Great Growth Stocks

Monday 4 March 2019 Great growth stocks

The Bill Shorten threat to franking credits and tax refunds for retirees in SMSFs has led to some ‘experts’ suggesting it’s time to change the way these super trustees invest. But I say: DON’T listen to them, unless your current investment strategy is wrong! At least wait to see if Labor wins first and then see what the Senate thinks of this ‘tough love’ shown to those retirees not getting a sniff of a pension. In the Report today, I explain why I hold this view.

Also in the Report today, Paul Rickard is happy to announce that after just two months, the market is up by 10%. And our portfolios have followed suit! In Paul’s second review for 2019, he look at how our income and growth portfolios performed in February.

Sincerely,

Peter Switzer

Inside this Issue 02 Don’t listen to those who want you to change Don’t listen by Peter Switzer 04 Portfolios up 10% after two months Up 10% in 2 months! by Paul Rickard 07 5 great growth stocks from reporting season by James Dunn 11 Buy, Hold, Sell – What the Brokers Say Don’t listen to those 25 downgrades versus seven upgrades by Rudi Filapek-Vandyck who want you to 15 Shares that go up or down because of the Federal change election by Peter Switzer Sectors and shares that are likely to be impacted 02 by Julia Lee 17 My “HOT” Stock – Automotive Holdings (AHG) I like Automotive Holdings (AHG) by Maureen Jordan

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, Sydney, NSW, 2000 individual's objectives, financial situation and needs and, if necessary, seek T: 1300 794 893 F: (02) 9222 1456 appropriate professional advice. Don’t listen to those who want you to change by Peter Switzer

The Bill Shorten threat to franking credits and tax me think that a lot of retirees could trust Gerry for 5% refunds for retirees in self-managed super funds exposure to their super nest egg, while holding say (SMSFs) has led to some ‘experts’ suggesting it’s 20 good income payers. I’m not advising that you time to change the way these super trustees invest. should, but it got me thinking that the next time the But I say: DON’T listen to them unless your current market has a silly ‘hissy fit’ sell off on the back of a investment strategy is wrong! Trump disturbance or any other sideshow, a stock like HVN, which went below $3 on the pre-Christmas And anyway, I’d wait to see if Labor wins first and share slide, might be worth thinking about. then let’s see what the Senate thinks of his ‘tough love’ shown to retirees with an SMSF and not getting And this is the kind of thinking that retirees in SMSFs a sniff of a pension. The Senate might insist that have to embrace as they potentially kiss their tax retirees receiving $10,000 in tax refunds be allowed refund goodbye! to get their tax refunds. I’ve been asked if I was worried about my Switzer Sure, I advocate more tweaking to an investment Dividend Growth Fund (SWTZ) in a ‘Bill Shorten as strategy that was a ‘set and forget’ portfolio of PM’ world. In fact, I think Bill makes my fund and my income-generating assets created to maximise the fund manager Shawn Burns (who thinks about and tax refund but there’s no need for a wholesale looks for great dividend-paying stocks 24/7) even change in approach and a new set of assets to be more valuable. acquired. We know that too many SMSF trustees were too Ironically, Bill Shorten and his proposed changes, exposed to the banks and Telstra and that’s why we while being grossly unfair to retirees who aren’t in created SWTZ, to get investors more diversified when receipt of huge tax refunds, will force the investors they went looking for stocks that pay income. This affected to become more engaged with their chart shows how risky it is to only have five stocks, investments. And Shorten’s changes will force many even if they are historically identified as reliable to become more diversified into more stable income income payers. payers, at a time when volatility is increasing, as we enter the likely final phase of this great stock market The dominant white line shows SWTZ, which has bull market. been constructed to give mainly income with a bit of allowance for capital gain. If Shawn sees a stock that That said, Bill won’t be making me give up on might not be great for dividends but it has been a income-paying stocks. However, he will make me victim of a crazy sell-off, he might try for some extra even more committed to finding those companies out capital gain, while tolerating a 2-3% dividend. But there that have been paying great dividends for years mainly his brief is to select good dividend-payers and but might not be top 100 companies. use his market knowledge to harvest dividends. We all could do this but we have to be across the timings After interviewing Gerry Harvey (who pointed out that for buying stocks at the right time to be Johnny on the Harvey Norman (HVN )was paying a dividend of 8% spot for those precious dividends. plus before franking credits) last Thursday, it made

Monday 04 March 2019 02 The chart shows SWTZ versus CBA (green), ANZ (red), WBC (orange), NAB (blue) and TLS (light blue). And while SWTZ suffered from the Royal Commission and the APRA effects on banks, it’s more diversified holdings delivered what diversification should.

