Monday 17 September 2018 Expert opinion

Last week we held our Switzer Listed Investment Conference (SLIC) and gathered together the best investment minds in the country that manage LICs. Today, I share with you a number of the investment tips that I picked up at the three conferences.

Paul Rickard also answers a very important question raised at one of the conferences in his article – The best managed investment. James Dunn takes a look at 5 stocks to ride the next infrastructure boom, and in Buy, Hold, Sell – what the brokers say, Myer gets two upgrades.

Sincerely,

Peter Switzer

Inside this Issue 02 The stocks and strategies from our SLIC conferences that will make me money The professional’s secrets by Peter Switzer 04 5 stocks to ride the infrastructure boom Catch the next wave by James Dunn 07 The best managed investment Which one? 5 stocks to ride the by Paul Rickard 11 3 companies to be affected by electric vehicles infrastructure boom Two centuries old by James Dunn by Roger Montgomery 04 13 Buy, Hold, Sell – what the brokers say Myer gets double upgrade by Rudi Filapek-Vandyck

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before Switzer Super Report is published by Switzer Financial Group Pty Ltd AFSL No. 286 531 acting, consider the appropriateness of the information, having regard to the Level 4, 10 Spring Street, , NSW, 2000 individual's objectives, financial situation and needs and, if necessary, seek T: 1300 794 893 F: (02) 9222 1456 appropriate professional advice. The stocks and strategies from our SLIC conferences that will make me money by Peter Switzer

The whole point of the Switzer Report is to give you a Look for moats crucial competitive edge in building your wealth, so when we put on something like our full day Switzer Paul Black was beamed in from Laguna Beach, Listed Investment Conference (SLIC) in Sydney, California, USA and explained the investment drivers Melbourne and Brisbane, we expect to unearth behind his global growth fund — WCM Investment learnings and investment ideas that could really make Management — outperforming the global benchmark a difference to how you should invest. For those of by 5.2% every year for the last 10 years! That’s a you who couldn’t come along, let me recap and huge effort and two standout reasons resonated with underline what I learnt from my three-days of hosting me. some of the smartest investment minds in, and outside, the country. First, they look for companies that, as Warren Buffett put it, have wide moats. The idea here is that a Platinum’s Kerr Neilson, Investors Mutual’s Anton company with a wide moat is like a castle and the Tagliaferro, Perpetual’s Vince Pezzullo and moat offers the company protection for its market, its WCMQ’s Paul Black have long been legends of profits and its share price. However, the guys who stock-picking and every time I get to talk to them, I drive the local WCM Quality Growth fund, with the know I learn something that makes me a better ticker code WCMQ, say they look for companies with investor. growing moats.

Look for the unloved These companies have a growing competitive advantage. By having a filtering system like this, Kerr Neilson admits he looks for the companies that WCM usually winds up with a bagful of very good have been mistreated by the market, which he operations, such that Paul is less concerned with the believes have lots of potential upside. He said he’s macroeconomic headwinds that can send stock not afraid to look through companies in the dinghy market indices plummeting. part of the market and when you think about it, a few years back, that’s where Bluescope was. He advised Look at the culture that you have to work out whether a market beating up on a company is linked to a structural problem or The WCM crew also believe the culture of a company where it is a temporary issue. can explain why it has a growing moat. Companies such as Costco, Amazon and Google have always When I recommended BHP some 18 months ago, it been singled out for their cultural quality. It’s not a was because I argued that its unloved status would ‘be all and end all’ matter but Black says there is a be temporary. And if you gave it three years to go high correlation between culture and company from $14 to $20, you’d still make $6 on $14, which performance. would have been a 42% return or 14% per annum. The actual return was $19 on $14 and that made it a The most recent addition to Paul’s portfolio is a 135% pay off and it was with arguably the best mining Canadian company called Shopify (SHOP) and company in the world. listening to him I had a new thought, and it surprised me that I’d never thought of this before — why would I

Monday 17 September 2018 02 get a local fund manager to invest for me overseas? I should look out for our video replays of his wouldn’t want a New York based fund manager to presentation — it was very insightful. invest for me here, so why wouldn’t I use an overseas fund manager to invest overseas? Look for surprises

