Australian Equity Strategy

Transcription

1 AUSTRALIA Market and sector EPS growth (%) All Companies Banks Property Trusts Resources Market and sector PEs (x) All Companies Banks Property Trusts Resources Market and sector DPS growth (%) All Companies Banks Property Trusts Resources Market and sector Dividend Yield (%) All Companies All Companies ex Resources Banks Property Trusts Resources Source (for all above): Factset, Macquarie Research, May 2016 For a few dollars more Federal Budget 16/17 We review the announcements made in the Australian Federal Government s 2016/17 budget yesterday. Key points / changes: The budget should help alleviate downside growth risk but is unlikely to significantly improve the near term upside growth trajectory. The budget could be considered stimulatory (an estimated deficit of A$37.1bn, or 2.2% of GDP) relative to the past few years (2.4% of GDP in 2015/16) but continues to be fiscally prudent. Alone, we doubt there is enough in spending intentions to provide sustainable catalyst for the overall market in the absence of domestic demand upside surprise. Likely beneficiaries are Construction and building material stocks (inc. BRS, CIM, DOW, UGL) and Retailers in the immediate term (inc. JBH, HVN, WES) with a slight drag for aged care providers and some healthcare stocks (incl. PRY). Australian corporates have a revenue growth problem. Fixing this requires a sustained boost to domestic demand and the restoration of pricing power. Cost out (which has been an ongoing theme for as long as there has been a revenue problem), gives leverage to a stronger top line but is not a dominant or sustainable driver of earnings growth as is starkly illustrated by the fact that corporate earnings are still 18% below their 2007 peak despite nearly a decade of cost reductions. Yesterday s 25 basis point cut to the cash rate in combination with the relatively neutral FY16/17 Budget is confidence boosting but is insufficient to alter the path of earnings growth and/or near term momentum, in our view. In addition, the other primary transmission channels for equities - a decline in the risk premium and potentially an increase in asset allocation are not likely to improve particularly with the uncertainty of an election overhanging future fiscal support and business confidence. Fig 1 Weak income growth is dampening domestic demand 8 y%ch Australia: Growth & Income Domestic Final Demand May 2016 Macquarie Securities (Australia) Limited -2-4 May-89 May-92 May-95 May-98 May-01 May-04 May-07 May-10 May-13 May-16 Source: ABS, Macquarie Research, May 2016 Gross Domestic Income Please refer to page 6 for important disclosures and analyst certification, or on our website

2 The budget does not exacerbate existing pressures for the market but the policy focus towards boosting supply and not demand does little over the near term to alleviate them either. On balance, it does not appear to have changed the fiscal impulse by enough to alleviate the need for ongoing monetary policy accommodation and further currency depreciation we think more is needed. Our view that the RBA will need to work much harder to weaken the A$ than previously thought due to a much more dovish stance by the Federal Reserve remains central to our view that the A$ might not quite get as low (below US$0.70) as needed for generating a steep recovery trajectory. From a spending perspective we don t see developments over the past 24 hours as a reason to become more bullish on consumer (early cycle) cyclicals. We think downward pressure on housing will continue, that income growth will remain weak and consumers will still need to supplement spending by running savings down. Tax cuts to high-income, lower marginal propensity to consume cohorts don t offer as much bang for buck in terms of demand boost within the economy relative to lower-middle income groups under greater financial pressures and with higher propensities to consume additional income. High effective marginal tax rates towards the lower end have been highlighted on many occasions as a significant participation drag. Fig 2 FY16 EPSg Market (ex Res) is weak at -1.3%... Fig 3 Profit margins around average for past 7 yrs 25 Industrials (Mkt ex Res, Banks & LPTs) EPSg 22 Industrials Profit Margins FY16E FY15 FY17E Averag 0 FY12 FY13 FY FY10 FY FY Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Monthly E Source: Factset, Macquarie Research, May, 2016 Source: Factset, Macquarie Research, May, Businesses Winners: All businesses Losers: Multinational corporations (fill face a Google tax of 40% on income they attempt to shift offshore) & Banks (to sacrifice $121m to fund ASIC). Form 1 July 2016, businesses with annual turnover < $10m will have a company tax rate of 27.5% (currently 28.5%). A range of concessions already available to small businesses with turnover <$2m will extend to all business with turnover <$10m, creating a new small and medium sized enterprise category, which will add ~one million medium sized enterprises into the concessional tax rate. Businesses that fall into the new category will also have access to the $20,000 instant asset write-off benefit. The company tax rate will be progressively lowered to 25% by for all businesses. Unincorporated small businesses with turnover < $5 million will get a tax discount of 8%. 4 May

