Thursday 1 December, 2016 Time to take profits?

The doomsday merchants would have woken up to a surprise when they found out OPEC agreed on a production cut! We might be disappointed at the petrol bowser, but any rise in our stocks and super should soften the blow! But as our trading profits rise, you might be wondering if it’s time to take advantage of some of your sudden windfalls. Today, Charlie Aitken explains why it might be time to take some profits in cyclical equities and put cash on the side-lines, while Tony Featherstone searches for value in the A-REIT space.

Sincerely,

Peter Switzer

Inside this Issue 02 Time to take profits in cyclicals: Keep buying Aristocrat It’s time by Charlie Aitken 05 Three A-REITs to watch Value emerging by Tony Featherstone 08 Super changes – get your cash flow in order Super changes by Mark Ellem 10 Professional’s Pick – ING Groep Online bank Time to take profits in by Sunny Bangia 12 JB Hi-Fi upgraded – what the brokers say cyclicals: Keep buying Upgrades and downgrades Aristocrat by Staff Reporter by Charlie Aitken 15 Questions of the week – employment in retirement and 02 super changes 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 36-40 Queen Street, Woollahra, 2025 individual's objectives, financial situation and needs and, if necessary, seek T: 1300 SWITZER (1300 794 8937) F: (02) 9327 4366 appropriate professional advice.

Powered by TCPDF (www.tcpdf.org) Time to take profits in cyclicals: Keep buying Aristocrat by Charlie Aitken

I highly doubt many of you thought Donald Trump private partnerships is flawed. For example, of the 14 becoming president of the United States would be a completed highway projects that relied on some form boon for your equity portfolio. However, here we are of private financing in recent years, eight have either and the Trump tax cutting and growth spending declared bankruptcy, or experienced a public buyout narrative has been completely bought into by equity of their private partners. All relied on toll revenue and markets. On the other hand, bond markets have been quite simply, Americans don’t like paying tolls. They smashed. Over the last few years, equity and bond expect their taxpayer dollars to pay for highways. markets have moved in tandem, to me this new divergence is a concerning development. While private-public partnerships seem like an easy way to build infrastructure without borrowing too, Christmas has come early for equity investors and I history shows such plans are much harder than they think it’s time to take some trading profits in cyclical appear. equities. My view is investors should be locking in some of the windfall gains they have experienced in My view is Trump will turn out to be “hopeless”. The the last few weeks. In my view, these prices won’t be likelihood of Trump delivering on all his promises is sustained as the reality of Trump lags way behind the zero. He is going to find it much harder to deliver than lofty expectations we see priced in today. his supporters or the markets currently think or price. This is a classic moment in markets and my I simply believe markets have gotten way ahead of advice is to lock in some of the windfall gains you themselves on so called “Trumpflation”. The ASX200 have experienced in cyclicals in the last few had its best November in 11 years. Where prices weeks and move to the sidelines. Holding some have been pushed to almost ensures disappointment cash may not be a bad thing as the return on cash in the weeks and months ahead. You’re basically is rising and its capital risk free. buying “hope”, but “hope” isn’t an investment strategy. My advice is to take some profits before Trump’s inauguration on January 20th. In fact, I’d be taking For example, US heavy construction material stocks some profits right now, as two months is a long time are up between +30% and 40% since the election. in markets and we are only one ridiculous “tweet” P/Es have risen from 14 to 18x. This is all on away from a genuine pullback in expectations, and expectation of a huge infrastructure upgrade therefore prices. program. Why am I such a sceptic on what Trump can deliver? However, this will prove many years premature. The Because I simply believe he lacks the ability to deliver Wall Street Journal ran an excellent article titled due to a lack of funding for his ideas. At the same Numbers don’t add up for Trumps trillion-dollar time, the Federal Reserve will be raising interest building plan. They are correct: the key problem is, rates and the world is charging the USA a higher how do you pay for it? rate of interest on any new borrowings or amounts that it eventually rolls over. Nobody argues America is in need of critical transport infrastructure upgrades, but Trump’s plan of public US 10-year bond yields have risen from 1.83% to