Look for reality Another interesting presentation came from Simon Shields of Monash Absolute Investment Company, Back to local stocks, and two guys who impressed who explained how an absolute investing LIC plays the audiences were Anton Tagliaferro from Investors both a long and a short game. Mutual and Vince Pezzullo from Perpetual Equity Investment Company. How he played Touch was very instructive. He explained how he didn’t go long the stock until it Anton gave us his four rules of investing: announced its plan to expand overseas. He said this news was not in the share price and as they had 1. Know the difference between speculating and proved the model locally, he foresaw there was investing. potential upside at $7.25. He then sold out 2. Understand momentum versus searching for progressively at $14.70 in July this year, $17.60 in value. August and then $20 again in August. 3. Avoid info-overload but search for knowledge, which he said this Report specializes in! He also said that some analysts are intimidated by (Thank you Anton.) big companies with plenty of influence. When that 4. Don’t get fooled by perception and always happens, it creates shorting opportunities because look for reality. the reality will eventually show up in the company’s accounts. He summed up his investment philosophy as: “We seek to buy and own companies with a competitive His LIC is trading at a discount to its net tangible advantage, with recurring earnings, run by capable assets and this led to a lot of questioning around the management that can grow…at a reasonable price.” potential gain when you buy into a LIC when the market is mispricing the actual value of the shares Investors Mutual looks for value beyond the top 20 and the performance of the fund manager. (And you stocks because Anton says most investors are can read Paul Rickard’s article today for a closer heavily exposed to these top stocks and he likes examination of that issue). “boring” companies, such as Pact and , rather than the likes of WiseTech. That said, those fund managers do need to communicate more effectively as some managers, Look for long-term growth who are good stock pickers in their own right, have shown themselves to be even better marketers of Perpetual’s Vince Pezzullo chases regular income their funds! and long-term capital growth and he likes the banks for a number of reasons, despite their Royal The lesson is to be mindful that LICs priced with a Commission challenges, with his favourite. significant premium could one day come back to bite He likes oil and thinks the outlook for commodities is you. positive, despite some short-term threats from Donald Trump’s trade war threats. Important: This content has been prepared without taking account of the objectives, financial situation or His top local holdings are: Westpac, Woolworths, needs of any particular individual. It does not Suncorp, NAB, BHP, , The Star, constitute formal advice. Consider the Oilsearch and . appropriateness of the information in regard to your circumstances. He’s worried about small regional banks and you

Monday 17 September 2018 03 5 stocks to ride the infrastructure boom by James Dunn

Australia has swung into an infrastructure boom, with high recently on the back of the FY18 result released spending accelerating on big-ticket public last month, which saw a 47% lift in net profit after tax infrastructure – roads, railways, runways, tunnels, (before amortization and significant items) and a very dams and electricity generation and distribution rosy outlook for the company’s Australian business, facilities. The infrastructure boom is taking over from with the company predicting an “extraordinary next mining construction, and as broker CommSec points decade” in infrastructure, with what chief executive out, the centre of construction activity is no longer Mike Kane describe as an “amazing” amount of work Western , Northern Territory and northern on roads, highways, bridges, tunnels and airports. , but rather the growing population The stock market appears to believe that work in centres of south-east Australia. commercial, infrastructure and major projects activity should well and truly offset any impact from the Australia is spending more on infrastructure now than residential property slowdown. at any time in the past 30 years – almost $100 billion in the last financial year alone, according to the The major concern for analysts remains the Reserve Bank of Australia (RBA). And the next few company’s 2017 acquisition of US building supplies years are likely to be even bigger. Nationwide, the group Headwaters, which specialises in fly ash, a Australian Infrastructure Budget Monitor shows that by-product of coal power stations that is used in almost $130 billion dollars is being invested in concrete and other road making and building infrastructure on the eastern seaboard alone. materials. Some analysts see Headwaters as a worryingly big bet at a crucial time in the US housing In Victoria, more than $100 billion worth of new roads, cycle, but Boral went a long way toward assuaging rail lines, hospitals, skyscrapers, prisons, wind farms those doubts in the FY18 result by achieving US$39 and other infrastructure is being built or planned, million worth of synergies in year one, bettering its Queensland has about $20 billion worth of work being target of US$35 million. done in Brisbane alone, and Western Australia has a $60 billion pipeline of infrastructure projects, Boral will be a major beneficiary of the Australian according to CBRE, with $13 billion earmarked for infrastructure boom, which could well be swelled by projects in the Perth metropolitan area. election promises: there is a state election in March, and Federal elections must happen It’s a good time to be involved in supplying the before November 2019. Analysts see plenty of scope infrastructure boom. Here are five players for Boral’s share price to rise.

