to Aussie equities. We recently lowered our December 2016 ... · to Aussie equities. We recently...

BAILLIEU HOLST RESEARCH

28 July 2016

Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Please read the disclaimer at the end of this report. Page 1

Australian Investment Strategy STRATEGY

3Q Outlook: Sideways

■ Global economics: The surprise of the UK referendum and slowing

activity in China have led our economists to shave their Global GDP

forecasts to 2.4% in 2016 and 2.6% in 2017. The global economy

continues to travel at stall speed and remains vulnerable to shocks.

■ Australian equities: After the sharp rally we forecast sideways markets

in the near-term. Further upside is capped by a combination of testing

valuations and broader macro concerns. The downside is also capped,

in our view, as the global-search-for-yield will continue to bring investors

to Aussie equities. We recently lowered our December 2016 ASX 200

target to 5500. Investors should anticipate less beta and more alpha.

■ Aussie sectors, global perspective: We provide a snapshot of how

Australian sectors compare to their international peers. We find Aussie

Healthcare stocks trade at a 50-60% P/E premium vs the global sector

average. This is despite weaker profit margins and EPS momentum.

Meanwhile, Australian Building Materials may look expensive vs the

domestic market but remain relatively cheap versus international peers.

Buybacks: The cost of debt for Australia Inc. is back down to record

lows. Despite higher equity valuations a lower cost of debt makes a

buyback in Australia extremely accretive. Companies in a position to

announce an EPS accretive buyback but currently not doing so include

Qantas, Caltex, Boral and AGL Energy.

Figure 1: Aussie P/E ratio now at a post-financial crisis high

12 month trailing P/E ratio for ASX 200

5

10

15

20

25

70 74 78 82 86 90 94 98 02 06 10 14

Average = 15.3x

17.8x

Source: Company data, BH

http://www.baillieuholst.com.au/


28 July 2016

Baillieu Holst ABN 74 006 519 393 www.baillieuholst.com.au Please read the disclaimer at the end of this report. Page 2

3Q OUTLOOK: SIDEWAYS

After the sharp rally in Aussie equities we forecast sideways markets in the near term.

Further upside is capped by a combination of testing valuations and broader macro

concerns. The downside is also capped, in our view, as the global-search-for-yield will

continue to bring investors to Aussie equities. We recently lowered our December 2016

ASX 200 target to 5500. Investors should anticipate less beta and more alpha.

An area of potential alpha within the Aussie market are the beneficiaries of a record low

cost of debt. We highlight companies that are in a position to do an EPS accretive buyback

and take advantage of the unusual pricing on offer by credit markets. Our screen includes

Qantas, Caltex, Boral and AGL Energy.

Finally, we introduce a new section to the Australian Equity Quarterly and provide a global

perspective on Australian sectors. Our work highlights that Aussie Healthcare stocks trade

at a 50-60% P/E premium vs the global sector average. This is all despite weaker profit

margins and EPS momentum. Meanwhile, Australian Building Materials may look

expensive vs the domestic market but remain relatively cheap versus international peers.

Market returns in 2Q Expectations of further global central bank policy were reflected in asset prices in 2Q16.

Gold, government bonds and credit all performed well. The gold price rallied 45% in A$

terms. The rally in government bonds now means that 20% of global sovereign debt

provides a negative yield. Meanwhile the strong performance of corporate bonds means

yields have hit a record low again. There was little separating DM and EM equities in

2Q16, although EM has performed better in 3Q so far. The iron ore price was volatile. It

plunged more than 7% in US$ terms (4% in A$) in 2Q which has since rebounded in 3Q.

Figure 2: Gold and fixed income outperform Figure 3: Weak Sterling helps UK equities

Major asset class returns in Q2 2016 (in AUD) Major stock index returns in Q2 2016 (in local currency)

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Gold

US

10 Year+

US

High Y

ield

DM

Equities

Aus 5-10 Y

ear

Aus E

quities

EM

Equities

US

Cash

Aus C

ash

Iron Ore F

utures

Q3 to dateQ2 16

45%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

UK

Canada

Australia

US

New

Zealand

EM

Asia

Eurozone

Japan

Q2 16 Q3 to date

Source: the BLOOMBERG PROFESSIONAL™ service Source: the BLOOMBERG PROFESSIONAL™ service



28 July 2016


To the surprise of many, UK equities were the best performer of the major markets in

2Q16, and the performance has continued into 3Q. Of course local stocks have benefited

immensely from a weaker currency as three quarters of UK Plc earnings come from

abroad. Canadian and Australian equities also performed well. In Australia's case at least

this is in line with previous Gummy Rallies following benign bear markets. It seems that

Japanese equities suffered the most post Brexit as a stronger Yen weighed on profits. But

the performance here has since recovered, as the Yen has weakened.

Global economics

Our economists forecast Global GDP to grow 2.4% in 2016 and have shaved their 2017 forecast to 2.6% following the Brexit vote. Our economists believe a recession in the UK, a slowdown in continental Europe, and renewed headwinds for China will not be offset by resilience in other emerging markets and the US. We expect the BoJ, BoE and PBoC to ease policy further in 2H16. Political risk remains acute after Brexit, with the US election and Italy’s constitutional referendum adding to market volatility in 2H16.

Figure 4: BH Real GDP and CPI Forecasts

Year average annual change (%)

Real GDP Growth Inflation

2015 2016E 2017E 2015 2016E 2017E

Global 2.6 2.4 2.6 2.4 3.4 4.0

US 2.4 1.9 2.2 0.1 1.2 2.0

Euro Area 1.6 1.5 1.0 0.0 0.3 1.5

Japan 0.5 0.4 0.2 0.6 -0.3 0.0

UK 2.3 1.0 -1.0 0.0 0.7 2.1

Switzerland 0.9 1.0 1.5 -1.1 -0.5 0.0

China 6.9 6.5 6.5 1.4 2.0 1.7

Australia 2.5 2.5 3.2 1.5 2.1 2.4

Source: BH estimates

US – Fed back in 2017

The current US economic expansion has been primarily driven by consumer spending,

which is supported by rising labour income, improving consumer confidence and strong

household balance sheets. Slowing payroll growth is not a sign of concern as the US

approaches full employment. However, high uncertainty related to Brexit and the US

election could weigh on consumer confidence in 2H16. The housing sector has seen

improvement and investment will likely boost growth through the rest of 2016. Government

spending could be another tailwind to growth, but the continuation of a divided government

is unlikely to usher in major fiscal expansion in the near-term. Core PCE inflation is

forecast to reach the Fed's 2% target by the end of 2017, but heightened political

uncertainty after Brexit, weak global growth and volatile domestic data will put the Fed on

hold until May 2017.

Europe – little Britain

In Europe, the political uncertainty after Brexit may deter corporate investment and lead to

slower growth in 2H16, but corporate spending could prove resilient because of rising

capacity utilisation and years of underinvestment in capital stock. Still our economists

forecast a mild recession in the UK and weak growth in Continental Europe. The concern

around European banks' profitability is likely to persist given the mix of 'even lower rates for

even longer'. A potential bailout of troubled Italian banks could be reached to avoid the

political repercussion on the EU. Persistently low inflation would prompt the ECB to extend

asset purchases into late 2017 or early 2018. The ECB appears to have little appetite to push

rates further into negative territory when its monetary policy is at limits. Still, the political



28 July 2016


capacity for coordinated fiscal stimulus is not yet available. We expect the Bank of England

will cut rates in August to 0.05% from 0.5%, and launch another round of QE of £75bn.

Japan – pushing the policy boundaries

Without substantial Yen depreciation, Japan will re-enter deflation in 2017. The BoJ is

under increasing pressure to ease policy further in anticipation of further CPI weakness.

Maintaining current policy for too long may risk further JPY strength as real interest rates

rise amid a fall in expected inflation rates. Given the BoJ’s limited capacity for conventional

monetary easing, fiscal and monetary authorities may take coordinated action to launch

another fiscal package, possibly an expansion of deficit bond issuance and JGB purchases

by the BoJ.

China – peaking

Despite a recent bounce in 2Q16 GDP growth, China's structural slowdown will likely

resume in 2H16 when the excessive liquidity boost to infrastructure and credit fades. The

central government has shifted back to a focus on supply-side reform from demand

stimulus. It is attempting to rein in leverage and cutting excess capacity especially amongst

the SOEs. Although the boost from fiscal policy has effectively increased public fixed asset

investment, it has not prevented a material slide in private investment growth. The efficacy

of fiscal and credit stimulus in propping up GDP growth is diminishing. Excessive debt and

supply is holding back the main policy tools. Monetary policy is likely to play only a passive

role in any future stimulus, with the PBoC potentially cutting the reserve requirement ratio

(RRR) by 100 bps, and the policy guidance rates by another 25 bps in 2H16 if the Fed

remains dovish.

Bonds, credit, FX, commodities Our strategists think government bond yields will continue to rally in the short term and

Australian rates will benefit from its 'high-yielder' status and supportive monetary policy.

Credit conditions will ease further, while GBP and AUD are expected to become weaker.

The gold price is expected to strengthen while iron ore price will stabilise.

Government bonds

The post-Brexit bond rally has driven government bond yields around the world to historic

lows. Despite solid US June retail sales and payrolls data, there has not been a sharply

higher reassessment in the pace of US rate hikes. US 10-year Treasury yields are

currently 1.56%, and weaker data in 3Q16 may support a further rally across the yield

curve. 10-year Treasury yields could reach 1.2% by the end of 3Q16 before reversing

modestly higher to 1.4% by year-end. Without a meaningful reversal in yields, the ECB

could run out of German Bunds it can purchase in 2H16. Consequently, the German yield

curve is likely to flatten.

Australian rates are likely to benefit from a combination of favourable domestic and global

factors. Low inflation and fiscal consolidation are expected to keep monetary policy

supportive. Weak global growth prospects and negative rate regimes should make

Australian rates more attractive due to its 'high-yielder' status in the developed world. Our

rates strategists expect yields will move lower, the curve to remain flat and the current

Australian rates rally would continue and outperform the US on a relative basis.



28 July 2016


Figure 5: Plenty of negative yield about Figure 6: Correlation breakdown Energy vs US HY

Government bond yields curves to 10 years US HY Yields (%) vs WTI Crude Oil Price (RHS, inverted)

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

1y 3y 5y 7y 10y

Australia

US

Japan

Germany

Switzerland

30

35

40

45

50

55

600

5

10

15

20

25

30

Oct 15 Nov 15 Dec 15 Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 Jul 16

US High Yield

US Energy High Yield

WTI Crude Oil Price(RHS, inverted)

Source: the BLOOMBERG PROFESSIONAL™ service, BH Source: the BLOOMBERG PROFESSIONAL™ service, BH

Credit

Credit conditions have eased significantly since early 2016. The trend is expected to

continue into 2H16 given the global appetite for fixed income assets after Brexit. The

favourable combination of higher oil prices, easier central bank policy and improving US

economic data have helped drive down credit yields. US HY bonds are yielding 6.63%,

down from 9.57% in February, while Energy sector HY has dropped below 10% for the first

time since July 2015. The fall in yields is in spite of rising energy company default rates

which is now at a six-year high of 5.1%. More recently, HY credit continues to rally even

though energy prices sell-off (Figure 6). Perhaps buying by the ECB in Europe is affecting

credit markets around the world.