Thursday 01 December 2016 02 2.38% since Trump was elected. That’s a 7.5% curbs kicked in at -5% on the day of the election. Yes, capital loss for US bond holders, and the world thinks US futures were “limit down”, only to recover to about the higher risk of the US defaulting on its debt record highs within two weeks. Again, this is under Trump. That, in turn, has led to US variable sentiment, not economic fact, and it is reasonable to mortgage rates rising by around .4%, a roughly 10% expect further large sentiment shifts in the weeks and increase in monthly mortgage payments for US months ahead. That is why I believe it is time to mortgage holders. Yes, Mr. Blue Collar with a take some trading profits in cyclicals and raise variable rate 30-year mortgage is already significantly cash levels. worse off under Trump. This is an important point. Make America Great Again, hey? An interesting If you do take some profits in cyclicals that have run start to that, with Middle America’s mortgage belt ahead of themselves, what do you switch to? Well, already significantly worse off since the Presidential my answer is structural growth stocks that aren’t election. Gasoline prices have also risen sharply, reliable on government spending or central bank which is a regressive tax on the middle class. policy.

While Middle America is worse off already under Aristocrat (ALL) Trump, ironically, Wall St has been the winner. US investment banks, such as Goldman Sachs, Morgan I wrote to you last week about Aristocrat (ALL), Stanley and Bank of America Merrill Lynch have led previewing what I thought would be an excellent US equity indices to all-time highs. In fact, gains in result. The good news is ALL delivered an even financial stocks have accounted for over 50% of the better result than I expected and absolutely cemented index rally since the election. Make Goldman Sachs itself as the world’s no.1 manufacturer of gaming Great Again. Did those who voted for Trump really machine hardware and software. This was a truly think they were voting for Goldman Sachs’ share great set of numbers and I remain a high-conviction price to do this? +23% this month … and one of their buyer of ALL shares, which were actually left out of alumni will be Treasury Secretary. last month’s rally which favoured cyclicals. ALL is down about -10% from all-time highs, and I see that as a great buying opportunity for exposure to the structural earnings, cash flow and dividend growth it offers.

To summarise, the research on ALL from the no.1 rated sector analyst at Citi:

FY16 NPATA of $398.2m (+69% YoY) was above Citi (c$391m), consensus (c$382m) and guidance (c$366m) despite higher-than-expected cost items, So, already, Wall St is “Trumping” Main St. with D&D and corporate costs coming in c$20m above our estimates in aggregate, and net interest That wasn’t how this was meant to play out, and to and tax also above our expectations. me, this is just the start of an extended period of volatility where all of us are going to increase the Segment profit (+45% YoY) was 4% above Citi, amount of trading we do in our portfolios to deliver largely due to beats from North America and Digital, superior returns. These WILL NOT BE BUY AND with Digital margins again surprising on the up in 2H HOLD EVERYTHING MARKETS. Far from it – we (42% constant currency vs. Citi c38.5%). 2H North are going to see big swings in sentiment and big America participation net installs of 2,062 units was tradeable swings in sentiment. well above Citi (1,600) and 1H (1,805) and was the key driver of the Nth Am beat. We, however, assume You’ve already seen a classic example of a major c21% growth in ALL’s net install base and c4% YoY sentiment swing in the last month. US equity futures growth in yields in FY17e, which we view as a key

Thursday 01 December 2016 03 earnings driver in FY17e.

Our FY17-19e EPS has increased marginally (by c1-2%) and our revised FY17e NPATA of c$478m (from c$469m) implies c20% YoY growth and is c10% above pre-result consensus.

Click here for larger image

As you all know, I value companies on the cash they generate. On that basis, ALL’s cash conversion of 160% is outstanding and led to a major reduction in net debt.

Currently trading on a c20x/18x FY17-18e PE, in line with market (All Ind 200 ex Fin) and below its historical 1 yr forward PE of c20x, we view ALL’s current pricing as attractive given its growth outlook (c16% two yr EPS CAGR to FY18e), strong market positions, cash generation (free cash flow yield of c6% in FY17e) and balance sheet (FY17e ND / . EBITDA of <1x).

I genuinely believe this will be a $20 stock over the next few years. On a FY17 PEG ration of 1x, ALL is cheap.

