Tag Archives: Banks

article 3 months old

Weekly Broker Wrap: Mobiles, Retail, Insurance And The Australian Dollar

-Handset repayments need scrutiny
-Competition tougher for supermarkets
-Homemakers top non-food retail
-Majors lose share in life insurance
-Pressure on AUD continues
 

By Eva Brocklehurst

Mobiles

Mobile sector activity was modest in August, with price cuts by all four major operators. Macquarie expects service revenues can continue to grow over the medium term, given the increasing demand for data. Rates of growth may be slower, nonetheless. The broker believes the current trends warrant close attention with regard to revenue per unit and handset subsidies.

Optus ((SGT)) and Vodafone reduced monthly handset repayments by an average of 5.0% and 6.0% respectively over the last two months. This is a turnaround from a rising trend since 2013. Morgan Stanley also believes this should be monitored, as it could negatively affect industry profitability, particularly when combined with a weakening Australian dollar. Most handsets are priced in US dollars.

Both brokers will be monitoring the launch of the new iPhone this month, particularly in the case of Telstra ((TLS)), which continues to increase handset repayments on average. Morgan Stanley forecasts Telstra will maintain a 40% mobile earnings margin in FY16 and decreasing handset repayments would likely have a negative influence.

Retail

Australian supermarket margins are unwinding and Morgan Stanley concludes consensus estimates remain too optimistic. Global average supermarket earnings margins are around 3.0%, compared with 5.4% and 7.8% for Woolworths ((WOW)) and Coles ((WES)) respectively.

The broker lowers earnings margins for FY20 for Woolworths and Coles to 5.5% and 4.7%, respectively. Morgan Stanley observes that the discounters' market share in Australia is only just going back to 1990's levels, a time when Bi-Lo, Franklins and Food for Less were in operation.

Aldi and Costco may appear to be aggressively taking share but at the 15% forecast by FY20 this remains less than the share of 20% the formerly mentioned discounters enjoyed. Nevertheless, Morgan Stanley expects the two new arrivals will achieve a similar market share and the Australian market is over-estimating the ability of the established chains to react.

Morgan Stanley calculates that returns for Australian supermarkets are high by global standards but are now decreasing. This has attracted players into the industry with deep pockets and vast experience in operating in different markets, with low return hurdles and disruptive discounting models.

Meanwhile, in the non-food department, Deutsche Bank considers conditions are the best they have been for some time. Non-food retail is growing at its fastest rate since 2008, which the broker attributes to strength in housing and some benefit from a weaker Australian dollar. However, not all categories are equal. Harvey Norman ((HVN)) is the broker's top pick, given late-cycle benefits from its exposure to homemaker categories.

Flight Centre ((FLT)) is attractive because of its valuation and improving outlook, while Dick Smith ((DSH)) also appeals on valuation. Wesfarmers is not considered cheap enough, although a solid FY16 is expected. Myer ((MYR)) has fallen since its FY15 results and, while there is still execution risk, Deutsche Bank notes some balance sheet head room and upgrades to Hold from Sell.

Retailing is about to get harder, in Credit Suisse's prognosis. The household goods sector may have a relatively more favourable outlook and should remain strong over 2015. Growth is expected to slow in other areas with the broker noting both clothing store sales and groceries weakened through the second half of FY15.

JB Hi-Fi ((JBH)) was the only company in the listed household goods sector to record an expansion in gross margin in FY15 for its Australian operations. Credit Suisse warns that consensus earnings forecasts for FY16 fell consistently throughout the past 12 months for the majority of retailers.

Insurance

Macquarie has reviewed and ranked Australian general insurers on premium growth, margin, capital flexibility and risks. QBE Insurance ((QBE)) tops the order of preference, with currency and interest rate tailwinds. Suncorp ((SUN)) is second, with strength in value metrics and the best expense ratio. Insurance Australia Group ((IAG)) brings up the rear and appears constrained without an imminent capital return, amid concerns about profitability of opportunities in Asia.

Changes in the remuneration of life insurance providers will start to take place in the lead up to the effective introduction of new requirements from January 2016. As reform takes place and lapse/claim challenges settle, UBS believes AMP ((AMP)) is right to prioritise margin over growth.

There are no signs the major players are stepping up to take back market share in life insurance. The broker observes AMP, National Australia Bank ((NAB)) and Commonwealth Bank ((CBA)) have given up 4.0% market share over the past two years. UBS does not expect this trend will turnaround in the medium term.

As a result, in-force growth for the three remains in a negative 1.0% to plus 2.0% range. UBS accepts, as new remuneration structures gain broader market acceptance, this may change. Still, the broker continues to forecast low single-digit in-force growth for AMP out to 2018.

Australian Dollar

With China and the rest of the global economy likely to stay weaker for longer, Asian currencies will probably fall further, analysts at Commonwealth Bank maintain. The Australian dollar is now expected to ease to US65c by the first quarter next year. The analysts foresee a risk for a larger fall to US60c in 2016.

The main reason underpinning the downgrade to forecasts is a pushing back of economic recovery in China. 2016 GDP growth is forecast to be 6.5%, down from prior forecasts of 6.9%. The main drag on China is decelerating growth in heavy industry and poor export growth, reflecting weak external demand. A hard landing for China is not expected, however, because a significant amount of policy stimulus is in place.

Other reasons for downgrading forecasts include the fall out for Asian economies from the easing back of growth in China, and the likelihood of subdued commodity prices as global demand fails to recover swiftly, following the largest global mining investment boom in four decades which continues to generate increased global supply.
 

