Thursday 30 January 2020 US kicks off 2020 well

We have a bumper issue for you today, due to Monday’s holiday for Day. In his article, Charlie Aitken reports that the US Q4 reporting season has started constructively and that we’ve had a noisy start to the year in global equity markets. Charlie gives his view on a few juicy US companies. Meanwhile, Tony Featherstone outlines the reasons why he thinks Tabcorp is still a reasonable bet, despite online betting headwinds, and gives you an update on his views on certain tourism stocks.

Sincerely,

Peter Switzer

Inside this Issue 02 Which stock is the apple of my eye? Juicy US companies by Charlie Aitken 04 Why I think Tabcorp is still a reasonable long-term bet Does Tabcorp offer value? by Tony Featherstone 08 Should an investor try to catch any of these falling knives? Falling knives worth a catch? Which stock is the by James Dunn 11 Buy, Hold, Sell – What the Brokers Say apple of my eye? 11 downgrades, 6 upgrades by Charlie Aitken by Rudi Filapek-Vandyck 02 14 My “HOT” stock Tencent by Maureen Jordan 15 Questions of the Week TWE, CSL & NBI by Paul Rickard

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. Which stock is the apple of my eye? by Charlie Aitken

It has been a noisy start to the year in global equity Of course, markets are forward-looking, so much of markets, with the enthusiasm of the first several the devil lies in the details. Broadly speaking, weeks being somewhat dampened by the ongoing companies are issuing guidance for 2020 that is public health challenges posed by the coronavirus cautiously upbeat, though tempered by some spreading in China (and beyond). Against this prudence given the unknown timing and depth of the backdrop, the US earnings season is in full swing. impact that the coronavirus outbreak in China may have. Given that China is a major source of growth While it’s fairly early days yet (around a fifth of the for many companies, it’s worth unpacking that in S&P 500 have reported results), fundamentals some more detail. continue to remain reasonably solid: roughly 62% of companies have reported revenues that met or On the Apple earnings call this morning, CEO Tim exceeded consensus expectations, while that number Cook was forthright and helpful in addressing rises to 77% at an earnings level. questions on the issue.

“With respect to [our] supply chain [in China], we do have some suppliers in the Wuhan area. All of these suppliers, there are alternate sources, and we’re obviously working on mitigation plans to make up any expected production loss. We factored our best thinking in the guidance that we provided you.

With respect to supply sources that are outside the Wuhan area, the impact is less clear at this time. The Source: Morgan Stanley reopening of those factories after Chinese New Year has been moved from the end of this month to February 10, depending upon the supplier location. And we’ve attempted to account for this delayed start-up through our larger range of outcomes […] mentioned earlier.

With respect to customer demand and sales, we’ve currently closed one of our retail stores and a number of channel partners have also closed their store fronts. Many of the stores that remain open have also Source: Morgan Stanley reduced operating hours. We’re taking additional precautions and frequently deep cleaning our stores While it’s always worth taking quarterly earnings with as well as conducting temperature checks for a pinch of salt, the general trend reinforces the view employees. While our sales within the Wuhan area we’ve had since August last year: things are not itself are small, retail traffic has also been impacted quite as dire as headlines make them out to be. outside of this area across the country in the last few

Thursday 30 January 2020 02 days. And again, we have attempted to account for needs of any particular individual. It does not this in our guidance range that we’ve provided you.” constitute formal advice. Consider the appropriateness of the information in regard to your The guidance referred to by Mr. Cook is for Apple to circumstances. generate global revenues between $63bn and $67bn next quarter, implying year-on-year revenue growth of between 8.5% and 15.5%. With Apple likely joining the 5G smartphone market later in 2020 – and seeing strong demand for its wearable devices, such as the Apple Watch and the recently launched Airpods Pro wireless headphones – there is every likelihood of the company being able to deliver mid-to-high single digit sales growth over 2020. Combined with some margin expansion (partly driven by a shift to Apple’s more profitable Services business) and a healthy capital return programme, there is very high likelihood that Apple will grow its cash flows at a healthy clip, despite all the uncertainty out there.