FX

Our FX strategists remain bearish on Sterling and forecast a further 5-10% depreciation

from here. The combination of easing by the Bank of England and an extended period of

uncertainty will weigh on the currency. While the Yen has rallied considerably, we forecast

a reversal as Japanese policymakers engage in fiscal and monetary coordination. Slowing

Chinese growth and falling investment returns in China will reinforce trend CNY weakness

through capital outflows. The AUDUSD is expected to reach 0.72 in three months because

short-term FX volatility and elevated risk aversion could diminish the appeal for risk-on

sensitive currencies like the AUD, but ongoing political instability in Europe and uncertainty

from the US presidential election could drive long-term portfolio capital flows to Australia. A

slim majority for the Coalition government carries downside risks for the AUD but will be

small in magnitude, as the government will push further for fiscal consolidation under

pressure from international rating agencies.



28 July 2016


Commodities

Mini-cycles of commodities have returned. Our analysts expect the iron ore price will likely

recede from a June spot price of $51/t to $45/t in 3Q16 as demand slows. However an

increase in China's infrastructure build in 4Q16 should raise steel demand and production

above seasonal norms, lifting iron ore prices back to $50/t. Continued tight supply,

increasing financial market volatility and heightened political instability will prolong the

strength of gold. We have revised up our forecasts for 3Q16 gold price from US$1,300 to

US$1,350 per ounce. Our oil team is concerned that the demand outlook for crude oil has

become weaker as the Brexit vote has become the latest and the strongest catalyst for a

looming slow-down of global growth. Although production outside OPEC is forecast to

decline, total global oil supply may not experience a substantial change in 2017. Our team

forecasts the crude price to finish 2016 at $44 a barrel and $55 a barrel at the end of 2017.

Australian economics Australian GDP has surprised to the upside recently, with year-ended growth picking up to

3.1% in 1Q. However, most of the strength is attributable to rising resource export

volumes. Domestic demand growth remains weak — below 1% annualised. In early 2Q,

the evidence is that domestic demand has remained sluggish. Retail sales were flat

through to May, while capex has continued to head backwards. Residential investment still

looks like it has some room to rise given the elevated level of building approvals — but

there are question marks as to whether there are enough resources in the country to build

all of the homes implied by the approvals data. Also, developers may respond pre-

emptively to falling demand by cutting back supply. In our view, housing remains the

weakest link in the economy. Leading indicators point to a sharp decline in housing

demand towards the end of the year, reflecting the delayed effects of macro-prudential

regulation on local buyers and reduced foreign demand.

Figure 7: Residential investment to continue Figure 8: Housing demand to weaken sharply

Change in bank credit and change in net loan approvals Auction clearance rate and mortgage availability

-32%

-22%

-12%

-2%

8%

18%

28%

38%

-10%

-5%

0%

5%

10%

15%

20%

25%

1986 1990 1994 1998 2002 2006 2010 2014 2018

YoY% Change in BankCredit (LHS)

YoY% Change in NetLoan Approvals (RHS,Smoothed)

20%

24%

28%

32%

30%

50%

70%

90%

2006 2008 2010 2012 2014 2016 2018

Auction Clearance Rate (LHS)

Mortgage Availability (RHS, Led 1 Year)

Source: RBA, ABS, BH Source: APM, APRA, BH



28 July 2016


We expect the RBA to cut rates further in this environment. CPI and wage data continue to

register disinflation, consistent with the sluggishness in domestic demand, and a fairly wide

output gap. Also, there is tightening coming through other channels. Credit standards have

tightened, as evidenced by falling loan approvals, while the AUD/USD remains

substantially overvalued.

Global equities Our global strategy team expects flat equity markets from here. They expect S&P 500 to

finish the year at 2000 (in a full Brexit scenario by invoking Article 50) or at 2,100

(assuming 'Brexit-lite'). While discount rates remain low, absolute valuations remain high,

especially for the S&P 500. As of July the US equity market is trading at a post-tech bubble

peak on 12-month forward P/E at 18.4. This is 1.6 standard deviations above trend. Our

US Strategists note that valuations at these levels have preceded declines in the equity

market over the coming 12 months more than half the time. Amongst the major regions our

strategists are Overweight Emerging Market equities and Underweight Continental

European equities. They are neutral UK equities despite obvious headwinds. Our team

believes the FTSE 100 is 10-15% cheap and three-quarters of FTSE earnings come from

outside the UK which would benefit from a weaker Sterling. They highlight the tactical risks

of higher global bond yields in the near term. Most economic variables, such as ISM new

orders and commodity prices, are consistent with a rebound in yields. If bond yields rise,

financials and cyclicals are likely to outperform, while consumer staples and utilities would

underperform.

Figure 9: S&P 500 valuations are testing Figure 10: Asian Materials sector to outperform

US S&P large cap 12-m fwd P/E, with avg = 15.4 Asian Materials sector performance around the US Fed tightening

8

10

12

14

16

18

20

22

84 87 90 93 96 99 02 05 08 11 14

70

80

90

100

110

120

130

140

150

160

170

-9m -8m -6m -4m -3m -1m 0m +2m +3m +5m +6m +8m +9m +11m

Jun-04

May-13

current

MXASJ Materials

-28.5%

-25%

+71%

+22%

-32%

+26.2%

Source: S&P Capital IQ, Thomson Reuters/IBES, Compustat, BH Source: MSCI, BH, 0m is the first Fed tightening in that cycle

Our Asian equity strategist notes we are seeing the first signs of EPS upgrades and

sectors leading the way include Materials, Energy and Technology. Our Asian team is

currently overweight Banks, Technology and Materials. Amongst the countries we prefer

Korea, Taiwan and MSCI Hong Kong where investors can find the best combination of

price-to-book and RoEs. While we are overweight Materials we are underweight Australia

given the excessive valuations for our market when compared to the rest of the regions.



28 July 2016


AUSTRALIAN EQUITIES: SIDEWAYS

We think the Aussie equity market is caught between conflicting forces. Supporting further

upside are low cash rates and bond yields, prospect of a market-wide earnings recovery

and yet another potential round of global policy stimulus. However, providing some

downside risk are high absolute valuations and concerns about the broader global profits

outlook following the recent UK referendum.

We were previously of the view that the Aussie dividend yield would compress to about 4%

by year-end and this would take us to a ASX 200 index level of 6000. As we highlight

below, much of this compression is now done, but we are concerned about the outlook for

future earnings and dividends given our economists' recent GDP downgrades. We recently

cut our year-end target to 5500 — where the index currently sits. Further upside could be

upon us in 2017 as there are clearer signs of a profits recovery and policy continues to

remain ultra-accommodative, in our view. But for now, we expect Aussie equities will be

range bound.

Below we outline the building blocks of our market view.

Valuation

The ASX 200 has rallied hard from the post Brexit lows. Now the trailing P/E ratio is

nudging 18x. This is a new post-financial crisis record (Figure 10). While the Aussie P/E is

above long-term averages our market does not look particularly expensive when compared

to others around the world. For example, the June 2017 P/E ratio remains lower than those

for US and Pan-European equity markets. However, it is higher than markets in Asia.

While our entire market does not look particularly expensive on a global basis, some of the

sectors in our market certainly do. For example, Healthcare stocks in Australia trade at a

50-60% P/E premium to global peers (Figure 95), despite weaker earnings trends.

Figure 11: P/Es high vs history Figure 12: P/Es in-line with global markets

12 month trailing P/E ratio for ASX 200 June 2017 P/E ratio

5

10

15

20

25

70 75 80 85 90 95 00 05 10 15

Average = 15.3x

20.3 18.5

17.5 17.3 16.3 16.0

12.7 12.2 11.7

0

4

8

12

16

20

24

Aus Industrials

Aus C

omm

odities

US

Pan-E

urope

AS

X 200

AS

X 200 x C

omm

Japan

Big 4 B

anks

Asia ex Japan

Source: Company data, BH Source: IBES, BH Estimates



28 July 2016


Aussie valuations look more attractive when we focus on dividends rather than earnings.

The current trailing dividend yield is close to 4.4%. This is 70 basis points lower than at the

start of the year but still 30 basis points higher than the long-term average. There is more

room for yield compression, especially when we consider cash rates and global fixed

income yields are hovering around record lows. Dividend yields for our market also

continue to look attractive when compared to global indices. For example, an income

seeking investor should expect to benefit from less than a 2% yield in the US over the next

12 months. This is marginally higher than Aussie cash rates. Meanwhile, a buyer of Aussie

banks is forecast to reap a yield of more than 6% (pre-franking). No wonder Australia's

income seeking investors much prefer to stay home.

Figure 13: Yield compression Figure 14: Considerable global yield spread

12 month trailing Dividend Yield ratio for ASX 200 June 2017 Dividend Yield

2

3

4

5

6

7

70 75 80 85 90 95 00 05 10 15

Average = 4.1%

6.2%

4.4%3.8%

3.5% 3.4%2.8%

2.6%2.2%

1.7%

0%

1%

2%

3%

4%

5%

6%

7%A

us Big 4 B

anks

AS

X 200

Aus Industrials

Pan-E

urope

Aus ex F

inancials

Asia ex Japan

Japan

Aus C

omm

odities

US

Source: Company data, BH Source: IBES, BH Estimates

Growth

We think the risks to the growth outlook are to the downside, at least in the near term.

Expectations are now for Aussie EPS to grow by almost 10% over the 12 months to June

2017. This will be amongst the fastest of the major global equity markets. We calculate that

just over 40% of this growth is expected to come from the commodity companies (Mining

and Energy). Commodity company profits have declined by almost 80% since the peak in

2011. They are forecast to recover by 40% (from current depressed levels over the next 12

months) but still be 65% below 2011 peak level EPS.

We highlight three reasons why the risks to the growth outlook are to the downside. First,

our economists highlight a near-term peak in the growth outlook for China. This could have

obvious repercussions for commodity prices and commodity company profits. Second, our

global economists are in the process of lowering their economic outlook following the UK

referendum. We are yet to see the ramifications of this in markets or aggregate profits.

Could we be at that rare point in time when economists' revisions collectively lead financial

markets? Third, in addition to these international concerns we remain concerned that the

lost decade in Australia will continue to weigh on top-line growth, especially for our equity

index which remains overweight domestic housing.



