ANALYST OUTLOOK FOR 2019 - Our analysts share their outlook and top stock picks for 2019.
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ANALYST OUTLOOK FOR 2019. Our analysts share their outlook and top stock picks for 2019.
To learn more about the stocks mentioned in this CONTENTS
report, speak to your adviser or refer to the Client BANKS & GENERAL INSURERS 3
Access Research Library. DIVERSIFIED FINANCIALS 4
LISTED INVESTMENT COMPANIES 5
Please note that Speculative securities may not be HYBRID MARKET 6
suitable for retail clients (refer to final page of this AGRICULTURE & FMCG 7
report). TECHNOLOGY 8
DISCRETIONARY RETAIL 9
www.bellpotter.com.au INDUSTRIALS 10
1300 0 BELLS (1300 023 557) RESOURCES 11
info@bellpotter.com.au HEALTHCARE & BIOTECH 14BANKS & GENERAL INSURERS. TS Lim
Our 2019 top three picks Macquarie Group (MQG) Insurance Australia Group (IAG) Westpac Banking Corporation (WBC)
possess strong risk MQG’s value lies in its ability to IAG is our preferred stock in the WBC has been the most consistent
manage risk and adapt to changing
management and execution general insurance space given its major bank in terms of earnings growth,
market conditions. This has allowed better risk-adjusted return profile and
capabilities in addition to ROE and clean results. Its strategy is
itself to gradually transform and push front/back office capabilities. 2019 underpinned by a relatively stronger
strong balance sheets and for higher sustainable risk-adjusted guidance (based on further premium credit risk profile (conservative approach
the ability to return surplus returns. MQG is largely a global asset increases in short tail personal and due to retaining sufficient corporate
and risk manager with world-class commercial lines, modest volume
capital to shareholders. expertise in infrastructure investment
memory over credit losses in the early
growth and ongoing cost discipline) 1990s) and we see significant ROE and
These companies have also undergone and capabilities in finance and was reaffirmed at the last AGM but we value upside from further productivity
massive transformation since the banking. These attributes in addition believe its GWP growth target of 2-4% and efficiency gains within the retail
GFC and are now considered much to predominantly lower-risk annuity- is conservative given Steadfast Group’s and business banks – and even more
more resilient as the financial services style earnings streams (~70% of Group recent bullish top line comments. so should they rationalise some of the
sector heads into a new and noisy net profit contribution) and capital Surplus capital may have declined overlapped St George and Westpac
election year. Our X’mas stocking management flexibility (~$1.5bn following its $592m capital return branches in NSW. WBC would also be
comprises one diversified financial surplus capital based on 10.5% RWA) and special dividend but this should the least impacted major bank should
(MQG), one general insurer (IAG) and continue to underpin our bullish view start to build up given expectations of proposed higher capital requirements in
one major bank (WBC). Despite some of the stock. As a lower risk, higher strong organic capital generation and New Zealand be implemented.
negative sector publicity to date, the return investment proposition, MQG ultimate divestment of residual Asian
remains our top sector pick. Buy, price target $28.00
overall setting remains in good shape investments.
for MQG (e.g. strong prospects in Buy, price target $135.00 Buy, price target $8.20
the global asset management and
infrastructure space), IAG (premium
cycle still favourable) and WBC
(e.g. resilient domestic economy
underpinned by low unemployment
and interest rates, least exposure to
proposed New Zealand bank capital
rules).
ANALYST OUTLOOK FOR 2019. 3DIVERSIFIED FINANCIALS. Lafitani Sotiriou
Leaders Emerging
Janus Henderson Group (JHG) Pendal Group (PDL) Afterpay Touch Group (APT) Netwealth (NWL)
JHG is navigating perhaps the worst We believe PDL is close to a possible The Afterpay customer growth rate Our view is that the momentum in
quarter in global equity markets since low point on many fronts including in the U.S. has jumped in the last the independent investment platform
the Global Financial Crisis, with the performance fees, share price, and net- month, from an already rapid rate. space will continue apace, particularly
MSCI Global Index on track for a ~12% flows. With regards to performance fees, In November, Afterpay U.S. is set to given the significant structural shift
decline for the December quarter. FY19 (end of calendar 2018), is likely add ~140,000 new customers, which occurring in the sector, with a move
Despite the ~12% decline and the well- to be the low point in the JO Hambro compares to the ~70,000 added in to greater independence and away
publicised negative flows the company performance fee, which is on track for October in that market. The doubling in from large fully-integrated players.
is experiencing, the total FUM is on ~$15m, vs a previous high of $114m. the number of new customers added in Further, it appears that the fee cuts
track to only fall ~7% this year (despite a JO Hambro performance fees can’t go a single month bodes well for the future from Panorama hasn’t had the impact
share price fall of ~45%). The relatively negative, providing limited downside to outlook of the U.S. business, which now some feared in the sector and the
modest fall in the total FUM highlights future performance fee revenue. boasts over 450,000 total customers. Royal Commission is likely to reshape
the breadth and depth of JHG’s funds Further, net-flows may be passing the We have upgraded our overall customer the industry in favour of independent
management business. The global low point, with the MySuper transition (which includes A&NZ) growth numbers players like NWL.
reach of JHG, varying asset classes and the retiring JO Hambro Portfolio to 210,000 per month in the December BUY, Price target $10.50
and positive flows in certain areas Manager impact absorbed in recent quarter, which we believe remains
(Alternative Assets), provides support years. conservative until more detailed
to the overall business to navigate the information is provided for the wider
current extreme market conditions. Finally, we may be approaching the group and until we have more history of
share market and sector low, where progress.
