ANALYST STOCK PICKS FOR FY19 - Our analysts share their outlook and top stock picks - Bell Direct
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ANALYST STOCK PICKS FOR FY19. Our analysts share their outlook and top stock picks. July 2018
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 5
FIXED INCOME 6
Please note that Speculative securities may not AGRICULTURAL FMCG 7
be suitable for retail clients (refer to final page of TECHNOLOGY 8
this report). DISCRETIONARY RETAIL & PROFESSIONAL SERVICES 9
INDUSTRIALS 10
www.bellpotter.com.au RESOURCES 11
1300 0 BELLS (1300 023 557) HEALTHCARE & BIOTECH 14
info@bellpotter.com.auBANKS & GENERAL INSURERS. TS Lim
The banking sector has never been stronger in terms of capital and liquidity Macquarie Group (MQG)
including funding and asset quality. However, emerging revenue headwinds will now MQG’s long term value lies in its We continue to regard MQG as a
have a greater impact on the bottom line. ability to understand risk and adapt its global asset and risk manager with
These include NIM pressure on the asset side (repricing tailwinds easing, strategy and business mix to changing world-class expertise in infrastructure
differential between the front and back books narrowing and price competition market conditions. This has enabled investment (leading player with
effects as big and small banks alike fight for volume growth) and the liability side the company to transform itself and $495bn AUM and $86bn EUM) and
(higher funding costs from elevated 90 day BBSW rates impacting the wholesale push for higher and more sustainable also in the finance, banking, advisory
funding space including securitisation and from price competition to secure stickier revenues. The more obvious benefits and risk and capital solutions space.
term deposits) as well as decreasing sources of non-interest income (driven by of the transformation are the higher These attributes in addition to
removal of ATM fees and wealth contributions, competition and fewer trading margin and capital efficiency achieved predominantly lower-risk annuity-style
opportunities). that have resulted in higher profit earnings streams (~70% of Group net
contributions and Group ROE in return profit contribution) and strong capital
While the major banks have the capacity to further reduce operating expenses to
for lower volatility. Our estimates management flexibility (~$2.4bn
cushion the blows, the smaller players appear to be caught in the perfect storm
suggest this transformation occurs surplus capital based on 10.5% RWA)
where top line constraints are combined with the relative inability to quickly reduce
on average once every 4-5 years for continue to underpin our bullish view
costs given their lack of scale. Given these constraints and ongoing concerns
annuity-style revenue components of MQG. As a lower risk, higher return
over how the Royal Commission will ultimately impact the sector, we believe the
such as net interest income and base investment proposition, MQG remains
prospects are better in the next 12-18 months for players with diverse earnings and
fees. our top sector pick.
offshore exposure such as MQG and CYB. Of the majors, WBC is now our top pick.
We also believe MQG’s performance Buy, Price Target $125.00
fees now have some annuity-style
characteristics, given the timeline
of AUM growth and pipeline of
realisation, and this should be
stable at around 50bp of EUM. Other
fees and commissions were first
rebased after four years but appear
to have stabilised at ~$1.5bn while
capital markets facing M&A fees and
trading income also show a level of
sustainability.
ANALYST STOCK PICKS FOR FY19. 3BANKS & GENERAL INSURERS. TS Lim
Clydesdale Bank (CYB) Westpac Group (WBC)
The Boards of Virgin Money Holdings Upon completion, Virgin Money WBC has a reputation for producing WBC’s corporate memory over credit
(UK) plc (Virgin Money) and CYB have shareholders will own ~38% of clean results and its 1H18 was no losses remains intact in our view (after
agreed the terms of a recommended the merged entity. Virgin Money exception. Cash earnings were mainly having had a near-death experience
all-share offer to be made by CYB for shareholders would also be entitled driven by strong NIE including stellar in the early 1990s) and the bank
Virgin Money. The merger would create to any dividend declared and paid NIM growth, stable other income, cost continues to recognise the need for
the largest mid-sized bank and the in the interim period ended 30 June discipline and strong and conservative quality credit and operational risk
sixth largest bank in the UK that would 2018. The transaction is expected credit risk management on top of a management (in addition to managing
be active in the retail and SME space to be materially earnings accretive benign credit environment. for profitable growth) and a very strong
with scale and national presence, based on estimated annual pre-tax balance sheet (capital, liquidity and
As in the past few years, WBC’s
leading digital and mobile banking cost synergies of £120m (BP estimate funding). This is the conservative side
consumer and business banks remain
capabilities and ~6m customer base. £118m based on £85m after tax and of Australia’s oldest bank which we
the key drivers of earnings and ROE.
CET1 ratio for the merged entity is effective tax rate of 28%) with a full run think will continue to underpin lower
Group ROE was at the top end of the
expected to be >12% and this should rate to be achieved after 30 September risk and steady earnings growth (in
13-14% target range while CET1 ratio
further increase following near-term 2021. The proposed cost synergies line with GDP) in the years ahead.
was 10.5%, equal to APRA’s 2020
capital optimisation initiatives and equate to ~19% of CYB’s underlying
minimum requirement. The interim Buy, Price Target $31.90
mortgage risk weight accreditation. cost base and ~12% of the merged
dividend was unchanged at 94cps and
entity’s underlying cost base.