This trend of strong results combined with cautious guidance seems to be an early theme in management feedback. Starbucks CEO Kevin Johnson and CFO Patrick Grismer alluded to the same, saying:

“Given the strength of our Q1 results, we had intended to raise certain aspects of our full year financial outlook for fiscal 2020. However, due to the dynamic situation unfolding with the coronavirus, we are not revising guidance at this time. […] We would have raised guidance on operating margin and for EPS on the strength of our Q1 results […] but given the uncertainty of the coronavirus situation in China and its impact to our near term results, which we expect to be temporary, we felt it was best to defer any change to our guidance until we had better visibility to full year results including the impact.”

In both cases, the benefits of capable management teams with years of on-the-ground operating experience should provide some comfort to investors that businesses can weather any near-term disruptions.

In summary, the US Q4 reporting season has started constructively. We will get more clarity on this trend over the next few days, particularly as some of the mega-cap technology names report.

Important: This content has been prepared without taking account of the objectives, financial situation or

Thursday 30 January 2020 03 Why I think Tabcorp is still a reasonable long-term bet by Tony Featherstone

I confess to watching too much sport over summer. enough to re-rate the stock. Lingering market First, a cricket season that started to bore and now concerns about wagering disruption – and how the the gripping Australian Open tennis. Soon, it will be incumbent bricks-and mortar operator will compete rugby’s turn. with online insurgents – are weighing on Tabcorp.

Sadly, watching televised sport means being I examined this theme in a favourable column on bombarded by betting ads. And from a stock market Tabcorp in The Switzer Report in January 2019. My perspective, regular reminders about the challenges view was based largely on the growth potential of the facing (TAH) from an onslaught of Lotteries division and it did not disappoint in the FY19 online gaming services that are disrupting global result. But the share price has barely moved since my wagering. report ($4.58 at the time).

Tabcorp provides wagering and media services Nevertheless, I remain positive on Tabcorp’s through its totalisator, fixed-odds betting and retail long-term prospects. In a fully priced equities market, wagering networks (42% of FY19 revenue); lotteries Tabcorp offers reasonable value, although its and Keno in most Australian states and territories recovery will take time. The stock looks undervalued (52% of revenue) after its 2016 acquisition of Tatts; against its global peers and on historical grounds. and gaming support services to more than 3,500 venues nationally (6%). Chart 1: Tabcorp

Tabcorp has underperformed the market in the past five years: the annualised total return (assuming dividend reinvestment) is 6.8%, Morningstar data shows. The one-year total return is a lousy 4.5%, in a rallying share market.

Whichever way one cuts, Tabcorp has disappointed. Its $11-billion merger with Tatts, from a share-price perspective, has underwhelmed, raising questions Source: ASX about execution. Tabcorp needs to get faster results from the integration and bring sceptical investors Lotteries back to its stock. My positive view on Tabcorp is based mostly on the After rallying in the third quarter of 2019, Tabcorp outlook for the Lotteries and Keno division. An ageing drifted lower, despite its FY19 result meeting market population is good for lotteries because older people expectation. It trades at $4.64, down from a 52-week tend to follow lottery draws more closely than younger high of $4.98. ones. Population growth is another positive, for it means a larger customer base buying lottery tickets Strong growth in Tabcorp’s Lotteries division and allocating more household income to such underpinned the FY19 result, but has not been entertainment.

