Rudi’s View: Treasury Wine, PWR Holdings, Star Entertainment

This story features ARISTOCRAT LEISURE LIMITED, and other companies. For more info SHARE ANALYSIS: ALL

In this week's Weekly Insights (published in two separate parts):

-Not In The Mood
-Conviction Calls: CLSA, Morgans, Wilsons, CS, Ord Minnett, Citi
-Post August Share Price Impact
-CBA And The Premium Gone (Vol 3)
-Rudi On BoardRoomRadio (Updated)
-Post August Broker Research Nuggets
-2016 – L'Année Extraordinaire
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour

[Note the non-highlighted items appeared in part one]

Conviction Calls: CLSA, Morgans, Wilsons, CS, Ord Minnett, Citi

By Rudi Filapek-Vandyck, Editor FNArena

The Australian share market offers exposure to some high quality, genuinely strong growth stories. Think Aristocrat Leisure ((ALL)), a2 Milk ((A2M)), Corporate Travel ((CTD)) and Altium ((ALU)), to name a few. One of the more contentious names is Treasury Wine Estates ((TWE)). Having first disappointed investors in its ex-Foster's existence, the stock has nearly tripled since 2015 and yet another strong performance in August has ignited the next leg upwards for the shares.

The stock has never traded without a certain level of controversy and today certainly is no different. Stock Analysis on the FNArena website shows out of the seven stockbrokers covering the company, only Morgan Stanley and Ord Minnett have a positive rating. In the latter's case it's Accumulate, the number two level, instead of the highest rating which is Buy.

Only Morgan Stanley has a price target above today's share price. This smacks of a comparison with Cochlear ((COH)), yet another prime growth success whose share price is constantly above stockbroker valuations; thus nobody ever likes it, but shareholders cannot but keep smiling as the share price continues to rally higher.

Cochlear shares appreciated 2.5x since early 2014. Admittedly, they had a much tougher time during the three years prior.

One of the unwavering supporters of Treasury Wine, CLSA, thinks investors can still jump on board and enjoy further strong gains. The secret, so to speak, according to CLSA lies within the margin. The analysts firmly believe, with conviction, that management still has multiple levers to pull to push the operational margin to a level closer to that of the competition.

This, says CLSA, is not well understood by the market. Hence general scepticism and a sense of: surely this share price must come back down to earth shortly? Not so, predicts CLSA who remains confident enough to declare the stock a Conviction Buy with a price target of $17.

On the other side, Citi's latest update on the company represents the opposing side of the argument with Citi analysts stating the company is being treated like a luxury stock but 75% of all products sold are commercial which is enduring price and margin pressures. Citi analysts point out price per case has remained stagnant for the past two years. The analysts cannot see how the current valuation stacks up. They certainly do not share CLSA's conviction. Hence why Citi's rating remains Sell with a twelve month price target no higher than $10.90.

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Over at stockbroker Morgans, the list of High Conviction Stocks has seen the addition of PWR Holdings ((PWH)), Aventus Retail Property Fund ((AVN)) and NextDC ((NXT)). These three new inclusions join ResMed ((RMD)), Westpac ((WBC)), Oil Search ((OSH)), Motorcycle Holdings ((MTO)), Bapcor ((BAP)) and Australian Finance Group ((AFG)).

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Wilsons has decided to remove Rural Funds Group ((RFF)) from its Conviction Calls. The reason is a steep climb of the share price. Wilsons remains attracted to the business model and long term growth prospects but for now the rating has moved to Hold from Buy.

Rural Funds Group has been replaced with Ruralco ((RHL)) and Alliance Aviation ((AQZ)). Both join EML Payments ((EML)), Afterpay Touch ((APT)), Elmo Software ((ELO)), Class ((CL1)), Collins Foods ((CKF)), Ridley Corp ((RIC)), ImpediMed ((IPD)), Nanosonics ((NAN)), SomnoMed ((SOM)), Opthea ((OPT)) and Pinnacle Investment ((PNI)).

