DISCLAIMER The information contained in this report is provided to you by Morgans Financial Limited as and share purchase plan for Over the Wire Holdings Limited and received fees in this regard. RED: This report general advice only, and is made without consideration of an individual’s relevant personal circumstances. was prepared solely by Morgans Financial Limited. ASX did not prepare any part of the report and has not Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, contributed in any way to its content. The role of ASX in relation to the preparation of the research reports employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or is limited to funding their preparation, by Morgans Financial Limited, in accordance with the ASX Equity damage arising from or in connection with any action taken or not taken on the basis of information contained Research Scheme. ASX does not provide financial product advice. The views expressed in this research report in this report, or for any errors or omissions contained within. It is recommended that any persons who wish may not necessarily reflect the views of ASX. To the maximum extent permitted by law, no representation, to act upon this report consult with their Morgans investment adviser before doing so. Those acting upon warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by ASX as to such information without advice do so entirely at their own risk. the adequacy, accuracy, completeness or reasonableness of the research reports. This report was prepared as private communication to clients of Morgans and is not intended for public circulation, publication or for use by any third party. The contents of this report may not be reproduced in RECOMMENDATION STRUCTURE whole or in part without the prior written consent of Morgans. While this report is based on information from For a full explanation of the recommendation structure, refer to our website at sources which Morgans believes are reliable, its accuracy and completeness cannot be guaranteed. Any www.morgans.com.au/research_disclaimer opinions expressed reflect Morgans judgement at this date and are subject to change. Morgans is under no obligation to provide revised assessments in the event of changed circumstances. This report does not RESEARCH TEAM constitute an offer or invitation to purchase any securities and should not be relied upon in connection with For analyst qualifications and experience, refer to our website at November 2019 any contract or commitment whatsoever. www.morgans.com.au/research-and-markets/our-research-team DISCLOSURE OF INTEREST Morgans may from time to time hold an interest in any security referred to in this report and may, as principal or agent, sell such interests. Morgans may previously have acted as RESEARCH COVERAGE POLICY manager or co-manager of a public offering of any such securities. Morgans affiliates may provide or have For a full list of stocks under coverage, refer to our website at provided banking services or corporate finance to the companies referred to in the report. The knowledge https://www.morgans.com.au/research-and-markets/company-analysis/Research-Coverage-Policy of affiliates concerning such services may not be reflected in this report. Morgans advises that it may earn brokerage, commissions, fees or other benefits and advantages, direct or indirect, in connection with the making of a recommendation or a dealing by a client in these securities. 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morgans.com.au Highlights from Why China had the 2019 Morgans 4 to negotiate 3 QLD conference with Trump
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Morgans was pleased to host its 29th annual Queensland Conference in October Economics featuring 45 companies across a broad cross-section of the economy. It provided Why China had to negotiate with Trump 3 an opportunity to take the pulse of corporate Australia and get a sense of key opportunities and threats across the industries represented. We summarise the Equity Strategy key highlights and top picks from the conference this month. Also, we preview 2019 Morgans Queensland Conference 4-5 the upcoming bank reporting season and look at why China had to negotiate with Banks the US on trade. Outlook better than results will suggest 6 Recently published research Morgans Best Ideas 7 Australia Strategy (16/10) Morgans 2019 Queensland Conference – key picks and highlights Major Banks (28/10) Bank Reporting Season ADD PT A$11.15 – outlook better than results will suggest Orora (12/10) An offer too good to refuse ADD PT A$3.34 JB Hi-Fi (24/10) A solid performer HOLD PT A$35.34 Sydney Airport (22/10) Regulatory pressures ease ADD PT A$8.71
In this issue indicates published research available online.
