dow Jones Industrial Average stood at 16,816.04, up 10.63 points (0.06 per
cent). The broad-based S&P 500 dipped 3.07 (0.16 per cent) to 1,961.51, while the tech-rich Nasdaq
Composite Index edged up 2.22 (0.05 per cent) to 4,046.02. Markit said its preliminary or ‘flash’ US services
sector purchasing managers index slipped to 57.3 last month, the lowest reading since April, from 58.9 in
September. “The October readings indicate that the pace of economic growth looks set to moderate in the
fourth quarter, down to perhaps 2.5 per cent,” said Chris Williamson, chief economist at Markit in London. The
government is expected to report on Thursday that the US economy expanded at a 3.0 per cent annual pace
in the third quarter, according to a Reuters survey of economists. Separately, the Federal Reserve Bank of
Dallas said its production index, which measures the state of manufacturing conditions in Texas, fell to 13.7
this month from 17.6 in September. The new orders sub-index, however, doubled and hit a six-month high.
Companies were also upbeat about the future. AFR
Europe – European stocks fell on Monday, as investors booked the gains they made after the European
Central Bank’s review of the region’s banks and an index of German business sentiment dropped to its lowest
in almost two years. Following an early rally, most euro zone banking stocks turned negative as traders took
profits after the sector had risen 14 per cent since mid-October in the run-up to the results of the ECB review.
Europe’s banking health check has shown countries and lenders are implementing global capital rules at
vastly different speeds, and 36 firms would have failed if new capital rules were fully applied. The French
government plans to cut its budget deficit by an additional €3.6-3.7 billion next year, Finance Minister Michel
Sapin said, adding that this should allow Paris to respect EU-deficit rules. AFR
Asia – Tokyo stocks rose 0.63 per cent on Monday following advances on Wall Street last week, but market
gains were limited by investor caution ahead of a US Federal Reserve policy meeting. The Nikkei 225 index at
the Tokyo Stock Exchange climbed 97.08 points to finish at 15,388.72, while the Topix index of all first-section
issues was up 0.96 percent, or 11.96 points, at 1254.28. India’s Jindal Steel and Power said the Indian federal
police were investigating the granting of a coal mining licence block to the company. The company’s
statement late on Monday was in response to media reports that the Central Bureau of Investigation (CBI)
was investigating accusations that it paid bribes to secure coal blocks. AFR
China – Hong Kong stocks closed 0.68 percent lower Monday after the postponed launch of a stock-trading
platform linking the city and Shanghai weighed on the market. The Hang Seng Index fell 158.97 points to
23,143.23 on turnover of $HK56.75 billion. The delay of the Shanghai-Hong Kong Stock Connect platform
also had an impact on the Chinese mainland markets. The benchmark Shanghai Composite Index fell to a
one-month low. It slipped 0.51 per cent, or 11.84 points, to 2290.44 on turnover of 113.4 billion yuan. The
Shenzhen Composite Index, which tracks stocks on China’s second exchange, rose 0.44 per cent, or 5.75
points, to 1302.39 on turnover of 125.5 billion yuan. AFR
Currency – The Australian dollar is trading at US88.06¢, compared with US88.16¢ at Monday’s local close.
