Lonsec Equities Equities Research Process Document and Methodology

Transcription

1 P 1-25 Lonsec Research Pty Ltd ABN AFSL Lonsec Equities Equities Research Process Document and Methodology

2 P 2-25 ISSUE DATE: Contents Lonsec Equities Research An Overview 3 Lonsec s Equities Research Business Model 3 Lonsec s Equities Research Objective 3 Research Coverage 4 Research Philosophy 5 Research Approach 5 Research Methodology and Process 5 Ratings Outcome 7 Rating changes 8 Income and Growth risk profile changes 8 Action signal changes 8 Equity Research Process in More Detail 10 Lonsec s Listed Income (Hybrids) Securities Research Process 16 Listed Equities Research Team 23

3 P 3-25 ISSUE DATE: Lonsec Equities Research An Overview Lonsec Research Pty Ltd (Lonsec), and its predecessors Lonsec and Lonsdale Securities, has been a provider of investment research to the Australian financial intermediary market since On 1 July 2011, Lonsec became a fully owned subsidiary of Lonsec Fiscal Holdings Pty Ltd (formerly Financial Research Holdings Pty Ltd), a privately-owned entity with a multi-brand strategy of providing leading financial services research and investment execution. We believe that professional financial advisers need informed opinions on the best investment strategies and securities to provide value for their clients. To meet this need, Lonsec has an experienced and specialist equities research team, which draws on a robust research process to undertake in-depth assessments of securities and financial products. Lonsec offers equities research on; All ASX200 companies; Listed income (hybrid) securities; Direct equity model portfolios; A quarterly investment outlook; and An AM and PM Bulletin daily market and stock-specific news. The key strengths of Lonsec s equities research offering are as follows: Experienced team an equities team with over 50 years combined experience in equities research and portfolio management. Proven track record an impressive 15-year track record of managing equity model portfolios that add value to the benchmark return (alpha) whilst also reducing the risk of the portfolio relative to the benchmark (beta). Products well suited to financial planners all equity research and model portfolios are well suited to the needs of financial planners and their clients. Backed by the resources of the Lonsec Group the equities research team can leverage off the resources and various experts within Lonsec research and investment consulting to produce high quality research and a professional approach to portfolio management. Lonsec s Equities Research Business Model Lonsec s business model is structured to minimise conflicts of interest, perceived or actual. The Lonsec Equities Research department is part of Lonsec Research Pty Ltd. The potential for conflicts of interest with its ASX 200 research or equity model portfolios is minimal. For further information on conflict management, please see: Lonsec s Equities Research Objective Lonsec s key research objectives are to: Provide financial advisers with a comprehensive equities research service Produce quality Listed Income Securities research for financial advisers that help them to understand the terms, risks and potential return of a particular listed hybrid / debt security Produce quality Australian equity model portfolios for financial advisers that help them to construct and manage Australian equity portfolios for clients Provide ongoing support via regular communication and presentations.

4 P 4-25 ISSUE DATE: June Quarter 2018 Listed Income Investment Journal Research Coverage Lonsec s equities research coverage spans: All constituents of the S&P / ASX200 index Currently 49 ASX-listed hybrid / debt securities (Listed Income Securities) Lonsec will from time to time cease coverage of stocks that drop out of the ASX200 index and initiate coverage on all stocks that enter the ASX200 index. Lonsec will generally maintain research coverage of all listed income securities until the call / maturity date for each perspective security. Report Type Summary Release frequency Equities Stock Viewpoint A comprehensive 2-page equity research report inclusive of stock rating, investment risk profile, company valuation, business snapshot, investment view, financial forecasts, bull & bear points and key trends and charts. Daily Equities Corporate Action Reports Equities IPO Reports & Initiations Listed Income Viewpoint Listed Income Corporate Action Reports Listed Income Quarterly Journal Listed Income Yield Update Quarterly Investment Insight General Market Updates Lonsec TV Market update Lonsec provides corporate actions reports (including recommendation) on a broad range of corporate actions for all ASX200 stocks under coverage. The corporate actions covered include capital raisings and mergers & acquisitions. Lonsec will initiate coverage on all stocks that enter the ASX200 index during the year. Lonsec will also provide research reports on major IPOs on an adhoc basis. A 2-page research report inclusive of issue rating, key financial metrics and an overview of the key risks associated with the issue. Lonsec provides corporate actions reports (including recommendation) on a broad range of corporate actions for all Listed Income Securities under coverage. A quarterly journal providing a comprehensive wrap on the listed debt / hybrid market for financial advisers. The weekly Yield Update table provides a summary of the structure, trading metrics and distribution details of the listed income securities within Lonsec s universe. In addition, this document shows Lonsec s current preferred securities and an overview of topical fixed income news during the week. Investment Insight provides a concise overview of Lonsec s short term macro-economic outlook and recommended tactical asset allocation. Ad hoc market update reports discussing major market developments. A monthly market update video discussing recent market developments and short-term market outlook. As required. Usually within 3 business days of announcement Quarterly, post the announcement of S&P / ASX200 Index changes by Standard & Poor s. Quarterly (or earlier if required) As required. Usually with 3 business days of announcement Quarterly Weekly Quarterly As required Monthly May 2018 Lonsec Research Pty Ltd ABN AFSL This information must be read in conjunction with the warning, disclaimer and disclosure at the end of this document. This report supersedes all prior reports.