But look closer at the chart and see what happened if you had 25% in US stocks, 25% in Aussie stocks, 25% in bonds and 25% in cash/term deposits. Bill’s anti-tax refunds policy should make you think about your income diversification but adding to your You would’ve made $150,437 from US shares, portfolio stocks that pay dividends is still a good $113,292 from local stocks, $77,621 from strategy. cash/deposits and $71,260 from bond funds.

Interestingly, like one last hurrah before the world So $10,000 distributed into these four investments changes for retiree investors, the AFR told us that netted you $412,609, which is only a bit short of being “the earnings season just ended looks set to give in local stocks. But with Aussie stocks only, you back to shareholders a record $84 billion in dividends would have had a lot more concentration risk! for the financial year.” I know Bill’s franking credits play is unreasonable for However, it’s also time to think about what you can a lot of SMSF retirees and I think the Senate will get from fixed income. make him introduce a cap of $10,000 or maybe more but let’s use this threat and turn it into an opportunity. And once again, being diversified makes a lot of wise Being more diversified by both being in more stocks investor sense. that pay dividends, having more overseas stocks and being in other asset classes are all good ideas that The Shorten threat makes it timely to look at bond financial planners have been recommending for ages. funds, floating rate notes and fixed interest style investments. The big problem here is that most Important: This content has been prepared without investors feel unsure about these assets and don’t taking account of the objectives, financial situation or like them because they assume their returns are needs of any particular individual. It does not pretty low. And while they do offer less than shares, constitute formal advice. Consider the they can surprise you over time. appropriateness of the information in regard to your circumstances. Here’s my favourite chart, which shows what happened to $10,000 from 1970 to 2009, just after the stock market had crashed 50% in 2008. If you’d stayed and reinvested your profits in the equivalent of an index fund for the ASX 200, that $10,000 rolled over into $453,542. And that was one year after the GFC! But have a look at what bonds did. They snowballed from $10,000 to a pretty impressive $285,039.

Monday 04 March 2019 03 Portfolios up 10% after two months by Paul Rickard

A buoyant Wall Street and a recovery in financial stock investment size of $3,000; stocks helped the Australian share market post a gain our stock universe is confined to the ASX 100. of 6% in February. After just two months, the market This has important implications for the growth is up by 10%. And our portfolios have followed suit! portfolio, because the stocks with the best medium term growth prospects will often In the second review for 2019, we look at how our come from outside this group (the so called income and growth portfolios performed in February. ‘small’ caps); we avoid stocks from industries where there The purpose of these portfolios is to demonstrate an is a high level of exogenous risk, such as approach to portfolio construction. As the rule sets airlines; applied are of critical importance, we provide a quick for the income portfolio, we prioritise stocks recap on these. that pay fully franked dividends and have a consistent record of paying dividends; and Portfolio recap within a sector, the stocks are broadly weighted to their respective index weights, In January, we made some adjustments to our although there are some biases. Australian share ‘Income Portfolio’ and ‘Growth Portfolio’ Overlaying these processes are our predominant (see investment themes for 2019, which we expect to be: https://switzersuperreport.com.au/here-are-our-portfol ios-for-2019/ ) Economic growth to slow in the USA, Europe, China and Japan, but not into recession The construction rules for the portfolios are: territory; The US Fed moving to a more neutral stance we use a ‘top down approach’ looking at the on US interest rates. If not pausing, only one prospects for each of the industry sectors; or two more hikes in 2019; for the income portfolio, we introduce biases Interest rates in Australia to remain at that favour lower PE, higher yielding sectors; historically low levels, with the RBA unlikely to so that we are not overly exposed to a market move rates higher; move, in the major sectors (financials and AUD around 0.75 US cents, but with risk of materials), our sector biases will not be more breaking down if the US dollar firms; than 33% away from index. For example, the Oil price remaining well supported around weighting of the ‘materials’ sector on the US$50 per barrel. Base metal and iron ore S&P/ASX 200 is currently 18.7%, and under prices to soften; this rule, our possible portfolio weighting is in A positive lead from the US markets; the range from 12.5% to 24.9% (ie plus or Growth in Australia to ease to around 2.5%, minus one third or 6.2%); with no real pick-up in domestic inflation; we require 15 to 20 stocks (less than 10 is Housing prices in Australia to ease insufficient diversification, over 25 it is too moderately, but not collapse; and hard to monitor), and have set a minimum A federal election in May, which may limit any

Monday 04 March 2019 04 market gains in the first half. Returns of the 11 industry sectors for February and calendar 2019, plus their respecting weighting as part Performance of the ASX 200, are shown in the table below.

