Final Bell
UBS sales commentary, not research, for Australian equity market investors published by 5pm.
Wednesday 4th February 2015
UBS Institutional Equities Desk
Not for distribution directly/indirectly into the US or to any US person or any person acting for the account or benefit of a US person; Canada; Japan; and/or Brazil.
1
Overview
Australian equities extended their recent rally with the ASX200 Index (+1.2%) posting its 10th
consecutive daily gain with miners and energy stocks the best performing.
The iron ore sector surged with Atlas Iron (AGO) up 27.2%, BC Iron (BCI) 15.8% stronger and
Fortescue Metals (FMG) rallying 8.9%. Copper and nickel exposures also fared well in trade on the
back of the commodities' price gains overnight, with Sandfire (SFR), PanAust (PNA), Sirius (SIR) and
Panoramic Resources (PAN) all posting solid gains.
A continued advance in the oil price overnight fuelled gains in the energy sector. Senex Energy (SXY)
rallied 15.4%, Drillsearch (DLS) put on 8.3% and Sundance Energy (SEA) gained 4.9%. After a 50%
decline over the past 8 months, we believe oil prices are showing signs of stabilisation. Our order of
preference for the sector based on a 12-month view is Santos (STO) followed by Oil Search (OSH) and
Woodside Petroleum (WPL). Among the small caps we prefer Karoon (KAR) and Horizon Oil (HZN).
A small 1H15 beat vs guidance and an overall solid result failed to push Echo Entertainment (EGP) into
positive territory in light of recent strong stock performance. The company's result showed a
continuation of momentum exhibited in 2H14, strong cash flow and lower gearing.
We have initiated research coverage on Australia's largest provider of private health insurance,
Medibank Private (MPL) with a Sell rating and $2.00/share price target. While MPL offers exposure to a
scaled health insurer with a strong brand, good financials and an attractive capital light model in an
industry with supportive growth fundamentals, our Sell rating reflects our view that the stock's post-IPO
performance appears to have captured virtually every positive theme but no negative ones.
79% of respondents in our recent survey of 82 surgeons/audiologists across Europe/USA expect
Cochlear (COH) to cede share to a new Advanced Bionics system. In our view the growing competitive
landscape carries risk incompatible with COH trading at more than 31x our FY16 forecast earnings (a
50% premium to global peers) and with a static dividend yield.
2
Macro Releases
3
Research Released Intraday
4
Research Released Overnight
Lower oil & rates to boost consumer cashflow (Haslem & Tharenou, Australian Economics) Despite an environment of likely ongoing modest jobs and wage growth, our model of consumer cash
flow points to a solid pick-up through 2015.
None.
Boral Limited (BLD) - Scratch growth in QLD, USA catalysts emerge? (Leitch).
Energy Developments Limited (ENE) – The new yield play (Leitch).
Medibank Private Limited (MPL) – Fully Loaded (Coghill).
Mma Offshore Limited (MRM) – Will MMA Offshore trade like global oil service stocks? (Byers).
Navitas Limited (NVT) – More UP Partners Needed (Byers).
Australian Energy - Large cap oil stocks: An investment thesis refresh (Burns).
Australian Real Estate Sector - Federation + Novion: complementary businesses; good strategic fit; longer
term growth options (McCasker).
1
Australian Supermarkets - Grocery outlook: What do FMCG suppliers think? They are more optimistic
than 6 months ago. (Gilbert).
5
Stock Movements
6
Tomorrow's Events & Upcoming Dividends
ASX 100 Advances = FMG, ALQ, MND, MIN, DOW, BSL, TPI, BHP, ILU, AWC.
ASX 100 Declines = NVT, FDC, TTS, REC, EGP, ORA, ALL, WFD, DXS, QAN.
Stock:
1H Results: Downer EDI (DOW), FlexiGroup (FXL), News Corp (NWS), REA Group (REA) and Tabcorp
(TAH).
National Australia Bank (NAB): Quarterly trading update.
Upcoming Ex-Dividend Dates:
Resmed (RMD): 10-Feb, 2.9488c, 0% Franked.
