Airlines Soaring?

Thursday 31 August 2017 Airlines soaring?

With reporting season pretty much over, it’s time to pick through the companies that stood out. Charlie Aitken says reporting season was “disappointing” overall, but one highlight was HUB24. Find out why.

Also in the Switzer Super Report, have airline stocks hit cruising altitude or can they still soar higher? Tony Featherstone checks if there’s still value to be found. Plus, some of the world’s biggest investors have expressed concern about comments from President Donald Trump, so what does this mean for markets? Barrie Dunstan shares his views.

Sincerely,

Peter Switzer

Inside this Issue 02 Big airline stocks have further to fly Two to watch by Tony Featherstone 05 HUB24: small cap structural growth idea Company highlight by Charlie Aitken 08 Trump and Wall Street What does it mean for markets? by Barrie Dunstan Big airline stocks have 10 Buy, Sell, Hold – what the brokers say Upgrades and downgrades further to fly by Staff Reporter by Tony Featherstone 14 Questions of the Week – minimum pension withdrawals 02 and transfer balance cap Reader queries by Questions of the Week

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. Big airline stocks have further to fly by Tony Featherstone

There are many reasons not to buy aviation stocks. from better resource sector activity. After a difficult Large airlines need huge capital investment, have few years, the regional airline has delivered a expensive, depreciating assets and no sustainable one-year total return of 53%. But the stock had flat competitive advantage. Their return on equity (ROE) return over five years and a slightly negative return has collectively been low and volatile. over 10.

Then there’s the vagaries of weather, safety Across the Tasman, Air New Zealand has soared incidents, plane crashes and terrorism fears. Hardly 93% over one year. The airline’s latest full-year the stuff of dependable, recurring earnings growth result slightly beat market expectation. Like Qantas, that drives ROE higher, expands the airline’s intrinsic Air New Zealand is in its best shape in years thanks value and ultimately rerates the share price. to a good strategy and strong management execution. Some good judges I know avoid airline stocks. But every company has its price and some airlines, Airline bears, for the most part, have missed a mighty notably Qantas Airways, are rapidly improving and rally in the past 12 months. In a sluggish economy, still look OK value. Even Warren Buffett, a noted critic investors expected a more subdued performance of aviation stocks, started buying airlines again last from the cylical aviation sector. But they year. underestimated the turnarounds in Qantas and Air New Zealand. Qantas has delivered a 78% total return (including dividends) over 12 months, making it one of How high can airline stocks fly? Australia’s great corporate turnarounds. The company was on its knees a few years ago before The question now, is whether the rally can continue. management orchestrated a defining transformation Although recent gains impress, some airlines are still program. trading well below multi-year highs and have much ground to make up after earlier disappointments this In contrast, Virgin Australia Holdings continues to decade. The rally could run further. disappoint. The one-year total return is minus 15%; over 10 years Virgin has an annualised loss of almost I preferred to play the aviation theme through airport 20%. Virgin, at least, rallied in the past few weeks, stocks rather than airlines. Readers of the Switzer prompting speculation of a nascent recovering. Super Report know Sydney Airport was one of my favourite stocks for years (though it looks fully priced, Micro-cap airlines are also recovering. Mining for now). The boom in in-bound tourism is a mighty services group, Alliance Aviation Services, has a 47% tailwind for Sydney Airport and, increasingly, for one-year total return, having soared in the past few domestic airlines that benefit from extra travel activity. months after a period of heavy falls. Alliance is benefiting from a pick-up in resource sector activity Longer term, investors are underestimating four and higher aviation demand in remote areas. factors with airline stocks. The first is the purchasing power and preferences of Millennials (born between Regional Express Holdings (REX) is also benefiting 1983 and 2000). The Millennials are travelling far

