investment watch October 2013 Short term headwinds driven by US indecision creating investment opportunities

Transcription

1 investment watch October 2013 Short term headwinds driven by US indecision creating investment opportunities The Australian market is likely to be significantly influenced by actions in the US in October. We saw late in September the US Federal Reserve Chairman Ben Bernanke express concern that fiscal headwinds from the heated Congressional debate over its budget and recent jump in interest rates could slow the US economic recovery. Our Chief Economist, Michael Knox, had forecast the Federal Reserve to continue stimulating the US economy due to high unemployment. In contrast, the market view was that the Fed s bond purchases would be tapered. Consequently, the move by Bernanke surprised the market which resulted in solid share market gains. In our view, the next two potential flashpoints which could create significant volatility for debt and equity markets over the next month both revolve around US Congressional decisions. If this sounds familiar, it s because we went through a similar fiscal gridlock two years ago which saw the S&P 500 fall ~7% until it was resolved. ACT ONE The shutdown threat (Timing Before 1 October) The first issue is whether the 535 members of Congress will approve a Federal budget for the fiscal year that begins on 1 October. At the time of publishing, House Republicans approved a stop-gap measure that would maintain funding levels for federal agencies through 15 December. However, it also included legislation that would defund the health care law and prioritise debt payments in the event of a default on the debt ceiling. The Senate Democrats are likely to respond by stripping out defunding language and default provisions, basically passing back a Bill that would extend spending, leaving the Senate Republicans less than 48 hours to accept or reject the Bill. Consequently, the Democrats are betting the Republicans do not have the stomach to go past the 30 September deadlines as it would result in unpopular shutdowns, which we witnessed in the early 1990s under the Clinton administration. ACT TWO The default threat (Timing Mid-October) In our view, the default threat is actually greater than shutting down the US government. As Minority leader Nancy Pelosi expressed shutting down the government is one bad thing, but you shut it down, you open it up again. Not lifting the debt limit is unleashing a torrent, a river of no return. It is beyond cataclysmic. The US has never defaulted on its debt so there is no trend or historical performance which we can look at, but create volatility in equity markets in the near term What should you do with your portfolio? In our view, this short term volatility is likely to see high yielding and defensive stocks continue to be supported as market participants seek out safety. We continue to believe we will see strength in the big four banks, Telstra, utility stocks and A-REITS, this volatility could create an opportunity to reposition portfolios into global and domestic cyclicals. Our expectation is for the ASX 200 to move towards our fair value target of 5503 points in Key cyclical stocks to keep an eye on include Harvey Norman, Super Retail Group, Fletcher Building and Amcor. Important disclosures regarding companies that are the subject of this report and an explanation of recommendations and volatility can be found at the end of this document. RBS Morgans Limited (A.B.N ) AFSL A Participant of ASX Group A Professional Partner of the Financial Planning Association of Australia Level 29, Riverside Centre, 123 Eagle Street, Brisbane QLD 4000, Australia Phone:

2 2 investment watch October 2013 Economic update Europe, US, China, Australia US We now think that the US economy will achieve only 1.6% growth in Growth would be much stronger were it not for the tightening of fiscal policy. From a level of 7% last year, the budget deficit has fallen 2.3% to a level of only 4.7% of GDP this year. Normally that level of fiscal tightening would result in a US recession. This year quantitative easing has provided enough support to domestic demand to result in a period of only softer growth. We think that growth will accelerate significantly in The degree of fiscal tightening will ease. This will support a significantly stronger level of housing activity, which in turn supports the long term recovery of the US economy. Europe The Purchasing Manager s Index (PMI) for the Euro zone for August suggested the region