Macro:
AU = NAB business conditions (Q4), NAB business confidence (Q4), Retail sales – values (Dec), Retail
volumes (Q4).
UK = Bank of England Bank Rate.
ASX200 – Intraday chart
Source: Iress
S&P / ASX Index
Close
+/- Chg
% Chg
S&P / ASX Index
Close
+/- Chg
% Chg
ASX 200
5,777
69.9
1.2%
Small Ords
2,123
28.0
1.3%
$21.11
$0.27
1.3%
UBS IQ Research ETF
$21.78
$0.33
1.5%
UBS IQ Research
DIV
ASX 200 Energy
11,677
179.7
1.6%
ASX 200 Financials
6,755
72.5
1.1%
ASX 200 Materials
9,390
303.5
3.3%
ASX 200 REITs
1,324
-3.7
-0.3%
ASX 200 Industrial
4,423
43.7
1.0%
ASX 200 Info Tech
772
-0.8
-0.1%
ASX 200 Discretionary
1,874
-3.7
-0.2%
ASX 200 Telecoms
2,296
-22.4
-1.0%
ASX 200 Staples
9,736
106.8
1.1%
ASX 200 Utilities
6,527
95.2
1.5%
18,049
89.1
0.5%
ASX 200 HealthCare
Total Traded Volume (m)
1,866
Total Traded Value ($m)
6,032
* The UBS IQ Research Preferred ETF tracks a portfolio of UBS BUY-rated Australian securities and trades on the
ASX under the ticker code “ETF.AXW ”.
** The UBS IQ Research Preferred Dividend ETF tracks a portfolio of high yielding Australian securities and trades
on the ASX under the ticker code “DIV.AXW ”.
2
1. Overview
Aussie market extended its rally… ASX200 10th consecutive day in positive territory.
- Australian equities extended their recent rally with miners and energy stocks outperforming after gains on most
key commodity markets overnight. This follows a positive offshore lead as European markets continued to climb
overnight with the Greek market particularly strong in trade, rallying +11.3% to post its best two-day gain in 24
years. The US market also gained strength with all sectors firmer and a busy day of M&A headlines driving
pockets of outperformance.
Miners rallied…
- The iron ore sector surged with Atlas Iron (AGO $0.21) up 27.3%, BC Iron (BCI $0.55) 15.8% stronger and
Fortescue Metals (FMG $2.58) rallying 8.9%. Copper and nickel exposures also fared well in trade on the back
of the commodities' price gains overnight, with Sandfire (SFR +8.0% $4.70), PanAust (PNA +9.2% $1.36),
Sirius (SIR +11.8% $2.94) and Panoramic Resources (PAN +3.2% $0.49) all posting solid gains.
…As did the energy sector… the oil price is showing signs of stabilisation… We like STO, OSH & WPL.
- In the energy sector Senex Energy (SXY $0.38) rallied 15.4%, Drillsearch (DLS $0.98) put on 8.3% and
Sundance Energy (SEA $0.54) gained 4.9%. After a 50% decline over the past 8 months, we believe oil prices
are showing signs of stabilisation. While we are unwilling to conclude that oil prices have bottomed (given a
physical oversupply of oil looks likely for at least the next 18 months), we see increasing evidence of selfcorrecting forces at work. In light of current trends, we expect an ongoing focus on cost reduction among
Australian energy companies, balance sheet strength and growth. Our order of preference for the sector based
on a 12-month view is Santos (STO +1.8% $8.36) followed by Oil Search (OSH +1.7% $8.47) and Woodside
Petroleum (WPL +0.5% $35.87). Among the small caps, our preference is for Karoon (KAR +2.1% $2.44) and
Horizon Oil (HZN +0.0% $0.13) (although both could be considered high risk) followed by Drillsearch (DLS
+8.3% $0.98). Beach Energy (BPT +0.6% $1.18) is our least preferred name in the sector after the recent share
price rally.
Consumer stocks were mixed in trade… Lower oil price & rates should boost consumer cash flow.
