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The Research Monitor
December Quarter 2018
inside this issue
The Hayne Report
Late cycle investing
The semiconductor sector
Demand for Aged Care
+ stock picks
September Quarter 2018 Performance
The Australian Share Market, as measured by the S&P/ASX 300 Index, rose only 0.2%
on a price basis and by 1.5% including dividends in the September 2018 quarter.
Strong Q2 GDP growth figures published the second largest sector, Materials 29.5 points at the start of the year,
in early September failed to shrug off (17.9% index weight) fell 1.2% including however. Measures of housing activity
the global trade concerns for Australia’s dividends, with bellwether BHP up 2.1%. continued to show weakness, suggesting
share markets. Among Australian the broader economy is coming off the
equity sectors, the newly created The market fell 1.3% in September boil somewhat, although a lower currency
Communication Services sector stood mostly on the back of concerns about is likely to provide some inflationary
out with a stunning 25.3% return for rising interest rates in the United States pressures. The Australian dollar has
the quarter, thanks mostly to a recovery and about the potential for a damaging fallen for five consecutive quarters. Value
in Telstra (TLS) shares, which were up trade war between the US and China stocks outperformed growth stocks in the
21.8%. Other stand-out sectors were breaking out. September quarter for the first time in a
Commercial and Professional Services, long time, but both classes were negative
The September quarter is typically a period
up 14.5% - lead by index heavyweight in the month of September. Growth has
where companies trade “ex-divided” as
Brambles (BXB) which rose 22.75% and outperformed value 9.5% to 2.4% year to
full year dividend payments are made
the Capital Goods sector, which was date, but in the September quarter, value
to shareholders – which keeps pressure
dominated by strongly performing CIMIC rose 2.1% versus growth only 1.0%.
on prices. This quarter was no different
(CIM) up 21.4%, rose 7.8% during the Equal weighted portfolios outperformed
with the accumulation return exceeding
quarter. market cap weighted portfolios by 1% in
the price return by 1.3% across the All
the quarter.
The largest component of the S&P/ASX Ordinaries Index.
300 Index is the Banks Sector (22.9% Market measures of risk or volatility,
The spread between 90 day bank bills
index weight), which fell 1.5% in price remain very low suggesting that investors
and cash fell from 61 basis points at the
terms and -0.4% including dividends, are comfortable with the likely path of
end of June to 44 basis points at the
extending the period over which banks inflation, interest rates, growth and trade.
end of September – a sign of moderating
have underperformed the index. Similarly,
credit conditions. The same spread was
Heat map legend: Size of box: market cap of sector. Colour of box: Quarterly performance (green positive, orange negative).
Real Estate
$118.36bn
2.0%
Diversified Financials Transportation Insurance
$90.32bn $72.01bn $64.13bn
Banks 0.2% -2.0% 0.8%
$393.62bn
-0.4%
Energy
$103.00bn
4.2%
Consumer Services Health Care Equipment Telecommunica-
$53.64bn & Services tion Services
-0.8% $51.68bn $46.17bn
1.8% 25.2%
Food & Staples Retailing
$96.13bn
Media &
-0.1% Entertainment
Commercial & Food Beverage & $19.00bn
Professional Services Tobacco 2.0%
Materials $43.90bn 36.06bn
$307.30bn 14.5% -1.8%
-1.2% Pharmaceuticals, Biotech Capital Retailing
& Life Sciences Goods $16.86bn
Software & Services Utilities $16.89bn 9.4%
$95.89bn $39.92bn $32.07bn
7.8%
2 | Research Monitor | DEC 2018 6.3% 10.2% -3.9%
The Hayne Report
The interim report from the financial services Royal Commission
was released on Friday 28 September.
Brett Le Mesurier
Senior Banking and Insurance Analyst
Group of issues identified Potential outcomes for banks
Do all Australians have sufficient Changes to remuneration structures
access to banking services? to remove sales incentives
For whom do financial intermediaries Mortgage brokers to disclose the
act and how should they be commissions they receive and the The biggest loser appears to be
remunerated? amount of the commission to no AMP. Their business model is based
longer be linked to the size of a on vertical integration, grandfathered
How should the responsible lending commissions and allows for a
standards be defined and applied? loan. There is also the possibility that
commissions will be banned substantial risk of conflicted advice.
Have the regulators fulfilled their
duties? More questions to be asked about the The sooner grandfathering of
suitability of a loan and the ability to commissions is terminated, the
Causes of poor conduct identified repay that loan quicker the higher margin wealth
Conflict of interest and duty Agriculture specialists to deal with management products become
loans to the agriculture sector lower margin new products issued by
Remuneration structures another provider and the sooner their
Culture and governance Financial advice and FoFA intermediaries are not allowed to sell
Regulatory response The more significant issues involve AMP products, the less the company
conflicted advice, remuneration and is worth. Banks have already
Responses to the causes of grandfathering. Commissioner Hayne substantially modified their approach
misconduct has highlighted the problem clearly and to lending but the executives may
the solution will undoubtedly follow. find an unwelcome and adverse
Potential changes to the law
impact on their remuneration.
The role of ASIC and APRA Those companies who have business
The potential further damage to
Should an intermediary be allowed relying on intermediaries who are
banks appears to be coming from a
to sell any financial product of the continuing to put their interests ahead
wounded ASIC with a point to prove.
intermediary’s employer or provider of their clients; and/or are not offering Their fines and penalties are likely to
of its licence? superior outcomes for their clients are be higher now. Intermediaries of all
facing the greatest consequences. types are likely to be losers as well.
Potential outcomes for wealth The concepts of money for nothing
management, financial planning and and too much money for doing too
life insurance companies little will be part of history with little
The reduction or elimination of future.
grandfathered commissions
The end of vertical integration
DEC 2018 | Research Monitor | 3
Martin Crabb
Chief Investment Officer
Late Cycle Investing
4 | Research Monitor | DEC 2018
Despite two pull-backs that Resources versus Industrials
did not qualify as bear markets
(more than 20% fall), the Since the 1940’s, if one had invested in resources over
Australian share market has
been in a bull market since
industrials two years prior to the onset of a US recession and
March 2009 – the bottom of unwound the position one year after the US recession had
the GFC – and has risen three- begun, you would make on average 25%.
fold including dividends since
that time. Whilst bull markets This historical phenomenon makes sense since many cyclical
do not die of old age, there is peaks are accompanied by inflation in commodity prices and
only a finite amount of time that
the market can go up without
the share prices of those companies that produce them.
having a bear market. Resources do very well in the late cycle and as a result, our
Large Cap Core Equity portfolio is well positioned in the
Economically, we are clearly in the “late Mining and Energy sectors.