is now expanding at the fastest rate in two years, rising to 51.5, up from 50.5 in July. Euro Area manufacturing led the upturn in August with production volumes expanding at the fastest rate since the first half of In spite of the fact that we are beginning to see a recovery in demand, the labour market is still soft and unemployment continues to rise. Europe has finally shaken off the effects of the Euro Area banking crisis. It has begun to grow again. We think the resurgence of Europe will be increasingly important in supporting world growth in China Chart 1 shows a bottoming of Chinese Industrial production growth in the year to June at 8.9%. This was the lowest level since cycle lows in March 2013 and August Since June, the pace of industrial production has picked up. It accelerated to 9.7% in July and to 10.4% in August. Of particular interest to Australia was the growth rate in steel production up 7.2% for the year to June. It kicked to 10.9% for the year to July and a very healthy 15.6% for the year to August. This of course is a good sign for sales of Australian iron ore in China. This month we look at... Economics update: Europe, US, China, Australia Retail: Switch from Myer Holdings into Harvey Norman Finalist CoreData SMSF Service Awards Australian Shares Technical analysis: Harvey Norman Resources: The Dragon Returns. Is China confounding market expectations of a hard landing? Morgans Annual QLD Conference 9 11 October 2013 Catalysts abound in Small Cap Oil and Gas Fixed Interest: update High Conviction picks: top 100 and ex 100 Watch our Chief Economist Michael Knox discuss the global economic outlook. % 12 Year-on-year growth rate of total value added of the industrial enterprises above designated size /Aug Sep Oct Nov Dec2013/Jan Feb Mar Apr May Jun Jul Aug Australia Employment numbers for August show that Australia remains in a growth recession. For the year to August the total number of employed persons in trend terms grew by only 1%. This is less than half of the long term average since January 2000 of 2.2%. The result of this low employment growth is that unemployment continues to rise. In trend terms, it was up 0.5% for the year to August. This would have been worse if it was not for the fact that the participation rate fell by 0.1%. This employment growth is consistent with an Australian economy growing by 2.6% per annum. The growth rate needs to rise to at least 3.2% merely to stabilise unemployment. Press coverage since the Federal election has shown that business confidence has risen to the best levels since Our judgement is that this higher level of business confidence is still only consistent with growth in early 2014 of 3.0%. The economy will need to grow faster than that. We think the RBA will need to undertake two more rate cuts of 25 basis points to take the cash rate down to 2%. Rates will need to be maintained at that low level for some time. We need growth in the Australian economy to maintain at higher than 3.2% to bring unemployment down. It appears that this may take some time to do.

3 October 2013 investment watch 3 Retail Switch from Myer Holdings into Harvey Norman The outlook for the Retail segment is improving as low interest rates and improving house prices begin to boost consumer confidence. Combined with high consumer savings rates, the general household is in pretty good shape. We recommend being Overweight Consumer Discretionary Stocks, with a preference for companies with defensible market positions, strong earnings growth drivers and exposure to non-apparel categories. We are particularly cautious on the department store and fashion/apparel retailers and recommend switching into housing-related retailers. The department store retailers in particular, have few leavers for growth and their store footprints are too big. Accordingly, our key picks are: Harvey Norman, Super Retail Group and JB Hi-Fi. We recommend switching out of Myer Holdings into Harvey Norman. Focusing on Harvey Norman, it s easy to look at its recent share price performance and think you ve missed it. But, we think the household goods retailers have more work to do. All the dynamics are right for an earnings upgrade cycle which will see the PE continue to re-rate: 1. Leverage to an improving housing market. House prices have already commenced their upward trend and approvals are starting to improve as well. Harvey Norman has a large exposure to furniture, bedding and white/kitchen goods. We expect a housing recovery over the coming years, benefiting Harvey Norman. 