ASX Investment talks

Transcription

1 ASX Investment talks Mid-Year Review SPEAKER: Carl Daffy, Wilson HTM LOCATION: Melbourne DATE: 26 June 2012 DISCLAIMER: The following material was presented at ASX Investment talks. The views, opinions or recommendations of the presenters are solely their own and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN and its related bodies corporate ( ASX ). Information and material presented at the seminar is for educational purposes only and does not constitute financial product advice. Investors should obtain independent advice from an Australian financial services licensee before making investment decisions. No responsibility is accepted by ASX for any loss or damage arising in any way (including due to negligence) from anyone acting or refraining from acting as a result of this information or material. Copyright 2012 ASX Operations Pty Limited ABN All rights reserved 2012.

2 Disclosure and Disclaimer Disclosure of Interest. The Directors of Wilson HTM Ltd advise that at the date of this report they and their associates have relevant interests in securities in companies mentioned in this report. They also advise that Wilson HTM Ltd and Wilson HTM Corporate Finance Ltd A.B.N and their associates have received and may receive commissions or fees from these companies in relation to advice or dealings in securities. Some or all Wilson HTM Ltd authorised representatives may be remunerated wholly or partly by way of commission. Disclaimer. Whilst Wilson HTM Ltd believes the information contained in this communication is based on reliable information, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. To the extent permitted by law Wilson HTM Ltd disclaims all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage) however caused, which may be suffered or arise directly or indirectly in respect of such information. Any projections contained in this communication are estimates only. Such projections are subject to market influences and contingent upon matters outside the control of Wilson HTM and therefore may not be realised in the future. The advice contained in this document is general advice. It has been prepared without taking account of any person s objectives, financial situation or needs and because of that, any person should, before acting on the advice, consider the appropriateness of the advice, having regard to the client s objectives, financial situation and needs. If the advice relates to the acquisition, or possible acquisition, of a particular financial product the client should obtain a Product Disclosure Statement relating to the product and consider the Statement before making any decision about whether to acquire the product. This communication is not to be disclosed in whole or part or used by any other party without Wilson HTM Ltd's prior written consent. This document provides market commentary, research and strategy ideas to the Wilson HTM Ltd clients. On occasion, information provided herein might include excerpts, abstracts, and other summary material derived from research reports published by WHTM Research. Any reference to a research report or research recommendation is not intended to represent the whole report and in itself considered a recommendation. Readers are directed to the original research report or note to review the Research Analyst s full analysis of the subject company as well as important disclosures. 2

3 Mid-Year Review Carl Daffy, Senior Investment Adviser July 2012 Prices in presentation are as at 7 June, 2012.

4 All Ords Graph - Hurdles Just when you feel the market is getting somewhere there is another hurdle to jump.. At least Sally knows how many hurdles she has to jump! 4

5 Hurdle: Europe The key problem is that the key differences in competitiveness between countries cannot be eradicated by currency adjustment, hence a long term structural adjustment plan is needed (actually paying taxes, changes to pension ages, privatising assets PLUS an indication that austerity measures are being taken). Evidence that this was happening would placate lenders and lower borrowing costs The Germans have to accept that this might mean a risk of higher inflation (and some of their taxes go to the greater good of supporting Europe and the banks, including their own) The European Central Bank has to support the banking system in Europe as a whole otherwise the Euro is doomed. The risk to global growth in that case is significant. Rest of the world can help by stimulating growth (China, US). 5

6 Volatility We are getting used to it 2011 saw a pickup in volatility then settled a little, until recently All Ords Index - Daily % Change 8 % Source: IRESS, WHTM Bear Sterns Lehman Bros Sovereign Debt

7 % Loss of jobs from peak Hurdle - US Employment Situation Softest job recovery of the modern generation 1% Change in US employment levels from start of a recession 0% -1% % -3% -4% -5% -6% -7% Months Since Employment Peaked now 7 Source: BLS, Bloomberg, WHTM.

8 Hurdle: US has too much existing home supply But downward pressure on house prices easing (up 8% May 11 May 12) Excess Inventory Falling 8 Source: Bloomberg, WHTM

9 Hurdle: China Slowing But How Far? 7-9% annual GDP growth is more sustainable Lower inflation allowing monetary authorities to take foot off the brake. We expect further loosening of policy through 2012 China Industrial Production YoY(%) China Consumer Price Index YoY (%) Food CPI (yoy) (LHS) Non-Food CPI (yoy) (RHS) % /12/2006 1/06/2008 1/12/2009 1/06/ Source: Bloomberg, National Bureau of Statistics of China, WHTM.