cycle”. Unemployment rates are falling all
over the world and the US has run out of
workers; there are 7 million job openings
for only 6.2m unemployed. Output gaps Resources outperform Industrials by an average of
have all closed and production is running 25.8% in the “late cycle” – from two years prior to
above capacity in many industries,
fuelling the need for more workers, more the onset of a US recession to one year after.
materials and more investment. Wages
are starting to rise, commodity prices
– especially energy – are rising and the 2 years Mining/ 1 year Mining/
introduction of tariffs on imported goods before date Industrial into date Industrial Return
all add to inflationary pressure. Feb-43 0.0481 Feb-46 0.0486 1.05%
Nov-46 0.0466 Nov-49 0.0621 33.28%
As a result, central banks are removing
Jul-51 0.0520 Jul-54 0.0649 24.81%
accommodation by increasing interest
rates and winding back bond purchases. Aug-55 0.0783 Aug-58 0.0851 8.65%
Recently, the United States hiked cash Apr-58 0.0828 Apr-61 0.1265 52.75%
rates and this follows rate hikes in the UK,
Dec-67 0.4167 Dec-70 0.8299 99.15%
Sweden, Canada, Indonesia, India and
Mexico amongst others – all since June. Nov-71 0.4394 Nov-74 0.4693 6.79%
The removal of policy accommodation Jan-79 0.4515 Jan-82 0.4118 -8.78%
also has the impact of reducing liquidity Jul-88 0.2319 Jul-91 0.2604 12.26%
in the financial system and making credit
Apr-99 0.1558 Apr-02 0.1873 20.20%
more expensive and difficult to attain.
This explains the recent mortgage interest Jan-06 0.3350 Jan-09 0.4482 33.76%
rate hikes by Australia’s domestic banks. Average 25.81%
In order to help investors navigate the
120%
“late cycle”, we have undertaken a study
of previous late cycles and looked at 100%
strategies that have benefited investors
and helped to cushion their portfolios 80%
from tightening monetary policy, rising
60%
inflation and slowing growth – all of which
are bad for bonds and equities (which 40%
comprise the vast majority of investment
portfolios). Here is an example of a 20%
strategy that performs well “late cycle”.
0%
-20%
Unemployment rates
-40%
are falling all over the
-60%
world and the US has
-80%
run out of workers.
2012
2016
1936
2000
2004
2008
1960
1964
1968
1992
1996
1940
1944
1948
1952
1956
1972
1976
1980
1984
1988
US Recession Mining-Industrial
DEC 2018 | Research Monitor | 5Darren Vincent
Senior Analyst
Technology, Life Sciences,
Industry Consolidators
The rise of the Australian
semiconductor sector
6 | Research Monitor | DEC 2018Following Shaw and Partners’ listing
of Pivotal Systems in June 2018, there Memory’s growing share of semiconductor capex
are now 10 ASX listed semiconductor
(SC) companies that Shaw and USD bn
Partners tracks.
50
We expect further semiconductor
ASX listings over the next 12 to 24
40
months – including additional U.S. based
semiconductor companies electing to list
on the ASX, rather than taking VC funding 30
or listing on the NAZDAQ, both of which
are relatively expensive options. 20
With the likely growth of semiconductor
investment opportunities in mind, we 10
discuss the sector’s outlook and the
importance of selecting appropriate 0
underlying exposures. 2013 2014 2015 2016 2017 2018F
OUTLOOK Memory Other semiconductors
The outlook for the semiconductor sector Source: IC Insights
is strong with a number of interrelated
long term structural factors driving the
growth in semiconductor demand. They CYCLICALITY
include: There are of course significant risks that Samsung, the largest
semiconductors are being
play into share prices every day. For semiconductor
example the semiconductor capex cycle
incorporated into an increasingly equipment investor,
larger number of products, has traditionally been cyclical and the
more semiconductors are being
industry is not immune to the tariff war. announced in August
Tariffs have impacted semiconductor
incorporated into each generation of companies, especially those heavily that it will invest
new product, and exposed to importing components from US$161bn over the next
advanced wafers are being demanded China. Additionally, technology transfer is
and achieved through increased on the minds of investors. China will top three years in R&D and
capital intensity. the rest of the world in fab investment in capex.
2020 with more than $20bn in spending
These thematics are evident in the strong
on 25 new fab construction projects
industry numbers. Semi, the global
either underway or in planning. Much of
semiconductor equipment industry body, OUR SELECTION
the equipment that will be required for
forecasts semiconductor capex growth Despite the positive long term drivers
these fabs will be sourced from the U.S.
to be 15% this year up from 7% expected that will play into a stronger for longer
earlier in the year. Similarly all the big semiconductor sector, the timing of sales
semiconductor and semiconductor Cyclicality has also recently been
is everything and concerns about tariffs
equipment companies continue to step impacting semiconductor share prices,
and a maturing memory capex cycle has
up their level of investment in the sector. with concerns that the memory cycle is
recently hit the share prices of some U.S.
maturing. We expect the industry to be
semiconductor companies, while others
Samsung, the largest semiconductor less cyclical going forward due to the
continue to appreciate. This makes
equipment investor, announced in August ever widening number of products that
understanding the underlying exposures
that it will invest US$161bn over the next require different semiconductors, many of
and stock selection crucial, especially
three years in R&D and capex. This is which are being developed and coming
as Australian investors are given more
approximately a 20% pa increase for to market in staggered waves. Memory
opportunities to invest in semiconductor
three years on the US$44bn it spent in has been on a steep growth trajectory for
conductor companies in the future.
2017. Applied, Intel, Hynix and others a number of years. Other semiconductor
have announced similar increases in categories such as Artificial Intelligence
With this in mind the underlying drivers
investment. In total there are 19 announced (AI), the internet of things (IoT), machine
of Shaw and Partners’ preferred
new multi-billion dollar semiconductor vision and autonomous vehicles are now
semiconductor companies, Pivotal
fabrication plants (commonly called fabs) coming into growth.
Systems and Audinate, are discussed
which are expected to begin construction on page 20 and 21 respectively.
in 2019 and 2020 for memory and other Samsung for example recently announced
semiconductor devices. it would spend US$22bn in AI and 5G,
areas it has not previously invested so
heavily in.
DEC 2018 | Research Monitor | 7Peter Zuk
Senior Analyst, Real Estate
The increasing demand
for aged care
Australia’s population as at 30 June 2018 The Australian government is forecasting
was estimated at 25.25 million, representing that the percentage of people aged 85 or
growth of almost 1.85 million persons since older will be nearly 5% of the population
the 2016 Census. Interestingly, the “over by 2055. Against this backdrop, it is
70” age cohort continues to grow and is unsurprising that there has been an
now at 2.73 million persons, representing increase in demand for Aged Care services
10.8% of Australia’s total population. There in Australia, with this demand expected to
are now 242,530 more “over 70’s” than increase.
there were in 2016, and 637,323 more than
there were in 2011.
