ORDS MONTHLY SAFETY FIRST - STARTING OVER - Ord Minnett
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July 2018
ORDS MON T H L Y
SAFETY FIRST
STARTING OVER
The Australian stock market jumped 3%
in the final month of the financial year
“We remain positive Its recent full-year guidance update
disappointed, but the company is
just finished, but its annual price gain on equities given winning strong fund flows. Industry
trends favour HUB24 and its peers as
of 8.3% proved somewhat of a middling
performance – outperforming
analysts’ valuations, fallout from the Royal Commission
European peers but not providing a earnings growth and drives advisers from the big players
such as AMP to independent licensees.
challenge to its US and key Asian rivals.
robust balance sheets We set out our view on page 7.
In this edition of the Ords Monthly,
our investment strategists ponder the
all provide a solid This edition finishes with the inventor
outlook for the next six months to find foundation” of the toasted sandwich maker.
Starting with radios in 1932, Breville is
a clearer picture for investors.
That need for a new start is also driving now a global distributor of homeware
Broadly speaking, we remain positive the restructure of Telstra, although the appliances such as its eponymous
on equities given analysts' valuations, telecommunications carrier is doing it jaffle-maker, along with brands such
earnings growth and robust balance via a trial separation rather than a as Kambrook and Ronson. We see
sheets all provide a solid foundation divorce, creating a standalone but accelerating earnings growth in fiscal
for the next six months. That said, we wholly owned business – InfraCo – to 2019 that is both self-funded and
also suggest adding some protection hold its prized utility infrastructure globally focused. See page 8 for more.
to portfolios, given the risks around assets. Telstra would consider selling
tightening financial conditions and InfraCo in 2022 when the NBN rollout is
trade wars. Our investment strategy complete, but our analysts expect the
note starting on page 2 lays out the relationship to end before then. See our Needing your 30 June
issues needed to fine-tune a portfolio. note on page 6.
Boral has disappointed since the stock
tax summaries?
Breaking up is hard to do, but
nearly hit a 12-year high in February,
Commonwealth Bank is giving it a Your portfolio and
with a soft interim result and a cut to
shot, spinning out its wealth
full-year guidance. It has been an transaction records are
management business, most of its all available online at:
uncertain start for Boral following the
financial planning operations and its
Headwaters acquisition in 2017, but we ords.com.au
mortgage broking operations into a
see the stock offering compelling value
new company. CEO Matt Comyn is at current price levels and we explain If you’re not already
reshaping the business after a torrid our investment thesis on page 5.
12 months to deal with a rapidly registered, please contact
changing regulatory landscape HUB24 is one of the leaders of a rapidly your adviser to set up your
for financial services in a growing number of independent account access.
post-Royal Commission world. platform providers that give advisers,
See page 4 for more details. planners and investors an efficient way
to manage investments.
ords.com.auINVESTMENT STRATEGY
DEFENCE MECHANISM
The Australian stock market services activity, has averaged 54 this
outperformed its European peers in year. This is still in expansionary
the financial year just gone, but came territory above 50, and consistent with
up well short of its US and key Asian GDP growth annualising 3.0–3.5%.
counterparts. So, where to from here?
Regional view – We see global growth
The global economy has sustained slowing modestly to an annualised
above-trend growth in 2018, despite rate of 3.2% from 3.6% currently, so
weak patches, and Australia’s still an above-trend rate. The slowing
economy has positively surprised. growth will be mostly policy-induced,
Risks are building, however, and the in our view. Stronger growth in the
issues that jangled investor nerves in US and euro zone is being limited by
the first half of 2018 will likely persist central banks gradually removing
in the second half. stimulus, while trade tariffs will shave
some growth off China.
Ord Minnett examines these risks in
detail later in this note, but overall, We assume the euro zone and US will
valuations, corporate earnings growth maintain a 2.5% annualised GDP
and solid company balance sheets still growth, while China’s growth is
leave us positive on the outlook for forecast to ease to circa 6.3% by year
equities. We do, however, see sense in end from 6.6% currently. Emerging
ensuring your portfolio has sufficient markets are also forecast to slow as
defensive characteristics, given the they face reverberations from the
risks around tightening financial direction of US policy, that is, trade
conditions and trade wars. tensions and relative interest rates.
