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. [CLICK HERE TO SEE THE FULL REPORT] [Back to top] 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% [Back to top] 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 SALES AND TRADING DISCLAIMER When distributed to UBS clients, distributed by UBS Securities Australia Ltd ABN 62 008 586 481 (Holder of Australian Financial Services License No. 231098) or UBS Wealth Management Australia Limited ABN 50 005 311 937 (Holder of Australian Financial Services License No.231127) which is a subsidiary of UBS AG or otherwise, distributed by UBS AG (Holder of Australian Financial Services License No. 231087) and/or Affiliates (“collectively “UBS”). 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