AUSTRALIA Recommendations: CSL Outperform P/T: $110.00 RMD Underperform P/T: $7.50 COH Outperform P/T: $100.00 SHL Outperform P/T: $24.00 ANN Outperform P/T: $26.00 RHC Outperform P/T: $75.00 A$ earnings sensitivity to 5% decline in A$ COH 8.0% RMD 6.9% CSL 6.0% ANN 5.0% SHL 2.6% RHC 1.5% Currency adjustments Event We update our earnings forecasts across the sector in response to Macquarie Economics revising its currency assumptions. Impact Economics team makes revisions to FX and commodity forecasts: The Macquarie Economics team has updated its commodity price forecasts and recalibrated and retested its FX forecast modelling. In summary it believes that the A$ will fall lower than previously anticipated (to 0.63 USD and 0.58 EUR) due to a combination of factors including a lower cash rate; slow growth from the transition from mining to non-mining; the likelihood that a fiscal response remains absent; and a further deterioration in commodity prices. The team then expects the AUD to appreciate beyond F17 but to a lesser extent than before, with new terminal rates (FY20) and 0.74 USD (was 0.84) and 0.64 EUR (was 0.71). Earnings for AUD reporting companies impacted the most: Due to COH and SHL deriving most of their revenue offshore, the AUD FX downgrades provide the greatest earnings boost for these stocks. Additionally, COH incurs a high proportion of costs domestically (vs. SHL where costs are fairly evenly matched with offshore revenue), meaning the impact to COH earnings is leveraged. However, the impact is delayed somewhat due to COH s FX hedging. RHC also has meaningful FX exposure through its French and UK operations (which now account for c40% of earnings), however the exposure is hedged through the company holding a considerable debt offshore. RMD, CSL and ANN revisions dampened due to USD reporting: As RMD, CSL and ANN all report in USD, earnings revisions exclude the translational tailwinds from a weaker AUD. This results in relatively minimal earnings revisions for all companies. Revisions: FY16 FY17 FY18 Target Price CSL (USD) -0.70% -1.60% -1.90% no change RHC -0.40% 4.20% 4.10% 2.70% RMD (USD) 2.30% 3.70% 4.00% no change SHL 3.40% 4.10% 4.70% no change COH 3.10% 5.20% 8.20% 5.30% ANN (USD) 0.00% 0.00% 0.00% no change Outlook The highest exposed stocks in the healthcare sector to a falling AUD (once earnings are converted to AUD) are COH, RMD, CSL and ANN. However in reporting currency terms, the highest exposed are COH and SHL. 15 September 2015 Macquarie Securities (Australia) Limited Please refer to page 3 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Macquarie economics currency forecasts Fig 1 New currency forecasts FY16 FY17 FY18 F19 F20 AUD/USD 0.67 0.64 0.70 0.74 0.75 AUD/EUR 0.61 0.58 0.61 0.64 0.64 AUD/GBP 0.43 0.42 0.46 0.48 0.48 AUD/CHF 0.64 0.62 0.67 0.71 0.72 AUD/JPY 80.3 75.7 80.2 81.2 78.6 Source: Macquarie Research Economics, September 2015 Fig 2 Old currency forecasts FY16 FY17 FY18 FY19+ AUD/USD 0.68 0.71 0.82 0.82 AUD/EUR 0.64 0.63 0.68 0.68 AUD/GBP 0.45 0.46 0.51 0.51 AUD/CHF 0.65 0.69 0.79 0.79 AUD/JPY 79.2 81.1 87.4 87.4 Fig 3 Earnings (in $A) sensitivity to 5% fall in $A COH RMD CSL ANN SHL RHC 1.5% 2.6% 5.0% 6.0% 6.9% 8.0% Note: All figures are in AUD, including USD reporting companies. Source: Company data, Macquarie Research, September 2015 15 September 2015 2
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 First South - 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 60 100% 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 30 June 2015 AU/NZ Asia RSA USA CA EUR Outperform 46.23% 58.36% 47.27% 44.20% 60.65% 43.01% (for US coverage by MCUSA, 9.68% of stocks followed are investment banking clients) Neutral 37.67% 25.65% 29.09% 49.29% 34.19% 40.93% (for US coverage by MCUSA, 5.53% of stocks followed are investment banking clients) Underperform 16.10% 15.99% 23.64% 6.52% 5.16% 16.06% (for US coverage by MCUSA, 1.38% of stocks followed are investment banking clients) CSL AU vs ASX 100, & rec history RMD AU vs ASX 100, & rec history COH AU vs ASX 100, & rec history SHL AU vs ASX 100, & rec history ANN AU vs ASX 100, & rec history Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, September 2015 12-month target price methodology CSL AU: A$110.00 based on a DCF methodology RMD AU: A$7.50 based on a DCF methodology COH AU: A$100.0 based on a DCF methodology SHL AU: A$24.00 based on a DCF methodology ANN AU: A$26.00 based on a DCF methodology RHC AU: A$75.00 based on a DCF methodology Company-specific disclosures: CSL AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of CSL Limited's equity securities. COH AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Cochlear Limited's equity securities. SHL AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Sonic Limited's equity securities. ANN AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Ansell Limited's equity securities. RHC AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Ramsay Health Cares's equity securities. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. 15 September 2015 3
Target price risk disclosures: CSL AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include RMD AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include COH AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include SHL AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include ANN AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include RHC AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include 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 94 122 169 279, AFSL No. 318062) ( 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 58 002 832 126, AFSL No. 238947) 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 41 002 574 923, AFSL No. 237504) ("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. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) ( 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 1989. 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 e-mail and delete the document. We do not guarantee the integrity of any e-mails 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 www.macquarie.com/disclosures. Macquarie Group 15 September 2015 4
Macquarie Group 15 September 2015 5