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2 Investment Watch November 2019 Economics – why China had to negotiate with Trump
The way the Communist Party of China sees the Rapidly escalating food prices has the potential to world is in terms of historical progress outlined first increase political instability. The solution is to dramatically The tentative in Marx and second in Lenin (see our recent article accelerate the re-population of the swine herd, which agreement “How the US China trade war caused the bond requires a lot of grain. It just so happens that the number bubble” http://bit.ly/China-US-Bonds one grain exporter of soybeans and feed grains in the between world is the US. And as a result of that, stage one of the Right now, they see themselves living through the period China and potential agreement between China and Trump includes described by Lenin in his Imperialism: the importation of US$40-50bn of feed grains. Historically The Last Stage of Capitalism. Where that takes you in Donald Trump the largest ever year of China buying US feed grains was terms of their bargaining position is that they will only emphasises 2013, in which they bought US$29bn. They are proposing make decisions regarding international negotiation to buy almost twice as much this time around. not because they are attempting to establish trust or there are two be generous to anybody but because they have to for The second thing China has proposed to do, is to open up short term structural reasons. the capital market to US financial companies. The reason they’re forced to do that can be seen in the outlook for structural The tentative agreement between China and Donald both the budget balance and the current account balance Trump emphasises there are two short term structural problems according to the IMF outlook database. What it shows is a problems within the economy the leadership is attempting change in the structure of Chinese growth. within the to address. One of those is in the food markets and the problem with food inflation, and the other is in the capital China has moved from being a primarily industrial country economy the market; the increasing problem that China will have in to primarily a service economy. The problem with that is leadership is financing its current account. as services rise and manufacturing falls as a proportion of China’s GDP, it is still manufacturing that generates most attempting to Food is the most internally politically sensitive. Variation in of the export income. That means the increase in growth food prices has historically had enormous impact on the address. in services is generating increasing demand for imports political stability of China. Let’s go back some decades but their ability to produce exports to counterbalance that to the events that unfolded in Tiananmen Square in is declining. The result is that the current account surplus 1988. We find that those events were driven by a rapid has almost disappeared. food price acceleration, which in turn generated political instability. What we’ve got in China at the moment is the A worse problem is the lack of capital inflow into China. For more economics beginning of a possible circumstance like that forming Previously the Chinese economy was developing by the coverage subscribe to from escalating pork prices. migration of foreign firms and in particular US firms into the Morgans Podcasts China. And that was because US firms could take their The enormous herd of swine has been affected by African capital, both intellectual and financial, and move to China swine fever which meant s a significant amount of the and set up manufacturing concerns to sell their products herd had to be destroyed. Thus, the domestic production back to the US. But this negotiation Trump has entered of pork has fallen. This causes problems with prices and into has stopped that process dead. consumer price inflation. So, the bottom line is that the Chinese are only offering Pork prices domestically in China are up by 75%. This these concessions because they have to. has introduced an acceleration in food prices of 45%. The result of this acceleration is to bring overall inflation to 3%. This is towards the upper end of the inflation range this century. Moreover, core inflation is only 1.5%, which shows there is not an industrial problem.
China Food Inflation Tracker
year on year 6 4 .5 2 0 6 4 2 0 2 4 6 an 0 an an 2 an 3 an 4 an 5 an 6 an 7 an an
Source: Bloomberg
Investment Watch November 2019 3 Equity strategy 2019 Morgans Queensland Conference
Morgans was pleased to host its 29th Annual Queensland Conference featuring 45 companies across a broad cross-section of the economy. This year’s presenters were mostly upbeat about FY20 with the teething troubles from FY19 largely in the rear view mirror, although management teams continue to strike a balance between controlling costs and investing for growth. Contrasting trading updates from FLT (negative), BLX (positive) and AFG (positive) show that the domestic environment remains patchy but a bottoming out in the housing market is becoming more apparent - a positive read for the consumer. Common themes included: reinforcing and enlarging technology leadership; managing cost inflation; environmental sustainability; putting a focus on offshore growth; and right-sizing for the current infrastructure cycle. We discuss our key conference picks in more detail below: An encouraging start to FY20… Cleanaway §§ Sustainability – with the growing importance of The Morgans Queensland Conference provides an sustainability in household, business and government opportunity to take the pulse of corporate Australia and decision-making, waste management is becoming an to get a sense of key opportunities and threats across increasingly valuable sector with CWY the Australian the many industries represented. Corporate