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Over at Credit Suisse, the list of Australia Top Picks no longer includes Challenger ((CGF)) and CSL ((CSL)). Instead, Premier Investment ((PMV)) and Speedcast International ((SDA)) have been added. Remaining on the list: ALS Ltd ((ALQ)), Boral ((BLD)), Computershare ((CPU)), Caltex ((CTX)), Fairfax Media ((FXJ)), iSelect ((ISU)), Lend Lease ((LLC)), Nine Entertainment ((NEC)), Qantas ((QAN)), Star Entertainment ((SGR)) and Southern Cross Media ((SXL)).

Credit Suisse's Top Picks list also contains 2x short ideas (i.e. expected to see a decline in share price): Brambles ((BXB)) and IDP Education ((IEL)). The latter in particular must be hurting.

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Small cap specialists at Ord Minnett put forward two key picks amongst small cap industrials; one positive (Buy) and one negative (Lighten). Top Buy Pick is salmon farmer Huon Aquaculture ((HUO)) whose undemanding valuation and prospects for a higher wholesale salmon price makes for an irresistible combination with Ord Minnett's forecasts currently above market consensus.

On the negative side, the broker doesn't like Collection House ((CLH)) with too high a gearing affecting the company's ability to bid on meaningful one-off sales, says Ord Minnett.

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Finally, Citi has elevated Link Administration ((LNK)) as its favourite stock among diversified financials on the ASX. One key factor is the share price has been held back on apparent market concerns about growth in Link's funds admin operations. Plus the company's risk profile has increased post the transformational acquisition of CAS in the UK.

Citi analysts are not completely singing from a different song sheet on both issues, but they nevertheless are of the view that Link's share price deserves to be higher, also because they see potential for upside surprise.

Janus Henderson ((JHG)) is Citi's number two pick in the sector.

Note to paying subscribers: updates on Conviction Calls have been a regular feature in my Weekly Insights stories since early February this year, with only a rare exception. For past updates: see Rudi's Views on the FNArena website.

Rudi On BoardRoomRadio (Updated)

The latest audio interview (not to be confused with last week's):

https://boardroom.media/broadcast/?eid=59b75a3d0f7013455d23aa33

Post August Broker Research Nuggets

Local reporting season in August wasn't great, rather disappointing really, with banks and resources companies performing okay, but industrials revealed their soft spots, in the view of Deutsche Bank. The challenge for the market ahead is FY17 might be as good as it gets.

In practical terms, the analysts suggest a subdued reporting season means the local share market is in dire need of an international, macro-driven catalyst to decisively move higher. They still believe 6000 for the ASX200 by year-end is possible, but then their target for June 30, 2018 also sits at 6000.

Deutsche Bank strategists do point out current forecasts are that profit growth shall slow significantly in the year(s) ahead, which explains why FY17 growth has likely marked the peak, for the time being, but they also note if commodity prices remain steady at current levels, this will provide a big boost to profit forecasts, allowing resources companies to still achieve decent growth.

Deutsche Bank's overweighting towards "value" stocks in August didn't work out, but the strategists remain overweight Resources. Other observations made are that conviction among local analysts seems low, high growth, high PE stocks performed well, but commodities related exposure trumped all, while many of the "cheap" stocks (telcos, retailers) simply became cheaper in August.

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Equity strategists at Citi share the view of their peers at Deutsche Bank. On their assessment, August results have brought the share market back down to earth. Outside the resources sector, Citi found little to cheer about, but the strategists remain confident higher for longer commodity prices will translate into more profits for the sector, and this underpins the forecast the ASX200 should still be able to reach 6400 by mid next year.

The table below shows how forecasts have changed at Citi pre- and post August reporting season. The strategists draw confidence from the fact that growth forecasts have become more realistic, while staying positive, and the outlook for reasonable return (double digit percentage total for the year ahead) should continue to support Australian shares.

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Analysts at Wilsons believe it was a reporting season in which quality proved its mettle, and outperformed. This including many of the companies on Wilsons' Conviction List, they point out.

Amongst the stand-out results were, on Wilsons' assessment, Afterpay Touch ((APT)), MYOB ((MYO)), Autosports Group ((ASG)), Noni B ((NBL)), Citadel Group ((CGL)) and Zenitas Healthcare ((ZNT)).