The income portfolio to 28 February is up by 10.15% and the growth-oriented portfolio by 9.72% (see tables at the end). Compared to the benchmark S&P/ASX 200 Accumulation Index (which adds back income from dividends), the income portfolio has outperformed the index by 0.07% and the growth-oriented portfolio has underperformed by 0.36%.

Income portfolio Financials lead the market in February On a sector basis, the income portfolio is moderately A somewhat “wet blanket” response from the Royal overweight financials and utilities, and underweight Commission into misconduct in the financial services materials and health care (where there are no sector propelled the major banks higher, allowing medium or high yielding stocks in the ASX 100). them to claw back a chunk of the losses incurred over Otherwise, the sector biases are reasonably minor. the last 18 months. The largest sector on the ASX by market capitalisation with a weighting of 32.3%, the On paper, it is roughly index weight in industrials. financials sector topped the list of winners with a gain However, this exposure is being taken through toll of 9.1% during February. road operator Transurban which is not your typical industrial stock. All sectors except consumer staples posted gains, the latter set back by somewhat underwhelming half-year In the expectation that interest rates in Australia are profit reports from Woolworths, Coles and Coca Cola staying at record low levels and that a federal election Amatil. The materials sector continued to benefit from is due in May, it has a defensive orientation and a the disruption in the iron ore supply, with BHP, Rio bias to yield style stocks. In a bull market, we expect and Fortescue posting strong gains. that the income portfolio will underperform relative to the broader market, due to the underweight position Oil prices remained firm, helping the energy sector to in the more growth-oriented sectors and the stock post a gain of 7.9% and be the best performing sector selection being more defensive, and conversely in a in calendar 2019 with a return of 20.4%. The IT sector bear market, it should moderately outperform. also remained well supported in February, up by another 7.6% and for a gain of 17.6% this year. The portfolio is forecast to yield 5.78%, franked to 82.3%. The forecast yield is higher than would Company reporting season was generally thought to normally be expected due to the payment by BHP of be a tad disappointing, although this didn’t have a a special dividend of $1.42 per share. When this is huge impact on sentiment due to the bevy of special excluded, the yield drops back to 5.49%. dividends, super-charged ordinary dividends and buybacks that are returning funds to investors. In February, the income portfolio returned 6.43% for a Interestingly, the market was led in February by the relative outperformance of 0.45%. Year-to-date, it has top 20 stocks, which returned 6.6%. returned 10.15% for an outperformance of 0.07%.

Monday 04 March 2019 05 The return includes both capital and income. On the In February, the portfolio returned 6.33% for a relative income side, the return (which takes into account outperformance of 0.35%. Year-to-date, it has dividends that the portfolio is contractually entitled to) returned 9.72% for an underperformance of 0.36%. is currently 1.62%, franked at 96.7%. Most stocks contributed to the return, with strong Helping in February was the strong performance of performances by ANZ, Macquarie, Ramsay Health the major banks, particularly ANZ (where the portfolio Care, Rio and Seek. Challenger made up some is moderately overweight). Rio was also a big ground in February but is still down by 15% this year. contributor due to the disruption in the iron ore Despite reporting well, JB Hi-Fi remains under supply. pressure from short sellers, while Reliance lost ground following the sell-down by a founding No changes to the portfolio are contemplated at this shareholder. point in time. No changes to the portfolio are contemplated at this The income-biased portfolio per $100,000 invested point in time. (using prices as at the close of business on 28 February 2019) is as follows: Our growth-oriented portfolio per $100,000 invested (using prices as at the close of business on 28 February 2019) is as follows:

Growth portfolio

The growth portfolio is moderately overweight financials and energy, and underweight materials, consumer staples and real estate. Overall, the sector Important: This content has been prepared without biases are not strong. taking account of the objectives, financial situation or needs of any particular individual. It does not On paper, it is overweight consumer discretionary. constitute formal advice. Consider the Part of this exposure is through Aristocrat Leisure appropriateness of the information in regard to your (which is servicing the gaming and gambling markets) circumstances. and through conglomerate Wesfarmers.

The stock selection is marginally biased to companies that will benefit from a falling Australian dollar – either because they earn a major share of their revenue offshore, and/or report their earnings in US dollars.