10 Hurdle: Consumers are re-building savings Saving more = spending less = easier monetary policy % Australia Household Saving Ratio (%) United States Source: US BEA, RBA, WHTM

11 Global Monetary Policy Official Overnight Cash Rates (%) Aus US Euro (%) Source: RBA, WHTM

12 Dividend Yields Attractive vs. Cash Reporting season saw dividend forecasts maintained 12 Month forward dividend yield versus bank deposit rate 9.00 (%) 8.00 Gross Dividend Yld Bank Special Deposit Rate Source: RBA, WHTM

13 The Earnings Report It s all about the surprises For FY11: Resources earnings up 44%. Financials earnings up 11.5%. Industrials earnings flat (+0.7%). Analysts forecasts for FY12e and FY13e: Resources earnings down 5.5%, then up 24%. Financials earnings up 5%, then up 8.5%. Industrials earnings flat, then up 15% Risks to the Forecasts? We remain wary of earnings forecasts they still look too high, especially 2013 Company balance sheets in strong shape - Capital management (e.g. buy-backs), higher dividends, mergers and acquisitions. 13

14 Valuation: How Much Already In The Price? Global uncertainty has seen market sentiment remain volatile. Current 12-month forward PE about 11x. Longer term average close to 14x. The difference between equity market valuation and interest rates very wide the market applying an extremely large discount to earnings forecasts some of which looks justified. Need to adjust historic fair value downwards for persisting high level of global uncertainty regarding sovereign debt: the global growth risk premium needs to be above the longer term average. Fair value probably closer to 12.5x 13x. Implies markets already pricing in another 15-20% downgrade to earnings forecasts: bad news already priced in. 14

15 In Summary: Where to from here? Global economy taking a pause. Fear of European meltdown The European Central Bank is now reacting - but the politics of structural change in many countries is difficult to navigate. Volatility to continue The US household sector benefiting from more jobs and higher incomes Chinese authorities are now supporting growth rather than trying to restrict it Australian economy two speed, but RBA has been back on the job However, earnings forecasts for Australian companies for 2012 and 2013 still look too high Company balance sheets are strong Equities offer long term investors a very attractive yield. Europe remains the obvious key risk. Reviewing portfolios ahead of the August reporting season is critical 15

16 16 Implications for Australia

17 A brief discussion around some of the stocks my clients are holding EPS Growth - QR National Mining Services ORI, MYE Banks ANZ, CBA Mid Cap defensive - SGH New economy NXT Digging holes BHP & RIO 17

18 Sector: Industrials - Transportation QR National BUY TP: $4.30 Bull Case Asian demand for coal, management s ability to optimise the business. Diversity of business: regulated/unregulated reduces volatility Significant CAPEX spend Repricing of legacy contracts Lifting key operating metrics to sector averages Bear Case Ability to optimise costs Sustained reduction in demand/price of coal Limited history as a public company Wilson HTM Corporate Finance Ltd acted as Co-Lead Manager in relation to the November 2010 IPO of securities of QR National Limited and received fees for this role as disclosed in the Prospectus. Source: Company Data, IRESS, Bloomberg, Capital IQ, WHTM Estimates. TSR : Total Shareholder Return. Financial Summary % changes are CAGR.

19 Slater & Gordon Ltd BUY TP: $2.44 Bull Case Strong brand Core business is NOT correlated to the broader economy Expect 10% organic growth per annum Stable margins / Stable market share Predictable earnings Highly regarded management team Bear Case Acquisition risk bedding down RJW Regulatory risk in Australia and UK Source: Company Data, IRESS, WHTM Estimates.

20 Position your portfolio to tackle each hurdle and with some good advice you can stay on track.. 20 The market is cheap and it may remain cheap for a while. But it won t remain cheap forever

21 If you would like to discuss your current portfolio as it stands your broader asset allocation how to derive greater income from your portfolio How to ensure your portfolio s current income levels are sustainable when deposit rates are declining How to lower risk within your portfolio Please contact Carl Daffy to discuss on

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