Rudi’s View: Link Admin, Clinuvel Pharma & Altium

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In this week's Weekly Insights (this is Part Two):

-All About Dividends
–Royal Commission: Ongoing Impact
-Quote Of The Week
–No Weekly Insights Next Week
-FNArena's Corporate Reporting Monitor
-June Rebalance For ASX200 Index
-Conviction Calls (with update)
-Rudi On Tour
-AIA Conference Special

[Non-highlighted parts appeared in Part One on Thursday]

By Rudi Filapek-Vandyck, Editor FNArena

Royal Commission: Ongoing Impact

A recent encounter with an industry veteran has taught me the domestic industry of funds managers and financial planners is most likely facing even more upheaval and transformation than I had assumed previously – see also Weekly Insights last week, "Value & The Eye Of The Beholder".

On one hand we have the cohort of aging pensioners and retirees who, faced with Labor's new franking ideas and low returns in general, will be eying further reduction in costs, where possible. This points to direct shares ownership or ETFs, but certainly away from actively managed funds whose costs are higher and not necessarily offering a better return (certainly not for income oriented investors).

On the other hand, there already is pressure on financial planners to lower the costs of managing the income generating capital. Since financial planners like to retain their own margin, here too a trend is being established towards ETFs, away from actively managed funds.

Thirdly, industry super funds are also taking another look at their costs and allocation of funds with outside managers. Their problem is the size of the Australian share market, which remains rather small, in particular at the top. In practice, this translates into lots of overlap in share ownership between internal and external managers, as well as between the external managers.

Meanwhile, Australian investors continue to redirect funds away from retail funds, owned by AMP ((AMP)) and the banks, or otherwise. Here the winners are industry funds. Recent data suggest a cumulative $7.5bn in funds flowed out of AMP, National Australia Bank ((NAB)), Westpac/BT ((WBC)) and ANZ Bank ((ANZ)) in the six months to March 2019.

Morgan Stanley's industry sources suggest many industry funds are budgeting for similar flows out of retail funds and under their management in the six months ahead. Underlying growth in membership for industry funds has lifted post Royal Commission to more than 3.5% from less than 1% previously. This is a sizable step up.

One of the obvious beneficiaries of the latter trend should be Link Administration ((LNK)) whose share price has been creeping up from a low near $6.40 in December to $7.80 more recently. Morgan Stanley estimates every new member of an industry fund whose member accounts are administered by Link translates into an extra $50 per annum in revenues.

While this doesn't sound like much, the analysts add 3% growth in membership thus means $10m extra for Link, which equals in excess of 4% of the company's earnings.

Link Administration is included in my personal selection of All-Weather Performers (see website) and has been part of the FNArena/Vested Equities All-Weather Model Portfolio for quite a while (with the intention of keeping it there for much longer).

Quote Of The Week

In 2015 I published the book "Change. Investing in a Low Growth World" and ever since in my writings and on stage presentations I have tried to convene the message that investors should adapt and adjust, because so many changes are descending upon us, the past surely cannot be relied upon to assess investment opportunities.

To my utter surprise, I do not find my core message has been widely accepted and adopted. Yet, on my own observations, changes and disruptions are increasingly becoming a deciding factor for ASX-listed companies. And I still think this is yet only the beginning of what the decade ahead is going to serve up.

On Tuesday morning, prior to writing this week's Weekly Analysis, I stumbled upon the following quote from market analysts at Schroders Australia: "We must try and identify why and how a business has made money in the past, and how this will change in the future".

My advice to you all is: print it out and place it somewhere on your desk. This principle should now be part and parcel of your own research and portfolio strategy. It'll increasingly prove its value in the years ahead. Read Citi's downgrade for Unibail-Rodamco-Westfield ((URW)) in the Australian Broker Call Report on Tuesday and accept these tectonic changes are slowly developing for a long time, before kicking into acceleration.

I think I'll include this quote in my next set of PowerPoint slides, unless I discover a better one before then.

In addition, followers of my research into All-Weather Performers (see also website and further below) already know I put a lot of value on company quality.

Of course, there is no general consensus about what exactly corporate quality actually means or  how it it is measured, but every time someone has an attempt to pick a similar selection of High Quality Stocks in Australia I cannot help but noticing their list has a large overlap with mine.