. 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 01 December 2016 04 Three A-REITs to watch by Tony Featherstone

Opportunity is emerging in yield stocks as the market expectations of higher bond yields in equity stampede towards cyclical growth companies valuations – and then some. tramples valuations in interest-rate-sensitive sectors. Commentators are warning against buying the big Investors could not get enough of the big mining defensive yield stocks. They might be right in the next stocks and other cyclicals after Donald Trump’s few months as momentum towards growth stocks surprise win in the United States election sparked lingers. Blanket views, however, overlook improving hopes of a stronger US economy and higher valuations in yield stocks for long-term investors. commodity demand. It unleashed the bulls. Consider the Australian Real Estate Investment Trust The flipside was firming expectations for US (A-REIT) sector. It leapt in the first half of 2016 as interest-rate increases and a higher US dollar. The bond yields fell and investors sought defensive market has baked in a US rate hike in December and sectors. The S&P ASX 200 A-REIT index rallied expects further increases in 2017. That’s bad for the almost 20% in the first half of 2016, in a flat market. so-called “bond proxies”, such as infrastructure stocks and listed property. Then it tumbled by almost as much from July as prices became overvalued, the 10-year bond yield Sector rotation from overvalued defensive yield rose and the August profit-reporting season for stocks to undervalued cyclical growth stocks was well A-REITs disappointed. At its peak, the A-REIT sector overdue. I went cold on pricey infrastructure stocks, traded 29% above its Net Tangible Assets (NTA) in such as Sydney Airport and Group, in July on numbers – a valuation July, just before their price pullbacks. premium that was unsustainable.

But I underestimated the strength of commodity The A-REIT index has given back most of its gains in prices and gains in BHP Billiton, and 2016. This index is up 5.9% this calendar year (on a . As I outlined in November, total-return basis, including distributions). That the resource sector had rallied too far, too fast, and compares with a 7.1% return for the S&P/ASX 200 was being driven more by sentiment than index. fundamentals. Chart 1: S&P ASX 200 A-REIT Index This rapid portfolio tilt has pushed several mining stocks to 52-week highs, and key infrastructure stocks and listed property trusts to near 52-week lows – a trend that should put yield stocks back on the radar of value investors.

Yes, rising bond yields are bad for interest-rate-sensitive stocks. They make equity yields look less attractive and hurt companies with higher debt. But the market has quickly priced in

Thursday 01 December 2016 05 Source: Yahoo Finance Several of these A-REITs traded at substantial premiums to the NTA at their price peaks and needed This is a rare period of underperformance for the a share-price pullback. None look overwhelmingly A-REIT sector against the broader share market over cheap now, even after 15-20% falls, but they are the past three years. The ASX 200 A-REIT index’s heading towards value territory. annualised total return of 15% compares with a 5.3% return for the ASX 200. Three A-REITs to watch

That does not mean the A-REIT sector is National Storage REIT looks interesting after recent undervalued or that investors should load up price falls. The star REIT is well placed to make portfolios with listed property trusts. The sector is still acquisitions in the highly fragmented self-storage trading around 7% above NTA on Macquarie industry and, longer term, is a play on capital-city numbers (although care is needed with aggregate densification, smaller apartments and demand for NTAs because of the high weighting of Westfield extra storage space. Group and other large A-REITs in the index). National Storage reaffirmed its FY17 That suggests value is improving in select A-REITs. earnings-per-share guidance at its Annual General Meeting in in November. An increase in Niche A-REITs appeal occupancy rates from 75% to 79% impressed, but it came with a lower rate per square metre. National I had a positive view on several niche A-REITs and Storage is discounting to attract tenants and betting it outlined that view for The Switzer Super Report in can lift rental rates over time. 2015 (some examples here). Favoured ideas included National Storage REIT, Asia Pacific Data I like the long-term thematic of consolidation in the Centre Group, Arena REIT, Galileo Japan Trust and self-storage sector as bigger players snap up small the US Masters Residential Property Fund. independents. At $1.43, National Storage trades below a median price target of $1.69, based on a Shopping Centres Australasia Property Group, BWP small consensus of five brokers that cover the REIT. Trust and Charter Hall Retail were other small- and mid-cap A-REITs covered favourably for this report in National Storage trades well above its latest net 2014. tangible asset (NTA) of $1.14 a security, but deserves a reasonable premium given its higher growth For the most part, these A-REITs performed well in prospects and its self-storage management 2015 and in the first half of 2016. But like the broader operations. It looks about fair value – something that listed property sector, they sold off sharply in the past has been rare for National Storage since it listed at 98 few months. cents a unit in December 2013.