5 P 5-25 ISSUE DATE: Research Philosophy The primary purpose of investing in equities is to generate income, capital growth or a combination of both. It is the relationship between these rewards and the risks accepted to access them that determines the attractiveness of an investment, rather than its outright return potential in isolation. For any given company, the level of risk to capital and the level of risk to income are not necessarily the same. In order to differentiate between these two types of risks inherent in equity investments, Lonsec s equity research sets out to capture and highlight the various characteristics of each stock in a simple, yet effective manner. This approach has been tailor made for the advice channel and sets out to assist financial advisers in selecting the right stock for the right client. Research Approach Lonsec s approach to equities research departs from the traditional Buy-Hold-Sell approach and focuses on classifying equities based on a relative risk-reward basis rather than an outright return potential in isolation. This approach utilises a combination of qualitative and quantitative analysis methods to provide answers to three key investment questions: What to buy? (Rating: Approved / Not Approved) Why should I buy it? (Risk Profile: Income / Growth) When should I buy it? (Action Signal: Undervalued / Overvalued) Research Methodology and Process Lonsec s equity research process follows a structured framework of assessing a wide range of qualitative and quantitative factors for each company in order to determine the key factors that are likely to impact the potential risks and returns of each investment. Lonsec s proprietary quantitative models utilize a database comprising over 200,000 actual and forecasted data points to determine and classify the Income risk profile and Growth risk profile for each stock. The Rating for each stock is determined by combining the Income and Growth Risk ratings for the company. If the risk ratings in both categories are above Lonsec s risk threshold, the stock is deemed as high risk and will be classified as Not Approved. Stocks that are Not Approved are a combination of stocks that are Not Investment Grade and stocks where there is insufficient historical and / or forecast information to form an opinion about Investment Grade status. Using this approach, the ASX200 universe is filtered down to a smaller universe of quality stocks Approved or Investment Grade. Lonsec s equities research team then combines the outputs of the quant models, the latest consensus earnings forecasts, the latest company announcements, together with the Lonsec s top-down macro view (on a sector level), to form an investment view and derive and maintain valuations for each of the ASX200 constituents. The valuations and investment views for each company are monitored daily to capture the latest changes in the outlook for each company. This innovative approach of utilising 10 years of actual and forecast data, a proprietary quantitative engine, together with the irate platform, which automatically generates and updates the latest equity research reports, allows the equities research team to utilise its experience to focus solely on making the right investment calls, without the need for substantial analyst resources.

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7 P 7-25 ISSUE DATE: Ratings Outcome Lonsec s approach to equities research departs from the traditional Buy-Hold-Sell approach and focuses on classifying equities based on a relative risk-reward basis, rather than an outright return potential in isolation. Using this approach, Lonsec classifies its investment universe constituents as either Approved or Not Approved investments. An Approved rating indicates that Lonsec believes the stock is of Investment Grade quality, meaning we believe the long-term income and / or growth potential of the company outweighs the potential risks The Not Approved rating indicates that Lonsec believes the stock is not of Investment Grade quality, meaning we believe the potential risks outweigh the long-term income and / or growth potential of the company A Stock Watch rating indicates that Lonsec is reviewing the Investment Grade status of the stock due to a material change (positive or negative) in the company s income and/or growth potential or potential risks. This rating should only be applied for a short period, usually less than 10 business days. A Ceased Coverage rating indicates that the stock is no longer included in the S&P/ASX 200 and hence Lonsec has ceased coverage of the stock. New stocks coming into the S&P/ASX 200 will be initiated with an Approved or Not Approved rating within 20 business days of inclusion in the index