2. A more rational pricing environment (inflation is back = positive leverage) If such rational conditions persist, we expect consensus earnings estimates could prove conservative (particularly from a margin perspective). In fact, electronics prices have already started to increase (after a prolonged period of deflation). We expect this will lead to solid revenue growth and margin leverage. There is also a strong product pipeline (gaming in particular) in place. 3. Strong earnings growth on offer and valuation not stretched. We believe the valuation is attractive versus the earnings growth profile (most importantly, we believe earnings risk is to the upside). We believe Harvey Norman will continue to re-rate as the Australian housing market and general retail conditions improve. Finalist CoreData SMSF Service Awards Australian Shares RBS Morgans was recently named as a finalist in CoreData s inaugural Self Managed Super Funds (SMSF) Service Awards in the Australian Shares category. These awards were decided upon based on the findings from CoreData s study of more than 1,400 SMSF members. RBS Morgans is proud of this acknowledgment of our commitment to providing high quality SMSF services to our clients; be it investment advice, wealth management advice or SMSF administration and portfolio reporting services. This recognition together with our recently announced Full Service Broker of the Year award at the Australian Financial Review s Smart Investor Blue Ribbon Awards firmly establishes RBS Morgans as a leader in stockbroking and wealth management services, particularly in the area of self managed superannuation. Speak to your RBS Morgans adviser for more information. AUSTRALIAN SHARES FINALIST SMSF MEMBER CATEGORY Allied Healthcare Group Rights Issue Allied Healthcare Group (Allied Healthcare) is undertaking a fully underwritten $10.4 million non-renounceable Rights Issue to eligible security holders who were on the record date as at 5.00pm, 1 October The Rights Issue is being undertaken at $0.05 per security. There is also a top up facility to allow eligible security holders to apply for additional securities beyond their entitlement. The proceeds from the Rights Issue will assist the company to continue the growth and progress of the existing programs further along the development pathway towards commercialisation and ultimately towards profitability for the Company. The Rights Issue closes at 5.00pm, 18 October RBS Morgans Corporate Limited is Lead Manager and Underwriter to the Rights Issue. Contact your Adviser today to find out more about the Allied Healthcare Rights Issue Technical Corner Harvey Norman HVN has been trading in a strong up trend since Dec 2012, which remains firmly intact. Momentum indicators have entered into the bull market range, suggesting that the stock is trading in a primary up trend. Recent price action broke above resistance of $3.24 indicating that higher price levels are likely to unfold in the months ahead. The potential long term upside price target is $3.95. Any short term weakness is a buying opportunity. O J A J O J A J O J A J O J A J O J A J O J A J O J A J O J A J O J A J O J A J Source: RBS Morgans

4 4 investment watch October 2013 Resources The Dragon Returns Is China confounding market expectations of a hard landing? Three core questions are consuming retail investors exposed to the Resources sector. These revolve around risks in China, if and when the sector will see some relief, and how to adjust investing strategies accordingly. Of key concern to Resources investors since mid 2012 has been whether or not China s economy will endure a hard landing. Perceptions have improved significantly between June and September. In July, China Purchasing Manager s Index (PMI) and Trade data saw strong rebounds after 6 months of decline. Recent commitments to RMB 660bn in infrastructure programs and additional tax incentives by the Chinese government is also translating into higher productivity and trade. Adding fuel to the fire, Chinese industrial output surged in August showing factory production rose 10.4% year on year, outperforming softer consensus expectations. This has led to a raft of upside revisions to market expectations for Chinese GDP growth. So what does this mean for equities There is broad market agreement that mining producers are cheap on fundamentals, but are oversold due to key concerns around: 1) doubts around Chinese growth; 2) a tepid short term outlook for commodities; and 3) a lack of catalysts to change the status