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article 3 months old

No Point In Chasing CBA

 

Bottom Line 09/09/15

Daily Trend: Up
Weekly Trend: Down
Monthly Trend: Down
Support levels: $70.99 - $69.12
Resistance levels: $88.40 / $96.17

Technical Discussion

Commonwealth Bank ((CBA)) is Australia's leading provider of integrated financial services including retail banking, premium banking, business banking, institutional banking, funds management, superannuation, insurance, investment and sharebroking products and services. The Group is one of the largest listed companies on the Australian Securities Exchange. It provides a full range of retail banking services including home loans, credit cards, personal loans, transaction accounts, and demand and term deposits through its Commonwealth Bank and Bankwest brands. The Group has leading domestic market shares in home loans, personal loans, retail deposits and discount stockbroking, and is one of Australia's largest credit card issuers. For the year ending the 30th of June 2015 interest income increased 1% to A$34.1B. Net interest income after loan loss provision increased 4% to A$14.81B. Net income applicable to shareholders increased 5% to A$9.01B.  Broker/Analyst consensus is a comprehensive "Sell".  The dividend yield is currently 5.8%.

Reasons to be cautious longer term:
? Further capital raising is feasible.
? Leveraged to a low interest environment.
? The March quarter came in below consensus.
? Margin pressure on mortgages has been increasing.

It's just over a couple of weeks since our last look at CBA although back then we concentrated on the weekly time frame and therefore the larger degree patterns. These portended a decent bounce, albeit within a large consolidation pattern – likely a triangle.  The ideal situation was to see short-term weakness taking price into the area of confluence around $71.00 before reversing higher.  In that respect we couldn't have asked for too much more with slightly lower levels being tagged over the past couple of weeks.  Over the past few days a solid rally has been unfolding and although it's far too early to be getting overly confident in regard to a multi-month trend unfolding this would be the perfect world scenario from a pure pattern perspective. 

We also noted Type-A bullish divergence last time although at that juncture it hadn't triggered.  It has now which opens the door for the recent show of resilience to continue for the foreseeable future.  Incidentally, there is also bullish divergence evident on the weekly time frame (not shown) which should support price.  Bullish divergence doesn't necessarily portend a strong impulsive movement higher but it does suggest that the prior pivot low will not be overcome until our oscillator rotates all way back into the overbought position which on the weekly chart isn't going to happen overnight.  In summary, there is plenty of confluence and positive patterns showing here.  All that's left is for price to prove itself over the coming weeks.

Trading Strategy

One of the reasons for advocating caution in the amount of trades taken is because greater volatility increases the chances that our initial stop will be tagged during normal market noise which unfortunately is exactly what's transpired here.  We recently initiated positions with the initial stop set beneath the strong reversal bar on the 25th of August.  As can be seen that low was penetrated by the slimmest of margins last week before buyers stepped in.  The end result is a little bit of frustration and a small loss although at that time it was a valid set up with a nice risk/reward.  I don't see any reason to chase price higher from here although a micro consolidation pattern or even a small a-b-c retracement over the coming days would gain our interest and provide another low risk entry.
 

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not by association FNArena's (see our disclaimer).

Risk Disclosure Statement

THE RISK OF LOSS IN TRADING SECURITIES AND LEVERAGED INSTRUMENTS I.E. DERIVATIVES, SUCH AS FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER YOUR OBJECTIVES, FINANCIAL SITUATION, NEEDS AND ANY OTHER RELEVANT PERSONAL CIRCUMSTANCES TO DETERMINE WHETHER SUCH TRADING IS SUITABLE FOR YOU. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF SECURITIES AND DERIVATIVES MARKETS. THEREFORE, YOU SHOULD CONSULT YOUR FINANCIAL ADVISOR OR ACCOUNTANT TO DETERMINE WHETHER TRADING IN SECURITES AND DERIVATIVES PRODUCTS IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CIRCUMSTANCES.

Technical limitations If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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article 3 months old

Are Westpac’s Goals Too Ambitious?

-Is 15% return target achievable?
-Restructuring charges unsettling
-Merit in reducing branch numbers
 

By Eva Brocklehurst

The banking industry is experiencing a rapid change in technology and Westpac Banking Corp ((WBC)) has risen to the challenge by renewing its focus on customer service.

Efficiency was the buzz word at the bank's strategy update, with a cost-to-income ratio target set to below 40% for FY18 and a reaffirmation of the 15% return on equity (ROE) target. The bank will increase spending on improving customer service and productivity with a goal of increasing customer numbers by one million.

UBS believes the customer number goal is ambitious and unusual and is a little puzzled by it, as more customer numbers do not necessarily imply profitable returns. Rather, increasing the main financial institution customers or increasing risk-adjusted revenue would be a better target, in the broker's view. In a similar vein, adding products per customer does not always correlate with more profit.

Achieving the ROE target is ambitious, UBS maintains, as banks are now required to increase mortgage risk weights to at least 25% on average and hold unquestionably strong levels of capital. To the bank's credit, Westpac does not believe such requirements should be an excuse for lower returns. Still, the broker believes it is unrealistic to expect bad debts to stay at record low levels, given the economic headwinds.

Several brokers were unsettled by the banks' decision to take restructuring charges in FY15 and FY16 below the line while reviewing its treatment of capitalised software. UBS considers this decision a throw-back to the 1990's. Write-offs might support earnings for a few years but, in the end, the broker maintains expenses have a habit of re-emerging. The bank has a track record of conservative accounting so using this restructuring lever is of concern to UBS.

Both Deutsche Bank and Goldman Sachs have set aside their reservations on this count and await further detail about the magnitude of restructuring costs before assessing the current growth trajectory in expenses. Credit Suisse, too, complains about the charges, agreeing that such expenses risk becoming recurrent. The pressure on capital, the broker acknowledges, is probably not enough to force a capital raising beyond the base case for a discounted dividend reinvestment plan (DRP).

The broker is more upbeat regarding defence of the ROE target. The bank will need to work on this but is considered well positioned given its leading exposure to investor mortgages, which have been re-priced, and its early move on productivity as well as a measured approach to raising capital.

Credit Suisse also notes the bank is intent on strengthening wealth, small-medium enterprise business and Asian growth, although predominately via links with Asia rather than being a competitor in Asian markets.

Macquarie believes the targets are somewhat conservative and the benefits of mortgage re-pricing and productivity will allow the bank to reach its targets, specifically in terms of the cost-to-income ratio. The lack of a capital raising announcement suggests the additional requirements will be met through a partially underwritten/discounted DRP between now and July 1, 2016. Moreover, the branch footprint relative to the customer base is seen improving against its peers.

