Aristocrat Leisure – FY16 Earnings

Aristocrat Leisure posted strong FY 2016 results with top-line net profits surging more than 67% to $398 million compared to a year ago. This result was well in front of the consensus forecast of $376 million and reflects strong growth in both the US and Australian markets.

However, as impressive as the headline numbers for the 2015 to 2016 time frame appear, some of the internal figures suggest the growth in share the price may not repeat in 2017. With dividend growth expected to increase from 20.5 cents per share in 2016, to 24.6 cents per share in 2017, the total dividend yield is expected at 1.7%.

With EBIT expected to rise from $605 million to $674 million, this small increase in expected dividends is making Aristocrat look expensive at current levels.

Chart - ALL
Chart – ALL

Australian Housing Data

The Housing Industry Association’s (HIA) monthly survey of Australia’s largest home builders indicates that new home sales dropped to a two year low during October. HIA announced that new home sales fell 8.5% for the month on the lowest volume since July of 2014.

Further details showed that sales on both sides of the market saw sizeable declines with detached house sales down 8.2%, while multi-unit sales fell by 9.2%.

This sharp decline in new homes sales will likely temper recent calls for the RBA to maintain a neutral interest rate bias.

Scentre Group – Algo Engine Buy Signal

We’ve been tracking SCG and looking for the right entry point. With US bond yields running into resistance, we now feel money flow will continue to build in SCG, creating support and eventual price extension from the current $4.20 price point.

5.5% forward yield with 3% underlying EPS growth into FY17, makes SCG worth looking at, especially following our recent algo engine buy signal.

As the share price moves higher, at around $4.40, we look to sell the $4.50 covered calls with an April expiry. The April expiration date will allow us to collect the upcoming February dividend, as well. This strategy will boost the 6 month cash flow to over 5%, or 10%+ on an annualised basis. Plus allowing for capital growth of 7%.


Chart - SCG
Chart – SCG

Global Macro

Over the last three weeks, the USD has gained more than 6% versus the Japanese Yen, nearly 4% against the Euro and USD Index has reached its highest level in over 13 years at 102.10. Further, the US SP 500 and Dow Jones 30 both pushed into new record territory. But the strong surge in the Greenback and US Stocks met resistance last Friday with the G-7 pairs closing well away from the best levels on the session. This pullback has FX strategists wondering if the US equity run is over and it’s time to sell the US Dollar.

Statistically, there is no question that the US Dollar has gotten ahead of reality and a correction of some degree is reasonable. However, it’s important to recognize that the sharp rally in the USD and US Stocks, along with surge in US Bond yields has been driven by 3 fundamental factors: position adjustments to USD and US rates, the prospects of an aggressive fiscal program from the new US administration and the expected impact of higher US inflation.

Along this line of thinking, the US FED FUNDS futures have fully priced in an adjustment higher in the FED Funds target next month to .75% and nearly a 40% chance of another 25 basis point hike by May of 2017. With the second rate hike not expected until the middle of next year, the USD and US Stocks could take another leg higher if the FOMC statement suggests that further rate normalization could come sooner.

This means that the USD correction could be swift and unbalanced across the G-7 pairs. For example, a large percentage of the USD/JPY rally has been driven by US yield spreads gaining against Japanese Government bonds. This is not the case for the sell off in the AUD and the EURO. The Euro faces a list of political and economic troubles which should keep the pair under pressure going into the end of the year. Which brings us to the Sterling; which has firmed against the USD over the last few sessions.

The GBP/USD looks to be setting up for a breakout after consolidating over the last week. The big story driving the Sterling last week was UK Chancellor Hammond’s comments about the budget. While Mr Hammond lowered his growth forecasts for the next two years, he promised more borrowing and investment into innovation and infrastructure. He also announced a new National Productivity Investment fund of £23 billion and plans to double UK export finance to make it easier for British businesses to export.

These new spending plans were not expected which pushed the EUR/GBP sharply lower and lifted the FTSE 100 to its highest close in two weeks. With respect to Brexit politics, Prime Minister May repeated her plans to trigger article 50 by march of 2017 and exit the European Union by March of 2019. As such, we believe that the Sterling will outperform the Euro, USD and the other G-7 currencies over the near-term as the USD and US Stocks correct lower.