Australian Market Trading Day Wrap 17 February 2017 SUNSET STRIP ***SALES COMMENTARY > Blue Ocean Equities Pty Ltd and associates may hold shares in the stocks mentioned in this email and this position may change at any time without notice*** INVESTMENT MOTTO: “Life is all about cycles. You evolve with the cycle or it runs over you.” MARKET SNAPSHOT AND INTRADAY S&P 200 CHART COUNTRY LAST % CHANGE COM/CURR/YIELD LAST % CHANGE NZ 7093.53 -0.09 SPTGLD 1238.38 -0.07 AUSTRALIA 5805.80 -0.18 AUDUSD 0.7709 0.19 JAPAN 19232.35 -0.60 NZDAUD 0.9345 -0.35 SOUTH KOREA 2077.09 -0.23 GBPAUD 1.6219 -0.06 SINGAPORE 3110.07 0.43 EURAUD 1.3845 -0.20 CHINA 3211.78 -0.55 EURUSD 1.0673 -0.01 HONG KONG 23999.59 -0.45 USDJPY 113.3535 0.10 FRANCE 4899.46 -0.52 DXY 100.47 0.00 UK 7277.92 -0.34 US-DOWJON 20619.77 0.04 US BOND10 2.4575 -1.39 US-NASDAQ 5814.90 -0.08 US BOND30 3.0616 -0.58 US-SP500 2347.22 -0.09 AUS BOND10 2.8066 0.34 CHART OF THE DAY: US Inflation > The near decade long down trend in US inflation has been broken as the latest data moves into 5-year high level. We are seeing similar trends around the world including China. US Fed is sitting on -2% real interest rates. The strength in the economy based on unemployment and consumer spending since mid-2016 suggests that US Fed is behind the game on raising rates and will have to play catch up. Despite flagging 3 rate hikes in 2017, market is only expecting 2 rate hikes. The US economic strength is pointing to market surprise on rate hikes and downgrades to asset valuations in the medium term. MARKET COMMENTARY: 1. Local market ran out of steam as US rate cycle and US political uncertainties started to weigh on sentiment as the weekend rolls in. 2. Health Care and Resources weighed on the market while Gold stocks were the bright light. 3. US politics continues to raise risk while US economic data remains strong. US Dollar index fell overnight and boosted Gold. 1 Page Mathan Somasundaram > [email protected] Sales Commentary Alex Balzuhn > [email protected] Australian Market Trading Day Wrap 17 February 2017 4. US Fed updates are in play for the next month (1) Chair Janet Yellen continues her Semiannual Monetary Policy Report to the Congress tonight (2) Minutes from last month’s FOMC meeting will be released on the 22nd (3) FOMC’s next meeting on 14/15th March. 5. Commodity prices outlook remains robust as China continues to keep the credit expansion and inefficient producer shutdown going. 6. Mining Services sector remains cheap exposure to resource sector…recovery story in play as the unexpected commodity cycle recovery in 2016 will start to show solid cashflow in miners and support better capex outlook. 7. China credit growth driving commodity and asset price recovery… 8. Singapore recovers on manufacturing from the lows… 9. OPEC compliance on supply cuts… 2 Page Mathan Somasundaram > [email protected] Sales Commentary Alex Balzuhn > [email protected] Australian Market Trading Day Wrap 17 February 2017 INTERESTING MOVES OF THE DAY: (1) SEK (+6%) on update on Chinese Zhaopin plans (2) LNK (+4%) on strong result showing the growth in the business (3) AQG (+2%) on Copler Sulfide project update (4) BBN (-7%) on solid result not living up to market expectations (5) MTR (-6%) on solid result despite weakness in city/corporate business (6) VRL (-6%) on remaining in downgrade cycle keeping the negative sentiment TOSH’S TIPS: Alliance Aviation (AQZ, BUY) recently produced a solid result in line with our expectations. AQZ’s diversification strategy is a real positive with services earnings offsetting the weakness in contract and charter biz. Strong cashflow was a highlight allowing for a further reduction in debt and we expect a final divi announced later this year, with potential for an interim divi 1H18… AQZ still has 16/21 of the Austrian airlines aircraft to be brought into service so against a relatively fixed cost base we see considerable leverage available, especially with potential for new business in Tourism, Charter, Joint Venture and Aviation Services. AQZ is trading at a 30% discount to its NTA yet it generates a positive and increasing ROE… 17% EPS growth, P/B 0.64, PE 6.8 AQZ.ASX@AUX: 0.79 MA (AQZ.ASX@AUX): 200 0.6903, 100 0.7703,50 0.7629 1.1 1.05 1 0.95 0.9 0.85 0.8 0.75 0.7 0.65 0.6 0.55 