Australian Quant Action

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1 AUSTRALIA Top ranked stocks in the Macquarie Alpha model Code Company Name REA REA GROUP LIMITED RMD RESMED INCO. RRL REGIS RESOURCES LIMITED CSL CSL LTD. FLT FLIGHT CENTRE LIMITED COH COCHLEAR LIMITED GNC GRAINCORP LIMITED WBC WESTPAC BANKING CORP. TWE TREASURY WINE ESTS.LTD. TEL TELECOM CORP.OF NZ.LTD. Bottom ranked stocks in the Macquarie Alpha model Code Company Name WHC WHITEHAVEN COAL LIMITED FMG FORTESCUE METALS GP.LTD. TAH TABCORP HOLDINGS LTD. ASX ASX LIMITED NHC NEW HOPE CORP.LTD. AWC ALUMINA LTD. EGP ECHO ENTERTAINMENT GLD. NCM NEWCREST MINING LTD. TCL TRANSURBAN GROUP QBE QBE INSURANCE GROUP LTD. Long-term performance of a child entity following a demerger Demergers: Breaking up is hard to do Event With the impending spin-off of Shopping Centres Australasia Property Group (SCP) from Woolworths (WOW), we look at the historic performance of stocks around demergers. Impact The child entity typically performs in line with the market for the first few weeks following the spin-off. This is followed by a period of underperformance. The short-term underperformance in the child company is soon reversed, with strong longer-term outperformance. After a year, the child entities have typically rebounded to outperform the market. Short-term performance is shown below whilst longer-term performance is shown in the chart on the left. Fig 1 Short term Performance of a child entity following a demerger -1% -2% -3% -4% -6% Average Median 1 Average Median -7% -8% -9% Days around Spin Off November 2012 Macquarie Securities (Australia) Limited We found that the parent company (that retains the price history) and child company tend to behave differently after a demerger. The parent company tends to market perform around a demerger. Outlook Of the 28 spin-offs in our dataset since 1995, 54% of the child entities had positive returns on the first day of trading (from open to close). This did not appear to impact the short-term returns, however, in the longer run those companies with negative returns typically underperformed and had greater dispersion of returns. We also compare the performance based on turnover on the 1 st trading day. Child entities with greater than turnover typically outperformed in the two months following a split. These stocks outperform those with lower trading volume in both the long and short term. Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website

2 Analysis Using an event study methodology, we calculated the cumulative excess returns 6 months before and 12 months after the demerger date for both the parent and child entity. When the data is split up to examine the performance of the parent entity compared to the child entity we find that behaviour varies quite consistently. The child entity can underperform by up to 9% in the six months following a demerger. It is not until 12 months after the split that the child entity typically outperforms. For the parent entity, the performance is typically flat leading into a demerger. This is followed by market performance following the split. Fig 2 Performance of a parent post demerger Fig 3 Performance of child entity post demerger 6% Average Median 1 Average Median 4% 3% 2% 1% -1% -2% -3% -1-4% -1 Source: Macquarie Research, June 2011 Source: Macquarie Research, June 2011 We further examine the data by looking at the performance of the stock on the 1 st day of trading. Of the 28 spin-offs in our dataset since 1995, 54% of the child entities had positive returns on the first day of trading (from open to close). This did not appear to impact the short-term returns however in the longer run, those companies with negative returns typically underperformed and had greater dispersion of returns. We also compare the performance based on turnover on the 1 st trading day. Child entities with greater than turnover typically outperformed in the two months following a split. These stocks outperform those with lower trading volume in both the long and short term. Fig 4 Split by 1 st day return Fig 5 By Day 1 turnover 1 1st Day Return < 1st Day Return > 1 1st Day Turnover < 1st Day Turnover > Source: Macquarie Research, June 2011 Source: Macquarie Research, June 2011 Our test data only contained around 30 demergers therefore we must be wary of any conclusions made. It is worth noting however that whilst the sample set is small the pattern is consistent, i.e. there are no significant outliers. In particular, we recognise that many demergers have been in cyclical industries and the results might be related to the market cycle. However when comparing such stocks to respective industry performance there is still longer-term outperformance of demerged entities. 23 November