outlook leader. commentary was broadly positive, with most companies signalling that domestic conditions have improved early §§ SKM asset acquisition fits with CWY’s recycling FY20. Confirmation that the slowdown in the housing strategy and would cost twice the purchase price market has bottomed (AFG, BLX, ADH) bodes well for to build. retail and the economy in general. §§ Mid-single digit compound EBITDA growth leveraging into high single digit/lower double digit But some changes to remain... growth in EPS. Organic growth and achievement of The challenges companies face remain consistent with TOX-related synergies will drive growth in the short what we’ve come to expect over the course of FY19. term, albeit the business is partly exposed to a slowing These include: 1) subdued end markets (though with domestic economy. some evidence of improvement); 2) lingering impact of Bingo Industries global macroeconomic risks (Brexit, Trade Wars, Hong §§ Increasingly defensive earnings as business Kong); 3) headwinds from currency and cost inflation concentration increases towards Post-Collections eating away at margins; and 4) the persistence of (expected to be c80% of revenue). devastating drought conditions. Despite the prevailing uncertainty, many companies presenting at the §§ Plenty of capital investment-driven growth conference are investing in efficiency gains and/or looking drivers in FY20 despite the slowdown in residential to pass on higher costs to customers. construction waste collection, asset sales, and loss of SEQ arbitrage profit. Key conference themes §§ 15% ROCE target over the medium term implies an Smart management teams continue to create their own increase in EBIT well beyond consensus expectations, opportunities amid the mixed investment climate, rather albeit ‘medium term’ is undefined. than being passengers in it. Corporates are: 1) embracing technology and innovation (NXT, MP1, CTD, DMP, NAN, Motorcycle Holdings AMS, SIQ, DTL); 2) pursuing offshore acquisitions and §§ Sales declines starting to moderate: It was clear expansion (CTD, LOV, IPH, DMP, BAP, MP1); 3) leveraging from our interview with the CEO and recent industry the move towards environmental sustainability (CWY, BIN); statistics, that new motorcycle volumes have started to and 4) broadening the product offering (BLX, OTW, EHL, turn off a very low base. SGR, AFG, CWY.
4 Investment Watch November 2019 §§ Cost-out provides protection: MTO has removed §§ Strong current performance: KSL remains comfortable >A$2m of cost from its business which is now nicely it can deliver 20% loan growth this year. KSL’s loan market Corporate entrenched. Should volumes trend positive, the earnings share has increased from 4% several years ago, to now leverage would be meaningful. closer to 8%. The group ROE of 17.5% is well above outlook regional banking peers. §§ Cassons performing to plan: MTO tweaked the commentary Cassons operating model to provide more in the form Australian Finance Group was broadly of customer rebates. The company believes this is the §§ A recovery in lodgements – The September-2019 right strategy to protect and grow market share and it positive, quarter trading update is positive with 11% growth in has gone to plan to-date home loan lodgements on the pcp. This bodes well for with most Baby Bunting the system home loan growth outlook. companies §§ Private label/Exclusive product penetration has §§ Merger – If the Connective merger eventuates then signalling further to go: Currently at 33%, the target remains we expect value to be created for AFG shareholders 50% over the medium term. This will yield GM benefits through cost and revenue synergies. If approved AFG that domestic (some of which will be invested back into customer believes it will be writing 1 in 5 home loans nationally, conditions value). with digital strategy to streamline process and therefore further margin expansion. have improved §§ Supply chain investment: Investment in new DC will cater to an +80 store network and realise cost §§ AFG Securities – the loan book has been growing early FY20. efficiencies. Fulfilment hubs within a handful of stores strongly which is positive as this is the highest margin will allow the group to fulfil 90% of online orders intra- part of AFG’s business. day in metro locations profit. Credit Corp §§ Investing in services: Expansion into car seat fitting Refer to our note published §§ Domestic environment opening up market share and rental services is a key pillar of BBN’s future 16 October 2019 for the opportunities: Several domestic competitors are facing growth plans. BBN will then also look to move into complete 2019 Morgans regulatory or balance sheet issues and CCP is expected other product categories like cots, prams etc; and other Conference wrap up. to meaningfully increase its domestic market share over channels such as B2B (hotels, restaurants, hire-car). the next 12 months. Kina Securities §§ USA growth path is large and on-track: CCP is §§ ANZ acquisition is transformational: The ANZ now an established player in the US market (top five integration is now complete and is transformational for debt buyer). A second collections site will soon be KSL. The acquisition expands KSL’s footprint regionally operational and sitting at >2% market share in a through PNG, gives KSL another 125,000 customers. growing market - there is a very long runway ahead. §§ A clear 5-year plan in place: Focus is on mass §§ Organic growth supplemented by potential affluent and emerging middle class customers in PNG. acquisitions: In Apr-19 the group raised A$140m in KSL also aims to be PNG’s leading digital bank creating equity of which roughly half has been deployed via the a clear point of differentiation to its competitors. Baycorp acquisition. Opportunities to deploy more capital via acquisition or market share increases have improved.
