• CONTENTS •

ISSUE 024 22 MARCH 2019

CHANGING CONSUMER 12 BLUE CHIP BUY TASTES 02

We look at how the wealth effect impacts HOLD SELLS on the investment returns of retailers. The results are more surprising than you In this Blue Chip Value issue we’re covering would think. 12 stocks and we’ve done a portfolio revamp. BLUE CHIP VALUE 03 Consumer stocks are under pressure and we’re PORTFOLIO PERFORMANCE adding and subtracting from the 25 stocks in our Blue Chip Value Portfolio, which continues ASX BIG CAP ANALYSIS 05 to outperform due to its defensive bias.  Alumina (AWC) Buy

As you can see from the stocks listed on the right, they cover a variety of sectors and in  BlueScope Steel (BSL) Buy a number of cases we’ve changed our recommendations.  Boral (BLD) Buy A key to many consumer stocks is the wealth effect and we spend some time  Coca-Cola Amatil (CCL) Hold explaining what it is and how it is impacting the earnings outlook for many companies.  Coles (COL) Sell  It is interesting to see what effect the investment decisions of big companies like  Lendlease (LLC) Hold Coles, Woolworths and Metcash has on their valuations. You might not see it  Origin Energy (ORG) Hold immediately in the profit and loss, but it has a profound impact on the profitability of  Rio Tinto (RIO) Take $$$  the business over time. As we have said before, our valuation methodology frowns upon big “capex  Sydney Airport (SYD) Buy humps” where are a company is set to spend huge amounts.  Wesfarmers (WES) Hold  The good news is that there are plenty of Blue Chips focused on maximising the  Woolworths (WOW) Hold returns from their existing asset base, which are the companies we tend to favour. n  WorleyParsons (WOR) Buy

Talking Big “As expectations continue to grow that interest rates might be cut, we’re comfortable having JB Hi-Fi (JBH) in the portfolio. Ironically, the Richard Hemming Editor diminishing wealth effect has had a positive effect on the electronic retailer. It’s all about expectations in the equities markets.” UNDER THE RADAR BLUE CHIP VALUE PORTFOLIO

99% of all financial news relatesto  the 40 to 50 biggest companies. So what about the rest? They’re Under the Radar.

Published by Under the Radar Report Pty Ltd Editor Richard Hemming Publisher Caroline Mark 45 Evans Street, Balmain NSW 2041 ABN: 65147404662. AFSL: 409518.1 Telephone +61 2 9106 2167 Email [email protected] www.undertheradarreport.com.au

PORTFOLIO 22 MARCH 2019

CHANGING CONSUMER TASTES

In our portfolio section we look at the changes we’re making to our portfolio in consumer facing stocks. The graphic below gives you a big indication as to why we are making those changes and some of the nuances involved in maintaining our holding in one of the portfolio’s top performers: JB Hi-Fi (JBH).

THE WEALTH EFFECT The contribution to six-month annualised growth of the average household’s net wealth. ----- TOTAL  HOUSING AND DURABLES  FINANCIAL ASSETS  LIABILITIES

PPT

30

20

10

0

-10

-20 ABS; SOURCES: RBA 2008 2010 2012 2014 2016 2018

We consume out of our current income; but we also has flagged that it may cut interest rates. Ever since the RBA consume out of changes in our net wealth – the changes in indicated this, JB Hi-Fi (JBH) has outperformed the market. the value of our house and the changes in the value of our As expectations continue to grow that interest rates might financial assets. As these changes increase, we spend more. be cut, we’re comfortable having this stock in the portfolio. This graphic shows that we’ve been spending less as those Ironically, the diminishing wealth effect has had a positive values diminish, particularly house values. The wealth effect effect on the electronic retailer. It’s all about expectations in has gone into reverse. This is one of the reasons the RBA the equities markets.