Storage provider National Storage REIT has fallen Chart 2: National Storage REIT from a 52-week high of $1.94 to $1.43. Data centre operator Asia Pacific Data Centre Group is down from $1.67 to $1.47. Education and childcare property owner Arena REIT has eased from $2.44 to $1.79.

Shopping Centres Australasia is 13% off its 52-week high, BWP is off 26% and Charter Hall Retail REIT is down 15%. Two other A-REITs I covered for this report this year, Aventus Retail Property Fund and Folkestone Education, are also well off their 52-week highs after strong earlier gains. Source: Yahoo Finance

Thursday 01 December 2016 06 Aventus Retail Property Fund is another worth centres, in turn reducing tenancy risk. watching. I included it in a story on five top small-caps for this report in September when it traded at $2.37. NEXTDC’s strong operating performance creates The owner of big-box retail centres rallied to $2.55, more confidence in AJD. The REIT’s single-tenancy then eased to $2.26 as the A-REIT sector sold off. It risks through NEXTDC have been the market’s main has held up relatively well and still trades above its $2 concern. AJD’s $1.46 security price compares with issue price from its October float. its latest stated NTA of $1.43 (which increased 15% over the year). Like National Storage, Aventus has an interesting market position in a property niche that is poorly AJD’s leverage to the fast-growing cloud-computing represented by REITs. These properties have good trend, and its ownership of a property portfolio that is prospects as big-name electrical, homeware and hard to replicate, arguably demand a premium to NTA other specialty retailers are grouped together in – something the REIT had for most of this year until “super centres”. Big-box retailing, and the REITs that the broader A-REIT sell-off. own these properties, are much more common in the US than in – a reason why Aventus was The long-term thematic for data-storage centres initially overlooked upon listing. appeals as companies store more data and increasingly outsource that service to specialist Aventus beat several prospectus forecasts in its providers. AJD’s trailing 6.5 per cent distribution yield maiden full-year result in August and lifted its is another attraction. guidance. The current price ($2.26) is above the latest stated NTA of $2.02, but Aventus’s portfolio Chart 4: Asia Pacific Data Centre Group had almost double-digit gains in property valuations.

Aventus, too, has good opportunities to consolidate a fragmented property niche and grow through acquisitions and organically. It is one of the more interesting niche A-REITs to emerge on ASX in the past few years.

Chart 3: Aventus Retail Property Fund

Source: Yahoo

Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. All prices and analysis at November 30, 2016.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not Source: Yahoo constitute formal advice. Consider the appropriateness of the information in regards to your Asia Pacific Data Centre Group (AJD), a favourite of circumstances. this column over the past few years, also stands out at the current prices. The NEXTDC spin-off owns three data centres and is a lower-risk play on the cloud-computing boom. It is benefiting as NEXTDC attracts more companies to its state-of-the-art data

Thursday 01 December 2016 07 Super changes – get your cash flow in order by Mark Ellem