Thursday 31 August 2017 02 more than previous generations, much earlier in their A share buyback of up to $373 million suggests life. This demographic change is a key driver for Qantas is confident in its outlook and news of direct airlines, but analysts don’t seem to be factoring it into flights to London and New York is another positive. valuations. But the shares fell about 7% on the profit as brokers speculated on weaker domestic travel demand and The second is the potential for disruption through challenging international travel conditions. I suspect frequent-flyer programs. I wrote favourably about some investors were itching to take profits. Qantas’s program for this report in 2014, arguing that it had a lot more latent value than the market realised. The sell-off is good for prospective investors. At Analysts who argue airline stocks have no $5.61, Qantas trades on a forecast price-earnings competitive advantage underestimate the power of (PE) multiple of 10.7 times FY18 earnings, consensus giant frequent-flyer programs. Who needs Bitcoin analyst forecasts show. That is undemanding for a when Qantas frequent-flyer points are Australia’s company of its quality and just below the global de-facto second currency? average for airline stocks of about 11 times. As one the world’s most profitable airlines, Qantas arguably The third factor is the pick in the mining sector. The should trade at a small premium to the average fluorescent shirts that dominated regional airports at multiple for global airlines. the height of the mining boom, thanks to fly-in, fly-out workers, are starting to return. It’s nothing like A consensus price target of $6.20, from broking firms boom-time conditions, but there’s enough to suggest that cover Qantas, suggests the stock is undervalued regional aviation demand is slowing improving, giving at the current price. I’m expecting Qantas to recover a fillip to airlines. recent losses, and then some, within 12 months. A share price approaching $7, based on rising earnings The final factor is management. For years, investors and a slightly higher valuation multiple, would not marked down global airline stocks for poor surprise. The caveat is oil prices not racing higher. management. Qantas’s executive team has done a terrific job in a difficult sector that is highly unionised and regulated. Qantas’s ROE averaged about 4% for the five years to 2013. The current ROE is about 26%. A management premium in the valuation is warranted.

When choosing airline stocks, stick to the big players. Speculators might focus on Alliance Aviation; it looks Source: ASX undervalued as mining service conditions improve. But most investors should stick with Qantas and Air Air New Zealand New Zealand. The prominent airline, dual listed in Australia and NZ, Qantas delivered a solid FY17 result that led to some broking firms upgrading recommendations and price targets. The Qantas FY17 result, released last week, slightly beat market expectation. Underlying profit before tax, Profit before tax of NZ$527 million was slightly ahead $1.4 billion, was the second highest in the of market expectation. A final 11 cent per share company’s 97-year history. dividend was 10% up on the previous corresponding period. A highlight was 6% growth in domestic revenue and 5% in international revenue in the fourth quarter. That It was a good result given rising competition in suggests Qantas is capitalising on a pick-up in airline international aviation and one that creates confidence demand and benefiting from good capacity in Air New Zealand’s medium-term prospects. The management, cost control and plane yields. company said it is “optimistic” about overall market

Thursday 31 August 2017 03 dynamics and expects to improve on 2017 earnings. Important: This content has been prepared without A higher dividend is perhaps the best sign of taking account of the objectives, financial situation or management’s confidence. needs of any particular individual. It does not constitute formal advice. Consider the Air New Zealand ticked plenty of boxes with its appropriateness of the information in regards to your operational performance. Costs were well managed, circumstances. and aircraft utilisation and yield were solid. Rising demand for outbound travel from New Zealand to Bali and Pacific Islands is another tailwind.

Like Qantas, Air New Zealand has an excellent market position, prominent brand and improving customer experience. It also has rising return on invested capital (15.3%). Both tran-Tasman airlines have come through their transformation program better than the market expected.

At NZ$3.55, Air New Zealand trades on a forecast FY18 PE of around 10 times, according to consensus analyst forecasts. Like Qantas, Air New Zealand is valued below the global airline PE average, despite its improving operational performance.

The consensus price target of $3.55, based on the average of six broking firms, suggests Air New Zealand is fully valued at the current price. The stock can do better than the market expects as it uses gains in FY17 as a strong platform for growth in the next few years.