Citi is less sure, believing that the ROE is aspirational. Westpac is more reliant on investor mortgages compared with its peers as well as a retail franchise built on acquiring smaller regional bank business where relationships are typically not as strong. The broker accepts there is merit in reducing the size of the branch network but the productivity targets are modest. The bank is not the productivity story many expected and Citi prefers ANZ Bank ((ANZ)) among the majors.

The reiteration of a 15% return target is more aggressive than Deutsche Bank expected. The outcome of the Basel 4 discussions is yet unknown and the broker suspects that may have a material impact on ROE outcomes for the sector. Deutsche Bank also expects the increased level of spending will be a trend across the sector in the face of competition and disruptions to traditional banking flows, in which case customers may end up being the winners rather than the banks.

Goldman Sachs, not one of the eight brokers monitored daily on the FNArena database, considers the update more evolution than revolution while welcoming the extra clarity in the outlook and retains a Neutral rating and $34.96 target.

The database shows five Buy ratings, two Hold and one Sell for Westpac. The consensus target is $35.14, suggesting 16.2% upside to the last share price. The dividend yield on FY15 and FY16 forecasts is 6.2% and 6.4% respectively.
 

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article 3 months old

Weekly Broker Wrap: GDP, State Economies, Banks, Classifieds And Key Picks

-Economic growth soft and narrow
-NSW's lead extends further
-Westpac's productivity potential 
-Sydney, Melbourne underpin R/E
-Buying opportunity in CGF, GBT?
 

By Eva Brocklehurst

Economy

Australia's GDP growth was 0.2% in the June quarter to be 2.0% for FY15. The Australian Bureau of Statistics noted nominal GDP growth of 0.3%, 1.8% higher over the year, is the weakest since 1961-62.

The national accounts reveal an economy which is struggling to lift demand in a sustainable fashion, Macquarie observes. Hours worked are increasing, employment is holding up but income per person is flat, so to lift consumption in the quarter households were relying on lower debt servicing costs and insurance pay-outs.

Macquarie suggests the one-off nature of several supports for growth in the quarter means a potential reversal is likely over coming quarters. A significant lift in demand is needed to raise output to a level to sustain spending and the broker asserts that recent concerns over global growth will not help.

Expenditure-side growth was driven by government and this cannot be relied on indefinitely, Citi maintains. Moreover, households are adding more disposable income to savings, with less expenditure on discretionary items. Financial services are the bright spot in the economy, growing by 1.3% in the quarter.

Citi notes the yearly growth rate was in line with the Reserve Bank's forecast, but the composition is narrow and the increase in the household savings ratio was not what the central bank was expecting. Citi continue to forecast a 25 basis point reduction to the cash rate at the November board meeting.

State Economies

ANZ's inaugural economic "stateometer" reveals NSW and Victoria are improving, with NSW extending its lead. The other states are firmly below trend. Mining states have arrested the slowdown in activity, for now, while South Australia is falling behind.

Tasmania and Queensland share some of the strong characteristics, with solid housing and private consumption and a benefit from the depreciating Australian dollar. Economic activity in Western Australia and South Australia is on a downtrend. For WA it is the fall in resources investment while for SA the analysts note a broader malaise in industrial activity.

Given the strong interlinkage between NSW and Victoria and the rest of the country the analysts believe the performance of these most populous states bodes well for an ongoing, albeit slow, recovery.

Banks

Greater functionality in online and mobiles has driven a dramatic decrease in branch-based transactions at banks. The role of the branch is now centred on complex transactions and advice. Macquarie also observes, with increasing population density in cities, there is less need for multiple branches. The broker's research indicates a clear opportunity for branch closures.

Westpac ((WBC)) has the best opportunity to reduce numbers, given its larger network and many branches in close proximity to each other. The size of the cost reduction opportunity varies between 0.5% of earnings for Commonwealth Bank ((CBA)) and ANZ Bank ((ANZ)) and 2.0% for Westpac over three years, Macquarie calculates. Macquarie has upgraded Westpac to Outperform.

Credit Suisse has also upgraded Westpac to the same rating, elevating the bank to its number one pick among the majors. The broker expects Westpac to lead the industry in structural productivity initiatives. The reasons for the upgrade include the bank's leverage to ongoing mortgage customer re-pricing and productivity enhancement.

Conversely, Credit Suisse downgrades National Australia Bank ((NAB)) to Neutral, reducing it to number four pick. The story is one of mature cost restructuring which is now approaching completion. The stock's P/E multiple has now re-rated compared to its peer group.

The sector has now moderated its capital accumulation task, the broker observes, although Westpac may have to underwrite another dividend reinvestment plan.

Real Estate Classifieds

Real estate new listings growth eased in August, to around 4.0% by the end of the month, but this is not a surprise to Deutsche Bank. Comparables are likely to be difficult for the remainder of this half year. Capital city listings growth was slightly higher than the national trend, with Sydney ahead of the pack. Growth in total listings is expected to continue in the first quarter of FY16.

Despite the moderation in the growth rate the data remains supportive of REA Group ((REA)) and Fairfax Media's ((FXJ)) Domain in FY16, Deutsche Bank contends. While Sydney and Melbourne constitute around 39% of national listings, these two cities contribute well over 50% of revenue for property classifieds.

High Conviction Stocks

Low expectations heading into reporting season were largely met, Morgans maintains. The broker calculates, in terms of the ASX200, FY15 earnings declined 2.0% while expectations for FY16 were revised down by 1.0%. Still, the broker is not swayed from a cautious approach over the next few months as global events take the spotlight.

Re-visiting key stocks post the results, Morgans adds Challenger ((CGF)) and GBST ((GBT)) to its list and removes Qube Holdings ((QUB)) and Admedus ((AHZ)). Challenger provides solid mid to high earnings growth over the medium term while GBST offers exposure to increasing demand for wealth management and capital markets systems. The recent sell-off is considered a buying opportunity.