8 | Research Monitor | DEC 2018Australian Population by Age
2,000,000
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
85+
70-74
10-14
30-34
45-49
60-64
0-4
25-29
55-59
75-79
15-19
35-39
65-69
5-9
40-44
80-84
20-24
50-54
Source: ABS Census, Department of Health
2011 2016 2018e
SUPPLY OF AGED CARE The majority of this expenditure went RESIDENTIAL AGED CARE
Per the Australian Government towards residential aged care - roughly PROVIDERS – OWNERSHIP TYPES
Department of Health, there were $12.1 billion versus $4.4 billion on home
care and support. This expenditure is
210,815 places across Australia as at
expected to be $18.6 billion in 2017-
4%
30 Jun 2018. This represents a ratio of
2018, increasing to $22.2 billion by
1%
77.2 places for every 1,000 people aged 18%
70 years and over. In addition, there 2020-21
were 865 Home Care places, being 0.3
places per 1,000 people over the age THE ROYAL COMMISSION INTO 40%
of 70. AGED CARE IN AUSTRALIA
On 16 September 2018, Prime Minister 13%
AGED CARE PROVIDERS Scott Morrison announced a Royal
Aged care services are managed by Commission into Australia’s aged care
not-for-profit organisations, government system following cases of abuse of
organisations, or private companies. Not- elderly people and non-compliance by a 24%
for-profit organisations manage more number of operators in Australia.
than 50% of residential aged care. In
Clearly the debate will involve tackling Private for-profit
most cases, the Australian Government
important issues like regulations, care Religious
contributes towards the costs of care.
of residents, staffing levels, training and
funding to ensure aged care residents Community-based
GOVERNMENT SPENDING ON
get the appropriate level of care. The Charitable
AGED CARE
inquiry will also look at what can be Religious/Charitable
Aged care services in Australia are done to prepare for the increasing
funded by governments (federal, state, State and Territory government
demand on aged care as the baby
territory and local governments), non- boomers age. Local government
government organisations (charities,
religious and community groups), and ASX-listed “for profit” operators like Estia Source: Department of Health
personal contributions from those Health (EHE) and Japara Healtcare (JHC)
receiving care. Governments subsidise welcomed the Royal Commission into
the cost of care and recipients contribute the Aged Care industry. However they,
through fees and payments. along with peer Regus Healthcare (REG)
saw their share prices tumble post the
Per the “Sixth report on the Funding and announcement of the Royal Commission
Financing of the Aged Care Sector July due to market concerns over industry
2018” issued by Australian Government, headwinds and potential margin
total Australian Government expenditure pressure for these listed operators.
on Aged Care was $17.1bn in 2016-
2017 up from $16.2bn in the previous
year.
DEC 2018 | Research Monitor | 9Shaw Managed Accounts
Shaw Managed Accounts are a sophisticated investment and reporting platform
incorporating advanced features to assist in the management of your overall investment
strategy and portfolio.
Shaw Managed Accounts are established Once you decide which Model Portfolios With Shaw Managed Accounts, not
and offered within the registered are best suited to your investment needs only are you the beneficial owner of
managed investment scheme known as and objectives, Shaw and Partners will the portfolio (and shares), you will also
the Separately Managed Accounts. Each purchase securities to be included in enjoy the ownership benefits (such as
investor has a separate “account” to your account so that it reflects the Model dividends and franking credits) and have
which their investments are allocated. Portfolio, or a combination of Model the ability to see the exact make up and
Portfolios. market value of the portfolio at any time,
Your account can be constructed by via our online service.
using a range of available investment The Model Portfolios are managed in
strategies (referred to as Model Portfolios) a disciplined and consistent manner;
that you can select from the investment overseen by a dedicated team of
menu together, with your Shaw and investment professionals with many years
Partners adviser. of experience in securities markets.
Investment goals (return, risk tolerance,
time horizon) and financial situation
Investor Shaw Adviser
Investment strategy, asset allocation
Shaw platform
Portfolio management
and performance
reporting
Shaw Direct Equity SMA Investment
Portfolio Service Model Portfolios professionals
in specie transfer Individual portfolio
of securities
Shaw Managed Accounts are positioned between Individually Managed Portfolios and
Managed Funds. They offer increased levels of control and transparency, agility and tax
optimisation.
Benefits of Shaw Professionally managed Reduced tax Flexibility
Managed Accounts administration
Lower trading costs Portfolio transparency Performance monitoring Dividend reinvestment
Powerful online Dividend and franking In specie transfers No inherited liability
reporting tools credit benefits
Safe custody of Beneficial ownership Tax optimisation Margin Lending
investments capability
10 | Research Monitor | DEC 2018Shaw Managed Accounts
Portfolio Performances – September 2018
1 Mth 3 Mth 6 Mth 1yr Inception
Shaw Income Goal Portfolio Total Portfolio Return -0.42% 2.17% 6.42% 8.60% 8.71%
Objective: RBA Cash +3% Portfolio Objective 0.37% 1.14% 2.28% 4.59% 4.91%
Inception: Sep-17 Excess v Objective -0.79% 1.04% 4.14% 4.01% 3.80%
Shaw Balanced Goal Portfolio Total Portfolio Return 0.01% 1.92% 7.43% 11.24% 11.40%
Objective: RBA Cash +4% Portfolio Objective 0.45% 1.39% 2.79% 5.64% 6.03%
Inception: Sep-17 Excess v Objective -0.44% 0.53% 4.64% 5.60% 5.38%
Shaw Growth Goal Portfolio Total Portfolio Return -1.13% 2.61% 10.88% 19.6% 19.12%
Objective: RBA Cash +5% Portfolio Objective 0.53% 1.65% 3.30% 6.70% 7.16%
Inception: Sep-17 Excess v Objective -1.66% 0.97% 7.57% 12.90% 11.96%
Total Portfolio Return -0.09% 0.81% 1.75% 3.04% 2.74%
Debt Securities Income Portfolio
Inception: Sep-17
Total Portfolio Return 1.33% 1.46% 2.69% 5.25% 5.65%
Hybrid Income Portfolio
Inception: Sep-16
Total Portfolio Return -1.71% 0.97% 8.60% 9.72% 9.41%
Australian Equity (Large Cap) - Income
Inception: Sep-17
Total Portfolio Return -2.78% 1.80% 13.40% 24.40% 22.93%
Australian Equity (Large Cap) - Growth
Inception: Sep-17
Total Portfolio Return -0.48% -0.73% 8.97% 12.80% 13.77%
Australian Equity (Large Cap) - Core
Inception: Sep-16
Total Portfolio Return -0.28% 1.47% 9.09% 16.79% 16.77%
Australian Equity - Small and Mid Cap
Inception: Sep-17
Total Portfolio Return 0.99% 6.41% 10.72% 16.87% 18.40%
International Equity Portfolio
Inception: Sep-17
Total Portfolio Return -0.46% N/A N/A N/A -0.28%
Shaw Liquid Alternatives Portfolio
Inception: Aug-18
DEC 2018 | Research Monitor | 11Australian Large Cap Model
Portfolio
After a “horrible” August, our Pharmaceuticals. Our better stock September saw a recovery in relative
Australian Large Cap Model Portfolio selection calls were in the Materials (+59 performance of the Australian Large Cap
rebounded well in September, rising basis points) and Banking sectors (+17 Model portfolio via a combination of
in a falling market, outperforming basis points). sector selection (overweight Energy and
the market by 1.7% and improving Materials) and stock selection (NST, no
the annual return to 13%. Stellar CHANGES CSL). We have taken the opportunity
performance from new portfolio We have tweaked the portfolio further this to switch from high-flying Northern
addition Northern Star (NST) and re-balance by switching NST to Evolution Star (NST) into Evolution Mining (EVN),
being generally underweight growth Mining (EVN) - a cheaper gold play, exiting maintaining our overweight position to the
stocks helped performance. war-torn IOOF Holdings (IFL) in favour of Aussie gold sector.
