Thursday 11 May 2017 The Beam me up, Scotty, Budget

Thursday 11 May 2017

The "Beam me up, Scotty, Budget"

Scott Morrison presented the Budget this week, and I called it a “Beam me up, Scotty, Budget”. Youcan read my thoughts here. Charlie Aitken also shares his views on the Budget today, including thenew bank tax, and why he’s going long on Henderson Group.

Also in the Switzer Super Report, Tony Featherstone details five ways investors can regain marketconfidence if their portfolio has taken a hit.

Sincerely,

Peter Switzer

Inside this Issue

Short Scomo, longHGGby Charlie Aitken02

02 Short Scomo, long HGGBank taxby Charlie Aitken

06 5 ways to regain stock market confidencePortfolio taken a beating?by Tony Featherstone

09 Professional’s Pick – HelloworldStock to watchby Ben Griffiths

11 Buy, Sell, Hold – 3 bank downgrades and 1 upgradeUpgrades and downgradesby Staff Reporter

16 Questions of the Week – Woolworths (WOW) andVocus (VOC)Reader quesriesby Questions of the Week

Switzer Super Report is published by Switzer Financial Group Pty Ltd AFSL No. 286 53136-40 Queen Street, Woollahra, 2025T: 1300 SWITZER (1300 794 8937) F: (02) 9327 4366

Important information: This content has been prepared without taking accountof the objectives, financial situation or needs of any particular individual. It doesnot constitute formal advice. For this reason, any individual should, beforeacting, consider the appropriateness of the information, having regard to theindividual's objectives, financial situation and needs and, if necessary, seekappropriate professional advice.

http://www.switzer.com.au/the-experts/peter-switzer-expert/its-a-beam-us-up-scotty-budget/

Short Scomo, long HGGby Charlie Aitken

I didn’t think I’d actually see the day a FederalLiberal Government introduced an extra tax on thebanks, but here we are. At the top of the commoditycycle, Canberra introduced a mining tax, and at thetop of the housing cycle Canberra introduced a newbank tax, which really is a banks super profit tax. Italso appears there was absolutely no consultationwith the major banks.

And just look how offshore investors reacted tounexpected regulatory change: exactly as they didwith the mining tax. They dumped the sector.

On Tuesday, the big four Australian banks lost acombined market cap of $14.1b. This was solelydriven by a leaked news story that the new bank levywould generate $6b of revenue over four years.

Scott Morrison needs to understand that with thissingle pen stroke he has driven bank profits down(-5% according to analysts), bank dividends down,and share prices down. He has INCREASED the costof bank capital and will INCREASE the cost ofmortgages, as banks will end up passing on this newtax. This decision will lead to LOWER Australian GDPgrowth and a LOWER ASX200 than would otherwisehave occurred. The ripple effects will be widespread.

He has hit all your retirement savings bysingle-handedly causing serious falls in Australianbank share prices with a basic piece of short-sightedpopulist politics. Politicians simply DON’Tunderstand the cause and effect of their actions infinancial markets. It’s that simple. At least the USAhas a bunch of ex Goldman Sachs alumni running theTreasury.

Morrison needs to understand very quickly thatAustralia is in a global competition for investor capital.We are only 2% of the world and it’s very easy for a

global fund manager to go zero weight Australia. Hejust gave them that excuse with the bank levy. Healso gave the world’s hedge fund community thegreen light to short Australian banks and wholesaleinvestors the green light to charge Australian banksmore for their offshore funding. And that’s exactlywhat they have done.

The clear problem is not bank profits. They are agood thing. The clear problem is Australia andAustralians living beyond their means. Thegovernment and households are simply spendingmore than they are earning, and financing thedifference from an ever-increasing pile ofgovernment and mortgage debt.

The Australian government is now “reclassifying”debt between good and bad debt. That only happenswhen you have TOO MUCH DEBT.

The Australian government raised the “debt ceiling”.That only happens when you have TOO MUCHDEBT.

Similarly, a record number of Australians are payinginterest only loans. This generally happens when youhave TOO MUCH DEBT.

We are all borrowing from the future and that meansgrowth will be lower for longer than anyone believesand the Federal Budget will remain in deficit fordecades. Is it then any surprise that Australian retailsales have been NEGATIVE for three straightmonths? People aren’t spending because they haveso much mortgage debt, rising living costs and flatwages. You can see hedge funds are alreadyshorting Australian retailers because they can seewhat is happening. This isn’t all about Amazonarriving in Australia.