3 Factor Performance Summary: Most signals, except Low Risk and Technical, were negatively predictive of returns last week. The worst performing style groups were Profitability and Momentum. Overall it was a tough week for the Alpha Model given most factors had underperformed. Valuation: Forward Book Yield performed strongly last week leading the style group with an IC of 15.. On the other hand, forward Dividend Yield lost ground reversing previous gains. Overall performance of Value was subdued netting an IC of -6.9%. Analyst Sentiment: Last week was a mix week for Sentiment factors. Up-down Earnings Revision was the biggest drag on returns (-13.2% IC) while 3M Recommendation Revisions led (IC 16.7%). Net return from Sentiment was slightly negative. Momentum: Last week Momentum and Low Risk decoupled from their positive correlation seen in previous weeks. Low Risk was positively predictive of returns with an IC of 4. while Momentum lost ground with an IC of -16%. The Macquarie Periodic Momentum was the only Momentum factor with positive gain. Fig 6 Factor Performance: Information Coefficients Analyst Sentiment Capital & Funding Growth Liquidity Low Risk Momentum Profitability/ Return on Capital Quality Technical Indicators Valuation Macquarie Alpha Last Week 4W Avg YTD Last Week 4W Avg YTD Last Week 4W Avg YTD Last Week 4W Avg YTD Valuation -6.9% -0.6% 1.4% Profitability/ Return on Capital -19.2% 3.7% 9.3% Analyst Sentiment -3.4% 1.6% -2.3% Earnings Yield NTM -6.4% -4.6% -8.4% CFROI -11.7% -1.6% -10.9% Consensus Recommendatio 2.3% -9.9% -21.4% Earnings Yield FY % ROA NTM -10.4% 7.6% 4.2% DPS Revisions 3M -8.2% 5.6% -2. Book Yield NTM % -7.7% ROE NTM -14.3% % Earnings Revisions 3M -6.8% 7.8% 10.4% Dividend Yield NTM % 22.9% ROIC NTM -14.2% % Up-down Earnings Revision -13.2% 8.2% -1.3% Sales Yield NTM 11.2% 0.2% -2.9% Maquarie Sentiment Indicat -1.4% 11.4% 6.7% EBITDA / EV NTM 0.3% -0.6% -17.9% Quality -5.4% 4.2% 5.4% Recomm. Revisions 3M 16.7% -5.3% -1.7% Earnings Stability -15.8% 10.6% 15. Price Upside % -43.4% Technical Indicators % -10. Macquarie Quality Indicator % -5.8% Low Risk % 15. Momentum 1M % Operating Accruals 0.8% -9.1% -10.3% Altman Z-score -16.9% % RSI 14 Day 9.2% 0.2% 4.3% Profit Margin NTM -9.6% 3.3% 10.3% Earnings Certainty -6.2% % Stochastic Oscillator % 6. Merton Model -17.9% 4.7% 10. Williams %R -4.1% -0.1% 7. Liquidity % 1. Relative Volatility 8.8% 2.4% 9. Relative Turnover -3.2% Volatility 250D 10.6% -15.7% -44.1% Grow th -6.8% 1.3% -2. Size -5.7% 7.1% 17.9% BETA 1.9% -9.2% -37.9% 5 Year EPS Trend 10.2% -2.7% -3.1% Turnover 20D -4.4% 4.7% 6.3% EPS Growth FY-1/FY0-1.8% -5.9% 2. Broker Coverage -6.1% % Momentum % 24.7% EPS Growth FY0/FY1-5.6% 7.3% -5.4% Momentum 12M -18.4% 20.6% 32. Margin Growth FY0/FY1-1.3% -4.3% -15. Capital & Funding -13.1% 4.3% 14.4% Momentum (12M - 1M) -16.7% 21.9% 28.2% ROA Growth FY0-FY % -9.7% Buybacks to Shares % 18.7% Momentum 3M -7.9% 5.9% 1.6% ROE Growth FY0/FY1-1.7% 7.6% -8.6% Captial Expenditure Growth -2.9% % Momentum 6M -8.9% 20.7% 30.6% Sales Growth FY0/FY % -25.4% Increase in the Number of S 7.3% -2.6% -11. Macquarie Periodic Moment 4.1% 7.6% 21. External Financing 6.3% -4.3% -7. Macquarie Alpha -16.6% % 23 November

4 Size and Sector Performance Below we show the recent returns of Small and Large cap indices. Large Cap companies outperformed Small Cap companies over the last 12 months. Fig 7 Small versus Large Cap Returns S&P ASX 100 S&P ASX 100 Industrial S&P ASX 100 Resources S&P ASX Small Ordinaries S&P ASX Small Industrials S&P ASX Small Resources 1 week 1 Month 12 Months All sectors had positive returns last week. The best performing sectors were Telecom, Energy and IT. The worse performing sectors were Health Care, Utilities and Financials. Fig 8 S&P ASX 200 Sector Total Returns Health Telecommunication Services Financials Information Technology Consumer Staples Utilities Consumer Discretionary Industrials Materials Energy Months 1 Month 1 week S&P ASX 200 Resources S&P ASX 200 Industrial S&P ASX 200 / Financial x Property Trusts -SEC S&P ASX 200 / Property Trusts -SEC Headline Index Name 1 week 1 Month 12 Months S&P ASX % -2.9% 8.9% S&P ASX 200 / Property Trusts -SEC 1.2% -1.1% 25.3% S&P ASX 200 / Financial x Property Trusts -SEC 1.1% -3.8% 18.2% S&P ASX 200 Industrial 1.6% -2.1% 17.3% S&P ASX 200 Resources 2.2% -5.3% -10.8% GICS Industries Energy 2.9% -6.4% -10.2% Materials 2.2% % Industrials 1.9% -3.6% -0.7% Consumer Discretionary 2.2% Utilities % 11.1% Consumer Staples 2.3% -0.4% 14. Information Technology 2.7% -0.4% 17.4% Financials 1.1% -3.4% 19.4% Telecommunication Services % 36.6% Health 0.8% 1.2% 37. S&P ASX Months 1 Month 1 week 23 November