The euro recovered lost ground in range bound trade, boosted by weaker-than-expected US housing data that
softened the blow to the euro zone common currency from news that German business morale fell. The
German data had taken the shine off better-than-expected stress-test results for European banks issued on
Sunday but widely leaked at the end of last week. David de Ferranti, market analyst at FXCM, notes there is
plenty of US event risk on the docket with the highlight being the FOMC meeting. “The Fed is widely expected
to continue tapering their asset purchase program, turning the focus to the statement. Traders will be looking
Page 28
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
for guidance on when the central bank may eventually look to raise rates and whether the phrase a
‘considerable time’ is retained. “Stronger forward guidance on rates may be saved until the December
meeting when chair Janet Yellen will have the ability to communicate the central bank’s thinking more clearly
in the accompanying press conference. However, the continued improvements in the labour market figures
and general economic data suggests we could at least hear a more hawkish tone from the central bank. This
turn could offer additional support to the USD and keep pressure on the AUD/USD. Downside risks remain
centered on the 2014 lows near 0.8660 which if broken on a ‘daily close’ basis could pave the way for a
descent on 0.8320 - the July 2010 low.” AFR
Commodity – Iron ore was down 1.2 per cent at $US79.52, according to Metal Bulletin. US oil prices
tumbled to a 28-month low below $US80 per barrel after Goldman Sachs slashed its price forecasts amid
further signs of lacklustre demand and booming supply. Goldman cut its forecast for Brent to $US85 a barrel
from $US100 for the first quarter of 2015 and reduced its projection for US crude to $US75 from $US90,
making it the most bearish bank on Wall Street. Three-month copper on the London Metal Exchange was up
0.7 per cent at $US6735 a tonne at 1531 GMT, after earlier touching its highest since mid-October at
$US6752. "The copper market is already positioned short so the risk now is for a bit of a rally into the yearend. Imports into China are rising and there's better orders from the power sector," said Gayle Berry, metals
analyst at Jefferies. In the longer term, however, Berry said: "If copper gets near $US7000 people will sell
because of the expected supply surge." Spot gold was down 0.1 per cent at $US1229.23 an ounce by 2.10pm
in New York, having moved in a narrow range of less than $US6. The metal has now dropped in its fourth
consecutive session. US COMEX gold futures for December delivery settled down $US2.50 an ounce at
$US1229.30. Commonwealth Bank economists note that Saudi Arabia signalled it is comfortable with lower
crude oil prices for now. UAE, Iran and Iraq have lowered crude oil prices in line with Saudi Arabia. AFR
Debt Market – Patersons Securities says that with the US stock markets moving lower during the early part of
October and pressures in the EU, bond yields reduced on strong buying particularly in the US Bond market.
Going against the trend to an extent, Greek 5-year bonds continued to flick higher quoted at 7.63 per cent,
this is of course very much below crisis levels when 5-year bond yields peaked near 65 per cent. “The EU
Bond market is significantly distorted by anticipation of ECB actions, with the ECB purchasing covered-Bonds
(Covered Bonds are backed by a pool of loans such as residential mortgages). The ECB has provided banks
with the opportunity to borrow longer term and will also start buying bundled loans or asset backed securities.
The ECB will present a review of EU bank health next week. “EU inflation stood at 0.3 per cent in September,
too close to deflation for comfort, causing the ECB to implement measures to support EU growth. “The
International Monetary Fund (IMF) has cut its forecast for economic growth in sub-Saharan Africa in 2014 to
5.0 per cent from 5.5 per cent, due in part to “economic spill overs starting to materialize” from the outbreak of
Ebola as people avoid the area.” AFR
MACRO PERSPECTIVE
The following stocks will trade ex-dividend today – None. AFR
Petrol Tax – The federal government has used special powers to enact its proposed increase to petrol tax,
resulting in a half a cent increase starting in two weeks. But unless the increase is supported by legislation
within 12 months, the revenue will have to be refunded to oil companies and importers. Finance Minister
Mathias Cormann has announced that the government has unilaterally used tariffs to reintroduce the twiceyearly indexation of petrol excise, which was frozen by the Howard government. Outlined in the May budget,
the reindexation was supposed to start in August. The increase was budgeted to raise $1.2 billion this
financial year. Starting November 10, petrol tax will rise from 38.14 cents per litre to 38.6 cents per litre. From
February next year, the twice yearly increases will resort to being in line with inflation. The previous Labor
government used the same tactic to increase the taxes on alcopop mixed drinks. It enacted a 70 per cent tax
hike by tariffs and then secured the legislation a year later. Senator Cormann said he believed that after a
year, Labor or the Greens would support the legislation to make the fuel tax increase permanent and there
would be no need to refund the revenue collected. “Labor and the Greens will see the benefit of what we’re
doing,” he said. Labor opposed the fuel price hike because it was a broken election promise. Mr Shorten
