Remain Selective
As we head into 2016 we remain positively positioned towards equity markets, although we believe
investors will need to be selective in picking investments in order to generate significant positive returns.
Key themes we will be watching to drive markets in 2016 will be the pace of tightening by the US Federal
Reserve, and whether commodities, in particular oil, can recover from their current lows. With this in mind
we highlight our top 10 stock picks for 2016.
Dining Boom – Global population growth
and decreases in available arable land is
putting food in high demand
Higher US interest rates – The US Federal
Reserve will continue to gradually raise
interest rates into 2016/2017
Lower AUD/NZD – Higher US interest
rates and lower AU & NZ cash rates should
result in lower domestic currencies
Stronger tourism – A lower AUD and NZD
should translate to an increase in foreign
tourism
Strong retail spending – Effects of lower
interest rates and strong consumer
confidence should translate to a stronger
retail sector
New Zealand
NEW ZEALAND REFINING – NZR.NZ
New Zealand Refining (NZR) shares have continued to power ahead and are up 66% year to date alone. The surge has been driven by a perfect storm for as the falling NZ Dollar has been a major tailwind for the stock, while at the same time the oil price has fallen and refining margins have remained solid. As we had previously forecasted NZR has recently reinstated a dividend and offers a healthy dividend yield of 5.2%, which should attract a new set of investors to the stock.
While the share price rally has been large, significant upside potential remains in our view. Our view is while we have seen some consolidation in the NZ dollar, there will be further weakness in the NZ dollar versus the US dollar over 2016 as the US Federal Reserve raises interest rates. The currency is one of NZR’s key profitability drivers and weakness in the NZD translates directly into higher profit as refining margins are denominated in NZ dollar terms. While refining margins are inherently volatile, the fall in the crude oil price should benefit NZR and we do not foresee a sharp move higher in the price of oil in 2016. All this points towards another strong year for NZR which remains at a low valuation
relative to expected earnings next year, in our view.
PGG WRIGHTSON LIMTED – PGW.NZ
A significant increase in demand for protein PGW.NZ enriched diets from a growing middle class in the
developing world (in particular Asia) is a favoured Current Share Price multi-year theme for . Australasia is set to Dividend Yield directly benefit from this dynamic, with Australia Price to Earnings Ratio and New Zealand being agricultural exporting Last 12 Month Return nations in close proximity to Asia. Australasian Market Cap agricultural businesses, such as PGG Wrightson, should directly benefit from the increase demand for food.
Global population growth and decreases in available arable land is currently out stripping the production
growth in agriculture (population is predicted grow to over 9 billion by 2050 representing a + 30%
growth from current levels). believes this will eventuate in significant shortages for available food
supplies and will result in much higher soft commodity prices (for example dairy, meat, wheat)
in the medium term. Higher soft commodity prices indirectly translates to higher revenues and profits for PGW.
believes PGW offers an attractive risk reward opportunity to gain exposure to global agricultural
trends. PGW is an agricultural supply business and holds a diversified portfolio which provides the
business insulation from disruptions in commodity prices and adverse weather conditions.
Furthermore, the stock offers a healthy dividend (+10%) representing excellent income opportunities in an environment where interest rates are expected stay low. In our opinion this stock offers attractive
a substantial income stream with agricultural
diversification benefits.
AIR NEW ZEALAND LIMITED – AIR.NZ
remains negative on the outlook on the NZD. We expect the NZD to remain under pressure AIR.NZ
heading into 2016 as the US looks to increase Current Share Price interest rates further, while the Reserve bank of Dividend Yield New Zealand looks to maintain New Zealand’s low Price to Earnings Ratio interest rate environment. Tourism is set to be the Last 12 Month Return biggest benefactor of a weakening NZD. Market Cap expects to observe an increase from international visitors as New Zealand becomes a relatively more attractive holiday destination compared with its
global counterparts.
We believe AIR is well positioned to take advantage of a stronger domestic tourism sector. The material
slide in the NZD correlates to higher international visitor numbers for New Zealand. The company has
undertaken an ambitious expansion plan with perfect timing. Air New Zealand has added a number
of new routes, as well as adding to its current aircraft fleet capacity (AIR’s network grew capacity by
passenger volume: Asia +8%, Trans-Tasman +3%, NZ domestic +5%, North America and Europe +7%. It
has also committed to $1.8 billion of investment in aircraft over the next 3.5 years). With higher total
available passenger capacity we expect to see material earnings upgrades from the company.
Furthermore, these initiatives have placed the airline in a strong position to take advantage of
falling oil and fuel prices. By offering addition routes and services at a time when passenger demand is
increasing, ultimately we believe this will lead to stronger bottom line profit for AIR.
FISHER & PAYKEL HEALTHCARE – FPH.NZ
Fisher & Paykel Healthcare (FPH) has been one of the main beneficiaries of a lower New Zealand dollar, as FPH.NZ almost all of its revenues are generated outside of Current Share Price
New Zealand. This has certainly not been lost on the Dividend Yield market, with the FPH share price up another 34% to Price to Earnings Ratio date in 2015.