28 July 2016


Figure 15: Aussie EPS rebound ahead Figure 16: Sluggish DPS outlook

June 2017 EPS growth forecast (now vs 3 months ago) June 2017 DPS growth forecast (now vs 3 months ago)

0

5

10

15

20

25

Aus C

omm

odities

AS

X 200

Asia ex Japan

Aus Industrials

Pan-E

urope

Japan

US

Aus B

ig 4 Banks

3 mths agoJun '17

+41%

-5

0

5

10

Aus Industrials

US

Japan

Asia ex Japan

AS

X 200

Pan-E

urope

Aus B

ig 4 Banks

Aus C

omm

odities

3 mths agoJun '17

-16%

Source: IBES, BH estimates Source: IBES, BH estimates

The outlook for Aussie DPS growth is a little more muted than EPS. Expectations are just

3% growth June 2017. This should help lower the Australian payout ratio to the low 70s. It

was around 80% in June 2015. All of the increase in dividends is expected to come from

the Industrial companies (excluding Financials and Commodities). Aussie DPS growth is

expected to be amongst the weakest in the world over the next 12 months. The only major

market forecast to report even weaker growth is Pan-Europe.

Gummy rally

Earlier this year we highlighted our expectation that Aussie equities were in the midst of a

typical rally which has previously followed benign bear markets. We christened this the

Gummy Rally and in Figure 17 we illustrate how the current episode (beginning in early

February) has tracked the historical average closely. But from here we think the rally will

stall for a while.



28 July 2016


Figure 17: Current Gummy Rally tracking average closely but expected to stall

ASX 200 (rebased) after previous 20% draw-downs

70

80

90

100

110

120

130

0 25 50 75 100 125 150 175 200 225 250Tradng days after initial 20% decline

ASX 200 during Gummy Rally's

ASX 200 during Grizzly Bears

ASX 200 after 10/Feb (most recent bear)

CS Dec-16 f'cast

Source: Thomson Reuters Datastream, BH, BH estimates

Previous Gummy Rallies have occurred against a backdrop of falling credit yields and

rising indicators of economic activity. Indeed, the cost of corporate debt has eased and

PMIs have increased since the last bear market ended. While credit conditions should

remain underpinned with easy central bank policy, we expect PMIs will retrace lower,

consistent with our economists' weaker GDP forecasts. A weakening growth outlook is

enough reason to expect the rally to stall for a while.

Figure 18: Easier credit conditions good for Gummy Figure 19: Economic activity supported Rally

Moody's BAA Yield Change (%) after ASX 200 draw-down of 20% US ISM New orders after previous 20% retracements in ASX 200

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

0 25 50 75 100 125 150 175 200 225 250

Tradng days after initial 20% decline

US BAA Yield during Gummy Rally's

US BAA Yield during Grizzly Bears

Now

40

42

44

46

48

50

52

54

56

58

60

0 1 2 3 4 5 6 7 8 9 10 11 12

Months After Initial 20% decline

ISM New Orders after Gummy Bears

ISM New Orders during Grizzly Bears

Now

Source: the BLOOMBERG PROFESSIONAL™ service, Thomson Reuters Datastream, BH Source: Thomson Reuters Datastream, BH

We stick to our recently revised target of 5500 for the ASX 200 by December 2016. Our

forecast implies that Aussie equities have made their gains for the year. Beta will matter

less from here, alpha is set to take over.

BH



28 July 2016


Buybacks The cost of debt has again pushed down to generation lows and we think it is time for

Australia Inc. to lock it in. Our measure of the cost of debt is the A-rated 3-5 year corporate

bond yield. It is currently just over 3%. It hit a 2016 high of 3.9% in March and a global

financial crisis high of more than 9%. We think the low cost of debt continues to provide

opportunities for Australia Inc. For example, we expect the low cost of debt will finance

more and bigger M&A. But instead of paying a premium to buy someone else's stock, we

think Aussie companies should first consider buying themselves. Despite the sharp rally in

equity markets, and P/E ratios at post-financial crisis highs, a buyback continues to be

immensely accretive for the average Industrial stock. We calculate a 1% buyback provides

more than 50 basis points of EPS accretion. This is in line with levels we highlighted this

time last year, when equity valuations were lower but the cost of debt was higher.

Figure 20: Aussie cost of debt back to record lows Figure 21: Aussie EPS accretion from 1% buyback

A-Rated 3-5 Year Australian Corporate Bond Yield EPS accretion from a 1% buyback for average ASX 200 Industrial

2

3

4

5

6

7

8

9

10

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

-0.2%

-0.1%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

Aug 96 Aug 00 Aug 04 Aug 08 Aug 12 Aug 16

More accretion

Less accretion

Dilution

Source: Company data, the BLOOMBERG PROFESSIONAL™ service, Thomson Reuter Source: the BLOOMBERG PROFESSIONAL™ services Datastream, BH

We think EPS accretion is just one reason why those companies doing buybacks have a

long history of outperformance. In addition, those corporate managers investing in their

own stock signal to investors that they understand the process of capital allocation, in our

view. They are actively working to lower their cost of capital. Also, it highlights that

management are shrewd enough to wait for the right opportunity to come along to expand.



28 July 2016


Figure 22: Aussie buybackers have delivered

Total median return of ASX 200 listed companies that have shrunk their share count by 2% or more over the last 12 months. Portfolio reweighted quarterly.

0

100

200

300

400

500

600

700

800

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

ASX 200 buyback basket

ASX 200 Accumulation Index

Source: Company data, Thomson Reuters Datastream, BH

We have noticed that more buybacks tend to get announced at the full year results. And

given the reporting season is just around the corner we think it is an opportune time to

highlight potential buyback candidates. In Figure 23 we screen for these stocks. These

stocks all have a cost of equity (our crude measure is the reciprocal of the P/E ratio) higher

than their cost of debt. The cost of debt for each company is estimated by our analysts. We

exclude those companies with excessively geared balance sheets and we also include our

analysts' thoughts on a potential buyback. The most interesting stocks are those in the

middle of the table, in our view. These companies are in a position to do an accretive

buyback but are yet to announce it. Importantly, our analysts believe the probability of

these companies announcing a buyback is relatively high.



28 July 2016


Figure 23: Potential Aussie Buybackers

Stocks where cost of debt is less than cost of equity and leverage is reasonable and/or BH analyst believes buyback is possible

Sector Mkt

Cap

(A$b)

Cost of

Eqty

(1/PE)

Cost of

Debt

Net Debt/

EBITDA

Comment

Buyback underway/announced

Telstra Telecoms 70.8 6.4% 5.0% 1.3 $1.5b buyback announced post the sale of Autohome. NBN payments may finance further buybacks

CSL Health Care 40.6 3.5% 2.5% 1.4 Forecast a further US$700mn buy-back in FY17

Aurizon Industrials 10.5 5.4% 5.1% 2.3 c$100m to complete current program. Not expecting a significant increase

James Hardie Materials 7.4 4.1% 3.4% 0.9 Started current buyback program. Unlikely to extend given share price rally. Special dividends possible

Computershare Technology 3.7 7.6% 3.0% 2.4 Unlikely to extend buyback. Require funds for recent acquisitions and mortgage services business.

CSR Materials 2.0 8.5% 4.9% -0.2 Current $150m buyback is underway (over 2-yrs). Few shares have been acquired to date.

OZ Minerals Materials 2.0 4.0% 5.0% -1.5 $60mn buyback (<4% capital) currently ongoing

Regis Res Materials 1.8 9.4% 5.0% -0.5 5% on-market share buyback (25m shares) announced 12 months ago but not executed

Seven Wst Med Discretionary 1.6 12.1% 5.0% 1.7 Announced a "disciplined" $75m buyback at the half-year result.

Sims Metal Materials 1.6 6.3% 6.5% -1.5 Net cash, 10% buyback announced Nov 15, well progressed but completed. Further buy back possible

Henderson Grp Div Fins 1.4 7.5% 2.5% -1.2 Commenced c3% buyback 1/June set to complete in December

Sigma Pharma Health Care 1.4 4.6% 3.0% 0.3 c5m shares still to be bought back under current program. Expect more in FY17.

Asaleo Care Staples 0.8 6.9% 5.5% 2.2 70% through current buyback program. Not expected to extend given operating issues

Nine Ent Discretionary 0.9 14.4% 5.0% 0.2 10% buyback in place, unlikely to continue given operating pressures

Buyback possible

AMP Div Fins 17.3 6.0% 5.0% n.a Will finalise life structure before capital management. Can release additional c$1.5bn to shareholders.

Insurance Aust Insurance 14.4 5.8% 5.0% n.a Has mentioned alternative capital management options. Buyback has merit over special dividend.

AGL Energy Utilities 13.8 6.0% 5.5% 1.5 Potential to announce a buyback in next 12 mths. Press reports of bid for Alinta the main impediment.

Caltex Aust Energy 8.5 6.8% 6.5% 0.4 Large franking credit balance suggests off market buyback more likely. Expect another one in 2017

South 32 Materials 7.2 6.2% 4.0% -0.1 Option of pursuing acquisitions, committing to mine expansions or buybacks.

Qantas Industrials 6.2 21.0% 5.9% 0.9 Forecast another buyback announced at FY16 results of $500mn

Harvey Norman Discretionary 5.2 6.6% 3.5% 0.9 Possible to do off-market buyback to distribute franking credits

Boral Materials 5.1 5.4% 5.2% 1.2 Potential for a buyback to be announced because M&A targets have been difficult to identify

Incitec Pivot Materials 4.9 6.0% 3.5% 1.9 Likely to commence buyback in 2017 due to completion of US ammonia capex

JB Hi-Fi Discretionary 2.5 7.3% 3.5% 0.2 Will depend on acquisition opportunities in the sector.

Ansell Health Care 2.1 6.9% 1.6% 1.8 US$100mn buyback almost complete. Forecast a further buy-back in FY17.

Independ Grp Materials 2.0 5.4% 5.0% 1.7 Will be debt free in 12 months may consider buyback then.

Metcash Staples 2.0 9.4% 3.5% 0.8 Will depend on acquisition of HTH. Dividend likely to be reinstated for FY17 final.

Buyback would be accretive, but unlikely

BHP Billiton Materials 45.4 4.8% 4.0% 1.9 More likely to invest

Rio Tinto Materials 15.2 5.3% 3.5% 1.2 More likely to buy or invest

Newcrest Mining Materials 13.0 7.0% 3.9% 1.4 Focus has been on debt reduction. Expect resumption in divs before buyback.

Amcor Materials 13.3 5.3% 4.0% 2.7 More interested in acquisitions

Fortescue Metals Materials 9.4 8.1% 5.5% 1.7 Would rather grow dividend

Sonic Healthcare Health Care 9.4 5.1% 3.3% 2.7 More likely focused on acquisitions

ResMed. Health Care 9.2 4.1% 1.5% 0.9 Buy-back on hold post Brightree acquisition.