BLUE CHIP VALUE 2

PORTFOLIO 22 MARCH 2019

BLUE CHIP VALUE PORTFOLIO

PERFORMANCE

DEFENSIVE VALUE ATTRIBUTES ARE DELIVERING OUTPERFORMANCE FOR UNDER THE RADAR BLUE CHIP The portfolio has been outperforming the ASX200 since late August 2018 and we believe will continue to in 2019

Index Points 110

108 ASX 200 106

104 MODEL 102 PORTFOLIO

100

98

96

94 31/1/2019 28/2/2019 29/12/2017 29/01/2018 28/02/2018 31/03/2018 30/04/2018 31/05/2018 30/06/2018 31/07/2018 31/08/2018 30/09/2018 31/10/2018 30/11/2018 31/12/2018

PORTFOLIO COMMENT up, which is desirable for long-term attractive than Coles, having spent a We are uncertain about Coles (COL) sustainable growth but in the short- lot more in the past, and is preferable because it was parachuted into the term will depress profitability. There is to Metcash (MTS) which is a much portfolio due to its spin-off from scope for the stock to de-rate. We don’t smaller third player. Our hunch is that Wesfarmers (WES). More importantly want to be in Coles but want exposure while Coles is catching up, the group its 1H19 result delivered in February to consumer staples, which we have will have limited ability to engage in was soggy. It sounds like management in Bunnings via Wesfarmers but a renewed price war. We believe this has to reset the business model. It having a defensive bias, we want more. will favour Woolworths. In our next also sounds like Wesfarmers has been Woolworths (WOW) fits the bill. On portfolio rebalancing at the end of the deliberately under investing and that our model it looks good value, trading quarter (31 March), Coles will most the group will need big capex to catch in line with its price target. It’s more likely be replaced with Woolworths. n

BLUE CHIP VALUE 3

PORTFOLIO 22 MARCH 2019

MARKET DIVIDEND PORTFOLIO NAME (CODE) SECTOR CAP $BN YIELD % WEIGHT %

WESTPAC BANKING (WBC) FINANCIALS 91.3 7.10 8.27

COMMONWEALTH BK.OF AUS. (CBA) FINANCIALS 128.0 5.96 9.20

AUS.AND NZ.BANKING GP. (ANZ) FINANCIALS 75.0 6.07 9.14

NATIONAL AUS.BANK (NAB) FINANCIALS 70.1 7.85 8.40

BHP GROUP (BHP) BASIC MATERIALS 107.5 4.64 10.95

RIO TINTO (RIO) BASIC MATERIALS 34.0 4.36 5.89

SOUTH32 (S32) BASIC MATERIALS 19.2 5.94 2.93

BLUESCOPE STEEL (BSL) BASIC MATERIALS 7.3 0.71 1.05

ALUMINA (AWC) BASIC MATERIALS 7.4 12.14 0.90

COCA-COLA AMATIL (CCL) CONSUMER GOODS 6.2 5.52 1.29

JB HI-FI (JBH) CONSUMER SERVICES 2.8 5.68 0.24

WESFARMERS (WES) CONSUMER SERVICES 39.2 6.37 4.50

QANTAS AIRWAYS (QAN) CONSUMER SERVICES 9.1 3.91 1.01

COLES GROUP CONSUMER SERVICES 15.3 0.00 1.82

ASX (ASX) FINANCIALS 13.6 3.19 3.56

MEDIBANK PRIVATE (MPL) INSURANCE 7.6 6.73 2.25

LENDLEASE GROUP (LLC) INDUSTRIALS 7.1 3.74 1.07

AMCOR (AMC) INDUSTRIALS 17.2 4.20 4.11

TRANSURBAN GROUP (TCL) INDUSTRIALS 33.8 4.59 9.13

SYDNEY AIRPORT (SYD) INDUSTRIALS 16.8 5.05 4.19

DOWNER EDI (DOW) INDUSTRIALS 4.4 4.56 1.10

WORLEYPARSONS (WOR) OIL & GAS 6.7 1.57 0.38

TELSTRA (TLS) TELECOMMUNICATIONS 38.8 3.83 4.66

AGL ENERGY (AGL) UTILITIES 14.5 5.34 2.17

ORIGIN ENERGY (ORG) UTILITIES 13.0 2.68 1.81

PORTFOLIO PERFORMANCE - AS AT 15 MARCH 2019 1 MONTH 3 MONTHS 6 MONTHS 12 MONTHS Model Portfolio 2.78% 12.37% 4.23% 10.17% Benchmark (ASX200) 2.75% 11.81% 2.30% 8.81% Value Add 0.03% 0.56% 1.94% 1.36%