We believe the main downside has we believe the main downside has
occurred with the sector having de-rated occurred with the sector having de- BUY, Price target $23.63
by around 3-4 PE points on the back rated by around 3-4 PE points on the
of primarily macro drivers to do with back of primarily macro drivers to do
the Trade War between U.S. and China, with the Trade War between U.S. and
possible hard Brexit, and the momentum China, possible hard Brexit, and the
of passive funds. JHG flows have been momentum of passive funds.
poor, but well known and factored into
our forecasts. Further, we expect the BUY, Price target $13.15
Buyback to be renewed throughout 2019.
BUY, Price target AU$51.65
ANALYST OUTLOOK FOR 2019. 4LISTED INVESTMENT COMPANIES (LICs). Will Gormly
The LIC sector has grown MFF Capital Investments (MFF) Global Value Fund (GVF) MCP Master Income Trust (MXT)
~8.1% over the past 12 MFF aims to invest in global GVF invests using a discount MXT is a fixed income LIT that
months to a market companies with attractive business capture strategy, owning a diverse aims to provide exposure to the
characteristics at a discount to their range of global assets purchased at Australian corporate loans market
capitalisation of $41.3bn, assessed intrinsic values. During a discount to their intrinsic value. with diversification by borrower,
covering 114 securities. a time of increasing volatility in The Company aims to provide industry and credit quality. Metrics
global equity prices we see value an alternative source of market Credit Partners (The Manager) is
Historically LICs were in investing with a Manager with a outperformance compared to a an alternative asset manager with
predominately Australian Equity proven and sustained investment strategy of global equity selection, an experienced investment team
focused, but in recent times LICs history. The portfolio can be utilising listed debt instruments, that have the capability to cover all
with Long/Short, Global and reviewed and quickly changed in the listed private equity and listed fundamentals of direct lending and
Alternative focused mandates are event market conditions present hedge funds in addition to listed private credit including originating,
rising in popularity. With domestic more attractive investments, with equity. GVF is trading on an structuring and distributing private
asset prices expected to continue the potential shift in focus away indicative FY19 yield of ~6% (70% debt. MXT has a target return of the
the volatility into 2019, LICs and from predominately large cap franked), based on a distribution of RBA Cash Rate +3.25% (currently
Listed Investment Trusts (LITs) securities. MFF’s 10yr Pre-Tax 6.3c as per the Board’s guidance. 4.75%) net of fees. MXT has a 1yr
can provide cost efficient solutions NTA (incl. div) has outperformed GVF has a 3yr share price (incl. div) share price return (incl. div) of
to gaining access to a diversified the MSCI World Acc. Index (A$) return of ~6.2% p.a. and is trading ~7.5% and is trading at a premium
portfolio with low correlation to the by ~6.7% p.a. and it increased its at approximately par to the Pre-Tax to NAV of ~4.3%. The Company is
domestic equity market. Three LIC/ dividend by 1c to 3c (fully franked) in NTA. actively invested in a well-diversified
LITs to consider include: 2018. MFF is trading at a discount to pool of ~90 individual loan assets.
Pre-Tax NTA of ~5.0%.
ANALYST OUTLOOK FOR 2019. 5HYBRID MARKET. Damien Williamson
The ASX listed hybrid market non-reinvested CBAPC redemption should the elected Government Crown Subordinated Notes II
performance has zig-zagged on 17 December, and $325m support the continuation of cash (CWNHB)
for AMPHA on 18 December. A rebates on surplus franking credits.
throughout 2018. We saw majority of hybrid securities also Redemption and reallocation of Since being priced at a margin of
strength up to early February, pay dividends in December. On 17 NABPC funds may be considered 4.00% in March 2015, Crown has
issuance and ALP franking significantly de-risked, focusing
December alone, 14 securities are under an adverse policy.
operations on its casino monopoly
policy related weakness up scheduled to pay a total of $150m Call Date 23 March 2020 in Melbourne and Perth, and its
until late May, a recovery up of cash income, plus an additional
Fair Value $100.89 Barangaroo development in Sydney.
