Australian Monthly Wrap

Transcription

1 Australian Equity Research 04 March 2015 Australian Monthly Wrap February 2015 Key market drivers. The S&P/ASX 200 index recorded its best monthly performance since Oct-11, jumping 6.1% in price terms and 6.9% on an accumulation basis (plus dividends). At a sector level, the Materials sector posted its best absolute return since Sep-07 (+11.9%), helped by a 15.0% return by heavyweight BHP Billiton (BHP). The Energy sector benefitted from firmer oil prices (Brent +18.1%), while Utilities (+7.8%) and Consumer Discretionary (+7.7%) also outperformed. Defensive sectors including A- REITs (+3.7%), Consumer Staples (+1.0%) and Telco s (+0.6%) underperformed the rising index. The domestic index s performance was broadly in line with global developed market peers (the MSCI Developed market index rose 5.7%). Among the regions, Europe, as measured by the Euro Stoxx 50 index, led outperformance (+7.4%), while the Nikkei 225 (+6.4%) and the S&P500 (+5.5%) also beat the average. Economic news. Policy easing was the key economic theme last month. Domestically, the RBA cut its policy rate by 25bps to 2.25%, the first move since Aug-13. In a similar vein, the PBOC announced policy adjustments aimed at stimulating growth in China. The measures included a 25bps cut to benchmark interest rates and reductions of the required reserve ratio, which will free up capital for financial institutions to lend. Major company news. Capital management was a prominent theme during reporting season; Rio Tinto (RIO), Amcor (AMC) and Fairfax Media (FXJ) announced buybacks, while Tabcorp (TAH), Oil Search (OSH) and Leighton Holdings (LEI) announced special dividends. On the M&A front, Toll Holdings (TOL) entered into a Scheme Implementation Deed with Japan Post Co. Ltd. The board unanimously recommended the acquisition of all TOL shares for $9.04 per share. Published by: Dominic Mlcek Dominic.Mlcek@BTfinancialgroup.com Steve Burgess Head of eqr securities eqr securities Pty Limited ABN AFSL (eqr) Equitiesresearch@btfinancialgroup.com ASX 200 Price Index 6,100 5,900 5,700 5,500 5,300 5,100 4,900 Feb-14 Aug-14 Feb-15 Source: Bloomberg MSCI Australia relative to MSCI Asia Pacific ex Japan, US$ terms Feb-14 Aug-14 Feb-15 Source: Bloomberg Sector and stock returns% Ranked sector returns Top and bottom ASX200 universe stocks One month Three months One month Three months Materials +11.9% A-REITs +16.7% Toll +44.4% Northern Star Res % Resources +11.4% Utilities +16.7% Seven +36.8% Beadell Resources +60.0% Energy +9.2% Health Care +15.6% Japara Healthcare +36.6% Toll Holdings +58.5% Utilities +7.8% Banks +15.0% Dominos Pizza +33.1% Evolution Mining +57.9% Consumer Disc. +7.7% Telcos +13.7% Sirtex Medical +31.9% Nufarm +57.8% Banks +7.0% Industrials +13.4% Health Care +6.6% Materials +12.5% Stw Comm -23.4% Kathmandu -45.5% Industrials +5.7% Consumer Disc % Kathmandu -19.8% Mma Offshore -41.1% Technology +5.2% Resources +7.0% Bradken -18.7% Horizon Oil -40.0% A-REITs +3.7% Technology +6.7% Ainsworth Game -15.3% Metcash -39.8% Consumer Staples +1.0% Consumer Staples +3.7% Navitas -14.2% Stw Communications -39.5% Telcos +0.6% Energy +0.3% Source: Bloomberg, MSCI.