Orica Materials 5.0 8.5% 3.5% 2.1 Priority is to reduce debt

BlueScope Steel Materials 4.6 10.6% 5.5% 0.8 Cash generation likely applied to debt reduction. Divs to increase before buyback.

Adelaide Bright. Materials 3.8 5.4% 4.6% 0.8 Preference for special dividend due to franking credits and 33% holding by Barro Group

Fairfax Media Discretionary 2.3 6.5% 5.0% 0.0 Recently completed buyback. Unlikely to extend given focus on restructuring.

Nufarm Materials 2.1 6.7% 6.0% 1.4 Potentially saving balance sheet for acquisitions post the current global mega mergers

Downer EDI Industrials 1.7 9.9% 5.6% 0.2 Preference to utilise balance sheet for M&A

Myer Discretionary 1.0 7.6% 3.5% 0.4 Only recently completed a capital raising. More likely to use surplus funds to accelerate restructuring.

G.U.D. Holdings Discretionary 0.8 6.7% 5.5% 1.8 Likely to focus on divesting Dexion, followed by a further acquisitions

SAI Global Industrials 0.8 7.5% 4.0% 1.5 Has a stated inorganic growth focus - acquisitions likely over buybacks.

Source: Company data, BH estimates



28 July 2016


Stocks As we highlight above AGL has the balance sheet to do an accretive buyback. Importantly,

the company continues to generate plenty of free cash and is attractively valued as it

trades at about a 7% FCF yield. While the stock has rallied with falling bond yields, it has

not outperformed the market more recently. Within the market it seems like investors prefer

the more expensive infrastructure stocks than boring Utilities.

Dulux is one of the most expensive Chemical companies in the world. It trades at more than

11x EBITDA while the Global Chemical sector trades at 9x. Dulux operates on a 14%

EBITDA margin vs 18% for the global benchmark. We estimate the paint business within

Dulux trades at 14x EV/EBITDA which seems excessive against a backdrop of a slowing

end-market.



28 July 2016


AUSTRALIAN SECTORS, GLOBAL PERSPECTIVE

Over the following pages we provide a global perspective on Australian equity sectors. We

compare Australian sectors to their international peers on various valuation, return and

profitability measures. All of the data, except market cap and stock return, is from IBES

consensus and is for a rolling 12 months forward period. The market cap data is free float

adjusted. Our three-month returns include dividends.



28 July 2016


Energy (4.3% ASX 200, 7.0% Global) Australian Energy stocks de-rated considerably vs global peers. Valuations seem to have

been driven lower once it became apparent that dividends would be cut. Energy is one of

the few Australian sectors where the dividend yield is less than international peers.

Figure 24: Top 10 stocks, sector aggregate and sector median comparisons

Australia Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

($A,%)

Global Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

(Lc,%)

3m Ret

($A,%)

Woodside 23 18.0 4.1 7.9 70 -3 ExxonMobil (US) 523 24.9 3.2 9.0 16.4 8 5

Oil Search 11 36.3 1.3 9.9 69 6 Chevron Corp. (US) 267 31.1 4.1 7.4 22.1 4 1

Origin Energy 10 16.0 2.4 6.7 21 15 Royal Dutch Shell (Neth) 248 16.9 6.7 5.4 17.2 18 24

Santos 9 31.8 1.7 6.1 46 9 Total (Fra) 159 12.6 5.7 5.9 15.7 0 -1

Caltex 8 15.5 3.5 8.5 7 0 Schlumberger (US) 152 51.0 2.4 15.0 24.1 4 0

WorleyParsons 2 14.6 2.7 7.0 6 23 BP (UK) 149 18.6 6.6 5.9 11.7 22 28

Whitehaven 2 27.3 0.1 7.8 21 127 Shell (UK) 142 17.8 6.4 5.4 17.2 23 29

Beach Energy 1 9.1 1.5 3.0 50 -9 Occidental Petro (US) 77 n/a 4.0 11.6 42.9 0 -4

CNOOC (HK) 76 28.3 3.1 4.9 55.2 2 -1

ENI (Italy) 76 30.8 5.6 4.7 20.7 3 3

Sector Aggregate 67 19.3 2.8 7.4 24 6 4,291 19.8 3.6 7.2 17.8 5 49

Sector Median 9 16.9 2.0 7.4 34 7 13 13.6 2.9 8.4 24.7 3 23

Figure 25: 12-month forward P/E and P/E Relative Figure 26: 12-month forward DY and DY Spread

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

6

8

10

12

14

16

18

20

22

24

Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 Jul 16

Australia Global PE Rel (RHS)

-1.5

-1.0

-0.5

0.0

0.5

1.0

2.0

2.5

3.0

3.5

4.0

4.5

5.0


Australia Global DY Spread (RHS)

Figure 27: 12-month forward EPS (rebased) Figure 28: 12-month fwd EBITDA Margin and Spread

20

40

60

80

100

120

140

160

180


Australia (AUD) Global (AUD) Relative

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

14%

16%

18%

20%

22%

24%

26%


Australia Global Margin Spread (RHS)



28 July 2016


Chemicals (1.0% ASX 200, 2.4% Global) Five years ago Australian Chemical stocks traded at P/E parity with global peers. They

have since de-rated and now trade at 15% discount. It seems the de-rating has been

driven by weaker margin trends which have weighed on EPS.


Australia Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

($A,%)

Global Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

(Lc,%)

3m Ret

($A,%)

Orica 5 11.9 4.4 6.6 18 -13 BASF SE (Germany) 97 14.9 4.2 7.8 17.3 5 4

Incitec Pivot 5 12.0 4.6 7.8 24 -7 DuPont (US) 79 19.7 2.5 11.1 21.9 3 -1

Dulux Group 3 19.0 3.7 11.4 14 8 Dow Chemical (US) 79 14.0 3.6 7.5 19.9 1 -3

Nufarm 2 15.6 1.7 6.5 13 10 Monsanto (US) 62 21.5 2.1 13.1 29.4 13 9

Syngenta (Switz) 49 20.9 3.1 13.1 21.3 -1 -4

Air Liquide (Fra) 48 17.3 2.9 9.1 25.3 -7 -8

Ecolab (US) 47 25.2 1.2 13.1 22.0 3 -1

Lyondell (US) 45 8.1 4.3 5.9 22.0 -11 -15

Praxair Inc. (US) 45 20.1 2.6 11.6 34.0 -1 -5

Air Prod & Chem (US) 43 18.6 2.3 10.7 33.6 1 -3


Sector Median 4 13.8 4.1 7.2 16 0 11 15.1 2.6 8.4 18.2 -1 1

Figure 30: 12 month forward P/E and P/E Relative Figure 31: 12-month forward DY and DY Spread

0.7

0.8

0.9

1.0

1.1

9

10

11

12

13

14

15

16

17

18



0.6

0.9

1.2

1.5

1.8

2.1

2.4

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5




60

70

80

90

100

110

120



-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

14%

15%

16%

17%

18%

19%

20%

21%

22%



Source: Company Data, IBES



28 July 2016


Building Materials (1.8% ASX 200, 0.8% Global) Australian Building Materials companies trade at a premium to the local market, but

the P/E ratio is in line with global peers. There is a solid case for Australian companies

to trade at a premium given their higher dividend yield, stronger EPS momentum and

rising relative margins.


Australia Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

($A,%)

Global Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

(Lc,%)

3m Ret

($A,%)

James Hardie 10 25.5 2.9 14.0 26 20 Lafargeholcim (Switz) 36 15.9 3.8 7.4 20.4 -6 -9

Fletcher Building 6 14.5 4.6 7.6 10 16 Daikin Industries (Japan) 34 19.1 1.3 8.9 14.2 2 -4

Boral 5 17.7 3.6 7.9 15 7 CRH (Ire) 32 15.4 2.6 8.4 11.5 4 3

Adelaide Brighton 4 18.7 4.6 10.5 24 13 Assa Abloy (Swe) 31 24.3 1.6 15.1 18.4 15 16

Brickworks 2 16.4 3.2 12.2 26 -1 Saint-Gobain (Fra) 30 14.1 3.6 6.9 10.4 -8 -9

CSR 2 12.3 5.7 5.5 14 24 Siam Cement (Thai) 23 12.3 3.6 9.0 17.6 4 3

GWA GROUP Limited 1 11.7 6.6 9.2 18 -4 Vulcan Matls (US) 22 30.0 0.6 12.4 29.8 15 11

Ultratech Cement (India) 20 28.9 0.3 15.0 21.4 11 9

Heidelbg (Germany) 20 12.8 2.6 7.0 18.9 -7 -9

Geberit (Switz) 18 23.9 2.6 16.1 28.6 5 3

Sector Aggregate 30 19.3 3.7 10.1 15 14 489 17.4 2.3 9.1 16.4 4 5

Sector Median 4 16.4 4.5 9.2 18 13 9 18.5 2.5 8.9 18.9 4 4

Figure 35: 12 month forward P/E and P/E Relative Figure 36: 12-month forward DY and DY Spread

0.8

0.9

1.0

1.1

9

11

13

15

17

19

21



1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5




60

70

80

90

100

110

120

130

140



-3.0%

-2.0%

-1.0%

0.0%

12%

13%

14%

15%

16%

17%

18%





28 July 2016


Packaging (1.5% ASX 200, 0.2% Global) Amcor is the second-largest packaging company in the world and despite EBITDA margins

below the global sector average the stock trades at a P/E and EV/EBITDA premium.


Australia Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

($A,%)

Global Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

(Lc,%)

3m Ret

($A,%)

Amcor 18 19.4 3.8 11.0 15 1 International Paper (US) 25 12.6 4.1 7.1 17.4 5 0

Orora 3 19.8 3.4 9.4 10 14 Amcor (Aust) 18 19.4 3.8 11.0 14.9 1 1

Pact Group Holdings 2 17.1 3.9 9.0 16 17 WestRock (US) 15 16.0 3.5 6.2 16.0 19 14

Ball Corporation (US) 13 18.0 0.7 10.3 15.4 -6 -10

Sealed Air Corp. (US) 13 17.3 1.3 11.5 17.2 -6 -10

Crown Holdings Inc. (US) 10 13.0 n/a 9.1 15.4 -2 -6

Packaging Corp (US) 9 15.8 3.1 7.8 19.2 13 9

Avery Dennison (US) 9 17.8 2.3 10.2 12.8 -1 -5

CCL Industries (Can) 8 21.4 0.8 11.5 19.7 1 0

Klabin (Braz) 6 11.2 3.0 8.3 39.4 -6 -17


Sector Median 3 19.2 3.8 9.4 15 14 10 17.3 2.3 9.7 16.0 -1 4


0.8

0.9

1.0

1.1

1.2

1.3

1.4

8

10

12

14

16

18

20



1.0

1.5

2.0

2.5

3.0

3.5

4.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0




40

60

80

100

120

140

160



-3.0%

-2.0%

-1.0%

0.0%

1.0%

12%

13%

14%

15%

16%

17%



Source: Company Data, IBES,



28 July 2016


Metals & Mining (8.0% ASX 200, 1.3% Global) Australian Metal & Mining companies have endured declining profit margins, declining EPS

and declining dividends when compared to their international peers. Despite all this, they

trade at an ever expanding P/E premium. Now at 30%.