slammed the latest tactic as a sneaky tax hike. The Australian Automobile Association’s chief executive
Andrew McKellar called it “weak, sneaky and tricky’’. He urged motorists to keep their receipts, saying it is
they who would have to be refunded if the supporting legislation never passed, not oil companies. AFR
House Prices – The Housing Industry Association reported that land sales rose by 8.4 per cent in the June
quarter – the strongest result in a year and the second best quarter in four years. Capital city land prices were
up 7.4 per cent over the year with prices in Regional Australia up 4.1 per cent, notes CommSec. The Housing
Industry Association-RP Data Residential Land Report is released quarterly as a guide to activity in the home
building sector. AFR
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Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
GST Debate – Tony Abbott’s push for a mature debate on raising the GST to fix the problems of federation
has stumbled at the first hurdle, after the states rejected any ownership of the proposal and federal Labor
slammed it as a broken promise that will hit families. Economists backed the call on the grounds it made good
policy sense but warned the Prime Minister’s pledge to compensate low and middle income earners with tax
cuts would hit an already deficit-ravaged budget. Deloitte Access Economics partner Chris Richardson said
lifting the GST from 10 per cent to 12.5 per cent would raise an extra $12 billion a year. To make it politically
palatable, the government would have to give back, at a bare minimum, $1 in every $6 raised – or about $2
billion a year. When John Howard introduced the goods and services tax in 2000, he gave back as
compensation 55 per cent of the revenue raised, about one in every $2 dollars raised. “The economics of
doing more on the GST are great, it’s the politics which are diabolical,’’ Mr Richardson said. Treasury
numbers show a 12.5 per cent GST would cost a two-income family with children an average $205 extra a
fortnight. AFR
Offshore Betting Sector – Tabcorp chairman Paula Dwyer says the wagering giant is in talks with the
Coalition about blocking offshore, unregulated online bookmakers from taking bets from Australians. The flow
of money to foreign bookies is risking the integrity of sport and siphoning revenue that would be returned to
the community and racing industry, Ms Dwyer told shareholders at the $3 billion company’s annual general
meeting. Ms Dwyer pointed to France, where in 2010 the government ordered internet service providers to
block a particular unlicensed online gambling sites or face daily fines of €10,000. Similar regulations are being
enacted in the United Kingdom this week, she said. “Tabcorp’s view is that a similarly powerful response is
needed in Australia, and we are in active dialogue with the Federal Government on this issue,” Ms Dwyer
said. “While it is difficult to measure precisely, there are estimates that as much as 14 per cent of betting by
Australian-based customers is conducted with operators who are not licensed in Australia.” The chief
executive of William Hill Australia, Tom Waterhouse, who controls the Sportingbet, Centrebet and
TomWaterhouse.com brands, recently told The Australian Financial Review that an area of significant concern
regarding offshore operators is online in-play betting. Taking a punt on the outcome of a sporting event once
the event has started is allowed in Australia via telephone betting or in person, but not online. Mr Waterhouse
warned that a number of offshore operators are targeting online in-play offers to Australian punters. AFR
Supermarket Sector – Billions of dollars in payments from suppliers to retailers will come under renewed
scrutiny in Australia following an accounting scandal that has wiped 20 per cent off the value of British retailer
Tesco and claimed the scalp of its chairman and at least eight senior executives. Tesco told investors last
week that it had overstated its first-half accounts by £260 million ($475 million) by pulling forward payments
from suppliers for rebates, discounts and promotions and deferring costs. Accounting experts and retailers
have all but ruled out a similar scandal in Australia, saying supplier payments have been a major focus for
auditors and audit committees in recent years and there are sufficient checks and balances in place to ensure
that revenues are not manipulated. “While you can never say never, the major retailers in Australia have
invested a significant amount around systems and processes and controls to make sure these types of errors
or manipulation doesn’t happen,” said Deloitte retail leader David White. “A large amount of transactions go
through these organisations – they’re driven and agreed [to] by the buyers. Because of the nature of the
transactions, typically you have strong systems and controls around them. “If you didn’t have that they could
be subject to manipulation. There would have to be a major breakdown in controls or major collusion between
people in an organisation to prevent a material error like we’ve seen at Tesco.” The accounting standards
covering the treatment of supplier rebates in Britain are identical to those in Australia. Risk-averse audit
committees are now likely to take a closer look at supplier payments to ensure practices are in line with
policies and that checks and balances are doing their job. AFR
Bank Sector – Australia’s big banks are likely to sell assets and issue new shares through their dividend
reinvestment plans in order to satisfy a predicted toughening in capital rules, fund managers and analysts say.