8 P 8-25 ISSUE DATE: Rating changes The Rating Approved or Not Approved for each stock is a long-term assessment which will remain relatively stable over the medium to long term. This is a key attraction of the Lonsec rating process versus the Buy-Hold-Sell approach. However, a small number of stocks may change rating each year when a material change (positive or negative) occurs and Lonsec adjusts its return and risk ratings on the stock. In this situation, Lonsec will apply the Stock Watch rating for a period, usually less than 10 business days, while the stock is being reviewed by the equities research team. Income and Growth risk profile changes The Income and Growth risk profiles are derived from eight years of actual data and two years of forward consensus data. This 10-year data set rolls over time as one year is dropped and another year is added. In addition, the consensus data itself can also change with analyst forecasts. Accordingly, the Income and Growth risk profiles for each stock will gradually change over time as the data changes. Given the data set is over 10 years, there should not be any rapid change, unless a company has a sudden and major change (positive or negative) to its forecasts. Action signal changes The Action Signal will change with movement in the share price and Lonsec s fair value. Movement between Undervalued, Fairly Valued or Overvalued will be mostly dependent on share price movements. Lonsec s fair value will be reasonably stable in the short term but will change over the medium to long term, in-line with company, industry and macro-economic fundamentals. In circumstances where the Company s valuation requires an urgent review due to a material event, Lonsec will place the fair value under review. In this situation, Lonsec will remove the fair value for the stock and advise that its valuation is currently under review in the Action Signal section. This status will usually only apply for short period of less than 5 business days. When a valuation is under review, the rating is not affected, only the fair value is being reviewed. ASX200 UNIVERSE WITH STOCKS RATED "NOT APPROVED" 17-8% ASX200 UNIVERSE WITH STOCKS RATED "APPROVED" % As at August 2017

9 P 9-25 ISSUE DATE: Lonsec Equites Research Key Inputs Investment philosophy Lonsec s investment philosophy is to invest in quality stocks trading at a reasonable price (QARP). Quantitative models Historical and consensus forecast data Top-down overlay Valuation models These proprietary models, designed by Lonsec s equities research team, analyse over 200,000 data points on a daily basis to assess each stock s Income and Growth risk profiles. Lonsec s proprietary quant engine is based on 10 years of company data made up of 8 years historical actual data and 2 years consensus forecast data. The innovative use of this data significantly reduces the need for in-house equity analysts. Lonsec also takes a view on each GICS sector and industry based on topdown macro themes. These themes are identified by the Lonsec analysts and discussed at Lonsec Investment Committee level. The Lonsec Investment Committee is made up of a broad range of sector experts from across the Lonsec Group and is responsible for setting Lonsec s strategic and tactical asset allocation and its macro-economic themes and outlook. The valuation models have a direct feed to the latest actual and consensus forecasts. Lonsec s equities research team then utilizes a variety of valuation methodologies, subject to Lonsec s QARP investment philosophy and the nature of each company modelled, in deriving and maintaining valuations for the stocks under coverage. Quantitative models For any given company, the level of risk to capital and the level of risk to income are not necessarily the same. To differentiate between these two types of risks inherent in equity investments, Lonsec has developed a set of proprietary quantitative models to determine the relevant risk ratings for each company in the ASX200 universe. These quantitative models utilise a comprehensive database of over 200,000 data points, inclusive of a wide range of historical and forecast financial data, to provide an accurate reflection of the underlying risks associated with the Income and Growth profile of the given company. Consensus forecasts Consensus analyst estimates form an important part of Lonsec s equity research product. We believe consensus estimates tend to provide a more accurate reflection of the financial position of a company rather than any individual analyst. Accordingly, Lonsec s valuation models are updated daily with the latest consensus estimates, ranging from earnings per share to forecast gearing and valuation metrics. Qualitative analysis The qualitative component of the equities research product involves a combination of top-down macro analysis and a bottom-up company valuation model. Lonsec identifies big picture top down themes which are likely to influence the performance of equities and sectors within the equity market. These themes are identified by the Lonsec analysts and discussed at Lonsec Investment Committee level. Our highest conviction top-down themes will influence the industries we will favour amongst the 20 GICS Industries. Preferred industries should benefit from the top-down theme we have identified but we will also assess the industry fundamentals in terms of growth rate, market structure, barriers to entry, regulation, key macro drivers and volatility of earnings. Lonsec s internal equities research team then combines the outputs of the quant models, the latest consensus earnings forecasts, the latest company announcements together with the Lonsec s top-down macro view (on a sector level) to form an investment view and derive and maintain valuations for each of the ASX200 constituents. The valuations and investment views for each company are monitored daily to capture the latest changes in the outlook for each company.