$60m of franking credits. We expect
until early October supported hybrid investors will receive ~$1.5bn Net debt has reduced from $2.4bn
by net redemptions, and now in cash in the week commencing 17 Macquarie Group Capital Notes 2
(Dec 2014) to the group sitting on
have the current weakness $221m of net cash at June 2018
December. (MQGPB)
following several divestments.
associated with increased The outlook for new issuance into These included realising A$4.3bn
As a security paying income that
equity market volatility, 2019 is fairly skinny, with only two is currently 45% franked, MQGPB from its 34.3% stake in Melco,
issuance (CBAPH and WBCPI), projected refinancing transactions. provides an option to address the US$264m from the sale of the
and rising wholesale funding We expect the $1.5bn NABPA will ALP’s election policy of scrapping Alon Las Vegas site and A$150m
costs. be refinanced ahead of its 20 March the cash rebate when franking (including advanced loans) for the
2019 call date, and IAG will refinance credits exceed tax paid. We sale of its 62% stake in CrownBet.
With the CBAPH and WBCPI issues the $550m IANG security ahead of currently forecast MQGPB will pay
closed and settled, we see the Call Date 23 July 2021
its December 2019 call date. $7.29 of grossed up income over
potential for a Christmas rally. Since the next 12 months. If MQGPB was
December 2011, the average trading NAB Capital Notes (NABPC)
100% franked, cash income would
margin on major bank hybrids has Investors concerned about the be $5.10, with $2.19 of franking. The
firmed 0.37% during the month from impact of the ALP’s policy of cash top up required for 45% partial
the high in mid-December to the low scrapping the franking rebate franking increases cash income to
in early January. This is consistent when franking credits exceed tax $6.11, while franking reduces to
with December historically being the paid may consider a strategy of $1.18.
strongest month for performance. buying shorter dated hybrids such
Call Date 17 March 2021
One key factor to drive the market as NABPC. As we expect a NABPC
is upcoming redemptions support, refinancing transaction ahead of its Fair Value $106.17
where we estimate $0.8-1.1bn for 23 March 2020 call date, investors
may consider Reinvestment,
ANALYST OUTLOOK FOR 2019. 6AGRICULTURAL FMCG. Jonathan Snape
Investments in the Synlait Milk (SM1) Select Harvests (SHV) Nufarm (NUF)
Agricultural & FMCG sector SM1 is NZ’s fourth largest milk processor Select Harvests (SHV) is an integrated NUF is a leading supplier of off-patent
(accounting for ~4% of NZ’s milk intake) and grower, processor and marketer of agricultural chemicals (~77% of the
should be considered high a B2B supplier of dairy ingredients (SMP, almonds owning and operating farming contestable market), seeds and seed
risk and come with volatility. WMP & AMF), infant formula (IMF) products and processing assets in Australia. SHV treatments globally, with a marketing
For this reason we tend to and Lactoferrin. SM1 counts global FMCG offers a vertically integrated model with presence in over 30 countries and sales in
companies among its client base, including core capabilities in farming, processing over 100 countries
focus on stocks where we see the a2Milk Co (A2M) for which SM1 is the and marketing. SHV operates a diversified The share price of NUF has fallen
either: a structural uplift in exclusive supplier of infant formula in China,
portfolio of almond orchards as well
Australia and NZ. materially from its 2018 highs as the
ROIC through the cycle (SM1), as state of the art processing facility in impact of less than ideal seasonal
The key driver of SM1’s recent earnings Carina VIC and value added processing in
cyclical growth stories (SHV), growth acceleration has been the conditions in Australia and Europe,
Thomastown VIC.
or counter-seasonal crop transition of its revenue streams from bulk increased competition in Australia,
commodities to higher value consumer Long-run almond price cycles historically unfavourable US rulings around
exposures (NUF). have run 9-10 years with a bottoming in glyphosate and a capital raising to
packaged and IMF products, with this
process largely driven by the success of A2M prices emerging in year 3-4. We are now deleverage the balance sheet impacted
branded products in Australia and China. ~3 years removed from the previous peak the share price. While we acknowledge
Looking into FY19e we continue to view the suggesting we are now at or approaching the heightened ESG overlay owing to the
growth trajectory of A2M IMF products in the bottom of the current long-run pricing potential risk around glyphosate liabilities
China as a key driver of earnings for SM1, cycle. Given its maturing orchard asset and the potential impact of a weaker
but also expect the company to increasingly base, we see SHV as having greater selling window in Europe, we see the
benefit from a more diversified portfolio operating leverage to elevated almond current ~20% discount to its global peer
of customers (particularly in FY20-21e prices in this cycle than the last, with group, which carry a similar risk profile,
when ~NZ$400m of capital deployment production at its peak (FY24-26e) forecast as excessive. We see the likely share price
begins to contribute) as supply agreements to exceed FY15 levels (the previous peak catalyst as being a return to more normal
with New Hope Nutritionals, Bright Dairy,
when SHV generated EBITDA of $100m) seasonal conditions in both Australia and
Munchkin and Foodstuffs commence.
by ~50%. In the short term a weaker than Europe, the latter now representing ~50%
If SM1 is successful in gaining required
expected Californian crop (~80%) of global of earnings.
regulatory approvals for these brands and in
developing its asset base, then we estimate supply) could also prove a tailwind for
SM1 has the scope to double its EBITDA almond prices as we enter FY19e.
by FY21-22e, which would put it on a pace
to generate earnings growth in excess of
A2M, something not reflected in its relative
valuation.