1. Boral (BLD) 2. Adelaide Brighton (ABC) Market capitalisation: $8 billion Market capitalisation: $4 billion Consensus estimated FY19 yield: 4.1%, 50% Consensus estimated FY19 yield: 4.7%, fully franked franked Analysts’ consensus target price: $7.90 Analysts’ consensus target price: $6.02 (Thomson Reuters), $7.55 (FN Arena) (Thomson Reuters), $6.04 (FN Arena)

Building products heavyweight Boral has been riding Australia’s biggest cement maker, Adelaide Brighton,

Monday 17 September 2018 04 is also very well-placed to ride the tailwind of booming equipment, formwork and concrete, and specialised infrastructure spending by governments on projects site services. including roads, tunnels, bridges and freeways. Adelaide Brighton has been able to lift its prices in GCS has successfully expanded into the east coast recent years – as indeed has Boral – and thus boost market, particularly Victoria, where it has several its margins, and it should be able to continue that major customers, including Multiplex, BGC trend as infrastructure spending surges. Contracting and . Last month the company secured $24.6 million worth of concrete Adelaide Brighton has said that the infrastructure structure works with Watpac Construction on two boom on the eastern states is taking over from a major building projects in Victoria – the construction slowing housing sector as the prime driver of the of Deakin University’s new Law Building and the company’s profits, and that momentum is building in four-storey Melbourne Data Centre. GCS has timed its business. The residential housing sector makes up this transition particularly well. Since entering 31% of Adelaide Brighton’s revenues, while Australia’s east coast construction market in engineering and infrastructure makes up 34%: mid-2017, the company has won more than $63 commercial building represents 24%, while the mining million worth of work and has more than $600 million industry is at 11%. worth of work in the contract tender pipeline. CGS has a particularly strong business in cladding However, the company’s recent half-year result rectification work, which has recently received a lot of (ABC uses the calendar year as its financial year) attention was treated by the market as a touch disappointing: first-half profit met expectations, but despite the GCS is coming off a buoyant FY18, in which it lifted company’s bullishness on market conditions, the revenue by 33% to $247.5 million, boosted net profit guidance for full-year net profit was weaker than by 25% to $13.6 million, and more than doubled its expected, at $200 million–$210 million – a fully franked dividend, to 4.5 cents. The order book is contradiction that saw brokers lowering profit healthy and the balance sheet is also strong, with a estimates and price targets, thus hurting the share net cash position. On consensus, Thomson Reuters price. The market was also concerned by the fact that has analysts expecting 6.9 cents in earnings per both the chief executive officer and chief financial share (EPS) in the current financial year, and a fully officer are leaving the company. Adelaide Brighton is franked dividend of 4.8 cents. That prices GCS at 9.4 a decent yield-payer, but is not seen as being as times expected earnings, which analysts see as attractive on price grounds as Boral. cheap – hence the 26% discount to the consensus target price. 3. Global Construction Services (GCS) Market capitalisation: $144 million 4. Decmil Group (DCG) Consensus estimated FY19 yield: 7.4%, fully Market capitalisation: $162 million franked Consensus estimated FY19 yield: no dividend Analysts’ consensus target price 88 cents expected (Thomson Reuters) Analysts’ consensus target price: $1.21 (Thomson Reuters), $1.12 (FN Arena) The Western Australian-based Global Construction Services is about to change its name to SRG Global, Engineering and construction company Decmil has having merged with fellow Perth company SRG to struggled in recent years, with a very disappointing create an engineering, construction and maintenance result in FY17, but that could be to the benefit of business. GCS is a supplier of integrated on-site investors looking at the company now. DCG is products and services to the engineering, well-placed to tap into the increased infrastructure construction and maintenance industries. It is spending in Victoria and the expected boost to mining involved through the entire lifecycle of a project and construction expenditure. provides the onsite workforce and site accommodation, scaffolding and access, plant and In FY18, Decmil’s Victorian business unit won more