Thursday 30 January 2020 04 Product and sales innovations are other factors. the TAB brand and heightened investment to Instant, online lottery draws, more frequent lottery maintain customer numbers during the business draws and other innovations should continue to transformation. Online competition is the big issue. attract new lotteries customers. Selling lotteries via digital channels, and use of customer loyalty cards Tabcorp’s strategy is to modernise, digitise and that encourage repeat business, should lower wage optimise its wagering operations in FY20. It wants to expenses and improve lotteries profit margins over establish a unique brand and purpose for TAB, time. enhanced digitisation to compete with online rivals, use data to personalise services, reinvigorate its totes Longer term, the Lotteries business should benefit and transform its media. from high barriers to entry because it is hard for new entrants to compete in giant lotteries. Also, The next step is creating a seamless omni-channel government regulations effectively create a lotteries spanning bricks-and-mortar and digital wagering monopoly for Tabcorp in the States and Territories in products in FY21. I’ve written before that Tabcorp which it operates. reminds me a little of – retail shopfronts when you need them and a comprehensive online These strengths were evident in Tabcorp’s FY19 offering when you don’t. And the ability to move result. Lotteries and Keno revenue rose 22.8% on a easily between the two. year earlier to $2.8 billion. Underlying earnings (EBIT) rose 37% to $425 million. Omni-channels sound good in theory, but are hard to implement in practice. Tabcorp’s bigger problem is Innovations in Tabcorp’s high-profile Powerball that young people are less inclined to spend their game, designed to deliver larger and more frequent afternoon at the local TAB placing bets than previous jackpots and more winners, boosted the performance. generations. Today’s twentysomethings are more A jackpotting Powerball and the publicity it creates likely to place bets with an online-only provider via an boosts Tabcorp’s customer base and benefits sales App on their smartphone. of its other games. Tabcorp’s Wagering business has had some growth Remarkably, Tabcorp has 3.3 million registered in customer numbers and digital-channel sales. Lotteries players, up 600,000 on the previous However, UBET’s performance remains challenging corresponding period. Almost a quarter of Lotteries ahead of its TAB integration and the Wagering revenue is derived from digital sales. The increase in division has execution risk and uncertainty. Lotteries customer numbers did not get the market attention it deserved. The flipside is the Wagering business has significant upside potential if Tabcorp can accelerate its digital I doubt the market fully recognises the strength of growth and better link it to its traditional sales Tabcorp’s Lotteries division or its potential as channels. customer numbers expand rapidly and more products are sold online. The division is ripe for innovation as Valuation digital and personalised lottery products are offered to a fast-growing customer base. The market is factoring in too much future bad news from Tabcorp’s Wagering business, and not enough Wagering & Media good news from Lotteries at the current price.

As the Lotteries division starred, Wagering struggled. On forecasts, the Wagering & FY19 revenue fell 3.6% to $2.3 billion and underlying Media division is trading on an EBITDA multiple of earnings (EBIT) dropped 11% to $271 million. about 5 times (compared to 17 for the Lotteries and Keno division). If correct, this would value Wagering This is partly because of ongoing integration of Tatts & Media at a 50% discount to Tabcorp’s global peers Group’s challenged UBET retail betting shops into and a similar discount compared to Tabcorp’s

Thursday 30 January 2020 05 pre-merger valuation (before it acquired Tatts Group). to $4.16.

Macquarie wrote this week: “Some investors may Chart 2: Sydney Airport see the discount as appropriate, but we see a re-rating towards our 7 times valuation (from 5 now in the wagering business).” A 1 point re-rating in the Wagering division EBITDA multiple adds 21 cents to Tabcorp’s share price.

Macquarie has an outperform recommendation and a 12-month target of $5.25. An average share-price target of $5.19, based on the consensus of seven broking firms, also suggests Tabcorp is moderately undervalued.

If the consensus view is correct, Tabcorp’s total return over 12 months should be around 20 per cent (including its dividend yield). An estimated grossed-up dividend (after franking credits) of almost 7% in FY2020 should support demand for Tabcorp in an income-focused market. Source: ASX With the integration of Tatts and Tabcorp due for completion in FY2020, the business will have more Chart 3: Airways bandwidth to integrate UBET, revitalise the Wagering business, derive greater synergies and accelerate innovation in its high-performing lotteries division.

Nevertheless, prospective shareholders should not expect windfall gains from Tabcorp and owning a gambling company is not to everyone’s taste in this responsible-investing era.

However, Tabcorp looks like it has been left too far Source: ASX behind in an increasingly overpriced stock market – and a solid rather than spectacular opportunity for Suffice to say my bearish view remains after several patient value investors at the current price. tourism operators in affected bushfire areas this month said forward-looking bookings have slumped – Update: Tourism stocks and the industry has warned of deteriorating trading conditions generally. I began 2020 with a bearish column on tourism stocks. My view was based on the effect of the If that wasn’t enough, the outbreak of the bushfires on domestic and international tourism – and Coronavirus in China will further dent travel here as on company valuation grounds. the Chinese government bans overseas tours.