Global Macro picture – We are constructive
Despite some patchy data in Europe, on the outlook for US and euro-zone
upgrades to the outlook in the US and consumers. Unemployment rates are
China have helped the global at their lowest levels since the Global
economy sustain a healthy, above- Financial Crisis in these regions, and
trend pace of growth so far this year. consumer sentiment is strong.
The Composite Global PMI, an A modest pick-up in business capital
indicator of manufacturing and expenditure is also forecast.
Figure 1: Changes to our balanced asset allocation in the past six months
– tactical weight to equities now 60%, cash weight lifted to 7.5%
Investment Strategy 2
Defence mechanism 5% 7.5%
Commonwealth Bank 4 22.5% 5% 22.5% 5%
Clearing the decks 30%
30%
Boral 5 55%
Contrarian view
10% 10% 55% 60%
Telstra 6
10% 10%
Rebooting
Hub24 7
62.5% As at 31 Dec 2017 As at 30 Jun 2018
Platform play
Breville Group 8
Equities Property Interest rate securities Cash
Toastie choice
Source: Bloomberg, Ord Minnett Research
ords.com.auThe key risk, however, is political – potential at 2.5% annualised by year Currency – The Australian dollar has
specifically, how the policies of end. This reflects fading contributions fallen 5% this year versus the US
populism-driven coalitions in from net exports and still-subdued dollar, but given monetary policy in
Germany and Italy evolve. An household spending. Australia lags the US – along with less
escalation in trade conflicts, for upside to iron ore prices – the
example, risks unravelling an If anything, risks are skewed to the currency should stay in the low
otherwise robust economic picture. downside, as our anticipated US$0.70s range.
slowdown in housing credit growth to
Inflation – Global inflation should 4% from 6% over 18 months gains Our view is the above-mentioned risks
accelerate to 2.5% by year end from more conviction following the will keep markets choppy and limit
a combination of protectionist Royal Commission and calls from returns. We still see the S&P/ASX 200
policies, prolonged strength in regulators for stricter lending criteria. Index as still likely to trade within our
commodity prices and a continued This adds to the list of constraints on previously forecast 5800–6300 band
recovery in wages as labour-market into the end of 2018.
consumers – along with high levels of
slack diminishes.
indebtedness, low savings rates, low This outlook does not necessitate
Interest rates – Major central banks wage growth, and a smaller wealth turning bearish, but it is worth giving
remain confident, leading the US effect from housing. your portfolio a health check to ensure
Federal Reserve to raise rates twice this it is sufficiently robust to mitigate the
Macro picture – Business expenditure
year and the European Central Bank near-term risks.
should improve as the drag from the
(ECB) to target an end to its bond
mining investment downturn fades, First, speak to your adviser to
purchase program in December 2018.
while non-mining construction determine if you should trim your
Our base case is for the US Federal spending and public infrastructure exposure to certain stocks or sectors
Reserve to raise rates twice more in projects will contribute positively. as a method of enhancing your
2018 – a quarter of a percentage point portfolio's defensive qualities.
both times – and US 10-year bond The key for Australia in the second
half is how much consumers will trim Second, adjust your portfolio to, in
yields to rise to 3.2% by year end.
spending if pressure on household effect, stay short the Australian dollar.
We see ECB commentary turning more finances is not alleviated. We see As a commodity currency, the
hawkish, but they will stop short of spending growth in 2018 being Australian dollar, given its greater
lifting rates until late 2019. Likewise, lower than in 2017. economic reliance on Asia, would
Japan will keep monetary policy steady suffer comparatively more if trade
this year given little evidence of Inflation – Commodity price conflicts escalated and threatened
inflation pressures. Indications for pressures, including higher food global growth. This strategy can be
China, however, are that monetary prices, may see inflation pick up. A implemented indirectly, through
policy will be eased further in response lack of wage growth given excess increasing exposure to stocks with
to the heightened external risks. capacity in the labour market, predominantly US-dollar earnings, or
however, means inflation should still directly, via an exchange-traded fund
Australia stay towards the low end of the 2–3% such as the BetaShares US$ ETF.