Monday 17 September 2018 05 than $100 million worth of new transport infrastructure for commercial and residential high-rise buildings and construction work. The company has also expanded civil infrastructure. its business in New Zealand, where last year it won more than NZ$185 million in work in the corrections Acrow says its outlook for FY19 is strong, with a end education sectors of government spending. growing order book and new business wins in the east coast infrastructure market. At a FY18 balance Decmil is also well-positioned to pick up resources date the company had nil debt, with a net cash work in its speciality of non-process infrastructure position of $4.9 million. Although only a micro-cap (NPI) construction projects. At the FY18 result, the company at present, Acrow knows its niche business company said it expected FY19 revenue to exceed very well, and has a high return on equity – above $500 million, based on order book and tender 20%. It is an unfranked dividend payer, with a pipeline. That is against the $342 million in revenue relatively low (about 30%) payout ratio, being more for FY18. Since the result, Decmil has won a $150 concerned at present with reinvestment for growth. million coal-seam-gas work contract in Queensland Analysts believe that the strong share price and an $86 million road contract in Victoria. performance since listing has taken it past fair value, but Acrow could surprise on the upside over the Decmil is not expected to pay a dividend this year, medium term as the company becomes better known. but dividends are expected to resume in FY20 and analysts see a healthy outlook for medium-term Important: This content has been prepared without capital growth in the stock. taking account of the objectives, financial situation or needs of any particular individual. It does not 5. Acrow Formwork and Construction Services constitute formal advice. Consider the Limited (ACF) appropriateness of the information in regard to your Market capitalisation: $88 million circumstances. Consensus estimated FY19 yield: 4.1%, unfranked Analysts’ consensus target price: 50 cents (Thomson Reuters), 52 cents (FN Arena)

Spun off by Boral to private equity owners in 2010, and returned to the stock market through a backdoor listing in April this year, Acrow provides hire equipment to the Australian civil infrastructure and construction sectors. Once mainly a scaffolding provider, the company has moved more into providing formwork (the moulds into which concrete or plastic materials are poured) and falsework (the temporary framework structures used to support a building during construction), which are much higher-margin products. And given that its products are mainly used in building motorways, bridges and tunnels, ACF is nicely positioned to benefit from the increased infrastructure spending on the eastern seaboard.

Coming to the stock market in April at 20 cents, Acrow has been a big success, moving to 54 cents. The company announced record revenue of $65.3 million for FY18, and a net profit of $10.5 million. In August, the company announced the acquisition of Natform, which it describes as the country’s leading designer and hirer of screen-based formwork systems