Macquarie Equities has a $3.90 price target and upgraded its recommendation from neutral to buy after Air New Zealand’s FY17 result. That looks about right.

Chart 2: Air New Zealand

Source: ASX

Tony Featherstone is a former managing editor of BRW and Shares magazines. All prices and analysis at August 30, 2017.

Thursday 31 August 2017 04 HUB24: small cap structural growth idea by Charlie Aitken

The ASX reporting season has been a very mixed Financial advisors and planners are increasingly bag, but the overall summation must be that it has looking at migrating their funds to low-cost, more user been “disappointing”, particularly in terms of forward friendly, non-institutional platforms. The easy-to-use guidance. interface has seen HUB receive several 1st place awards for overall client satisfaction and navigation. The ASX200 has pulled back as a result of the We see HUB having several points of differentiation, disappointing earnings and guidance season, due which include its mobile app, direct trading on mainly to analysts lowering forward earnings growth international exchanges, reporting functionality and forecasts. tax optimization tools.

What that means to us is that genuine double-digit Strong market share growth is highlighted by HUB earnings growth for FY18 and beyond is getting taking 10% of the industry net flows through FY17, harder to find in Australia and those stocks that offer even with less than 1% of total market funds under it will continue to see their P/E multiples expand management. A range of industry feedback indicates versus the broader “growthless” ASX200. this is comes off the back of the market leading technology, functionality and overall platform My fund, while global, picks stocks anywhere in the satisfaction. world where a top down structural growth theme meets excellent management execution and business model. That has led to the AIM Global High Conviction Fund delivering returns well ahead of the ASX200 and global equity indices.

The AIM Global High Conviction fund owns shares in and is increasingly confident about the outlook for Australian investment platform provider HUB24. We thought the HUB24 result was one of the clear highlights of the Australian reporting season.

Many of you have probably never heard of HUB24 (HUB.ASX) so I will start with a high-level description.

HUB allows investors to manage their portfolio of shares, term deposits, managed funds, model portfolios and other financial instruments through their advisor. The FY17 result highlights the scaleability of the business and potential for further margin expansion. They also delivered their first positive NPAT of $4.6m.

Thursday 31 August 2017 05 service providers.

Wealth management is undergoing significant In January 2017, HUB acquired Agility Applications, a change and HUB is very well positioned to benefit specialist technology services provider targeted at from this tailwind. The changing landscape is driven stockbrokers. The acquisition allows HUB to offer an by four key trends: integrated solution that allows brokers, advisors and accountants to reduce costs, increase efficiency and 1. Adoption of managed portfolios across dealer enhance client engagement. HUB has already started groups and advisers obtaining joint clients and this will be a key area for 2. Market share shifting to non institutional future development and investment. platforms 3. Convergence between advisory, stockbroking HUB has given guidance for >$12bn funds under and financial advice management over the next three years. This certainly 4. Australians increasing use of international seems within reach if FY17 growth continues to play shares. out and the key tailwinds eventuate. Management highlighted that FY 2018 was already off to a good The March 2017 quarter highlighted the start of this start through July and August, with $170m and shift, with the big 5 banks and AMP market share $150m of inflows respectively. declining from 82.1% to 81.7%. Although at face value this seems small, 0.5% market share loss We believe the culture of innovation in the company presents a significant opportunity for HUB and its is clear. The international exchange capability, the smaller competitors. Netwealth, a competitor of Agility integration and incorporation of 3rd party apps HUB’s, is also able to take advantage of the (such as some forms of SMSF software) were all changing industry space. added in FY17 to stay ahead of competition. Such continued growth and innovation investments HUB’s advisor base has increased from 250 in FY14 have street forecasts of +136% EPS growth in to 1000 in FY17. HUB should also be able to take FY18, and 30-40% pa EPS growth over the next advantage of their advisors’ existing funds under five years. management (FUM). HUB currently has an average of $6m per advisor, which compares to a total per There seems to be a clear structural change in this advisor of $30-$40m. space, and HUB is the best positioned to benefit from this, given their market leading technology offering. Scaleability will help HUB expand margins and The end market is huge for HUB if they can continue increase profitability as it grows. This operating to get their product right. leverage was clear in the FY17 result. Strong incremental EBITDA margin gains (52%) and I love scaleable platform businesses in any industry, segment margins are likely to continue improvement but particularly an industry such as Australian with additional FY18 investment. Key drivers of this superannuation that is legislated to grow. Below is the margin expansion include add on products, increased consensus analysts revenue forecast for HUB for trading activity, automation of administrative functions FY18. You can see it is in a structural upward revision and having better negotiating power with third party cycle.