Australia’s economy has tracked better target band of the Reserve Bank of
than forecast so far this year, largely We still keep an overweight bias to
Australia (RBA).
due to net exports and government equities and our balanced asset
spending. Households remain key to Interest rates – We expect the RBA to allocation recommends a 60% tactical/
sustaining confidence in the stay on hold, rather than risk a credit shorter-term weighting in equities via
economy’s underlying strength, crunch by raising interest rates. a combination of Australian and
however, and there is little evidence international shares. See Figure 1.
The market is already undertaking This is above the recommended
of improvement.
some tightening on behalf of the RBA strategic/longer–term allocation of
Domestic view – There has been no – with banks raising lending standards 55%, although this was fine-tuned
significant change to our economic and some increasing rates on some from 62.5% in March as we saw
outlook for Australia, which assumes products to offset wholesale funding increased volatility ahead potentially
economic growth remains below cost pressures. presenting opportunities.
3COMMONWEALTH BANK
CLEARING THE DECKS
Sector: Banks Recomm: Hold Risk rating: Medium Share price: $75.67
Year to June 2017A 2018E 2019E Commonwealth Bank (CBA) share price
Profit after tax ($m) 9,881 9,421 10,578 86
Earnings per share ($) 5.56 5.24 5.82
79
Price/earnings (x) 13.6 14.4 13.0
$
Dividend ($) 4.29 4.30 4.34 72
Dividend yield (%) 5.7 5.7 5.7
65
Franking (%) 100 100 100 Jun 17 Sep 17 Dec 17 Mar 18 Jun 18
Source: Company reports, Ord Minnett Research. Profits are on a normalised basis. Source: IRESS
Commonwealth Bank will spin off its Comyn said the CFS Group made a That inquiry followed court action
wealth management and mortgage pro-forma net profit of more than against CBA by the Australian
broking operations, ditching a $500 million in fiscal 2017 and would Transaction Reports and Analysis
long-running vertically integrated have a "strong capacity to pay Centre (AUSTRAC) for breaches of
business model in favour of a franked dividends", while the bank anti-money laundering regulations.
strategy to become what CEO itself would benefit from being a
APRA had already imposed a
Matt Comyn calls a “simpler and simpler business focused on its core
$1 billion additional capital
better bank”. Australasian market.
requirement on CBA following its
The largest part of the new company, CBA will keep its salaried financial report, and CBA only reached a
known as CFS Group, will comprise advice business, Commonwealth settlement with AUSTRAC in mid
Colonial First State Global Asset Financial Planning, which will form June, paying a civil penalty of
Management – with $207 billion in part of its consumer financial services $700 million and $2.5 million in
funds under management – and the business. This unit will sit in the retail AUSTRAC’s legal costs.
Colonial First State superannuation banking services division.
The so-called Remedial Action Plan
platform – with $135 billion in funds
CBA also made a series of senior outlines changes to improve the way
under administration.
appointments: Nigel Williams as chief the bank runs its business, manages
The new company will also own the risk officer, David Cohen as deputy risk and works with regulators.
Count Financial and Financial CEO, Angus Sullivan as head of retail
Measures in the plan include cutting
Wisdom financial advice businesses, banking services, and Andrew
senior executive remuneration by
the Aussie Home Loans mortgage Hinchliff as head of the institutional
more than $60 million and the
broking operations, and minority banking and markets division.
reduction in fees for non-executive
shareholdings in CountPlus and
Only the group CFO role is yet to be directors announced in August 2017.
Mortgage Choice.
filled in the executive leadership
Our Hold recommendation reflects a
CBA will also undertake a strategic team, and an appointment is
further deterioration in CBA’s return
review of its general insurance expected after the full-year result.
on tangible equity as it digests
business, including considering a
Separately, CBA received Australian regulatory capital headwinds.
potential sale.
