Bell Potter: Elixinol Global – Analyst Stock Picks for FY19
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ANALYST STOCK PICKS FOR FY19. Our analysts share their outlook and top stock picks. July 2018 To learn more about the stocks mentioned in this CONTENTS report, speak to your adviser or refer to the Client BANKS & GENERAL INSURERS 3 Access Research Library. DIVERSIFIED FINANCIALS 5 FIXED INCOME 6 Please note that Speculative securities may not AGRICULTURAL FMCG 7 be suitable for retail clients (refer to final page of TECHNOLOGY 8 this report). DISCRETIONARY RETAIL & PROFESSIONAL SERVICES 9 INDUSTRIALS 10 www.bellpotter.com.au RESOURCES 11 1300 0 BELLS (1300 023 557) HEALTHCARE & BIOTECH 14 [email protected] BANKS & GENERAL INSURERS. TS Lim The banking sector has never been stronger in terms of capital and liquidity Macquarie Group (MQG) including funding and asset quality. However, emerging revenue headwinds will now MQG’s long term value lies in its We continue to regard MQG as a have a greater impact on the bottom line. ability to understand risk and adapt its global asset and risk manager with These include NIM pressure on the asset side (repricing tailwinds easing, strategy and business mix to changing world-class expertise in infrastructure differential between the front and back books narrowing and price competition market conditions. This has enabled investment (leading player with effects as big and small banks alike fight for volume growth) and the liability side the company to transform itself and $495bn AUM and $86bn EUM) and (higher funding costs from elevated 90 day BBSW rates impacting the wholesale push for higher and more sustainable also in the finance, banking, advisory funding space including securitisation and from price competition to secure stickier revenues. The more obvious benefits and risk and capital solutions space. term deposits) as well as decreasing sources of non-interest income (driven by of the transformation are the higher These attributes in addition to removal of ATM fees and wealth contributions, competition and fewer trading margin and capital efficiency achieved predominantly lower-risk annuity-style opportunities). that have resulted in higher profit earnings streams (~70% of Group net While the major banks have the capacity to further reduce operating expenses to contributions and Group ROE in return profit contribution) and strong capital cushion the blows, the smaller players appear to be caught in the perfect storm for lower volatility. Our estimates management flexibility (~$2.4bn where top line constraints are combined with the relative inability to quickly reduce suggest this transformation occurs surplus capital based on 10.5% RWA) costs given their lack of scale. Given these constraints and ongoing concerns on average once every 4-5 years for continue to underpin our bullish view over how the Royal Commission will ultimately impact the sector, we believe the annuity-style revenue components of MQG. As a lower risk, higher return prospects are better in the next 12-18 months for players with diverse earnings and such as net interest income and base investment proposition, MQG remains offshore exposure such as MQG and CYB. Of the majors, WBC is now our top pick. fees. our top sector pick. We also believe MQG’s performance Buy, Price Target $125.00 fees now have some annuity-style characteristics, given the timeline of AUM growth and pipeline of realisation, and this should be stable at around 50bp of EUM. Other fees and commissions were first rebased after four years but appear to have stabilised at ~$1.5bn while capital markets facing M&A fees and trading income also show a level of sustainability. ANALYST STOCK PICKS FOR FY19. 3 BANKS & GENERAL INSURERS. TS Lim Clydesdale Bank (CYB) Westpac Group (WBC) The Boards of Virgin Money Holdings Upon completion, Virgin Money WBC has a reputation for producing WBC’s corporate memory over credit (UK) plc (Virgin Money) and CYB have shareholders will own ~38% of clean results and its 1H18 was no losses remains intact in our view (after agreed the terms of a recommended the merged entity. Virgin Money exception. Cash earnings were mainly having had a near-death experience all-share offer to be made by CYB for shareholders would also be entitled driven by strong NIE including stellar in the early 1990s) and the bank Virgin Money. The merger would create to any dividend declared and paid NIM growth, stable other income, cost continues to recognise the need for the largest mid-sized bank and the in the interim period ended 30 June discipline and strong and conservative quality credit and operational risk sixth largest bank in the UK that would 2018. The transaction is expected credit risk management on top of a management (in addition to managing be active in the retail and SME space