BLUE CHIP VALUE 4

ASX BIG CAP ANALYSIS 22 MARCH 2019

ASX BIG CAP ANALYSIS We look in depth at 12 Big Cap stocks

ALUMINA RADAR RATING BUY Bauxite miner and alumina refiner In FY18 (31 December year end) the company’s earnings were strong, as ASX CODE AWC expected. Alumina declared a fully franked final dividend of US14.1 cents (A19.9 cents) bringing the total dividend for the year to US22.7 cents (A32.1 cents), up CURRENT PRICE $2.60 68% on the previous year. The 33% increase in the alumina price more than made up for a 14% increase in production costs, which was driven by higher MARKET CAP $7.5BN caustic soda prices. The dividend was underwritten by operating cash flow. NET CASH US$96M The company faces increasing costs, although if the alumina price stays at or around its current levels of close to US$400 per tonne, operational cash flow is DIVIDEND YIELD 7.7%* sufficient to ensure that dividends are maintained. This is a big deal considering AWC - Share Price 18 18 18 19 19 19 18 18 18 18 18 they have more than quadrupled in the past three years. The tight alumina market $ 18 JUL FEB OCT SEP DEC JUN JAN AUG AUG NOV NOV APR MAY MAY should be maintained due to the world’s largest mine Alunorte in Brazil operating at MAR 50% of capacity, although this will ramp up during this year. The Trump trade talks 3.000 should also have an impact (which if anything could be negative). n 2.800

2.600

RADAR RATING: For us Alumina is about dividends and at current levels the 2.400 average yield on offer over the next few years is close to 8%, although there 2.200 is a great deal of macro risk. The yield is still pretty good if you can get it, 2.000 ASX SOURCE: which you can. BUY. *FY19 Forecast

BLUESCOPE STEEL RADAR RATING BUY Steel manufacturer When it goes your way in the steel industry, it really does go hard. Then again, ASX CODE BSL when the winds reverse, you can literally go out of business. Just ask any long- term watcher of BlueScope Steel. CURRENT PRICE $13.40 For 1H19 the company produced a record half year profit, boosted by its North MARKET CAP $7.2BN Star steel producing operations in Ohio, to report NPAT of almost $624m, up $183m on the same period a year earlier. The company is not a big dividend NET CASH $128M payer, but paid out 6 cents (the same as last year) and is continuing a buyback of up to $250m in stock. Arguably of more importance, the group guided to FY19 DIVIDEND YIELD 1.0%* EBIT being 10% higher than the prior year and better than expectations. BSL - Share Price 18 18 19 18 19 19 18 18 18 18 18 When you’re hot you’re hot, but for how much longer? A key to the future is North $ 18 JUL FEB OCT SEP DEC JUN JAN AUG AUG NOV NOV APR MAY MAY Star expansion, which is being considered pending an engineering report that MAR

is in its final stages. North America made up almost half the company’s EBITDA, 18.000 n while Australia contributed 38%. 16.000

14.000

RADAR RATING: The company trades on a forecast PE of just under 10 times, 12.000

reflecting the cyclical highs the company is taking advantage of, while its ASX SOURCE: 10.000 dividend yield is only 1%. We continue to believe that with its US expansion the wind will be at BSL’s back, plus it’s good value, based on our price target. BUY. *FY19 Forecast

BLUE CHIP VALUE 5

ASX BIG CAP ANALYSIS 22 MARCH 2019

BORAL RADAR RATING BUY Building products The building material company remains one of the best positioned to profit from the ASX CODE BLD infrastructure boom in Australia and the US and we regard its depressed 1H19 profit result as a buying opportunity. CURRENT PRICE $4.72 For the six months to 31 Dec 2018, NPAT was down 6% to $200m despite sales MARKET CAP $5.5BN climbing 5% to $2.93bn, although the company announced a small 0.5 cent increase in the interim dividend to 13 cents. Net debt was slightly higher than NET DEBT $2.3BN expected at $2.3bn. The lower result was partially due to declining concrete volumes in Australia (-8%) although prices held up; while other impacts were DIVIDEND YIELD 5.7%*

reduced volumes in the US due to heavy rainfalls and increased competition and a BLD - Share Price 19 18 18 19 18 19 18 18 18 18 18 cyclical downturn in South Korea. $ 18 JUL FEB OCT SEP DEC JUN JAN AUG AUG NOV NOV APR MAY MAY MAR The highly visible CEO Mike Kane was optimistic about the Australian residential market, predicting that it would stabilise after a couple more years of depressed 7.500 activity. The big areas of growth are in US residential and infrastructure. The company 6.500 left FY19 guidance unchanged, predicting EBITDA ahead of FY18’s $1,056m. n 5.500

4.500

RADAR RATING: The stock looks good value, trading on a forecast PE of close ASX SOURCE: to 10 times and a dividend yield of 5.5%, which is forecast to grow. There are many irons in the Boral fire, which gives confidence that overall growth can *FY19 Forecast be achieved and the group is on track to deliver targeted synergies from its big US acquisition. BUY.