1. Less tax on the benefit payment The new superannuation changes have focussed our For a member under the age of 60, a whole or part minds mainly on the impact of the reduced commutation of a pension to a lump sum benefit is contribution caps and the $1.6 million transfer taxed on its taxable component. However, no tax is balance cap. (Paul Rickard outlined how you may payable on the first $195,000 of the taxable need to respond to this in Monday’s report – see here component of any lump sums withdrawn from super ). However, there are other less obvious things that between ages 56 and 60. If the same amount was we need to consider such as changes to pension made as a pension payment, the taxable component commutations and the subsequent cash flow position would be subject to tax at the member’s marginal tax of the SMSF. rate, plus applicable levies, less a tax offset equal to 15% of the taxable amount of the pension. In many A pension can be either fully or partially commuted. scenarios, commuting all or part of the pension to a However, the amount of the commutation can only be lump sum benefit will result in a more favourable tax withdrawn from superannuation where the benefits outcome for the individual. are ‘unrestricted non-preserved’ (URNP). The most common scenario for superannuation benefits to For example, Mary, aged 58, has retired and started become URNP is when a person ‘retires’. If a an account based pension. Her pension balance at 1 transition to retirement income stream (TRIS) July 2016 is $780,000 and is split into 80% taxable commences, access to the preserved component can and 20% tax-free components. Her minimum pension be obtained prior to permanently retiring. for 2016/17 is $31,200, with $24,960 being the taxable component. She decides to receive a pension From 1 July 2017, it will no longer be possible to of $31,200. The taxable component of the pension is receive a payment from a TRIS and elect to have the taxed at her personal rate of 32.5%, plus 2% amount taxed as a lump sum. This begs the question: Medicare levy. Applying the 15% pension tax offset, can you take a lump sum from a pension at all after the tax on Mary’s pension payment would be 30 June 2017? Or, in other words, can a member $4,867.20 or 19.5%. continue to wholly or partially commute their Account Based Pension (ABP) to a lump sum? Our Rather than taking the payment as a pension, if Mary understanding is that it will still be possible to fully or commuted it partially to a lump sum the amount partly commute pensions to lump sums in cash or in received would be counted towards her minimum specie. However, any amount received or the value of pension payment. Consequently, as the taxable the assets transferred from the commutation will not component of $24,960 would be under her low rate count against the minimum pension payment. cap of $195,000 (assuming no previous lump sum benefit payments), effectively the payment would be Currently, a partial commutation of a pension counts received by Mary tax-free, saving her $4,867.20 in towards the minimum pension amount (confirmed by tax. In addition, Mary’s pension has satisfied the the ATO in SMSFD 2013/2) and is beneficial, for two minimum pension requirement. reasons: 2. Receiving a lump sum as a transfer of investments

Thursday 01 December 2016 08 The Regulator’s view is that the super legislation Important: This content has been prepared without requires pension payments to be made only in cash. taking account of the objectives, financial situation or However, a lump sum can be paid as a full or partial needs of any particular individual. It does not commutation of the pension as an in specie transfer constitute formal advice. Consider the of a fund investment. SMSF Determination 2013/2 appropriateness of the information in regards to your published by the ATO says that a partial commutation circumstances. counts towards the minimum pension amount. In Mary’s example previously, if she took the payment of $31,200 as an in specie transfer of fund assets, she would have the same tax outcome, that is, no tax on the lump sum she receives and the fund would satisfy the minimum pension payment rule.

Changes from 1 July 2017

It will still be possible to partially commute the pension to a lump sum and receive the payment as an in specie transfer of investments from 1 July 2017.The value of the investments transferred will be subject to lump sum tax rules, including access to the low rate cap amount. So far, as you can see, there is no change from the current rules.

However, from 1 July 2017, a partial commutation will not count towards the fund satisfying the requirement to pay the minimum pension. In Mary’s situation, partial commutation of $31,200 would not count towards her minimum pension if taken after 30 June 2017. Consequently, she would need to take a further pension payment of at least $31,200 to satisfy her minimum pension payment (assuming $31,200 was her minimum pension payment for 2017/18). Using the same marginal tax rate, the amount of tax levied on the pension payment would be $4,867.20.

As partial commutations of a pension will not count towards the minimum pension requirements from 1 July 2017, SMSFs will need to ensure they have sufficient available cash to pay the required pension minimum. With the Regulator’s view that pension payments can only be made as cash payments, the option to make last minute pension payments as in specie transfers of fund investments will not be possible.

To summarise, from 1 July 2017, both cash flow of the SMSF and the personal tax situation of the member will need to be reviewed in light of these changes.

Thursday 01 December 2016 09 Professional’s Pick – ING Groep by Sunny Bangia

What is the stock? since 1991, running several regional business units including Netherlands, Belgium, Luxembourg and ING Groep Romania. His overall understanding of the ING business and its digital competitive advantage is How long have you held the stock? impressive.