CYB would acquire all the ordinary WBC intends to maintain dividends
share capital of Virgin Money using All else being equal, the proposed until the payout ratio normalises to the
an exchange ratio of 1.2125 new CYB deal should be highly value accretive 70-75% target range.
shares for each Virgin Money share in terms of underlying EPS (up to
(i.e. ~547m new CYB shares will be 16% upside given the full run rate for
issued for Virgin Money’s ~451m cost synergies) and ROE (this should
shares). The offer implies a 19% improve by up to 2.4% in absolute
premium to Virgin Money shareholders terms). The merged entity would be
based on Virgin Money’s closing price valued at $6.23, in line with our $6.30
of £3.12 per share and a 35% premium price target.
based on its three-month VWAP of Buy, Price Target $6.30
£2.76 per share.
ANALYST STOCK PICKS FOR FY19. 4DIVERSIFIED FINANCIALS. Lafitani Sotiriou
Pendal Group (PDL) Challenger (CGF) Janus Henderson Group (JHG)
PDL (formerly BTT) returns as CGF is set to benefit from some of JHG is set to continue its post-merger
one of our Key Picks for FY2019, the biggest changes to the Australian success into FY2019, with the company
with the company continuing to Superannuation system in a number expected to realize further cost
focus on future growth through the of years. We see the forthcoming synergies, and revenue opportunities
selective expansion of its investment introduction of Deferred lifetime arising from its broad cross-border
capabilities, and significant investment Annuities (DLAs), and the Federal distribution base.
in seeding new offerings. Government’s Comprehensive Income We foresee JHG delivering double
Products for Retirement or CIPRs
PDL is expected to exceed A$100bn digit EPS growth over CY18e &
framework as being significant
in FUM during FY19, and we believe CY19e, supported by a recently
catalysts for CGF over the medium-
PDL’s strategy remains supportive of announced buyback. We believe JHG
term.
our double digit EPS growth forecast is a compelling growth and yield
over the medium term. We continue to We estimate these changes have the opportunity over the medium term.
rate the stock as one of our top picks potential to create over $10 billion Buy, Price Target A$70.00
in the sector. in additional market demand for
annuities products, which represents
Buy, Price Target $15.50
a significant opportunity for CGF to
capitalize on given its strong brand
recognition, expertise, and broad
distribution reach within the Australian
Market.
Buy, Price Target $17.49
ANALYST STOCK PICKS FOR FY19. 5FIXED INCOME. Damien Williamson
After a strong start to 2018, the ASX Bendigo and Adelaide Bank Convertible Crown Subordinated Notes II Westpac Capital Notes 5
listed debt and hybrid market saw Preference Shares 3 (BENPF) (CWNHB) (WBCPH)
weakness over February and March. BENPF remains attractively priced Since being priced at a margin of The launch of the WBCPH issue on
This was associated with the digestion relative to other hybrids from financial 4.00% in March 2015, Crown has 5 February 2018 coincided with the
of over $3bn of new issuance and the issuers. Paying half yearly income significantly de-risked, focusing 2018 peak in the hybrid market. The
negative reaction to Bill Shorten’s at a margin of 4.00% above 180 day operations on its casino monopoly subsequent weakness has seen
policy proposal on scrapping cash bank bill, BENPF has benefitted from in Melbourne and Perth, and its this security trade below $100. The
rebates on excess franking credits the recent spike in bank bill rates. Its Barangaroo development in Sydney. likelihood of redemptions exceeding
announced on 13 March. These factors December 2018 dividend of $2.1871 Net debt has reduced from $2.4bn hybrid issuance over the next 6
contributed to both WBCPH and fully franked will be the highest (Dec 2014) to $250m (Dec 2017), months provides a catalyst for WBCPH
CBAPG listing at a discount, breaking dividend payment since June 2016, following the A$4.3bn divestment of to narrow its discount to face value.
the winning sequence of 14 bank / having been reset at the 180 day bank its 34.3% stake in Melco. In early 2018,
financial hybrid lists spanning back to Call Date 22 September 2025
bill rate on 15 June 2018 of 2.1644%. Crown realised US$264m from the
December 2015. Fair Value $98.06
sale of the Alon Las Vegas site and
Call Date 15 June 2021
We have seen some stabilisation A$150m (including advanced loans) for
since early April, when investor Fair Value $102.72 the sale of its 62% stake in CrownBet.
sentiment received a boost with the CWNHB is likely to see support from
resumption of positive new listings, the $2.4bn pipeline of pending ASX
after the MQGPC new issue was listed debt redemptions over the next
priced attractively enough to list at a 6 months.
premium on 8 June. One catalyst for Call Date 23 July 2021
a recovery is the $4.5bn pipeline of
redemptions over the next 6 months, Fair Value $102.69
spanning 6 ASX listed debt and hybrid
securities. We expect a refinancing
issue for the $2.0bn CBAPC, where
the refinancing requirement has been
reduced via the $1.365bn CBAPG
issue completed in April. The $2.4bn
pipeline of pending ASX listed debt
issue redemptions will most likely be
refinanced through the wholesale debt
market.