Prudential Regulation Authority (APRA) However, we believe these
The spin-off will not affect CBA’s endorsement for its plan to fix headwinds are now adequately
20-year strategy distribution shortcomings in governance, risk reflected in CBA’s valuation metrics.
partnership with Hong Kong-based management and accountability found
AIA Group in relation to life products. by a regulatory inquiry into the bank.
ords.com.auBORAL
CONTRARIAN VIEW
Sector: Materials Recomm: Accumulate Risk rating: Higher Share price: $6.56
Year to June 2017A 2018E 2019E Boral (BLD) share price
Profit after tax ($m) 352 506 551 9
Earnings per share ($) 0.37 0.43 0.47
8
Price/earnings (x) 17.6 15.2 13.9
$
Dividend ($) 0.24 0.26 0.28 7
Dividend yield (%) 3.7 4.0 4.2
6
Franking (%) 80 50 100 Jul 17 Oct 17 Jan 18 Apr 18 Jul 18
Source: Company reports, Ord Minnett Research. Profits are on a normalised basis. Source: IRESS
Boral is an integrated heavy We address both issues below, but Importantly, fly ash prices – at
construction materials producer and point out that sentiment has turned too circa US$62/tonne in 2018 – are
building products supplier in Australia negative, in our view, and we are at a steep discount to Portland
and the US, and holds a 50% share in comfortable with our adjusted EPS cement – US$90–130/tonne –
a plasterboard joint venture with compound annual growth rate (CAGR) despite fly ash having superior
environmental and physical
USG Corp in Asia, Australia and projection of 13% over FY17–20. We
properties to cement.
the Middle East. have maintained our Accumulate
recommendation and target price We factor in flat volumes, strong
Shares in Boral nearly hit a 12-year but moderating price increases
of $7.70.
high of $8.13 on 2 February 2018 ahead and steady underlying margins for
of the first-half fiscal 2018 result. Since US fly ash supply the business through to our
then, however, the company has Fly ash is a by-product of coal-fired forecast horizon. Sentiment
disappointed the market with a weak power plants and has cement-like towards the business has turned
first-half result and a downgrade to its properties that allow it to be used too negative, in our view.
full-year guidance. Boral shares as a substitute for Portland cement Australian performance
plumbed depths as low as $6.29 in mid in the production of concrete. A view held by some investors is
June – a slide of more than 20% from Boral is tackling supply issues that Boral’s Australian performance
the February high – before recouping following the closure of coal-fired has been underwhelming, given
some losses to end June at $6.53. power plants in Texas. This dynamic robust construction activity in
will clearly continue, but we note it recent years, and that peak earnings
Ord Minnett concedes it has been an is not a new headwind faced by for those operations could have
uncertain start for Boral following the either Headwaters or Boral. been reached.
Headwaters acquisition in 2017, but we Some 190 coal-fired power plants We disagree – concrete volumes for
see the stock offering compelling value were shut down in the US over the division have kept pace with
at current price levels. 2011–17, but we estimate pro-forma broader activity since 2011, and
fly ash volumes for Boral and there has been a substantial
The key issues concerning the market
Headwaters combined grew at a improvement in margins and
seem to be security of supply of fly ash
CAGR of 2% over the same period. divisional returns.
in the US – given the ongoing closures
At the same time, Headwaters’ Ord Minnett sees modest volume
of coal-fired power plants – and the
fly-ash margin expanded by and price rises over fiscal 2017–21,
performance of the Australian
6.3 percentage points (Boral did not complemented by margin
operations during the robust separate fly ash earnings over expansion following fixed-asset
construction activity seen in this period). upgrades and contributions from
recent years. the proposed Geelong mill.
5TELSTRA
REBOOTING
Sector: Telecommunications Services Recomm: Accumulate Risk rating: Higher Share price: $2.80
Year to June 2017A 2018E 2019E Telstra (TLS) share price
Profit after tax ($m) 3,889 3,147 2,343 4.60
Earnings per share ($) 0.33 0.26 0.19
3.90
Price/earnings (x) 8.6 10.7 14.5
$
Dividend ($) 0.31 0.22 0.18 3.20
Dividend yield (%) 11.1 7.9 6.4
2.50
Franking (%) 100 100 100 Jul 17 Oct 17 Jan 18 Apr 18 Jul 18
Source: Company reports, Ord Minnett Research. Profits are on a normalised basis. Source: IRESS
Telstra used its recent strategy Our view, however, is that a This was well below our estimate at
day to reveal a change in tactics structural separation of InfraCo is the time of $11.4 billion and the
designed to reignite the dominant the best option, and much could then-consensus expectation of
carrier's stuttering performance in develop between now and 2022 that $10.5 billion. We have since reduced
a fiercely competitive may spur Telstra to sell the business our forecast for fiscal 2019 operating
telecommunications market. before then. earnings to $9.1 billion.