to be materially earnings accretive benign credit environment. for profitable growth) and a very strong based on estimated annual pre-tax with scale and national presence, As in the past few years, WBC’s balance sheet (capital, liquidity and cost synergies of £120m (BP estimate leading digital and mobile banking consumer and business banks remain funding). This is the conservative side £118m based on £85m after tax and capabilities and ~6m customer base. the key drivers of earnings and ROE. of Australia’s oldest bank which we effective tax rate of 28%) with a full run CET1 ratio for the merged entity is Group ROE was at the top end of the think will continue to underpin lower rate to be achieved after 30 September expected to be >12% and this should 13-14% target range while CET1 ratio risk and steady earnings growth (in 2021. The proposed cost synergies further increase following near-term was 10.5%, equal to APRA’s 2020 line with GDP) in the years ahead. equate to ~19% of CYB’s underlying capital optimisation initiatives and minimum requirement. The interim Buy, Price Target $31.90 cost base and ~12% of the merged mortgage risk weight accreditation. dividend was unchanged at 94cps and entity’s underlying cost base. CYB would acquire all the ordinary WBC intends to maintain dividends share capital of Virgin Money using All else being equal, the proposed until the payout ratio normalises to the an exchange ratio of 1.2125 new CYB deal should be highly value accretive 70-75% target range. shares for each Virgin Money share in terms of underlying EPS (up to (i.e. ~547m new CYB shares will be 16% upside given the full run rate for issued for Virgin Money’s ~451m cost synergies) and ROE (this should shares). The offer implies a 19% improve by up to 2.4% in absolute premium to Virgin Money shareholders terms). The merged entity would be based on Virgin Money’s closing price valued at $6.23, in line with our $6.30 of £3.12 per share and a 35% premium price target. based on its three-month VWAP of Buy, Price Target $6.30 £2.76 per share. ANALYST STOCK PICKS FOR FY19. 4 DIVERSIFIED FINANCIALS. Lafitani Sotiriou Pendal Group (PDL) Challenger (CGF) Janus Henderson Group (JHG) PDL (formerly BTT) returns as CGF is set to benefit from some of JHG is set to continue its post-merger one of our Key Picks for FY2019, the biggest changes to the Australian success into FY2019, with the company with the company continuing to Superannuation system in a number expected to realize further cost focus on future growth through the of years. We see the forthcoming synergies, and revenue opportunities selective expansion of its investment introduction of Deferred lifetime arising from its broad cross-border capabilities, and significant investment Annuities (DLAs), and the Federal distribution base. in seeding new offerings. Government’s Comprehensive Income We foresee JHG delivering double PDL is expected to exceed A$100bn Products for Retirement or CIPRs digit EPS growth over CY18e & in FUM during FY19, and we believe framework as being significant CY19e, supported by a recently PDL’s strategy remains supportive of catalysts for CGF over the medium- announced buyback. We believe JHG our double digit EPS growth forecast term. is a compelling growth and yield over the medium term. We continue to We estimate these changes have the opportunity over the medium term. rate the stock as one of our top picks potential to create over $10 billion Buy, Price Target A$70.00 in the sector. in additional market demand for Buy, Price Target $15.50 annuities products, which represents a significant opportunity for CGF to capitalize on given its strong brand recognition, expertise, and broad distribution reach within the Australian Market. Buy, Price Target $17.49 ANALYST STOCK PICKS FOR FY19. 5 FIXED INCOME. Damien Williamson After a strong start to 2018, the ASX Bendigo and Adelaide Bank Convertible Crown Subordinated Notes II Westpac Capital Notes 5 listed debt and hybrid market saw Preference Shares 3 (BENPF) (CWNHB) (WBCPH) weakness over February and March. BENPF remains attractively priced Since being priced at a margin of The launch of the WBCPH issue on This was associated with the digestion relative to other hybrids from financial 4.00% in March 2015, Crown has 5 February 2018 coincided with the of over $3bn of new issuance and the issuers. Paying half yearly income significantly de-risked, focusing 2018 peak in the hybrid market. The negative reaction to Bill Shorten’s at a margin of 4.00% above 180 day operations on its casino monopoly subsequent weakness has seen policy proposal on scrapping cash bank bill, BENPF has benefitted from in Melbourne and Perth, and its this security trade below $100. The rebates on excess franking credits the recent spike in bank bill rates. Its Barangaroo development in Sydney.