Monday 17 September 2018 06 The best managed investment by Paul Rickard

Investors in Australia’s biggest Listed Investment Total Returns to 31 August 2018 Companies (LICs) have witnessed mixed fortunes over the last 12 months. While on paper an annual return in the range of 12.7% to 13.1% looks pretty commendable, this masks the fact that they have underperformed the benchmark S&P/ASX 200 accumulation index by 2.3% to 2.7% over this period. And if share price performance is considered (growth in share price plus dividends), they have fared even Shareholder returns in LICs have been further worse as the premium to NTA (net tangible asset diminished by the closing of the premium to NTA. And value) has evaporated. The second largest, Argo it is this discussion of premiums, or a discount, which (ASX: ARG), has returned only 7.2% on this measure leads me to address one of the most frequently asked over the 12 months to 31 August. questions by investors: what is the best managed investment? Part of the reason for the underperformance of the major LICs is that they tend to invest in the major cap While many investors prefer to construct their own stocks, and the top part of the market has portfolio of direct shares, others see the advantages underperformed relative to the mid and small caps. of using a managed investment – particularly if they Many of our major companies (the major banks, don’t have a lot of time to follow the market. Some retailers, insurance companies, telcos, etc) are investors use managers to complement a portfolio of somewhat “growthless” and are struggling to direct shares, while others go the opposite way and increase shareholder returns. This is reflected in the run a core portfolio with a manager and then invest in return of the S&P/ASX 20, which is 13.86% for the 12 individual shares as the satellite component. months to August, 1.54% below the return of the S&P/ASX 200 of 15.40%. Two of the easier ways to gain exposure to the market are through broad based LICs or index As the following table makes clear, the top part of the tracking Exchange Traded Funds (ETFs). Listed and market has underperformed over the last few years. traded on the ASX, both are managed investments. Interestingly, it’s almost a reversal of what happened There are also many other managed investments over the first half of the decade, when the market was (ETFs and LICs) that specialise in components of the led by the major stocks. On a 10-year basis, the top market (such as mid caps or small caps), sectors, or 20 stocks have marginally outperformed the investment styles (e.g. deep value). And of course S&P/ASX 200, while underperforming on a 1-year, there is the Switzer Dividend Growth Fund (ASX: 3-year and 5-year basis. SWTZ), which because I am conflicted, I will exclude from this discussion. The ”stars” have been the mid-cap stocks. The midcap 50 index, which tracks stocks ranked 51st to But I propose to stick to funds that offer broad market 100th by market capitalisation, has returned 18.17% exposure and address the question: what is the best per annum over the three years. managed fund? I answer this by saying it largely comes down to the premium or discount.

Monday 17 September 2018 07 Exchange traded funds (ETFs) The major LICs Most ETFs are designed to track an index. They are There are three major broad market LICs – AFIC or on “autopilot” – the manager invests and maintains Australian Foundation Investment Company (AFI), the investment in accordance with the index. If the Argo Investments (ARG) and Milton Corporation index weight for is 7.5%, very (MLT). They are big, professionally managed and close to 7.5% of the ETF will be invested in very credible investment companies. Milton Commonwealth Bank shares. The manager doesn’t Corporation, for example, was listed on the ASX in try to beat the market – all he/she does is to try to 1958 and has paid a dividend to its shareholders reduce the index tracking error. every year since.

With their low management fees, they should provide LICs are actively managed. That said, these broad a return that closely matches the return of the index. market LICs essentially invest in the major blue chip Nothing more, nothing less. companies, placing considerable emphasis on companies that have reliable earnings, pay The major market cap ETFs are set out below. They fully-franked dividends and have an ability to grow track broad-based indices, with both IOZ and STW these dividends. An investment précis is set out in the tracking the S&P/ASX 200 (IOZ from 1 December table below. 2015), while VAS tracks the broader S&P/ASX 300. Fees are very competitive. As the table demonstrates, the funds have largely matched the performance of the S&P/ASX 200 Performances to 31 August 2018 (after fees) are accumulation index over 10 years, but shown below, as is the benchmark S&P/ASX 200 underperformed in more recent time periods. Milton accumulation index. Corporation, the smallest in size at just under $3.3 billion, boasts the best performance over three years, Major ETFs five years and 10 years.

Interestingly, one of Argo’s largest investments at 31 August (1.6% of its funds) was in rival Milton Corporation. It also has a sizable investment in another LIC, Australian United Investment Company (AUI).

