’s Top ASX Blue Chip Picks
Large Blue Chips Lag, Creating Opportunity’s
After what was one of the worst starts to a calendar year in terms of share market performance, markets
have bounced back and shown quite amazing resilience. Locally the Australasian markets were certainly not
left behind, as the Australian market (ASX 200 Index) was up +6.3% in July and touched a high for 2016,
while the NZ market (NZX 50 Index) rallied +6.5% and hit a new all-time high.
However, looking at the market returns of the ASX in recent times, it has been the smaller cap companies
which have led the way. The chart below illustrates how the returns of the top 20 large cap stocks (blue
chip names) have lagged the broader market.
Small cap stocks are generally perceived as better “value” than larger caps, but given price moves, we now
see relative value in some of our larger blue chip names.
Many of the safer big name stocks which offer an attractive yield (e.g. CSL, Sydney Airport) have experienced
strong share price gains on the back of multiple expansion (higher valuations). While we are positive on CSL
and Sydney Airport, we see areas with strong earnings tailwinds which are trading at less stretched prices
(trade at lower valuations – i.e. “value” stocks).
Keeping this in mind our top 3 large cap value stock ideas on the ASX are:
Crown Resorts (CWN.AX)
Westfield (WFD.AX)
Macquarie Group (MQG.AX)
Crown Resorts (CWN.AX)
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.
Crown management have attempted to unlock value in the business by recently by
announcing the demerger of its business.
Crown Resorts will hold mainly domestic assets and is estimated to be worth around
$8 billion, while its international company spin-off, which will hold its 27% stake in
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Macau-focused Melco Crown Entertainment, may be valued at $3 billion. In addition
to the demerger, CWN is exploring a potential spinoff structure for its Australian hotels
(excl. Crown Towers Melbourne) via a separate IPO of 49% of its interest in a new REIT.
Despite the share price response, we believe the shares remain significantly
undervalued by the market. Given the break down value of Crown’s individual parts
and the fact that management have addressed the suggested lack of clarity
surrounding the company’s offshore assets, we believe there is still money left on the
table at current valuations. Spinning off each of the individual components as listed
above would give a breakdown value of approximately A$13 bn (8bn Domestic
assets; 3bn International assets; 2 bn Hotel trust). With current market valuation
sitting closer to A$9.5 bn, in our opinion there is still significant value that can be
unlocked for shareholders
Being in the tourism space, CWN benefits from a weakening Australian dollar, which
we forecast should fall further as US interest rate hikes come back on the table. The
company is a major beneficiary of the tourism boom we foresee in Australia and New
Zealand, especially given the influx of tourists from China.
Further, CWN has also recently announced that it intends to begin paying out 100% of
the company’s profits (normalised NPAT) in a new dividend policy aimed at rewarding
shareholders. This is likely to see the dividend climb to healthy level of roughly a 5%
dividend yield.
Westfield (WFD.AX)
Westfield Corporation is an Australia-based shopping center company. The Company is
engaged in ownership, development, design, construction, asset management, leasing
and marketing activities with respect to the United States and the United Kingdom
portfolio. The Company’s segments include Property investments, Property and project
management, and Corporate. Its shopping center portfolio includes over 30 centers in
the United States, the United Kingdom and Europe encompassing approximately 6,480
retail outlets.
At current prices WFD is trading on a price to earings growth (PEG) ratio of just below
3x, which is attractive versus peers and offers a dividend yield of 3.5%.
Given WFD has operations in the UK, it has raised concerns around the impact of Brexit
on business by some commentators, which are likely overstated (in any case it is very
early to tell with any certainity what the impact of “Brexit” may be). We believe WFD’s
earnings trajectory remains intact following the UK’s decision to leave the EU (at least
for the next couple of years). At the same time we believe that the pipeline of WFD’s
US developments coming towards completion can improve operating metrics and
drive a valuation re-rating vs. global peers.
As with CWN, WFD is exposed to the exchange rate given it has significant offshore
earnings. Potential for further AUD/USD weakness would be a bonus at current share
price levels, as the market is not factoring this is to current prices, in our view.
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Macquarie Group (MQG.AX)
Macquarie Group is a global provider of banking, financial, advisory, investment and
funds management services. Its strategy focuses on offering a full service investment
banking operation in Australia. It has a diversified operational base with its business
categorized by two major sections; Annuity-style business and Capital markets.
The financial sector in Australia has been under pressure for some time, and MQG
shares have also lagged the borader market. At current prices MQG trades on a price
to earnings multiple of 12x, and offers a healthy dividend yield of close to 6%.
At its recent AGM, MQG reaffirmed its earnings guidance for 2017. The company’s
profits will be "broadly in line" with this year’s record numbers and comes despite
softer first-quarter operating results. The fact that Macquarie still expects results to be
in line with last year should be viewed as a positive given the challenging market
conditions incurred from the share market turmoil at the start of 2016 and events like
the Brexit.
While management appear quite opimistic, there are a number of drivers which
could work in MQG’s favour, and result in its valuation re-rating higher: These include
improvements in equity market conditions, further improvement in commodity
markets, higher gains on sale or performance fees and/or a weaker Australian dollar.
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
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3 August 2016