ANALYST OUTLOOK FOR 2019. 7TECHNOLOGY. Chris Savage
We continue to be positive Technology One (TNE) Citadel Group (CGL) Integrated Research (IRI)
on the technology sector Technology One is an end-to-end Citadel is a software and services Integrated Research is a software
in Australia as, in an provider of enterprise software in company that specialises in company that has one key product –
Australia, New Zealand, Malaysia managing information in complex called Prognosis – which monitors
environment of low interest and the UK. In our view the environments. The company is the performance of a customer’s
rates and low growth, we company is in the strongest position currently transitioning from being communications, infrastructure and/
believe there are a number it has ever been in with its Cloud more of a services company to more or payments system. The company
of good quality stocks in the business now starting to take off, of a software company as Citadel has many of the attributes we
the Consulting business turning provides more solutions through look for in a tech company: global
sector with reasonable to around and the UK business nearing the use of its own software. Our presence, leading market position,
strong growth outlooks. profitability. We believe these key investment thesis is that, over high quality customers, large
factors will enable the company to time, the PE ratio will re-rate from recurring revenue, long history,
We acknowledge that many stocks increase its annual NPAT growth that of a managed services company barriers to entry, strong balance
in the sector have had a strong target from 10-15% to 15-20% and (i.e. c.15-20x) to more of a software sheet and good management.
re-rating over the past couple of this will occur either this year or company (i.e. 25-30x) and this The share price fell in 2018 due
years but believe there is still some next (i.e. FY19 or FY20). The stock is indeed started to occur in 2018. The to a relatively flat FY18 result and
value in the sector with a number of not cheap – the FY19 PE ratio is >30x stock is now trading on an FY19 also the resignation of both the
good quality stocks on reasonable – but with this positive outlook we PE ratio of >20x and on the back Chairman and the CEO. We believe
forward PE ratios. Our goal is to believe the PE ratio can re-rate up to of both good earnings growth and the company will return to growth
find good quality tech stocks with around that of Altium which trades further contract wins with its own in FY19 and combined with some
strong growth outlooks that are on an FY19 PE ratio of >40x. software we believe the re-rating continuity in management we expect
currently trading on forward PE will continue in 2019. a rebound in the share price.
BUY, PT $7.50
ratios of around 25x or less and that, BUY, PT $10.00 BUY, PT $3.50
over time, can re-rate up to over 30x
as has happened with stocks like
WiseTech Global (WTC) and Altium
(ALU).
ANALYST OUTLOOK FOR 2019. 8DISCRETIONARY RETAIL & Sam Haddad
PROFESSIONAL SERVICES.
Temple & Webster (TPW) in the trade and commercial segment; 5) material efficiency opportunities in Zealand are ripe for consolidation with
TPW is Australia’s largest online only adding new adjacent categories; and AJ Park; 7) neutralising losses in the a long tail of independently owned
furniture and homewares retailer with expansion into new geographies. Data Services business; 8) potential operators. PFP also stands to benefit
over 130,000 products on sale from over FX tailwinds on the back of weakness from the compelling fundamentals of
700 suppliers. The TPW e-commerce in the $A/$US FX rate; and 9) potential the death care industry, including the
IPH (IPH) earnings accretive acquisitions that positive long term trend in the number
platform includes the integration of
ZIZO (formerly Wayfair Australia) and IPH wholly owns Spruson & Ferguson provide cost and revenue synergy of deaths underpinned by an increasing
Milan Direct, all now trading under (which now includes former FAKC and benefits. and ageing population, the industry’s
the Temple & Webster brand. TPW Cullens), Pizzeys and AJ Park. IPH highly defensive attributes and the
targets the ‘impulse’ buyer looking is the leading Intellectual Property relatively high barriers to entry. We
(IP) services group in the Asia-Pacific Propel Funeral Partners (PFP) believe PFP’s current share price levels
for a discovery experience as well as
the ‘intent’ buyer seeking a planned region, with specialist services spanning PFP is the second largest provider of presents an attractive entry ahead of
purchase. TPW is well positioned to the protection, commercialisation, death care services in Australia and death volumes normalising back to
benefit from a number of structural enforcement and management of Zealand. PFP’s portfolio footprint growth (off soft market death volumes
trends, including: the migration to IP. The group comprises a team of comprises 109 locations including in 2018) and with an active acquisition
online (only 4% of Australia’s furniture ~630 staff that services a diverse 25 crematoria and 8 cemeteries. We pipeline at hand.