A key plank of the plan is the The second plank is an aggressive Given the drastic rebasing of
creation of a wholly owned cost-cutting plan and the sale of earnings, we also expect the
standalone business unit, known as $2 billion in assets to bolster the dividend to be cut to 18 cents per
InfraCo, comprising Telstra's prized balance sheet. Productivity gain share over the fiscal 2019–20 period,
fixed-network infrastructure. This targets have been increased by and to 15 cents from fiscal 2021,
business, which will sell services to $1 billion to $2.5 billion in a bid to implying dividend yields of 6.4% and
cut core fixed costs by the latter 5.4%, respectively, based on prices
Telstra, wholesale customers and
amount by 2022. This means a net at 6 July.
NBN Co, will include data centres,
reduction of 8,000 in headcount and
copper lines, international subsea Telstra has one of the most
the removal of several layers of
cables and exchanges, but not recognisable and valuable brands in
management.
mobile network assets such as Australia, similar to incumbent
spectrum, radio access equipment The company also plans to telecom operators in other
or towers. dramatically simplify its product countries. We expect its dominance
offerings – more than 1,800 in the local market to continue, but
InfraCo will also hold Telstra’s recent structural changes to the
consumer and small business plans
NBN Co commercial works activities will be slashed to just 20 core plans industry from the NBN and the entry
and the wholesale unit, with a – while larger mid-market and of TPG Telecom as a fourth mobile
workforce of around 3,000. The new enterprise customers will migrate to operator could pressure growth and
business will have assets valued at a completely new technology profitability in the near term.
about $11 billion, while annual framework, allowing Telstra to ditch
revenue and operating earnings are That said, current valuation levels
its legacy systems.
expected to be $5.5 billion and are attractive – the stock is fairly
$3 billion, respectively. In the nearer term, Telstra also valued on a dividend yield basis,
used the strategy day to lower but we see more than 20%
Management flagged that InfraCo guidance for operating earnings to potential upside from an eventual
could be spun off after completion $8.7–9.4 billion for fiscal 2019. structural separation of the
of the NBN rollout in 2022. company’s businesses.
ords.com.auHUB24
PLATFORM PLAY
Sector: Financials Recomm: Buy Risk rating: Higher Share price: $11.59
Year to June 2017A 2018E 2019E HUB24 (HUB) share price
Profit after tax ($m) 5 9 17 16.00
Earnings per share ($) 0.08 0.14 0.26
12.50
Price/earnings (x) 143.8 82.6 44.5
$
Dividend ($) - 0.07 0.17 9.00
Dividend yield (%) - 0.6 1.5
5.50
Franking (%) - - - Jul 17 Oct 17 Jan 18 Apr 18 Jul 18
Source: Company reports, Ord Minnett Research. Profits are on a normalised basis. Source: IRESS
HUB24 is an independent platform Fitzpatricks’ accounts are set to This strong flow momentum
provider that allows investors to transition to HUB24 by the end of the leading into the new financial year
centrally and efficiently manage a first half of fiscal 2019. We expect and the Fitzpatricks' transition of at
range of investments through an the funds will be on a lower fee than least $700 million lead us to raise
adviser or planner – including the average fee charged by HUB24, our fiscal 2019 estimate of funds
shares, term deposits, managed given the book's size. under administration by 12% to
funds and dealer model portfolios – $12.62 billion.
In its first full year, the deal's
with functionality that rivals the
benefits should more than offset the Industry trends continue to shift in
industry’s largest players such as
added costs, boosting forecast fiscal favour of HUB24 and its peers, with
AMP and the major banks.