2 Equity review Major Market Performance, February 2015 Level Change DJ Industrials 18, % S&P 500 2, % NASDAQ 4, % FTSE 100 6, % Nikkei225 18, % Euro Stoxx 50 3, % ASX 200 5, % Source: Bloomberg. Note: Index levels are as at close of business, 27 February US equity market The S&P500 saw its highest level for the month on the 25th, as the index subsequently faded into month-end. Nonetheless, the index finished the month 5.5% higher. Higher beta sectors including Consumer Discretionary (+8.5%), Banks (+8.3%), Materials (+7.9%) and Technology (+7.8%) outperformed, while the Energy (+3.5%) and Utilities (-7.0%) sectors underperformed despite stabalising oil prices in the US. With 87% of S&P 500 companies having reported 4Q14 results, earnings were above expectations. On their count, 68% of companies beat estimates versus 66% in recent quarters Australian equity market The ASX200 delivered its best monthly performance since Oct-11, with a +6.9% accumulation return (+6.1% price). The Materials sector was the standout, posting an 11.9% return in accumulation terms and its best absolute return since Sep-07. The Energy (+9.2% acc.) and Utilities sectors (+7.8% acc.) also outperformed. Defensive sectors including Consumer Staples (+1.0% acc.) and Telco s (+0.6% acc.) underperformed the index. The Feb-15 reporting season was characterised by better-than-expected earnings, on average. On our count, 38% of companies beat analyst earnings expectations resulting in a beat-to-miss ratio of 1.1x. EPS growth for the ASX200 index implied by consensus estimates for FY15 finished reporting season at +1.0% y/y, down 1.5%-pts from the growth rate implied prior to reporting season. Other Financial Data, February 2015 Level Change AU RBA Cash rate 2.25% -25bp US 10 yr bond yield 1.99% +35bp AU 10 yr bond yield 2.46% +2bp Australian dollar/us$ % LME Metals Index 2, % Source: Bloomberg. Note: Index levels are as at close of business, 27 February Bonds Domestically, the ten-year benchmark yield was virtually unchanged, rising a modest 2bps. Despite the flattish domestic long rate and 25bps of easing at the front end, the yield curve remained inverted out seven years, presenting a gloomy outlook for the domestic economy. In the US, the 10-year benchmark yield rose 35bps, the largest increase since May-11. In Europe, movement in long rates was mixed; 10-year benchmark yields rose in Germany (+3bps), the UK (+47bps) and France (+6bps), while yields in Italy (-26bps) and Spain (- 16bps) fell. Uncertainty surrounding Greece s fiscal situation was shrugged off by bond holders, with the 10-year Greek benchmark yield falling 174bps. Currencies In addition to delivering a policy rate cut at the RBA s February meeting, in the post meeting statement, governor Glenn Stevens described the AUD, despite falling noticeably, as remaining above most estimates of fundamental value. Notwithstanding the policy move and accompanying comments from Glenn Stevens, the Aussie rose against the USD (+0.6%). More broadly the AUD trade weighted index rose marginally against its largest trading partners (+0.3%). Commodities Spot Brent crude recorded its first monthly increase since June-14 as the decreasing oil rig count seemed to support prices. The Baker Hughes US oil rig count fell by 237 over the month bringing the total count to 986, down 31% on Feb-14, and the lowest level since June-11. The benchmark spot iron ore price rose firmly to mid-month, but subsequently faded into month-end, resulting in the commodity price roughly unchanged for the month (+0.6%). The prospect of higher iron ore prices in the near-term faded as China s steel PMI eased further to 43 in Jan-15 and new orders less inventories, fell to a 4-month low. Base metals as measured by the LME index rose 1.4%. Of the six primary index members, Copper was the only base metal to post a gain for the month (6.9%), while Aluminium (-2.8%), Lead (- 7.1%), Zinc (-3.4%), Tin (-5.6%) and Nickel (-7.1%) lost ground. Spot gold fell 5.5% over February, giving back most of the gains made last month. 2