and homewares sales is online, vs client base of Fortune Global 500 believe PFP’s location footprint is
14% in the US and UK); online savvy companies and other multinationals, difficult to replicate as many of its
millennials now entering TPW’s core public sector research organisations, funeral homes have been operating
demographic; and faster internet/ foreign associates and local clients. since the late 1800s and early
mobile speeds. With a stabilised The key positive factors we see for IPH 1900s. Management have significant
platform and strong balance sheet in include: 1) improved underlying market experience investing in the death care
place (net cash of $10.5m at 30 Sept conditions with impacts of the America industry spanning over 10 years and
2018), management can now focus more Invests Act (AIA) now behind; 2) which is strongly aligned through significant
attention to accelerate top-line growth. in turn should support solid organic equity ownership, the majority of which
Early benefits are evident with the growth, especially in Asia where growth is escrowed for 10 years. Based on a
acceleration in sales growth from 22% is two-fold including growth of the proven growth strategy, the leadership
in 3Q-FY18 to 28% in 4Q-FY18 to 39% in market itself and market share gains; of an experienced management team
1Q-FY19. There are several initiatives 3) the recent expansion into China, and the backing of a strong balance
underway to accelerate sales growth opening significant long-term growth sheet, we believe PFP is well positioned
including: adding depth and breadth to prospects; 4) the realisation of FAKC to drive further industry consolidation.
the company’s core offer; investing more - Cullens merger efficiency benefits; Both markets in Australia and New
ANALYST OUTLOOK FOR 2019. 9RESOURCES: BASE & David Coates
PRECIOUS METALS.
After carrying some strong lithium ion battery / renewable energy debt-free balance sheet. With interest Nickel Mines (NIC)
momentum into 2018 the Resource thematic remains a key factor in demand in the gold equities increasing for safe- We see several important company-
growth and a catalyst for higher prices to haven/defensive positioning and the gold specific catalysts for NIC in 1HCY19
equities overall have been fairly incentivise a required supply response. price, particularly in Australian dollar
rangebound through the course of which, combined with a compelling
The gold price has remained resilient in terms, holding up well we rate RRL as value proposition from the current share
the year. We are however seeing the face of a strong US dollar and steadily one of our top picks. price, make it one of our top picks.
some divergence into the end of rising real interest rates. With the Buy, Target price $4.90/sh Construction of the four Rotary Kiln
2018, with the gold producers combination of its counter-cyclical role Electric Furnace (RKEF) lines in which it
trading at the top of their ranges and the potential for real interest rates has an interest with Tsingshan Group, the
to stabilise or drop on lower inflation Pantoro (PNR) world’s largest stainless steel producer,
and the base metal and diversified
expectations, we may see some of the PNR is a growing gold production is well advanced. Commissioning is
miners trading at the bottom of headwinds to the gold price removed. We company, operating its flagship, 100% scheduled for the end of the June 2019
their ranges. also point out that the Australian dollar owned, Halls Creek Project (including the quarter but we see the potential for this
gold price remains very strong and local Nicolsons Gold Mine) in the Kimberley to come in ahead of schedule and for NIC
This has been driven by a shift in producers are making excellent margins. Region of Western Australia. PNR is to make the transition from developer to
sentiment as concerns about slowing now debt free and has just completed Nickel Pig Iron (NPI) producer by early
growth and elevated equity market Overall, while the demand outlook is
clouded by the US-China trade dispute, a major capital investment program 2HCY19. The recent announcements
valuations have seen increased interest which is planned to lift production from of qualification for material tax relief
in counter-cyclical and safe-haven key fundamental indicators remain
supportive and value is starting to ~50kozpa to 80-100kozpa and lower All- benefits over the first nine years of
investments – a function which gold and In-Sustaining Costs (AISC) to A$1,000/ production and the securing of fixed price
gold equities have traditionally fulfilled. emerge across the sector.
oz. While delays to achieving this have production growth (the third and fourth
In contrast, exposure to “Dr Copper”, the been reflected in the recent share price RKEF lines) we believe are yet to be
rest of the base metals complex and iron Regis Resources (RRL) decline, it is our view that PNR is well factored in by the market. As production
ore – driven by various forms of industrial placed to meet this target. The mill has approaches we think these will be
demand and construction growth – has RRL is an established, low-cost
Australian gold producer with an been upgraded, the Wagtail underground incorporated into NIC’s valuation and
lost its appeal. is commencing production and the drive a material share price re-rating.
excellent track record of production and
In the base metals, however, cost performance as well as delivering balance sheet has been strengthened. Speculative Buy, TP $0.65/sh
fundamental indicators remain sector-leading shareholder returns. It We expect production growth, Resource
encouraging with all markets facing also has one of the strongest organic growth and increasing free cash flow to
supply deficits and stockpile drawdowns growth pipelines among the multi-mine drive a share price re-rating in CY19
over 2018-2019. Copper and nickel gold producers and the capability to fund Buy, TP $0.31/sh
remain favoured exposures as the EV / that growth itself, thanks to a strong,
ANALYST OUTLOOK FOR 2019. 10RESOURCES: Peter Arden
OIL, GAS & LITHIUM.