Macquarie Group, reducing the significant
SECTOR HIGHLIGHTS We think the tailwinds for Alumina (AWC)
overweight Woodside Petroleum (WPL)
in the form of higher commodity prices
Only four sectors posted gains in to below our 5% threshold in favour of Oil
and earnings upgrades will turn into
September, which saw the ASX100 index Search (OSH) and trimming bank sector
headwinds going forward and favour the
fall 1.3% in accumulation terms. With exposure in favour of more BHP. We exit
commodity outlook for copper and hence
the exception of the Telecommunications Alumina Limited (AWC) as we see a turn
replace AWC with Oz Minerals (OZL) and
sector – which continues to catch a bid for the worst in Alumina prices in favour
a bit more BHP. We drop IOOF Limited
from corporate activity – all other sectors of Oz Minerals (OZL).
(IFL) as we think it stays in the naughty
were driven by macroeconomic factors;
RECOMMENDATION corner post Banking Inquiry despite
namely rising US interest rates and better
apparent value and consider Macquarie
than expected opening trade war salvos With valuations in the “goldilocks zone” at
Group (MQG) as better placed in the
from China and the United States. Energy, around 9.5% TSR including dividends, it
Diversified Financials sector.
Materials and Capital Goods sectors all is only in a low risk environment that this
posted 3-5% rises. return makes sense and so we don’t see a Lastly, we maintain a preferred maximum
huge need for investors to be overweight relative weight to any stock of +/- 5% and
PORTFOLIO POSITIONING the market as a whole. In sector terms, Woodside (WPL) is now above this so
Our portfolio was positioned well for however, we see Energy and Resources we trim by 1.5% in favour of Oil Search
the change in sentiment toward cyclical stocks as providing a very attractive risk/ (OSH).
stocks, albeit we had trimmed exposure reward way to hedge portfolios against
at the end of August as a precautionary rising inflationary pressures, which we
measure against a much more severe see evident in many measures. We build
trade war. The risk/reward is worth up portfolio beta this month after being
reconsidering as we don’t really think “spooked” last month by the potential for
we have “lost” much by reducing the risk things to get much worse on the trade
profile of the portfolio, but we were going front.
to lose a lot if things got worse. Portfolio
management is all about managing the PORTFOLIO PERFORMANCE
risk/reward. Now in it’s 9th year, the The Australian Large Cap market –
Australian Large Cap Model portfolio as measured by the S&P/ASX100
has compounded just shy of 10% per Accumulation Index – fell 1.3% in
annum, before franking credits, with an September. The majority of sectors
average alpha of 1.8% and a tracking posted losses, with only the cyclical
error of 2.9%. sectors (and Telcos) moving forward.
Sector weights added 126 basis points 33 of the top 100 stocks traded
to performance in September; stock ex-dividend during the month, and the
positions added another 33 basis points. difference between the price (no dividends)
55 basis points came from overweight and accumulation (with dividends)
Energy and 54 basis points from being indices was 0.51%. We estimate that we
(passively as we have no coverage) generated 0.39% income return in the
portfolio in September.
12 | Research Monitor | DEC 2018Portfolio Performance (Accumulation Basis)
2.00
1.90
1.80
1.70
1.60
1.50
1.40
1.30
1.20
1.10
1.00
Dec 14
Dec 16
Dec 12
Dec 13
Dec 15
Dec 17
Jun 14
Jun 16
Jun 18
Jun 13
Jun 15
Jun 17
Portfolio Index
Model Portfolio at 30 September 2018
BHP BHP Billiton Limited 11.7% EVN Evolution Mining Limited 4.2%
CBA Commonwealth Bank 10.7% CTX Caltex Australia Limited 3.9%
WBC Westpac Banking Corp. 9.6% WES Wesfarmers Limited 3.5%
NAB National Aust. Bank 7.7% MGR Mirvac Group 3.3%
WPL Woodside Petroleum Ltd 7.1% FLT Flight Centre Travel 3.2%
MQG Macquarie Group Ltd 6.3% OZL OZ Minerals Limited 3.0%
SGP Stockland 4.9% SCG Scentre Group 3.0%
RIO Rio Tinto Limited 4.8% BOQ Bank of Queensland 2.1%
OSH Oil Search Limited 4.7% VCX Vicinity Centres 1.9%
SUN Suncorp Group Limited 4.5% Total 100%
DEC 2018 | Research Monitor | 13Our Preferred Stocks
OZ Minerals (OZL) is an Australian
Stockland (SGP) is a diversified
based mining company with a focus
Macquarie Group (MQG) offers Australian property group. The Group
on copper. The company owns and
banking, financial advisory, investment operates the Prominent Hill copper-gold develops and manages Retail centres,
and funds management services. The mine and the Carrapateena copper-gold Residential Communities and Retirement
company offers financial advice, cash project located in South Australia and Living assets with a focus on regional
management, wealth management and has a number of equity interests in listed centres and outer metropolitan.
private banking, life insurance, securities resource companies. The company was Stockland also owns a portfolio of Office
brokerage, corporate debt financing, real founded in 1988 and is headquartered in and Industrial assets. The company was
estate funds management, real estate Parkside, Australia. founded in 1952 and is headquartered in
development financing, investment funds Sydney, Australia.
management, and foreign exchange
services. The company was founded in
1969 and is headquartered in Sydney,
Australia.
Vicinity Centres (VCX) is a Real Estate
Caltex Australia (CTX) is a transport
Investment Trust (REIT) that engages
fuel supplier, convenience retailer and
in the development, operation and
an integrated oil refining and marketing management of shopping centres in
Suncorp Group (SUN) is a financial company. The company operates Australia. Vicinity Centres was created
services company, which engages through the following segments: on 11 June 2015 following the merger of
in the provision of banking, wealth, Supply & Marketing and Lytton. Caltex Federation Centres and Novion Property
insurance products and services. Australia was founded in 1900 and is Group.