Morgans Queensland conference key picks
Company Code Price 2y EPS CAGR(%) FY20F PE (X) FY20F Div Yield (%) Australian Finance Group AFG $2.52 13.3% 14.4 6.7% Baby Bunting BBN $3.81 26.4% 23.2 4.3% Bingo Industries BIN $2.37 1.6% 25.0 2.9% Cleanaway Waste CWY $1.79 9.7% 24.4 3.0% Credit Corp CCP $31.59 11.9% 20.7 3.4% Kina Securities KSL $1.43 30.0% 6.5 10.0% Motorcycle Holdings MTO $2.39 9.0% 14.3 1.5%
Source: Morgans, Data as at 30 October 2019
Investment Watch November 2019 5 Banks – outlook better than results will suggest
housing credit has improved, particularly based on the following data points: data provided by mortgage aggregator Australian Finance Group shows that home loan lodgements in the September-2019 quarter were up 11% on the prior comparative period, with an increase seen across all states; Sydney and Melbourne dwelling values increased over the September-2019 quarter according to data published by CoreLogic; and weekly auction clearance rates for all the capital cities in combination have continued to improve according to data published by CoreLogic.
On net interest margins (NIMs), while there have been concerns in the market that a lower Official Cash Rate (OCR) environment will result in NIM compression, we We believe the sector outlook for the major continue to think the major banks will only pass on enough banks is better than the upcoming major bank of OCR cuts to borrowers to keep their margins broadly results for FY19F will suggest. We expect stable. We believe the home loan rate cuts announced by the major banks in early-October support our view. the FY19 results to be marred by significant customer remediation-related charges; however, On dividends, while we do not believe WBC needs to we do not expect these charges to recur to the cut its nominal dividend, our base is that WBC will opt same extent in FY20F. to cut when it reports its FY19F result due to domestic institutional investor pressure. We do not expect any other We also expect the FY19F results to be weighed upon ordinary dividend cuts in the upcoming results. by anaemic system housing credit growth over the last 12 months. However, we believe the outlook for system WBC remains our preferred major bank.