Sydney Airport (SYD) has fallen from a peak of $9.04 According to media reports, China’s move puts at in 2020 to $8.15, in a mostly rising market. Qantas risk up to a quarter of the travellers that Australia Airways (QAN), a stock I nominated as key sell idea receives from there. Also, the ban coincided with the in 2020, is down from a $7.20 to $6.36. SeaLink Lunar New Year period when more than half of Travel Group (SLK) has slumped from a high of $4.89 Chinese tourism occurs. A tour ban that lasts longer

Thursday 30 January 2020 06 than expected could have a catastrophic effect on Australian tourism operators that service inbound Chinese tourists.

Either way, I wouldn’t be buying tourism stocks yet, despite price weakness. Industry conditions will worsen before they improve, as the Coronavirus spreads.

Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 29 January 2019.

Thursday 30 January 2020 07 Should an investor try to catch any of these falling knives? by James Dunn

We’re coming into a reporting season – half-year to is the company’s largest by revenue, and the December 31 for most companies, but full-year competition there is intense: lifting sales in the US will results for those which use the calendar year as their be more crucial over the next few years than financial year – and that can only mean one thing: increasing success in China.”) Nevertheless, such “confession season” is ending. blind-siding hurts.

Just as there are two reporting seasons – February Earlier in January, online retail and services specialist and August – there are two confession seasons, one Kogan.com released a surprisingly disappointing in December-January and the main one, April-June first-half trading update. Kogan’s gross sales and (early confessions come after companies see their gross profit grew 16% and 9%, respectively, in the results for the March quarter.) If the companies first half compared to 12 months ago, but gross profit realise that they are unlikely to meet their own growth slowed from 28% at the end of September “guidance” for expected profits – often expressed as quarter. The company’s operating costs fell during a range – or the market’s expectations, based on the period, meaning that the net profit could still grow, analysts’ current consensus estimates – they tell the but the market was not impressed, and KGN stock fell market about it. more than 22% on the day of the announcement (20 January), and is now almost 32% lower than where it And depending on what the market was expecting, was on 19 January. these revisions to outlook can have a severe impact on share prices. On the same day as Kogan released its upgrade, private health insurer NIB (NHF) updated its outlook For example, on Tuesday night, Treasury Wine for FY20. An increase in claims expenses means NIB Estates sprung a surprise on the ASX, bringing out a now expects its underlying operating profit (UOP) to weaker-than-expected first-half result, and be about $170 million in FY20, down from previous downgrading its full-year forecasts, on the back of a guidance of at least $200 million. NHF stock fell by downturn in its US business. Treasury says a flood of 12.7% on the day: since the downgrade, further price cheap wine that has entered the US wine market and slides have taken its fall to 17.4%. cut into margins might take two years to reverse: in response, the share price fell more than 25%. 20 January also saw Super Retail (SUL) – owner of (Treasury shares had already fallen by close to 6% the Rebel Sport, Super Amart, BCF, Macpac and on Tuesday, largely seen in the market as being Super Cheap Auto brands – release a trading update driven by concerns as to what the coronavirus stating that the bushfires and sustained drought outbreak in China might do to consumer spending in conditions had impacted December trading. While the the company’s most profitable market.) market only marked SUL down by 1.8% on the news, the stock has been singled out as one of the Such a brutal fall in the share price is a kick in the ASX-listed stocks most exposed to the bushfires, stomach to shareholders: I should know, as I had through its “outdoor” category, namely BCF and TWE as one of my five top tips for 2020, in Macpac. Since the trading update, increased December, at $17.09 – it is now trading at $12.50. nervousness around the bushfire impact has stripped (Although, I did pose the caveat that “the US market more than 11% from the SUL share price.