Australia Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

($A,%)

Global Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

(Lc,%)

3m Ret

($A,%)

BHP Billiton 63 30.1 2.1 7.3 42 -4 BHP Billiton (Aust) 63 30.1 2.1 7.3 42.4 -4 -4

Rio Tinto 21 21.5 2.9 7.9 33 -4 Rio Tinto (UK) 58 16.6 3.4 7.2 32.5 2 6

Fortescue Metals 13 17.5 1.7 5.2 41 20 Glencore (UK) 48 34.5 1.1 7.0 5.4 13 18

South 32 10 24.0 1.6 4.3 22 10 BHP Billiton (UK) 35 24.4 2.6 6.9 42.9 -5 -1

BlueScope Steel 5 11.3 1.8 4.9 11 18 NorilskNickel (Russia) 31 9.9 8.2 - 46.7 -1 -7

Alumina Limited 4 22.7 5.2 26.4 n/a -4 Southern Copper (US) 27 24.8 1.0 12.3 38.9 -10 -13

Iluka Resources 3 29.1 3.8 10.0 34 12 Grupo Mexico (Mex) 25 15.4 2.3 8.0 37.2 6 10

Independence Group 2 34.7 0.9 8.0 40 26 Nippon Steel (Japan) 24 11.9 2.3 7.1 11.0 -16 -22

OZ Minerals 2 22.5 2.1 3.0 44 19 Fresnillo plc (UK) 24 45.2 1.0 17.4 51.0 69 76

Sims Metal 2 19.5 2.9 4.8 5 -7 Vale SA (Braz) 23 11.9 1.8 - 41.7 -10 -20


Sector Median 3 22.4 2.1 4.9 39 8 11 15.7 1.8 7.1 20.4 0 16


0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

0

5

10

15

20

25

30

35



-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0




0

20

40

60

80

100

120

140



14%

15%

16%

17%

18%

19%

20%

15%

20%

25%

30%

35%

40%

45%

50%






28 July 2016


Gold (2.0% ASX 200, 0.3% Global) Australian Gold companies trade at some of the biggest P/E discounts relative to their

international peers at about 40%.


Australia Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

($A,%)

Global Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

(Lc,%)

3m Ret

($A,%)

Newcrest Mining 19 20.1 0.9 8.5 45 35 Barrick Gold (Can) 32 25.8 0.4 7.3 46.3 31 30

Evolution Mining 4 10.8 1.7 4.8 51 50 Newmont Mining (US) 29 22.8 0.4 7.5 40.8 30 25

Northern Star 3 9.4 2.5 4.0 54 31 Goldcorp (Can) 21 34.4 0.6 9.5 42.8 10 9

Regis Resources 2 12.8 3.8 5.9 49 43 Newcrest Mining (Aust) 19 20.1 0.9 8.5 45.2 35 35

St Barbara Mining 2 8.3 0.1 4.5 52 37 Franco Nevada (Can) 18 78.0 1.0 25.7 77.9 14 13

Saracen Mineral 1 11.1 0.3 2.1 42 58 Agnico Eagle (Can) 16 7.0 0.6 12.4 42.1 33 3

Randgold (UK) 14 32.5 0.6 16.1 50.4 34 39

AngloGold (Sth Afr) 11 12.9 0.3 4.7 39.7 35 31

Kinross (Can) 8 33.0 0.6 5.4 38.3 13 12

Yamana Gold (Can) 7 31.3 0.4 7.5 41.2 35 33


Sector Median 2 11.0 1.3 4.6 50 40 11 25.8 0.6 7.5 42.1 31 41


0.3

0.5

0.7

0.9

1.1

1.3

1.5

0

5

10

15

20

25

30

35

40



-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5




0

50

100

150

200

250

300

350

400



-2%

0%

2%

4%

6%

8%

10%

12%

14%

30%

35%

40%

45%

50%

55%

60%






28 July 2016


Commercial Services (1.2% ASX 200, 0.8% Global) The Australian Commercial Services sector is a hodge-podge of companies. The sector

has suffered weak earnings trends but has benefitted from rising P/E ratios as it has been

the beneficiary of M&A activity.


Australia Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

($A,%)

Global Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

(Lc,%)

3m Ret

($A,%)

Seek 6 26.5 2.5 13.6 38 1 Waste Management (US) 40 22.8 2.5 9.9 27.3 20 16

ALS Limited 3 21.7 2.6 9.7 20 11 Recruit Holdings (Japan) 28 33.1 1.4 7.9 12.4 13 6

Mineral Rsc 2 23.2 2.1 6.1 20 35 Nielsen Holdings (US) 27 18.4 2.3 12.8 31.2 8 5

Downer EDI 2 11.1 5.2 3.3 7 8 Tyco International (US) 26 20.5 2.0 11.6 15.8 17 13

Spotless Group 1 9.8 7.0 6.2 10 -3 Experian (UK) 25 20.1 2.2 12.4 35.0 19 25

Cleanaway Waste 1 20.5 2.6 5.3 19 11 Republic Services (US) 24 23.1 2.4 9.0 28.5 14 11

IPH 1 21.0 4.1 14.3 45 -4 SGS Surveillance (Switz) 23 24.7 3.3 13.8 20.9 1 -1

McMillan Shkspeare 1 12.8 4.6 8.6 36 18 Equifax Inc. (US) 22 24.4 1.0 14.8 35.6 16 13

SAI Global 1 12.7 4.7 6.8 23 6 Secom (Japan) 22 19.7 1.9 7.3 20.5 -10 -16

Credit Corp 1 12.0 4.2 n/a 31 29 Verisk Analytics Inc. (US) 19 26.0 n/a n/a 51.5 9 5

Sector Aggregate 19 16.9 3.6 7.4 13 9 491 19.4 2.2 9.9 14.8 5 -1

Sector Median 1 12.8 4.2 6.5 20 11 10 20.1 2.3 10.1 19.6 2 1


0.6

0.7

0.8

0.9

1.0

1.1

1.2

10

12

14

16

18

20

22



0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0




20

40

60

80

100

120

140

160

180



-2%

-1%

0%

1%

2%

3%

12%

13%

14%

15%

16%

17%



Source: Company Data, IBES, BH



28 July 2016


Transport (3.0% ASX 200, 2.1% Global) Despite considerable restructuring, Aurizon still operates on lower EBITDA margins vs

North American peers. Qantas trades at 5x EPS. While low in an Australian context this is

in line with the largest airline in the world (by market cap) — Delta.


Australia Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

($A,%)

Global Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

(Lc,%)

3m Ret

($A,%)

Brambles 21 23.3 2.9 9.8 28 7 United Parcel (US) 129 18.2 2.9 9.5 17.3 5 1

Aurizon 10 18.6 5.1 8.2 43 19 Union Pacific (US) 101 16.7 2.6 9.1 47.8 2 -2

Asciano Limited 9 20.0 3.4 9.6 31 3 CN Rail (Can) 65 17.6 1.9 10.9 53.7 -1 -2

Qantas 6 5.0 6.0 2.8 19 10 FedEx Corporation (US) 56 13.0 1.0 6.5 13.9 -5 -8

Central Jpn Rail (Japan) 48 10.2 0.7 6.3 47.2 -8 -15

East Japan Rail (Japan) 47 13.7 1.4 8.4 29.1 -7 -13

Deutsche Post (Germany) 46 12.6 3.9 7.5 8.3 3 1

MTR Corp (HK) 43 27.1 7.7 15.0 37.6 26 21

Delta Air Lines, Inc. (US) 38 6.5 2.0 4.3 22.8 -13 -17

Norfolk Southern (US) 36 15.7 2.7 7.9 41.7 1 -3

Sector Aggregate 47 14.7 3.9 7.1 25 7 1,260 12.9 2.4 7.4 18.4 -2 -6

Sector Median 10 19.3 4.2 8.9 30 5 11 14.1 1.8 7.8 18.6 -3 0


0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

10

12

14

16

18

20

22

24



0.8

1.0

1.2

1.4

1.6

1.8

2.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5



Figure 62: 12 month forward EPS (rebased) Figure 63: 12-month fwd EBITDA Margin and Spread

40

60

80

100

120

140

160

180

200

220



0%

1%

2%

3%

4%

5%

6%

7%

8%

15%

20%

25%

30%






28 July 2016


Infrastructure (3.1% ASX 200, 0.5% Global) Infrastructure stocks have been darlings in Australia and have also performed well when

compared to their global peers. Despite eye watering P/E and EV/EBITDA ratios Aussie

infrastructure stocks still offer a considerably higher div yield than international peers.


Australia Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

($A,%)

Global Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

(Lc,%)

3m Ret

($A,%)

Transurban 25 62.6 4.0 23.5 76 11 Aena (Spain) 28 19.5 2.8 11.5 60.4 10 8

Sydney Airport 17 51.2 4.3 20.0 82 15 Atlantia (Italy) 27 16.7 4.8 8.5 61.9 -6 -8

Qube Holdings 3 25.4 2.3 n/a 19 - Transurban (Aust) 25 62.6 4.0 23.5 76.4 11 11

Macquarie Atlas 3 29.1 3.4 n/a n/a 22 Airports of Thailand (Thai) 21 25.9 1.7 15.7 61.8 -3 -4

Abertis (Spain) 20 17.3 5.2 8.2 66.0 2 1

DP Wrld (UAE) 19 14.1 2.0 9.8 48.8 -11 -15

Sydney Airport (Aust) 17 51.2 4.3 20.0 82.4 15 15

Aeroports de Paris (Fra) 15 20.1 3.0 9.9 41.8 -5 -7

CCR (Braz) 13 21.5 3.6 7.6 60.3 20 6

China Merch Intl (HK) 10 13.0 3.4 9.5 57.7 -3 -7


Sector Median 10 40.1 3.7 23.5 79 13 6 19.9 3.0 10.1 56.1 1 7


1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

10

15

20

25

30

35

40

45

50

55

60



0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5




40

60

80

100

120

140

160

180



2%

4%

6%

8%

10%

12%

14%

16%

18%

40%

45%

50%

55%

60%

65%

70%






28 July 2016


Gaming (2.3% ASX 200, 0.4% Global) Strong performance amongst the Australian Gaming companies is mostly attributable to

Aristocrat. Gaming is one of the few Australian sectors that does not provide a dividend

yield premium when compared to the global peers.