02Thursday 11 May 2017

I basically think we reached the point of maximumgearing in Australia, at the government andhousehold level. If I am right, you will start seeing asavings culture emerge, which appears to be startingin the household sector. Australians will service theirmortgage debt pile and have not much else todiscretionarily spend. This probably means youshould buy the dip in Australian banks, but be verycareful in discretionary retailers, supermarkets,property developers, retail landlords and anythingconsumer facing.

This will mean it will become harder and harder tofind earnings growth from domestic exposedAustralian companies. In fact, if the Australian dollarcontinues to fall, the best earnings growth in the ASXwill come from industrial companies with a very highpercentage of offshore earnings.

I should thank Scott Morrison for driving my fund’sperformance in stocks like Treasury Wine Estates(TWE), Aristocrat (ALL), IPH, Henderson Group(HGG), EML Payments and CYBG (CYB) to name afew. I should also thank him for making investorsaware of the risk of owning too much Australianexposure in a period where Australia simply has toomuch government and household debt, as it drivesthe outperformance of Australian-based Global funds.

But as an Australian and a capitalist, I genuinelyhate decisions that do damage to Australia’sinternational reputation. Australia and Australiansare genuinely WORSE OFF from what is the mostshort-sighted revenue grab since the mining tax at thetop of the mining cycle. It’s simply poor populistpolicy.

However, it is what it is and we, as investors, need todeal with consequences. They are materialconsequences as you’ve seen this week in bankshare prices, retailer share prices etc.

What I think this ensures is a period ofunderperformance from Australian banks and theASX200. The bank tax has also come during theseasonally weak period for commodity prices andcommodity equities. In previous weeks, there hadbeen rotation from resources to banks, but that allended with the bank tax and now both sectors areunderperforming.

I encourage investors to look for large cap offshoreearners, which will continue to outperform as globalGDP and global earnings growth accelerates.

One I like is Henderson (HGG), which is in theprocess of merging with another large fund managerin US based Janus (JNS).

This looks to me a stock that should be $5.00 in 12months’ time, as investors warm to the mathematicsof the merger. I think it’s a cheap stock versus itsgrowth prospects and will be a great way for domesticinvestors to effectively buy exposure to the Eurozoneand US equity markets.

HGG is cheap, has solid growth ahead, an excellentbalance sheet, excellent management, rising ROE,consensus earnings upgrades and growing dividendyield. It has every attribute I seek in a medium-terminvestment.

UBS this week upgraded HGG to “buy” with a $5.00price objective. Below I quote directly from the UBSreport because I think it’s a very good summary ofthe HGG investment case.

Four reasons UBS like HGG

1. Stock is too cheap

13x 1-year f P/E (pro-forma) and forecast todeliver 9% three-year EPS CAGR with upsidevia better cost/revenue synergies.That’s an 11% discount to US peers…7%discount to UK peers…and a whopping 23%discount to Australian peers.JNS has traded at an average P/E of 14.8xover the past three years…that’s despite itsterrible FUM flow and fee performance.I don’t think anyone will disagree that HGGhas been a better run biz + deserves a highermultiple than JNS…similarly I don’t thinkanyone will disagree that a combinedJNS/HGG (JHG) has greater prospects than astandalone JNS…on that basis, it seemslogical to assume that JHG should trade at>14.8x P/E over time with upside to the16-21x P/E multiples afforded to theAustralian fund managers.


2. FUM flows should normalize (market ispricing in negative flows forever)

JNS has had a particularly difficult time withFUM flows in recent years (-1.9% p.a. overpast three years)…HGG has performed muchbetter but struggled over the past few quartersdue to a bout of softer performance + Brexitimpacts.The merger will significantly enhance bothHGG and JNS’ distribution capabilities…HGGhas historically struggled in the US/Japan,while JNS has never had much traction inEMEA, LatAm or Australia…We also think themarket is underestimating the Dai-Ichirelationship…Dai-Ichi was a significant help ingrowing JNS’ Japanese biz (HGG hardly hasone) + have committed to taking theirpost-merger stake in JHG to 15% (from9%)…that could also absorb a chunk of the UKpassive selling.On top of that, while recent performance forHGG/JNS funds has been softer, three-yearmetrics remain solid…73% of HGG’s AUMhas outperformed benchmarks over the pastthree years…while 83% of JNS’ complex-widemutual fund AUM sits in the first or secondquartile.HGG’s monthly retail flow momentum isalready improving with £800m insto mandatesalready funded in 2Q + improved investmentperformance across both HGG and JNS.The market is pricing too pessimistic anoutcome for group FUM flows…current shareprices imply -0.5% FUM flows p.a. goingforward…we think JHG should see flows lift to+1.5% p.a. by FY20.