Monday 04 March 2019 06 5 great growth stocks from reporting season by James Dunn

The interim profit reporting season confirmed that very well, with Privigen sales up 17% and Hizentra plenty of companies see favourable growth prospects sales 14% higher. Sales of the plasma-based going forward – and while for many of these, the products rose 8%, and the Seqirus influenza vaccine opportunities had been baked-in to the share price business posted a 21% sales gain on the back of the and price/earnings (P/E) ratio by an expectant flu prevalence in US and Europe in the northern market, there were some situations where investors winter. Sales of Haegarda, CSL’s treatment for could enjoy a robust result while also seeing scope patients with hereditary angioedema (rapid and for the share price to move higher. Here are five such severe swelling, often in an allergic reaction, which situations. can be life-threatening) tripled in the half year. Kcentra, CSL’s anti-bleeding treatment used in 1. CSL (CSL, $195.66) surgery, posted a 19% increase in sales. Market capitalisation: $88.6 billion FY20 forecast price/earnings (P/E) ratio: 29.6 As one of the Australian market’s premier growth times (FN Arena) stocks, CSL typically justifies a high price/earnings FY20 forecast dividend yield: 1.5%, unfranked (P/E) ratio: its P/E reached a record high of about 43 Analysts’ consensus target price: $203.95 (FN times expected earnings last September, when it Arena), $205.16 (Thomson Reuters) reported its full-year result and lifted full-year net profit by almost 30%, and the dividend by the same One of the very few frustrating things about owning proportion. CSL is very much a US-style stock in that global biotech heavyweight CSL is that while it its dividend yield is paltry – the FY19 expected yield continues to deliver, the market often expects more. is 1.4% at the current price, and that is unfranked – The interim result last month was a familiar story: with the share price growth bringing the reward for CSL beat market estimates with a 7% rise in interim shareholders. net profit, to $US1.2 billion ($A1.7 billion); lifted its Australian-dollar interim dividend by 20% to $1.20 a CSL was trading at about 33 times expected FY19 share and lifted its full-year guidance, but the market earnings before it released its interim results: the was unimpressed (the shares initially fell by 7% on stock’s post-result drop took the P/E to 31 times the release.) CSL was simply expected to do as well earnings, and it has moved back to 33 times as CSL as it did. And confirming that full-year FY19 guidance has recovered what it lost. Further out, on FN would be at the upper end of the previously stated Arena’s collation of analysts’ forecasts, CSL is $US1.88 billion–$US1.95 billion range – compared to trading at about 29.6 times expected FY20 earnings. US$1.73 billion in 2018 – was not considered to be a For most stocks, you would not pay that – but for rosy enough outlook: the market was hoping for the CSL, many investors will make an exception. FN guidance band to be moved higher, not just confirmed Arena has an analysts’ consensus target price at at the upper end. $203.95 – just 4.2% above market, with Macquarie the most bullish, at $230 – while Thomson Reuters The solid half-year performance was driven by rising has a slightly higher analysts’ consensus target demand for CSL’s immunoglobulin products for price, at $205.16. chronic therapies, and higher-value sales of its flu vaccines. The immunoglobulin portfolio is performing

Monday 04 March 2019 07 Source: nabtrade Source: nabtrade

2.REA Group (REA, $82.02) 3. Treasury Wine Estates (TWE, $15.31) Market capitalisation: $10.8 billion Market capitalisation: $11 billion FY20 forecast price/earnings (P/E) ratio: 28.5 FY20 forecast price/earnings (P/E) ratio: 20.8 times (FN Arena), 28.7 times (Thomson Reuters) times (FN Arena), 20.9 times (Thomson Reuters) FY20 forecast dividend yield: 1.8%, fully franked FY20 forecast dividend yield: 3.1%, fully franked Analysts’ consensus target price: $86.44 (FN Analysts’ consensus target price: $17.74 (FN Arena), $87.44 (Thomson Reuters) Arena), $19 (Thomson Reuters)