quo. China s positive economic data gives us comfort in the resilience of commodities demand, and that the current malaise really is all about supply. We believe that supply/ demand (i.e. price) fundamentals will normalise in time, and that investor confidence and risk appetite will similarly improve. We think the recent rebound for Resources stocks off the late June lows can continue as concerns over the Chinese economic outlook continue to ease. We should see the large diversified miners continue to close their discounts to valuations and improved sentiment slowly filter toward higher risk stocks. It s this uptick in confidence that could provide a trigger for money that has been hiding in lower risk, higher yield assets at fundamental premiums to valuations to again start seeking value in hard commodities and Resource equities. Iron ore has been a contentious market to forecast after steel prices tested 12 months lows in June. Market expectations were again for the worst. Chinese steelmakers were simply managing working capital and probably attempting to rebalance market pricing. Steel prices duly recovered seeing steelmakers again scramble for product importing a record 74Mt in July which drove up iron ore prices to their highest level in 5 months catching many market participants by surprise. Such is the ebb and flow of the Chinese steel cycle, which is unfolding over shorter and shorter timeframes. Chinese end user demand (via manufacturing data) supports a healthy economic picture seeing 11.8% growth in the year to July for ferrous metals processing. This suggests real activity and real demand for steel rather than the shifting of inventories between steel producer and consumer. So this positive picture really suggest that overall 2013 looks like a year where investors have capitulated, rather than commodities. We see recent market activity as a positive lead indicator to ongoing stability in the sector. For these reasons we are happy to continue accumulating the major diversified miners led by BHP Billiton. This article will also be published in the Australian Financial Review s Magazine The Pick, in late September. Morgans Annual Qld Conference 9 11 October 2013 Our Annual Qld Conference will be held in mid October. This year we have 36 companies presenting over three days. Post our 2012 conference we recommended a list of 5 standout ideas which on average returned 21% versus the Small Ordinaries index of -4% over this time. Post the conference we will be releasing our key picks for the year ahead. Presenting companies that we will be paying close attention to include: Residential & Consumer recovery Improving consumer sentiment, coupled with the fact that housing affordability is on the rise given the low interest rate environment, makes the consumer and residential recovery a strong theme over the next 24 months. Companies presenting to watch include: Mortgage Choice, Devine, Flight Centre, Super Retail Group, Domino s and Ardent Leisure. Increasing global food demand The Agriculture and Food space has been getting a lot of attention of late with M&A activity on the rise. This year we have Warrnambool Cheese presenting who is currently being aggressively pursued by Bega. On the same theme Freedom Foods is the market leader in the free from food industry in Australia. Tech & Telco a structural shift to cloud In our view, tech and telco stocks are going to be well placed to benefit from the changing dynamics of technology and the increase demand for cloud storage and technology on the go. This year we have NextDC, APDC Group, iinet, M2 Communication, Data#3 and Vita Group all presenting.

5 October 2013 investment watch 5 Oil and Gas Catalysts abound in Small Cap Oil and Gas The oil price has stayed strong over the quarter, and the high pricing is supportive of exploration and development activities in oil and gas acreage. Once an oil price base has been established, the sector tends to trade on catalysts. At present, there are plenty of activities that we are watching in the small cap sector this October that could act as catalysts: Pura Vida Energy is expecting the completion of its farmout during early October, which would see it receive cash of $15 million and which we feel the market is waiting for. Armour Energy is testing its Egilabria 2 lateral well from the Lawn Shale Formation. The well is cleaning up prior to the expected flow of gas. Results are expected over the next few weeks and the company is looking to show that a lateral well using fracture stimulation