- Myer Holdings (MYR $1.69) climbed 3.7% and JB Hi-Fi (JBH $17.30) gained 2.9%, while Kathmandu (KMD
$1.32) lost 4.4% and Retail Food Group (RFG $6.13) declined 1.8%. Despite an environment of likely ongoing
modest jobs and wage growth, our model of consumer cash flow points to a solid pick-up through 2015. A
20% fall in petrol prices combined with 50bp of rate cuts, together represents a 1.4% boost to 2015 income
growth, worth over 1.5% of 2014's consumption, and as much as 6% of 2014's retail spend. In our view we no
longer need a fall in the saving rate to achieve our above consensus forecast for 3% real consumption in 2015.
Harvey Norman (HVN +0.3% $3.98) remains our preferred discretionary retailer with operational
improvements coming through, falling franchisee support, positive earnings momentum and ongoing leverage
to the domestic housing thematic.
EGP closed -2% weaker despite a strong 1H result… much of the beat was already in the share price.
- Echo Entertainment (EGP -2.1% $4.14) this morning reported a solid 1H15 result with momentum exhibited
in 2H14 continuing into FY15, strong cash flow and lower gearing. See below for a summary of the result vs our
expectations. In our view the small beat vs guidance was largely already captured in the share price that has
performed well year-to-date.
Echo Entertainment (EGP -2.1% $4.14) 1H15 Result:
- 1H15 EBITDA of $261.4m was slightly below our $266m forecast but above guidance of $245-260m.
- Gross operating cash flow of $264.4m implies a strong 110% conversion on EBITDA.
3
- Declared a 5c interim dividend. Net debt of $505m was lower than the $634m level reported in June.
We initiated coverage on MPL with a Sell rating and $2 price target… valuation is currently stretched.
- We have initiated research coverage on Australia's largest provider of private health insurance, Medibank
Private (MPL -0.8% $2.40) with a Sell rating and $2.00/share price target. While MPL offers exposure to a
scaled health insurer with a strong brand, good financials and an attractive capital light model in an industry
with supportive growth fundamentals, our Sell rating reflects our view that the stock's post-IPO performance
appears to have captured virtually every positive theme but no negative ones. In our view, 24x FY15 forecast
earnings and 22x FY16 expected earnings are inconsistent with a number of industry features and likely margin
volatility. Our $2/share price target implies an adequately generous 20x FY15 P/E, a level that we believe
accounts for likely margin volatility, pricing complexities and government risk.
COH remains expensive… Growing competitive landscape is incompatible with >31x FY16 P/E.
- Our recent survey of 82 surgeons/audiologists in Europe/USA confirms the perception that Cochlear's (COH
+2.1% $85.15) reliability has declined following its product recall in 2011, making it susceptible to competitor
innovation. 79% of survey respondents expect COH to cede share to a new Advanced Bionics system. In our
view the growing competitive landscape carries risk incompatible with COH trading at more than 31x our FY16
forecast earnings (a 50% premium to global peers) and with a static dividend yield.
COH valuation summary:
[Back to top]
2. Macro Releases
Lower oil & rates to boost consumer cashflow (Haslem & Tharenou, Australian Economics)
While real consumer spending drifted higher through 2014 – rising to a 2½% y/y pace in 2H14, from 1½% y/y
in mid-13 – this only partly reflected better household income growth, relying equally on a reduced rate of
saving by households. The willingness of households to reduce their saving likely reflected both a pick-up in
confidence, as well as wealth impacts on the back of gains in housing & equity market prices.
But can we rely on a further draw-down in the household saving rate to support spending in 2015? Over recent
months, confidence has somewhat relapsed with, among other things, elevated unemployment & low wage
growth likely weighing.
Despite an environment of likely ongoing modest jobs and wage growth, our model of consumer cash flow
points to a solid pick-up through 2015. A 20% fall in petrol prices combined with 50bp of rate cuts, together
represents a 1.4%pt boost to 2015 income growth, worth over 1½%pts of 2014's consumption, and as much
as 6% of 2014's retail spend. On our figuring, cash flow growth should accelerate from its current ~4% y/y
pace, to 5½% y/y through 2015. Importantly, we now no longer need a fall in the saving rate to achieve our
above consensus forecast for 3% real consumption in 2015.