Thursday 30 January 2020 08 On 22 January, engineering and construction down 4.4%, is 6.4% weaker, and Fortescue giant Downer (DOW) cut its profit guidance for FY20 Metals has lost 9%. to $300 million, from the previous figure of $365 million, representing a 12% fall in the forecast, and But none of these companies has released an thus an effective 19% decline in full-year earnings if announcement specifically referencing coronavirus – borne out. The major problem was the Engineering, it is too uncertain and fast-moving a situation. Construction, and Maintenance (EC&M) business, as However, it could certainly affect full-year earnings if Downer deals with ongoing difficulties at the it worsens, and widens. company’s renewable energy and mining projects. Downer faces the double-whammy of escalating cost So, should an investor try to catch any of these falling to complete construction projects currently in knives? progress, but a smaller pipeline of new projects. DOW stock slumped 18% on the day of the Take Downer (DOW) for example. Stock announcement and has extended that fall to 19.6%. Doctor/Thomson Reuters has an analysts’ consensus valuation of $7.79, while FN Arena has One day after Downer’s mea culpa, construction and $7.89. The stock is offering, at the current price of contracting group, CIMIC (the former Leighton around $7.26, a consensus forecast FY21 yield 4.4%, Holdings) told the market that a review of its grossed-up to 5.3%. Broker Ord Minnett – which businesses would see it take a $1.8 billion post-tax updated its recommendation on January 28 – has a write-down on the value of Middle Eastern group BIC target price on the stock of $8.90, more than 22% Contracting, in which CIMIC holds a 45% north of the current price. non-controlling interest. Investors took more than 20% off the CIM share price, and the stock is still CIMIC is a similar case. Stock Doctor/Thomson down 19.9% from where it had been trading. Reuters shows a consensus valuation on CIM of $33.75, compared to the current price of $28.99; FN There are always reasons for downgrades, whether Arena’s consensus valuation is even higher, at company-specific or more general in terms of market $34.475. CIMIC’s FY December 2020 forecast yield and economic factors; and given the effect of the is 5.3% fully franked, equating to a grossed-up yield bushfires (and now, potentially, floods in northern of 7.6%. Australia) on consumer spending; and also the rapidly broadening impact of the coronavirus epidemic Post-downgrade, Kogan is trading at $5.38. Despite emanating from China, on which news changes daily, the downgrade, Stock Doctor/Thomson Reuters says there are likely to be more. analysts’ consensus values the stock at $6.94; FN Arena puts it at $6.83 (with Credit Suisse the most ASX stocks exposed to travel have been hit in share bullish broker, at $7.37). If those consensus price terms. valuations are reached from here, the potential upside is in the range of 27%–28% – and there is a Qantas Airways (QAN): down by 11% forecast FY21 yield of 3.9% fully franked to go with Sydney Airport (SYD): down by 7% that, equivalent to a grossed-up yield of 5.6%. Corporate Travel Management (CTD): down by almost 15%. Investing after downgrades – or lowering your (WEB): trading 10% lower average entry cost by buying more – can be a Flight Centre (FLT): down by 10.6% lucrative pastime, but it also requires a redoubling of “doing your homework,” to make sure that your After a strong start to the year, A2 Milk – which sells original investing case has not been harmed too into China – has lost 3% in three days, while Crown much. Resorts is down 8%. And on that note, it is too early to say that for Of the big bulk-commodity suppliers that would be , on which the first brokers to affected by a Chinese economic slowdown, BHP is respond have significantly cooled expectations –

Thursday 30 January 2020 09 despite price targets that look attractive from where it ended up on Wednesday.

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.