can flow gas to surface. We consider this a key catalyst, as it is the first flow test of a lateral well in this type of formation in Australia, and the results will be key in determining potential commerciality from the Lawn Shale formation. Horizon Oil is drilling the Tingu gas/condensate exploration well in PNG, which has the potential to be about 400Bcf gas and 22mmbbls of condensate. Results are expected by mid October. Horizon Oil is also drilling the Manaia 2 oil well in New Zealand, which has the potential to add 11mmbbls of gross reserves to the Manaia field. The well spudded on 1 September and was expected to take 30 days, so results are expected over the next week to two weeks. Tlou Energy is currently finalizing drilling and completing its first horizontal CSG pilot pod. After completion operations, the company will begin dewatering the well, with first flows expected in late October/ early November and first gas anticipated in 4Q13. Ingenia Communities Group Rights Issue Ingenia Communities Group (Ingenia) is undertaking a fully underwritten $61.7 million non-renounceable Rights Issue to eligible security holders who were on the record date as at 7.00pm Friday, 20 September The Rights Issue is being undertaken at $0.365 per security which represents a significant discount to the current security price. There is also a top up facility to allow eligible security holders to apply for additional securities beyond their entitlement. The proceeds from the Rights Issue are being utilised to further advance Ingenia s leading position in the manufactured home estate (MHE) market with Ingenia having up to 7 acquisitions expected to be announced over the next few months. The Rights Issue closes on Tuesday, 8 October RBS Morgans Corporate Limited is Joint Lead Manager and Underwriter to the Rights Issue. Contact your Adviser today to find out more about the Ingenia Communities Group Rights Issue. Fixed Interest update With short term rates falling, current income levels for investors in the floating rate fixed interest space are consequently lower. However, a factor yet to impact positively on investor returns is the rapid steepening of the yield curve. That is, shorter dated risk free rates are declining, while longer dated rates are increasing. It is important for investors to not just look at the current income levels (taking the margin and adding that to the current 90 or 180 day BBSW rate) as this will only give an indication of what near-term income is expected to be. Investors in longer dated securities, such as ANZPD which is one of our key picks, need to look at the relevant interest rate swap which equates to the security s call or maturity date. In the case of ANZPD current gross income expectations are 6.00% (3.40% margin plus 2.60% BBSW rate), while the average level of income expected over the life of the security is significantly higher at 7.40% (3.40% margin plus 4.00% 7yr swap rate). Our yield to call (YTC) pricing incorporates all forecast income by utilising the relevant swap rate to give investors a better indication of the likely total return per annum offered by purchasing the security at the current price. Importantly, the YTC also includes the security reverting back to Par value (generally $100) on the call or maturity date. In many instances, and particularly with regards to a vast number of recently issued securities, investors purchasing at current levels will see good levels of income over the life of the security, but they will make a loss on the capital price given the significant premiums a number of these securities are trading at relative to their Par values. There has been a significant tightening in the trading margins of a number of listed hybrid and debt securities over recent months and it is getting increasingly more difficult to find compelling value in the sector. There are also a number of securities which are trading at levels well in excess of where we deem them to be fair relative to other listed securities, as well as wholesale securities. Clients may wish to trim holdings in BOQPD, SUNPC, TAHHB, WBCPC and WOWHC.