Rob Tucker's of Chester High Conviction Fund is the latest of such lists I have come across, and my observation has once again been confirmed.

Tucker's selection of the best quality businesses among large cap stocks in Australia consists of the following: CSL ((CSL)), Seek ((SEK)), ASX ((ASX)), REA Group ((REA)), Macquarie Group ((MQG)), ResMed ((RMD)), Aristocrat Leisure ((ALL)), Xero ((XRO)), and Transurban ((TCL)).

No Weekly Insights Next Week

Next week, starting Monday 20th May, I am visiting Toowoomba in Queensland (first time ever) to present to local investors. Hence there will be no Weekly Insights that week. The next update will be written and published in the week May 27-31.

Also, in case you missed it, Australia's one and only business & finance TV channel, Your Money, will broadcast its final hour on Thursday this week (16th May). This also gives me the opportunity to move back to the original rhythm of writing Weekly Insights on Monday.

FNArena's Corporate Reporting Monitor

Just a reminder to all, FNArena is running a Corporate Results Monitor, which gets extremely busy throughout February and August, but the overview with regular updates runs all-year around and can be visited (even without a paid subscription) at its designated section on the website:

https://www.fnarena.com/index.php/reporting_season/

For those who like to go back to, and analyse, past Reporting Seasons, there is a special section with past reports, data and updates. This section is accessible by paying subscribers only.

June Rebalance For ASX200 Index

Standard & Poor's will be making announcements about changes to Australia's most followed share market index on the morning of Friday, June 14. Past experience teaches us that inclusions and exclusions for that index in particular can have a noticeable impact on relevant share prices.

Such impact, remind analysts at Morgan Stanley, can be felt and measured from up to twenty days prior to the event.

On Morgan Stanley's assessment, the June rebalancing of the ASX200 is likely to see the inclusion of Clinuvel Pharmaceuticals ((CUV)) with most likely loser graphite disappointer Syrah Resources ((SYR)). Other possible inclusions are Cooper Energy ((COE)) and/or Service Stream ((SSM)) which means Seven West Media ((SWM)) and Emeco ((EHL)) could lose their spot as well.

Morgan Stanley also thinks the ASX100 could be equally due a few changes with Altium ((ALU)) likely to be included in a swap for Adelaide Brighton ((ABC)) with lower probabilities ascribed to potential inclusion of Beach Energy ((BPT)) and/or Afterpay Touch ((APT)) which would likely translate into wealth managers Pendal Group ((PDL)) and/or Janus Henderson ((JHG)) being kicked out of the Top100.

Morgan Stanley is not anticipating any changes to the S&P/ASX20 or 50, while the S&P/ASX300 is only reveiwed semi-annually in March and September.

Conviction Calls

[This section is largely a repeat from Part One, with two last minute additions about Macquarie on ReadyTech Holdings and stockbroker Morgans' list of stocks to avoid]

"Market-leading student management, attitudinal assessment and profiling systems for tertiary education and training providers";"Mission-critical people management software for educators and employers" and "Ready for the Future of Work" are just a few quotes  from the corporate website of newly listed ReadyTech Holdings ((RDY)).

The shares listed on the ASX on April 17 with a price of $1.78 only to subsequently fall to $1.65 but, apparently, appearances do mislead or maybe this is simply a case of bad timing? Earlier press reports had it that the company had been aiming for a listing in 2018, but a severe change in the overall investment climate put that idea to bed at the time.

Analysts at Wilsons initiated coverage this week and immediately added the stock to their select list of Conviction Buys. Wilsons sees double digit growth and expansion in PE multiples ahead.

At face value, the company does have several buzzwords to offer that sound extremely attractive in the present context, including 85% recurring revenues, Software-as-a-Service (SaaS), mission critical nature of software, uncommonly high operating margins and, not to be dismissed, provider of education and employment software.

Wilsons sees a robust growth outlook, starting from an attractive valuation. The maiden Buy (with Conviction) rating is accompanied by a twelve month price target of $2.35. The two lead managers of the company's float were Macquarie and Wilsons. It'll be interesting to note whether Macquarie's initiation -no doubt not far off- is able to match the bullish enthusiasm at Wilsons.