Thursday 30 January 2020 10 Buy, Hold, Sell – What the Brokers Say by Rudi Filapek-Vandyck

In the good books main geographies of Australasia and Asia-Pacific. Cost of the exit is higher than Credit Suisse expected, (BOQ) was upgraded to with a P&L post-tax impact of around -$1.8bn in 2019 Hold from Lighten by Ord Minnett and a cash impact of -$700m in 2020. The final dividend for 2019 has been cancelled. The decision Ord Minnett believes 2020 will be a challenging year to exit removes an overhang from a known issue and for retail and commercial banks. It is difficult to Credit Suisse believes the extent of the sell off in the envisage significant upside for share prices although shares provides a buying opportunity. Rating is material downside is also considered unlikely. Bank upgraded to Outperform from Neutral. Target is stocks appear cheap versus an expensive market, reduced to $35 from $36. the broker adds. Bank of Queensland is upgraded to Hold from Lighten, given the recent GROUP (JHG) was underperformance in the share price. Target is $7.70. upgraded to Overweight from Equal-weight by The broker still expects a reduction in the dividend in Morgan Stanley the first half resulting from margin pressure. This stock is not covered in-house by Ord Minnett. Morgan Stanley envisages many upside risks, the Instead, the broker white labels research by JP largest positive being better retail flows. This should Morgan. drive a substantial re-rating, either at the fourth quarter result or in the next quarter and the broker (BKL) was upgraded to Neutral upgrades to Overweight from Equal-weight. In the from Sell by Citi results on February 4 the broker targets adjusted earnings of US$134m and expects flows to improve. Citi continues to believe the stock is overvalued but A new US$100m buyback is expected. The stock is acknowledges an underweight position is risky given considered cheap versus Australian peers and the the ongoing pursuit of a Chinese partner, increased target is raised to $47.00 from $34.50. Industry view multinational interest in the segment and the prospect is In-Line. of Marcus Blackmore selling shares. The broker upgrades to Neutral from Sell and incorporates a SYDNEY AIRPORT (SYD) was upgraded to takeover scenario into the valuation. Target is raised Outperform from Neutral by Macquarie to $88 and $66. Blackmores is expected to report on February 25 and Citi estimates first half sales of Macquarie believes the impact of the coronavirus will $349m with earnings (EBIT) of $33m. be constrained to one quarter, as was the case with SARS. The risk is the impact lasts 12 months but CIMIC GROUP (CIM) was upgraded to Outperform given the response of the Chinese government this is from Neutral by Credit Suisse considered low. On that basis the broker suggests the sell-off means the stock is now offering value. The company will exit its 45% stake in BIC Upgrade to Outperform. Target unchanged at $8.68. Contracting that operates in the Middle East. Weakening market conditions in the region were cited TPG TELECOM (TPM) was upgraded to Neutral as well as a desire to focus on opportunities in the from Underperform by Credit Suisse

Thursday 30 January 2020 11 Credit Suisse expects the merger with Vodafone construction will reduce risk in FY21 and beyond. Australia will proceed and now reflects this in its Moreover, the sale of the mining and/or laundries valuation of the stock. As it is trading close to the business could be a positive catalyst. Target is updated target, raised to $6.70 from $5.50, the broker reduced to $8.00 from $8.80. upgrades to Neutral from Underperform. The broker believes the outcomes from the NBN wholesale MACQUARIE GROUP (MQG) was downgraded to pricing review will be incrementally positive for TPG Sell from Neutral by Citi Telecom. Since the earnings trough in 2012, Citi notes the In the not-so-good books company has had a stellar run up in the share price. The stock is now on unfamiliar ground as earnings ALACER GOLD CORP (AQG) was downgraded to momentum is set to slow and the broker believes the Neutral from Outperform by Credit Suisse recent re-rating is now implying upgrades to guidance. The likelihood of another record year looks December quarter production delivered on 2019 a difficult proposition to Citi and the rating is guidance. Credit Suisse was pleased with the downgraded to Sell from Neutral. Target is steady at commissioning of sulphide production although this $123.50. was at the lower end of guidance. The 2020 guidance, for 310-360,000 ounces, at the high end is REGIS RESOURCES (RRL) was downgraded to below the broker’s current 2020 sulphide forecast. Underperform from Neutral by Macquarie Nevertheless, Credit Suisse is not concerned about its current modelling of 2020 production as there is December quarter production of 90,800 ounces has potential upside from oxide. Rating is downgraded to taken the first half production to 50.3% of the mid Neutral from Outperform on valuation. Target is point of FY20 guidance. The Rosemont underground unchanged at $7.20. development is on budget and the scoping study on Garden Well is nearing completion. Credit Suisse CLASS (CL1) was downgraded to Hold from Add found the production report solid and maintains a by Morgans Neutral rating. A downgrade to estimates for FY20 earnings per share reflects higher cost guidance. Morgans notes managing director Andrew Russell Target is reduced to $4.75 from $4.95. has delivered on a promise to reduce the reliance on a single product. The purchase of NowInfinity takes RESOLUTE MINING (RSG) was downgraded to the company into a larger software market, although Neutral from Outperform by Macquarie the overlap with the existing client base is high. The broker considers the deal highly accretive to The company will raise up to $146m from institutions valuation. The strategy involves some implementation and $25m from its largest shareholder, with up to and timing risks but could eventually return the $25m in the share purchase plan at a -6.4% discount company to double-digit revenue and earnings to the last closing price. Funds will be used to retire growth. Morgans downgrades to Hold from Add as the US$130m bridging loan. Macquarie the stock is now trading near the revised valuation. acknowledges this will provide some relief to the Target is raised to $2.00 from $1.41. balance sheet but the near-term performance of Syama will determine further de-leveraging capacity DOWNER EDI (DOW) was downgraded to over 2020. The dilution drives a reduction in the Underperform from Neutral by Credit Suisse target to $1.20 from $1.40 and a downgrade to Neutral from Outperform. While the downgrade to guidance is disappointing, Citi maintains a Buy rating and expects most of the THE (SGR) was issues will be contained to FY20. Contracting is downgraded to Hold from Buy by Ord Minnett and inherently risky but the broker expects the to Neutral from Buy by UBS re-positioning of the business away from fixed-price