The company operates through the headquartered in Sydney, Australia.
following segments: Insurance, Banking
and Wealth, Suncorp New Zealand
and Corporate. The company was
founded in 1996 and is headquartered in
Apiam Animal Health (AHX) operates
Brisbane, Australia.
as a veterinary practice and products
Woodside Petroleum (WPL) is an
supplier. The company practices across
Australian based oil and gas exploration
the pig, dairy, feedlot, sheep, equine,
and production company. Key assets
are the Pluto, North West Shelf and and companion animal sectors. Apiam
BHP (BHP) is an international Animal Health was founded in 1998 and
Wheatstone LNG projects offshore WA.
resources company. The company’s Oil is produced from the Enfield and is headquartered in Bendigo, Australia.
principal business lines are mineral Vincent FPSO’s. Exploration is underway
exploration and production, including internationally offshore West Africa,
coal, iron ore, gold, titanium, ferroalloys, Myanmar, and onshore Canada. The
nickel and copper concentrate, as well company was founded in 1954 and is
as petroleum exploration, production, headquartered in Perth, Australia.
and refining. Dually-listed company with
BLT LN.
14 | Research Monitor | DEC 2018Shaw and Partners provides coverage on
100+ ASX listed companies across a range of
sectors, specialising in Australian mid-cap and
emerging companies.
Capitol Health (CAJ) is a leading
Pivotal Systems (PVS) provides the provider of diagnostic imaging and
best-in-class gas flow monitoring and related services with Australia.
control technology platform for the global CAJ operates primarily across the
semiconductor industry. The company’s geographies of Victoria and Tasmania,
proprietary hardware and software where the company currently offers
utilises advanced machine learning to services through 48 clinics. The
diagnostic imaging services include MRI,
enable preventative diagnostic capability
Ultrasound, CT, Echocardiography and
resulting in an order of magnitude
X-Ray amongst a host of treatments.
increase in fab productivity and capital The company has grown through
efficiency for existing and future a combination of both organic and
technology nodes. Pivotal Systems was acquisitive growth and operates in an
founded in 2003 and is headquartered in industry with a sustained and positive
Fremont, CA. industry outlook.
Audinate Group (AD8) engages in the
development and commercialization of Rhipe (RHP) provides software
audio visual software and hardware. licensing, subscription management
Its products include chips, modules tools and cloud computing services.
and cards with embedded software; Its software vendors include Microsoft,
reference designs and software to Citrix, Datacore, McAfee, Red Hat, Trend
enable network configuration and Micro, Veeam, Zimbra and VMware. The
management under the Dante brand. company was founded in 2003 and is
The company was founded in 2006 and headquartered in Melbourne, Australia.
is headquartered in Ultimo, Australia.
Bingo Industries (BIN) operates as
a waste management and recycling
company. The company offers front
and rear lift commercial waste bins
and compactors to handle waste such
as general waste, paper, cardboard,
and co-mingled recyclables, as well
as provides solutions for liquid waste
such as oily waters, grease traps, wash
waters, and chemicals.
DEC 2018 | Research Monitor | 15Macquarie Group (MQG) Suncorp Group (SUN)
Recommendation Buy Recommendation Buy
Risk High Risk Medium
Share Price (as at 12 October 2018) $115.53 Share Price (as at 12 October 2018) $13.59
Target Price $130.00 Target Price $16.00
Analyst Brett Le Mesurier Analyst Brett Le Mesurier
Share Performance Chart Share Performance Chart
145 120
MQG ASX 200 SUN ASX 200
135 115
125 110
115 105
105 100
95 95
Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18
Source: FactSet, Shaw and Partners Source: FactSet, Shaw and Partners
1 mth 3 mth 12 mth 1 mth 3 mth 12 mth
Relative Performance* -8.7% -5.8% 24.0% Relative Performance* -6.4% -9.1% 1.8%
* Relative Performance is compared to the S&P/ASX 200 Index * Relative Performance is compared to the S&P/ASX 200 Index
MQG’s revenue growth has been reliant on continued strong SUN is finalising the sale of its Australian life insurance
profits from their investments over the past few years. If the business for $600m (after transaction costs) and should be
markets allow, this should continue as MQG has increased able to return the entire proceeds to shareholders. This will
those investments. The recent sale of Quadrant Energy is an probably come as a share buy back in view of their relatively
example of the gains from the sale of investments that can be tight franking credit position. This will be down to a balance of
achieved by MQG in FY19. $150m after the payment of the final dividend of 40 cps and
The lack of growth in net interest income highlights the issue a special dividend of 8 cps.
faced by the major and regional banks. It’s not such an issue We have allowed for a $800m share buy back once the sale
for MQG as it represents less than 20% of its income. of the life insurance business is completed at the end of this
MQG’s revenue growth is linked to the growth in the equities calendar year.
market. There are many contributing factors to this: base The general insurance margin increased from 8% in 1H18 to
fees, performance fees, trading income, capital markets and 16.3% in 2H18. Lower peril costs in 1H18 provided 3.3% of
gains from asset sales. Strong equity markets are consistent the improvement, larger reserve releases provided 1.7% and
with strong capital markets generally which support asset a reduction in risk margins provided 2%. 2.3% was attributed
prices and provide liquidity for asset sales. to business improvement from 1H18 to 2H18.
While the correlation is strong, it’s imperfect which reflects As a result of the operational improvement from 1H18 to 2H18,
the timing of asset sales, the realisation of performance fees there is some basis for thinking that the incremental benefits
and the timing of transaction fees. MQG can dampen this of approximately $150m from the Business Improvement
volatility through expense management and it can leverage Program could materialise.
the relationship between revenue and the capital markets by Growth in home and motor premiums was offset by a decline
continuing to achieve a declining cost to income ratio. in compulsory third party (CTP) premiums as a result of the
MQG’s capital requirements react to the health of the market. reforms to the NSW scheme.
The timing in the relationship between the increasing market Bank income declined by 4% from 1H18 to 2H18 and its
and the increase in capital is immediate. pre-tax profit fell by 3%. From FY17 to FY18, there was 3%
income growth but profit fell by 5%. This was because bad
debts increased by $20m over the period.