Thursday 31 August 2017 06 I think HUB has all the hallmarks of a structural small cap growth stock. If it delivers to our expectations, I expect HUB to be an $8.00 stock in 12 months’ time. We have increased our investment in HUB since the excellent FY17 result.

If you consider an investment in HUB, I would remind you it is a small cap stock with limited liquidity. On that basis, it should be appropriately sized in portfolios.

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 regards to your circumstances.

Thursday 31 August 2017 07 Trump and Wall Street by Barrie Dunstan

For investors, the Trump presidency is starting to look lips at the prospect of cuts in the corporate tax rate fraught with danger. It’s one thing to annoy from the current 35% to perhaps 22% to 25%, as part Democrats, even growing numbers of Republicans of a whole package of business-friendly reforms. and all those liberals. But it’s not smart to annoy the Now, with dwindling support in Congress, these big movers and shakers of Wall Street. hopes have been lowered.

A little over half a year into his first term, Donald The push for tax reform won’t go away; indeed, it Trump now has managed to antagonise some of the now may well be one of the few shots left in Trump’s world’s biggest investors like Bridgewater’s Ray locker. But it will be that much harder to achieve Dalio, Mohamid El-Erian of Allianz and Goldman because the President is rapidly antagonising his Sachs’ Lloyd Blankfein. They have publicly potential political friends in Congress. Donald Trump expressed concerns about the President’s less than doesn’t seem to be aware of tactical nuances in the helpful comments, which have affected investors’ political game – even with his own, nominal confidence. So far this hasn’t translated into a Republican allies. negative stock market, but it has certainly cast a pall over medium to long-term market sentiment. Apart from tax reform, Trump also faces battles over the budget, and the need to lift the debt ceiling to So, when that starts to affect the world’s largest avoid a major default. These are crucial issues which, hedge fund Bridgewater with about $A190 billion of without careful handling, could spook the markets. funds), major investment house Goldman Sachs (about $A930 billion of investments) or Allianz’s The big problem is that Trump appears not to massive bond fund run by PIMCO (over $A2 trillion), appreciate (or even care about) the potential damage world markets should be on heightened alert. his actions could cause – and their large effect on business and investment confidence. In fact, boosts Bridgewater has turned from optimistic early in the from tax cuts and the wall between the US and year to a more defensive stance. Dalio said it was Mexico, which were positives a few months ago, now reducing its risk because it was likely that the conflicts have almost become potential handicaps. in Washington wouldn’t be handled well – and this would have a greater effect on the economy, markets Not to mention the other big items on the Trump and general well-being than classic monetary and agenda, like major health care reforms and fiscal policies. infrastructure investments. Add uneasy racial incidents in the US and global tensions with North Others like El-Erian, looking at the recent ruptures Korea and there is an uncomfortable list of things between Trump and business leaders. are getting that could go wrong. nervous about an overstretched market and are taking out protection against any market turbulence. Trump’s political supporters appear oblivious to (Dalio, for instance, recently urged investors worried these concerns, hoping their man can push through. about global uncertainty, to buy gold.) Investors, however, don’t regard hope as a long-term alternative to sensible policies and practical political Earlier this year, confident investors were licking their tactics – factors that seem to be lacking in the Trump

Thursday 31 August 2017 08 strategy.