3. Performance fees should normalize

Risk skewed to the upside, with HGGperformance fees near historic lows…whileJNS’ fulcrum performance fees areapproaching negative limits (JNS earnnegative performance fees during periods ofunderperformance though these are cappedat -$61m p.a.vs. annualising at -$53m p.a.currently).FY16 saw HGG performance fees fall to13.5bps (vs. historic avg 25bps).

We assume a recovery in performance feesfor both JNS and HGG…but still assumenegative fees for JNS going forward.

4. US$110m cost out targets are realistic…andpotentially conservative

Targeting US$110m cost synergies = 9.3% ofcombined cost base…that’s in-line withcost-out achieved from other large globalasset management deals (we’ve looked atthe 10 largest).Post-synergies, JHG cost:income will sit at~64%…that’s still 310bps above similar sizedpeers = realistic + offers upside if they can domore.

Story in pictures

1. HGG and JNS FUM flows have beenimpacted by softer performance + Brexitrelated sentiment issues + structuralheadwinds.

2. But we see this improving, thanks toenhanced distribution capabilities post-merger+ still strong three-year performance metrics.

3. Performance fees are tracking at historiclows…we see this improving going forward.


4. US$110m synergy target appears realistic inthe context of other mega-mergers.

5. Most importantly, the stock is cheap! Chanceto buy a world-class fund manager at asignificant discount to peers.

And finally after a big period of underperformance,HGG is breaking long-term downtrends technically.HHG has broken up through its 50,100 and 200 daymoving averages.

HGG is a cheap stock with plenty of medium-termupside to be released. There will be index change

liquidity later this month, as HHG leaves the UK andre-lists on the NYSE, but I think any short-termpullback driven by one-off index changes is a buyingopportunity. It may well be your last buyingopportunity at discounted prices.

All in all, I am hugely disappointed by the FederalBudget. I think it ensures the ASX200 underperformsthe world due to the attack on our major banks, buton the other hand, I think it ensures the furtheroutperformance of global earning stocks and globalinvestment strategies.

I encourage you to consider an investment in HGG,which should continue to be re-rated in the monthsahead.

Important: This content has been prepared withouttaking account of the objectives, financial situation orneeds of any particular individual. It does notconstitute formal advice. Consider theappropriateness of the information in regards to yourcircumstances.


5 ways to regain stock market confidenceby Tony Featherstone

A young family member asked me about investing.He wanted to buy junior mining stocks after his friendmade $10,000 in quick profits.

“My friend has a fool-proof investment system,” hesaid. I replied: “Don’t do it. You’ll blow your savingsand set yourself back financially for years. Put yourmoney in a low-cost managed fund, educate yourselfon shares and follow the market.”

Of course, he did not heed my advice. Does any20-year-old take conservative, sensible advice onmoney matters from someone more than twice hisage? He invested $8,000 in a mining stock and withina year lost most of his capital.

That $8,000 was saved through a series of part-timejobs and weekend sacrifices. The funds could havebought a cheap used car and his first overseasholiday. Or better still, been the start of a sharemarketportfolio.

My young relative has sworn off the sharemarket. Hisconfidence is busted. It will take years before heregains enough confidence to buy shares, if ever.

A twenty-year-old punting on junior mining stocksseems an extreme example of sharemarketconfidence gained and lost. But even seasonedinvestors lose their confidence when well-researchedstock purchases turn sour and destroy capital.

Resilience is an under-appreciated skill. Greatinvestors have it in spades. They recover fromsetbacks and live to fight another day. They know thetwo most important words in investing are CapitalPreservation.

Regaining confidence, after the market mauls yourportfolio and comes back for a second helping, is

never easy. But the ability to buy stocks when otherslose their confidence and panic can superchargeportfolio returns.

Here are five ways for small investors to regain theirsharemarket confidence:

1. Have realistic expectations

Confidence is all relative. Some investors give up themarket after their first loss, not realising that evenprofessional investors struggle to beat the index.

Almost 70% of Australian general equity fundsunderperformed the S&P/ASX 200 index over fiveyears to the end of 2016, Standard & Poor’s found.

Put another way, seven in 10 funds, each run byprofessionals who invest in the sharemarket as theirday job, could not do better than ASX 200 over longperiods.

A friend, a successful Melbourne stockbroker, sayshis goal each year is to pick one unknown small-capstar. Yes, just one. He manages it about two in everyfive years, but the gains from a stock that increasesfive or tenfold more than outweigh average returnsand small losses in others part of his portfolio.