Australia Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

($A,%)

Global Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

(Lc,%)

3m Ret

($A,%)

Aristocrat Leisure 9 22.6 2.0 11.5 36 51 LVSC (US) 50 19.0 6.3 11.1 35.0 1 -3

Crown 9 19.5 4.3 11.6 24 9 Sands China (HK) 38 20.2 6.8 14.8 30.9 1 -3

Tatts Group 6 21.1 4.4 12.4 17 4 Galaxy Entertainment 18 19.8 1.6 10.3 18.5 -12 -16

Star Entertainment 5 18.5 2.7 9.0 23 0 MGM Resorts Intl (US) 17 23.1 0.8 9.8 25.3 5 0

Tabcorp Holdings 4 19.7 5.5 8.3 24 3 Paddy Power (Ire) 13 25.5 1.9 18.2 25.5 -2 -4

SKYCITY 3 17.7 4.5 9.4 34 3 Wynn Resorts (US) 13 21.8 2.4 11.3 28.1 -2 -6

Wynn Macau (HK) 11 22.0 4.0 13.8 24.0 7 3

Genting Berhad (Malay) 11 17.1 0.6 6.4 33.1 -8 -8

Kangwon Land (Korea) 10 16.1 2.9 n/a 41.5 -3 -7

Genting Singapore (Sing) 10 26.2 1.9 6.9 35.8 -5 -8

Sector Aggregate 36 20.6 3.5 10.6 25 19 263 19.6 3.8 10.7 24.8 1 -13

Sector Median 5 19.6 4.4 10.5 24 3 9 19.5 2.9 10.1 24.4 0 0


0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

10

12

14

16

18

20

22

24



-1.5

-0.9

-0.3

0.3

0.9

1.5

2.1

2.7

3.3

3.9

4.5

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5




40

60

80

100

120

140

160

180

200



-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

22%

23%

24%

25%

26%






28 July 2016


Media (1.3% ASX 200, 2.4% Global) Despite weaker earnings trends and lower EBITDA margins Australian Media stocks have

outperformed their (mostly broadcasting) international peers.


Australia Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

($A,%)

Global Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

(Lc,%)

3m Ret

($A,%)

REA Group 8 30.8 1.7 17.0 56 28 Comcast (US) 218 17.9 1.8 7.5 33.6 10 6

Fairfax Media 2 15.6 4.3 6.7 17 28 Walt Disney (US) 212 16.1 1.6 10.0 30.5 -5 -9

Sky Network 2 14.0 5.9 7.1 34 0 Charter Comm (US) 85 94.2 n/a 8.3 35.7 10 5

Seven West Media 2 9.5 6.1 6.1 20 10 Naspers (Sth Afr) 85 33.5 0.4 66.6 11.1 12 9

APN Outdoor 1 22.1 2.6 12.0 27 20 Time Warner (US) 82 13.5 2.1 9.2 28.4 2 -2

News Corporation 1 25.5 1.5 6.7 11 2 ThomsonReuters (Can) 43 19.5 3.2 10.6 28.7 10 9

Nine Entertainment 1 7.4 12.2 5.2 16 -2 Twenty-First Fox (US) 40 13.0 1.3 8.6 25.1 -12 -16

Southern Cross Media 1 11.7 5.8 n/a 25 14 WPP (UK) 38 15.0 3.3 10.5 16.6 7 11

Village Road 1 15.2 5.3 7.3 17 5 DISH Network (US) 33 19.6 n/a 11.4 19.8 8 4

APN News & Media 1 14.3 2.9 10.7 30 10 Vivendi (Fra) 32 29.5 5.9 12.6 11.8 -1 -3

Sector Aggregate 20 15.7 4.1 8.9 17 20 1,490 18.1 2.0 9.3 28.5 2 -2

Sector Median 1 14.7 4.8 7.1 22 10 12 17.4 2.1 9.0 29.0 -1 2


0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

8

10

12

14

16

18

20

22

24

Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 Jul 16Australia Global PE Rel (RHS)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1.5

2.5

3.5

4.5

5.5

6.5

7.5

8.5




60

70

80

90

100

110

120

130

140



-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

15%

17%

19%

21%

23%

25%

27%

29%






28 July 2016


Retail (1.1% ASX 200, 3.6% Global) Australian Retail could be experiencing an inflection point in EPS momentum when

compared to international peers. Despite this, Aussie companies trade at a 30% P/E

discount and provide a dividend yield which is 300 basis points higher.


Australia Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

($A,%)

Global Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

(Lc,%)

3m Ret

($A,%)

Harvey Norman 5 14.6 5.5 9.1 20 7 Amazon com Inc. (US) 469 93.3 n/a 17.8 12.0 20 15

Premier Investments 2 20.2 3.4 11.7 15 0 Home Depot (US) 226 20.3 2.1 11.3 16.3 1 -3

JB Hi-Fi 2 15.2 4.3 8.5 7 14 Inditex (Spain) 141 28.2 2.3 16.0 22.5 5 4

Trade Me Group Ltd 2 22.6 3.5 13.4 66 23 Lowe's (US) 95 18.4 1.7 11.0 12.8 6 2

Super Retail Group 2 14.2 5.0 7.6 11 13 The Priceline Group (US) 88 18.2 n/a 13.7 40.0 0 -4

Bapcor 1 24.4 2.6 9.3 12 13 The TJX Companies (US) 70 21.5 1.4 10.8 13.5 4 0

Automotive Holdings 1 12.8 5.6 9.0 4 11 Hennes & Mauritz (Swe) 59 20.1 3.9 11.2 17.3 -9 -8

Myer Holdings 1 13.3 5.0 5.3 6 20 Target Corporation (US) 58 13.8 3.2 6.8 10.5 -9 -13

Greencross 1 16.4 3.2 9.2 14 1 Netflix, Inc. (US) 49 140.7 n/a 48.9 7.7 -10 -14

Fast Retailing (Japan) 43 36.1 1.1 12.4 10.9 6 -2


Sector Median 2 15.2 4.3 9.1 12 13 10 18.1 1.5 9.1 13.5 -1 0


0.5

0.6

0.7

0.8

0.9

1.0

5

10

15

20

25

30



2.0

3.0

4.0

5.0

6.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0




40

60

80

100

120

140

160

180

200



-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

9%

10%

11%

12%

13%






28 July 2016


Food Retail (5.0% ASX 200, 2.3% Global) Australian Food Retail EBITDA margins have decreased almost 200 basis points over the

last five years and some 70 basis points when compared to international peers. Investors

seem to be pricing in a further fall with Aussie stocks now trading at a small P/E discount.


Australia Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

($A,%)

Global Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

(Lc,%)

3m Ret

($A,%)

Wesfarmers 47 17.8 5.0 9.7 8 0 Wal-Mart Stores (US) 306 17.0 2.8 7.9 6.5 8 3

Woolworths 29 17.4 4.0 8.6 6 3 CVS Health (US) 139 15.6 1.9 9.3 7.3 -4 -8

Metcash 2 11.0 3.3 5.8 2 21 Walgreens Boots (US) 118 16.5 1.8 10.5 7.7 2 -2

Costco Wholesale (US) 98 28.3 1.0 12.8 4.2 12 7

Walmex (Mex) 57 25.4 3.3 13.6 9.8 12 16

Seven & i (Japan) 50 20.0 2.0 6.5 9.9 -4 -11

Wesfarmers (Aust) 47 17.8 5.0 9.7 7.7 0 0

Kroger Co. (US) 46 15.5 1.3 7.5 5.3 1 -3

Sysco Corporation (US) 39 22.4 2.5 11.6 5.3 14 9

Loblaw Companies (Can) 30 17.3 1.5 8.5 8.1 3 2


Sector Median 29 17.4 4.0 8.6 6 3 10 19.9 2.1 8.6 6.5 3 0


0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

12

13

14

15

16

17

18

19

20



1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9

3.1

3.3

3.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0




60

70

80

90

100

110

120

130



0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

1.0%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%






28 July 2016


Food & Beverage (1.7% ASX 200, 9.0% Global) Despite a large and growing EBITDA margin deficit to their international peers, Australian

Food, Beverage & Personal Goods companies trade more or less in-line on a P/E basis.


Australia Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

($A,%)

Global Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

(Lc,%)

3m Ret

($A,%)

Treasury Wine 7 25.6 2.6 12.8 19 5 Nestle (Switz) 328 22.2 3.1 13.3 19.2 8 5

Coca-Cola Amatil 7 16.3 5.2 8.3 18 3 Procter Gamble (US) 303 21.4 3.2 14.8 26.4 6 2

Blackmores Ltd 3 20.8 3.7 13.5 22 0 Anheuser-Busch (Belgm) 269 27.9 3.1 16.7 38.9 2 0

Graincorp 2 22.7 2.3 9.3 7 6 The Coca-Cola Co. (US) 262 22.7 3.2 19.2 31.7 3 -1

The a2 Milk Company 1 25.4 0.8 13.9 19 14 PepsiCo, Inc. (US) 208 21.8 2.8 10.6 20.5 7 3

Bellamy's 1 17.7 1.9 12.0 23 13 Philip Morris Intl (US) 206 21.1 4.3 13.2 44.1 4 -1

AACo 1 17.2 n/a n/a 13 46 Altria Group (US) 179 21.4 3.6 14.1 48.6 14 10

Costa Group Hldg 1 17.1 4.0 11.1 11 -1 British Am Tobacco (UK) 157 18.8 3.6 14.0 40.8 15 20

Bega Cheese 1 23.0 2.1 11.7 6 -4 L'Oreal (Fra) 143 25.9 2.0 15.3 21.6 8 6

Asaleo Care Limited 1 10.9 7.3 9.7 23 -20 Kraft Heinz (US) 142 24.9 2.7 16.0 30.5 13 8


Sector Median 1 19.6 3.0 11.1 19 5 15 22.0 1.9 12.4 17.9 6 2


0.8

0.9

1.0

1.1

12

14

16

18

20

22

24



0.2

0.5

0.8

1.1

1.4

1.7

2.0

2.0

2.5

3.0

3.5

4.0

4.5

5.0




50

60

70

80

90

100

110

120

130



-5%

-4%

-3%

-2%

-1%

0%

1%

14%

15%

16%

17%

18%

19%

20%






28 July 2016


Healthcare (8.0% ASX 200, 10.7% Global) Despite relatively weak EPS momentum versus international peers, Australian Healthcare

companies trade at a 50-60% P/E premium and a 30% EV/EBITDA premium. Cochlear

trades at a 100% premium to the global sector average.