ANALYST STOCK PICKS FOR FY19. 6AGRICULTURAL FMCG. Jonathan Snape
Investments in the Agricultural & The a2Milk Company (A2M) Synlait Milk (SM1) Select Harvests (SHV)
FMCG sector should be considered Despite a recent profit downgrade The key driver of earnings and value In the near term we see SHV as the
high risk and come with volatility. For for FY18e, A2M continues to achieve at SM1 has been the transition from a beneficiary of tighter global supply-
this reason we tend to focus on stocks strong levels of earnings growth while producer of bulk dairy ingredients to demand dynamics in almond markets
where we see either: a structural generating high levels of operating a producer of higher value consumer following weaker than expected
uplift in ROIC through the cycle (A2M, cash realisation. Near term we see packaged and IMF products. To date projection for the Californian crop
SM1) or cyclical growth stories (SHV). China as a key driver of earnings this process has been driven by A2M (~80% of global supply). In the long-
growth as both the distribution branded products but increasingly term we see SHV as the beneficiary
footprint expands and sales velocities we expect SM1 to benefit from of rising production (on an expanded
improve, however, we are also supply agreements with New Hope acreage) at a time when global almond
optimistic about other growth levers Nutritionals, Bright Dairy, Munchkin prices look to have moved through the
open to A2M including the US, UK and Foodstuffs. Over the coming low of the current long-run pricing
and adult nutrition. Longer-term twelve months we see potential share cycle. We see SHV as having greater
we see both the geographic and price catalysts for SM1 including: operating leverage to elevated almond
product expansion strategy for A2M (1) receival of CFDA registration for prices in this cycle than the last, with
as providing the next legs of growth, New Hope and Bright IMF products; production at its peak (FY24-26e)
with the company’s success in the IMF (2) USFDA approval for the Munchkin forecast to exceed FY15 levels (the
category allowing A2M to internally grassfed product; (3) completion of the previous peak in almond prices when
fund both its geographical expansion liquid beverage plant and clarification SHV generated EBITDA of $100m) by
and product diversification strategy. on the RTD nutritional strategy; and ~50%. With modest net debt (excluding
(4) completion of the Pokeno facility lease liabilities) and tailwinds
and transition from base ingredients emerging in almond prices and
to nutritional’s products supporting an volume growth, we see SHV entering
improving ROIC profile in FY21-22e. an extended period of improving ROIC.
ANALYST STOCK PICKS FOR FY19. 7TECHNOLOGY. Chris Savage
We continue to be positive on the The Citadel Group (CGL) Integrated Research (IRI) Technology One (TNE)
technology sector in Australia as, in Citadel is a software and services Integrated Research is a software Technology One is an end-to-end
an environment of low interest rates company that provides integration company that has one key product – provider of enterprise software in
and low growth, we believe there are and managed services solutions to called Prognosis – which monitors Australia, New Zealand, Malaysia and
a number of good quality stocks in state and federal governments and the performance of a customer’s the UK. We regard Technology One as
the sector with reasonable to strong the private sector in Australia. The network. The company has many one of the highest quality listed tech
growth outlooks. We acknowledge that stock is currently trading on an FY19 of the attributes we look for in a stocks in Australia and accordingly the
many stocks in the sector have had a PE ratio of c.22x and so, in our view, tech company: global presence, stock tends to trade on a forward PE
strong re-rating over the past year or is being priced by the market as a mix leading market position, high quality ratio of >30x. The share price – and PE
so but we believe there is still some of both software and services which customers, large recurring revenue, ratio – has recently fallen, however,
value in the sector with a number of is probably reasonable. Over time, long history, barriers to entry, strong due to a contract dispute with a
good quality stocks on reasonable however, we believe the company will balance sheet and good management. customer (that has now been resolved)
forward PE ratios. Our goal is to find become more like a pure software The share price has recently fallen and a modest reduction in growth
good quality tech stocks with strong company and so will get re-rated by on no new news but some apparent in both FY17 and FY18. The outlook,
growth outlooks that are currently the market and trade on a forward PE concern on the growth outlook. however, is for a return for strong
trading on forward PE ratios of around ratio of c.30x or more. We believe this We, however, believe the stock can growth in FY19 and so over the next 12
25x or less and that, over time, can re- transition will become increasingly continue to deliver strong double digit months we expect the stock to re-rate
rate up to over 30x as has happened evident during FY19 and so the re- EPS growth over the medium term and return to a forward PE ratio of
with stocks like WiseTech Global (WTC) rating will gradually occur over the and so see good value in the stock at c.30x or more.
and Altium (ALU). next 12 months or so. present on an FY19 PE ratio of c.21x. BUY, PT $5.50
BUY, PT $7.50 BUY, PT $4.15
ANALYST STOCK PICKS FOR FY19. 8DISCRETIONARY RETAIL & Sam Haddad
PROFESSIONAL SERVICES.
Premier Investments (PMV) Our positive view on PMV is supported Propel Funeral Partners (PFP) IPH (IPH)
by the company’s strong long-term
We continue to prefer retailers with PFP is the second largest provider of IPH wholly owns Spruson & Ferguson
earnings growth outlook underpinned
the following key attributes: death care services in Australia and (which now includes former FAKC and
by three key growth pillars: Smiggle’s
-- Leveraged to global growth New Zealand. PFP’s portfolio footprint Cullens), Pizzeys and AJ Park. IPH
global expansion (the primary growth
opportunities; comprises 105 locations including is the leading Intellectual Property
pillar), Peter Alexander and online. 24 crematoria and 7 cemeteries. We (IP) services group in the Asia-Pacific
-- Elements of scalability on a global We note these growth pillars are believe PFP’s location footprint is region employing ~635 staff. Over
platform; higher margin and therefore a tailwind difficult to replicate as many of its recent reporting periods, IPH has
-- Preferably own their own brands; to group margins. We believe the funeral homes have been operating been impacted by external issues
-- Preferably own differentiated brands Smiggle brand can become a global since the late 1800s and early primarily relating to the America
or have a unique market position; brand given its leverage to youth 1900s. Management have significant Invests Act (AIA). This resulted in a
education and hence universal appeal experience investing in the death care series of negative earnings surprises
-- Are market leaders in their category; across cultures, and differentiated industry spanning over 10 years and and a de-rating in PE. However we
-- Strong omni-channel capability; and market position. is strongly aligned through significant believe AIA impacts are now behind
-- Have defensive attributes. equity ownership, the majority of and expect underlying IP market
The growth opportunity for Smiggle
which is escrowed for 10 years. trends to normalise moving forward.