Have realistic return expectations. Australian sharesreturned 5.5% annually (before fees) over 10 years tothe end of 2015, found the 2016 ASX/RussellInvestments Long-Term Investing Report. That’slower than normal because of a weak 2015, butsingle-digit returns have been, on average, the normsince the 2009-08 Global Financial Crisis.

These stats are not meant to deter you from shareinvesting. Rather, they provide some context forexpected returns. You’re doing well if your portfolio


consistently returns more than 10% each year, afterfees — and if your stock winners outnumber loseseach year by a decent margin.

Think about that next time your confidence isshattered and you give up. Every investor has losingstocks. It’s how you limit losses and recover thatmatters.

2. Invest in education

It sounds cliched or trite to suggest that “education isthe best investment” and a cure-all for strugglinginvestors who lose their confidence. There’s nomagic formula in the sharemarket or “how-to” guidethat delivers dazzling returns.

I’m always surprised when investors put thousandsof dollars into a stock with barely any research intothe company or sharemarket generally. Like myyoung family member, they are easy prey for savvyinvestors who take their money.

If your sharemarket confidence has evaporated, usethe next six months to learn about investing. Buy agood, readable local investment book, such as RogerMontgomery’s Value.Able or MichaelKemp’s UnCommon Sense. Or classics by USinvesting gurus Peter Lynch, Jeremy Siegel andothers.

Enrol in the ASX Public Sharemarket Game. Thisfree, online simulated trading game allows you to buyand sell shares, without money. It’s a great way totest your investment or trading strategy and get someconfidence back.

Beware buying expensive courses or software whenyour investing confidence is low. Some financialproducts prey on disheartened investors who seek aquick fix to recoup their losses.

3. Learn money-management techniques

In the earlier example, my family member punted hisentire portfolio on a single stock. He should haveinvested in a low-cost active fund or exchange-tradedfund that provided diversification.

He had no idea of the stock’s valuation and no

stop-loss rule (a pre-determined price point to sell thestock, to limit losses). As so often happens, he rodethe stock all the way to the bottom, hoping it wouldrecover.

Limiting your losses is central to successfulsharemarket investing. Ever noticed how many fundmanagers dump a stock as soon as it downgrades itsearning guidance? They take a small loss early, tolimit larger losses later.

My relative could have invested $2,000 across fourstocks (forget about transaction costs, for now). Hecould have had a 20% stop-loss on each trade. Forexample, a 10-cent stock is sold if it hits 8 cents, andthe stop-loss is lifted as the stock rallies, to protectprofits.

Using this basic technique, he would have limited theloss on the bad mining investment to $400 (plustransaction costs), instead of the $8,000.

Some simple rules on portfolio diversification, positionsizing (how much you allocate to each stock) andknowing when to sell go a long way to preservingcapital. Your investing confidence will stay intact ifyou limit losses when things go wrong and preservecapital.

4. Consider a funds approach

Too many first-time investors dive straight into stocksand forget about managed funds. In doing so, theyrisk poor portfolio diversification and take on toomuch risk.

Choosing an actively managed fund with a sound,long-term record and investment style is a good ideaat any time, and especially when your confidence isdown. You focus on picking the right manager, notthe stocks its portfolio holds.

Listed investment companies, a form of listed fundson ASX, are a good option for new investors withlimited funds to invest.

Plenty can go wrong with manager selection:yesterday’s star can be tomorrow’s underperformer.But it’s easier to pick a high-quality manager than tospot an exceptional company trading below its


intrinsic or fair value.

It’s also rewarding earning 10% or more from a fundthat holds dozens of stocks (thus reducing risk) andwhere the manager does the hard work.

Focus on choosing the right active and/or passivefunds for the core of your portfolio and you’ll soondevelop the confidence to buy stocks directly asportfolio satellites.

Having most of your portfolio held through fundsallows you to focus on fewer direct stocks where youhave a strong view on their prospects.

5. Stick to the best companies

Focus on high-quality companies when your investingconfidence is down. Do not chase mid-, small- ormicrocap stocks, unless there are compellingreasons.

As I outlined previously for The Switzer Super Report,exceptional companies tend to have a high and risingreturn on equity (ROE), low or no debt, strong surpluscash flow to fund growth internally, and a clear,sustainable competitive advantage.

Better still, look for exceptional companies withreliable, fully franked dividends. Their yield willeventually attract investors if the share price falls toofar and investors are confident the dividend will bemaintained.

Most of all, think like a company owner, not an assettrader or speculator. Focus on buying strongcompanies when they trade below their true value,often during market corrections or pullbacks thataffect most stocks.