In the energy sector, the oil with strong storage battery growth with a 40% interest in Blocks A2 and A5 Gruyere points to the potential for
price has retraced by 35% from points to continued strong demand in The Gambia, close to and in a similar significant additional standalone gold
growth for lithium and associated geological setting as the SNE field. While production from prospects such as
recent four-year highs under battery components (nickel, cobalt the recent well drilled into the Samo Smokebush, Wanderrie, Toppin Hill,
the combination of relative and copper). The lack of meaningful Prospect in these blocks by FAR and its Tamerlane, and Corkwood/Ibanez.
oversupply that has caused a lithium pricing information and joint venture partner, the global oil major, Speculative Buy, Valuation $1.04/sh
significant build in oil stockpiles the largely extraneous influence of PETRONAS, did not encounter economic
and forecasts of lower growth in non-demand factors on the Chinese oil, it provided valuable data that Metals X (MLX)
spot lithium carbonate price has enhances the value of nearby prospects
2019. contributed to what we believe is a and targets.
MLX is a copper and tin producer. Its 100%
owned Nifty mine in WA is undergoing
false perception of lithium demand Speculative Buy, Valuation $0.22/sh a renewed transition to produce about
OPEC and other producers led by weakness in 2018. There is growing 35ktpa of copper in concentrate after
Russia have agreed to total cutbacks evidence that underlying demand for Gold Road Resources (GOR) having experienced delays and production
of 1.2 million barrels of oil per day, so higher quality lithium products has
GOR is a gold development and issues related to the rundown nature of
prices are expected to stabilise and actually been quite firm in 2018 and so
exploration company. Through its fully the historic mining areas. Nifty’s future
should then head higher as economic with very limited new supply coming
funded 50% ownership of the Gruyere production is based on a new Resource
conditions improve again. Gas prices on, this points to a growing likelihood
Gold Project in WA, the build of which is containing predominantly recently
in Eastern Australia have also retraced of firmer lithium prices in 2019.
being managed by JV partner Goldfields discovered ore outside the historic mining
from their peaks after guarantees of
and is nearing completion, first gold area. MLX also has a 50% interest in and
greater supply availability but they FAR Limited (FAR)
production from the world class Gruyere is Operator of the world scale Renison tin
are set to at least remain around FAR has a 15% interest in several major open pit mine is scheduled in Q2 of 2019 mine joint venture (JV) in Tasmania where
current levels because of their close oil discoveries in offshore Senegal that and to average 300kozpa for 12 years. it is currently increasing high margin tin
relationship to the LNG netback are economically attractive at current GOR’s average annual share of gold from output by about 15% using ore sorting
price and they are set to potentially oil prices and now about to enter the Gruyere of 150koz is expected to generate technology and the JV partners are
move higher in coming years as the development phase. With 2C Resources of very strong cash flows averaging around considering a further 55% increase in tin
global LNG market is undergoing 641 million barrels (Mbbls) (recoverable), $100m at current gold prices through low output to about 13ktpa (100% basis) from
strong demand growth. The continued the SNE field is still one of the largest forecast all in sustaining costs averaging the Rentails fuming project. MLX is also
increase in battery density and oil discoveries in the last four years and A$1,025 per ounce. There is scope to investigating high grade cobalt deposits
expansion of electric vehicle models along with the nearby FAN discovery expand and enhance Gruyere’s production in its 100% owned huge Wingellina
by the major car makers, (assisted (with 2C Resources of 198Mbbls) is by exploiting shallow deposits around nickel-cobalt limonite project in Central
by a range of government measures nearing a development decision in early Gruyere. Exploration success in GOR’s Australia.
that includes quite generous subsidies 2019. FAR has also been very active in 100% owned regional areas surrounding Buy, Target Price $0.85/sh
in some major countries) along the adjoining areas, where it is Operator
ANALYST OUTLOOK FOR 2019. 11RESOURCES: COAL. Stuart Howe
The key themes for coal Metallurgical and thermal coal prices Coronado Global Resources (CRN) Whitehaven Coal (WHC)
have remained strong to the end
markets are persistent but of 2018 and are comfortably above
CRN is the largest dedicated supplier WHC expect coal production of 22.0-
steady levels of demand, to the global metallurgical coal 23.0Mt (100% basis) in FY19, with
consensus estimates for 2019. A high
trade, and the fifth largest among the majority being thermal coal
increasing barriers to new level of demand across the Asia-
its commodity diversified peers. The (around 80%) and sourced from its
supply and the likelihood region for coal products has persisted.