Amongst the retail stocks we cover, is significant, with the brand only now
Based on a proven growth strategy, The key positive factors we see for
we believe LOV and PMV meet these entering Continental Europe and yet
the leadership of an experienced IPH include: 1) the resumption of
key attributes very well, although we to enter North America. Management
management team and the backing solid growth, especially in IPH Asia;
recently downgraded our rating on LOV has guided for Smiggle annual sales
of a strong balance sheet, we believe 2) the recent expansion into China,
from Buy to Hold based on valuation. to exceed $450m by FY20, which
PFP is well positioned to drive further opening significant long-term growth
This leaves PMV as our key retail pick. represents a significant doubling vs
industry consolidation. Both markets prospects; 3) the realisation of FAKC -
Smiggle’s FY17 sales.
PMV is an investment company whose in Australia and New Zealand are ripe Cullens merger efficiency benefits; 4)
major investment is in discretionary for consolidation with a long tail of material efficiency opportunities in AJ
retailer Just Group. Just Group independently owned operators. Park; 5) neutralising losses in the Data
operates specialty retail brands Just Services business; and 6) potential
PFP also stands to benefit from the
Jeans, Jay Jays, Portman’s, Jacqui E, FX tailwinds on the back of recent
compelling fundamentals of the death
Dotti, Peter Alexander and Smiggle. weakness in the $A/$US FX rate.
care industry, including the positive
long term trend in the number of
deaths underpinned by an increasing
and ageing population, the industry’s
highly defensive attributes and the
relatively high barriers to entry.
ANALYST STOCK PICKS FOR FY19. 9INDUSTRIALS. Tim Piper
Corporate Travel Management (CTD) Johns Lyng Group (JLG)
Our longer term investment thesis We like JLG’s exposure to growing
on CTD is based on the opportunity general insurance claims and extreme
to continue growing market share weather related events which we
in large, highly fragmented global expect to deliver ~20% EBITDA growth
corporate travel markets driven by in FY18e. The FY18e result will benefit
CTD’s customer value proposition. from strong CAT earnings from
While the share price has rallied Cyclone Debbie, however we note that
recently resulting in a slightly full underlying business as usual (BAU)
forward P/E multiple, we believe Insurance Building revenue also
this multiple will be justified by a continues to track well. The current
strong FY18e result in August and Suncorp trial contract presents
the likelihood of further accretive another growth opportunity running
acquisitions in the near term. Macro into FY19e if secured, but we do
drivers also remain in CTD’s favour note that JLG is carrying some extra
with strong business confidence levels overheads through FY18e to support
across key markets such as Australia this Suncorp trial. The company
and North America driving higher recently reaffirmed FY18e guidance.
business travel activity levels. BUY
BUY
ANALYST STOCK PICKS FOR FY19. 10RESOURCES. David Coates, Peter Arden & Stuart Howe
Resource equities overall have Together with a weaker Australian Despite the price drop, iron ore has
had a solid start to 2018, with the dollar we believe this helps explain held up well, having maintained
broader Metals and Mining Index the relative stability of the equities. an average price for 2018ytd above
up approximately 7.1% for the year Notwithstanding that, it is our view US$70/t and consensus has come up
to date. Having said that there is a that it is difficult to find compelling to meet our US$64/t price forecast for
sense in some corners of the market value in the sector. 2018. However, the increased spread
that valuations are full. Over the last In the energy sector, the lift in the oil between benchmark 62% prices and
month or so concerns around free price from the combination of supply lower grade 58% grade product has
trade restrictions and a stronger constraint and increased demand remained a feature of the market.
US$ are dampening sentiment, with has reduced oil stockpiles with the Gold has been mixed with a weaker
the Index 4.2% down from the high result that OPEC is talking about US$ price offset by gains in the A$
reached in mid-May. lifting output slightly, so prices may gold price. What has emerged as
The underlying commodities are flat-line for a while. Gas prices in a strong feature of the market is
generally off the elevated levels at Eastern Australia have retraced from the strong outperformance of gold
which they started the year, with the recent peaks after improved supply equities, particularly over the last
latest round of free trade rhetoric but are set to remain at elevated quarter. The ASX Gold Index has risen
and US dollar strength driving further levels as the global LNG market faces 10% in this time and share prices of
price drops. For 2018 year to date zinc strong demand growth. The continued the larger producers are at or near
is off 13.5%, iron ore 10.0%, copper expansion of electric vehicle models all-time highs.
6.8%, aluminium 4.0%, lead 3.4% and by the major car makers and
tin 0.4%. The exceptions are nickel up forecasts of strong growth in storage
15.7%, thermal coal up 9% and the batteries points to very strong supply
Australian dollar gold price up 9%. growth requirements for lithium
In the base metals, however, and associated battery components
fundamental indicators remain (nickel, cobalt and copper). Significant
encouraging with all markets potential expansions of lithium supply
facing supply deficits and stockpile have caused some forecasters to
drawdowns over 2018. Copper in predict lithium prices will begin to
particular looks tight over the balance decline in 2018. However there is
of the year. The global composite PMI considerable doubt about the ability of
has remained in growth territory as it many forecast new lithium projects to
has for key economies such as China achieve their slated output, pointing to
and the US. firmer lithium prices.