Of the ASX’s big three internet sales stocks – REA Las month, I nominated Australia’s global wine Group, Carsales and SEEK – REA is arguably the leader Treasury Wine Estates as one of our best best-positioned, after reporting better-than-expected foreign currency earners, on the back of an revenue growth of 15.3%, despite a 3% fall in impressive interim result; and the company qualifies volumes. Net profit rose by 20%, and the company as a standout growth stock, too, given that it took the opportunity to repay debt from previous reiterated its full-year guidance for 25% earnings acquisitions, resulting in a fall in REA’s growth. net-debt-to-equity ratio from 34% to 29%. That will be handy given the fact the property market will be hit by Treasury Wine Estates generates more than 75% of the New South Wales and federal elections this year. its revenue from offshore, including 40% from the Better Asian earnings are expected to kick-in, but Americas; and it is the Asian (particularly China) and investors buying REA are banking on the company’s Americas regions that are driving the company’s cautious full-year guidance proving to be a case of revenue and profit growth. TWE has an almost under-promising in order to over-deliver. If Australian uniformly bullish analyst panel, with even the only property listings can start to pick up, REA will look in broker rating it a “sell,” Citi, seeing only minimal hindsight to have been good value at around the share price erosion from current levels. The rest see current share price. REA divides the stockbroking substantial upside, with the most optimistic broker, community, with bears such as UBS expecting a price Credit Suisse, holding a price target for TWE of retreat to $75, and bulls such as Citi predicting a $19.85. move above $100. Analysts still predict earnings growth of 20%-plus in FY19 and FY20 and on balance, REA still appears to be a growth prospect.

Monday 04 March 2019 08 Source: nabtrade

4. Bravura Solutions (BVS, $5.09) Market capitalisation: $1.1 billion FY20 forecast price/earnings (P/E) ratio: 28.6 times (FN Arena), 29.8 times (Thomson Reuters) FY20 forecast dividend yield: 2.5%, unfranked Analysts’ consensus target price: $5.50 (Macquarie)

The financial services industry may have had a tough 2018, but behind the scenes, a company that Source: nabtrade supplies the industry with software has continued to generate impressive growth. Bravura Solutions 5. Rhipe (RHP, $1.71) supplies superannuation, pension, life insurance, Market capitalisation: $235 million investment, wrap, private wealth and funds FY20 forecast price/earnings (P/E) ratio: 23.8 administration software, led by its Sonata wealth times (Thomson Reuters) management platform. The company sells enterprise FY20 forecast dividend yield: 2.1%, fully franked software and also software-as-a-service Analysts’ consensus target price: $1.90 (FN (SaaS) applications, depending on what a customer Arena), $1.885 (Thomson Reuters) wants. Cloud-based software distributor Rhipe is a managed In the December 2018 half-year Bravura lifted services business that partners with large software revenue by 24%, to $127.4 million, and increased net vendors – such as Microsoft, IBM, Citrix, VMWare, profit by 15%, to $16.3 million. The interim dividend Acronis and Trend Micro – to market their services to was lifted by 0.8 cents, or 18%, to 5.3 cents, enterprise customers through subscription licensing. unfranked. Recurring revenue surged by 31%, and Rhipe’s enterprise customers pay for the usage of now represents 72% of total revenue – but Bravura these services, according to their consumption: Rhipe has significant room to grow its business in its focus drives this consumption with value-added services markets of Australia, New Zealand, United Kingdom, such as training, consulting, marketing, support, Europe, Africa, and Asia, especially in the area of reporting and subscription billing services. In this replacing legacy systems that companies have that manner, Rhipe also drives lead generation for its are no longer up to market standard. vendor partners.

Bravura upgraded its full-year guidance for earnings The crucial relationship for Rhipe is Microsoft. Rhipe per share (EPS) growth from “the mid-teens” to “the was appointed to Microsoft’s Cloud Partner Program mid to high-teens.” At $5.09 (closing price 1 March in 2015 and become one of its twelve global 19), Bravura has come a long way from the managed partners (out of 500 indirect resellers) in disappointment of its listing day, in November 2016, 2017. Rhipe is Microsoft’s number one partner in the when volatility blamed on the victory of Donald Trump Asia-Pacific region driving the adoption of cloud in the US Presidential election saw the company fall services. Microsoft is on a mission to tackle Amazon 20% from its issue price of $1.45. Web Services for leadership of the public cloud services market, and Rhipe is heavily involved in this BVS is not a well-followed stock, but the analysts at strategy. Microsoft’s Cloud Solutions Provider (CSP) Macquarie have $5.50 in their sights, on the back of business and the Microsoft Azure enterprise-grade expected growth in business. There is also the cloud computing platform are the company’s two distinct possibility of Bravura being involved in M&A main growth channels. As long as Microsoft grows its (mergers and acquisitions) activity. market share, Rhipe benefits.

Last month’s interim result was very impressive.

Monday 04 March 2019 09 Revenue grew by 30% and net profit almost tripled: on an EPS basis, earnings jumped from 0.8 cents in the December 2017 half-year to 2.2 cents. The $3 million net profit for the half-year equalled the net profit that Rhipe delivered in the previous full financial year. The interim dividend was doubled to 1 cent, fully franked. Rhipe upgraded its operating profit guidance to a range of $11.5 million–$12 million which was about 8% higher than the guidance provided at the company’s annual general meeting (AGM) in November, and better than analysts’ consensus expectations.