6 6 investment watch October 2013 High Convictions Stocks top 100 We add Harvey Norman, Sonic Healthcare and ANZPD Capital Notes to our High Conviction list. Aurizon AZJ Price $4.70 PE (x) 19.7 Price Target $5.00 Yield 3.1% Upside 6.4% Gross Yield 4.4% Aurizon is Australia s largest rail freight operator and controls the regulated coal track infrastructure in the Bowen Basin. Volume growth, contract re-pricing, costout, improved productivity, and ramp-up in major project earnings should drive strong earnings growth. Dividends should grow in line with earnings growth. Earnings should become increasingly defensive given the regulatory regime protects the revenues of the below rail business and increasing proportion of above reail coal revenue is sourced from fixed revenues. AZJ s balance sheet is conservatively geared, with positive free cashflow forecast from FY15. BHP Billiton BHP Price $36.36 PE (x) 13.5 Price Target $39.40 Yield 3.5% Upside 8.4% Gross Yield 5.0% BHP Billiton is the world s largest mining company. Its major assets include iron ore, copper, petroleum and coal. Exploration and Development is multi-commodity, with emphasis on potash. As owner of numerous Tier 1 assets, BHP enjoys the security of a low cost production position for its key products, ensuring profitable operations through the commodity cycle. BHP looks offers solid valuation upside with a lower risk profile relative to peers. As the sector leader, BHP is likely to be a major beneficiary of any improvement in the outlook for global growth, commodities demand (including China) and risk appetite. Harvey Norman HVN Price $3.24 PE (x) 16.9 Price Target $3.10 Yield 3.1% Upside -4.3% Gross Yield 4.4% Harvey Norman is an integrated retailer, specialising in electrical goods, furniture, bedding, white goods and small appliances. Leverage to an improving retail and housing market which is underway. A more rational pricing environment (inflation is back = positive leverage). HVN has A$2.3bn of net asset backing providing asset support. In tougher sales periods, HVN typically provides franchisee support. Last year they spent 2.7% of sales on tactical support to franchisees. This will fall in the better sales environment, providing extra leverage. Oil Search OSH Price $8.86 PE (x) 33.4 Price Target $9.10 Yield 1.2% Upside 2.7% Gross Yield 1.2% Oil Search OSH has a 29% interest in the PNG LNG Project, operated by ExxonMobil. First LNG sales are expected in Exploration activities in PNG have been encouraging; with early results indicating opportunity for expansion. Partnered with a major global player with a strong reputation for successfully bringing on large projects. Opportunities for growth from expansion of the current LNG project, as well as via international oil and gas exploration. Earnings are expected to significantly increase following first sales, which may lead to additional capital management. Sonic Healthcare SHL Price $16.20 PE (x) 16.2 Price Target $16.91 Yield 4.4% Upside 4.4% Gross Yield 5.1% Sonic Healthcare is Australia s largest pathology operator with significant operations in the US and Germany. In addition to this, SHL operates radiology and GP centres which positions the business well to benefit from an aging population and an increasing trend towards genetic testing and personalised medicine. SHL recently posted an FY13 result which was up 4.7% on pcp and has provided guidance of EBITDA growth of 12% at the current exchange rate. At current prices, SHL is our key pick in the large cap health care sector, trading on an FY14 PE ratio of 16.5x and offering a partly franked yield of 4.4%. Suncorp Group SUN Price $13.33 PE (x) 14.0 Price Target $13.52 Yield 5.2% Upside 1.5% Gross Yield 7.4% Suncorp Group is a diversified financials company offering general insurance, life insurance, and retail and business banking. SUN s diversity gives it a number of levers for growth and we believe the business will reward shareholders with solid yield along the way A three year transformation has made SUN is a simpler, de-risked business. SUN s focus has moved from stabilisation to growth, and it now has the capital structure and systems to drive this. SUN is well capitalised and we see potential for further special dividends to be paid over the next months, adding to its underlying dividend yield of 5.5%. Sydney Airport SYD Price $3.99 PE (x) 51.7 Price Target $4.25 Yield 6.0% Upside 6.6% Gross Yield 6.0% Sydney Airport holds an 84.8% (soon to be 100%) economic interest in Sydney Airport. Strong competitive position. Passenger growth has shown a consistent upward trend over the long-term. SYD s strategy is to grow distributable cash faster than passenger growth, so as to produce solid dividend growth. By end 2013 SYD will acquire the minority interests in Sydney Airport, settle with the ATO regarding its tax dispute, and simplify its corporate structure. To view the latest research click on the table for each company Source: IRESS, RBS Morgans, financial information priced as at 27 September 2013, for FY14