5 Volume Watch: Keeping an ear to the ground Volume is often considered a good proxy for investor attention. In previous research, we have explored the interaction of Volume and Momentum which tends to exhibit a life-cycle. Stocks with high volume and high momentum will typically outperform whilst those with poor momentum and poor volume will underperform. Below we show the top and bottom ranking Large and Small cap stocks by Relative Volume. This is calculated as the ADV over the last week divided by ADV over the last 6 months. Fig 9 ASX100 High Volume Code Name Last Week ADV Over 6m ADV PDN-AU Paladin Energy Ltd. 20 LYC-AU Lynas Corp. Ltd. 199% ORI-AU Orica Ltd. 193% FXJ-AU Fairfax Media Ltd. 159% APA-AU APA Group 147% SGM-AU Sims Metal Management Ltd. 143% SWM-AU Seven West Media Ltd. 14 NAB-AU National Australia Bank Ltd. 136% MND-AU Monadelphous Group Ltd. 134% DJS-AU David Jones Ltd. 134% Fig 10 ASX100 Low Volume Code Name Last Week ADV Over 6m ADV ARI-AU Arrium Ltd 42% CRF-AU Centro Retail Australia 43% AGO-AU Atlas Iron Ltd. 44% PNA-AU PanAust Ltd 4 CPA-AU Commonwealth Property 5 SGP-AU Stockland Australia 51% WHC-AU Whitehaven Coal Ltd. 53% TOL-AU Toll Holdings Ltd. 54% AWC-AU Alumina Ltd. 5 RIO-AU Rio Tinto Ltd. 5 Fig 11 ASX Small Ordinaries High Volume Code Name Last Week ADV Over 6m ADV BSE-AU Base Resources Ltd. 368% VAH-AU Virgin Australia Holdings Ltd 361% TXN-AU Texon Petroleum Ltd. 307% MPO-AU Molopo Energy Ltd. 276% CDD-AU Cardno Ltd. 27 TGA-AU Thorn Group Ltd. 258% GGG-AU Greenland Minerals & Energy 257% PRG-AU Programmed Maintenance 247% CCV-AU Cash Converters International 246% MDL-AU Mineral Deposits Ltd. 244% Fig 12 ASX Small Ordinaries Low Volume Code Name Last Week ADV Over 6m ADV PAN-AU Panoramic Resources Ltd. 1 IVA-AU Ivanhoe Australia Ltd. 16% NXS-AU Nexus Energy Ltd. 22% RFE-AU Red Fork Energy Ltd. 24% NMG-AU Noble Mineral Resources Ltd. 2 RCR-AU RCR Tomlinson Ltd. 32% CSV-AU CSG Ltd. 32% PRR-AU Prima Biomed Ltd. 32% CFU-AU Ceramic Fuel Cells Ltd. 33% IMD-AU Imdex Ltd. 38% 23 November