COCA-COLA AMATIL RADAR RATING HOLD Asia Pacific beverages The beverage giant continues to be a case of jam (or Coke) tomorrow. Coca-Cola ASX CODE CCL Amatil reported a weak FY18 result that was largely as expected. Underlying EBIT and NPAT from continuing operations fell 6.5% to $635m and $388m CURRENT PRICE $8.42 respectively. The dividend was held at 26 cents, 50% franked. MARKET CAP $6.1BN This performance was due to the core Australian operation (59% of group EBIT), which reported an 8.8% decline in EBIT reflecting lower volumes and growth NET DEBT $1.3BN initiative costs. EBIT in Indonesia and PNG (13% EBIT) was down 6.4% on weak economic conditions in Indonesia and operational issues in PNG. The NZ & Fiji and DIVIDEND YIELD 5.3%* Alcohol & Coffee segments continue to perform well. CCL - Share Price 18 19 19 18 18 19 18 18 18 18 18 $ 18 JUL FEB OCT Management view FY19 as another transition year as it progresses the cost cutting SEP DEC JUN JAN AUG AUG NOV NOV APR MAY MAY MAR and reinvestment program with mid-single digit EPS growth from FY20 targeted. There was nothing in the result to change our view that this is a stretched target. n 10.500 10.000 9.500 RADAR RATING: A portfolio of leading consumer beverage brands and a 9.000 record of product innovation puts CCL in a better position than peers to deal 8.500 8.000

with changing consumer tastes and pressure from the big supermarkets 7.500 ASX SOURCE: in Australia. This plus good cashflow generation and a high (circa 80%) payout allow it to pay a healthy dividend. But the stock is not cheap and *FY19 Forecast the FY19 outlook is weak so we would be looking to sell on share price strength. HOLD.

BLUE CHIP VALUE 6

ASX BIG CAP ANALYSIS 22 MARCH 2019

COLES RADAR RATING SELL  Supermarket (DOWNGRADE FROM HOLD) Direct comparisons of Coles’ numbers with the prior year were difficult due to its ASX CODE COL demerger from Wesfarmers. And Wesfarmers’ shareholders received the benefit of dividends based on earnings in 1H19. CURRENT PRICE $11.66 Coles’ group sales revenue was up 2.6% at $20.9bn, while EBIT was down almost 6% at $753m. Supermarkets were the star with sales up 4% and EBIT MARKET CAP $15.5BN almost flat at $602m, while the main decline was at Express where EBIT fell almost 40% to $51m. Liquor produced 7% earnings growth on flat revenue. NET DEBT $1.2BN Express was impacted in 1H19 by sharply lower petrol volumes, which have led to the sale of the petrol retailing business to Viva. In future Coles will derive a DIVIDEND YIELD 2.1%* commission on petrol litres sold. COL - Share Price 19 19 18 $ 19 FEB DEC JAN Costs of doing business have increased, and these pressures are unlikely to MAR

abate. The company announced an investment of almost $1bn in new supply 13.000 chain modernisation and automated distribution centres, with uncertain returns in 12.500 a mature and potentially weak retail environment. n 12.000

RADAR RATING: Coles has only been independently listed since November, but 11.500

is already raising capital expenditure expectations to maintain market share. 11.000 ASX SOURCE: The stock looks overvalued on our model. SELL. *FY19 Forecast