ANALYST STOCK PICKS FOR FY19. 11RESOURCES. David Coates
Aeon Metals (AML) Pantoro Limited (PNR) We have switched our third top pick Breaker Resources (BRB)
from FMG to BRB. Ongoing wide
AML is focused on the exploration PNR is a growing gold production BRB recently released a maiden
discounts to the benchmark iron ore
and development of its 100%-owned company, operating its flagship, Resource for its Bombora gold
price are dampening the upside for
Walford Creek Copper-Cobalt-Zinc 100% owned, Halls Creek Project discovery at the Lake Roe gold project
FMG. In contrast, BRB has suffered a
project in NW Queensland. Following (including the Nicolsons Gold Mine) of 11.8Mt @ 1.6g/t Au for 624,000oz,
strong selloff while at the same time
the delineation of a small, high grade in the Kimberley Region of Western of which 42% was in the higher
achieving a significant de-risking
Resource in 2017, AML has developed Australia. Over the course of 2017 it confidence Indicated category and
milestone in the release of a maiden
a robust geological model for the grew production, lowered costs and of which ~240koz is within 50m of
Resource for its Lake Roe Gold project
Walford Creek deposit. This model has strengthened its balance sheet. PNR is surface. BRB has also put forward
in WA, making the upside compelling
since successfully intersected high now debt free and has just completed an Exploration Target of 1.1-1.3Moz
from this point.
grade extensions of the Resource and a major capital investment program which, for a greenfield Resource
points to the potential for significant which is planned to lift production limited largely by the extents of
Resource growth over +20km of from ~50kozpa to 80-100kozpa by drilling, we view as highly likely to be
prospective strike length. A $30m the end of CY18 and result in All-In- achieved. We estimate the Resource
capital raise in late 2017 is funding a Sustaining Costs (AISC) dropping to has been delineated at a discovery
major drilling campaign through 2018 A$1,000/oz. Exploration upside and cost of A$23/oz – which we view as
which has commenced and yielded Resource and Reserve growth remains both competitive and value adding.
exciting results. It is likely to drive a compelling and we expect this to Clearly market expectations were not
material Resource upgrade in early underpin mine life extensions, adding met. The share price has been hit by
2019 with strong newsflow in the further value. ~35% since the Resource has been
interim. In our view AML has entered released and this is disappointing.
Buy, TP $0.36/sh
an exciting period of cost effective However, looking at the Resource as
discovery and growth which we expect it stands, we see a good foundation
more recognition of in 2018. that is likely to grow and an opportune
entry point created by emotional
Speculative Buy, Valuation $0.54/sh
rather than rational selling.
Speculative Buy, Valuation $0.96/sh
ANALYST STOCK PICKS FOR FY19. 12RESOURCES. Peter Arden
FAR (FAR) Metals X (MLX) Xanadu Mines (XAM)
FAR currently has a 15% interest in MLX is a copper and tin producer. XAM is an advanced copper-gold
several major oil discoveries it has Its 100% owned Nifty mine in WA is exploration company based in
made in offshore Senegal that are transitioning to producing 35ktpa Mongolia. Recent drilling at XAM’s
economically attractive and now about of copper in concentrate after effectively 76.5% owned Kharmagtai
to enter the development phase. With overcoming several production issues Copper – Gold Project in the South
2C Resources of 641 million barrels related to the rundown nature of Gobi porphyry district has discovered
(Mbbls) (recoverable), the SNE field is the operation, which it acquired in significant higher grade extensions
still one of the largest oil discoveries August 2016. Nifty’s future operation outside the existing Resources at
in the last four years and along with is based on a new Resource containing the White Hill and Stockwork Hill
the nearby FAN discovery (with 2C a significant component of recently Prospects and a major new porphyry
Resources of 198Mbbls) is nearing a discovered ore outside the historic centre nearby at the Zarra Prospect.
development decision in early 2019. mining area. MLX also owns a 50% The latest drilling has benefited from
FAR has also been very active in the interest in and is Operator of the world several recent studies that have given
adjoining areas, where it is Operator scale Renison tin mine joint venture XAM new insights into the nature and
and is farming down to a 40% interest (JV) in Tasmania where tin output is extent of the porphyry mineralisation,
in Blocks A2 and A5 in The Gambia, currently being lifted by about 15% and has indicated potential for high
close to and in the same geological using ore sorting technology and the grade bornite-rich mineralisation at
play as the SNE field. FAR has JV partners are considering a further depth, confirming Kharmagtai is one
identified the Samo Prospect in these 55% increase in tin output to about of the most attractive undeveloped
blocks containing P50 Prospective 13ktpa (100% basis) from the Rentails copper-gold prospects in one of the
Resources (best estimate) of 825Mbbls fuming project. MLX also has 100% most pro-mining jurisdictions in the
that will be drilled by a well in late of the large Wingellina nickel-cobalt world at a time when there are few
2018 under a favourable farm-out limonite deposit in Central Australia quality new copper projects. Recent
arrangement with global oil major, which is now focused on advancing the drilling at XAM’s other Mongolian
PETRONAS. high grade cobalt deposits. project, Red Mountain, continues
to discover significant new zones of
Speculative Buy, Valuation $0.26/sh. Buy, Target Price $0.98/sh.
high grade copper-gold porphyry and
epithermal gold mineralisation.
Speculative Buy, Valuation $0.58/sh.