2020 EPS by 3%. the Royal Commission precipitating
The company recently provided fiscal an accelerated exodus of advisers
The broader Fitzpatricks group has
2018 operating earnings guidance for from the banks and AMP into
more than $7 billion of funds under
its platform operations of $11.8 million, independent licensees.
administration, suggesting a
in line with Ord Minnett's forecast of
potentially substantial opportunity Despite the near-term earnings
$11.6 million, but also flagged a
to expand beyond the initial deal. hiccup, we see sufficient long-term
break-even result for its software
upside – our target price implies
business, making a miss versus our We are encouraged by HUB24’s
potential upside of nearly 20% from
(and consensus) estimate of $800,000. ability to sign such a large deal in
its 6 July closing price – to retain a
what is a competitive market, and
The tone of HUB24's market release Buy recommendation on HUB24.
expect that the platform's
and recent trade articles lead us to
technology, service, customisation
believe the company is investing in
and fees were all important drivers
sales and technology resources at a
of the win.
faster-than-anticipated pace, so we
have pared our fiscal 2019 earnings HUB24's funds under administration
per share (EPS) estimates by 9% finished fiscal 2018 at $8.3 billion
despite a part-year benefit from the versus our forecast of $8.15 billion,
recent Fitzpatricks Private Wealth deal. implying June-quarter net inflows of
circa $220 million per month, up 10%
The Fitzpatricks deal will include the
on the March-quarter run-rate and up
transition of $700 million of managed
20% on the first half of the fiscal year.
discretionary accounts to the
HUB24 platform.
7BREVILLE GROUP
TOASTIE CHOICE
Ord Minnett Head Office
Sector: Consumer discretionary Recomm: Buy Risk: Higher Price: $11.95 Sydney
Level 8, 255 George Street
Breville Group (BRG) is a global In addition, some of the commercial Sydney NSW 2000
distributor of homeware appliances food-focused items from the original Tel: (02) 8216 6300
that started life in 1932 making and list were removed in the subsequent ords.com.au
selling radios, and went on to list released by the administration. National Offices
create the iconic toasted sandwich Adelaide
There are a several items that Level 5, 100 Pirie Street
maker in 1974.
potentially could have affected Adelaide SA 5000
Besides the Breville name, the companies such as Breville, but Tel: (08) 8203 2500
company’s other well-known these products are either non- Brisbane
brands include Kambrook and consumer or immaterial, in our view. Level 31, 10 Eagle Street
Ronson and, more recently, Sage Brisbane QLD 4000
Overall, we expect no significant Tel: (07) 3214 5555
by Heston Blumenthal.
impact on Breville’s earnings from Buderim, Sunshine Coast
We see Breville as well-positioned to the proposed tariffs. That said, a 1/99 Burnett Street
accelerate earnings growth in fiscal ramping up of trade tensions could Buderim QLD 4556
2019. The most attractive feature of harm the stock due to the negative Tel: (07) 5430 4444
this growth, in our view, is that it is impact on investor sentiment, as Caloundra, Sunshine Coast
self-funded and globally focused, China has made it clear it will 79-81 Bulcock Street
Caloundra QLD 4551
with Breville poised to enter respond to any US action.
Tel: (07) 5491 3100
Germany, Europe’s largest coffee
Our forecast for the fiscal 2019 Canberra
market, to sell its own brands.
dividend is 40 cents per share, 60% 101 Northbourne Avenue
The threats by the White House to franked, offering a yield of 3.3%. Canberra ACT 2600
Tel: (02) 6206 1700
impose tariffs on goods made in We acknowledge Breville shares are
China, as much of Breville's product trading at a premium to the market, Gold Coast
Level 7, 50 Appel Street
line is, do not appear at this stage but our forecasts are above
Surfers Paradise QLD 4217
to pose a major problem. consensus and we project upside to Tel: (07) 5557 3333
our valuation of $15.60 a share.
We note that based on the first and Mackay
second lists of affected products, the For the full report, please contact 45 Gordon Street
Mackay QLD 4740
majority seem to be industrial goods. your Ord Minnett adviser.
Tel: (07) 4969 4888
Melbourne
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methodology and spread of ratings, please visit ords.com.au/methodology/ For information regarding any potential conflicts of interest and analyst
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Research at Ord Minnett Limited. Unless otherwise stated, all share prices, information and research as at Friday, 6 July 2018.
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