LENDLEASE RADAR RATING HOLD Contractor Back in May last year we stated how we liked Lendlease’s exposure to rising ASX CODE LLC construction of public infrastructure. The problem is this exposure has first led to $500m in write-downs in its troubled Engineering and Services segment; as CURRENT PRICE $12.33 well as an estimated $450m-550m in “restructuring costs” in order to get out of the business altogether. This news has led to the loss of over $2.8bn in market MARKET CAP $7.0BN capitalisation for Lendlease, which seems too harsh, but reflects the uncertainty NET DEBT $2.3BN about further infrastructure related write-downs and restructuring costs. There are some positives emerging out of this, however. The first is the clear signs DIVIDEND YIELD 3.3%*

that despite the weakening residential housing market, Lendlease has built up a LLC - Share Price 18 18 19 18 19 19 18 18 18 18 18 formidable global presence to offset this with a $74.5bn development pipeline. The $ 18 JUL FEB OCT SEP DEC JUN JAN AUG AUG NOV NOV APR MAY MAY group also has $34.5bn worth of assets under management generating big fees. MAR

The company has indicated that there are buyers emerging for its Engineering 22.000 and Services division. The latter generates about $50m a year, which puts it on an 20.000 estimated valuation of about $500m. 18.000 16.000 Finally, Lendlease remains profitable overall and its debt is not too onerous, at 14.000 15% gearing, which is at the bottom of its targeted range of 15-20%. For 1H19 12.000 10.000 ASX SOURCE: Lendlease delivered NPAT of just under $15m and a dividend of 12 cents (down from 34 cents in 1H18), which was better than the losses most had expected. n *FY19 Forecast

RADAR RATING: The risk is much higher for Lendlease than we had previously anticipated and although there is a great deal priced in, the company has not been clear enough about the extent of the problems in Engineering. HOLD.

BLUE CHIP VALUE 7

ASX BIG CAP ANALYSIS 22 MARCH 2019

ORIGIN ENERGY RADAR RATING HOLD Energy gentailer Origin’s business is both a beneficiary of high energy prices while also being the ASX CODE ORG object of Government and regulatory interest, as those same high prices cause political backlash. CURRENT PRICE $7.47 1H19 underlying EBITDA was up 20% to $1.7bn, leading to underlying NPAT of MARKET CAP $13.1BN $592m and EPS of 33.7c, both up over 50%. Net operating cash flow increased to $754 million including a $276m cash distribution from ORG’s stake in Australia NET DEBT $6.7BN Pacific LNG. Debt was reduced, and dividends were recommenced with a 10 cent interim after a three year hiatus. Growth came from the integrated gas operations, DIVIDEND YIELD 2.7%*

while the energy markets division was largely flat, impacted by competition, ORG - Share Price 19 19 18 18 18 19 18 18 18 18 18 consumer price stresses and lower volumes. n $ 18 JUL FEB OCT SEP DEC JUN JAN AUG AUG NOV NOV APR MAY MAY MAR

RADAR RATING: FY19 guidance was in line with expectations at an underlying 10.000 $3.3bn EBITDA, leading to 60 cents EPS, a PE multiple of 12.5 times. 9.000 Management forecast a total full-year dividend of 20 cents. We like the 8.000 stability of Origin’s business and competent management. Despite political 7.000 noise around the industry and the fact that it looks expensive on our model, 6.000 SOURCE: ASX SOURCE: we would rather own Origin than not. HOLD. 5.000 *FY19 Forecast

RIO TINTO RADAR RATING TAKE $$$  Diversified miner (DOWNGRADE FROM HOLD) The top tier miner reported a slightly better than expected FY18 result with guidance largely unchanged. Strong cash generation and bumper dividends ASX CODE RIO featured. Underlying EBITDA was only 2% lower at $18.1bn, despite divestments. CURRENT PRICE $92.09 Underlying NPAT was 2% higher to $8.8bn. The final dividend was raised 6% or US17 cents to a record US307 cents. A US243 cent special dividend is also MARKET CAP $34.2BN being paid. The board is displaying disciplined capital stewardship, sharing more of the NET DEBT US$8.0BN** spoils with shareholders rather than solely reinvesting in growth. We recall the disastrous US$38bn acquisition of Alcan in 2007 that nearly blew up DIVIDEND YIELD 5.5%* the company. Cash from divestments and internal cash generation has seen RIO - Share Price 19 19 18 18 19 18 18 18 18 18 18 US$13.5bn being returned to shareholders via dividends and buy-backs with $ 18 JUL FEB OCT SEP DEC JUN JAN AUG AUG NOV NOV APR MAY MAY respect to FY18. We expect this theme to continue. n MAR

90.000 RADAR RATING: With a diversified portfolio of leading assets and healthy 85.000 development pipeline underpinned by a strong balance sheet and good 80.000 cashflow generation, Rio Tinto is well positioned to continue to benefit from 75.000 the upswing in the resources cycle. But everything has a price and Rio Tinto 70.000 65.000 ASX SOURCE: looks expensive on our valuation model. We have milked the commodities boom well. It’s time to take some risk off the table. TAKE PROFITS. *FY19 Forecast **Proforma 31 Dec 18 - adjusted for post balance commitments including dividends and buy-back.