While retaining a long-term positive view on Qube, earnings risk in FY16 and limited catalysts mean Morgans suspects the stock will trade at current levels for 6-12 months. Admedus has achieved a number of milestones over the past 12 months and, while removing it from the list, the broker will use its active opportunities portfolio as a way of highlighting share price catalysts.
 

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article 3 months old

Weekly Broker Wrap: Oz Economy, Insurance, Banks And A-REITs

-Confidence hit from equities matters
-Returns peak for insurers
-Bad debts on the rise?
-Shift in A-REIT performance
 

By Eva Brocklehurst

Economy

Is Australia's economy in recession? UBS suspects that June quarter data may "pay back" the upside surprise in the March quarter GDP, which grew 0.9% quarter on quarter to be up 2.3% over the year. Exports fell in the June quarter and inventories are expected to be a drag, given the "cliff" in capital expenditure plans that is emerging.

The broker's GDP forecasts do not meet the accepted definition of a recession - two consecutive quarters of negative real GDP - but suggest a higher than normal risk of contraction in at least one quarter for the rest of 2015.

June quarter nominal GDP is forecast to contract 0.3%, dragged down by a collapsing terms of trade causing record low wages and flat corporate profits. Still, rather than a broad downturn across industries, UBS suspects would be more likely reflecting the timing of an intense reduction in capex this year, ahead of a boost from the full ramp up of LNG exports in 2016.

The risk that confidence is battered by the recent share market slump matters substantially, because growth is reliant on maintaining consumer and business confidence. Hence, UBS suspects the risks to GDP are on the downside.

Insurance

The market conditions for general insurance continue to worsen. Macquarie observes the slowest growth in gross written premium since 2005. APRA statistics reveal commercial is down 1.6% for the year to June 2015 while personal is up 1.9%. The weak June quarterly data is a poor sign for the sector, in the broker's opinion. Rates continue to fall and volumes are flat, so as insurance asset values increase this will squeeze margins.

Macquarie believes returns have peaked for Insurance Australia Group ((IAG)), Suncorp ((SUN)) and QBE Insurance ((QBE)) in the absence of further cost cutting. The overall market size in Australia is relatively flat so new entrants are continuing to make inroads and place pressure on incumbents. In response, Suncorp and IAG have turned to increased reinsurance to normalise returns.

Overall, the APRA data was slightly more positive than Credit Suisse had assumed. The June quarter for commercial property showed the first positive growth quarter since December 2013. Industry gross written premium grew 0.7% and the slowing was attributable to products other than commercial. Credit Suisse agrees IAG and Suncorp are losing market share.

The broker suspects current cost cutting initiatives are not enough to support margins at current levels. Credit Suisse prefers Suncorp over IAG and QBE.

Banks

Leading indicators of a deterioration in asset quality are emerging. Commentary from ANZ Bank ((ANZ)) causes the most concern at UBS. The bank indicated it was witnessing higher collective provisioning charges because of balance sheet growth coupled with heightened risk relating to agriculture and resources. To UBS the improvement in stressed exposures appears to be at an end.

In the past, higher corporate credit losses usually followed periods of elevated business lending and loose underwriting. UBS suspects, while these conditions are not apparent on the surface, a dive into the banks' reports shows total corporate exposures have grown 7.0% over the past five years. The broker remains concerned about the outlook for bad debts.

Any official rate reductions from the Reserve Bank, especially if US rate hikes are delayed, should allow for further re-pricing of the net interest margin. Still, UBS prefers Westpac ((WBC)) and Commonwealth Bank ((CBA)) given strong asset quality and greater re-pricing leverage.

Credit Suisse considers the backward-looking data for the banks from the reporting season reasonably benign, although acknowledges asset quality stresses are emerging. This is notable in pockets: in mining, NZ dairy exposures and agriculture on both sides of the Tasman.

Impaired ratios have declined although loss rates edged up. Collective provision coverage is flat for a second successive quarter, although, the broker acknowledges, it edged up for ANZ and National Australia Bank ((NAB)).

In sum, revenue growth for the banks has struggled and system business credit growth is soft, while major bank margins continue to edge lower. The broker suspects the bulk of capital raisings are complete although Westpac is expected to undertake further underwriting of the dividend reinvestment plan.

A-REITs

Australian Real Estate Investment Trust (A-REITs) returns contracted 2.6% over the latest reporting week, weaker than the overall equity market. The best results to date, in Credit Suisse's view are GPT Group ((GPT)), Stockland ((SGP)) and Mirvac Group ((MGR)).

Credit Suisse expects that sector earnings should remain stable over FY15-17 with growth of 4.4% and a shift in composition. Westfield ((WFD)) is expected to accelerate earnings the most, to 4.0% from 1.9%, while Dexus Property ((DXS)) and GPT are expected to decline to 5.7% from 9.2% and 2.9% from 6.0% respectively.
 

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article 3 months old

About Risk And Comfort

In this week's Weekly Insights:

- About Risk And Comfort
- Commodities: Buy Signal From Hell?
- US Equities: Divergence And Investor Concerns
- Realities Of The European Union
- Rudi On TV
- Rudi In The Australian

About Risk And Comfort

By Rudi Filapek-Vandyck, Editor FNArena

Investing is not about "knowing" the future. It's about deciding what risks you feel comfortable with.

Two events last week highlighted this very truth about investing and risk. Firstly, ANZ Bank ((ANZ)) requested a trading halt in its stock in order to announce a $3bn capital raising, dilutive in nature and relatively unexpected having previously indicated asset sales and a fully underwritten dividend reinvestment program (DRP) were the board's preferred strategy to deal with increased regulatory requirements.

Secondly, the world's largest supplier of explosives and blasting systems to mining and infrastructure projects, Orica ((ORI)), warned its profits will be lower than market consensus, with no immediate recovery in sight and some hefty impairment charges to be included for the year.

It is always easy to look smart after the event, but in these two cases: if you were completely taken by surprise then, sorry, but you haven't genuinely been paying attention.

Even excluding Weekly Insights, FNArena has offered numerous stories both on the banks and on Orica highlighting the potential risks. This is why I personally like diversity among the stockbrokers in the Australian Broker Call Report. It's not about Buy/Hold/Sell ratings, or about who is wrong and who is right. It's about trying to determine where the risks are, and whether I, as an investor, feel comfortable being exposed.