3 By and large, the budget should be supporting near term retail sales in Australia, particularly when coupled with yesterday s 25bps cash rate reduction from the RBA. Small businesses are likely to see benefit from immediate asset write-off measures, for assets $20,000 or less, enticing further spending on smaller business expansion and equipment, sales for hardware and office equipment, computers, mobile phones, new & used vehicles. At a stock level the budget favours electronic retailers (HVN, JBH), office suppliers (WES), used and new car retailers & advertisers (CAR). While a marginal positive in isolation for retail turnover in the immediate term (the measure expires Jun-17), we expect retail conditions to continue to moderate from here factoring slowing population growth, no material improvement in income growth, and moderation in house prices. Company tax rate cuts (companies with turnover < $10m to have a 27.5% tax rate from Jul-16, and tax rate for all companies to be lowered to 25% by FY27) are not a direct benefit to most stocks under MRE coverage, however, our REITs team notes that an improvement in the profitability of corporates would be a positive for retail landlords as it may result in an ability to extract higher rents over time. 2. Individuals Winners: Middle income earners Losers: Smokers The Government will increase the 32.5% tax threshold from $80,000 to $87,000 until This will stop~500,000 taxpayers facing the 37% marginal tax rate, offsetting the bracket creep, where wage inflation pushes people into higher tax brackets, without any corresponding increase in purchasing power. The Government will increase tobacco excise and excise equivalent customs duties through four annual increases of 12.5 per cent per year from 2017 until Today s budget is slightly more stimulatory than the last two, with only a very minor drag (~0.1%) on discretionary spending (2014 budget: ~2.0% headwind) (link). However, cutting income tax in a budget neutral manner does not have a material stimulatory effect. Benefits for the household budget over the next year include an increase in the middle income tax bracket (32.5%) from $80,000 to $87,000 (max ~$315 pa) and a youth employment package for unemployed people under 25, are offset by headwinds, which include the tobacco excise increase being reinstated and a reduction in other social assistance packages. 3. Health Winners: State & territory hospitals (government will provide an estimated additional $2.9bn between and to support public hospitals). Losers: Aged care providers (to lose >$1bn in funding over 4 years) & doctors (Medicare benefits schedule frozen for 3 years). Overall, an uneventful budget for listed domestic health care companies areas where cuts were made are: MBS (freezing indexation for another two years, until FY20 placing more pressure on bulk-billing for GP and specialist services) and aged care (tightening up the conditions for the complex health care (CHC) component of the ACFI and halving the indexation lever (COPE) for only the CHC component of ACFI from FY17). These changes were relatively well flagged by the Government and will thus unlikely come as a major surprise to providers and investors. Our Healthcare analysts note (link) that PRY is most impacted by the MBS measure and operators with a relatively high skew of fees from CHC are affected by the aged care growth pared back (however, as the listed operators do not disclose this level of funding granularity, it is difficult to assess their relative level of impact). 4 May

4 4. Infrastructure Winners: Sydney Metro rail project (receives $1.7bn from asset recycling fund), Melbourne Metro rail project (receives $857m from asset recycling fund), second Sydney airport at Badgerys Creek (receives $115m), Inland rail project (receives $1.7bn from asset recycling fund). Losers: Victoria (receives <10% of national infrastructure funding averaged over 4 years). The Government remains committed to investing $50bn on major infrastructure projects in the six years to FY20. The surge in spending on road, rail, airport and other infrastructure will provide a large increase in tendering opportunities for diversified engineers (incl. BRS, CIM, DOW, TCL and UGL) and should benefit infrastructure developers such as LLC. We not that there were no new initiatives announced with the budget for rail and land. 4 May

5 4 May Fig 4 Macquarie Strategy Recommended Australian Portfolio Share price Portfolio ASX 200 Active Sector Company Ticker 3 May 16 Weight (%) Weight (%) Weight (%) Financials Banks Commonwealth Bank of Australia CBA National Australia Bank NAB Westpac Banking Corporation WBC Diversified Financials Eclipx Group Limited ECX Insurance Medibank Private Limited MPL Suncorp Group Limited SUN Real Estate Goodman Group GMG Lend Lease Group LLC Westfield Corporation WFD Cyclical Industrials Consumer Discretionary Aristocrat Leisure ALL Carsales.com Limited CAR Mantra Group Limited MTR ooh Media! Limited OML The Star Entertainment Group SGR Industrials Amcor Limited AMC Incitec Pivot Limited IPL James Hardie Industries JHX Orora Limited ORA Qantas Airways Limited QAN Transurban Group TCL Defensive Industrials Consumer Staples Wesfarmers WES Health Care Cochlear Limited COH CSL Limited CSL Telcos, Infrastructure & Utilities AGL Energy Limited AGL Contact Energy Limited CEN Telstra Corporation TLS Resources Energy Caltex CTX Oil Search OSH Santos Limited STO Miners BHP Billition BHP Rio Tinto RIO Total Focus List and Sector Preferences Financials Banks Diversified Financials Insurance Real Estate Cyclical Industrials Consumer Discretionary Industrials Defensive Industrials Consumer Staples Health Care Telcos, Infrastructure, Utilities Resources Energy Miners Performance ending U/W N O/W 3 Months (9%) 6 Months (%) Date Month to Date (%) Quarter to Date (%) 3-May-16 Year to Date (%) Portfolio ASX200 Accum Relative Source: Factset, Macquarie Research, May 2016

6 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 March 2016 AU/NZ Asia RSA USA CA EUR Outperform 50.34% 59.09% 46.67% 44.76% 60.66% 46.12% (for global coverage by Macquarie, 3.72% of stocks followed are investment banking clients) Neutral 34.14% 25.66% 32.00% 49.90% 30.33% 35.10% (for global coverage by Macquarie, 4.79% of stocks followed are investment banking clients) Underperform 15.52% 15.26% 21.33% 5.33% 9.02% 18.78% (for global coverage by Macquarie, 2.31% of stocks followed are investment banking clients) Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN , AFSL , a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN AFSL ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. 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