Thursday 30 January 2020 12 Ord Minnett envisages a soft domestic outlook over company will undertake a strategic review relating to the next 12 months amid weak consumer sentiment the optimisation of its internal operating model. Rating and a subdued earnings profile in Sydney. The broker is downgraded to Neutral from Buy, given the decreases operating earnings forecasts for FY20 by increased near-term uncertainty. Target is reduced to -0.3%, and by -2.6% for FY21. Growth from the $18.00 from $20.50. projects in Brisbane and the Gold Coast, coupled with disciplined capital allocation, are considered the main WEBJET (WEB) was downgraded to Underweight positives. Rating is downgraded to Hold from Buy and from Equal-weight by Morgan Stanley the target reduced to $4.50 from $5.05. This stock is not covered in-house by Ord Minnett. Instead, the Morgan Stanley assesses the company’s B2C broker white labels research by JP Morgan. business in Australia is most at risk from the trends that are playing out elsewhere. Expedia and UBS assumes that the Sydney VIP market will grow TripAdvisor have both cited increased monetisation by 50% while in the first year of Crown of search traffic by Google as a contributing factor to Sydney’s (CWN) operations Star Entertainment will declines in their earnings and outlook. Morgan lose half of its VIP share to Crown. This is likely to Stanley expects revenue leakage, growth in result in a -25% reduction in VIP revenue. The broker marketing costs and ultimately compression in assumes the premium mass segment will grow by multiples. The implications are considered material 20% and that Star Entertainment keeps 55% of this. and the broker downgrades to Underweight from The broker re-models assumptions and downgrades Equal-weight. Target is reduced to $10.00 from to Neutral from Buy. Target is reduced to $4.50 from $12.40. Industry View is In-Line. $5.20. No material impact is assumed from the outbreak of the coronavirus at this stage although it is The above was compiled from reports on FNArena. a risk. The FNArena database tabulates the views of seven major Australian and international stock brokers: Citi, TREASURY WINE ESTATES (TWE) was Credit Suisse, Macquarie, Morgan Stanley, Morgans, downgraded to Hold from Accumulate by Ord Ord Minnett and UBS. Important: This content has Minnett and to Neutral from Buy by UBS been prepared without taking account of the objectives, financial situation or needs of any First half results were weaker than Ord Minnett particular individual. It does not constitute formal expected. The company has downgraded FY20 advice. Consider the appropriateness of the earnings (EBITS) guidance to growth of 5-10% and information in regard to your circumstances. provided FY21 guidance for growth of 10-15%. Commercial challenges in the US drove the weak result. A strategic review has been announced to accelerate change in commercial operations. Ord Minnett downgrades to Hold from Accumulate and lowers the target to $15 from $20. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.