Since February 2016 What is your target price on the company?

15 euro per share (currently 12.63) What do you like about it? At what point would you sell it? ING Groep is a streamlined leader in Northern European banking that offers multiple ways of ING is a cyclical opportunity within an industry in winning. The oligopolistic nature of the bank’s core shakeout. We look to sell into the recovery phase – markets (Belgium and Netherlands) provide Europe still lags North America, United Kingdom and protection against falling interest rates in tandem with Australia. higher levels of profitability. Half of the loan book is exposed to credit growth from Northern European How much has it added (subtracted) to your overall economies reflating under high savings rates and low portfolio over the last 12 months? yields. As a pioneer of online banking, ING continues to capture market share. In fact, it’s now Australia’s As at 30 November 2016, ING Groep has returned sixth-largest banking franchise – ahead of Suncorp ~30% in local currency terms since entering the and Bendigo Bank – all without opening a single portfolio. branch! Finally, higher interest rates will benefit all banks and we currently earn a 6.5% dividend yield. Is it a liquid stock?

How is it better than its competitors? Yes, it trades $320 million Australian dollars per day.

Most banks will claim they have a superior online Where do you see the value? offering but ING is the real deal. Despite strong incumbents, ING has built efficient and valuable The one constant in global markets is change and franchises in new territories, such as Germany and since the Global Financial Crisis, the financial sector Australia, via its digital distribution. In a low growth has faced no shortage of challenges with many banks banking environment hindered by regulation, ING’s stuck in a quagmire of poor regulatory and operating service and cost advantage enables it to grow conditions. In addition, banks have suffered margin profitably and with lower risk. pressure from low interest rates and social pressure from populist politics – particularly in Europe. What do you like about its management? Therefore, markets have shunned and discounted the sector down to attractive buying levels, particularly CEO Ralph Hammers has worked with ING Groep ING. Value resides in its robust balance sheet,

Thursday 01 December 2016 10 improving profitability by focusing on digital banking and Northern Europe, all whilst paying a sustainable 6.5% dividend yield.

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 01 December 2016 11 JB Hi-Fi upgraded – what the brokers say by Staff Reporter

In the good books should provide for a better domestic outlook from the second half of FY17, once contract losses have been HUB24 (HUB) Upgraded to Buy from Accumulate cycled through. by Ord Minnett B/H/S: 1/0/0 Acquisitions could provide further underpinning, The company will acquire Agility Applications, a leading UBS to consider risk/reward to now be more financial services technology provider, which will evenly balanced at the current valuation. Upgrade to broaden broker relationships and enhance Hub24’s Neutral. non-custodial reporting on offer. Vita Group (VTG) Upgraded to Add from Hold by Ord Minnett notes Agility counts 40% of the broking Morgans B/H/S: 1/0/0 market as clients and reports on $200bn of client assets, providing a rich cross-selling opportunity with The company has agreed to new commercial terms the Hub24 platform. with (TLS), with changes to the remuneration structure. No specific earnings impact was provided, The broker reassesses its valuation methodology and although the company stated it expects to see volume includes Agility in its estimates. improvement, offset by some margin compression.

JB Hi-Fi (JBH) Upgraded to Neutral from Morgans suspects, overall, the remuneration changes Underperform by Credit Suisse B/H/S: 3/3/1 reflect Telstra’s cost pressures and this could see increased measures from Telstra to control the The company has completed the acquisition of The growth of the retail licensee channel. Good Guys on November 28, earlier than expected. Credit Suisse consolidates profit from that date, The broker suspects the new deal reduces the having previously assumed it would occur on January medium/longer term growth opportunity in the 1 2017. company’s retail channel but, that said, Vita Group has multiple growth drivers. This results in a $16m increase in EBIT for the first half and a 5% upgrade to earnings per sharefor Westfield Corporation (WFD) Upgraded to Neutral FY17. The broker’s target increases to $26.43 from from Sell by Citi B/H/S: 5/1/0 $26.16 and, because of recent share price weakness, the rating is upgraded to Neutral from Citi analysts still believe market consensus forecasts Underperform. are too high. They also believe news flow has been largely negative since their last update on the Pact Group (PGH) Upgraded to Neutral from company in late August, with both Brexit and Trump Sell by UBS B/H/S: 2/3/0 occurring in core Westfield operating markets.