Forecasts Forecasts
YE 31-Mar FY18 FY19E FY20E YE 30-Jun FY18 FY19E FY20E
Earnings cps 758.1 839.6 888.3 Earnings cps 85.2 105.1 109.5
Dividends (AUD) cps 525.0 585.3 617.7 Dividends (AUD) cps 81.0 79.0 82.0
PE x 16.2 14.6 13.8 PE x 17.1 13.3 12.8
Yield % 4.3% 4.8% 5.0% Yield % 5.6% 5.6% 5.9%
Franking % 45% 45% 45% Franking % 100% 100% 100%
16 | Research Monitor | DEC 2018BHP (BHP) OZ Minerals (OZL)
Recommendation Buy Recommendation Buy
Risk Medium Risk High
Share Price (as at 12 October 2018) $33.84 Share Price (as at 12 October 2018) $8.79
Target Price $40.00 Target Price $13.00
Analyst Peter O'Connor Analyst Peter O'Connor
Share Performance Chart Share Performance Chart
140 140
135 BHP ASX 200 135 OZL ASX 200
130 130
125 125
120 120
115 115
110 110
105 105
100 100
95 95
Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18
Source: FactSet, Shaw and Partners Source: FactSet, Shaw and Partners
1 mth 3 mth 12 mth 1 mth 3 mth 12 mth
Relative Performance* 8.8% 0.8% 29.1% Relative Performance* 6.4% -1.6% 10.8%
* Relative Performance is compared to the S&P/ASX 200 Index * Relative Performance is compared to the S&P/ASX 200 Index
Divestment update – In late July BHP announced the long OZL is now advancing growth options across four separate
awaited sale of the US onshore shale oil and gas business. provinces – Prominent Hill, Carrapateena, Brazil and West
BP agreed to acquire the majority of the portfolio for a Musgrave. The latter is looking very interesting. Recently,
consideration of $10.5bn with 50% due in (late) October JV partner Cassini Resources (CZI) announced a second
2018 and then balance in 6 monthly installments. An significant intersection of nickel and copper mineralisation at
additional $300m gas portfolio sale completes the deal. the Yappsu Prospect which lies within the West Musgrave
Total transaction proceeds of US$10.8bn was a very good Project (WMP) in Western Australia.
outcome and should have met/exceeded most expectations. OZL and Cassini are advancing WMP on several fronts. The
Shareholder rewards. In the words of the CFO in February program is funded as part of the Earn-in/JV Agreement with
2018, “The proceeds won’t touch the sides” suggesting OZ Minerals. The JV Partners are currently undertaking a
shareholders will enjoy the spoils. Moreover, the latest Pre-feasibility Study (PFS) on the more advanced Nebo-Babel
commentary reads “BHP expect to return the net proceeds Deposits as well as a regional exploration program.
from the transactions to shareholders. Will confirm how, and WMP adds to growth from ~2022. The WMP has the potential
when, at the time of completion of the transactions.” to lift OZL’s top line from ~2022 as the West Musgrave
Capital management update - BHP’s “big” capital return is province kicks in, adding the fourth province to OZL portfolio.
now much closer. Likely distributions options include: Importantly, this doesn’t include contribution form Yappsu,
Buy back – Australian off market a key option. With this the source of the latest WMP discovery/announcement.
option delivering a ~14% buy back price discount afforded Sirius look-alike. Very early indications suggest that WMP may
by the tax effective credits (utilises BHP’s store of tax credits). have some of the attributes of the Nova project operated by
UK on market – Second ranking to and Australian Buy back peer, Independence Group. Pretty impressive leverage for
– unless the spread is >14% discount to BHP-UK – this is still OZL and more importantly junior Cassini Resources.
likely as a matching action to shareholders in the UK. OZL has a long term valuation tail that the market hasn’t
Special dividends – Not preferred given they are typically yet fully grasped, let alone valued – top line growth could hit
not capitalised in long term dividend growth projections. ~150% over the period to 5 year 2024. Do the math, that’s a
CAGR (%) of 18% vs. RIO and BHP at ~3% and pretty much
Ordinary dividend top up – This is already well covered by
internally funded to boot. So in the near term copper price
current high levels of free cash flow so whilst the ordinary
tribulations will whip-saw the share price but long term the
could be topped up we think it more likely to be left reflecting
company valuation will grow with future cash flow.
operational/business performance.
This asset sale and the mechanics of subsequent capital
management should help deliver BHP towards our $40/share
target price.
Forecasts Forecasts
YE 30-Jun FY17 FY18E FY19E YE 31-Dec FY17 FY18E FY19E
Earnings cps 126.4 167.8 154.5 Earnings cps 61.2 58.2 47.7
Dividends (AUD) cps 110.1 152.2 127.0 Dividends (AUD) cps 20.0 20.0 20.0
PE x 14.1 14.6 15.8 PE x 15.0 15.5 19.0
Yield % 4.6% 4.8% 3.8% Yield % 2.2% 2.2% 2.2%
Franking % 100% 100% 100% Franking % 100% 100% 100%
DEC 2018 | Research Monitor | 17Caltex Australia (CTX) Woodside Petroleum (WPL)
Recommendation Buy Recommendation Buy
Risk High Risk High
Share Price (as at 12 October 2018) $29.16 Share Price (as at 12 October 2018) $36.00
Target Price $35.00 Target Price $46.00
Analyst Stuart Baker Analyst Stuart Baker
Share Performance Chart Share Performance Chart
120 140
CTX ASX 200 WPL ASX 200
135
115
130
110 125
120
105
115
100 110
105
95
100
90 95
Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18
Source: FactSet, Shaw and Partners Source: FactSet, Shaw and Partners
1 mth 3 mth 12 mth 1 mth 3 mth 12 mth
Relative Performance* -1.9% -6.4% -11.3% Relative Performance* -1.9% 0.5% 24.2%
* Relative Performance is compared to the S&P/ASX 200 Index * Relative Performance is compared to the S&P/ASX 200 Index
Caltex is Australia’s market leader in import, production and Woodside is differentiated from domestic and global peers
supply of refined products with approximately 30% share of by its low-cost, long life production and strength of balance
the national market. sheet. It navigated the oil price collapse without having to sell
The refined product market is mature offering CTX little assets, hedge oil at low prices or change strategic direction
scope to grow volumes or expand margins from the current which is predominantly focused on developing up to three
level, hence the company is diversifying into new geographic world scale oil and gas projects.
markets such as New Zealand and The Philippines to date. Strong LNG demand growth, driven by China and the new
CTX is increasing its investment in convenience store and Asian customers, underpins a planned Scarborough-Pluto
food retailing, and in July 2018 CTX extended its long term LNG project, while the prospect of development of Browse
supply agreement with Woolworths which will benefit both Basin gas to the Karratha gas plant has risen, as a result
CTX’s wholesale fuel supply and grocery supply. of USA-China trade war and tariffs on USA LNG exports.
Woodside’s competitive advantage has just improved and
CTX expects material earnings growth from a multi-year new
apart from proposed expansion in PNG, there appear to be
store roll-out and in addition is transitioning all the franchised
few rivals to meet surging China & Asian demand.
retail sites to company owned.