Last 12 Month Return
However currency moves aside, FPH has Market Cap experienced strong operational improvements fromnew products which have been years in the making. At its recent investor day FPH highlighted the
elevated long term growth potential for the business going forward. As such we continue to believe FPH
shares are a solid buy even after the share price rally experienced in recent times and there is further
upside to come in 2016. FPH remains upbeat about its medium term growth
prospects and as an example has a target of reaching 20mn patient interactions per annum within 5-6
years (up from a previously guided 10mn). We have seen some short term consolidation in relation to
the fall in the NZ dollar (back to US$0.68), although over the medium term we expect further US dollar
strength as the US Federal Reserve raises interest rates. FPH is significantly exposed to currency moves
and should continue to benefit from a falling Kiwi going forward.
METRO PERFORMANCE GLASS – MPG.NZ
believes that the RBNZ will continue to
maintain its low interest rate environment into
2016. This is a positive for the NZ construction
industry. Low interest rates fuels demand for
property as it makes it cheaper for investors to
finance their investments. With material shortages Dividend Yield
4.7%
both in the Auckland and New Zealand housing Price to Earnings Ratio
x 14.1
stocks (it is estimated that an additional 77,000 Last 12 Month Return
-11%
houses is required over the medium term to meet Market Cap
$NZ 313 m
current demand), believes Metroglass is in the
front seat to benefit from this thematic.
Metroglass is the New Zealand’s leading value added
glass processor. It is a ‘pure play’ New Zealand
construction stock which means it has a heavy
exposure the construction and residential housing
cycles. believe is well positioned to benefit
from the spill over effects of New Zealand’s low
interest rates. In addition, net migration is set to
continue to increase over the coming years. This is
expected to add further strain to the already thin
available housing market.
The value added glass processing market in New
Zealand is an approximately $300 million market
which has been growing at an average of
approximately 8.6% per annum over the past two
years. The New Zealand glass market is highly
consolidated, favouring companies that have the
scale to invest in distribution, specialised processing
equipment and high levels of customer service. MPG
currently holds 50-55% market share.
29 December 2015
MPG makes it money via glass processing activities
which includes: cutting, shaping, laminating,
painting and toughening glass, and manufacturing
double glazed units. They operate throughout NZ
with 17 decentralised sites, including five major
processing sites.
AUSTRALIA
Crown Resorts – CWN.AX
Domestic tourism is set to be the biggest benefactor
of a weakening AUD. This is a key thematic in ’s
equity strategy. In particular, believes the
gaming sector is set to receive a material boost over
the near term. The falling AUD should attract high
visitor numbers and is expected to translate to
improved revenues for gamers. Furthermore, due to
regulator changes in Macau, we are anticipating a
further uplift to the gaming sector as Asian gamblers
seek alternatives to Macau gaming.
We believe Crown is the best positioned Australian
gamer set to take advantages of these macro-
economic changes. Specifically, it differentiates itself
from its domestic competitors by its offerings as a
market leader in capturing both Asian and VIP
gamers. believes both these categories are set
to experience high double digit growth in 2016.
Furthermore, believes Crown’s assets are
currently undervalued at its current share price. Mr
Packer has clearly made his intention clear to take
the company’s assets private and in order to achieve
this, he is likely to need to pay a premium for them.
This will provide on-going momentum for the shares.
Crown Resorts is an international gaming company.
It includes businesses and investments in the
integrated resort and entertainment sectors in
Australia and Macau, and wholly-owns and operates
a high-end casino in the United Kingdom.
QBE INSURANCE – QBE.AX
Key Metrics
Earlier this month the US Federal Reserve increased
interest rates for the first time in 9 years, ending an QBE.NZ
era of emergency support for the US economy. All Current Share Price
$12.17
else equal higher US cash rates are a positive for Dividend Yield
3.7%
QBE’s earnings, give the large amount of funds it Price to Earnings Ratio
x 16
holds in cash or short term investments. This makes
it one of the few Australasian investment cases Last 12 Month Return
9%
which should see share price gains on the back of Market Cap
$AU 16.4 b
29 December 2015
higher US interest rates. At the same time a lower
Australian dollar also benefits QBE’s given its
substantial offshore operations.
Apart from the macroeconomic tailwinds highlighted
above, operationally the company also looks to be
heading in the right direction, in our view. We
believe QBE shares are simply consolidating since
peaking in early August when the US Federal Reserve
caused shockwaves through markets by indicating
global growth concerns may delay rate hikes in the
US. At current levels QBE looks attractively priced to
us (paying a dividend yield of 3.7%) and we believe
investor sentiment should swing back in favour of
QBE in 2016.
ARDENT LEISURE – AAD.AX
Key Metrics
The macroeconomic themes supporting AAD remain
very much intact as we see AAD as a beneficiary of a AAD.AX
lower Australian dollar (as we move through 2016).
Current Sha re Price
AU$ 2.20
AAD has significant US operations (accounting for Dividend Yield
6.0%
over a third of the company’s earnings) which will Price to Earnings Ratio
x 15.5
directly benefit from a weaker AUD. At the same Last 12 Month Return
-27%
time a weaker Australian Dollar should indirectly Market Cap
$AU 952 m
increase tourism and benefit AAD’s Australian theme
parks.