10 P ISSUE DATE: This innovative approach of utilising 10 years of actual and forecast data, a proprietary quantitative engine, together with the irate platform which automatically generates and updates the latest equity research reports, allows the equities research team to utilise their experience to focus solely on making the right investment calls, without the need for substantial analyst resources. Equity Research Process in More Detail Income risk profile Lonsec s assessment of a company s Income Risk profile follows a structured framework of assessing ten key financial metrics to arrive at an overall Income risk rating for the company. This risk rating is combined with the expected dividend yield of the company, over the medium term, to classify the company into one of the following categories: Low Income reflecting a below-market dividend yield, whilst exhibiting lower dividend volatility and a relatively lower risk profile than the broader market; Attractive Income reflecting an above-market dividend yield, whilst exhibiting lower dividend volatility and a relatively lower risk profile than the broader market; Income at Risk reflecting an above-market dividend yield, whilst exhibiting higher dividend volatility and a relatively higher risk profile than the broader market; and Inferior Income reflecting a below-market dividend yield, whilst exhibiting higher dividend volatility and a relatively higher risk profile than the broader market. The key financial metrics assessed are those which are most likely to impact the company s ability to pay dividends. Some of the financial metrics assessed include: Historical earnings and dividends track record; Forecast earnings and dividend expectations and trends; Balance sheet strength; Divided cover & payout ratio; Historical volatility of earnings and dividends; and Free cash flow generation.

11 P ISSUE DATE: Growth risk profile Lonsec s assessment of a company s Growth Risk profile follows a structured framework of assessing ten key financial metrics to arrive at an overall Growth risk rating for the company. This risk rating is combined with the expected earnings growth of the company, over the medium term, to classify the company into one of the following categories: Low Growth reflecting a below-market growth rate, whilst exhibiting lower earnings volatility and a relatively lower risk profile than the broader market; Attractive Growth reflecting an above-market growth rate, whilst exhibiting lower earnings volatility and a relatively lower risk profile than the broader market; Growth at Risk reflecting an above-market growth rate, whilst exhibiting higher earnings volatility and a relatively higher risk profile than the broader market; and Inferior Growth reflecting a below-market growth rate, whilst exhibiting higher earnings volatility and a relatively higher risk profile than the broader market. The key financial metrics assessed here are those which are most likely to impact the company s earnings. Some of the financial metrics assessed include: Historical sales and earnings track record; Forecast earnings expectations and trends; Balance sheet strength; Historical volatility of earnings; Free cash flow generation; Return on Equity; Book value / NTA growth; and Track record of outperformance.

12 P ISSUE DATE: Rating The Rating for a stock is determined by combining the Income and Growth Risk ratings for the company. If the risk ratings in both categories are above Lonsec s risk threshold, the stock is deemed as high risk and will be classified as Not Approved. An Approved rating indicates that Lonsec believes the stock is of Investment Grade quality, meaning we believe the long-term income and / or growth potential of the company outweigh the potential risks. A Not Approved rating indicates that Lonsec believes the stock is not of Investment Grade quality, meaning we believe the potential risks outweigh the long-term income and / or growth potential of the company. A Stock Watch rating indicates that Lonsec is reviewing the Investment Grade status of the stock due to a material change (positive or negative) in the company s income and/or growth potential or potential risks. This rating should only be applied for a short period, usually less than 10 business days. A Ceased Coverage rating indicates that the stock is no longer included in the S&P/ASX 200 and hence Lonsec has ceased coverage of the stock. New stocks coming into the S&P/ASX 200 will be initiated with an Approved or Not Approved rating within 20 business days of inclusion in the index. The Rating or investment recommendation for each stock is a long-term assessment which remains relatively stable, though will be upgraded or downgraded should our investment grade view change usually due to material changes to a company s structure or financial outlook.

13 P ISSUE DATE: Action signal The Action Signal represents Lonsec s view on the perceived medium-term value of the underlying company. Lonsec utilises a combination of the following valuation methodologies in deriving valuations for the stocks under coverage: Price to Earnings (PE) models; Enterprise Value (EV) multiples; Relative value model; Price-to-book ratios; and Yield based valuation models. Once the fair valuation for a company is determined, the action signal bands are used to signify whether a company is currently under-valued or over-valued by comparing the current market price to the projected fair value of the business. If the current market price is 10% (or more) below the fair value, the stock is deemed as under-valued. The stock is deemed as over-valued if the current market price is at a 10% premium (or more) to the fair value. Lonsec does not provide a view on valuation for Not- Approved stocks given our view that the stock is not of Investment Grade quality, meaning we believe the potential risks outweigh the long-term income and / or growth potential of the company.