The President badly needs a victory to restore confidence in the medium-term, and as insurance against an unexpected macroeconomic or political setbacks. With stock market indices near peaks and interest rates likely to rise, there is limited slack in the markets to absorb bad news.

Investors need to hope that President Trump listens to his key staff, turns off his Twitter account and sticks to the script on his teleprompter.

Thursday 31 August 2017 09 Buy, Sell, Hold – what the brokers say by Staff Reporter

In the good books longer-term thematic of foreign consumer demand for Australian products should continue. Adairs (ADH) Upgraded to Add from Hold by Morgans B/H/S: 2/0/0 BT Investment Management was Upgraded to Neutral from Sell by UBS B/H/S: 2/4/0 FY17 results were in line with expectations following a recent upgrade to guidance. Morgans observes UBS sees only 3% growth in FY18, although this is trading improved substantially into the end of the expected to improve to 8% over FY19 and FY20. financial year and has continued into the start of JOHambro’s FY18 performance fee outlook has FY18. Guidance for $33-37m in EBIT for FY18 improved slightly over the past two months. appears conservative to Morgans. The broker upgrades to Add from Hold and raises the target to Caltex (CTX) Upgraded to Accumulate from $1.67 from $1.35. Lighten by Ord Minnett B/H/S: 4/2/1

Alumina (AWC) Upgraded to Neutral from Ord Minnett upgrades to Accumulate from Lighten Underperform by Credit Suisse B/H/S: 1/4/2 and raises the target to $35 from $28. The main reason for the changes includes a belief that refiner First half numbers were solid and ahead of Credit margins and transport fuel margins are likely to Suisse estimates. The broker updates for commodity remain elevated. Moreover, the broker has increased price forecasts and 2017 guidance, which is largely confidence in the opportunities in the convenience unchanged. Marginally higher cash costs are store business. assumed. The dividend yield is attractive and there are reasonably undemanding valuation multiples. Graincorp (GNC) Upgraded to Outperform from Hence, the broker upgrades to Neutral from Neutral by Credit Suisse B/H/S: 2/3/0 Underperform. Target is raised to $2.30 from $1.70. Credit Suisse believes earnings risks are modestly to Blackmores (BKL) Upgraded to Accumulate from the downside. The broker notes seasonal conditions Hold by Ord Minnett B/H/S: 1/2/0 have not deteriorated further and it remains comfortable with the risks to an 18.1mt east coast FY17 results were broadly in line with Ord Minnett. crop forecast. While the risks are to the downside, The broker believes a normalisation of one-offs and investors are expected to be adequately rewarded by investment should lead to meaningful earnings a higher pay-out ratio, and a recent decline in the growth. This view leads the broker to upgrade to share price produces a more favourable risk/reward, Accumulate from Hold and raise the target to $115 hence, Credit Suisse upgrades to Outperform from from $110. Neutral. Target is raised to $9.42 from $9.33.

Ord Minnett believes the business faces near-term Mantra Group (MTR) Upgraded to Outperform challenges related to distribution channels, pricing from Neutral by Credit Suisse B/H/S: 6/2/0 harmonisation and customer concentration which could lead to some volatility. However, the FY17 results were in line with Credit Suisse