A few good wins from exceptional companies willsoon boost your confidence. Your portfolio will benefitfrom higher returns at lower risk, your wealth will growand you’ll develop greater clarity on investmentdecisions.

Remember, confidence works both ways. It’s a killerwhen you blow your hard-earned savings on a stock.And an investment weapon when you have theconfidence to buy great funds or stocks when

everyone else is nervous.

Tony Featherstone is a former managing editor ofBRW and Shares magazines. The information in thisarticle should not be considered personal advice. Allprices and analysis at May 10, 2017.



Professional’s Pick – Helloworldby Ben Griffiths

What is the stock?

Helloworld Limited (HLO)

How long have you held the stock?

A very recent addition to our new EmergingCompanies Portfolio, so the position is about twomonths old.

What do you like about it?

Helloworld is an integrated travel services companythat participates in several key components of thetravel industry. They are a travel retailer (Helloworld –formerly known as Harvey World Travel), wholesalerof domestic/international/inbound tour travel productsand provider of corporate travel services.

The company had been in serious tumult for severalyears. Its management and its ownership haveundergone significant change as a result and this hadthe potential to damage the business model andculture irreparably. Install seasoned management, anethos of operational excellence/fiscal discipline and afavourable travel environment and you have theformula for a great turnaround story.

We like the continuing exposure to inbound tourismstrength (especially growth in Chinese and Indianmarkets), the prospect of material growth in revenuemargins, opportunities to increase the cross-sell ofwholesale services into the company’s retail channeland the chance to meaningfully grow their share oflocal corporate travel spend. All areas seeminglypassed over by previous management.

How is it better than its competitors?

It is not necessarily better, rather it is a different

service offering, starting from a long way back versusincumbent competitors. Its retail channel endured aname change and online competitive challenges fromwithin the group, somewhat disenfranchising itscustomer base whilst Flight Centre thrived with a wellrun, disciplined and identifiable offering. Helloworld isnow better placed as a retail offering and able toaccess internal wholesale product more effectivelyand profitably than ever before. In corporate travel,the company is now demonstrating its bona fidesfrom clients like PWC and the federal governmentand we expect they will slowly take share fromAMEX, Carlson Wagonlit and ASX listed CorporateTravel Mgt.

What do you like about its management?

Chief Executive, Andrew Burns and his wife Cinzia(also active in the business) collectively own around37% of the company, so they are seriously alignedwith a successful turnaround of the business. Todate, Burns has demonstrated an ability to effectchange with a sense of urgency. Restoration ofmorale amongst retail franchisees was a high on theturnaround triage and we believe he has done this.His travel experience has made for a redoubtableleader and his careful selection of replacement seniormanagers shows good judgement. His quick grasp ofwhat needed to be done has parlayed nicely intoresults to date and likely in the medium-long term. Heand his management team have adapted well topublic company life.

What is your target price?

We don’t set target prices but it is not unrealistic tothink that the company could easily be trading on 18xFY18 estimates. Assuming eps of ~ $0.29, that wouldequate to a $5.22 share price ($3.92 currently).


At what point would you sell it?

When we deem the stock expensive (in terms of PEratio) versus its forecast three years eps growthprofile. Emerging companies are best held for 3-5years for optimal returns.

How much has it added (subtracted) to youroverall portfolio over the last 12 months?

The stock was one of the first purchases our newfund, the Eley Griffiths Group Emerging CompaniesFund, made and we are marginally in front to date.

Where do you see the value?

At 13x FY18 earnings and forecast 25% growth ratefor the next three years, we see a well-priced growthcounter and that excludes sizable cost and revenuesynergies the company is pursuing. Investors need toremember that Helloworld is a turnaround story andthe travel industry is inherently cyclical but on ourrisk/reward assessment Helloworld screensfavourably.

Source: ASX. Data as at 10 May, 2017.



Buy, Sell, Hold – 3 bank downgrades and 1upgradeby Staff Reporter

In the good books

Commonwealth Bank (CBA) Upgraded to Addfrom Hold by Morgans B/H/S: 1/4/3

Cash earnings for the March quarter tracked in linewith Morgans second half expectations. Income wasa little softer than expected and credit impairmentcharges a little better than expected.

The broker upgrades to Add from Hold as a result ofrecent share price weakness. Cash earningsforecasts are reduced by -0.7% and- 0.5% for FY17and FY18 respectively. Target is lowered to $87.50from $88.00.

See downgrade below.