14 P ISSUE DATE: Forecast returns Forecast returns represent the Income and Capital growth returns expected from an investment in this company at the last traded price. The Income is represented by the expected dividend yield over the next two fiscal years. The Capital growth component is calculated by comparing the current market price to Lonsec s fair valuation for the company in each year. The Forecast Return projections are based on numerous variables and forecasts that are subject to change / review on a regular basis.

15 P ISSUE DATE: Quantitative Filters These charts provide a visual snapshot of some of the key financial parameters that are likely to impact the share price performance of the given company. The charts are grouped into four different segments, namely Growth, Income, Financial Strength and Valuation. These charts display up to 10 years (where available) of historical and forecast data to provide a real-time snapshot of the company s track record with respect to its earnings, dividends, balance sheet strength and secondary market valuation metrics. Please refer to the glossary section for the definitions of the financial metrics displayed in these charts.

16 P ISSUE DATE: Lonsec s Listed Income (Hybrids) Securities Research Process Lonsec s listed income research follows a structured framework to derive an investment rating and risk assessment. The investment rating is, much a like a credit rating, a long-term assessment which remains relatively static, though will be upgraded or downgraded should our investment grade view change. The risk assessment is more dynamic and may vary more frequently throughout the term of the issue. In forming our investment rating, we have assumed that positions are held to maturity and therefore will continue investment coverage through to maturity. Investment recommendation Each listed income investment under coverage is assigned either an Approved or Not Approved rating: Approved The Approved rating indicates that Lonsec believes the security is of Investment Grade quality, meaning we believe the issuer has sound financials, the security will pay all distributions in the term to call and holders will receive face value on maturity, such that the income potential outweighs the potential risks. Not Approved The Not-Approved rating indicates that Lonsec believes the security is not of Investment Grade quality, meaning we believe the potential risks outweigh the long-term income potential of the security. These ratings are made regarding the Lonsec risk assessment, which is discussed below, and with consideration to the relative attractiveness of the expected return. The potential return refers to the interest margin on offer over the relevant benchmark rate and any other investment return which may include conversion discounts, in-built call options, entitlements to IPOs and future step-ups in the margin.

17 P ISSUE DATE: Risk assessment The six risk categories identified and assessed (in order of importance) are: Structure The risks inherent in any listed income security can vary significantly based on the security structure. To assess structure risk, Lonsec examines subordination/capital classification, distribution payment tests, distribution restriction conditions, conversion conditions and capital and non-viability triggers. Maturity The risks associated with the maturity structure of the issue are examined in detail and a relevant risk rating is assigned accordingly. One of the key factors in the market s pricing of a listed income security is the maturity terms and conditions, as these determine if, how and when the invested capital is returned to the investor. Lonsec forms a view on the expected maturity date of each security, having considered the time horizon to maturity and/or conversion terms, the financial capacity of the issuer, the ascribed equity credit and the significance of the size of the issue to the issuer. Financial The financial strength of the issuer is examined according to the sector in which it operates and the security product. This is primarily designed to ensure the analysis represents a true reflection of the issuer s financial strength and to account for the fact that banks, insurance companies and traditional industrial companies all have very different financial structures. Furthermore, the financials important to Tier 1 securities are different to those that relate to bonds, for instance. Specifically, the key indicators analysed include wholesale credit ratings, balance sheet strength, capital adequacy, funding, outlook, exposures, asset allocation, earnings and cash flow. Liquidity Liquidity risk is the risk that an investment may not be easily converted into cash with little or no discount to the last traded market value and at minimum delay. A liquidity premium should be required by investors to compensate for lack of liquidity. Low liquidity can also result in higher than desired volatility. Key attributes analysed to rate liquidity include issue size and average weekly turnover. Volatility Volatility measures how much the market value of an issue fluctuates over its life with respect to its face value. Volatility is often viewed negatively in that it represents uncertainty, however, it can also provide the potential for higher returns. Both capital and income will contain some degree of volatility depending on the nature of the underlying investment. Our assessment of expected volatility takes into consideration metrics including issuer strength, economic and credit market conditions, investor sentiment, equity market conditions, maturity risk, capital ranking/structure, turnover, conversion terms and the volatility of listed peers. Industry Structural and operational risks associated with the industry in which the company operates can impact the financial position and prospects of the issuer and hence the performance of the listed income security. Industry analysis involves consideration of the following factors: current and forecast industry conditions, domestic and global economic outlook and its expected impact on the industry, regulatory risks, the company s positioning and pricing power within its industry, the power of suppliers and buyers, as well as the life cycle stage of the industry.