ANALYST STOCK PICKS FOR FY19. 13HEALTHCARE & BIOTECH. Tanushree Jain
The fundamentals and demographic trends for the healthcare and biotech sector Mesoblast (MSB) Pharmaxis (PXS)
remained strong in FY18 and we expect this momentum to continue into FY19, Pharmaxis is a biopharmaceutical
Mesoblast is a biotechnology company
based on the following 3 key themes: company focused on the development
commercialising the therapeutic use
1. Friendly regulatory environment – the US FDA not only approving more drugs, of mesenchymal lineage cells (MPCs of drugs for inflammatory and fibrotic
but also making efforts to expedite the approval of much needed innovative and MSCs) – a kind of adult stem cell. diseases. Its lead assets Phase 2
drugs. SSAO/VAP-1 inhibitor BI_1467335
It is the leading allogeneic
partnered in a multi-million dollar
2. Increased activity in licensing and M&A – driven by large pharma and biotech’s regenerative medicine player with
deal with Boehringer Ingelheim (BI)
need to replenish pipelines following the expiry of patents on their legacy one of the most diversified pipelines
and currently unpartnered Phase 1
blockbuster products and US tax reforms. We have already seen an uptick in and several products in late stage. We
LOXL-2 inhibitors are targeting Non-
licensing and M&A activity in 1H18 in both US and Australia. view the positive results to date from
alcoholic Steatohepatitis (NASH),
the company’s paediatric GvHD (Graft
3. Companies approaching maturity phase - several of the ASX listed biotech and a multibillion dollar market with
vs. Host Disease) Phase 3 trial as an
healthcare stocks we cover will reach maturity, with sentiment overall likely currently no approved treatments.
important de-risking milestone for it
to be driven by late stage trial read-outs, regulatory approvals and launches, PXS’ LOXL-2 assets have successfully
which not only validates its technology
increased commercial momentum and partnering activity. completed the first stage of its
platform and clinical design strategy,
In view of these factors we believe the following stocks stand out as potential Phase 1 program indicating no
but also takes it closer to having
winners: safety or tolerability issues and
its first product approved in the US
have demonstrated significant and
market.
long lasting inhibition of LOXL-2
MSB is currently focusing its highlighting its best-in-class profile.
partnering efforts on its Tier 1 assets PXS is already engaged with multiple
and we expect late stage data read- companies in discussions around
outs, followed by potential partnering partnering this asset.
deals to act as re-rating catalysts for The company has a strong cash
the stock over the next 6-12 months. position and several upcoming value
Next Key catalysts: Day 180 safety and inflexion points which include: results
survival data from Phase 3 GvHD trial from Phase 2A trials in NASH and
in 3QCY18 and Top-line results from Diabetic Retinopathy for partnered
Phase 2B end stage heart failure trial asset with BI in 1HCY19 and results
in 3QCY18. from Phase 1 trial with LOXL-2
Buy, speculative, Valuation $3.75/sh. assets are expected in 3QCY18, with
a partnership deal expected to follow
later in the year.
Buy, speculative, Valuation $0.52/sh.
ANALYST STOCK PICKS FOR FY19. 14HEALTHCARE & BIOTECH. Tanushree Jain
Bionomics (BNO) Starpharma (SPL)
Bionomics is an Adelaide-based The company has also recently started Starpharma is a Melbourne-based
drug discovery company focused on a third Phase 2 trial with the drug platform company commercialising
development of drugs to treat CNS for agitation in elderly patients with the science of nanoscale polymers
disorders such as anxiety, Alzheimers results due in 1QCY19. With currently called dendrimers. Its proprietary
disease and post-traumatic stress no approved treatments for agitation dendrimer technology is versatile
disorder (PTSD). positive results from this trial would with wide applicability across the
further enhance the assets licensing pharmaceuticals sector. In drug
The company has recently sharpened
prospects. delivery the company is focused
its focus on its core strength in ion
on oncology (cancer) with platform
channel biology and drug discovery. The stock represents compelling value
validated by partner AstraZeneca.
The platforms supporting this have ahead of the upcoming results from
been validated by partner Merck the BNC210 trials and a partnership In 2018, SPL licensed its VivaGel BV
who has inked two multi-million deal later in FY19. (Bacterial Vaginosis) product for most
dollar deals with the company and is of Ex-US markets to Mundipharma
Buy, speculative, Valuation $0.92/sh.
also a shareholder in BNO. Clinical with launch expected in 2019. Key
stage non-core oncology assets are upcoming catalysts include a)
in the process of being monetised. licensing deal for VivaGel BV for North
Recruitment has been completed for America followed by approval and
BNO’s Phase 2 PTSD trial with lead launch, b) initiation of Phase 1 trial
asset BNC210, with results expected with SPL/AZN’s AZD0466 asset which
in 3QCY18 which would be a key triggers a US$3m milestone to SPL,
inflexion point for the stock. Positive c) launch of VivaGel BV by Aspen in
results from this trial when combined Australia and Mundipharma in Europe
with previous strong results from and other licensed markets and d)
Phase 2 General Anxiety Disorder initial data from ongoing Phase 2 DEP
(GAD) is bound to attract strong docetaxel trial and Phase 1 cabazitaxel
partnering interest. trial.
Buy, speculative, Valuation $1.88/sh.
ANALYST STOCK PICKS FOR FY19. 15HEALTHCARE & BIOTECH. John Hester
Avita Medical (AVH) Zenitas Healthcare (ZNT)
Avita Medical is a medical device The device is predominantly for The company has recently completed a -- the company allows allied health
company specialising in the treatment hospital use and the hospital must series of acquisitions which we expect care professionals to retain a
of 2nd and 3rd degree burns requiring be able to justify the use of new will drive the 45% EPS growth during meaningful equity stake in the
hospitalisation. The major catalyst technology by either cost savings or FY19. At the time of writing the stock business, effectively providing
over the course of the next 6 months is additional revenue generation. ReCell was trading at $1.00 representing a 1 important cash incentives for
expected to be FDA approval allowing can potentially achieve both criteria. year forward price earnings multiple founders.
it to commence commercial sales in of 8.7x.