Thursday 31 August 2017 10 estimates. While problematic markets are likely to Tox Free Solutions (TOX) was upgraded to Buy continue, the broker believes this is well understood from Neutral by UBS B/H/S: 1/3/0 and offset by strength in other areas. The broker also notes an estimated $50m of head room for FY17 results were broadly in line with UBS estimates. internally-funded acquisitions, as the company is UBS says FY18 should conclude the transition away clearly active in a consolidating market. Accordingly, from more volatile, low quality resource construction with the stock trading at a reasonable price/earnings earnings, to be replaced by the full year contribution ratio the broker upgrades to Outperform from Neutral. from the health waste business. Target is raised to $3.15 from $3.05. In the not-so-good books Medibank Private (MPL) Upgraded to Hold from Reduce by Morgans B/H/S: 2/3/3 Ainsworth Gaming Technology (AGI) Downgrades to Neutral from Outperform by Macquarie B/H/S: FY17 net profit was ahead of Morgans, largely on 0/1/1 higher investment income. FY18 outlook is more positive than the broker expected regarding health FY17 results were ahead of guidance. Macquarie is insurance gross profit margins and management encouraged by the outlook for FY18, especially with expenses. Morgans upgrades FY18 and FY19 the launch of the video cabinet and accompanying estimates by 6-7%. Target is raised to $2.68 from games in August. North America was disappointing $2.40. The broker is now more comfortable with the but forward orders imply FY18 growth. The stock outlook and a narrower gap to valuation, thus has recently re-rated to reflect the recent business upgrades to Hold from Reduce. improvement. Nevertheless, Macquarie is cautious to capitalise growth beyond FY18, given the company’s Regis Resources (RRL) Upgraded to Neutral from high exposure to outright sales and poor visibility in Underperform by Credit Suisse B/H/S: 1/4/3 the Latin American market. Rating is downgraded to Neutral from Outperform. Target is raised to $2.22 FY17 results were slightly behind the broker’s from $2.04. forecasts. FY18 guidance is for 335koz to 365koz, all in sustaining cost of $940-$1,010/oz and growth Ausdrill (ASL) was downgraded to Hold from Buy capital spend of $23m. The December quarter is by Deutsche Bank B/H/S: 0/1/0 expected to deliver McPhillamys maiden reserve and DFS. Negligible EPS changes until 2020, which is After posting a solid FY17 result, Ausdrill has raised impacted by McPhillamys. Credit Suisse upgrades new capital though both equity and debt in order to the stock to Neutral from Underperform and target capitilise on improving conditions domestically and a raised to $3.70 from $3.50. strong pipeline on offer in Africa. Deutsche Bank expects new contract wins over the next year. Select Harvests (SHV) Upgraded to Hold from Execution is critical, with several large projects Reduce by Morgans B/H/S: 0/2/0 ramping up over the next six months and contract renewals due. Deutsche sees strong earnings The company’s weak FY17 results were in line with momentum ahead but also a full valuation, hence a recently downgraded guidance. Cash flows were downgrade to Hold. materially lower and gearing is too high in Morgans’ opinion. Further almond orchard sale and leaseback Avita Medical (AVH) Downgraded to Hold from opportunities or capital raising to restore the balance Add by Morgans B/H/S: 0/1/0 sheet cannot be ruled out by the broker. FY18 production guidance was lower than expected FY17 net loss was in line with expectations. Sales are prompting Morgans to lower FY18 forecasts by -31% moving in the right direction but Morgans is frustrated and FY19 forecasts by -24.1%. Rating is upgraded to by the slow growth. A new CEO took the helm in May, Hold from Reduce and target reduced to $4.00 from aiming for a more clinically-focused approach, which $4.05. the broker suspects will pressured near-term sales.