Mining Services Tragedy

Orica, whose corporate roots trace back to the Victorian gold rush more than 130 years ago believe it or not, has done Australian investors one huge, under-appreciated favour. In 2010 it spun off its paint division which now trades as DuluxGroup ((DLX)) on the Australian share market. One glance at the share price graph over that period suffices to support my view that Orica has given Australian investors one big gift and I do hope the average long term investment portfolio contains a little exposure to this relatively defensive business that offers lower volatility exposure to the booming housing market in Australia.

Late last year, Orica also disposed of its chemicals division and became a full, undiluted mining services provider. This is only a good thing if you happen to believe the cycle is finally turning for this sector. More announcements about capex restraints by the likes of BHP Billiton ((BHP)) and Rio Tinto ((RIO)), plus North American gold producers in pain with a bullion price below US$1100/oz, plus bulk commodities in severe and ongoing oversupply, does not genuinely support such view.

But then there's a plethora of views out there, and some experts on the sector, or on Orica in particular, are trying to convince you and me the shares represent an excellent buying opportunity at levels around $16 (5.7% yield, partially franked). Supporting their view is the fact the company's shares have mostly traded with a 2 in front post 2009. But then that was including Dulux and also including Chemicals until last year. Note Orica shares traded above $22 only a few weeks ago (so much for "market intelligence").

Mining services providers enjoyed a golden run until early 2012 when it became clear the giants in the sector had set their sights on reducing capex, which has been the sector's downfall until today. Just ask Downer EDI ((DOW)), whose outlook also disappointed last week.

Fund managers, stockbrokers, tip sheets and the like have been rummaging through the carnage in years past, trying to anticipate the turning point, if not for the sector in general then for some individual players. Admittedly, potential rewards can be significant if only because share prices have been absolutely pummelled. But is it worth the risk?

My view has been, and still is, this sector represents without the slightest doubt some fine buying opportunities that will be highly rewarding at some point in the future (exact timing unknown). The problem is there are so many more possibilities to pick a wood duck and suffer from the next profit downgrade (while cursing myself I ever ventured into this space in the first place).

Another way to look at this is: in five years from today, stocks like Orica, Downer EDI and the likes, which are generally considered high quality plays in an out-of-favour sector, will be more than likely trading at a higher price level. While they do offer healthy dividends in the meantime, nobody really knows what's going to happen in the short to medium term. Your own guess is as good as anybody else's as to whether this is the bottom of the cycle, or simply a pause in the downtrend, or much better, or much worse.

What I do know is this is not the type of risk I personally feel comfortable being exposed to. I do understand the principle of value investing and I do wish all value investors jumping on board post yet another shellacking all the luck in the world. As far as I am concerned, you need it.

Disclosure: the FNArena/Pulse Markets All-Weather Model Portfolio has exposure to DuluxGroup (see disclaimer further below for more info).

Banks Or No Banks?

Should you invest in Australian banks? The question is as divisive in Australia today as it has ever been. Most retail investors have large exposures to the Big Four banks, larger than is wise from a risk concentration point of view. They are being laughed at because of it by professionals in the funds management industry. Honest is honest though, many retail portfolios have performed better than expected in years past and the banks have played a crucial part in this.

Earlier this year I literally rang the bell when hosting Your Money, Your Call Equities on the Sky Business pay-TV channel. To announce the obvious: the golden era for Australian banks is now over. Don't look over your shoulder and fall in love with past returns.

Having said so: banks are by no means about to replicate the downturn that killed the bull market for mining services providers. But the way forward is looking a lot more demanding and challenging, and share price sell-offs and de-ratings this year are simply the market re-adjusting for the sector's new reality.

If anything, recent company announcements seem to indicate the sector has now lost its knack to always deliver a little extra on the positive side and that too is a true signal that times have reversed. The sector is now essentially ex-growth in that most levers that can be pulled, have been exercised in years past, while bad debts and margin pressure plus constraints on property loans are keeping growth in single digits to be eroded by the issuance of extra capital.

From here onwards we can all come up with various scenarios about what can go wrong for the Australian economy, and for the banks, and surely when downturns kick in, the bias is for more negative news to simply trigger more negative news. Soon we'll see doubt about whether this bank should no longer increase its dividend, or lower the pay-out ratio, or raise more capital.

The key question overshadowing all of this is whether share price valuations are already capturing these increasingly challenging prospects? If not, the bulls will argue most of it should be priced in by now (e.i. more upside potential than downside risk).

Note: despite this year's de-rating for Australian banks, local share market indices continue to point towards a positive return for investors.

Admirable Track Record On Banks

Most readers of Weekly Insights have been on the mailing list for many years, so I am expecting a lot of nodding heads in the next few minutes. To all others: I am specifically writing the following paragraphs for you. You might appreciate the how, why and what we do  at FNArena a little more.

In 2007 (gosh, that's such a long time ago), FNArena was among the first to understand the importance of what had been going on with subprime lending in the USA. We turned our focus to Australian banks and warned they would not be immune from overseas problems; a view that was held by a small minority only at that time, and for a long time. We pretty much spent the whole of 2008 repeating our view on banks, again, and again, and again.

We turned bullish on the sector in mid-2009. We were not the first, but then we were never going to be. When we make these calls, we want to make sure we are right in our assessment. That time around, we encountered a largely dismissive audience, having been burned in the years prior and not believing my personal prediction at the time that bank shares would offer 100% return over the decade ahead. As we've all experienced since, they have done better than that and the decade is yet far from over (2015 is giving some of it back, though).

Last year, we turned more cautious. Earlier this year, I rang the bell to announce the end of the golden era.

I do not believe Australian banks will be detrimental to investors' portfolios as have been mining companies and energy producers over the years past, especially the small caps in both sectors. But they won't be "fantastic", "excellent" or "outstanding" either, even from current price levels. Banks can, and probably will, still generate reasonable returns, not in the least because boards will defend those dividends with everything in their might.