Meanwhile, in terms of sector-specific trends within consumption, over the past 5 years, the long-running trend
toward greater consumption of services, relative to goods has continued, with spending on services now more
than 70% of the consumer dollar, with goods less than 30%, compared with a 67%/33% split a decade ago.
The greatest command on the consumer wallet is still occurring for 'necessities' such as rent, utilities, health &
education, helped by rapidly rising prices for these areas (as well as rising volumes for rent, health & education).
Rising demand is also evident for cars, financial services & insurance, and eating out, where volume growth has
accelerated.
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3. UBS Research Released Intraday
None.
4
4. UBS Research Released Overnight
Boral Limited (BLD) - Scratch growth in QLD, USA catalysts emerge? (Leitch)
Rating: Buy (unchanged)
Price Target: $6.49 (unchanged)
Energy Developments Limited (ENE) – The new yield play (Leitch)
Rating: Buy (unchanged)
Price Target: $6.65 (prior: $6.23)
Medibank Private Limited (MPL) – Fully Loaded (Coghill)
Rating: Sell (prior: Not Rated)
Price Target: $2.00 (prior: N/A)
Mma Offshore Limited (MRM) – Will MMA Offshore trade like global oil service stocks? (Byers)
Rating: Buy (prior: Neurtral)
Price Target: $1.23 (prior: $2.40)
Navitas Limited (NVT) – More UP Partners Needed (Byers)
Rating: Neutral (unchanged)
Price Target: $4.70 (prior: $4.95)
Australian Energy - Large cap oil stocks: An investment thesis refresh (Burns)
Rating: N/A
Price Target: N/A
Australian Real Estate Sector - Federation + Novion: complementary businesses; good strategic fit;
longer term growth options (McCasker)
Rating: N/A
Price Target: N/A
Australian Supermarkets - Grocery outlook: What do FMCG suppliers think? They are more optimistic
than 6 months ago. (Gilbert)
Rating: N/A
Price Target: N/A
[CLICK HERE TO VIEW FULL REPORTS OF UBS RESEARCH RELEASED OVERNIGHT]
[CLICK HERE TO RESET YOUR UBS RESEARCHWEB PASSWORD]
[Back to top]
5. Stock Movements
ASX 100 Top 10 - Advances
ASX 100 Top 10 - Declines
Change
Close
Price
Code
Company Name
Change
Close
Price
Navitas Limited
-7.4%
$4.40
FDC
Federation Cntres
-3.2%
$3.03
$8.88
TTS
Tatts Group Ltd
-2.8%
$3.83
5.4%
$7.18
REC
Recall Holdings Ltd
-2.3%
$7.16
Downer EDI Limited
5.2%
$4.49
EGP
Echo Entertainment
-2.1%
$4.14
BSL
BlueScope Steel Ltd
5.1%
$5.40
ORA
Orora Limited
-1.9%
$2.08
TPI
Transpacific Indust.
4.7%
$0.89
ALL
Aristocrat Leisure
-1.6%
$6.97
BHP
BHP Billiton Limited
4.4%
$31.99
WFD
Westfield Corp
-1.5%
$10.08
ILU
Iluka Resources
4.1%
$7.31
DXS
Dexus Property Group
-1.3%
$7.88
AWC
Alumina Limited
4.0%
$2.06
QAN
Qantas Airways
-1.2%
$2.38
Code
Company Name
FMG
Fortescue Metals Grp
8.9%
$2.58
NVT
ALQ
Als Ltd
6.2%
$5.45
MND
Monadelphous Group
5.5%
MIN
Mineral Resources.
DOW
ASX Small Ords Top 10 - Advances
ASX Small Ords Top 10 - Declines
Code
Company Name
Change
Close
Price
Code
Company Name
Change
Close
Price
NWT
Newsat Limited
30.8%
$0.17
MDL
Mineral Deposits
-6.5%
$0.79
AGO
Atlas Iron Limited
27.3%
$0.21
DNA
Donaco International
-6.5%
$0.65
PBT
Prana Biotechnology
18.9%
$0.22
EPW
ERM Power Limited
-5.7%
$2.00
BCI
BC Iron Limited
15.8%
$0.55
AMM
Amcom Telecomm.