Henderson Group (HGG) Upgraded to Buy fromNeutral by UBS B/H/S: 1/4/0

Post shareholder approval of Henderson’s mergerwith Janus, UBS has swapped analysts and the ratinghas been upgraded to Buy on the basis it is atransformational deal, offering cost synergies and aperformance fee rebound.

Funds flow targets appear ambitious but UBS doesnot think the market is pricing in any growth. Targetrises to 275p from 240p.

Investa Office Fund (IOF) Upgraded to Hold fromLighten by Ord Minnett B/H/S: 0/2/2

The company has revalued its portfolio, booking a$0.30 uplift to net tangible assets to $4.80 a share.The board has also endorsed the potentialjoint-venture acquisition of the property groupplatform in the absence of a formal cash offer fromCromwell (CMW).

Ord Minnett observes the revised NTA cuts throughthe proposed indicative cash offer price of $4.75 ashare. The broker suspects the board is holding outfor $5 a share, reflecting more bullish investorsentiment in recent weeks.

Ord Minnett raises its recommendation to Hold fromLighten and the target to $5.00 from $4.75.

In the not-so-good books

AGL (AGL) Downgraded to Neutral fromOutperform by Macquarie B/H/S: 3/3/1

Macquarie believes the rapidly falling price ofrenewables is creating a new threat in the market,namely that the Renewable Energy Certificatesmarket is likely to be structurally oversupplied fromFY22.

Macquarie downgrades to Neutral from Outperform.Whilst the company is becoming light on capitalneeds, there are challenges such as retail pricingreviews, five-minute pricing and the potential RECprice collapse, as well as some softening of spotelectricity prices.

While none of these affect the near term theyundermine the scope of earnings growth and theterminal value of the business, in the broker’sopinion. Target is reduced to $25.00 from $25.81.

Asaleo Care (AHY) Downgraded to Sell fromNeutral by Citi B/H/S: 1/1/1

Citi has downgraded to Sell from Neutral with anunchanged price target of $1.50. The analysts do notbelieve investors are sufficiently appreciating the risksand challenges that lay ahead for the company.


The analysts are anticipating weak results ahead andthis can potentially lead to a derating for the shares.Following a strong rally, the shares are now deemedexpensive. The dividend outlook remains stable.

Commonwealth Bank (CBA) Downgraded toUnderperform from Neutral by Macquarie B/H/S:1/4/3

The March quarter trading result was short ofMacquarie’s expectations and, similar to peers, theimproving capital position and organic capitalgeneration were the key positives. Should underlyingresults remain under pressure, the broker envisagesrisk to the bank’s ability to maintain its premium overthe medium term.

Separately, Macquarie notes the Commonwealthbudget has put further pressure on the bank earningsoutlook and the proposed bank levy will take -4-5%off earnings. The broker has become increasinglycautious about the sector in recent months.

The main near-term upside risk is that the changesannounced in the budget are watered down, while thelonger-term theme underpinning the broker’s outlookremains in place.

Rating is downgraded to Underperform from Neutral.Target is reduced to $81 from $85.

See upgrade above.

CSR (CSR) Downgraded to Sell from Neutral byCiti B/H/S: 0/4/2

Citi downgrades to Sell from Neutral as concerns onhousing combine with FY17 margin weakness, theanalysts explain. Price target drops to $4.10 from$4.32.

The analysts do think there will be one more hurrah,with FY18 projected to be peak earnings year forCSR. As housing approvals fall, compression of peakFY18 earnings should follow, predict the analysts.

Crown Resorts (CWN) Downgraded to Neutralfrom Buy by UBS B/H/S: 2/4/0

Crown has outperformed the index by 21% since

posting its result in Feb, which revealed costreductions and a more simplified business structurefocused on domestic assets. The Melbourne andBrisbane casinos are now passed their capex peaks,UBS notes.

Sydney capex is next, and there is debt to repay, solittle likelihood of capital management. UBS warns ofthe prospect of weaker gaming floor trends anduncertainty with regard VIPs. With the stock nowtrading on a five-year high relative PE, the brokerdowngrades to Neutral.

Target falls to $13.19 from $13.39.

G.U.D (GUD) Downgraded to Sell from Neutral byCiti B/H/S: 0/4/1

Citi downgrades to Sell from Neutral as the shareprice has run well ahead of underlying fundamentals,say the analysts. They reiterate being positive on theprospects for the Automotive division, but clearly themarket is so too.

Earnings estimates have been increased by 1-6% forthe years ahead. Target price rises to $11.44 from$10.45. Citi continues to see Oates and Davey asnoncore businesses and believes GUD should focuson divesting these businesses, in addition to Dexion,which remains up for sale.