I have a suspicion that once we get past regulatory issues and extra capital raisings, and the Federal Reserve's first interest rate hike, global bond markets will become more comfortable and settle for a prolonged period of no more rate hikes, and this -all else being equal- will trigger a come-back into favour for the banks. But this is, at this stage, not more than a suspicion.

There's so much that can still happen between now and then. Make sure you are comfortable with your portfolio and your strategies while bank shares, and equities in general, are sailing rougher seas.

Commodities: Buy Signal From Hell?

"As commodities reach new multi-year lows on a total returns basis and multi-decade lows relative to equities, fundamentals remain broadly weak. Therefore the sector is susceptible to any further deterioration in indices measuring manufacturing and industrial activity which remain narrowly in expansion at 51. Out of twenty commodities, only six are now above their 2000-2014 averages in real terms".

Those are the opening words to Deutsche Bank's latest update on the worst performing asset class for four years uninterrupted; commodities. It goes without saying everybody who took guidance from the sector's dismal performances in each of 2012, 2013 and 2014 and believed a return to favour surely must be around the corner, has now been burned badly, again, by July's general (and indiscriminate) wash-out.

Yet, there are a number of experts around, and not just in Australia, who are starting to suggest the sector is worth considering. Seriously.

The most fundamentally attractive thesis I came across in these volatile weeks full of turmoil and carnage and despair comes from sector analysts at Citi who published a daring report, essentially pointing out these wash-outs at the end of an enduring down turn ("bear market", if you like) are usually excellent buying opportunities, even though this may not become apparent immediately.

This is because markets tend to move well ahead of fundamentals.

Citi's report contains many graphs and charts, not even confined to the commodities space, which may well have been selected by Harry Hindsight, who's a multi-billionaire by now, as we all know.

Cue: those well-trodden quotes from Baron Rothschild and Warren Buffett that have been used a million times (make that a billion, surely?) about buying opportunities presenting themselves when things look bad, prices tank and investors are running scared. The most difficult part in this process is to overcome the past (full of disappointment), as well as the absence of any fundamental justification (just read Macquarie reports about how much supply needs to disappear).

Not for the faint-hearted. For all others: may Dame Fortuna be on your side, and remain on your side.

US Equities: Divergence And Investor Concerns

US equities are still showing healthy gains for the year. Or they are barely positive. Or they are, clearly, in negative territory now. It all depends on what benchmark investors happen to focus on.

What cannot be denied, however, is that technicals looks vulnerable, again, and divergence has become the new label to use when talking about US equities. Divergence is not a signal of a strong bull market, as we all know, but does this mean it automatically signals the start of a new bear market?

US investors are becoming increasingly worried. Not that we have much contact with investors in the US ourselves, here at FNArena, but whenever we read market updates written and published in the US by large financial institutions, and the topic shifts to contacts with clients, the background colour instantaneously turns grey. US investors are worried. On some indications, probably more worried than we here in Australia give them credit for.

A few snippets from a recent BTIG strategy missive, with BTIG strategist Dan Greenhaus retaining a bullish outlook nevertheless:

"Our client conversations have taken on a decidedly more negative tone of late and with the S&P 500 essentially sitting on its 200 DMA, we can hardly blame them... Further, with five major S&P sectors lower YTD and the type of narrowing leadership we've been discussing, many clients have found additional reasons to fret... Some have even brought up the year 2000 for comparison purposes, a year that many remember as hitting its top in March but fewer remember as being virtually unchanged with that peak level by August's end. It's been argued that peak was a "process" and this one will be too..."

I have written about US equities divergence myself (see "Time For Caution", 27 July 2015) and that title continues to illustrate my own view, and behaviour, regarding the Australian share market since the dynamics started to get rougher in May. For those who want to read more on divergence in US markets, here's a recent update from John P Hussman, from Hussman Funds: http://www.hussmanfunds.com/weeklyMarketComment.html

Be warned: the chart below is from Hussman's weekly market update and does not increase one's overall comfort with what's happening in US markets in 2015.
 


 

Realities Of The European Union

I came across this illustration via social media, but a targeted Google search helped me find a copy I can include in this week's Weekly Insights.

Even if you do not know which countries belong to all the flags on display, I think you get the general idea. And that's exactly how growing numbers of Europeans are starting to look at the political construction that is today's European Union.
 


 

Rudi On TV

- on Wednesday, Sky Business, 5.30-6pm, Market Moves

Rudi In The Australian

Australia's national newspaper, The Australian, has edited last week's Weekly Insights, to be published as an introduction to the local reporting season on page 27 of the Tuesday edition.

(This story was written on Monday, 10 August 2015. It was published on the day in the form of an email to paying subscribers at FNArena).

(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 Editor Direct on the website).

****

THE AUD AND THE AUSTRALIAN SHARE MARKET

This eBooklet published in July 2013 forms part of FNArena's bonus package for a paid subscription (excluding one month subscriptions).

My previous eBooklet (see below) is also still included.

****

MAKE RISK YOUR FRIEND - ALL-WEATHER PERFORMERS

Odd as it may seem, but today's share market is NOT only about dividend yield. Post-2008, less risky, reliable performers among industrials have significantly outperformed and my market research over the past six years has been focused on identifying which stocks, and why, are part of the chosen few; the All-Weather Performers.

The original eBooklet was released in early 2013, followed by a more recent general update in December 2014.

Making Risk Your Friend. Finding All-Weather Performers, in both eBooklet versions, is included in FNArena's free bonus package for a paid subscription (excluding one month subscription).

If you haven't received your copy as yet, send an email to info@fnarena.com

For paying subscribers only: we have an excel sheet overview with share price as at the end of July available. Just send an email to the address above if you are interested.

article 3 months old

OzForex Takes On The World

-3-year target to double revenue
-Expanding brand offshore
-Undemanding valuation
 

By Eva Brocklehurst

Money transfer business, OzForex Group ((OFX)), has a reinvigorated strategy, intent on growing earnings at a substantially faster rate over FY16-19.