BLUE CHIP VALUE 8

ASX BIG CAP ANALYSIS 22 MARCH 2019

SYDNEY AIRPORT RADAR RATING BUY Aviation Sydney Airport reported a record full year result driven by record passenger ASX CODE SYD numbers and strong performance in non-aeronautical segments (retail, property and parking) and cost containment. CURRENT PRICE $7.17 FY18 revenue and EBITDA increased around 7% to $1.58bn and $1.28bn MARKET CAP $16.2BN respectively. A modestly higher interest bill saw net operating cash receipts rise 9% to $861m. Full year distributions totaled of 37.5 cents. FY19 distribution NET DEBT $8.4BN guidance is 39 cents. DIVIDEND YIELD 5.4%* Passenger numbers were up 2.5% to 44.4m for the year with international rising 4.7% to 16.7m. Domestic traffic moderated recently but international is still SYD - Share Price 19 19 18 18 19 18 18 18 18 18 18 $ 18 JUL FEB OCT SEP DEC JUN JAN AUG AUG NOV NOV APR MAY MAY relatively strong. Sydney Airport is more resilient to changes in passenger activity MAR than an airline given that it is not directly exposed to airfare revenue, oil prices and has more diversified revenues. Non-aeronautical revenues represent over 7.500 half of the total. Changes in interest rate expectations have a greater impact on 7.250 the stock price. n 7.000 6.750

6.500

RADAR RATING: Sydney Airport is Australia’s largest and busiest airport. As 6.250 ASX SOURCE: the international gateway into Australia it is leveraged to growing tourism into Australia. Dividends should increase gradually over the next few years, *FY19 Forecast as they have done in the past few years. The 5.4% dividend yield looks good, particularly in a declining interest rate environment. BUY.

WESFARMERS RADAR RATING HOLD  Diversified industrial (DOWNGRADE FROM BUY) Wesfarmers has substantially restructured its operations over the first half, including the demerger of Coles and a few major disposals. ASX CODE WES The company reported a 1H19 underlying increase in NPAT of 10.4% to $1.08bn CURRENT PRICE $34.80 from total underlying EBIT of $1.65bn. The divestments funded a substantial reduction in debt and allowed a special dividend of $1 in addition to the ordinary MARKET CAP $39.3BN interim dividend of $1. Bunnings delivered a solid result and remains the key component of the business, contributing more than half of group earnings. Sales NET DEBT $324M revenues increased 5% and EBIT 8%, while Kmart Group EBIT, which includes Target was down 4%. Officeworks reported 8% revenue growth and almost 12% in DIVIDEND YIELD 4.9%*

earnings. The industrial business was slightly down on the prior year despite much WES - Share Price 18 19 18 19 19 18 18 18 18 18 18 higher revenue, impacted by higher ammonia costs and contracting expenses. $ 18 JUL FEB OCT SEP DEC JUN JAN AUG AUG NOV NOV APR MAY MAY MAR Operating cash flow was almost $2bn with substantial debt capacity for acquisitions, but it is not yet clear which direction the company will take. n 36.000

34.000

RADAR RATING: Wesfarmers earnings profile is substantially more exposed 32.000

to discretionary retail expenditure after the demerger of Coles and its 30.000

valuation is not compelling. We are downgrading. HOLD. 28.000 ASX SOURCE:

*FY19 Forecast

BLUE CHIP VALUE 9

ASX BIG CAP ANALYSIS 22 MARCH 2019

WORLEYPARSONS RADAR RATING BUY Engineering contractor The engineering group reported a stronger 1H19 result reflecting improved ASX CODE WOL conditions, cost cutting and the full period inclusion of the UKIS acquisition. No specific guidance was given, however outlook commentary was bullish and an CURRENT PRICE $14.48 improved full year result is expected. Importantly, the company is on track to complete the US$3.3bn Jacobs ECR acquisition by March/April 2019. MARKET CAP $6.7BN The lastest acquisition brings potential significant strategic and financial benefits NET DEBT $784M** as Worley will become the global leader in the upstream hydrocarbons, chemicals and minerals and metals sector. The timing also looks good as the energy DIVIDEND YIELD 1.8%* investment cycle looks to be on the upswing. However, this also brings increased WOR - Share Price 18 18 19 18 19 19 18 18 18 18 18 risk. Worley is making a big bet as it assumes no material downturn in commodity $ 18 JUL FEB OCT SEP DEC JUN JAN AUG AUG NOV NOV APR MAY MAY prices and also brings integration risk. MAR

For 1H19 underlying EBIT and NPAT were up 17% and 26% to $156m and $98m 20.000 respectively on 11% revenue growth to $2.57bn. Operating cash flow halved to 18.000 $21m but debt metrics are sound. The unfranked interim dividend was raised 2.5 16.000 cents to 12.5 cents. n 14.000 12.000

10.000 ASX SOURCE: RADAR RATING: WorleyParsons’ earnings outlook is positive and will be further improved by the Jacobs ECR acquisition. But this it is not without *FY19 Forecast risk. The challenge will be to manage a smooth integration and deliver **Excludes $2.9bn cash proceeds touted benefits. BUY. from the capital raising earmarked for the Jacobs ECR acquisition.

WOOLWORTHS RADAR RATING HOLD Supermarket Woolworths reported a 2.3% increase in sales revenue for 1H19 to $30.6bn, with ASX CODE WOW a balanced result across all its continuing operations: Australian Food, Endeavour drinks, New Zealand Food, BigW and Hotels. At the EBIT level, an improvement CURRENT PRICE $30.41 of 4% in Australian Food to $937m offset deteriorations in Endeavour to $290m, a small loss at Big W, and marginal losses in Hotels and NZ for total EBIT of MARKET CAP $40.0BN $1.441bn. NET DEBT $1253M The group is selling its petrol business, which will help fund a return of capital of up to $1.7bn, around $1.25 per share. Increases in the cost of doing business DIVIDEND YIELD 3.5%* in many divisions both in Australia and NZ cut into first half earnings, and these WOW - Share Price n 18 19 19 18 18 18 18 19 18 18 18 pressures will continue. $ 18 JUL FEB OCT SEP DEC JUN JAN AUG AUG NOV NOV APR MAY MAY MAR

RADAR RATING: We think that Woolworths is better positioned than is 31.000

arch competitor Coles to meet the challenges presented by a subdued 30.000

consumer market and increased competition nipping at its heels. 29.000 A good stock for the portfolio. HOLD. 28.000 27.000

26.000 ASX SOURCE:

*FY19 Forecast

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ASX BIG CAP ANALYSIS 22 MARCH 2019

WARNING: This publication is general information only, which means it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether a particular recommendation is appropriate for your needs before acting on it, and we recommend seeking advice from a financial adviser or stockbroker before making a decision. DISCLAIMER: This publication has been prepared from a wide variety of sources, which Under the Radar Report Pty Ltd (UTRR), to the best of its knowledge and belief, considers accurate. You should make your own enquiries about the investments and we strongly suggest you seek advice before acting upon any recommendation. All information displayed in this publication is subject to change without notice. UTRR does not give any representation or warranty regarding the quality, accuracy, completeness or merchantability of the information or that it is fit for any purpose. The content in this publication has been published for information purposes only and any use of or reliance on the information in this publication is entirely at your own risk. To the maximum extent permitted by law, UTRR will not be liable to any party in contract, tort (including for negligence) or otherwise for any loss or damage arising either directly or indirectly as a result of any act or omission in reliance on, use of or inability to use any information displayed in this publication. Where liability cannot be excluded by law then, to the extent permissible by law, liability is limited to the resupply of the information or the reasonable cost of having the information resupplied. No part of this publication may be reproduced in any manner, and no further dissemination of this publication is permitted without the express written permission of Under the Radar Report Pty Ltd.

Published by Under the Radar Report Pty Ltd Editor Richard Hemming Publisher Caroline Mark 45 Evans Street, Balmain NSW 2041 ABN: 65147404662. AFSL: 409518. Telephone +61 2 9106 2167 Email [email protected] Website www.undertheradarreport.com.au

BLUE CHIP VALUE 11