The financial system inquiry, due to report to Treasurer Joe Hockey next month, is tipped to argue that major
banks should be forced to run larger capital buffers, to compensate for the advantage they receive from being
“too big to fail”. While the recommendations have not been finalised, The Australian Financial Review on
Monday said the inquiry was likely to call for a “substantial” increase in “common equity tier one capital”, citing
sources close to chairman David Murray. UBS analysts have previously estimated that a 2 per cent rise in
capital buffers combined with more stringent rules for “risk weights” on mortgages could lead to a $24 billion
capital shortfall across the major lenders. However, fund managers and analysts said banks have many tools
for raising their capital levels, and any such changes are likely to be gradual. AFR
Energy Sector – Goldman Sachs has slashed its 2015 oil price forecasts, making it the most bearish among
major financial institutions, adding pressure to crude futures that have already tanked near 25 per cent over
the past five months. The US investment bank said rising production will outstrip demand, joining other oil
analysts who predict consumption will be dented by slower global economic growth and lead to a supply glut.
Goldman analysts said in a report released late on Sunday that they expect US benchmark West Texas
Intermediate (WTI)crude to fall to $US75 a barrel and Brent to $US85 a barrel in the first quarter of 2015, both
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Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
down $US15 from their previous forecast. WTI could fall as low as $US70 in the second quarter and Brent as
low as $US80, when oversupply would be the most pronounced, before returning to first-quarter levels,
Goldman said. Goldman is known for its bold oil price calls, some accurate, some not. In May 2011, with Brent
oil prices around $US115, Goldman said that oil could rise to $US130 within a year, and they very nearly did
for a brief period in March 2012. In 2008, with oil prices on the rise above $US100, Goldman said prices could
spike as high as $US200. Oil did reach near $US150 that July, but within months had begun a relentless
credit crisis-driven dive to below $US40 by the end of the year. AFR
STOCK PERSPECTIVE
Vocation Limited – How low can Vocation Limited go? It’s the question that was on fundies and analysts’ lips
as they headed to lunch on Tuesday. Vocation had plummeted $1.01 a share by midday on Tuesday, from
$2.29, after the company said it would shut down its largest registered trading provider BAWM early next year
and was stripped of almost $20 million in funding by the Victorian government. It prompted, once again,
fundies and analysts to consider what Vocation was worth without BAWM. Street Talk ran the numbers last
month and came up with $1.11 a share, which now looks a little generous. Vocation was formed when BAWM
bought Aspin, Avana, Student Hub and CSIA as part of last year’s initial public offering. BAWM represented
about half the company’s then $189 million market capitalisation. Vocation made $128.4 million revenue in the
2014 financial year, including $30.3 million from the businesses acquired at the IPO and another $4 million
from subsequent purchases according to the company’s 2014 annual report. It means BAWM made an
estimated $94.1 million revenue, or about 69 per cent of Vocation’s proforma revenue. AFR
BHP Billiton – BHP Billiton appears to have lost patience with the asset that forged its entry into the US shale
business, declaring it will look to sell its Fayetteville venture on which it has taken a hit of more than $US2
billion ($2.27 billion). In documents published ahead of last night’s major investor day in London, BHP
revealed it had started “marketing” its Fayetteville shale asset in Arkansas, bought for $US4.75 billion in
February 2011, to potential suitors. “As we look to improve the balance of liquids and gas across our
petroleum portfolio we have initiated the marketing [of] our Fayetteville acreage. However, we will only divest
the field if it maximises value for shareholders,” the company said. The Fayetteville assets were acquired from
Chesapeake Energy under the leadership of BHP’s then petroleum boss Mike Yeager, who six months later
took BHP deeper into shale with the $US15 billion takeover of Petrohawk Energy. But the acquisitions quickly