At its annual general meeting the company's new CEO, Richard Kimber, outlined a target to double revenue, with a focus on three areas: increased penetration in Australia, growth overseas, particularly in the US, and taking advantage of opportunities in adjacent segments such as wholesale, mobile and lower value payments.

Execution becomes the critical factor now the case for accelerated growth has been outlined, in Deutsche Bank's view. Uncertainty around the cost base to support this advance in top line growth was addressed to some extent in the presentation, with the broker noting the extra operating and capital investment. Revenue is expected to grow faster than expenses, implying margin expansion.

To achieve on its plans the company will invest $20m over FY17-18. OzForex is a small player in Australia and will undertake a marketing push to promote its brand. To increase penetration in other currencies, particularly the US dollar, the company will take advantage of its position in the US for high value transfers and capitalise on a very large market for immigrants and international students. The company will re-brand its operations under one common global banner, OFX.

Deutsche Bank increases forecasts by around 4-6% for FY16-18 and assumes margins will be flat until FY18. The broker believes a discounted cash flow valuation is the best means of capturing the high cash flow generation and growth potential and a Buy rating and $2.95 target are maintained.

OzForex currently generates 11% of revenue from wholesale activities where management believes there is a strong opportunity to grow by creating more flexible options. Traction is expected to come from the upgraded mobile application.

OzForex will also not neglect lower-value transfers, instead targeting a full service to existing customers who wish to conduct transfers lower than the minimum advertised transaction size of $1,000. Currently around 12% of transactions are below this level and in the past the company has often pushed customers towards competitors.

The goal is bold, Goldman Sachs observes. FY16 has begun well and, while the company is performing ahead of the broker's forecasts, higher costs are reducing medium-term earnings expectations by 6-7%. Forecasts have been slightly upgraded beyond FY20.

With regard to the company's goal of doubling revenue and earnings beyond FY16, the broker assumes revenue grows 62% and earnings 81% over the FY16-19 timeframe. Goldman Sachs, not one of the eight stockbrokers monitored daily by FNArena, has a Buy rating and $3.11 target.

The business is high quality, in Macquarie's opinion. It may be a relatively small company operating in a large market but the decision to ramp up its investment and pursue growth is the right one, the broker asserts. Nevertheless, Macquarie assumes it will take time for initiatives to gain traction and expects margin declines are likely in FY17 before the leverage is evident in FY18.

Execution and delivery are key to the success of the strategy and the outcome unknown but Macquarie points out that these sorts of high growth opportunities are relatively rare. Moreover, the stock's current valuation is not demanding and an Outperform rating and $2.70 target are retained.

The company's re-branding plans are also not without risk. Macquarie notes there potential to lose goodwill in established market, particularly in Australia where a large share of traffic is generated organically. On the other hand, the online payment and international money transfer market remains dominated by the banks, which continue to charge margins well above those of OzForex.

Industry consolidation continues to feature, Macquarie observes, with the international payments sector still relatively immature and scale benefits can be realised. Smaller participants are also feeling the pinch from increasing regulatory requirements.

The broker suspects weakness in the Australian dollar has increased the stock's appeal as a target for offshore market participants. In terms of the company's acquisition plans Macquarie expects these would be more likely to be offshore or in complementary technologies.
 

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article 3 months old

Suncorp’s Glow Fades As FY16 Challenges Mount

-Margins under pressure in GI
-Bank and life division support
-New CEO's approach in focus


By Eva Brocklehurst

Suncorp Group ((SUN)) produced a healthy FY15 result but the glow is fading as brokers envisage challenges will mount in FY16.

In an environment of falling yields, and claims inflation via a weak Australian dollar, as well as a rising catastrophe budget, Morgan Stanley flags the risk the market is over-estimating the medium-term capital benefits from internal risk-based capital models.

The broker also believes the company's reliance on CTP (green slips) for growth and underlying margin support masks the dilution of margins and value in the core personal lines franchise. On the positive side, there remains capacity for further special dividends, although the broker contends these will be lower in future. Morgan Stanley now expects a 10c special dividend in FY16.

Reserves releases underpinned the result, Credit Suisse notes, as well as higher-than-expected earnings on investment income. The broker downgrades to Neutral from Outperform, expecting core margins will decline by up to 200 basis points in FY16. Volatility in natural peril claims is declining but remains above that of its competitors.

Share price performance may have been justified in recent months because of upside risk to earnings from bank and life divisions, as well as the reserve releases, but Credit Suisse finds the next leg up for the share price is difficult to discern. 

Suncorp is now a more predictable entity and UBS hails the absence of any significant surprises in the result. Banking has modest tailwinds moving into FY16 while the broker considers life profits are supported by conservative assumptions.

Still, while the company's view that competition is easing and interest rates are potentially heading higher is encouraging, UBS notes this is not consistent with recent commentary from other industry participants. A Sell rating is maintained.

The bank and life growth should partially offset pressures on general insurance margins, in JP Morgan's view. The broker awaits further clarity on the approach the incoming CEO will take. Citi also flags its suspicion that FY15 may prove typical of a last hurrah from a departing CEO but concedes the general insurance business is coping reasonably well with the difficult market conditions.

Moreover, there are some tailwinds emerging for the banking business with advanced accreditation, a more level playing field with the major banks and a more modern banking system soon to be finalised. The broker also expects, near term, Suncorp could reap some benefit from its recent price rise on investor loans.

Citi allows for strengthened assumptions, which should mean underlying life profits improve in FY16, if FY15 lapse and claims experience are repeated. Events appear to be tracking better than Suncorp expected so far. Nevertheless, with a new CEO about to take over, and underlying margins potentially slipping, the broker believes the risks of holding the stock are increasing and retains a Neutral rating.

While the FY15 result was solid, Morgans was disappointed with the special dividend of 12c. Still, the broker accepts this leaves the new CEO, Michael Cameron, with a solid capital position. The broker remains positive on the turnaround that has been executed over the past few years but believes any re-rating depends on proving up the growth story in life and banking.