7 October 2013 investment watch 7 High Conviction Stocks ex 100 This month we add Ardent Leisure and remove Kathmandu, iinet and M2 Telecommunications to our High Conviction List. Kathmandu s share price has increased 20% post it s FY13 result in late September; we continue to like this story, but remove it from High Conviction post a very strong share price performance. We originally added iinet to our list ahead of their FY13 result and on the view that a bit of organic growth and cost reductions would be well received. With both these catalysts delivered at the result and the share price having performed well, we remove iinet from our High Conviction calls; noting with still rate it a buy. We added M2 Telecommunications to our high conviction calls ahead of their FY13 result and on the view that increased disclosure and news around their key supplier renegotiation would move the share price higher. It has been a volatile two months and those that accumulated on the weakness have done well. We remain convinced that there is significant upside for M2 Telecommunications in their renegotiations with key suppliers but expect investors may have to wait several months to hear the outcome. We temporarily remove M2 Telecommunications from our high conviction buys and will look to re- add it later on this year as renegotiations draw nearer. Ardent Leisure AAD Price $1.85 PE (x) 13.0 Price Target $2.00 Yield 7.0% Upside 8.1% Gross Yield 7.4% Ardent Leisure is an operator of leisure and entertainment assets (Theme Parks, Entertainment Centres in the US, Bowling, Marinas, Health Clubs). Strong fixed cost leverage in all businesses when top-line sales increase. Leverage to an imrpoving domestic tourism environement which should occur in coming years. AAD offers a rare combination of solid earnings growth, an attractive yield (7%) and leverage to an improving domestic tourism environment. ERM Power EPW Price $2.55 PE (x) 23.2 Price Target $2.98 Yield 4.5% Upside 16.7% Gross Yield 6.4% ERM Power is an integrated energy provider that sells electricity to businesses across Australia, owns and operates electricity generation assets, and has interests in gas exploration and production. Use market noise around a potential bid for the NSW Government owned MacGen (which we believe will be unsuccessful or great value), to buy. SME electricity sales will be the primary growth driver over 12 to 24 months with SME contract award announcements over the next six months the primary share price catalyst, in our view. We retain our high conviction call on EPW with an expectation that its return on equity will increase toward 20% over the next three years and it will continue to pay a good dividend. Super Retail Group SUL Price $13.22 PE (x) 19.2 Price Target $13.98 Yield 3.3% Upside 5.8% Gross Yield 4.6% Super Retail Group is a specialty retailer: Auto (Super Cheap Auto); Leisure (BCF, Ray s Outdoors and FCO); and Sports (Rebel and Amart Sports). Strong earnings growth profile (3-year EPS CAGR of 14%). $75-100m of working capital will be released over FY15/FY16 and capex will peak in FY14 (SUL will spin off significant cash flow thereafter). SUL has an exceptional management team with a strong track record of delivering top-line and margin growth. Virtus Health VRT Price $8.01 PE (x) 19.8 Price Target $8.64 Yield 3.0% Upside 7.9% Gross Yield 3.0% Virtus Health is a leading provider of Assisted Reproductive Services (ARS), conducting approximately 35% of the in vitro fertilisation cycles in Australia last year. There is a growing trend for use of ARS. VRT offered a vertically integrated model including advanced diagnostic services and day hospitals. VRT has delivered solid profit growth over the last three years. ANZPD Price $ PE (x) N/A Price Target $ Yield 4.1% Upside 0.3% Gross Yield 5.8% ANZPD is a Capital Note issued by ANZ. The security is Perpetual but has an initial call date of 1 September 2021 when the issuer has the ability to redeem the security. We expect the security to be redeemed for $ on the call date and given ANZ s strong capital position add the security to our high conviction list. The security has an attractive issue margin of 3.40% over the 180 day BBSW which equates to 6.00% based on current based BBSW. Given the positive shape of the yield curve (longer-term rates are higher than short-term rates) the security has a yield to call of 7.65%. To view the latest research click on the table for each company Source: IRESS, RBS Morgans, financial information priced as at 27 September 2013, for FY14