In oil, WPL has immediate growth from the Greater Enfield
CTX targets operatorship of >88% of its sites by year end
development in 2019 and the SNE oil development offshore
2020. We expect full impact on profits from retail growth and
Senegal ~2022.
the end of franchising will become more evident after 2020.
Higher oil prices flow through to EPS with around 96% of all
PE and EV/EBITDA multiples are not high for CTX’s high
production oil-linked. The dividend payout ratio is 80% of EPS
quality, relatively stable earnings and appear to discount
and as a result, WPL’s dividend yield is superior compared to
the company’s growth strategy. Dividend yield is reasonable
peers. On a DCF valuation basis, WPL is undervalued.
and CTX has a very large franking balance, which could be
addressed via a future buy-back, once the current investment There are significant earnings, dividend and valuation and
phase gives way to strong cash flow growth. price target upside if the current oil price rally holds.
Forecasts Forecasts
YE 31-Dec FY17 FY18E FY19E YE 31-Dec FY17 FY18E FY19E
Earnings cps 238.0 229.7 222.1 Earnings cps 121.5 163.6 244.2
Dividends (AUD) cps 121.0 115.4 111.1 Dividends (AUD) cps 127.8 181.8 276.4
PE x 14.3 13.0 13.5 PE x 21.3 16.3 10.9
Yield % 3.6% 3.9% 3.7% Yield % 3.8% 5.2% 7.3%
Franking % 100% 100% 100% Franking % 100% 100% 100%
18 | Research Monitor | DEC 2018Stockland (SGP) Vicinity Centres (VCX)
Recommendation Buy Recommendation Buy
Risk Low Risk Low
Share Price (as at 12 October 2018) $3.94 Share Price (as at 12 October 2018) $2.61
Target Price $4.69 Target Price $2.98
Analyst Peter Zuk Analyst Peter Zuk
Share Performance Chart Share Performance Chart
120 115
SGP ASX 200 VCX ASX 200
115 110
110
105
105
100
100
95 95
90 90
Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18
Source: FactSet, Shaw and Partners Source: FactSet, Shaw and Partners
1 mth 3 mth 12 mth 1 mth 3 mth 12 mth
Relative Performance* -6.0% -4.6% -8.8% Relative Performance* -3.0% -1.9% -1.5%
* Relative Performance is compared to the S&P/ASX 200 Index * Relative Performance is compared to the S&P/ASX 200 Index
Stockland’s stated return on assets (ROA) has trended up Like most REITs that have retail-sector exposure, VCX’s share
over the past 4-5 years from 6.8% in FY14 to 9.1% in FY18 price is suffering from negative sentiment. We are not arguing
– largely due to the performance of the Residential division. that the retail landscape in Australia is easy – it is not – but we
Despite negativity surrounding the Retail landscape and do believe the market is undervaluing the equity value of VCX.
SGP’s Retail investment portfolio, we note that its portfolio Looking at fundamentals, the portfolio is almost full with
is 99.4% occupied, sales growth remains positive at +1.6% occupancy of 99.7%. Comparable retail sales growth was
on a comparable basis, specialty sales per square metre modest at +1.2%, but importantly, specialty sales per square
continue to trend upwards and occupancy costs are relatively metre was up 7.5% to $10,133 across the portfolio in FY18.
low at 14.9%. Occupancy costs were up slightly to 14.7% (vs. 14.6% in
We note that development inventory (mainly residential land) FY17).
is held at the lower of cost or net realisable value – and not Our earnings estimates reflect management’s planned
at current market prices. As such, if you take the view that disposal of $2.0bn of assets, a strategy that we think makes
SGP can generate a positive return on this capital employed – sense. We see the trade-off of short term earnings dilution
which we do – then implicitly SGP should trade at a premium more than being offset by the impact of “validating” VCX’s
to book value (all other things being equal). portfolio values – on the assumption that asset sales achieve
On 6 September 2018, SGP announced it an on-market buy- at least book value in aggregate. Press reports suggest there
back for up to $350m of Stockland securities on issue, as are interested parties who have submitted bids for these
part of its active approach to capital management. Given the assets, so we now wait for a formal announcement from VCX.
stock is trading at a discount to its stated net tangible asset In the meantime, the stock is trading at a discount to its NTA
(NTA) backing of $4.18 per share, we see the buy-back as a backing of $2.97/share. The market continues to (1) discount
sensible move. the book value of VCX’s retail portfolio and (2) ascribe no
The balance sheet is in good shape with gearing of 22.2% value to its management business which currently has over
(as at 30 Jun 2018). Its attractive forecast DPS yield is based $11.0bn of funds managed on behalf of 3rd parties.
on a fairly conservative 74% payout of funds from operations Whilst management highlight redevelopment opportunities
(FFO). with change of use potential, we ascribe no value to such
opportunities due to uncertainty over timing, pricing, etc.
Forecasts Forecasts
YE 30-Jun FY18 FY19E FY20E YE 30-Jun FY18 FY19E FY20E
Earnings cps 31.6 32.8 33.7 Earnings cps 17.7 17.6 17.8
Dividends (AUD) cps 26.5 27.6 28.6 Dividends (AUD) cps 16.3 15.8 16.3
PE x 12.5 12.6 12.2 PE x 14.6 15.0 14.8
Yield % 6.7% 6.7% 7.0% Yield % 6.3% 6.0% 6.2%
Franking % – – – Franking % – – –
DEC 2018 | Research Monitor | 19Apiam Animal Health (AHX) Pivotal Systems (PVS)
Recommendation Buy Recommendation Buy
Risk Medium Risk High
Share Price (as at 12 October 2018) $0.64 Share Price (as at 12 October 2018) $2.65
Target Price $1.00 Target Price $3.12
Analyst Darren Vincent Analyst Darren Vincent
Share Performance Chart Share Performance Chart
130
125 AHX ASX 200 PVS ASX 200
125
115 120
105 115
95 110
105
85
100
75
95
65 90
Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Jul-18 Jul-18 Aug-18 Aug-18 Sep-18 Sep-18 Oct-18
Source: FactSet, Shaw and Partners Source: FactSet, Shaw and Partners
1 mth 3 mth 12 mth 1 mth 3 mth 12 mth
Relative Performance* 14.3% -3.8% -21.0% Relative Performance* -8.3% 2.7% N/A
* Relative Performance is compared to the S&P/ASX 200 Index * Relative Performance is compared to the S&P/ASX 200 Index
Shaw and Partners recently conducted a site visit to AHX’s Since PVS was listed by Shaw and Partners in June
head office and main distribution centre at Bendigo. The key 2018, risk to the company’s outlook has been significantly
takeaway was that its product initiatives are more advanced reduced by increased expectations about global long term
than we previously understood and could play into FY20 semiconductor capital equipment expenditure, PVS’s new
earnings. Our forecasts, TP and buy recommendation remain product initiatives and the leverage that was evident in its
unchanged. 1H18 results.