Although the forward P/E ratio is pushing toward 24 times earnings, RHP still looks capable of delivering double-digit growth.

Source: nabtrade

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. Prices and forecasts as at 1 March 2019.

Monday 04 March 2019 10 Buy, Hold, Sell – What the Brokers Say by Rudi Filapek-Vandyck

The final week of the February reporting season saw This week will see the February flood of broker one deviation from prior months: total Hold/Neutral research come to a sudden and immediate stand still. ratings for ASX-listed entities is now the largest group Investors will continue to focus on macro events, for the eight stockbrokerages monitored daily by while stocks going ex-dividend will continue to FNArena. populate the calendar.

This, of course, is the direct result of stockbroking In the good books analysts issuing decisively more downgrades than upgrades in their ratings for such stocks, with the 1. MICHAEL HILL INTERNATIONAL LIMITED index up double-digit percentage since late (MHJ) was upgraded to Add from Hold by December, of which some 6% (incl dividends) were MorgansB/H/S: 3/1/0 added in February. First half results were ahead of forecasts. Morgans For the week ending Friday 1 March 2019, FNArena senses a change in momentum after a counted 25 downgrades versus seven upgrades, prolonged period of the company missing taking the total tallies to respectively 43.06% expectations, and makes material upgrades to Hold/Neutral ratings and 42.26% Buy ratings, with the forecasts for FY20 and FY21. The broker believes the remaining 14.68% on Sell. Only two of the seven cost-cutting program will underpin two years of solid upgrades did not move to Buy. growth and upgrades to Add from Hold. Target is raised to $0.78 from $0.62. Only five of the 25 downgrades moved to Sell, and for some it was one of a number of downgrades received. Plenty of stocks received multiple downgrades during the week, ranging from Appen, Atlas Arteria, and OZ Minerals, to Ramsay Health Care. In all cases share prices went up and financial results have been released. In the not-so-good books Among the fresh Sell ratings, we find NextDC, Costa Group, OZ Minerals, Seek, and Spark Infrastructure. 1. ATLAS ARTERIA (ALX) was downgraded to Hold from Add by Morgans, to Neutral As is usual practice during reporting season, many from Buy by UBS, and to Neutral from amendments to consensus earnings forecasts, be it Outperform by Credit SuisseB/H/S: 2/4/0 negative or positive, are nothing short of ginormous. NextDC, Atlas Arteria, Unibail-Rodamco-Westfield Morgans found no major surprises in the results as and Rio Tinto grabbed the honours on the positive toll revenue had already been published. The broker side, whereas the heaviest reductions fell down upon was hoping for news about the removal of the Eiffarie Perseus Mining, Galaxy Resources, Automotive debt amortisation, as this accounts for 8-9c per Holdings, and Spark Infrastructure. security of its FY20-21 distribution forecast. Of most concern to Morgans is a potential change of

Monday 04 March 2019 11 legislated tax rate reductions in France. The broker requirement uncertainty. The broker’s forecasts have downgrades to Hold from Add, given recent strength been trimmed. Recent relative outperformance has in the share price. Target is reduced to $6.64 from taken ANZ back to its five-year PE average and its $6.74. dividend yield down to a sector-low 5.8%. Macquarie downgrades to Neutral from Outperform, retaining a 2018 results revealed a doubling of cash flow that $28 target. more than covered the distribution. UBS expects 2019 will be a year of transition as there are a 3. COSTA GROUP HOLDINGS LIMITED number of traffic disruptions and temporarily elevated (CGC) was downgraded to Lighten from corporate costs. Guidance is for a 25% rise in the Hold by Ord MinnettB/H/S: 3/1/0 2019 distribution to $0.30 per security, which reflects an expected 10% increase in cash flow from APRR. 2018 net profit was ahead of Ord Minnett’s forecast. UBS downgrades to Neutral from Buy, given a period The company may have a strong market position and of strong outperformance and insufficient upside to good growth opportunities but the broker finds valuation. Target is reduced to $6.90 from $7.10. guidance for 30% growth in 2019, off a depressed year, below expectations. Forecasts for 2019 and Credit Suisse lowers 2020 distribution growth 2020 are reduced by -5% and -2%, respectively. The forecasts to 10% from 23%, estimating there is a broker believes the exposure to the uncertainties of significant risk that Dulles Greenway may not pass agricultural supply/demand is not reflected in the the one-year debt test in December 2019. This would premium valuation and downgrades to Lighten from prevent distributions until 2021. Credit Suisse Hold. Target is reduced to $4.69 from $4.74. downgrades to Neutral from Outperform, having removed the option value for a favourable long-term 4. CROMWELL PROPERTY GROUP (CMW) toll regulation deal for Dulles Greenway. Target is was downgraded to Hold from Accumulate lowered to $7.15 from $7.50. by Ord MinnettB/H/S: 0/2/1