18 P ISSUE DATE: Risk rating Following an assessment of the risks and metrics described above, a risk assessment score is assigned to each of the six risk categories. The risk scores are assessed on a scale of 1 to 5, with 1 implying low risk and 5 implying high risk. Adding the scores of each category derives a total assessment score out of 100, which represents the overall risk assessment for the security. Out of the six risk categories, structural risk and maturity risk are the heaviest weighted categories, followed by financial risk. Liquidity and volatility are the lowest weighted categories, while industry risk assists in understanding the financial outlook. The risk rating categories range from Low to Speculative and are described below: Low A low-risk assessment indicates that the weighted risk is low and the overall risk score is less 45, which indicates strong credit quality. Low to Moderate A low-to-moderate risk assessment indicates that the weighted risk is low to moderate and the overall risk score is between 46 and 53, which indicates solid credit quality. Moderate A moderate risk assessment indicates that the weighted risk is moderate and the overall risk score is between 54 and 65, which indicates good credit quality. Moderate to High A moderate-to-high risk assessment indicates that the weighted risk is moderate to high and the overall risk score is between 66 and 73, which indicates reasonably good credit quality, but with some high-risk factors. High A high-risk assessment indicates that most the risks are rated as high and the overall risk score is between 74 and 85, which indicates low credit quality. Speculative A speculative risk assessment indicates that most the risks are rated very high and that the overall risk score is between 86 and 100, which indicates the issue has speculative qualities. Risk rating categories (example only) LOW MODERATE HIGH SPECULATIVE FINANCIAL MATURITY STRUCTURE LIQUIDITY INDUSTRY VOLATILITY RISK PROFILE Lonsec also advises on the Lonsec client risk profiles that each security is suited to.

19 P ISSUE DATE: Frequency of Review and Issuance Lonsec reviews its listed income research regularly, and provides the following publications: Listed income research Comprehensive and concise coverage on 52 listed income securities. Lonsec provides research on approximately 97% of the total listed income market capitalisation, and will continue to expand as our offering as new securities come to market. Those that we do not cover typically have speculative characteristics and/or poor liquidity. Our research is updated at least quarterly, and typically more frequently when required. Yield update A weekly report which provides a summary of the structure, trading metrics and distribution details of the listed income securities within Lonsec s universe. In addition, this document provides several useful charts and tables to help create portfolios, identifies upcoming distributions, maturities and new listings and provides an overview of topical fixed income news during the week. Corporate action updates and new issue research Produced as required and provides a comprehensive report, recommendation and risk profile on new issues and corporate actions. Listed Income Journal A quarterly publication which provides a comprehensive wrap on the listed debt/hybrid market for advisers. It expands on the weekly yield update to provide market outlook regarding our expectations for the cash rate, yield curve and credit spreads, provides education material on the listed income market and includes data, research and recommendations on all 52 securities covered by Lonsec.

20 P ISSUE DATE: Glossary of Terms Accrued interest Accrued interest is the amount of interest that has been accumulated from the last coupon payment date to the settlement date when the bond has been traded. Bank bill swap rate (BBSW) This is the average of the market rates supplied by domestic banks to Australian Financial Markets Association (AFMA) relating to specific maturity periods generally days. Basis points A basis point is a measure used to calculate interest returns. One basis point is 0.01% Bond A bond is a debt security or loan by the issuer and is an obligation by the issuer to pay a specified distribution at regularly defined intervals and to pay the principle (original loan) at maturity. Call option An option that gives the holder of the bond to buy a security at an agreed price up to an agreed date. Common Equity Tier 1 (CET1) The highest quality of capital available to banks, which is freely available to absorb losses. It comprises ordinary share capital, retained earnings and reserves. Capital Trigger Event Requires for the listed income security to be converted into common equity, without regard to the conversion conditions. Conversion discount A discount applied to the underlying stock price upon conversion of a hybrid security. Convertible bond A traditional fixed income style security that gives the investor the right to convert into ordinary shares of the company at redemption. Corporate bond A debt obligation (bond) issued by a corporation, maybe senior secured, senior unsecured or subordinated. Senior corporate bonds are secured against company property and rank ahead of other secured creditors. Coupon rate This is the rate of interest or distribution paid by the issuer. Floating rate: distributions are based off a short-dated benchmark usually BBSW90. The payments consist of a predetermined margin plus the benchmark Fixed rate: The coupon rate is fixed at a predetermined rate for the duration of the debt security. Credit risk Credit risk assessment that the issuing company may default its obligation to pay interest or principle on maturity. Credit spread Credit spread is the difference in yield between 2 securities. Credit spread generally measures the degree of risk between risk free assets i.e. Commonwealth Government Securities lower rated assets including corporate bonds and hybrid securities. Cumulative Distributions Unpaid distributions accumulate and continue to accrue interest at the prevailing distribution rate until paid.