Thursday 31 August 2017 11 Although clinical data and cost justification should corresponding period. Incorporating FY18 guidance underpin a commercial strategy, Morgans believes into its forecasts, Morgans cuts FY18 DPS forecast that to build a solid foundation will take many by -1.8% and FY19 DPS forecast by -1%. The broker years and be hampered by tight capital controls. The has downgraded the stock to Hold from Add and cut broker no longer targets FY19 profitability and the price target to $3.02 from $3.06. downgrades to Hold from Add. Target is reduced to 7.5c from $0.28. McMillian Shakespeare (MMS) Downgraded to Neutral from Outperform by Macquarie B/H/S: Boral (BLD) was downgraded to Sell from 1/3/0 Neutral by Citi B/H/S: 4/2/1 FY17 earnings were roughly in line with Macquarie. Boral’s FY17 results were in line with Citi’s The broker notes strong organic growth in group expectations. FY18 guidance was disappointing, with remuneration services. The retail financial services the company expected to face $15m to $20m in division is unclear because of regulatory and market energy headwinds and $15m less property profits. uncertainty. Rating is downgraded to Neutral from Combined with elevated D&A guidance, mainly at Outperform a valuation grounds. Target is raised to Headwaters, Citi downgraded core EPS forecasts by $15.46 from $13.20. -12% in FY18, -11% in FY19 and -9% in FY20. Monadelphous (MND) Downgraded to Reduce Caltex Australia (CTX) Downgraded to Neutral from Hold by Morgans B/H/S: 0/0/6 from Outperform by Macquarie and to Neutral from Buy by UBS B/H/S: 4/2/1 FY17 results were broadly in line with estimates and Morgans notes no formal guidance was provided for First half results were in line with expectations. FY18. The outlook suggests some revenue growth is Macquarie likes the growth in diesel volumes and possible. EBITDA margins are expected to remain marketing & supply earnings. The broker did not like under pressure. Morgans appreciates the resource the loss of non-fuel income affected by franchisee sector has stabilised, and remains bullish on the wage under-payment issues. Incremental news flow sector, but cannot justify the current valuation and around strategy underwhelmed the broker. Rating is downgrades to Reduce from Hold. Target is raised to downgraded to Neutral from Outperform. Target rises $11.32 from $10.95. to $33.85 from $32.65. Qantas (QAN) Downgraded to Sell from Hold by First half results were broadly in line with UBS Ord Minnett B/H/S: 4/0/1 forecasts. Caltex stated that the impact of losing the Woolworths ((WOW)) fuel volumes would be in the FY17 results were in line with guidance. Ord Minnett order of $150m, higher than previously expected. The downgrades to Sell from Hold, noting the strong gains broker has raised CY17 EPS forecast by 9.5%, CY18 in 2017. The broker cannot justify any other forecast by 11.5% and CY19 by 4.4%. However, UBS recommendation at the current share price. sees a large earnings issue ahead associated with the loss of volumes and downgrades the stock to To support current valuations, the broker estimates Neutral from Buy. Target raised to $33.40 further domestic airfare increases in the order of 10% from $33.00. are required and such a view appears optimistic. Target is raised to $4.55 from $4.15. Hotel Property Investments (HPI) Downgraded to Hold from Add by Morgans B/H/S: 1/1/0 Ramsay Health Care (RHC) was downgraded to Hold from Add by Morgans B/H/S: 1/5/0 FY17 results were in line with guidance, with no revaluations announced. FY18 distribution guidance FY17 underlying profit was in line with estimates and of 19.6c was provided, below the broker’s forecast Morgans observes the domestic business has shown and implying flat growth on the previous resilience despite industry volatility. However

Thursday 31 August 2017 12 regardless of the fundamentals and domestic business, headwinds are intensifying in the rest of the world and the broker expects this may handicap the near-term performance.

Servcorp (SRV) Downgraded to Neutral from Buy by UBS B/H/S: 0/1/0

Despite a beat on FY17 earnings, UBS has downgraded Servcorp to Neutral from Buy and lowered the target price to $6.15 from $6.75. The broker believes the company is well placed to increase occupancy, however a ramp up in competition leaves the broker cautious in the short to medium term.

Spark Infrastructure (SKI) Downgraded to Hold from Buy by Deutsche Bank B/H/S: 1/5/1

Spark’s result missed the Deutsche Bank on lower regulated revenue than regulation suggested, and increased costs. The dividend remains solid but cash coverage has now reduced upside risk to future dividends, the broker notes. Given the share price run of late the stock is trading in line with Deutsche’s valuation. Downgrade to Hold. Target rises to $2.60 from $2.55.

Speedcast International (SDA) Downgraded to Neutral from Outperform by Macquarie B/H/S: 2/2/0

First half results were largely in line with Macquarie’s expectations. The Harris CapRock acquisition drove revenue growth but challenging market conditions continued.