8 QUEENSLAND PORT MACQUARIE (02) BRISBANE (07) SCONE (02) BUNDABERG (07) SYDNEY LEVEL 9 (02) CAIRNS (07) SYDNEY LEVEL 33 (02) CALOUNDRA (07) SYDNEY MACQUARIE STREET (02) CAPALABA (07) SYDNEY MACQUARIE STREET (Parramatta) (02) CHERMSIDE (07) SYDNEY REYNOLDS EQUITIES (02) EDWARD STREET (07) WOLLONGONG (02) EMERALD (07) GLADSTONE (07) ACT GOLD COAST (07) CANBERRA (02) IPSWICH (07) MACKAY (07) VICTORIA MILTON (07) MELBOURNE (03) NOOSA (07) BRIGHTON (03) REDCLIFFE (07) CAMBERWELL (03) ROCKHAMPTON (07) CARLTON (03) SPRING HILL (07) FARRER HOUSE (03) SUNSHINE COAST (07) GEELONG (03) TOOWOOMBA (07) RICHMOND (03) TOWNSVILLE (07) SOUTH YARRA (03) YEPPOON (07) TRARALGON (03) WARRNAMBOOL (03) NEW SOUTH WALES SYDNEY (02) WESTERN AUSTRALIA ARMIDALE (02) PERTH (08) BALLINA (02) BALMAIN (02) SOUTH AUSTRALIA CHATSWOOD (02) ADELAIDE (08) COFFS HARBOUR (02) NORWOOD (08) GOSFORD (02) HURSTVILLE (02) NORTHERN TERRITORY MERIMBULA (02) DARWIN (08) NEUTRAL BAY (02) NEWCASTLE (02) TASMANIA NEWPORT (02) HOBART (03) ORANGE (02) DISCLAIMER The information contained in this report is provided to you by RBS Morgans Limited as general advice only, and is made without consideration of an individual s relevant personal circumstances. 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RBS Morgans or CIMB Securities Australia may previously have acted as manager or co-manager of a public offering of any such securities. RBS Morgans' affiliates or CIMB Securities Australia affiliates may provide or have provided banking services or corporate finance to the companies referred to in the report. The knowledge of affiliates concerning such services may not be reflected in this report. Each of RBS Morgans and CIMB Securities Australia advises that it may earn brokerage, commissions, fees or other benefits and advantages, direct or indirect, in connection with the making of a recommendation or a dealing by a client in these securities. Some or all of RBS Morgans' Authorised Representatives may be remunerated wholly or partly by way of commission. STATUTORY DISCLOSURES AHZ: RBS Morgans Corporate Limited was a Joint Lead Manager to the Allied Healthcare Group share placement and SPP in December 2012 and received fees in this regard. RBS Morgans Corporate Limited is a Joint Lead Manager to the rights issue for Allied Healthcare Group Limited and may receive fees in this regard. NXT: RBS Morgans Corporate Limited is was a Joint Lead Manager to the placement by NEXTDC Ltd and received fees in this regard. A Director of RBS Morgans Limited is a Director of NextDC Limited and will earn fees in this regard. DTL: A Director of RBS Morgans Limited is a Director of Data#3 Limited and will earn fees in this regard. INA: RBS Morgans Corporate Limited is a Joint Lead Manager to the rights issue for Ingenia Communities Group and may receive fees in this regard. PVD: RBS Morgans Corporate Limited is a Joint Lead Manager to the placement for Pura Vida and received fees in this regard. RBS Morgans Corporate Limited is a Joint Lead Manager to the placement for Pura Vida and may receive fees in this regard. HZN: RBS Morgans Corporate Limited was a Co-manager to the Placement of shares by Horizon Oil Ltd in August 2013 and received fees in this regard. SUN: RBS Morgans Corporate Limited was a lead broker to the public offer of Hybrid Securities by SUN in October 2012 and received fees in this regard. RBS Morgans Corporate Limited is a lead broker to the public offer of subordinated debt securities by SUN in April 2013 and received fees in this regard. EPW: RBS Morgans Corporate Limited is a Joint Lead Manager to the placement & SPP by ERM Power Ltd and may receive fees in this regard. VRT: RBS Morgans Corporate Limited is a participating broker to the public offer of shares by Virtus Health Limited in April 2013 and may receive fees in this regard. SUN CPS2: RBS Morgans was a Joint Lead Manager to the Issue and received fees in this regard. BOQ CPS: RBS Morgans was a Joint Lead Manager to the Issue and received fees in this regard. ANZ Capital Notes: RBS Morgans was a Joint Lead Manager to the Issue and received fees in this regard. RECOMMENDATION STRUCTURE For a full explanation of the recommendation structure, refer to our website at If you no longer wish to receive RBS Morgans publications please advise your local RBS Morgans office or write to RBS Morgans Limited, Reply Paid 202, Brisbane QLD 4001 and include your account details