21 P ISSUE DATE: Dividend stopper If distributions on the hybrid security are suspended the issuer cannot pay dividends on junior or equal ranking capital depends on the terms of the issue. Face value Is the original or par value of the bond and is the amount that will be paid by the issuer on redemption. Generally, face value is $100. Fixed rate bond The coupon interest rate has been set at the time of issue and will remain fixed for the life of the security. Commonwealth and State Government bonds are predominately issued with a fixed coupon rate. Floating rate note (FRN) FRN securities have two components, a fixed margin that is set at the time of maturity and the benchmark used to determine the total distribution rate. The most common benchmark is the Bank Bill swap rate (BBSW). Franking credit A tax credit for company tax already paid on corporate profits. Gearing ratio Net Debt/ Net Debt + Shareholders Equity Gross Yield Yield expressed inclusive of any franking credits. Interest cover EBITDA / Net Interest Expense Leverage ratio EBITDA / Net Debt Market price The price includes two components: Capital amount: the value of the security estimated by the market. It is based on several variables including current market interest rates relative to the coupon rate, time of maturity, ranking and credit quality. Accrued interest: the amount of interest accumulated on a security since the last payment. A security price should increase daily by the amount of interest that has accrued. Maturity date The maturity date is the date when the bond will be repaid by the issuer. Non-Viability Trigger Event Occurs when APRA notifies the issuer that conversion or write-off of the relevant listed income security is necessary because, without it, APRA believes the issue would become non-viable. Optional Call Date The issuer has discretion to redeem the security at face value at this date. Perpetual securities Perpetual securities offer regular periodic interest payments for an indefinite period. There is no maturity date. Reset date Hybrid securities and convertible securities may offer reset terms rather than offering redemption. The issuer will reset certain terms and conditions relating to the next continuation of the issue.

22 P ISSUE DATE: Running yield Running yield is a simple calculation that expresses the interest rate return as a percentage of the capital invested. Running yield does not consider capital accumulation of the investment. Stapled security A security that comprises two or more underlying securities, neither of which can be traded separately. Some hybrid securities comprise a preference share and an unsecured note, which aids in their coupons being deductible for tax purposes. Step up An increase to the issue margin at a predetermined date or on the occurrence of a certain event. Subordinated Debt that is outranked within the capital structure. Trading Margin The margin at which a security trades above or below its reference rate. It is calculated as adjusted gross yield to maturity less spot reference rate. Tier 1 Capital Comprises CET1 and Additional Tier 1 capital. Tier 2 Capital Comprises primarily subordinated debt and other funding sources that rank below deposits and other senior creditors. Total Capital Ratio Comprises Tier 1 & Tier 2 capital. Volatility The degree to which the price of a security fluctuates. VWAP Volume Weighted Average Price of a security during the relevant period. Yield to call/maturity Yield to call/maturity is the actual return on an investment that the client is likely to receive if the securities are held to their first call date, or maturity if there is none. The yield to maturity calculation considers the cash flows from the interest payments received, face value, plus or minus the capital discount or premium paid for the securities at the time of purchase.