company’s majority and founding two flagship mines; Narrabri and
The supply-side response to the high
of market consensus coal coal prices over 2016-18, from easily
shareholder (PE group EMG at 80%) Maules Creek. Company management
has committed to paying 100% of have established an enviable track
price outlook upgrades accessible projects in established
free cash flow to the end of 2019 as record developing and operating
all increasing the value of producing regions, has been
dividends. With a portfolio of mature coal assets, and managing WHC’s
exhausted. Therefore future supply
installed coal production growth will mostly be dependent on
assets and stable capex, CRN will balance sheet through the commodity
capacity. have strong earnings to free cash cycle. Its growth projects could see
the development of new projects
flow realisation and therefore a very production lift to over 25Mtpa by 2023
which are facing ever increasing
high dividend yield is likely. Its assets and potentially to over 30Mtpa in
environmental permitting and debt
are diversified across key global the longer term. WHC has a strong
financing barriers.
metallurgical coal producing regions; balance sheet and is positioned
the Bowen Basin (Queensland) and the to generate sufficient cash flow to
Central Appalachian Basin (US). maintain a dividend and develop its
growth projects.
ANALYST OUTLOOK FOR 2019. 12HEALTHCARE & BIOTECH. Tanushree Jain
The fundamentals and Pharmaxis (PXS) Mesoblast (MSB) Starpharma (SPL)
Starpharma is a Melbourne-based platform
demographic trends for the Pharmaxis is a biopharmaceutical company Mesoblast is the leading allogeneic
company commercialising the science of
focused on the development of drugs for regenerative medicine player with one of
healthcare and biotech sector inflammatory and fibrotic diseases. Its the most diversified pipelines and several nanoscale polymers called dendrimers.
remained strong in 2018. lead assets Phase 2 SSAO/VAP-1 inhibitor products in late stage. We view the positive Its proprietary dendrimer technology is
BI_1467335 partnered in a multi-million results to date from its paediatric GvHD versatile with wide applicability across the
We expect this momentum to continue into dollar deal with Boehringer Ingelheim (BI) (Graft vs. Host Disease) Phase 3 trial as an pharmaceuticals sector. In drug delivery the
2019, based on the following 3 key themes: and currently unpartnered Phase 1 LOXL- important de-risking milestone for it which company is focused on oncology (cancer) with
1. Friendly regulatory environment - the 2 inhibitors are targeting Non-alcoholic not only validates its technology platform, platform validated by partner AstraZeneca. In
US FDA not only approving more drugs, Steatohepatitis (NASH), a multibillion but also takes it closer to having its first 2018, SPL licensed its VivaGel BV (bacterial
but also making efforts to expedite the dollar market with currently no approved product approved in the US market. Positive vaginosis) product for most of Ex-US markets
approval of much needed innovative treatments. PXS’ LOXL-2 assets have meetings with the FDA recently keep MSB to Mundipharma with launch expected
drugs. successfully cleared Phase 1 trials which on track to file for approval in 1Q19, with in 1HCY19 and to ITF Pharma for the US
has increased their probability to partner approval expected by end CY19. Other market. We expect the company will move
2. Increased activity in licensing and
significantly. The results indicated no safety Key catalysts: a) completion of enrolment from an R&D stage company to a commercial
M&A - driven by large pharma and
or tolerability issues and have demonstrated in Phase 3 trial with advanced CHF in stage company with recurrent revenues
biotech’s need to replenish pipelines
dose dependent, significant and long lasting 1QCY19 and b) FDA BLA meeting to discuss from VivaGel BV starting in 2019 from Ex-
following the expiry of patents on their
inhibition of LOXL-2 highlighting its best- regulatory filing under RMAT designation US markets. US launch of the product is
legacy blockbuster products and US
in-class profile. PXS is already engaged for MPC-150-IM in end stage CHF patients potentially delayed following FDA asking for
tax reforms. We have already seen an
with multiple companies in discussions requiring LVAD in 1HCY19. We continue to additional confirmatory clinical data. Cash of
uptick in licensing and M&A activity in
around partnering this asset. Data on long believe that the selloff following the results A$49.5m provides more than 2 years runway.
2018 in both US and Australia.
term tox studies to make the LOXL-2 assets from the NIH run Phase 2b LVAD trial in Key upcoming catalysts include a) initiation of
3. Companies approaching maturity phase Phase 1 trial with SPL/AZN’s AZD0466 asset
Phase 2 ready are imminent. These tox end stage CHF patients is overdone. While
- several of the ASX listed biotech and which triggers a US$3m milestone to SPL,
data would complete the data package and the trial missed on the overall primary
healthcare stocks we cover will reach b) launch of VivaGel BV by Aspen in Australia
enable the company to move into serious endpoint, significant results on it were
maturity, with sentiment overall likely to and Mundipharma in Europe and other
partnering negotiations. PXS has a strong observed in a large subgroup of patients
be driven by late stage trial read outs, licensed markets from 2019, c) Initial data
cash position with A$47m providing at and statistically significant benefit on GI
regulatory approvals and launches, from ongoing Phase 2 DEP docetaxel trial
least 2 years runway and several upcoming bleeding and related hospitalisations was
increased commercial momentum and and Phase 1 cabazitaxel trial and d) Clarity on
value inflexion points which include: Tox reported, which have been advised by FDA to
partnering activity. US approval and launch timelines for VivaGel
studies results from LOXL-2 assets, with be an approvable and clinically meaningful
In view of these factors we believe the a partnership deal expected to follow in endpoint. The selloff therefore has created a BV following meeting with the FDA later in
following stocks stand out as potential 1HCY19 and results from Phase 2A trials in buying opportunity. 1QCY19.