Australia Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

($A,%)

Global Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

(Lc,%)

3m Ret

($A,%)

CSL Ltd 54 27.6 1.6 18.4 32 14 Johnson & Johnson (US) 459 18.1 2.6 12.4 35.4 11 7

Ramsay Health Care 16 29.6 1.8 11.9 15 21 Pfizer (US) 297 14.4 3.3 10.2 43.4 11 7

ResMed Inc. 12 22.3 2.0 14.4 30 14 Novartis (Switz) 291 16.7 3.5 14.3 29.4 10 7

Sonic Healthcare 9 20.1 3.5 11.3 18 15 Roche (Switz) 238 16.3 3.5 10.7 40.3 -1 -3

Cochlear 7 33.1 2.1 19.1 28 22 Merck & Co., Inc. (US) 217 15.7 3.2 8.7 49.1 4 0

Fisher & Paykel 6 31.9 2.2 19.2 31 17 UnitedHealth Group (US) 181 16.7 1.4 9.0 8.3 7 3

Healthscope 5 23.8 2.9 13.2 18 7 Bristol Myers Squibb (US) 168 25.6 2.1 19.9 31.2 7 3

Mayne Pharma 3 23.7 n/a 4.9 39 45 Amgen, Inc. (US) 165 14.0 2.6 10.0 58.2 1 -3

Ansell Limited 3 14.0 2.9 9.3 16 -3 Medtronic (US) 164 18.4 2.0 11.7 32.3 12 7

Primary Health Care 2 19.1 3.3 7.8 22 12 Gilead Sciences, (US) 155 7.2 2.3 5.9 69.7 -14 -17


Sector Median 2 21.9 2.9 11.6 22 13 16 19.8 1.1 12.1 25.5 5 3


1.1

1.2

1.3

1.4

1.5

1.6

8

10

12

14

16

18

20

22

24

26

28



-0.4

-0.1

0.2

0.5

0.8

1.5

2.0

2.5

3.0

3.5




60

80

100

120

140

160

180



-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

17%

18%

19%

20%

21%

Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 Jul 16Australia Global Margin Spread (RHS)




28 July 2016


Banks (25.0% ASX 200, 9.2% Global) Recently falling RoE and EPS momentum for the Australian Banks has occurred against a

backdrop of weakening global trends. Perhaps this is a reason why the sector has not de-

rated vs. international peers. The dividend yield premium has been stable for three years.


Australia Mcap

($A,b)

P/E

(x)

DY

(%)

Price to

Book

(x)

ROE

(%)

3m Ret

($A,%)

Global Mcap

($A,b)

P/E

(x)

DY

(%)

Price to

Book

(x)

ROE

(%)

3m Ret

(Lc,%)

3m Ret

($A,%)

Commonwealth Bank 132 13.8 5.5 2.1 16 3 Wells Fargo (US) 328 11.7 3.2 1.3 11.6 -4 -8

Westpac 102 12.5 6.1 1.7 14 0 JPMorgan (US) 312 10.7 3.1 0.9 9.4 0 -4

ANZ Banking Group 74 10.9 6.4 1.2 12 7 China Construction (HK) 224 5.2 5.8 0.7 14.2 13 9

National Australia 69 10.8 7.3 1.4 13 -2 Bank of America (US) 196 10.2 2.3 0.6 6.2 -5 -9

Bendigo Adelaide Bnk 5 11.4 6.8 0.9 9 7 HSBC (UK) 174 10.7 6.9 0.8 6.9 6 10

Bank of Queensland 4 10.8 7.3 1.1 11 -9 Citigroup Inc. (US) 173 9.0 1.4 0.6 6.6 -6 -10

Clydesdale Bank 3 17.2 1.0 0.7 4 0 Commwlth Bank (Aust) 132 13.8 5.5 2.1 16.1 3 3

Genworth Mtg Ins 1 6.2 14.3 0.6 10 46 Royal Bank of Can (Can) 122 11.5 4.2 1.8 16.5 5 4

Toronto Dominion (Can) 108 11.5 4.0 1.5 14.0 2 1

Westpac (Aust) 102 12.5 6.1 1.7 14.0 0 0


Sector Median 37 11.1 6.6 1.2 11 2 13 10.1 3.7 0.9 10.3 -2 0.4


1.0

1.1

1.2

1.3

1.4

1.5

1.6

4

6

8

10

12

14

16



0.8

1.3

1.8

2.3

2.8

3.3

3.8

3.0

4.0

5.0

6.0

7.0

8.0

9.0



Figure 102: 12-month forward EPS (rebased) Figure 103: 12-month forward RoE and Spread

70

80

90

100

110

120

130

140

150



0

1

2

3

4

5

6

8

10

12

14

16

18


Australia Global RoE Spread (RHS)




28 July 2016


Diversified Financials (4.9% ASX 200, 3.5% Global) Australian Diversified Financials trade at a small premium to international peers despite strong

earnings performance and a considerable dividend yield premium. Macquarie trades at a

considerable discount to global asset managers but at a premium to global investment banks.


Australia Mcap

($A,b)

P/E

(x)

DY

(%)

Price to

Book

(x)

ROE

(%)

3m Ret

($A,%)

Global Mcap

($A,b)

P/E

(x)

DY

(%)

Price to

Book

(x)

ROE

(%)

3m Ret

(Lc,%)

3m Ret

($A,%)

Macquarie Group 25 12.0 5.7 1.6 14 14 Berkshire Hatha (US) 243 18.7 n/a 1.2 6.6 -1 -4

AMP 17 15.1 5.3 1.9 13 -1 Goldman Sachs (US) 89 10.1 1.8 0.9 8.5 -2 -6

ASX 9 21.8 4.1 2.5 11 11 American Express (US) 82 11.6 2.0 2.8 24.5 -2 -5

Challenger Limited 5 13.9 3.7 1.8 14 3 BlackRock (US) 79 17.4 2.6 2.0 11.8 0 -3

Magellan 4 19.1 4.1 8.3 49 -1 Morgan Stanley (US) 75 10.6 2.8 0.8 7.2 6 2

Platinum 3 17.8 5.5 9.6 55 -2 UBS Group AG (Switz) 69 10.1 5.3 0.9 8.7 -14 -15

BTIM 3 17.6 4.7 3.5 20 -12 Bank of New York (US) 57 12.2 2.0 1.1 9.1 -3 -6

IOOF Holdings 3 15.0 6.1 1.9 12 -3 Charles Schwab (US) 50 20.7 1.1 2.4 12.9 -5 -8

Henderson Group 3 13.8 4.9 2.2 15 -16 Brookfield Asset (Can) 47 29.8 1.6 1.5 5.3 9 9

Perpetual Limited 2 15.8 5.7 3.3 21 2 CME Group (US) 46 22.6 4.9 1.6 7.3 9 6

Sector Aggregate 76 14.4 5.1 2.0 16 6 2,124 13.2 2.5 1.2 14.0 -1 2

Sector Median 3 15.1 5.1 2.2 15 -1 9 13.4 2.8 1.5 12.1 0 1.7


0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

8

9

10

11

12

13

14

15

16

17

18



1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0




50

70

90

110

130

150

170



-10

-5

0

5

10

15

20

25

30

0

5

10

15

20

25

30






28 July 2016


Insurance (3.6% ASX 200, 3.6% Global) Australian Insurers trade at a 30-40% P/E premium and 50% price-to-book premium

versus international peers. Dividends remain an obvious area of valuation support.


Australia Mcap

($A,b)

P/E

(x)

DY

(%)

Price to

Book

(x)

ROE

(%)

3m Ret

($A,%)

Global Mcap

($A,b)

P/E

(x)

DY

(%)

Price to

Book

(x)

ROE

(%)

3m Ret

(Lc,%)

3m Ret

($A,%)

Suncorp 17 13.6 5.8 1.2 10 3 AIA Group (HK) 102 19.0 1.9 2.2 11.9 5 2

QBE 15 12.6 5.4 1.0 8 -3 Allianz (Germany) 84 8.3 6.1 0.9 10.9 -14 -15

IAG 14 15.8 5.4 2.1 15 2 AIG (US) 82 11.3 2.4 0.6 6.2 -2 -5

Medibank Private 8 19.6 3.9 4.9 26 -4 CB Limited (US) 80 12.7 2.2 1.2 10.6 9 5

Steadfast 2 18.9 3.1 1.7 9 13 Japan Post (Japan) 74 14.8 3.9 0.4 2.6 -18 -25

Cover-More Group 0.4 14.0 5.4 2.0 15 -12 MetLife (US) 64 7.6 3.9 0.6 9.3 -6 -9

Axa SA (Fra) 61 7.5 6.7 0.6 9.4 -16 -17

Prudential (UK) 60 10.6 3.3 2.2 20.9 -6 0

Zurich Ins Group (Switz) 48 10.1 6.8 1.1 10.9 8 6

Ping An (HK) 47 10.3 1.8 1.4 14.5 0 -3

Sector Aggregate 56 14.5 5.2 1.5 13 0 2,186 10.9 3.7 1.0 12.1 -3 1

Sector Median 11 14.9 5.4 1.8 12 -1 14 10.6 3.5 1.1 10.7 -2 1


0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

8

9

10

11

12

13

14

15

16



0.8

1.3

1.8

2.3

2.8

3.3

3.8

4.3

4.8

2

3

4

5

6

7

8

9

10




40

50

60

70

80

90

100

110

120

130

140



-2

-1

0

1

2

3

6

7

8

9

10

11

12

13

14

15

16

17






28 July 2016


Real Estate (9.4% ASX 200, 3.6% Global) The dividend yield for the Australian REITs is now within 100 basis points versus their

international peers. It was 250 basis points higher just five years ago.