First half operating profit was below Ord Minnett’s forecast because of lower rental income and higher corporate costs. The company has maintained earnings guidance for FY19 of not less than 8c per share. Over time, Ord Minnett expects capital to be realised in the company’s office portfolio as assets are re-positioned and re-deployed into aged care or into Europe via co-investment. This is an opportunistic strategy that the company believes is justified by higher returns, although it carries increased complexity that the broker believes will not appeal to some investors. Rating is downgraded to Hold from Accumulate. Target rises to $1.13 from $1.10. 2. AUSTRALIA & NEW ZEALAND BANKING 5. NEXTDC LIMITED (NXT) was downgraded GROUP (ANZ) was downgraded to Neutral to Sell from Hold by Deutsche BankB/H/S: from Outperform by MacquarieB/H/S: 4/4/0 4/2/1 ANZ’s focus on expense management in a tough Deutsche Bank observes the business is increasingly revenue environment and its leading capital position exposed to a concentration of buyers, lower returns provide support, but Macquarie sees downside risk to on invested capital and an unpredictable sales cycle. forecasts given challenging revenue conditions, Sales velocity appears to have decreased because of ongoing market share losses and RBNZ capital the more complex nature of hyper-scale contracts.

Monday 04 March 2019 12 The company is also incurring significant expenditure European profitability is improving. to achieve its growth ambitions, and this is leading to elevated debt and interest levels in the short term. The broker expects the company to benefit from The broker downgrades to Sell from Hold. Target is increased tariffs in France and the UK, amid $5.50. synergies from the Capio acquisition. The broker downgrades to Hold from Buy on valuation. Target is 6. OZ MINERALS LIMITED (OZL) was $64.90. downgraded to Hold from Buy by Deutsche Bank, to Underperform from Ramsay delivered a solid result, in line with Citi’s Neutral by Credit Suisse, and to Hold from forecast. Revenue growth in Australia suggests Add by Morgans B/H/S: 3/4/1 Ramsay continues to take market share and by continuing to invest in hospital capex, the company is 2018 results beat Deutsche Bank estimates, driven attracting more doctors and driving market by lower depreciation & amortisation. The broker had share gains, the broker notes. France surprised to the expected more detail on the progress at upside and weakness in the UK reduced in the Dec Carrapateena, given its importance in the portfolio. In Quarter. Capio integration is now the focus, Citi updating 2019 assumptions and its views on copper, believes, but could take time. On recent share price the broker observes the stock has outperformed strength, the broker pulls back to Neutral from Buy. peers and the copper price, downgrading to Hold Target rises to $65.00 from $61.25. from Buy. Target is $11. 8. SEEK LIMITED (SEK) was downgraded to Profit was less than Credit Suisse expected. The Sell from Neutral by UBSB/H/S: 2/3/2 broker observes forensic analysis is required to unravel the company’s circuitous accounting. This First half results were in line with expectations and diverts attention from cash and the outlook and Credit UBS envisages inherent risk to the second half if Suisse wonders how the board understands the Australasian job volumes and the macro environment accounts as presented. The broker notes Brazil is not in China worsen. The broker cuts underlying yet materialising and the concentrate treatment plant estimates for earnings per share by -10% and project has been shelved. Credit Suisse downgrades downgrades to Sell from Neutral, reducing the target to Underperform from Neutral. Target is $9. to $17.00 from $18.50.

Results were in line with expectations. Morgans 9. UNIBAIL-RODAMCO-WESTFIELD (URW) observes the company continues to prudently was downgraded to Hold from Accumulate manage its growth options. The focus is on by Ord MinnettB/H/S: 0/3/1 re-affirming the construction schedule and budget for Carrapateena. Upside to the broker’s valuation has Ord Minnett has reassessed the prospects for the been reduced following a strong run up in the share company. The focus on prime shopping centres in price and the rating is downgraded to Hold from Add. wealthy catchments is likely to mean the business is Upon the full de-risking of Carrapateena the stock a long-term winner but the broker envisages few offers upside to valuation, the broker assesses. The near-term catalysts in a tough retailing environment. target is raised to $11.40 from $10.75. Ord Minnett downgrades to Hold from Accumulate and lowers the target to $12.60 from $13.00. The 7. RAMSAY HEALTH CARE LIMITED (RHC) broker notes 2019 earnings growth guidance was was downgraded to Hold from Buy by lowered for several reasons. The company is aiming Deutsche Bank and to Neutral from Buy by to sell EUR4bn in property and the broker is unsure CitiB/H/S: 1/6/1 how much was incorporated in guidance.