winners: NASH for partnered asset with BI expected
Buy, speculative, Valuation $4.03/sh (Buy, speculative, Valuation $1.88/sh).
in mid CY19.
Buy, speculative, Valuation $0.52/sh
ANALYST OUTLOOK FOR 2019. 13HEALTHCARE. John Hester
Avita Medical (AVH) (Speculative) Elixinol (EXL) (Speculative)
Avita Medical remains on the key In addition the company expects the Elixinol is a leading brand in the emerging The Australian operations of the group
picks list from mid year 2018. AVH is a first large procurement order from US market for hemp based nutraceutical include Hemp Foods Australia (HFA) being
medical device company specialising the Biomedical Advanced Research products. The category has continued a company focussed on the development
in the treatment of 2nd and 3rd degree and Development Authority (BARDA) to experience explosive revenue growth of the market for Hemp Foods. This
burns requiring hospitalisation. Recell in CY2019. This is part of a long term which we now believe will further category is also expected to grow rapidly
was approved for use by the US FDA in contract expected to generate tens of accelerate with the imminent passing from a zero base. The catalyst for the
September 2018. The next major catalyst millions in revenues over the next three to of the 2018 Farm Bill in the US. The Bill sector was the inclusion of hemp foods on
will be the US product launch and the five years. will reclassify industrial hemp off the the Foods Standards Code.
reporting of first commercial sales in the Following a recent capital raise of $40m, controlled substances act and the growing The Group is led by Chief Executive Paul
US. the company has plans to accelerate of hemp will now be regulated by the US Benhaim who is the co-founder of both
The data from the US clinical trials its clinical program in the treatment Department of Agriculture. In our view Elixinol US and Health Foods Australia.
demonstrates ReCell has an excellent of Vitaligo and for aesthetic use in the this is another important step toward Following the most recent capital raise
safety profile with comparable healing minimally invasive cosmetic market. industrial hemp products becoming he retains 62% of the listed entity and is
rates in burns patients. The major mainstream in the United States. the largest shareholder by a considerable
benefits of the device are the up to Recently the FDA approved the first margin. Mr Benhaim is considered an
~30% reduction in the size of the donor medicinal cannabis product in the US for expert in the field of industrial hemp and
site for grafting, improved aesthetic the treatment of Epilepsy in children. In medicinal cannabis following more than
outcomes and shortened length of stay for our view this event is likely to have a flow two decades of experience in the sector in
hospitalisation. The shortened length of on effect for other market participants Australia, the US and Europe.
stay is equally as important as the clinical including for the over the counter hemp The company has not provided earnings
outcomes for commercial adoption. The CBD products marketed by Elixinol US. guidance for CY18, however, quarter on
device is predominantly for hospital use quarter revenue growth has exceed 24%
and the hospital must be able to justify this year and annual revenues are on
the use of new technology by either cost track to increase by ~140% to ~$40m.
savings or additional revenue generation.
ReCell can potentially achieve both
criteria.
ANALYST OUTLOOK FOR 2019. 14The following may affect your legal rights: Disclosures Peter Arden owns 850,000 shares in FAR Ltd (FAR); the riskiness with which biotechnology investments
This document is a private communication to clients T S Lim holds long positions in MQG and and MQGPC. 100,000 shares in Gold Road Resources (GOR); and ought to be regarded. Stocks with ‘Speculative’
and is not intended for public circulation or for the use 200,000 shares in Metals X Ltd (MLX). designation are prone to high volatility in share price
Bell Potter acted as Co-manager in the following movements. Clinical and regulatory risks are inherent
of any third party, without the prior approval of Bell transactions and received fees for the services: WBC Bell Potter Securities acted as lead manager and
Potter Securities Limited. underwriter in the March and September 2017 in biotechnology stocks. Biotechnology developers
Capital Notes 5 & 6 offers (Feb & Nov 2018). usually seek US FDA approval for their technology
This is general investment advice only and does not placements of MSB and received fees for those
Bell Potter Securities acted as Co-Manager in MQG’s services. which is a long and arduous three phase process
constitute personal advice to any person. May 2018 Capital Notes 3 (MQGPC) offer and received to prove the safety, effectiveness and appropriate
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Disclosure of Interest: Biotechnology Risk Warning:
David Coates owns 1,400 shares in RRL.
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