This clinical data is available for In addition Zenitas does not pay
the US. marketing in the US today and the ZNT remains a relatively young upfront goodwill for single practitioner
Following years of frustrating delay, product is available on a highly company whose earnings thus far GP’s and neither does it have a
Avita has completed clinical trials limited basis via Continuing Access have been acquisition driven. In our dependence on expensive capital
in the US and is now awaiting Pre- and Compassionate Use programs. view the investor market will re- items (such as radiology equipment).
Market Approval (PMA) so that it In addition the company expects the rate the company if it demonstrates Consequently free cash flow is
may commence selling the ReCell first large procurement order from adequate levels of organic growth. normally quite strong.
device. We believe the risk of the PMA the Biomedical Advanced Research In our view there is ample scope for Our target price of $1.49 represents
application being unsuccessful is low. and Development Authority (BARDA) revenue synergies across the various an upside of 49% to the current share
The data from the US clinical trials in CY2018. This is part of a long term allied health businesses now operated price.
demonstrates ReCell has an excellent contract expected to generate tens by the company. The challenge is now
safety profile with comparable of millions in revenues over the next for those businesses to be integrated Buy
healing rates in burns patients. The three to five years. and to capture cross referrals.
major benefits of the device are the Speculative, Buy The key aspects of the business model
~30% reduction in the size of the which differentiate Zenitas from
donor site for grafting, improved healthcare role ups of the past are:
aesthetic outcomes and shortened
length of stay for hospitalisation. The -- the large components of self-pay –
shortened length of stay is equally as particularly in allied health which is
important as the clinical outcomes for generally not covered by Medicare;
commercial adoption. -- the absence of key man risk – the
business does not employ medical
specialists upon whom the entire
practice revenue relies; and
ANALYST STOCK PICKS FOR FY19. 16HEALTHCARE & BIOTECH. John Hester
Elixinol (EXL)
Elixinol is an established, leading brand The company has not provided earnings
in the nascent US market for hemp based guidance for FY18, however, 1Q18
nutraceutical products. The category is revenues grew by 24% over the prior
currently experiencing explosive revenue sequential quarter. We expect further
growth following recent regulatory double digit growth for at least the
changes to legalise the growing of hemp remainder of the year and for some
in the US and a growing acceptance of period thereafter.
the clinical benefit from these products We believe the imminent approval of
in controlling the symptoms of numerous the first medicinal cannabis product by
chronic medical conditions. the FDA in the US will provide further
The Australian operations of the group validation of the efficacy of CBD based
include Hemp Foods Australia (HFA) medicines. Epidiolex is owned by GW
being a company focussed on the Pharma and used for the treatment of
development of the market for Hemp Epilepsy in children. In our view this
Foods. This category is also expected event is likely to have a flow on effect for
to grow rapidly from a zero base. The other market participants including for
catalyst for the sector was the inclusion the over the counter hemp CBD products
of hemp foods on the Foods Standards markets by Elixinol US.
Code. Our target price of $2.16 represents an
The Group is led by Chief Executive upside of 56% to the current share price.
Paul Benhaim who is the co-founder Speculative, Buy
of both Elixinol US and Health Foods
Australia. Following the IPO he retains
53% of the listed entity and is the largest
shareholder by a considerable margin.
Mr Benhaim is considered an expert
in the field of industrial hemp and
medicinal cannabis following more than
two decades of experience in the sector
both in Australia, the US and Europe.
ANALYST STOCK PICKS FOR FY19. 17The following may affect your legal rights: Disclosures Bell Potter Securities acted as Lead Manager and Stocks with ‘Speculative’ designation are prone to
This document is a private communication to clients TS Lim holds 125 shares in Macquarie Group (MQG). Underwriter for the Placement of Mesoblast (MSB) in high volatility in share price movements. Clinical
and is not intended for public circulation or for the use March and September 2017 and received fees for that and regulatory risks are inherent in biotechnology
Lafitani Sotiriou holds 7,000 shares in Pendal Group service. stocks. Biotechnology developers usually seek US
of any third party, without the prior approval of Bell (PDL); and 10,000 shares in Challenger (CGF).
Potter Securities Limited. Bell Potter Securities acted as Lead Manager of Avita FDA approval for their technology which is a long
James Filius holds 1,585 shares in Pendal Group Medical’s (AVH) Placements in March 2015, November and arduous three phase process to prove the safety,
This is general investment advice only and does not (PDL). effectiveness and appropriate application or use of the
constitute personal advice to any person. 2017 and June 2018 and received fees for that service.