Macquarie is also Neutral on the stock, although Suncorp remains its preferred domestic general insurance exposure. The broker notes the company has used premium rates to defend the loss of unit market share in general insurance and is continuing to target lower costs to maintain peak margins in a soft premium rate environment.

There are no Buy ratings on FNArena's database but six Hold and two Sell. The consensus target is $14.08, signalling 2.1% downside to the last share price. This compares with $13.74 ahead of the report. The dividend yield on both FY16 and FY17 forecasts is 6.2%.
 

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article 3 months old

Rally Expected For NAB

By Michael Gable 

Since this time last week the market has put on about 90 points and continues to look like it will edge higher towards 5800 over the next few weeks. We have an interest rate announcement today but futures markets are pricing in about 90 per cent chance of no change. Whether the next move is up or down and whether it happens this year or next is not an issue in our opinion. What matters is that for at least the next couple of years, they will be in stimulatory territory, and that is supportive of markets. As mentioned previously, the near term focus is now on specific companies and their upcoming financial results, so we should find the next few weeks particularly interesting.

Today we take a look at National Australia Bank ((NAB)).
 


NAB spent much of 2014 making a "flag formation", as it corrected back against the longer-term uptrend (shown by the two blue lines). Like the other banks, it broke out earlier this year and staged a very impressive rally. After pulling back a few months ago, you will notice that it has come back to some uptrend support (indicated by the red line). Recent price action has seen it rally quite nicely, back above the flag. A crossing of the MACD is now very imminent (circled) which would also indicate a movement higher for NAB. We expect NAB to rally from here until it hits resistance between $36.50 - $37.00.


Content included in this article is not by association the view of FNArena (see our disclaimer).
 
Michael Gable is managing Director of  Fairmont Equities (www.fairmontequities.com)

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management, deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

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article 3 months old

Weekly Broker Wrap: Insurers, Banks, Utilities, Online Portals And iSelect

-Insurer growth lacklustre
-More re-pricing from banks?
-Yield and growth in utilities?
-REA Group winning online
-ISelect now has cash
 

By Eva Brocklehurst

General Insurers

Macquarie has reviewed the general insurers under its coverage, ranking them in terms of premium growth, margin pressure and key issues such as currency and cost cutting. The broker's top pick is QBE Insurance ((QBE)) which enjoys positive currency and interest rate tailwinds relative to its peers. The capital re-build is complete and the company is focused on core business.

Next up is Suncorp ((SUN)), which has earnings momentum and the best expense ratio, well placed to access newly privatised markets in coming years. After that comes Insurance Australia Group ((IAG)), which appears to be constrained in terms of premium growth. Multiples are full and without the prospect of imminent capital returns. While insurance margins are the highest of the three this suggests to Macquarie a greater vulnerability to challenger brands.

UBS finds compelling reasons to be a seller of general insurers. The broker expects gross written premium to track sideways, with downside risks. Questions could be raised at the results around margin sustainability and the answers may only become clearer as FY16 progresses.

The broker considers many of the events of recent months have been a distraction and looks for answers as to why IAG needed to free up $1bn in capital through a deal with Berkshire Hathaway.

The broker is mildly optimistic that QBE will have fewer complicated issues this time around, with a positive message on dividends likely. The next 12 months are considered critical for Suncorp's investment case, largely because of the broker's more conservative view on general insurer margins as rate pressures flow through.

Banks

UBS has downgraded earnings forecasts for FY17 for the major banks in the wake of statements from APRA which provide more clarity on the capital shortfalls. Three of the four have re-priced investment property loans in order to slow credit growth to below the APRA macro prudential thresholds.

This suggests the banks are moving to pass on some of the costs of higher capital requirements to customers and UBS considers this a smart move. The broker expects the spread between owner-occupier and investor mortgages to widen further as the banks continue to re-price these loans.

The broker also considers it likely the banks will look to rights issues to improve capital requirements. This may be an opportunity to increase exposure to the banks and participate in re-pricing upside.

Utilities

UBS likes regulated utilities which offer yield and growth potential. On this basis the broker prefers APA Group ((APA)) and upgrades to Buy from Neutral. The stock offers the best quality in terms of distributions and these are more than covered by free cash flow. DUET ((DUE)) and Ausnet ((AST)) are best in terms of up-front returns. DUET is rated Buy, with good yield and growth prospects on the back of the proposed acquisition of Energy Developments ((ENE)).

Ausnet and Spark Infrastructure ((SKI)) are rated Neutral. The broker considers the grossed up distribution yield of 8.0% is factored into Ausnet's price. Spark Infrastructure ranks poorly on distribution coverage and is the least attractive on an enterprise value/regulated asset basis despite strong growth forecasts.

Portals

Citi reviews online usage metrics across the desktop and mobile sectors in order to determine winners in the battle between REA Group ((REA)) and Fairfax Media's ((FXJ)) Domain portal. The broker looks closely at relative share, given the importance placed on being No 1 in online classified verticals.

Data from the Nielsen ratings shows Domain is closing the gap in terms of unique audience but on total page views the gap is actually increasing, which the broker considers is a better measure of engagement. This gap is widening despite Domain's push into new markets.

Mobile adds impact for both players and the gap appears constant. Mobile is driving increased engagement by consumers with the portals and is this is not unique to property. The discovery process appears to be via desk top mid week but reverting to mobile on the weekend. Nevertheless, it appears REA Group is retaining its number one position across online.

Citi rates REA Group as Buy and Fairfax as Neutral. Domain has a solid position in Sydney and Melbourne, supported by legacy print classifieds, and remains positioned for growth, which the broker considers is priced into the Fairfax valuation.

iSelect

ISelect ((ISU)) has agreed on a cash settlement for its outstanding NIA Health loan facility. Bell Potter welcomes the agreement and makes minor upgrades to forecasts because of changes in interest rate assumptions. The broker also adds a 15% premium to valuation to account for the prospect of capital management initiatives. As a result the price target is raised to $2.10 from $1.65. A Buy rating is retained.

The broker likes the agreement as the company can focus on its underlying business now the distraction has been removed. ISelect will have more than $100m in net cash on the balance sheet after settlement of the NIA deal.
 

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