First half results pleased Deutsche Bank, Earnings forecast demonstrating the Australian business can achieve decent revenue growth and margin expansion, while Listed below are the companies that have had their

Monday 04 March 2019 13 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.

The above was compiled from reports on FN Arena. The FNArena database tabulates the views of eight major Australian and international stock brokers: Citi, Credit Suisse, Deutsche Bank, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS.

Monday 04 March 2019 14 Shares that go up or down because of the Federal election by Julia Lee

Federal elections occur in Australia every three years — a shorter election cycle than in the US. If an election cycle is counted as the year before an election is held, the year of the election and the year after the election, there does appear to be some interesting results. The best performing years in the share market have been the year before or year of an election. Only once in a 28-year period have we seen the best performance over the three years being the Source: Bell Direct Research, 4 March 2019 year after an election result. The year after an election result is likely to herald the worst performing Ad spend (2004-2016) year in the three year election cycle. It has been the worst performing year in the three year election cycle Financial halves that include a Federal election have in seven out of the 10 election cycles since 1979. seen average TV ad revenue growth 7% compared to halves without Federal elections, which saw average A simply trading strategy where you buy on the last growth 1.4%. day of April the year before an election and hold until a year after the election would have seen an average Healthcare return of 29% over the 3-year election cycle. On the other hand, a ‘buy and hold’ strategy would have With Labor promising more spending on healthcare, it seen an average return of 26.7% over the election could prove to be a positive to those companies cycle. Since 1979, the trading strategy would have exposed to the domestic healthcare space. In seen $10,000 turned into over $260, 000, while the particular, Healius (formerly Primary) and Sonic ‘buy and hold’ would have resulted in just over (SHL) are impacted by the Pharmaceutical Benefits $190,000 — a difference of more than $70,000. Scheme, which could see a boost.

For markets, it’s not just the question of who wins Domestic energy power but also of stability. A key question is whether we see a majority or minority government. A minority With energy likely to be a key battleground in Federal government offering less stability to markets. At the and State elections, the uncertainty will likely impact moment, Betfair is paying $1.24 for Labour win, $5 for negatively on sentiment. The focus appears to be a Coalition win and $200 for any other party to win. cutting energy bills for consumers, which would be a (Source: Betfair, 2pm, Monday 4 March). negative for energy retailers such as AGL (AGL) and Origin (ORI). Australian impacts Health insurance Outside of the much debated excess franking credits, negative gearing changes, here’s a list of possible Labor has promised to keep private health insurance impacts: premiums capped at 2% per annum, if it wins the Federal election. This impacts on health insurers

Monday 04 March 2019 15 such as Medicare (MBL) and NIB Insurance (NHF). Private hospital operators such as Ramsay (RHC) and Healthscope (HSO) are also likely to be impacted as the insurers work to try and maintain margins by cutting costs.

Property listings

REA (REA )noted that over a 6-week period during the last Federal election, listings fell 15%. Listings were down 3% in 1H19, and this should accelerate in 2H19 due to the Federal election. There’s scope for rapid revenue growth once election is out of the way, depending on the taxation measures applied.

Monday 04 March 2019 16 My “HOT” Stock – Automotive Holdings (AHG) by Maureen Jordan

Like taking account of the objectives, financial situation or needs of any particular individual. It does not CMC Markets’ Chief Market Strategist, Michael constitute formal advice. Consider the McCarthy likes Automotive Holdings (AHG). “This appropriateness of the information in regard to your retail auto parts and logistics group is underpinned by circumstances. property holdings,” he says.

“A turn around in its share price in December is backed by a solid half year report in February. Despite share price gains it is still well below 12 month highs, and trading at an undemanding PE multiple around 13x,” he adds.

Dislike

Despite its much reduced share price, which may tempt some investors, Michael doesn’t like Bellamy’s (BAL). “This is a stock that polarises analysts,” he says.

“However, the 14-month wait (so far) for an all clear from Chinese authorities is, in my mind, a warning, and it’s possible the licence may never arrive,” he concludes.

Important: This content has been prepared without

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