3 US Economy Fed Chair, Janet Yellen, delivered a fairly upbeat assessment of the economy at her semi-annual monetary policy testimony. Dr. Yellen also expanded on the definition of patient in the statement language to emphasise the removal of the word does not necessarily signify an imminent rate hike, but rather the Fed would be looking to gain flexibility in responding to data. The Thomson Reuters/University of Michigan consumer confidence index was revised up from 93.6 to 95.4 (exp. 94) between the preliminary and final February reports. The ISM manufacturing PMI fell from 55.1 in Dec-14 to 53.5 (exp. 54.5) in Jan- 15, while the non-manufacturing survey rose to 56.7 (exp. 56.4) from 56.4 in Dec-14. Nonfarm payrolls rose 257k in Jan-15 (exp. 228k) and job growth for the previous two releases was revised up by a combined 147k. The participation rate rose 0.2%-pts to 62.9% (exp. 62.7%) pushing the unemployment rate up to 5.7% (exp. 5.6%). January housing starts fell 2.0% m/m (exp. -1.7%) to a seasonally adjusted annual rate (saar) of 1,065k. Meanwhile, housing permits fell 0.7% m/m (exp. 0.9%) to 1,053k saar. January CPI measures were in line with expectations. The headline figure fell -0.1% y/y (exp. -0.1%), and the core measure (ex. food and energy) rose 1.6% m/m (exp. +1.6%). China On February 28, the PBOC announced it will cut benchmark interest rates by 25bp effective from March 1, with the one-year benchmark deposit rate now at 2.50% (from 2.75%) and one-year benchmark lending rate at 5.35% (from 5.6%). Earlier in the month, the PBOC cut the required reserve ratio (RRR) for financial institutions by 50bp (from 20% to 19.5% for large banks and 18% to 17.5% for medium and small banks), effective from February 5. In addition, the PBOC announced targeted RRR cuts of 50bp for qualified city commercial banks and (non-county) rural commercial banks, and 400bp for China Agricultural Development Bank. The HSBC flash manufacturing PMI rose 0.4 points to 50.1, compared to the final reading of 49.7 in January. 91.4% of Chinese cities registered m/m house price declines in January, and on average, national prices declined 0.5% m/m, widening slightly from the 0.4% m/m decline in Dec-14. December CPI inflation eased to 0.8% y/y, while PPI deflation intensified to -4.3% y/y. Australian Economy and the RBA The RBA cut its policy rate by 25bps to 2.25%, the first move since Aug-13. The RBA now expects the period of sub-trend growth in the economy to be somewhat longer, so the peak in the jobless rate will be a little higher. Unlike previous post meeting statements, no policy guidance was provided. The NAB business confidence index rose one point to +3, while the NAB business conditions index slide two points to +2. The Westpac-MI consumer confidence index rose 8% m/m, with the index reaching above the pivotal 100 point level. Among the sub-indexes, gains in the outlook for the economy over the next one and five years were most impressive, at 10% m/m and 13% m/m respectively. The economy shed 12.2k jobs in January (exp k), resulting in the unemployment rate climbing to 6.4%. The participation ratio was steady at 64.8% (exp. 64.8%). Retail sales rose 0.2% m/m (exp. +0.3%). Among the categories, food was up 0.3% m/m, while household goods and department stores fell 0.4% m/m and 0.9% m/m respectively. Building approvals declined 3.3% m/m in Dec-14 (exp. -5.0%). The weakness in approvals was underpinned by the multi-family segment which declined 7.9% m/m. The volume of new housing finance commitments to owner occupiers rose 2.7% m/m (exp. +2.0%) and the value of such loans rose 3.8% m/m for the same month. Separately, the value of housing loans to investors rose 6.0% m/m. Europe As scheduled, the ECB Governing Council did not hold a monetary policy meeting in February. The next meeting will be held on 5 March Japanese 4Q14 GDP grew at a seasonally adjusted annual rate of 2.2% q/q (exp. +3.7%). While weaker-than-expected at the headline, all demand components except residential investment rose, pointing to signs of a recovery. 3