Major LICs

Returns to 31/8/18. Source: Respective Managers

The advantages of an ETF over a LIC are improved transparency and market pricing. ETFs update their NTA every working day, sometimes intraday, and due to their fungibility (the ability of an asset to be interchanged with other assets of the same type) and appointment of market makers, you can buy or sell an ETF within 0.10%/0.20% of the NTA of the fund. The premium or discount should always be small. Unlike LICs, they don’t offer share purchase plans. Returns to 31/8/2018. Source: Respective Managers

Each of the major ETFs pays distributions on a An advantage of LICs compared to ETFs is that they quarterly basis. usually offer share purchase plans, which allow

Monday 17 September 2018 08 shareholders to subscribe for new shares at a Source: Argo marginal discount to their underlying value or NTA (Net Tangible Asset value). Dividends, whilst Over the last 12 months, the LICs have moved from generally higher, are only paid twice a year trading at a small premium to trading at a small (compared to the quarterly distribution cycle offered discount. At the end of August, each of the major by ETFs). LICs was trading at a discount ranging from 0.8% for AFIC to 3.5% for Milton. A major disadvantage is that as close-ended funds, where new investors become investors by buying Discount/premium (as at 31 August 2018) shares from other investors on the ASX, the LIC can at times trade at a significant premium or discount to its NTA.

LIC or ETF? The tables demonstrate that despite their different *NTA sourced from Company Reports investment styles, objectives and benchmarks, the broad market LICs can be expected to deliver an With the ASX off almost 2% in September (1.96% on index style return plus or minus a bit, and the ETFs a total return basis), the discount has narrowed. We an index return less a fraction. While this is not a estimate that AFIC closed at a small premium on “given”, the outcome is not that surprising, given the Friday, while Milton’s discount was back to 2.7%. concentrated nature of the domestic share market and the relatively conservative investment style Estimated Discount/Premium (as at 14 September adopted by the LICs. 2018) So, the answer to the question: LIC or ETF? comes down to the premium or discount that the LIC is trading at.

The graph below shows Argo’s share price compared to the underlying NTA. At times, it has *NTA estimated by Switzer Report, based on reported traded at a discount of up to 15% and at other times a 31 August NTA adjusted for the movement in the premium as high as 17%. More recently, this range S&P/ASX 200 Accumulation Index has narrowed to around 5% either way. While LICs can point to relatively strong performance Argo’s share price to NTA – relative in the first half of the decade, their recent premium/discount underperformance suggests the assumption that the return will be around index may be difficult to sustain long term, and that a safer assumption for long-term performance may be “index minus a bit”. For ETFs, we can be confident that the return will be index less the management fee – nothing more, and nothing less.

So, my rule of thumb is:

If the LIC is trading at discount of at least 2%, then invest in the LIC,

otherwise, invest in the ETF.

Monday 17 September 2018 09 While there is arguably a little more variability in the based LICs are starting to look attractive. By a return from the LIC than the ETF (because the former whisker, long-term investors should consider LICs in is actively managed), the flipside is that its return may preference to index based ETFs. indeed be better than the index return. There is also some manager risk – so you may want to spread any Important: This content has been prepared without investment across two LICs. taking account of the objectives, financial situation or needs of any particular individual. It does not Calculating the premium or discount constitute formal advice. Consider the LICs are required to publish their NTA each month appropriateness of the information in regard to your (via an ASX announcement, plus on their website), circumstances. which is generally available by the fifth working day of the following month.

At other times, you can quite accurately estimate the NTAs for the broad market LICs. Take the last published NTA, and adjust it up or down by the percentage movement in the S&P/ASX 200 since the calculation date (i.e. end of month). To calculate the premium or discount, compare the estimated NTA with the current market price on the ASX (see table above for 14 September 2018).

Which one? My ranking of the ETFs (based on management fees and index tracked) is:

1. VAS (Vanguard) 2. IOZ (iShares) 3. STW (SPDR)

There is very little in this assessment – any of these ETFs could be selected. It is heavily influenced by fee and a longer term view that smaller companies will in time do better and hence a preference to opt for a broader index (the S&P/ASX 300 rather than the S&P/ASX 200).

With the LICs, Milton Corporation has the best performance record over three years, five years and 10 years and has the biggest discount. It gets the gong. In a tight race for second, I can’t really split the other two. If investing, I would buy whichever is trading at a bigger discount.