Incitec Pivot (IPL) Downgraded to Neutral fromBuy by Citi and to Underperform from Neutral byCredit Suisse B/H/S: 3/3/2

Citi analysts applaud management for delivering onits growth strategy thus far. They note the last ofthree key assets (WALA) is forecast to ramp up to itstargeted 800ktpa operating capacity by the end ofFY17.

But now what? The analysts seem to suggest a newstrategy is lacking. Luckily, the fertiliser price seemsto have bottomed. Increased forecasts are premisedon the latter. Target price gains 9c to $4.09.

Credit Suisse is not enthusiastic about the first halfresult, despite the company’s upbeat outlook. Thebroker believes balancing growth desires with themarket reality is likely to be the key to shareholder


returns.

The earnings outlook is little changed while theexplosives markets continue to be a volume story.Hence, Credit Suisse downgrades its rating toUnderperform from Neutral and reduces the target to$3.37 from $3.58.

JB Hi-Fi (JBH) Downgraded to Sell fromNeutral by Citi B/H/S: 3/3/2

Following analysis of US, UK and German retailerperformance around Amazon Prime launches plusCiti’s survey of price differentials in key categories,the analysts have cut long term earnings forecasts forJB H-Fi by more than -40%.

According to Citi’s proprietary survey, Amazon is-15% cheaper than Australian retailers across threemajor categories. Target price falls by -35% inresponse, to $18.50. Downgrade to Sell from Neutral.

Macquarie Group (MQG) Downgraded to Neutralfrom Buy by UBS B/H/S: 0/6/1

The FY17 result was ahead of UBS estimates. Theelement that was most pleasing for the broker wasthe delivery on costs.

The cost-to-income ratio fell to 68.5% in the secondhalf, continuing its downward trend from 85% inFY12. UBS envisages substantial operating leveragenow, with every -5% reduction in the cost-to-incomeratio providing 16% upside to earnings per share.

While the broker envisages material upside over time,the stock is up 53% over the last 12 months andongoing evidence of cost reductions needs to bedemonstrated to justify further appreciation. Rating isdowngraded to Neutral from Buy. Target is raised to$91 from $89.

Murray River Organics (MRG) Downgraded toHold from Add by Morgans B/H/S: 0/1/0

The company has made a material revision to FY17earnings guidance because of adverse seasonalconditions. Underlying guidance for EBITDA isdowngraded by -15-21%.

Morgans makes material downgrades to itsforecasts and stresses that short-term earningsuncertainty exist, as 80% of the harvest is yet to becompleted. The broker also observes gearing is nowat uncomfortable levels for a highly cyclical business.

Rating is downgraded to Hold from Add. Target isreduced to $0.68 from $1.57.

Myer (MYR) Downgraded to Underperform fromOutperform by Credit Suisse B/H/S: 1/5/1

Credit Suisse suspects the entry of TK Maxx andAmazon and, in the near term, a deterioratingdiscretionary spending environment are likely to bedifficult for the company to overcome.

The two businesses are both selling premiumbranded products, with TK Maxx at significantlydiscounted prices. The broker notes TK Maxx is tohave 35 stores in Australia after conversion of aformer Trade Secret stores, providing a solidgeographic footprint. Meanwhile, Amazon is likely toaccelerate a shift to consumers spending online.

The broker downgrades forecasts on the expectationof slower sales growth. Rating is downgraded toUnderperform from Outperform. Target is reduced to$0.82 from $1.44.

National Australia Bank (NAB) Downgrade toUnderperform from Outperform by MacquarieB/H/S: 3/1/4

Macquarie notes the Commonwealth budget has putfurther pressure on the bank earnings outlook and theproposed bank levy will take -4-5% off earnings.The broker has become increasingly cautious aboutthe sector in recent months.


Earnings pressure from the announcement isexpected to put the spotlight on NAB’s dividend andMacquarie envisages an increased likelihood thedividend will be cut. Rating is downgraded toUnderperform from Outperform. Target is reduced to


$31.50 from $34.00.

REA Group (REA) Downgraded to Neutral fromOutperform by Credit Suisse, to Neutral fromOutperform by Macquarie and to Sell fromNeutral by UBS B/H/S: 3/1/4

March quarter EBITDA growth of 20% was reportedwith Australian revenue growth accelerating to 16%.Credit Suisse observes this was a solid result,particularly given ongoing listing weakness in theperiod.

The broker reduces FY17 estimates for EBITDA by-2.4% because of higher forecast cost growth. Ratingis downgraded to Neutral from Outperform. Target israised to $65 from $60 to reflect higher longer-termforecasts

March quarter EBITDA was up 20% and in line withMacquarie’s expectations. Volume headwinds stillexist in Australia but have eased and the broker notesthe company is starting to cycle weaker comparables.