Australia Mcap

($A,b)

P/E

(x)

DY

(%)

Price to

Book

(x)

ROE

(%)

3m Ret

($A,%)

Global Mcap

($A,b)

P/E

(x)

DY

(%)

Price to

Book

(x)

ROE

(%)

3m Ret

(Lc,%)

3m Ret

($A,%)

Scentre Group 28 22.5 4.1 1.5 7 16 Simon Property US) 93 34.3 3.0 10.3 42.7 11 8

Westfield Corporation 23 23.1 3.2 1.6 7 10 American Tower (US) 67 44.4 2.0 7.1 16.7 14 10

Vicinity Centres 14 18.5 5.2 1.2 7 10 Public Strg (US) 59 34.6 2.9 5.3 23.2 -1 -4

Goodman Group 13 17.5 3.4 1.6 9 12 Sun Hung Kai (HK) 55 13.3 3.4 0.7 4.9 11 8

Stockland Group 12 16.8 5.1 1.2 8 20 Crown Castle Intl (US) 45 79.7 3.8 5.1 6.4 14 11

GPT Group 10 18.9 4.4 1.3 7 18 COLI (HK) 45 7.3 2.9 1.1 15.8 7 4

Dexus Property Group 9 16.0 4.7 1.2 7 18 Welltower (US) 38 37.8 4.4 1.8 5.9 15 11

Mirvac Group 8 15.7 4.8 1.1 7 19 General Grwth Propt (US) 37 44.7 2.6 3.5 10.9 11 8

Lend Lease 8 10.2 4.4 1.4 14 5 Dalian Wanda (HK) 37 9.1 3.2 0.9 10.8 -4 -7

Investa Office Fund 3 16.9 4.4 1.1 7 12 Prologis, Inc. (US) 37 49.3 3.3 1.6 4.7 16 12


Sector Median 3 16.9 5.0 1.2 8 12 11 18.6 3.5 1.2 7.3 7 1.2


0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

8

10

12

14

16

18

20

22



0.6

1.1

1.6

2.1

2.6

3.1

3.6

2

3

4

5

6

7

8




40

60

80

100

120

140

160

180

200



-3

-3

-2

-2

-1

-1

0

1

1

2

2

6

7

8

9

10

11






28 July 2016


Software (1.3% ASX 200, 8.7% Global) While not being household names like their international peers, Australian Software stocks

trade at similar P/E multiples and a much higher EV/EBITDA. Aussie Software stocks

operate on the same 30% EBITDA margin as elsewhere.


Australia Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

($A,%)

Global Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

(Lc,%)

3m Ret

($A,%)

Computershare 5 12.1 3.8 n/a 26 -11 Microsoft (US) 596 19.4 2.7 11.0 38.2 9 6

Link Administration 3 27.0 2.0 15.4 26 11 Facebook Inc. (US) 464 29.1 n/a 16.3 62.1 10 6

carsales.com.au 3 24.6 3.3 15.4 50 6 Alphabet (US) 349 20.6 n/a 11.4 40.7 2 -1

MYOB Group 2 22.1 3.2 12.4 49 8 Tencent Holdings (HK) 301 31.4 0.3 17.1 42.3 16 12

IRESS 2 22.3 4.3 n/a 31 -3 Alibaba Group US) 285 24.5 n/a 16.4 43.7 7 4

TechnologyOne 2 37.8 1.9 22.4 24 15 Visa Inc. (US) 255 25.9 0.7 n/a 68.4 2 -1

Aconex 2 104.1 n/a 46.6 15 23 Oracle (US) 227 14.6 1.4 9.4 45.4 1 -2

Altium 1 25.4 3.2 17.9 32 16 IBM (US) 209 11.7 3.3 8.8 25.2 10 6

Isentia Group 1 18.3 2.8 13.5 33 -3 SAP (Germany) 139 18.9 1.7 12.3 32.9 10 9

MasterCard Inc. (US) 136 24.2 0.8 n/a 58.2 -3 -6


Sector Median 2 24.6 3.2 15.4 31 8 16 18.6 0.9 11.6 28.7 4 3


0.8

0.9

1.0

1.1

1.2

1.3

1.4

10

12

14

16

18

20

22



1.7

1.9

2.1

2.3

2.5

2.7

2.9

3.1

3.3

3.5

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0




0

25

50

75

100

125

150

175

200

225

250



-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

28%

29%

30%

31%

32%

33%

34%

35%





28 July 2016


Telecoms (5.9% ASX 200, 5.3% Global) Australian Telecom stocks have benefitted from strong earnings momentum, operate on

higher EBITDA margins and offer a higher dividend yield but still only trade at a small

premium to their international peers.


Australia Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

($A,%)

Global Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

(Lc,%)

3m Ret

($A,%)

Telstra Corporation 71 15.9 5.5 7.2 40 7 AT&T (US) 356 14.6 4.5 6.6 32.9 14 11

TPG Telecom 10 25.2 1.5 12.3 33 15 China Mobile (HK) 342 14.8 2.9 4.2 37.1 8 5

Spark NZ 7 19.2 6.5 7.3 28 14 Verizon Comm (US) 307 14.2 4.1 6.7 35.8 12 8

Vocus Comm 5 21.3 2.2 11.8 24 -1 NTT Docomo (Japan) 136 16.1 2.9 6.6 31.0 8 1

NTT (Japan) 133 12.9 2.5 4.3 27.3 3 -4

Vodafone Group (UK) 110 36.2 5.2 6.4 29.2 7 12

KDDI (Japan) 107 14.4 2.6 6.2 32.1 0 -6

Deutsche Telekom (Ger) 105 16.2 4.1 5.9 30.1 1 0

SoftBank Group (Japan) 82 10.3 0.8 6.3 27.1 -14 -20

Telstra Corporation (Aust) 71 15.9 5.5 7.2 39.5 7 7


Sector Median 8 20.3 3.9 9.5 31 11 14 16.1 4.3 6.5 34.7 3 2


0.8

0.9

1.0

1.1

1.2

1.3

1.4

8

10

12

14

16

18

20



0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2.5

3.5

4.5

5.5

6.5

7.5

8.5

9.5




75

85

95

105

115

125

135

145



3%

4%

5%

6%

7%

8%

9%

30%

32%

34%

36%

38%

40%

42%





28 July 2016


Utilities (2.7% ASX 200, 3.7% Global) Australian Utility companies now trade at a 60% P/E premium to international peers. The

re-rating has occurred over the last three years as margins have expanded and investors

have increased their focus on the superior dividends on offer.


Australia Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

($A,%)

Global Mcap

($A,b)

P/E

(x)

DY

(%)

EV/

EBITDA

(x)

EBITDA

Margin

(%)

3m Ret

(Lc,%)

3m Ret

($A,%)

AGL Energy 14 17.2 3.7 8.5 16 11 NextEra Ener (US) 80 20.3 2.9 10.4 46.1 14 11

APA Group 11 42.2 4.7 13.3 63 16 Duke Energy (US) 80 18.5 4.0 10.1 39.3 14 10

DUET Group 6 26.6 7.1 n/a 58 22 National Grid (UK) 73 17.1 4.1 11.0 36.0 17 23

AusNet Services 6 21.9 5.1 11.1 59 17 Southern Co (US) 69 18.7 4.2 10.6 40.2 12 8

Spark Infrastructure 4 26.5 5.7 13.9 96 24 Dominion Resourc (US) 65 20.5 3.7 11.9 47.0 13 9

Enel (Italy) 60 12.6 4.7 5.2 20.4 8 7

Iberdrola (Spain) 57 15.0 4.8 8.3 23.5 5 4

Engie (Fra) 54 14.3 5.6 6.9 15.6 11 10

Korea Electric (Korea) 46 4.7 3.7 3.7 36.6 3 -1

Exelon (US) 46 14.4 3.4 8.0 26.7 10 7


Sector Median 6 26.5 5.1 12.2 59 17 11 15.6 3.6 8.7 30.6 8 1


0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

8

10

12

14

16

18

20

22

24

26



0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5




80

90

100

110

120

130

140



6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

20%

22%

24%

26%

28%

30%

32%

34%





Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Page 39

This document has been prepared and issued by:

Baillieu Holst Ltd

ABN 74 006 519 393

Australian Financial Service Licence No. 245421

Participant of ASX Group Participant of NSX Ltd

Analysts’ stock ratings are defined as follows:

Buy: The stock’s total return is expected to increase by at least 10-15 percent from the current

share price over the next 12 months.

Hold: The stock’s total return is expected to trade within a range of ±10-15 percent from the

current share price over the next 12 months.

Sell: The stock’s total return is expected to decrease by at least 10-15 percent from the current

share price over the next 12 months.

Disclosure of potential interest and disclaimer:

Baillieu Holst Ltd (Baillieu Holst) and/or its associates may receive commissions, calculated at normal client rates, from transactions involving securities of the companies mentioned herein and may hold interests in securities of the companies mentioned herein from time to time. Your adviser will earn a commission of up to 55% of any brokerage resulting from any transactions you may undertake as a result of this advice.

When we provide advice to you, it is based on the information you have provided to us about your personal circumstances, financial objectives and needs. If you wish to rely on our advice, it is important that you inform us of any changes to your personal investment needs, objectives and financial circumstances.

If you do not provide us with the relevant information (including updated information) regarding your investment needs, objectives and financial circumstances, our advice may be based on inaccurate information, and you will need to consider whether the advice is suitable to you given your personal investment needs, objectives and financial circumstances. Please do not hesitate to contact our offices if you need to update your information held with us. Please be assured that we keep your information strictly confidential.

No representation, warranty or undertaking is given or made in relation to the accuracy of information contained in this advice, such advice being based solely on public information which has not been verified by Baillieu Holst Ltd.

Save for any statutory liability that cannot be excluded, Baillieu Holst Ltd and its employees and agents shall not be liable (whether in negligence or otherwise) for any error or inaccuracy in, or omission from, this advice or any resulting loss suffered by the recipient or any other person.

Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments.

Baillieu Holst Ltd assumes no obligation to update this advice or correct any inaccuracy which may become apparent after it is given.

Baillieu Holst Ltd

ABN 74 006 519 393

Australian Financial Service Licence No. 245421

Participant of ASX Group

Participant of NSX Ltd

www.baillieuholst.com.au

Melbourne (Head Office)

Address Level 26, 360 Collins Street

Melbourne, VIC 3000 Australia

Postal PO Box 48, Collins Street West

Melbourne, VIC 8007 Australia

Phone +61 3 9602 9222

Facsimile +61 3 9602 2350

Email [email protected]

Adelaide Office

Address 1, 341 Payneham Road

Marden, SA 5070 Australia

Phone +61 8 7074 8400

Facsimile +61 8 8362 3942


Bendigo Office

Address Cnr Bridge & Baxter Streets

Bendigo, VIC 3550 Australia

Postal PO Box 40

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Phone +61 3 4433 3400

Facsimile +61 3 4433 3430


Brisbane Office

Address Level 18, 333 Ann Street

Brisbane, QLD 4000 Australia

Phone +61 7 3232 1110


Geelong Office

Address 16 Aberdeen Street

Geelong West Vic 3218

Postal PO Box 364

Geelong Vic 3220 Australia

Phone +61 3 5229 4637

Facsimile +61 3 4229 4142


Newcastle Office

Address Level 1, 120 Darby Street

Cooks Hill, NSW 2300 Australia

Postal PO Box 111

The Junction, NSW 2291 Australia

Phone +61 2 4037 3500

Facsimile +61 2 4037 3511


Perth Office

Address Level 10, 191 St Georges Terrace

Perth WA 6000 Australia

Postal PO Box 7662, Cloisters Square

Perth, WA 6850 Australia

Phone +61 8 6141 9450

Facsimile +61 8 6141 9499


Sydney Office

Address Level 18, 1 Alfred Street

Sydney, NSW 2000 Australia

Postal PO Box R1797

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Phone +61 2 9250 8900

Facsimile +61 2 9247 4092



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