-5.5%
$2.75
5
SXY
Senex Energy Limited
15.4%
$0.38
KMD
Kathmandu Hold Ltd
-4.4%
$1.32
LYC
Lynas Corporation
14.0%
$0.05
SLR
Silver Lake Resource
-4.4%
$0.22
SDL
Sundance Resources
12.0%
$0.03
NUF
Nufarm Limited
-4.0%
$5.77
SIR
Sirius Resources NL
11.8%
$2.94
OGC
OceanaGold Corp.
-3.9%
$2.69
TGS
Tiger Resources
10.6%
$0.07
TNE
Technology One
-3.7%
$3.35
OZL
OZ Minerals
9.3%
$4.25
AQG
Alacer Gold Corp.
-3.3%
$2.90
ASX 100 Heavy Volume
Code
Company Name
Today's
Vol
('000)
Closing
Price
% of
ADV
AGO
Atlas Iron Limited
34,225
$0.21
CRF
Centro Retail Aust
20,497
$3.03
OZL
UGL
CFX
BPT
MGR
ASX Small Ords Heavy Volume
Code
Company Name
Today's
Vol
('000)
Closing
Price
% of
ADV
313%
TGZ
Teranga Gold
Corp
2,020
$0.62
899%
310%
NVT
Navitas Limited
5,098
$4.40
491%
776
$0.28
437%
355
$3.50
380%
942
$0.08
346%
24,369
$0.38
339%
9,824
$0.98
327%
463
$0.50
302%
Aquarius
Platinum.
SMS
Management.
Phosphagenics
Ltd.
Senex Energy
Limited
OZ Minerals
9,380
$4.25
273%
AQP
UGL Limited
3,691
$1.70
263%
SMX
22,794
$2.51
256%
POH
32,608
$1.18
256%
SXY
27,897
$2.03
225%
DLS
Drillsearch Energy
CFS Retail Trust
Grp
Beach Energy
Limited
Mirvac Group
PNA
PanAust Limited
7,333
$1.36
214%
SLX
Silex Systems
SWM
Seven West Media
Ltd
6,806
$1.42
210%
BRU
Buru Energy
1,384
$0.42
286%
SGP
Stockland
16,116
$4.53
210%
MNC
Metminco Limited
3,917
$0.01
280%
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6. Tomorrow's Events & Upcoming Dividends
Stock Events
Code
Company Name
Event
UBS Comment
DOW
Downer EDI
Financial Result
Half Year: NPAT $103.9m DPS 12.0c
FXL
FlexiGroup
Financial Result
Half Year: NPAT $47.4m DPS 8.0c
NAB
National Australia Bank
Financial Result
Q1 2015 Sales and Revenue Release - Trad
NWSA.O
News Corp
Financial Result
Half Year:
REA
REA Group
Financial Result
Half Year:
TAH
Tabcorp
Financial Result
Half Year: NPAT $78.0m DPS 8.6c
Macro Events
Country
Event
UBS Comment
Australia
NAB business conditions (Q4)
Australia
NAB business confidence (Q4)
Australia
Retail sales – values (Dec)
Australia
Retail volumes (Q4)
UK
Bank of England Bank Rate
Ex-Dividend
Ex-Date
10-Feb
Code
RMD
Dividend
Amount
Franking
2.9488c
0%
6
**To see the Stock and Macro Events for the month ahead contact UBS**
[Back to top]
UBS Research Ratings and Price Targets
STO Buy UBS PT $9.5
OSH Buy UBS PT $8.6
WPL Neutral UBS PT $35.3
KAR Buy UBS PT $4.5
HZN Buy UBS PT $0.21
DLS Buy UBS PT $0.95
HVN Buy UBS PT $3.8
EGP Buy UBS PT $5.05
MPL Sell UBS PT $2
COH Sell UBS PT $57.9
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8