became controversial when gas prices in North America plummeted from above $US4 per unit to below $US2,
forcing BHP to focus on the more lucrative market for shale liquids. The value of the Fayetteville assets, which
are dominated by dry gas rather than liquids, were written down by $US2.84 billion before tax in August 2012,
and famously caused then BHP chief executive Marius Kloppers to forgo his annual bonus. AFR
ANZ Banking Group – ANZ Banking Group has accidentally revealed sensitive financial information to
investors days ahead of its annual profit results, in an embarrassing glitch suggesting the bank is on track to
post a bumper full-year profit of more than $7 billion. Just four days before its full-year profit results this
Friday, ANZ on Monday afternoon requested a trading halt in response to an inadvertent disclosure of
earnings changes in a spreadsheet last Friday. In a template for analysts and fund managers, the bank had
included the percentage change in cash profit for each division and geographic region, after adjusting for
foreign exchange movements. The spreadsheet showed the bank’s FX-adjusted cash profit rose 3 per cent in
the latest half, after a $3.5 billion performance in the previous March half. This implies second-half profits of
about $3.61 billion for the bank, and full-year earnings of about $7.11 billion, 9 per cent more than last year’s
figure of $6.5 billion. FX-adjusted profits are not the main figure scrutinised by the market, but nonetheless,
the figures provide a key gauge of the bank’s performance. ANZ said the information was “partial analytical
data only” and it remained in compliance with its continuous disclosure obligations. However, it had opted to
take a highly cautious approach. “Nonetheless, out of an abundance of caution, ANZ has sought a trading halt
until the close of trading on the ASX today,” it said. An investment analyst at Watermark Funds Management,
Omkar Joshi, said the numbers suggested ANZ’s full-year profit would be about 1 per cent ahead of the market’s expectations. AFR
Virgin Australia – Whoever succeeds Neil Chatfield as the chairman of Virgin Australia will need to be adept
at managing big personalities. Virgin is unique as it has four high-profile airline chief executives and a former
deputy prime minister amongst its directors. Chatfield, who turned 60 this year, has decided to step down from
the board when a replacement can be found. The move is not surprising as the former Toll Holdings finance
chief also juggles directorships at SEEK Ltd and Transurban and has made it clear for awhile he wants to
spend more time with his wife and grandchildren. It has been a tough gig at Virgin over the past year when the
airline came under attack from Qantas over its access to foreign funding and posted a loss following a
domestic turf war. Chatfield has also put new protocols in place aimed at avoiding conflicts of interest between
the chief executives of the competing airlines sitting on the board. Singapore Airlines chief Goh Choon Phong,
Etihad boss James Hogan and Air New Zealand’s Christopher Luxon joined Virgin chief John Borghetti on the
board this year. The three airlines are all major shareholders in Virgin. AFR
Page 31
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
Whitehaven Coal – WHC managing director Paul Flynn has delivered a spirited defence of the coal industry
as an economic and environmental good and says he remains upbeat about the outlook for Australian coal
exports. Mr Flynn argued the high level of investment in coal and the promise of carbon capture and storage
technology meant that “coal may well be the only form of energy that can materially address the man made
contributions to climate change”. He said Whitehaven received “broad-based” support from the Gunnedah
region, where it is the largest employer. But he took aim at environmentalists and their claims, telling
shareholders the region “is not the pristine forest that people would have you believe” and that protesters
were “fly in fly out” activists who were out of step with the attitudes of locals. “They do to represent the
sentiment of the people at large in the community,” Mr Flynn said. “At some point they’re going to have to
accept the umpire’s decision and move on.” Meanwhile, Whitehaven chairman Mark Vaile says global
demand for coal will continue to rise steadily, with prices to recover significantly over the medium term.