4 Company news Reporting season wrap-up The Feb-15 reporting season was characterised by better-than-expected earnings on average. ASX200 Dec-14 results AMC (+6.9%): Amcor Limited delivered 1H15 NPAT of US$321.3m, up 1.9% vs. the pcp. EBIT for the Rigid Plastics division of US$139.1m came in above the pcp result of US$128.3m, while EBIT for the flexible division rose 2.2% vs. the pcp reaching US$397m. In conjunction with the results announcement, AMC announced a US$500m on-market buyback. AMP (+16.1%): AMP delivered FY14 operating profit of $990m, up 25% y/y. The company declared a final 80% franked dividend of 26cps. Net inflows in FY14 of $2.28bn were slightly up on FY13 ($2.166bn net flows). AUM was roughly $128.4bn, up from $117.0bn in FY13 and $121.7 bn in 1H14. ANZ (+7.1%): ANZ reported unaudited 1Q15 cash earnings of $1.79bn. Group margins declined -6bp compared to the end of FY14, while net loans and advances growth was 8% for the quarter with lending demand varied across the group and customer pay down levels remaining elevated. BHP (+15.0%): BHP reported a strong 1HFY15 result, with earnings of US$5.3bn driven by lower costs, particularly in West Australia Iron Ore which were close to US$20/t. Net debt stood at US$24.9bn, down from US$25.8bn at June-14. The company reduced FY15 capex guidance from US$14.2bn to US$12.6bn. BXB (+4.7%): Brambles Limited reported 1H15 NPAT of A$305.5m, up 6.9% on the pcp. Pallets Americas EBITDA margins fell 170bps to 25.2%: Management commented the weakness was primarily due to direct cost increases from asset management practices (US$23m) and increased transport costs (US$10m). CBA (+2.9%): Commonwealth Bank reported 1H15 cash earnings of $4,623, up 8.3% on the pcp. Net interest margin (NIM) for 1H15 was 2.12%, compared to 2.14% in 2H14. Bad and doubtful debt expense totaled $440m representing 14bp of gross loans and acceptances. The company declared a dividend of $1.98 representing a 70% payout ratio. CSL (+4.9%): CSL delivered NPAT of $692.2m in 1H14, up 9% on a constant currency basis. The key issue of the result was a submarket growth rate in immunoglobulin (IG) and some margin pressure. In light of this, management downgraded constant currency NPAT guidance to 10% growth (from 12%). IAG (-4.7%): Insurance Australia Group reported 1H15 NPAT of $579m, down 9.8% vs. the pcp. Underlying margins fell to 13.3% in the period (from 14.2% in FY14 and 14.8% in 2H14). IAG declared a 1H15 dividend of 13cps fully franked, representing a cash payout ratio of 46.6% - the group s full year payout policy is 50 70% of cash earnings. NAB (+6.4%): NAB delivered 1Q15 cash earnings of $1.65bn, up 6% y/y. Bad and doubtful debts over the quarter rose 30% to $27m. At 30/Dec/14, the company s CET1 ratio stood at 8.74%, up 11bps on 4Q14 and the company maintained a target ratio of 8.75%-9.25%. RIO (+11.9%): Rio Tinto reported earnings of US$9.3bn for FY14 down 9% on FY13. The highlight of the result was a US$1.6bn off-market Plc buy-back, and an A$500m off-market buy-back of Ltd stock. SCG (1.6%): Scentre Group reported 2H14 funds from operations (FFO) of in line with its guidance (half FY14 proforma ) and SCG guided to 3.5% FFO growth in The company plans to sell its remaining four fully owned NZ assets, valued at NZ$760m, despite the cap rate tightening 7bps to an average 7.8%. 4

5 SUN (-5.0%): Suncorp Group reported 1H15 adjusted divisional NPAT of $681m, up 14% vs. the pcp. Management declared an interim dividend of 39cps fully franked. At the 1H15 result, SUN suggested their underlying margins increased from 14.7% in 2H14 to 14.8% in 1H15. TCL (-0.7%): TCL reported 1H15 earnings, with proportionate EBITDA coming in at $636m. A 19.5cps distribution will be paid for the period, comprising a 16.0cps distribution and 3.5cps fully franked distribution. Guidance for the full year was increased 0.5cps to 39.5cps, backed by free cash of 19.8cps TLS (-2.0%): Telstra reported EBITDA of $5,317 vs. guidance for 1H15 EBITDA to be broadly flat on the pcp. TLS added c.366k net additional mobile subscribers in the half. TLS s guidance for FY15 remains unchanged, with the company expecting continued low-single-digit income and EBITDA growth. TLS's management reiterated their focus on a sustainable increase in dividends. WES (+0.6%): Wesfarmers reported a strong 1H15 result, with NPAT up 8.3% y/y to $1.376bn. Coles and Bunnings