Major bank preferred exposures
Share Target Dividend Gross 12m Ranking Stock Recommendation Price Price Yield Yield Forecast TSR
1 WBC ADD $28.21 $33.00 6.4% 9.1% 26% 2 ANZ HOLD $26.74 $27.00 6.0% 7.8% 9% 3 NAB HOLD $28.61 $27.00 5.8% 8.3% 3% 4 CBA HOLD $78.66 $74.00 5.5% 7.8% 2%
Source: Morgans Research, IRESS (Data as at 30 October 2019)
Recent initiations
Cardno (CDD) Cardno is undertaking a demerger that will create two separate ASX listed entities with Intega (ITG) taking the Quality ADD TP A$0.67 and Materials Testing operations while Cardno Ltd will be a pure play consulting business. Intega (ITG) ADD PT A$0.54 OptiComm (OPC) OPC builds, owns and operates fibre based open access wholesale telecommunication networks. HOLD PT A$3.45 These are predominantly for residential premises. Red 5 (RED) RED 5 is a multi-asset gold producer with two operational mines in Western Australia (Darlot and King of the Hills). BUY PT A$0.50
6 Investment Watch November 2019 Morgans best Ideas Refer to our High Conviction update for more Our best ideas are those that we think offer the highest risk-adjusted returns over a 12-month timeframe, www.morgans.com.au/ supported by a higher-than-average level of confidence. They are our most preferred sector exposures. stockpicks
Company Sector Size Risk Price 12m Price Dividend Gross 12m Profile target Yield Yield TSR
Telstra (TLS) Communication Services Large Cap Lower $3.49 $4.46 4.6% 6.5% 32%
Wesfarmers (WES) Consumer Discretionary Large Cap Lower $40.23 $37.41 4.0% 5.7% -3%
Treasury Wine Estates (TWE) Consumer Staples Large Cap Moderate $17.36 $20.60 2.5% 3.6% 21%
Woolworths (WOW) Consumer Staples Large Cap Lower $37.20 $35.89 2.9% 4.2% -1%
Woodside Petroleum (WPL) Energy Large Cap Lower $32.35 $34.81 6.6% 9.5% 14%
Oil Search (OSH) Energy Large Cap Moderate $7.18 $8.68 2.7% 2.7% 24%
Westpac Banking Corp (WBC) Financials Large Cap Lower $28.55 $33.00 6.3% 9.0% 22%
Sonic Healthcare (SHL) Health Care Large Cap Lower $28.78 $31.00 3.0% 3.5% 11%
Sydney Airport (SYD) Industrials Large Cap Lower $8.86 $8.71 4.5% 4.5% 3%
APA Group (APA) Utilities Large Cap Lower $11.60 $10.64 4.3% 5.0% -4%
ResMed (RMD) Health Care Mid Cap Moderate $21.23 $22.82 1.2% 1.2% 9%
Cleanaway (CWY) Industrials Mid Cap Lower $1.84 $2.00 2.1% 3.0% 11%
Link Administration (LNK) Information Technology Mid Cap Moderate $5.54 $6.47 3.1% 3.1% 20%
Orora (ORA) Materials Mid Cap Lower $3.07 $3.34 4.2% 4.8% 13%
OZ Minerals (OZL) Materials Mid Cap Moderate $10.17 $10.90 2.2% 2.2% 9%
Frontier Digital Ventures (FDV) Communication Services Small Cap Higher $0.77 $0.94 - - 22%
PWR Holdings Limited (PWH) Consumer Discretionary Small Cap Moderate $4.68 $5.30 2.1% 3.1% 15%
Lovisa (LOV) Consumer Discretionary Small Cap Moderate $13.24 $14.12 2.3% 3.3% 9%
AP Eagers (APE) Consumer Discretionary Small Cap Moderate $12.61 $15.55 3.9% 5.6% 27%
Cooper Energy (COE) Energy Small Cap Higher $0.56 $0.69 - - 23%
Kina Securities (KSL) Financials Small Cap Higher $1.45 $1.51 9.9% 9.9% 14%
Generation Development (GDG) Financials Small Cap Higher $0.72 $0.83 2.8% 2.8% 18%
Pro Medicus (PME) Health Care Small Cap Higher $28.20 $32.79 0.5% 0.5% 17%
Over The Wire (OTW) Information Technology Small Cap Higher $4.74 $5.16 0.8% 0.8% 10%
IRESS (IRE) Information Technology Small Cap Moderate $12.57 $15.33 3.7% 4.4% 26%
Orocobre (ORE) Materials Small Cap Higher $2.66 $4.80 - - 81%
Red 5 (RED) Materials Small Cap Higher $0.27 $0.50 - - 84%
Aventus Group (AVN) Real Estate Small Cap Lower $2.75 $2.69 6.2% 6.2% 4%
APN Conv. Retail REIT (AQR) Real Estate Small Cap Lower $3.42 $3.43 6.4% 6.4% 7%
Source: Morgans, Data as at 31 October 2019 Indicates published/linked Research Note
Investment Watch November 2019 7 DISCLAIMER The information contained in this report is provided to you by Morgans Financial Limited as and share purchase plan for Over the Wire Holdings Limited and received fees in this regard. RED: This report general advice only, and is made without consideration of an individual’s relevant personal circumstances. was prepared solely by Morgans Financial Limited. ASX did not prepare any part of the report and has not Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, contributed in any way to its content. The role of ASX in relation to the preparation of the research reports employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or is limited to funding their