Two years of investment has given AHX a platform was ready SC industry cap ex - stronger for longer. Global fab
to be leveraged. It has a broader animal footprint, upgraded equipment spending is forecast to increase 15% this year to
systems, staff capability and improved service levels to US$62.8bn and 7.5%, to US$67.5bn, in 2019. Longer term
underpin the offering, all of which is currently ready to be industry forecasts tail off, but the biggest investors such as
leveraged by overlaying high margin product sales onto it. Samsung look set to grow capex at even greater rates going
Implementation of the initiatives has taken longer to put in forward.
place than management first thought, which has contributed PVS has announced three new product initiatives since listing
to the slide in AHX’s share price, but more importantly the all of which were led by client requests and involve client
platform is now ready to support >2x current sales. participation in their development. We see this increase PVS’s
AHX has moved into the product expansion phase of its market relevance and the likelihood of significant market
strategy. It has recently employed a senior executive (ex MSD share gains.
and Norbrook), to head up its new product initiatives and has Leverage was evident in PVS’s 1H18 result de-risking Shaw
a number of new products from exclusive brands, through to and Partners’ longer term forecasts. PVS’s 1H18 GM was
exclusive distribution rights and private label products that it 37% up from 17% pcp which suggests margins are likely
intends to bring to market over the next 3-24 months. These to strengthen again over 2H18 as increased volumes are
product initiatives are at various stages of development – realised. This puts risk to Shaw and Partners’ forecasts to the
some in registration, some require trials, and others AHX upside.
will wait to see Australian commercial traction prior to taking
into the US market. Initiatives include: i) Private Label, ii)
Distributorships, iii) Apiam Solutions- a JV with Swine Vet
Center in the U.S., and iv) further development of genetics
products and services for export.
Forecasts Forecasts
YE 30-Jun FY18 FY19E FY20E YE 31-Dec FY17 FY18E FY19E
Earnings cps 4.3 5.6 7.3 Earnings cps -2.9 1.0 7.1
Dividends (AUD) cps 1.6 1.4 2.2 Dividends (AUD) cps 0.0 0.0 0.0
PE x 17.5 11.5 8.9 PE x nm nm 27.9
Yield % 2.1% 2.2% 3.4% Yield % nm – –
Franking % 100% 100% 100% Franking % – – –
20 | Research Monitor | DEC 2018Audinate Group (AD8) Bingo Industries (BIN)
Recommendation Buy Recommendation Buy
Risk High Risk Medium
Share Price (as at 12 October 2018) $3.44 Share Price (as at 12 October 2018) $2.75
Target Price $5.20 Target Price $3.40
Analyst Danny Younis Analyst Danny Younis
Share Performance Chart Share Performance Chart
235 160
AD8 ASX 200 BIN ASX 200
215 150
140
195
130
175
120
155
110
135
100
115 90
95 80
Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18
Source: FactSet, Shaw and Partners Source: FactSet, Shaw and Partners
1 mth 3 mth 12 mth 1 mth 3 mth 12 mth
Relative Performance* -7.3% -17.9% 75.5% Relative Performance* -12.1% 13.3% 29.2%
* Relative Performance is compared to the S&P/ASX 200 Index * Relative Performance is compared to the S&P/ASX 200 Index
Impressively, AD8 is now profitable (EBITDA, NPAT) one year FY19 EBITDA forecast is expected to grow by 16% to
ahead of forecast. AD8 exceeded Prospectus forecasts in $109m year-on-year. This improvement is due to various
FY18 (revenue, EBITDA, operating cash flow, number of catalysts, notably: volume and scale; better performance
hardware units shipped). The revenue generated in FY18 of from Victorian operations – margins, utilisation and recovery
$19.7m is predicated on only 221 or 50% of OEMs shipping, rates; price increases; moderating employees opex post
with another 50% yet to contribute! ramp-up; greater contribution from post collections (with
New product launch of analog adaptors ahead of Shaw and higher margin); processing improvements with Minto and St
Partners’ expectations with 50 resellers onboarded, as was Mary’s coming on in 1H18 with upgraded processing plant,
the number of Dante Domain Manager (DDM) units shipped with Greenacre, Artarmon and Campbellfield now complete;
with growth of 58% from 95k to 150k. post IPO acquisitions of NRG and Has-a-Bin; and Collections
growth.
Number of Dante-enabled products on market continues to
grow, increasing from 925 in 2017 to 1,367 at end of February Announced another potentially transformational acquisition of
2018, to now 1,639, or now ~5x the market adoption of its Dial-A Dump Industries (DADI) for $578m (65% cash, 35%
closest competitor, CobraNet, with c. 343 products – at the equity) on an implied EV/EBITDA of 9.6x.
end 2H18, the number of OEM customers also rose from 310 Integration of previous acquisitions (NRG, Patons Lane) and
in 2016 to 438. The number of Dante units shipped also grew network capacity upgrades on track with first step-up from
38% from 180k units shipped in FY17 to 248k (FY16: 110k). 1.7mt to 2.2mt achieved in FY18, and then to 3.4mt in FY20.
Total Addressable Market (TAM) for AD8 in the professional Balance sheet and cash flow strong (+45% on pcp) despite
audio-visual (AV) market, according to Frost & Sullivan multiple acquisitions and network expansion with cash
/ Stiernberg (2017 Report) is c>A$450m annually and conversion of 95% and ROCE of ~20%.
calculated as follows. Outlook remains very positive with several tailwinds: (1)
AD8 continues to surpass expectations – 1H18 result, 3Q18 massive infrastructure pipeline (BIN’s pure focus); (2) shift
and 4Q18 results, the recent Site Visit, and now the FY18 from landfill to recycling; (3) Patons Lane (last likely Sydney
result. The share price has had a stellar run (from $1.22 listing approved landfill); (4) Qld levy implementation; and (5)
price) and we do not see any reason why this should not expected uplift from introduction of Qld levy. Rebased FY20
continue over time. PE of 14x is not too onerous given FY19 -FY21 is forecast to
yield quite strong double-digit earnings growth.
Forecasts Forecasts
YE 30-Jun FY18 FY19E FY20E YE 30-Jun FY18 FY19E FY20E
Earnings cps 4.0 0.8 3.6 Earnings cps 11.8 14.3 20.3
Dividends (AUD) cps 0.0 0.0 0.0 Dividends (AUD) cps 3.7 5.0 7.0
PE x 99.0 nm 99.6 PE x 22.8 19.9 14.0
Yield % 0.0% 0.0% 0.0% Yield % 1.4% 1.8% 2.5%
Franking % 100% 100% 100% Franking % 100% 100% 100%
DEC 2018 | Research Monitor | 21You can also read