"Australian exports are estimated to rise to 437 million tonnes by full year 2019, up from 336 million tonnes in
full year 2013, and prices are forecast to have recovered significantly from present levels over this period," Mr
Vaile told shareholders at the company's annual general meeting on Tuesday. AFR
Goodman Group – Leading logistics property owner, developer and manager, Goodman Group has had a
good start to the new financial year. However in its first-quarter update, Goodman did not upgrade guidance. It
is still forecasting full-year operating earnings per security in 2015 at 36.9¢, up 6 per cent on 2014. Chief
executive Greg Goodman said property fundamentals were robust and Goodman had “strong underlying
operating momentum across its business. “The current operating environment continues to be characterised
by the limited supply of quality industrial property and a surplus of capital available for investment, which is
driving demand and significantly higher asset pricing,” he said. During the quarter, Goodman capitalised on
the conditions and $322 million of investment properties. A further $1.3 billion of the group’s assets are under
offer or in due diligence – not counting the sites targeted for urban renewal. AFR
Vocus and Amcom – Vocus Communications chief executive James Spenceley says a merger with Perthbased rival Amcom Telecommunications would create Australia’s third-largest provider of corporate telco
services to take on Telstra and SingTel-Optus. As first revealed by Street Talk, Vocus on Friday raised its
stake in Amcom from 5 per cent to 10 per cent and offered to merge the two companies. But market sources
said the offer was poorly timed for Amcom, which ran a rare capital raising for $40 million in June and is
expected to announce its own east coast acquisitions and infrastructure investments shortly. It is understood
the quiet share purchases cost Vocus about $50 million. Under Mr Spenceley’s proposal, Amcom
shareholders would hand over their holdings in exchange for Vocus shares. Amcom first learned of the plan
only after the move occurred on Friday. Amcom had a market capitalisation of $557.7 million while Vocus was
valued at $570 million when the markets closed on Monday. AFR
CSL – CSL has vowed to turn around the loss-making influenza vaccine division of rival Novartis by taking
advantage of recently refurbished plants and pushing a portfolio of new products that will drive sales of $1
billion within five years. The $36 billion biotechnology giant said on Monday it would pay $US275 million
($313.5 million) for Novartis’ influenza vaccine business. The unit will merge with CSL’s vaccine subsidiary,
bioCSL, which manufactures predominantly from Melbourne. Chief executive Paul Perreault said the deal
would “transform bioCSL” by giving the smaller vaccine division access to modern facilities, global scale and
product and geographic diversity. CSL will become the second-largest player in the $US4 billion influenza vaccine market after Sanofi, he said. The company derived just 7 per cent of its $US5.3 billion in sales from
bioCSL. The bulk of its business was plasma products. “This transaction has the potential to create a global
platform for bioCSL that is comparable in many aspects to our global protein science business,” Mr Perreault
said. The influenza division came up for grabs in April when drug giant GlaxoSmithKline bought the other vaccines in Novartis’ portfolio. In the year ended December 31, 2013, the business had sales of $US527
million and lost $US138 million. AFR
SOURCE – AUSTRALIAN FINANCIAL REVIEW (www.afr.com), THE AUSTRALIAN (www.theaustralian.com.au), THE SYDNEY
MORNING HERALD (www.smh.com.au)
Page 32
Aussie Afternoon Institutional Market Wrap
28 Oct 2014
Mathan Somasundaram – Baillieu Holst Quant Strategy
mathan@baillieuholst.com.au – 612 9250 8947
Weather forecast around Australia
Darwin and Canberra are the sunny spots tomorrow!!!
Source – www.smh.com.au
Page 33
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