preparation, by Morgans Financial Limited, in accordance with the ASX Equity damage arising from or in connection with any action taken or not taken on the basis of information contained Research Scheme. ASX does not provide financial product advice. The views expressed in this research report in this report, or for any errors or omissions contained within. It is recommended that any persons who wish may not necessarily reflect the views of ASX. To the maximum extent permitted by law, no representation, to act upon this report consult with their Morgans investment adviser before doing so. Those acting upon warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by ASX as to such information without advice do so entirely at their own risk. the adequacy, accuracy, completeness or reasonableness of the research reports. This report was prepared as private communication to clients of Morgans and is not intended for public circulation, publication or for use by any third party. The contents of this report may not be reproduced in RECOMMENDATION STRUCTURE whole or in part without the prior written consent of Morgans. While this report is based on information from For a full explanation of the recommendation structure, refer to our website at sources which Morgans believes are reliable, its accuracy and completeness cannot be guaranteed. Any www.morgans.com.au/research_disclaimer opinions expressed reflect Morgans judgement at this date and are subject to change. Morgans is under no obligation to provide revised assessments in the event of changed circumstances. This report does not RESEARCH TEAM constitute an offer or invitation to purchase any securities and should not be relied upon in connection with For analyst qualifications and experience, refer to our website at November 2019 any contract or commitment whatsoever. www.morgans.com.au/research-and-markets/our-research-team DISCLOSURE OF INTEREST Morgans may from time to time hold an interest in any security referred to in this report and may, as principal or agent, sell such interests. Morgans may previously have acted as RESEARCH COVERAGE POLICY manager or co-manager of a public offering of any such securities. Morgans affiliates may provide or have For a full list of stocks under coverage, refer to our website at provided banking services or corporate finance to the companies referred to in the report. The knowledge https://www.morgans.com.au/research-and-markets/company-analysis/Research-Coverage-Policy of affiliates concerning such services may not be reflected in this report. Morgans advises that it may earn brokerage, commissions, fees or other benefits and advantages, direct or indirect, in connection with the making of a recommendation or a dealing by a client in these securities. Some or all of Morgans Authorised RESEARCH INDEPENDENCE STATEMENT Representatives may be remunerated wholly or partly by way of commission. https://www.morgans.com.au/Research-Independence-Statement REGULATORY DISCLOSURES AQR: Morgans Corporate Limited is a Participating Broker to the Placement of shares in APN Convenience Retail REIT and may receive fees in this regard. APE: Morgans Corporate Limited STOCKS UNDER COVERAGE is acting as Financial Adviser to AP Eagers in relation to its off-market takeover bid for Automotive Holdings For a full list of stocks under coverage, refer to our website at Group. AP Eagers will pay fees for financial advisory services provided in connection with the bid as set out in http://www.morgans.com.au/research-and-markets/company-analysis/ASX100-Companies-under-coverage the Bidders Statement lodged with ASX on 5 April 2019. A Director of Morgans Holdings (Australia) Limited, http://www.morgans.com.au/research-and-markets/company-analysis/EX-100-Companies-under-coverage the holding company of Morgans Financial Limited, is the Non-Executive Chairman of AP Eagers Limited and If you no longer wish to receive Morgans publications please advise your local Morgans office or will earn fees in this regard. OTW: Morgans Corporate Limited was a Joint Lead Manager to the placement write to Morgans, Reply Paid 202, Brisbane QLD 4001 and include your account details.
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morgans.com.au Highlights from Why China had the 2019 Morgans 4 to negotiate 3 QLD conference with Trump
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