Treasury Wine has reduced FY20 guidance and reported earnings (EBIT) growth of 6% in the first half. The miss to expectations stems from a -26% decline in the Americas earnings, related to both execution and market issues. UBS is particularly disappointed, given guidance was reaffirmed in October. FY20 earnings growth is now expected to be 5-10% versus prior forecasts for 15-20%. The broker reduces net profit estimates by -12% for FY20. The

Thursday 30 January 2020 13 My “HOT” stock by Maureen Jordan

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“Tencent Holdings (, Code: 700) is the holding company that provides internet, mobile, advertising and e-commerce services across China and the globe,” he explains.

“Although it is trading at around 37 times next year’s Source: Google earnings, an estimated long-term growth rate of 20% eases valuation concerns. Important: This content has been prepared without taking account of the objectives, financial situation or “Tencent outperformed the Hang Seng index in the needs of any particular individual. It does not initial coronavirus sell down, possibly supporting the constitute formal advice. Consider the view that any escalation of viral infection could see appropriateness of the information in regard to your greater demand for Tencent’s services,” he adds. circumstances.

Source: Google

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On the other hand, Michael doesn’t like (CBA). “The lift in CBA’s share price to levels above $84 is impressive, given the concerns and costs raised by the banking Royal Commission,” he says.

“I suspect some shareholders are hanging in for the February dividend.

“It may be smarter to sell ahead of the ex-dividend date,” he adds.

Thursday 30 January 2020 14 Questions of the Week by Paul Rickard

Question 1: Following from what I understand was a Question 3: Do you have a view on the current NB disappointing profit report from Treasury Wine Global Corporate Income Trust (NBI) entitlement offer Estates (TWE), would now be a good time to buy this and the unit price? stock? I am a long term holder. Answer: I am a fan (and investor) of the NB Answer: For the long, yes. For the short term, I Corporate Income Trust (NBI). I classify it within the would be inclined to wait as the history of market “risky fixed interest” portion of my portfolio. It is not jolters such as what has happened to TWE is that my only investment in this area – diversifying stocks don’t re-rate quickly. It rarely stops with the manager risk, as well as the risk of the underlying first fall – there is a lot of “egg on face” with the asset class (non-investment grade corporate bonds) analyst and investor community. And it has been a are key considerations. It is currently paying a massive fall for TWE. From $17.70 going into the distribution of 5.25% pa, although this will drop in Australia Day long weekend, it closed yesterday at FY21 to the mid to high ‘4’s. They are conducting a $12.35 – a fall of 30.3%. 3 for 4 entitlement offer at $2.05 per unit to raise about $500m. Last NTA is $2.06. The offer closes on According to FN Arena, the consensus broker target 21 February. As always, review the Product price still sits at $17.78. This will come down a touch Disclosure Statement closely before making any as more brokers revise their targets. Of those who decision to invest. have (post the announcement of TWE’s problems in the USA), UBS has a target of $18, Morgan Stanley Important: This content has been prepared without $15, Ord Minnett $15 and Citi is at $15.60. taking account of the objectives, financial situation or needs of any particular individual. It does not Fortune favours the brave… constitute formal advice. Consider the appropriateness of the information in regard to your Question 2: Will CSL split its shares this year? circumstances.

Answer: While there is no logical reason for a share split – it creates absolutely no value – it wouldn’t surprise me if CSL did a 10 for 1 or 20 for 1 share split. This would bring the price of the new CSL shares down to around $30 or $15 respectively.

Because of the way the ASX now trades, a new investor in CSL can buy just two shares (this exceeds the minimum of $500 in value), and an existing CSL investor can sell a single share (there is no minimum). This means that the reasons to split aren’t particularly compelling. That said, there is some pressure building to do one.

Thursday 30 January 2020 15

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