Macquarie observes the company has had a materialre-rating over the last six months on the back ofstabilising volumes and strong operatingperformance.

As a result, while remaining very comfortable with theoutlook, the broker believes this is now largelyreflected in the share price. Downgrade to Neutralfrom Outperform. Target is raised to $65.00 from$63.50.

REA posted another strong quarterly result despiteindustry headwinds, with volumes, mix and newproducts likely the drivers, UBS suggests. Theprospect is for continuing strong revenue growthahead, but increased costs will weigh on earnings.

The broker warns of the signal provided by materiallyweaker building approvals numbers for March. REA istrading on an FY18 PE of 30x versus 27x for Seek(SEK) and 21x for Carsales (CAR). While UBS likesthe long term growth story, near term a lower entrypoint would be desirable. Downgrade to Sell.

Treasury Wine Estates (TWE) Downgraded toUnderperform from Neutral by Macquarie B/H/S:

2/3/2

The recent investor briefing provided a betterexplanation of the future growth strategy forMacquarie but risks to growth exist as a companyrelies increasingly on new regions and products todeliver upside.

The company has also announced changes inmanagement, which flags a shift from restructuring togrowth in the US but also indicates to the brokerthe company is planning for a CEO succession andclouds the future.

Macquarie downgrades to Underperform fromNeutral. Target is $10.98.

Westpac (WBC) Downgraded to Neutral fromBuy by UBS and to Neutral from Outperform byMacquarie B/H/S: 2/5/1

Westpac’s result was slightly ahead of UBS butsubdued. As has been the case with the other banks,trading income provided a boost when revenuegrowth was flat. Capital was strong at 9.97% but thebroker questions whether it’s wise to offer adiscounted DRP when “unquestionably strong” is yetto be defined.

The main feature of the release was the revelation50% of the bank’s mortgage book represents interestonly loans. This implies a lot of work to get belowAPRA’s new 30% cap. UBS has thus cut its target to$32.50 from $33.50 and downgraded to Neutral.

Macquarie notes the Commonwealth budget has putfurther pressure on the bank earnings outlook and theproposed bank levy will take -4-5% off earnings.The broker has become increasingly cautious aboutthe sector in recent months.


Rating is downgraded to Neutral from Outperform.Target is reduced to $33.00 from $35.50.

Important: This content has been prepared without


taking account of the objectives, financial situation orneeds of any particular individual. It does notconstitute formal advice. Consider theappropriateness of the information in regards to yourcircumstances.


Questions of the Week – Woolworths (WOW)and Vocus (VOC)by Questions of the Week

Question: In Buy, Sell, Hold – what the brokers sayon 8 May 2017, Macquarie downgraded Woolworthsfrom Neutral to Sell. What’s your view, please? I holda large portion of my portfolio 2341 shares/21%, witha cost base price of $2.45.

Should I sell some or do the dividends make it a goodhold?

Answer (by Paul Rickard): The market seesWoolworths as a recovery stock, but I think it has hada large part of the run up. I think it is rather expensive– trading on a forecast multiple of 25.1 times FY17earnings, 21.8 times FY18 earnings. Forecastdividend yield of 2.7% and 3.2% for FY18.

So, I am in the “reduce” camp.

The question you may want to ask is: what are yougoing to replace it with?

Question: I would like your opinion on VocusCommunications (VOC). I was a long-timeshareholder of M2 Communications, which recentlymerged with Vocus. I watched the share price gethammered and I’m not sure if it’s a structural issuewith the company (massive debt and reducedmargins), or whether it’s short-term indigestion fromthe mergers. I hate to sell companies that have had amassive fall, but I don’t want to hang on to it if it’s nolonger the top quality company I originally bought. Itcurrently makes up 7.5% of my portfolio, down fromaround 16%. Your thoughts are appreciated.

Answer (by Paul Rickard): Vocus has lost any shredof credibility it once had, so much so that every majoranalyst now has a Neutral or Sell rating (no Buys).

It will take a long time to rebuild market trust.

Analysts currently have a target price of $2.72.

I suppose I would be a reluctant holder, but don’texpect a massive or speedy recovery. There is an oldadage in markets: “your first loss is your best loss”.Interestingly, that seems to work about eight out of 10times.

If you need some clear air, sell some to get yourweight down – otherwise, hang on and hope!


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Thursday 11 May 2017 The Beam me up, Scotty, Budget

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