1. MLT (Milton Corporation) 2. AFI (Australian Foundation Investments) or ARG (Argo)

Buy LICs Overall? With discounts out to 2% or more, the broad

Monday 17 September 2018 10 3 companies to be affected by electric vehicles by Roger Montgomery

Electric and autonomous vehicles capture the Even though electric vehicles will initially carry higher imagination and the headlines. Like many earlier sticker prices, when fuel and maintenance savings technologies, such as the internal combustion engine are factored in, electric vehicles will become cheaper and commercial aircraft, electric vehicles promise to – especially in regions where fuel costs are higher, change the course of human history. But it is easy to such as Europe. Once that happens, an inflection mistake excitement about the technology for a free point for demand will be reached. ride to investing success. For investors, it is important to remember that many History lessons businesses will be disrupted by the changes. Many production line jobs will be lost. History shows that new technology, even technology that has changed the world, has not necessarily Not only will the car industry need fewer people to made for good returns. manufacture vehicles, fewer still will be needed to maintain them. Petrol-fuelled, internal combustion In auto manufacturing, the wave of change will disrupt engines are much more likely to fail than an electric everything from petrol stations and fuel tankers to vehicle’s motor, and that’s not surprising coal mines and mechanical car maintenance. On the considering internal combustion engines have supply side, as component makers scale significantly more moving parts. manufacturing and the production costs fall, cheaper products will open new markets and demand. Now it won’t all be bad news for investors in the internal combustion engine and ancillary industries. It may come as a surprise, but the first electric car According to BP, by 2040 there will be nearly two was released in 1837. That puts electric vehicles billion cars on the planet, but only 300 million or 15% ahead of Ford’s Model T by about 70 years. Then, as of these will be electric cars. In other words, 85% of road infrastructure improved and people saw the the global vehicle fleet is expected to have an internal value in driving longer distances, early electric combustion engine. vehicles were unable to meet the challenges of range and speed. Then, oil prices plunged and electric With that in mind, let’s look at a few companies with vehicles were relegated to the scrap heap. exposure to the changing world of the most popular form of personal transport in the developed world. More recently, rising oil prices and environmental campaigns, as well as advances in battery ARB Corp (ASX:ARB) technology, has meant the return of electric vehicles today is likely to be longer-lived. ARB is Australia largest manufacturer and distributor of aftermarket 4WD accessories with an international Costs coming down distribution network that extends to more than 100 countries globally. Despite growing its equity On the demand side, the total cost of electric vehicle three-fold over the last decade, management has car ownership is expected to reach parity with managed to maintain a return on equity of almost combustion engines this year, making the decision to 20% per annum, ensuring value creation, which in buy electric that much easier. turn has been reflected in a share price that has risen

Monday 17 September 2018 11 from $3.85, 10 years ago, to around $20 today. parts. Today, however, the share price appears expensive. Arguably more consumer focused than Bapcor, Super ARB is unlikely to be affected by electric vehicles Retail Group’s fortunes are even more affected by given charging stations are unlikely to be available consumer sentiment. The arrival of Amazon to where most of the company’s customers drive their Australia’s shores will also have an impact, vehicles. In the meantime, the company continues to especially on the company’s non-automotive display solid operating trends with third quarter businesses, such as Rebel Sport.Cash from revenue growth of over 12%, driven by Australian operations materially exceeds reported profits, but aftermarket revenue growth of over 11% and export even though the company has added value since market revenue up more than 16%. By the end of 2013 by improving profits and profitability, the share 2019, another seven stores are expected to be price remains stubbornly below its 2013 highs. opened, and the current sales order book is reported to be very strong, thanks to car manufacturers Bank credit tightening, rising interest rates and falling releasing a plethora of new models. house prices are all conditions weighing on pro-cyclical discretionary consumer stocks and while BAPCOR (ASX:BAP) the share price currently appears to represent reasonable value, it is likely that any deterioration in BAP distributes automotive aftermarket parts and economic conditions will be accompanied by accessories, such as air filters, brake pads, oils and downgrades to SUL’s earnings outlook forecasts. lubricants as well as fan belts and engine parts directly to independent mechanics and through its Important: This content has been prepared without own networks, including under the Autobarn and taking account of the objectives, financial situation or Bursons brands. needs of any particular individual. It does not constitute formal advice. Consider the Bapcor is likely to eventually be affected by the appropriateness of the information in regard to your reduced need for repairs and maintenance by more circumstances. efficient battery-powered induction engines but it will be many decades before the mix shifts and the Australian and New Zealand car fleet is sufficiently dominated by electric vehicles to affect parts suppliers.