Following a couple of months of outperformance,
shares in Ardent Leisure (AAD) sold off significantly
in November on the back of what we saw as a solid
1st quarter trading update. We believe that the
current sell-off is overdone, and see value in the
stock at current levels. AAD’s US business, Main
Event, continues to be the standout, while the
Australian theme park business is benefitting from
increased tourism (from NZ and China). The only
disappointment in the trading update was the health
club business, which seems to have hurt investor
sentiment. However, the clubs are being converted
to 24/7 centres, and every club converted is
consistently providing positive membership growth.
Hence looking ahead into 2016 our view is the
increased membership growth should eventually
translate into better profitability from the gym
business.
29 December 2015
Myer – MYR.AX
It appears that the interest rate cuts from the
Reserve Bank of Australia are finally starting to take
effect on the wider economy. This bodes well for the
retail space which should benefit from consumers
having more discretionary income from lower
interest rates. One of ’s top thematic views is
that a “Spending Spree” will benefit selected
retailers and one of the retail company’s held in our
portfolio is up over 30% in the last few months.
Since the global financial crisis, retailers in Australia
have performed poorly. There are a number of
reasons, but lower discretionary spending, high AUD
& NZD and poor business models have been the
major drags on the industry’s performance. Retail
sales in Australia have been on the upward
trajectory over the past 3 months and believes
this momentum is set to continue.
Consumer
conditions
are
currently
very
accommodative. Interest rates are set to remain low
for the medium term and low fuel and cost inflation
are supportive for retailers. These factors should
translate to an increase in discretionary income for
consumers over the near term. Naturally, major
retailers such as MYR should benefit from the
increased consumer spending which should provide
further uplift to the company’s sales growth.
Sydney Airport – SYD.AX
The recent decline in the AUD is expected to provide
a boost to international tourism numbers and is a
key thematic in ’s 2016 strategy. A lower AUD
translates to an increased purchasing power for
international tourists which should result in Australia
becoming a more popular tourist destination relative
to its global competitors. We estimate that every 1¢
decline in the AUDUSD exchange rate will increase
international visitor arrivals by approximately 0.75%.
We remain bearish on the AUD outlook given the
interest rate fundamentals and therefore expect
further declines in the AUD as it reverts to its long
run average.
Furthermore, the material decline in oil prices
should
translate
to
reduced
aeronautical
transportation costs and correspond to an increase
in demand for both inbound and outbound travel.
Essentially both international and domestic travel
should become relatively more affordable with the
29 December 2015
decline in the price of oil. We predict that consumers
will take advantage of the cheaper fares resulting in
increased passenger traffic. Additionally, the
introduction of a number of low cost airline carriers
is resulting in further price declines and making air
travel relatively more attractive.
Sydney Airport has and will continue to be a major
benefiter of the decline in the AUD. In addition to
this, we believe the lower cost of air travel should
provide further support to passenger travel numbers
in 2016.
SYD remains Australia’s major gateway for
international visitors with 41% market share. SYD
owns and operates Sydney Airport which is the 11th
largest airport in the Asia Pacific region and 31st in
the world by passenger numbers.
It consists of two main business units which are 1)
Aviation (Sydney Airport) and 2) Commercial
Opportunities. The majority of revenues are
generated from the aviation side of the business
(49%), with the balance consisitng of retail (22%),
carparking/transport (12%) and property (17%).
Stock ratings
Given the dynamic nature of share prices ’s rating can become out of sync with the projected total return as the share price moves. The rating
must only be viewed as valid with respect to projected total return at the time of rating or target price changes.
Individual stock ratings are determined by the projected total return on a stock. ’s analysts project a 6 to 12-month target share price for each
stock. The capital gain or loss implied by the 6 or 12-month target share price, along with the analyst’s projected prospective dividend yield, generates
the analyst’s projected total return for a given stock.
Based on a current 6 to 12- month view of total share-holder return (percentage change in share price from current price to projected target price plus
projected dividend yield), we recommend the following:
BUY: Based on a current 6 to 12-month view of total share-holder return, we recommend that investors buy the stock
SELL: Based on a current 6 to 12-month view of total share-holder return, we recommend that investors sell the stock
HOLD: We take a neutral view on the stock 6 to 12-months out and, based on this time horizon, do not recommend either a Buy or Sell
This report may contain views, opinions, conclusions, estimates, recommendations and other information (Information). However, such Information
comprises general securities information only, and has not been prepared taking into account the particular investment objectives, financial situation
and needs of any particular person. Individuals should therefore assess whether it is appropriate in light of individual circumstances, or discuss, with
their financial planner or advisor, the merits of each recommendation for their own specific circumstances.
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published on its websites. However, no warranty is made as to the accuracy or reliability of any estimates, opinions, conclusions, recommendations
(which may change without notice) or other information contained in this document. research is based upon information known to us or which
was obtained from sources which we believed to be reliable and accurate at time of publication.
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29 December 2015