For the most disappointing result of the season, Wilsons analysts point at Mayne Pharma ((MYX)) which subsequently was downgraded to Hold with forecasts cut -20-25%.

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On Goldman Sachs' assessment, relative to consensus expectations the August 2017 reporting season was one of the weakest statistically in a dataset that goes back 22 years. The analysts found few genuinely good news stories, but a long list of stocks that de-rated significantly on the back of disappointing updates and analysts reducing forecasts.

Not helping matters is that implied margin expansion in market consensus forecasts might still be too optimistic. Goldman Sachs suspects further reductions might become necessary as August revealed Australian firms are facing rising wages, higher input costs (power in particular) and rising competition.

While increasing capex intentions have been mentioned as one of the season's positives, Goldman Sachs analysts note "a large portion of the spending appears to be being directed to defend existing positions or to offset rising cost bases suggesting incremental returns will be well below the market's current return on capital".

The analysts note dividend growth is now expected to be negative in twelve months' time, though admittedly Telstra's ((TLS)) big cut has a big impact on the general numbers.

As shown in the graph below, Australian companies are still returning more cash to shareholders (10% above the decade average) and they continue underspending on M&A and on capex.

Contrary to the general euphoria (in some corners) about capex intentions picking up, Goldman Sachs points out total capex in FY17 was -5% below the level spent in FY07; that's ten years ago. In contrast, total dividends paid out were 43% higher. One of the culprits in this story are, of course, commodity related companies; see graph below.

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Stockbroker Morgans found the August reporting season "steady but uninspiring", accompanied by the observation the stock valuations that investors are paying for earnings remain elevated. Morgans cautions against expectations of above-average returns, but at the same time, there are still plenty of good news opportunities out there, acclaims the stockbroker.

Stand-out opportunities, in Morgans' view, include Ansell ((ANN)), IPH Limited ((IPH)), PWR Holdings ((PWH)) and Jumbo Interactive ((JIN)).

Further putting a dampener on potentially too rosy expectations, Morgans is of the view that positive economic data have thus far failed to translate into cyclical tailwinds and as such the Australian share market is lacking a genuine catalyst for the time being, probably meaning the market will remain range-bound for now.

2016 – L'Année Extraordinaire

It was quite the exceptional year, 2016, and I did grab the opportunity to write down my observations and offer investors today the opportunity to look back, relive the moments and draw some hard conclusions about investing in the world today.

If you are a paid subscriber to FNArena, and you still haven't downloaded your copy, all you have to do is visit the website, look up "Special Reports" and download your very own copy of "Who's Afraid Of The Big Bad Bear. Chronicles of 2016, A Veritable Year Extraordinaire" (in PDF).

For all others who still haven't been convinced, eBook copies are for sale on Amazon and many other online channels. You'll have to visit a foreign Amazon website to also find the print book version.
 

All-Weather Model Portfolio

In partnership with Queensland based Vested Equities, FNArena manages an All-Weather Model Portfolio based upon my post-GFC research. The idea is to offer diversification away from banks and resources stocks which are so dominant in Australia, while also providing ongoing real time evidence into the validity of my research into All-Weather Performers.

This All-Weather Model Portfolio is available through Self-Managed Accounts (SMAs) on the Praemium platform. For more info: info@fnarena.com

Rudi On TV

This week my appearances on the Sky Business channel are scheduled as follows:

-Tuesday, 11.15am Skype-link to discuss broker calls
-Thursday, noon-2pm
-Friday, 11.15am Skype-link to discuss broker calls

Rudi On Tour

– I will be presenting in Adelaide on November 14th to members of Australian Investors Association and other investors, 7pm inside the Fullarton Community Centre, 411 Fullarton Rd, Fullarton. Title of presentation: Investing In A Slow Growing World – An Update

(This story was written on Monday 11th September, 2017. It was published on the day in the form of an email to paying subscribers at FNArena. This is part two. The first part was sent as an email to subscribers on Monday and published on the website on Wednesday).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via the direct messaging system on the website).

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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
– Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.

Subscriptions cost $380 for twelve months or $210 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index2.cfm?type=dsp_signup

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

P.S. I – All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to Portfolio and Alerts in the Cockpit and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website. 

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