6 Technical Indicators In our report on Let s get technical, Macquarie Quant, April 2009 we found that Williams %R was the most effective mean reversion indicator in the Australian market. Williams %R Developed by Larry Williams, this measures the relative location of the closing price in relation to the high-low range over a set time period with the intention to identify over extended moves in a non-trending market. The indicator will typically peak and turn down a few days before the price peak of the underlying security and vice versa when forming a trough. It is calculated by first determining the highest high and lowest low over the preceding n periods, then taking the ratio of the highest high minus the current price divided by the highest high minus the lowest low. Values range between -100 and 0. o o W = -100 * ((Hn Tc)/(Hn-Ln)) Hn = highest price in n periods; Ln = lowest price in n periods, Tc = today s Close Values between 0 & -20 it is deemed as overbought; between -80 and -100 it is deemed as oversold. Like the RSI we once again multiply the score by -1 to make sure high scoring (overbought stocks close to 0) rank lowly. Additionally, we also test a normalised version of the signal on a 3-, 6- and 12-month basis. Fig 13 ASX100 Overbought Code Name Williams R SEK SEEK LTD. 0 SWM SEVEN WEST MEDIA LTD. -1 UGL UGL LIMITED MYR MYER HOLDINGS LTD WES WESFARMERS LTD IPL INCITEC PIVOT LTD SGP STOCKLAND BLD BORAL LTD TAH TABCORP HOLDINGS LTD AGK AGL ENERGY LIMITED Fig 14 Small Ordinaries Overbought Code Name Williams R BBG BILLABONG INTL.LTD. 0 FKP FKP PROPERTY GROUP 0 HIG HIGHLANDS PACIFIC LTD. 0 NXS NEXUS ENERGY LIMITED 0 RMS RAMELIUS RESOURCES 0 HGO HILLGROVE RESOURCES 0 MMS MCMILLAN SHAKESPEARE 0 SFR SANDFIRE RESOURCES NL 0 GGG GREENLAND MRLS. 0 SEA SUNDANCE ENERGY AUS. 0 Fig 15 ASX 100 Oversold Code Name Williams R AGO ATLAS IRON LIMITED -100 FMG FORTESCUE METALS GP OZL OZ MINERALS LTD QBE QBE INSURANCE GROUP ORI ORICA LTD SGM SIMS METAL MAN.LTD ANZ AUS.AND NZ.BANKING GLD BOQ BANK OF QUEENSLAND -85 IAG INSURANCE AUS.GROUP GNC GRAINCORP LIMITED Fig 16 ASX Small Ordinaries Oversold Code Name Williams R SXY SENEX ENERGY LTD TGZ TERANGA GOLD CORP MNC METMINCO LIMITED -100 STB SOUTH BOULDER MINES BRG BREVILLE GROUP LIMITED KCN KINGSGATE CONS.LTD ASL AUSDRILL LIMITED SBM ST BARBARA LIMITED IVA IVANHOE AUSTRALIA LTD SKE SKILLED GROUP LTD November

7 FX Commodity Corp Bond Sovereign Bonds Equity Asset Class 23 Nov Nov Dec Dec Dec Dec Jan Jan Jan Jan Feb Feb Feb Feb Feb Mar Mar Mar Mar Apr Apr Apr Apr May May May May May Jun Jun Jun Jun Jul Jul Jul Jul Aug Aug Aug Aug Aug Sep Sep Sep Sep Oct Oct Oct Oct Oct Nov Nov Nov 12 Macquarie Risk Index In September 2011 we launched the Macquarie Financial Risk Index 1. The Macquarie Risk Index (MFRI) is a global cross-asset risk index which provides a holistic view of overall risk within the economy. We focus on Equity, Sovereign and Corporate Bonds, FX and Commodity asset classes. This provides a useful framework to understand risk and its drivers throughout global financial markets We show below the current readings of the MFRI. Green represents low risk, amber medium risk and red high risk. Fig 17 Macquarie Financial Risk Index (MFRI) MFRI Equity Soveriegn Bonds Corporate Bonds Commodity FX Economics US Equity EU Equity EM Equity UK Equity Japan Equity Asia ex Equity US Sovereign Bonds EU Sovereign Bonds UK Sovereign Bonds EM Sovereign Bonds Japan Sovereign Bonds Asia Ex Sovereign Bonds High Yield Investment Grade Energy Agriculturals Base Metals Precious Metals EU FX UK FX Asia Ex FX Japan FX EM FX US FX Green signals low risk (higher risk appetite), Red signals high risk (lower risk appetite) and Amber signals normal risk environment 1 See Risky Business Stressing about risk, Macquarie Quantitative Research, September November

8 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 >+1 Neutral expected return from -1 to +1 Underperform expected return <-1 Macquarie First South - South Africa Outperform expected return >+1 Neutral expected return from -1 to +1 Underperform expected return <-1 Macquarie - Canada Outperform return > in excess of benchmark return Neutral return within of benchmark return Underperform return > below benchmark return Macquarie - USA Outperform (Buy) return > in excess of Russell 3000 index return Neutral (Hold) return within of Russell 3000 index return Underperform (Sell) return > 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 6 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 4 in a year. Low medium stock should be expected to move up or down at least 25 3 in a year. Low stock should be expected to move up or down at least 15 2 in a year. * Applicable to 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 30 Sept 2012 AU/NZ Asia RSA USA CA EUR Outperform % 41.38% 63.19% 44.1 (for US coverage by MCUSA, 7.3 of stocks covered are investment banking clients) Neutral 36.62% 25.14% 27.69% 52.13% 30.77% 30.57% (for US coverage by MCUSA, 9.31% of stocks covered are investment banking clients) Underperform 13.38% 18.02% 10.77% 6.49% 6.04% 25.28% (for US coverage by MCUSA, 0.0 of stocks covered are investment banking clients) Company Specific Disclosures: Important disclosure information regarding the subject companies covered in this report is available at Analyst Certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN , AFSL No ) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General Disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN , AFSL No ) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN , AFSL No ) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return and delete the document. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at 23 November