Pact’s rigid packaging end-markets are finally But… the share price pull back that has occurred since showing signs of life, UBS notes, and dairy prices seems to provide sufficient compensation, hence why have recovered some 55% from their lows. This the rating moves to Neutral from Sell. Citi analysts

Thursday 01 December 2016 12 have reduced estimates and their valuation. Morgans downgrades to Hold from Add following the recent strength in the share price which has meant its In the not-so-good books target has been achieved. Target is raised to $25.82 from $26.54. 360 Capital Office Fund (TOF) Downgraded to Hold from Add by Morgans B/H/S: 0/1/0 The broker still considers the stock a key pick in the sector but expectations have cooled amid a belief that 360 Capital Investment Management, as the Chinese steel consumption will ease heading into the responsible entity, has entered into a conditional new year. contract to sell the majority of its funds management platform and co-investments to Centuria Capital That said, the broker has increased confidence in its (CNI). long-held view that the bottom of the resources cycle was hit in early 2016. As part of the transaction, Centuria will purchase all the units 360 Capital owns in TOF for around $47.4m The main risk to its call on BHP is the ongoing legal or $2.25 per unit. Centuria is considering a merger of process surrounding Samarco and short-term TOF and Centuria Metropolitan REIT (CMA), if it is in uncertainty in commodity prices. the best interest of unit holders. Investa Office Fund (IOF) Downgraded to Lighten 360 Capital Group (TGP) Downgraded to Hold from Hold by Ord Minnett B/H/S: 1/3/2 from Addby Morgans B/H/S: 0/1/0 Ord Minnett considers the Investa Commercial 360 Capital Group has entered into a transaction to Property Fund’s acquisition of Morgan Stanley’s sell 360 Capital Investment Management its 8.9% stake in IOF is aimed at protecting its ownership responsible entity along with co-investment stakes in of the Investa business by reducing the potential for most of its funds, including 360 Capital Industrial IOF to be acquired by a third party. (TIX) and 360 Capital Office (TOF), subject to a number of approvals from various stakeholders. The broker believes this is a negative for the share price in that the stock is trading at a premium that The remaining entity will be cashed up, Morgans reflects the increased probability of being acquired. notes, and funds will be used for a buyback and to The broker also envisages Cromwell (CMW) is now pursue new opportunities. likely to exit its 9.8% stake post the December distribution ex-date, which raises the possibility of a (AMC) Downgraded to Neutral from discounted sale to third-party investors. Outperform by Credit Suisse B/H/S: 3/4/1 (MTS) Downgraded to Hold from Credit Suisse downgrades to Neutral from Accumulate by Ord Minnett B/H/S: 3/2/2 Outperform because of changing macro conditions. The company’s defensive revenue streams suggest First half net profit of $82.8m was ahead of Ord it will be unlikely that the stock will outperform as Minnett forecasts, but was driven by gains at the investors seek growth. corporate line, with core EBIT for food and grocery below expectations. The US dollar appreciation against the euro has induced downgrades to earnings per share forecasts The broker downgrades to Hold from Accumulate and of about 5%. First half EBIT is likely to be flat, in the reduces the target to $2.00 from $2.30. Ord Minnett broker’s opinion, affected by the acquisition of Alusa. believes the competitive environment is challenging and likely to remain so, and this will BHP Billiton (BHP) Downgraded to Hold from Add consume much of the company’s cost savings. by Morgans B/H/S: 3/4/1 While the company is executing well, the position of

Thursday 01 December 2016 13 its customers in aggregate is not strong, which Xenith IP Group (XIP) Downgraded to Hold from weighs on the competitive position of the wholesaler, Add by Morgans B/H/S: 0/1/0 in the broker’s opinion. The company will buy Griffith Hack for $152m. RCG Corp (RCG) Downgraded to Hold from Morgan flags the transformational nature of the deal, Add by Morgans B/H/S: 0/2/0 given the sheer scale of Griffith Hack compared with the company’s market capitalisation. Like-for-like sales were reasonably subdued in the year to date, with the exception of Accent. The The broker believes Xenith has now reached its company has announced a material increase to the natural market share in Australia and may struggle to roll out of stores and a stronger-than-expected margin materially outgrow the broader market. Hence, future performance for Accent. growth will need to be driven by offshore penetration.

