The momentum looks positive on the XJO as the index bounces from the recent 5600 point low. We have a big week in earnings coming up with AMC, ANN, AZJ, BEN and NCM on Monday.
COH and TWE on Tuesday. BLD, CBA, CPU, CSL, DMP, ORA, SHL and WES on Wednesday.
IAG, ORG, S32, SYD and TLS Thursday.
ANZ, ASX, CCL, LNK, MPL and STO on Friday.
Until October 2016, TPG Telecom was the fast growing telco with almost 20% EPS growth whilst trading on a low 2% yield.
Then came the earnings update and the company suggested future EPS growth will be more like 5%. If Telstra is growing earnings at 3 – 5% and paying a 6% yield, why would an investor buy TPG on a substantially different yield or valuation?
You just wouldn’t. As such, we’ve watched TPG sell-off from $12.50 to $6.20 and the stock is now back on a 4.5% yield. TPG will likely find buying support now and the market is hoping EPS growth will creep higher into the range of 5 – 10% to support the yield differential with Telstra.
We’ve been buyers of Telstra at sub $5.00 and we’re looking for the stock to trade $5.50 before evaluating a covered call option strategy.
Goldman Sachs and JP Morgan remain within the consolidation range which began in early December.
In our local market we’ve seen BOQ & BEN sell off 10% from the January peak-to-trough. NAB reported weak revenue growth and higher than expected expenses, leading to a 1% fall in profit.
CBA report their half year results on Wednesday, we expect NPAT of $4.8b and DPS $2.00. 3 – 5% underlying EPS growth on the same time last year.
ANZ corrected 10% from peak-to-trough.
We’ll watch the US banks in the weeks ahead to see which way they break from their current consolidation range.
We’ve been buying the following names in the past week and selling covered call options.
WFD, GPT and SCG within the REIT space.
TCL and SYD defensive infrastructure.
RMD, CSL & SHL as our preferred healthcare exposure.
AMC, BXB and ANN as industrial trades.
IAG & MPL as insurance exposure.
The names above are performing well and in many cases have been the leading ASX companies by % gain, over the past week. Tabcorp on the other hand has been a disappointing inclusion in client portfolios. Our exposure to TAH is only minor, as we don’t view it as a core holding. (rather a tactical trade based around the Tatts deal).
TAH remains within our buy range, although testing the lower band. We continue to feel there’s opportunity ahead. We are again buying TAH at these levels and will look to exit mid year. The upcoming ACCC decision on the Tatts deal, will likely be a positive catalyst and we expect TAH to trade back above $4.60.
The other names mentioned above, have been complimented with a covered call option, which is helping to deliver 10 – 12% cash flow from the option premium and the upcoming dividends.
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BHP FY17 revenue is expected to be $40b, EBIT of $12b and reported profit of $7.5b.
The earnings translate into EPS of $1.40 and DPS of $0.78 placing the stock on a 3.8% yield.
AMP FY16 normalised profit $486m. AMP announced a $500m on market buyback.
FY18 reported profit is likely to remain flat on FY17 numbers and AMP’s ability to deliver against cost out in FY17 and continued cost discipline in future periods is the key to sustaining group EPS growth.
FY18 profit is likely to remain in the range of $900m – $930m, EPS $0.35 and DPS of $0.29 placing the stock on a forward yield 5.7%.
We remain cautions on AMP until the technical picture becomes more supportive. Support may begin building above $5.00.
CIM reported FY16 NPAT of $580m, slightly ahead of consensus.
We like CIM’s leverage to the infrastructure space and the recent acquisition of UGL is a positive.
Over the course of FY18, we see revenue at $17b, EBIT $1.b, EPS $2.30 and DPS $1.30, placing the stock on a forward yield of 3.5%.
RIO has delivered a solid CY16 earnings result of US$5.1b. A highlight of the result was the increased shareholder returns, with RIO announcing a final dividend of US$1.25ps
Revenue of US$35b, EBIT of US$7.8b and DPS of US$1.70 placing the stock on 3.3% yield.
Looking out over 2017, we expect a relatively flat market for iron-ore prices which will translate into only moderate EPS gains for RIO (5-10%). We assume revenue of US$38b and EBIT at US$9.5b, EPS $3.20, DPS US$2.50, which will place the stock on a forward yield of 4%.
Share buy backs and capital returns will help underpin the story here with RIO.
We see both RIO and BHP fully valued at current prices. With short term volatility likely ahead for Iron-ore prices, we recommend taking profits or selling covered calls to enhance the yield.
CAR Reported 1H EPSg of 5%, is the current 22x P/E sustainable?
Assuming an acceleration from 5% EPS growth to 10% EPS (big ask) in the next 12 months it will place CAR on a 3.5% yield. We’ve seen other high PE stocks negatively rerate such as TPG and I think some caution and close watching of the earnings trend in CAR is required.
Global tech players such as eBay, gumtree, facebook etc are becoming more active in CAR’s business space. This may be part of the reason EPS growth is dropping off.
The XJO is holding support at 5600 points and maintaining a bullish short-term price structure.
We’re cautious due to stretched equity valuations, political risks in the Euro zone, debt stability in China and low revenue growth in many industry sectors.
To mange these concerns we’ve tilted portfolios to defensive assets and become aggressive with our covered call overlay. The bulk of our portfolio returns will come through dividends and option premium over the next short while.
Furthermore, we’re just not convinced the reflation trade the market has positioned around, will actually materielize in FY17.
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