remained strong, with other divisions mixed, although discount department stores improved. The company declared an 89cps interim dividend, up from 85cps in the pcp. WFD (-0.5%): Westfield Corporation reported 2H14 FFO of $390.7m or 18.8 ps, in line with its guidance. WFD guided to 2015 FFO of In other news, Westfield Corporation sold a 47.4% interest in three US assets for US$438m to O Connor Capital Partners. The assets were sold roughly in line with book value on an exit yield of ~6.3%. WFD will retain management rights and 52.6% ownership. WOW (-3.4%): Woolworths delivered 1H15 underlying NPAT of $1.38bn, up 4.7% y/y. The company reported 2Q15 Food & Liquor LFL sales growth of 1.2%, the lowest since 3Q12 (flat) due to its weak price position vs peers and reduced labour in store. The FY15 NPAT growth guidance of 4-7% was removed with WOW now expecting FY15 NPAT growth to be toward the lower end of current analyst NPAT growth forecasts of %. WPL (+2.6%): Woodside Petroleum reported statutory NPAT of US$2.41bn and a record final dividend of US144cps fully franked. Woodside issued capex guidance for the first time, with CY15 capex target (ex. Apache) of US$1.12bn. Other significant news FXJ (+8.9%): Fairfax Media Limited announced an on-market buyback representing c.5% of outstanding shares to be carried out over the next 12 months. LEI (+6.8%): In conjunction with Leighton Holding's FY14 results, the company announced it will pay a 25cps special dividend. MQG (+17.4%): Macquarie Group held an Operational Briefing where the company retained guidance for FY15 group earnings to be up between 10 and 20 per cent on FY14, however with additional clarification that current conditions likely to result in this being at the upper end of this range. NUF (+27.6%): Nufarm Limited MD and CEO, Doug Rathbone, stepped down. In the interim, the head of Commercial Operations, Greg Hunt, has been installed as acting CEO and COO. The company stated that a global search for his replacement has commenced. OSH (+5.0%): Oil Search lost its arbitration hearing in a split points decision (2-1) over the right to preempt Interoil s US$401m up front sale of 40% (pre-govt back-in) of PRL 15 (Elk/Antelope) to Total. Oil 5

6 Search maintains its 23% interest and Interoil its 37% interest (both pre-govt and landowner back in of 22.5%). STO (+0.8%): Santos confirmed it will recognise post-tax asset impairments totaling A$1.6bn in its CY14 accounts. The bulk of impairments relate to producing oil assets due to lower forward oil price expectations and the delayed start-up and reserve estimate for NSW CSG. TAH (+12.1%): In conjunction with Tabcorp's 1H15 results, the company announced it will raise $236m to fund a 30cps special dividend. TOL (+44.4%): Toll Holdings board unanimously recommended the acquisition of all TOL shares for a cash consideration of A$9.04/share from Japan Post via a Scheme of Arrangement. The offer price represented a 53% premium compared to the three-month volume weighted average per-share price. Performance attribution for the ASX 200 sectors and best/worst stocks for February 2015 Sector % chg Points Best Performer % chg Points Worst performer % chg Points Materials 2.7% Lynas Corp Ltd Pact Group Holdings Ltd Consumer Discretionary 0.3% Domino's Pizza STW Communications Energy 0.3% Whitehaven Coal Ltd AWE Ltd Industrials 0.4% Toll Holdings Ltd Bradken Ltd FinancialsxREITS 3.5% QBE Insurance Group Suncorp Group Ltd Information Technology 0.0% +1.7 Technology One Ltd carsales.com Ltd Health Care 0.4% Japara Healthcare Ltd Virtus Health Ltd Telecoms -0.1% -4.5 TPG Telecom Ltd iinet Ltd Utilities 0.1% +7.5 APA Group Spark Infrastructure Consumer Staples 0.0% +0.6 GrainCorp Ltd Bega Cheese Ltd REITS 0.2% Cromwell Property Federation Centres Starting Index Level 1 5,588.3 Ending Index Level 5,928.8 Price Change +6.1% Source: eqr securities. 1 Starting index level is close of 30 January 2015, ending index level is close of 27 February 2015, performance of stocks is based on chg, point chg of sectors is calculated using starting index value and don't sum to points chg of index. 6

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