Morgans makes slight upgrades to forecasts of Morgan Stanley downgrades to Hold from Add, until earnings per share and moves to a 50-50 PE/DCF it is comfortable with how the integration is weighting. progressing.

Tatts Group (TTS) Downgraded to Neutral from Important: This content has been prepared without Outperform by Credit Suisse B/H/S: 4/3/0 taking account of the objectives, financial situation or needs of any particular individual. It does not Credit Suisse downgrades to Neutral from constitute formal advice. Consider the Outperform as the shares have rallied after appropriateness of the information in regards to your Tabcorp (TAH) acquired a 10% equity stake via an circumstances. equity swap. The broker envisages little chance of another suitor emerging.

At this stage, the broker believes Tabcorp offers a more compelling way to play the merger.

Vocus Communications (VOC) Downgraded to Equal-weight from Overweight by Morgan Stanley B/H/S: 4/2/0

Morgan Stanley observes investors have de-rated the Australian telco sector in recent months and the company shares are down 40% in the year to date.

The broker believes the stock offers the highest risk/return characteristics in the sector. While from an industry perspective there remain revenue growth opportunities for the company as a vertically integrated telco in the NBN, there are two changes in recent months that have changed Morgan Stanley’s fundamental view.

These are increased telco competition, which is negative for margins and future growth trajectory, and, specific to Vocus, disappointing early results from the just-completed acquisition of Nextgen.

Thursday 01 December 2016 14 Questions of the week – employment in retirement and super changes by Questions of the Week

Question: I have my own complying SMSF and had (ii) the trustee is reasonably satisfied that the person fully retired at age 55. With the downturn in share intends never to again become gainfully employed, prices, I decided to get a casual job and am earning either on a full-time or a part-time basis. in excess of $13,000 per year, at which time I was no longer considered retired but in the TRIS category, The Trustee needs to be satisfied that the person taking advantage of lump sum withdrawals. Under the intends to never again become “gainfully employed”. new super rules applying from 1/7/2017, you suggest This is defined to mean “means employed or one option is to fully retire again. self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or Would this require me to completely resign from my employment”. Full time means more than 30 hours, casual employment or just reduce my hours to ensure part time is at least 10 hours, and less than 30 hours I do not earn in excess of $12,500 in the financial per week. So, to answer your question, you can only year? Could you confirm what the exact threshold is? be retired if you are gainfully employed for 10 or less hours per week. Answer (By Paul Rickard): Under the super regulations, retirement has nothing to do with money, Question: We have an SMSF and considering the it is to do with intention and hours worked. This is the last changes to super funds which have gone through definition: Parliament, I was contemplating ways to increase value in our super but at the same time increase For the purposes of Schedule 1, the retirement of a liabilities to lower the overall maximum of $1.6m person is taken to occur: each. Can super funds have margin loans or something similar or maybe the advantages or (a) in the case of a person who has reached a disadvantages of starting another fund? preservation age that is less than 60 — if: Answer (by Paul Rickard): While you can increase (i) an arrangement under which the member was the assets and liabilities of your fund, this won’t gainfully employed has come to an end; and impact your net super balance, which is what is measured to assess capacity against the $1.6m cap. (ii) the trustee is reasonably satisfied that the person intends never to again become gainfully employed, Yes, your fund can borrow to invest in shares – but either on a full-time or a part-time basis; or not generally through a margin loan (NAB has a loan, which is acceptable). You can borrow through a (b) in the case of a person who has attained the age limited recourse borrowing arrangement. of 60 — an arrangement under which the member was gainfully employed has come to an end, and either of And yes, you can start another fund but this won’t the following circumstances apply: mitigate the issue. The capacity is assessed by members (not the fund), and each fund reports (by (i) the person attained that age on or before the law) to the ATO each member’s balance. ending of the employment; or Important: This content has been prepared without

Thursday 01 December 2016 15 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 01 December 2016 16