0.5 0.45 0.4 RSI (100.000000): 14 56.0578 100 80 60 40 20 February April May June July August September October November December January February March April May June July August September October November December January February 2015 2016 2017 Rhipe (RHP, BUY) Mgmt reiterated delivering $4m reported EBITDA… RHP continues to offer a deep value opportunity to own Microsoft’s favoured reseller in Asia. RHP is the No1 Asia Pac reseller and now the 6th largest in the world. This is a key strategic asset for any company that wants a global footprint (my understanding is Microsoft wants a global reseller!) They have now been appointed to look after South Korea which one of the two largest SPLA markets in Asia Pacific excluding Japan (APEJ) for Microsoft… Rhipe is in our offices today and in Melbourne on Monday. Ask to meet… RHP.ASX@AUX: 0.4 MA (RHP.ASX@AUX): 200 0.8151, 100 0.7125, 50 0.5465 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1 0.9 0.8 0.7 0.6 0.5 0.4 RSI (100.000000): 14 28.5919 80 60 40 20 3 February April May June July August September October November December January February March April May June July August September October November December January February 2015 2016 2017 Page Mathan Somasundaram > [email protected] Sales Commentary Alex Balzuhn > [email protected] Australian Market Trading Day Wrap 17 February 2017 Sigma Pharma (SIP, N/R) trading update… SIP had flagged that its Reported EBIT for the year to March 2017 is likely to be broadly in line with last year. Underlying EBIT is expected to be about 12% above last year. On our forecasts (taking into account it’s update at its AGM in January 2017) API is growing at least as fast as SIP, if not faster. Yet Australian Pharma (API, BUY) continues to trade at a material PE discount to SIP: 15.5x vs 19.8x (noting the different year ends). The differential simply should not be this large. SIP.ASX@AUX: 1.19 MA (SIP.ASX@AUX): 200 1.2643, 100 1.295, 50 1.2431 1.5 1.45 1.4 1.35 1.3 1.25 1.2 1.15 1.1 1.05 1 0.95 0.9 0.85 0.8 0.75 RSI (100.000000): 14 40.1103 80 60 40 20 February April May June July August September October November December January February March April May June July August September October November December January February 2015 2016 2017 Retail: looking at the David Jones result I would be selling Myer.. and while the press focuses on the negatives such as Herringbone there are some doing well such as Specialty Fashion Group and one of our covered stocks PMV. We pushed the fact that Premier Investments (PMV, BUY) would perform well due to the strength of Smiggle and Peter Alexander and Phil has had a look and thinks it still offers good buying… On Phils numbers it is on 16x then you strip out cash and equivalents its 14x then adjust for franking credits and you get to 12x… Ask to speak to Phil on this name. 4 Page Mathan Somasundaram > [email protected] Sales Commentary Alex Balzuhn > [email protected] Australian Market Trading Day Wrap 17 February 2017 STOCKS AND SECTORS IN PLAY TODAY: 1. Abacus Property Group (ABP, +1.68%) > Abacus Property Group said consolidated AIFRS statutory profit for the half year more than doubled from a year ago to $191.7 million (from $75.5 million). Underlying profit rose 22 per cent to $69.5 million and net tangible assets rose 10.5 per cent to $2.94 per security. Cashflow from operations rose to $64.6 million from $40.6 million and the group realised north of $80 million in cash from residential developments. Abacus boss Frank Wolf described the result as "impressive". "We continue to see reward for our diversified multi-platform business with strong contributions to both underlying profit and NTA from all sides of the business. 2. ASX Ltd (ASX, -0.50%) > ASX Ltd has announced a 3 per cent rise in first-half net profit after tax to $219.4 million on revenue of $386.6 million, up 2.8 per cent on a year ago. EBITDA jumped 1.9 per cent to $296.5 million. The operator of Australia's primary securities exchange said it will pay an interim dividend of $1.02 on March 29. 3. ANZ (ANZ, +1.85%) > ANZ CEO Shayne Elliot has delivered a 31 per cent rise in cash profit to $2 billion over the three months to December 31, well above expectations and has put forward a slightly brighter outlook than at the bank's full year results.