ReadyTech Holdings is profitable and on Wilsons projections will grow earnings per share (EPS) by 114% and 34.7% in the two years ahead (FY20 and FY21) while the company is also expected to start paying out annual dividends from next year onwards (100% franked).

LAST MINUTE ADDITION: On Friday morning, Macquarie released their own initiation of coverage report, starting off with a Buy recommendation accompanied by a price target of $2.20.

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Meanwhile, portfolio managers at stockbroker Morgans reported they have been reviewing several positions, including in major banks, Transurban ((TCL)), Cleanaway Waste Management ((CWY)), Corporate Travel ((CTD)) and Rio Tinto ((RIO)), and ultimately decided to not make any changes, at least not for the Balanced Model Portfolio.

In addition: "Cash holdings remain flexible enough to capture any opportunities on weakness."

The stockbroker's Growth Portfolio added ANZ Bank ((ANZ)), AP Eagers ((APE)) and more of Treasury Wine Estates ((TWE)) while trimming positions in Rio Tinto and Megaport ((MP1)), the latter post SPP.

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LAST MINUTE ADDITION: Stockbroker Morgans has also released three lists of stocks it considers either a downright Sell, too expensive or "no need to be there".

Stocks considered a Sell are:

-ASX ((ASX))
-AGL Energy ((AGL))
-Fortescue Metals ((FMG))
-Newcrest Mining ((NCM))
-TechnologyOne ((TNE))
-Villa World ((VLW))

The list of "no need to be there" stocks includes:

-NextDC ((NXT))
-JB Hi-Fi ((JBH))
-GWA Group ((GWA))
-Coca Cola Amatil ((CCL))
-Bellamy's Australia ((BAL))
-Blackmores ((BKL))
-Vocus Group ((VOC))
-Sandfire Resources ((SFR))

And the list of stocks deemed too expensively priced, with Morgans explicitly recommending investors should at least trim holdings and take some profits:

-APA Group ((APA))
-Transurban ((TCL))
-Magellan Financial ((MFG))
-Aurizon Holdings ((AZJ))
-Atlas Arteria ((ALX))
-Coles Group ((COL))
-InvoCare ((IVC))
-Ramsay Health Care ((RHC))
-Ansell ((ANN))
-a2 Milk ((A2M))
-Inghams Group ((ING))
-Orica ((ORI))
-Centuria Industrial REIT ((CIP))
-Hotel Property Investments ((HPI))
-Nanosonics ((NAN))

AIA Conference Special

Following on from my regular attendances in years past, I shall be participating in the upcoming Australian Investors Association's (AIA) National Conference at the Marriott Resort and Spa, Surfers Paradise, Qld, July 28-31.

I will be busy too. Apart from a one hour presentation on the approaching August reporting season, I am part of the share market panel "Buy, Sell or Hold" on Monday evening, as well as co-host of the Conference Dinner on Tuesday.

FNArena subscribers and readers who like to attend can do so through a Special Promotion offered by the AIA, but which expires on May 31st. The Special Offer includes three months of free AIA membership and a discount on entry tickets to the Conference.

To take up this offer, investors need to Join using this link https://administration.investors.asn.au/civicrm/?page=CiviCRM&q=civicrm%2Fcontribute%2Ftransact&reset=1&id=3.

After you have joined, you'll need to Register for the conference using this link https://administration.investors.asn.au/civicrm/?page=CiviCRM&q=civicrm/event/ical&reset=1&list=1&html=1

This year's Conference Theme is Boom. Boom. Boom…?? Investing beyond the boom.

Rudi On Tour In 2019

-ASA Toowoomba, Qld, May 20
-U3A Investor Group Toowoomba, Qld, May 22
-AIA Adelaide, SA, June 11
-AIA National Conference, Gold Coast, Qld, 28-31 July
-AIA and ASA, Perth, WA, October 1

(This story was written on Tuesday 14th May 2019. Part One was published on the day in the form of an email to paying subscribers, and again on Thursday as a story on the website. Part Two appears on the website on Friday).

(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 $420 (incl GST) for twelve months or $235 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.) 

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