Macquarie observes positive early progress and synergies from the acquisition but awaits further developments and subsequent de-risking at the final results. Rating is downgraded to Neutral from Outperform. Target is reduced to $3.63 from $4.83.

Thursday 31 August 2017 13 Questions of the Week – minimum pension withdrawals and transfer balance cap by Questions of the Week

Question: My wife and I have run an SMSF since With your SMSF, you would probably do a partial 1985. The fund is now in pension mode. For a variety commutation of your pension and then commence a of reasons, we decided to liquidate the assets within new pension, and re-calculate the minimum pension the SMSF and roll the proceeds into an industry payment based on the 30%. For the very brief period super fund. We opened accounts with an industry where 100% was held in the SMSF, you would base super fund on 5/07/2017, with approximately 70% of the minimum account on the full amount for those the funds in the SMSF on 30/06/2017, with the number of days. balance to be rolled over before 30/06/2018. We have made provision for our pension payments for the In total, you should only need to withdraw a minimum current year based on the value of the fund on of 5%. 1/07/2017.The industry fund has told us that we need to withdraw a minimum pension for each of us (5% of Question: I was of the understanding with the new the sum invested with them) in the current financial transfer balance cap (TBC) at $1.6 million — that once year. This would result in us having to withdraw 5% we were safely past 1 July, 2017, satisfying the cap, it each from our SMSF as well as from the industry would not matter should the balance of our funds fund. This would mean that we would be withdrawing supporting our pension grow past that amount 10% of our total funds in superannuation in this (hopefully) by increased capital gains etc. financial year. My understanding is that minimum pension withdrawals for any year are based on However, in an email I received today from the ATO account balances on 1 July of that financial year and requesting feedback on “SMSF event-based therefore we would not have to draw a pension from reporting”, Point 43 states the following “This means our industry super fund until after 1/07/2018. I would that SMSFs will not be required to take any action or like to know whether my interpretation of the rules is lodge any additional reports to the ATO during the correct. period 1 July 2017 to 30 June 2018. However, members must monitor the value of income streams Answer (by Paul Rickard): Unless the pension to ensure they will not be in excess of the TBC from 1 occurs in the last month of the year (June), the July 2017 onwards”. pension payment is pro-rated so that the minimum amount for the first year is worked out proportionately So, I take this to mean that we must be continually to the number of days remaining in the financial year, monitoring the value of our SMSF, particularly in including the start day. That is, for a pension improving market conditions, and moving funds out to commencing on 5 July, the payment will be based on stay under the TBC ON AN ONGOING BASIS. the account balance multiplied by 5% multiplied by 361 and divided by 365 (Account balance x 5% x Is this correct? I do note that the TBC is supposed to 361/365). be indexed each year around $100,000 though.

The pension balance for minimum amount purposes Answer (by Graeme Colley from SuperConcepts): will be the amount that you have in the industry fund Under the income tax law, which determines when a on 5 July. Your Industry Fund is correct. person has a transfer balance cap and a transfer balance account that pensions in retirement phase

Thursday 31 August 2017 14 are measured against, it works as follows:

For pensions in place prior to 1 July 2017 – the value of the pension on 30 June 2017 or in the case of a reversionary pension 12 months after it became payable, and For pensions commencing on or after 1 July 2017 – the value of the pension at the date it commences or in the case of a reversionary pension, 12 months after the pension became payable.

This is covered in section 294-25 of the Income Tax Assessment Act ‘97.

There is no requirement in the legislation to report changes in the account balance of the pension because of pension payments, investment gains or investment losses.

I notice that the quote from the ATO publication is referring to the ‘value’ of the pension, which is required to be reported as above rather than the ‘account balance’, which is ongoing and not required to be reported. In some cases, the value and account balance at the time the pension commences can be the same amount as in the case of an account-based pension.

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