Nevertheless, the share price for BAP is over 19 times forecast 2019 earnings and recent acquisitions, such as NZ’s Hellaby, which are performing strongly, have increased the debt on the company’s balance sheet. While the debt has only taken the company’s net debt to equity ratio to 56%, it does come at a time when interest rates are rising and the economy may slow down. This is a pro-cyclical business, trading at an expensive price.

Super Retail Group (ASX:SUL)

Included in the company’s suite of consumer retail networks and brands is BCF (Boating Camping and Fishing), Rays Outdoor, Macpac, Rebel Sport and Supercheap Auto, the latter selling car accessories and car care products as well as tools and spare

Monday 17 September 2018 12 Buy, Hold, Sell – what the brokers say by Rudi Filapek-Vandyck

Persistent weakness for the local share market has companies to create value through M&A opportunities finally triggered a switch towards recommendation in North America. A disparity between the ASX gold upgrades for individual ASX-listed stocks. For the sector and the Canadian-listed sector creates the week ending Friday, 14th September 2018, FNArena opportunity, despite the challenging operating registered no less than twelve upgrades versus only environment, as North America hosts many large three downgrades (see our Thursday report) with high-grade gold systems. The broker estimates its troubled department store operator Myer the sole ASX gold coverage will generate US$4 billion in recipient of two upgrades during the week; both to excess capital over the next three years and flags Neutral. (NCM), and Northern Star (NST) as the most likely to make In the good books potential acquisitions in the next 12 months.

ANSELL LIMITED (ANN) was upgraded to Buy MYER HOLDINGS LIMITED (MYR) was upgraded from Neutral by Citi. B/H/S: 2/5/1. Citi notes the to Neutral from Sell by UBS and to Hold from balance sheet is ungeared post the sale of the sexual Lighten by Ord Minnett. B/H/S: 0/3/3. UBS wellness business and now explicitly forecasts observes the focus of the FY18 result was how the acquisitions. Management has noted numerous new CEO, John King, will do things differently, given acquisition opportunities and believes it has the the business has been in a turnaround mode for the capacity to make a transaction worth US$1-1.4 billion. past five years. UBS notes some key positives, such The broker estimates an acquisition worth US$600 as improvement in like-for-like sales and million would be accretive to earnings by around 24% FY19 tracking in line with the fourth quarter of FY18. in FY21. The broker continues to forecast a FY19-21 estimates for EBIT are revised up 6-9%. progressive US$600 million buyback over FY19-22. Target is raised to $0.41 from $0.37. Target is raised to $28.50 from $25.50. FY18 results were ahead of Ord Minnett’s forecasts because of higher gross margins and lower tax. The broker has confidence in the new strategy, despite the weakness in sales over the near term. The target is raised to $0.43 from $0.37. Ord Minnett believes the new CEO has announced a credible strategy, with a focus on online sales growth, a smaller store network and improved organisational structure. This is a strategy that appears more willing to engage with the “discount value” customer and less with the more “aspirational” customer. EVOLUTION MINING LIMITED (EVN) was upgraded to Accumulate from Hold by Ord In the not-so-good books Minnett. B/H/S: 4/4/0. Ord Minnett upgrades and raises the target to $3.20 from $3.00. The broker See our Thursday report for commentary. believes the time is right for ASX-listed gold

Monday 17 September 2018 13 Earnings forecast

Listed below are the companies that have had their forecast current year earnings raised or lowered by the brokers last week. The qualification is that the stock must be covered by at least two brokers. The table shows the previous forecast on an earnings per share basis, the new forecast, and the percentage change.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

Monday 17 September 2018 14 Platinum’s Kerr Neilson explains how to make money from investing

Platinum Asset Management founder and investment guru Kerr Neilson discusses how to make money on the stock market with Platinum investment specialist Julian McCormack.

Monday 17 September 2018 15

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