Jonathan Snape holds 22,500 shares in The A2Milk developed drug and even after approval a drug can be
Because this document has been prepared without Bell Potter Securities acted as Lead manager of the subject of an FDA investigation of subsequently
Company (A2M); 7,000 shares in Synlait Milk (SM1); Zenitas Healthcare ‘s (ZNT) IPO in 2016 and Capital
consideration of any specific client’s financial and 5,000 shares in Select Harvests (SHV). discovered possible links between the drug and other
situation, particular needs and investment objectives Raise in 2017 and received fees for that service. diseases not previously diagnosed. Furthermore,
(‘relevant personal circumstances’), a Bell Potter Peter Arden holds 850,000 shares in FAR Ltd (FAR); Bell Potter Securities acted as Lead Manager of the Australian exchange listed biotechnology sector
Securities Limited investment adviser (or the financial 150,000 shares in Metals X Ltd (MLX); and 300,000 Elixinol Global’s (EXL) IPO in 2018 and received fees is subject to influence by the global biotechnology
services licensee, or the representative of such shares in Xanadu Mines Ltd (XAM). for that service. sector, particularly that in the USA. Consequently,
licensee, who has provided you with this report by Australian exchange listed biotechnology stocks can
arrangement with Bell Potter Securities Limited) Bell Potter Securities acted as Co-Manager in experience sharp movements, both upwards and
should be made aware of your relevant personal Exploration Risk Warning:
Macquarie Group’s (MQG) May 2018 Capital Notes 3 downwards, in both valuations and share prices, as
circumstances and consulted before any investment (MQGPC) offer and received fees for that service. The stocks of resource companies without revenue a result of a re-rating of the sector both globally and
decision is made on the basis of this document. streams from product sales should always be in the USA, in particular. Investors are advised to be
Bell Potter Securities acted as a Broker to the regarded as speculative in character. Since most
While this document is based on information from Westpac Banking Corp’s share sell down of BT cognisant of these risks before buying such a stock.
sources which are considered reliable, Bell Potter exploration companies fit this description, the
Investment Management/Pendal Group (PDL) in May speculative designation applies to all exploration
Securities Limited has not verified independently 2017 and received fees for that service. ANALYST CERTIFICATION
the information contained in the document and Bell stocks. The fact that the intellectual property base
Bell Potter Securities Limited has acted as Co- of an exploration company lies in science and is Each research analyst primarily responsible for the
Potter Securities Limited and its directors, employees
manager to the following issues: AMPHA, ANZPD, generally only accessible to the layman in a limited content of this research report, in whole or in part,
and consultants do not represent, warrant or
ANZPE, BOQPD, CBAPC, CBAPD, CBAPE, CBAPF, summary form adds further to the riskiness with certifies that with respect to each security or issuer
guarantee, expressly or impliedly, that the information
CWNHA, IANG, MXUPA, MQGPB, NABPA, NABPB, which investments in exploration companies ought that the analyst covered in this report: (1) all of the
contained in this document is complete or accurate.
NABPD, NFNG, SUNPD, TTSHA, WBCHB, WBCPF, to be regarded. Stocks with ‘Speculative’ designation views expressed accurately reflect his or her personal
Nor does Bell Potter Securities Limited accept
WBCPG, and WBCPH. Bell Potter Securities Limited are prone to high volatility in share price movements. views about those securities or issuers and were
any responsibility to inform you of any matter that
received fees for these services. Exploration and regulatory risks are inherent in prepared in an independent manner, including with
subsequently comes to its notice, which may affect
any of the information contained in this document and Bell Potter Securities acted as Lead Manager for exploration stocks. Exploration companies engage respect to Bell Potter, and (2) no part of his or her
Bell Potter assumes no responsibility for updating the $90m Institutional Placement and SPP of Select in exploration programs that usually have multiple compensation was, is, or will be, directly or indirectly,
any advice, views, opinions, or recommendations Harvests (SVH) in October 2017 and received fees for phases to them where positive results at some related to the specific recommendations or views
contained in this document or for correcting any error that service. stages are not indicative of ultimate exploration expressed by that research analyst in the research
or omission which may become apparent after the success and even after exploration success, there is report.
Bell Potter Securities acted as Lead Manager and
document has been issued. Past performance is not a often insufficient economic justification to warrant
Underwriter to Propel Funeral Partners’ (PFP) IPO in
reliable indicator of future performance. development of an extractive operation and there is
November 2017 and received fees for that service.
still significant risk that even a development project
Except insofar as liability under any statute cannot Bell Potter Securities acted as Joint Lead Manager, with favourable economic parameters and forecast
be excluded, Bell Potter Limited and its directors, Joint Book Runner and Sole Underwriter for Johns outcomes may fail to achieve those outcomes.
employees and consultants do not accept any liability Lyng Group’s (JLG) IPO in October 2017 and received Investors are advised to be cognisant of these risks
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otherwise) for any error or omission in this document Bell Potter Securities acted as Lead Manager for the
or for any resulting loss or damage (whether direct, Biotechnology Risk Warning:
$30.0m Placement of Aeon Metals (AML) in December
indirect, consequential or otherwise) suffered by the 2017 and Manager to the $5.0m Placement in August The stocks of biotechnology companies without
recipient of this document or any other person. 2017 and received fees for that service. strong revenue streams from product sales or
Disclosure of Interest: ongoing service revenue should always be regarded
Bell Potter Securities acted as a Participant in the
as speculative in character. Since most biotechnology
Bell Potter Securities Limited, its employees, $10.0m Equity Raise of Breaker Resources (BRB) and
companies fit this description, the speculative
consultants and its associates within the meaning received fees for that service.
designation also applies to the entire sector. The
of Chapter 7 of the Corporations Law may receive Bell Potter Securities acted as Lead Manager for the fact that the intellectual property base of a typical
commissions, underwriting and management fees $15.4m placement of Xanadu Mines (XAM) in October biotechnology company lies in science not generally
from transactions involving securities referred to in 2017 and received fees for that service. regarded as accessible to the layman adds further to
this document(which its representatives may directly
the riskiness with which biotechnology investments
share) and may from time to time hold interests in the
ought to be regarded.
securities referred to in this document.
ANALYST STOCK PICKS FOR FY19. 18You can also read