23 P ISSUE DATE: Listed Equities Research Team Lonsec Equities Research tenure and experience NAME TITLE LONSEC TENURE (YEARS) INDUSTRY EXPERIENCE (YEARS) ROSS BIRD SENIOR EQUITY STRATEGIST DANIAL MORADI SENIOR EQUITY STRATEGIST CHAD TROJA SENIOR EQUITY ANALYST 0 12 KELLY GLOVER EQUITY ANALYST 1 5 TOBY GREENE GRADUATE EQUITY ANALYST 2 2 AVERAGE 5 13 Danial Moradi B.Eng, DFP, GradDipAppFin Senior Equity Strategist Danial Joined Lonsec in 2007 and is currently responsible for ongoing ASX200 equities research and the management of Lonsec s direct equity model portfolios. Danial is also a member of Lonsec s Investment Committee that oversees the management and Investment strategies of Lonsec s equity model portfolios. Previously at Lonsec, Danial was responsible for in-depth research coverage on listed companies from a wide range of sectors, in addition to publishing Lonsec s quarterly Listed Income Securities Investment Journal. Danial has over 16 years experience in trading, research and analysis of local and international equity and derivatives markets. Ross Bird B.Eng, F.Fin Senior Equity Strategist Ross re-joined Lonsec in June 2012 developing specialised portfolios for wholesale clients and providing ASX200 equities research support. Ross is Chair of Lonsec s Equity Investment Committee that oversees the management and investment strategies of Lonsec s equity model portfolios. Ross has 30 years experience in banking, funds management, stockbroking research and portfolio management. Previously, Ross held strategist roles at Lonsec, Aegis Equities, Morningstar and Bellwether. Prior to this, Ross was a resources analyst at National Mutual (now AXA) for 10 years. Chad Troja B.Eng, F.Fin Senior Equity Analyst Chad joined Lonsec in December 2017 from Catholic Church Asset Management, where he was an investment analyst covering Australian equities. Prior to this, Chad spent 9 years at Perennial Investments Partners where he was part of the Global Equities team covering consumers, industrials and healthcare, whilst also involved in FX. With over 12 years funds management experience, other previous organisations include Invesco, Equity Trustees and Foreign & Colonial (UK). Kelly Glover M.Fin Equity Analyst Kelly joined Lonsec in March 2017 as an Investment Analyst within the managed funds research team, before moving into the Direct Equities Research team in December In this role, Kelly is involved in research coverage of Australian equities. Kelly completed his Master of Finance degree in Before joining Lonsec, Kelly gained five years of experience as an Analyst at Jenepe Capital. Kelly was responsible for producing valuation and equity reports and assisting the Corporate Finance team with international IPO s and capital raisings.

24 P ISSUE DATE: Toby Greene B.A, M. Fin Graduate Equity Analyst Toby joined Lonsec s equity research team in September 2016 as a Graduate Equity Analyst. Toby is responsible for the provision of research coverage on listed income securities and equities. His previous experience includes 1 year as an analyst at corporate finance firms and 2 years in marketing and media. Toby has completed all 3 levels of the CFA Program.

25 P ISSUE DATE: IMPORTANT NOTICE: The following relate to material presented in this document published by Lonsec Research Pty Ltd ABN , AFSL: ("Lonsec ) and should be read before making any investment decision. WARNINGS: Past performance is not a reliable indicator of future performance. Any express or implied recommendation or advice presented in this document is limited to General Advice (as defined in the Corporations Act 2001(Cth)) and based solely on consideration of the investment and/or trading merits of the securities alone, without taking into account the investment objectives, financial situation and particular needs ( financial circumstances ) of any particular person. Before making an investment decision based on the recommendation or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness. This is not Personal Advice (as defined in the Corporations Act 2001(Cth)) and does not constitute a recommendation to purchase, hold, redeem or sell any securities or financial product(s), and the reader should seek independent financial advice before investing in any financial product. DISCLOSURE AS AT THE DATE OF PUBLICATION: Lonsec Research receives a fee from the relevant fund manager or product issuer(s) for researching financial products (using objective criteria) which may be referred to in this document. Lonsec Research may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec Research services. Lonsec, its directors, officers, representatives, authorised representatives and their respective associates may have or acquire holdings or positions in the securities mentioned in this document, which holdings may change during the life of this document. Details of these holdings, if any, are not known to the Analyst(s). Lonsec considers any such holdings not to be sufficiently material to compromise the recommendations or advice. DISCLAIMER: This document is for the exclusive use of the person to whom it is provided by Lonsec and/or as provided by Lonsec Research to its wholesale clients and must not be used or relied upon by any other person. If you are not the intended recipient, you must not use or disclose the information in this research in any way without written authorisation. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information that has not been verified by Lonsec. The conclusions, recommendations and advice contained in this document are reasonably held at the time of completion but are subject to change without notice and Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, the information contained in this document or any loss or damage suffered, directly or indirectly by the reader or any other person as a consequence of relying upon the information. COPYRIGHT 2017 Lonsec Research Pty Ltd ABN , AFSL This report is subject to copyright of Lonsec. Except for the temporary copy held in a computer's cache and a single permanent copy for your personal reference or other than as permitted under the Copyright Act 1968 (Cth), no part of this report may, in any form or by any means (electronic, mechanical, micro-copying, photocopying, recording or otherwise), be reproduced, stored or transmitted without the prior written permission of Lonsec. This report may also contain third party supplied material that is subject to copyright. Any such material is the intellectual property of that third party or its content providers. The same restrictions applying above to Lonsec copyrighted material, applies to such third party content.