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Newsletter - Austock Group

Austock Group

Newsletter

Issue 68 – Monday 27 June 2011

SECURITIES | CORPORATE | LIFE | PROPERTY


The Week in Review

Michael Heffernan, Austock Securities

The market showed a healthy measure of stability in the

penultimate week of the financial year, after a particularly volatile

first half of 2011.

That the market has generally weathered the storm, in the face of

more so called factor X’s (events that one cannot predict) than I can

recall in a long time is quite an impressive result.

Specifically we had the floods then cyclone in Queensland, the

earthquake in Christchurch New Zealand, the earthquake/tsunami/

nuclear fall out problems in Japan, the re-emergence of the Greek

debt miasma and finally the columns of volcanic ash severely

impacting business activity along the eastern coast of Australia in the

last few weeks.

Looking back we have seen only 12 of the last 26 weeks which have

managed to show an increase on a weekly basis compared with 15

last year. Despite this however, our market has managed to show a

slight rise over the last 12 months, despite retreating by 5% since last

December.

Other world markets except Hong Kong and Japan have faired slightly

better than Australia this year. The US and German markets are up

around 3% each, France down slightly, and London down a little less

than us.

All told, and as I have indicated many times in previous reviews, the

fundamental underpinnings of our market still remain robust. With

sound Australian stocks being substantially lower than they were

several years ago, to me, this simply represents excellent value for

good stocks.

Underlining this proposition, and providing additional certainty as we

look ahead, were the minutes of the June meeting of the Reserve

Bank Board which were released last week. These minutes indicated

in fairly clear terms, that the Bank does not intend to increase interest

rates in the near term. This time the Bank seems to place a bit more

emphasis on a number of areas of the economy which are showing

subdued activity. It is interesting to note that the futures market is

indicating a 20% chance of an interest rate cut before the year is out!

As I have stated many times in the past, my view is that while interest

rates are on hold for a number of months, one still cannot rule out a

rise in rates later this year if the economy shows an uptick.

In similar vein the American Central Bank released their decision

last week, and not unexpectedly, they left their official interest rates

unchanged at between 0% – 0.25%.

Last week movements

24/06/2011 % Change

AU$ versus US$ 1.047 -1.4%

ASX 200 Index 4508 +0.5%

90 Day Bank Bill Rate 5.01 +0.8%

Aust 10 year bond 5.03 -1.8%

US 30 year bond 4.19 -0.6%

Dow Jones Index 11935 -0.6%

FT 100 Index 5698 -0.3%

Nikkei Dow Index 9679 +3.5%

Hang Seng Index 22172 +2.2%

Last week top winners

Top ASX 50

% Change

FGL Foster's Group +12.5%

AIO Asciano Limited +7.9%

WRT Westfield Retail Tst +3.8%

QRN Qr National Limited +3.8%

RIO RIO Tinto Limited +3.3%

Mid-cap (50-100)

% Change

LYC Lynas Corporation +10.9%

PRY Primary Health Care +5.9%

PDN Paladin Energy Ltd +5.8%

PNA Panaust Limited +4.2%

FXJ Fairfax Media Ltd +3.2%

Small ORDS (100-300)

% Change

CFE Cape Lambert Res Ltd +14.3%

CLO Clough Limited +11.2%

KRM Kingsrose Mining Ltd +10.8%

SLR Silver Lake Resource +10.8%

IGR Integra Mining Ltd. +8.7%

Austock Group Newsletter 2


Very importantly however and something that should not be

overlooked, while the Bank acknowledged that economic

activity in the United States has slackened in tempo, it is still

showing moderate positive growth. The Bank expects GDP

growth this year to still increase by between 2-7% - 2.9%

albeit down from 3.1% - 3.3% previously.

Too often commentators grasp for the negative, and use

words such as “America may experience a double dip

recession” etcetera which flies, in the face of both objective

evidence and comments by major official economic

agencies, as well as myself.

On the corporate front, locally there were quite a number of

very important announcements by major listed companies

during the week, most of which were generally positive in

nature.

On Thursday and not surprisingly the government

announced the agreement between the NBN Co and

Telstra, the bottom line of which provides Telstra, with $11

billion over the course of the next ten or so years in today’s

dollars.

This was largely as anticipated, although the $2 billion in

costs which are to be borne by Telstra were more than

some analysts had expected. However, Telstra advised that

these costs are covered within existing capital expenditure

plans and operational expenditure profiles.

Significantly the Managing Director of Telstra said that

this decision is not expected to have any material impact

on Telstra’s financial profile in the coming financial year.

Accordingly previous indications of an annual dividend of 28

cents per year is a reasonable expectation over the course

of the year ahead. This translates in current terms to a fully

franked dividend return of around 10%. In this uncertain

environment that is a particularly attractive income return.

Also another major company to make an announcement

was Fosters’ who advised that they had received an

unsolicited bid from major international beverage maker

SAB Muller to acquire all the shares in Fosters’ at $4.90 per

share. Clearly investors and analysts believe that this price

is lower than warranted, and the Board of Fosters’ rejected

the offer suggesting the proposal “significantly undervalues

the company”.

Also on the same matter, Coca Cola Amatil advised that

if SAB Miller does make an offer for Fosters then Coca

Cola would sell their interest in beverage maker Pacific

Beverages to SAB Miller which would represent a significant

profit on the value that Coca Cola has on its books for that

investment.

In addition Rio Tinto has given notice to Ivanhoe Mines (a

major copper and gold producer in Mongolia) that Rio Tinto

will increase its holding in that particular company. This

resource is one of the world’s major repositories of these

minerals.

Also on the positive note, Worley Parson’s advised that it

has been awarded a contract for Syncrude Canada’s Aurora

Tailings management project to provide Worley with an

estimated revenue of $600 million (Canadian).

A smaller mining services company NRW Holdings

announced that it had secured a milestone frame work

agreement with Rio Tinto. Particularly significant however is

the fact that this agreement represents the formularization

of the on going long term relationship between Rio Tinto

and NRW, and places NRW in a preferred contractor

position for various projects which will be required by Rio

Tinto over the next five years.

Another particularity significant announcement was by

Macquarie Airports who advised that it has entered into

exclusive negotiations with Ontario Teachers Pension

Plan to swap Macquarie’s interest in the Brussels and

Copenhagen airports in return for Ontario’s 11.02%

increase in Sydney airport. Should this proceed this would

provide Macquarie with 85% of the shares in Sydney airport

plus a cash payment of $850 million.

Looking ahead next week the most important piece of data

for Australia is on the labour market with skilled vacancies

out on Wednesday and the official Australian Bureau of

Statistics job vacancy figures on Thursday. If recent trends

continue, one can expect a weakening in this labour market

data which again provides further support to the Reserve

Bank leaving interest rates unchanged over the next several

months.

In the United States there is as usual a range of important

market moving data scheduled for release including the

Dallas Reserve Banks Federal Manufacturing Activity Index

on Tuesday, Consumer Confidence figures and mortgage

application figures on Wednesday while on Thursday

manufacturing data, in the form of the Chicago Purchasing

Managers report will be available and rounding out the

week on Friday and Saturday there is further manufacturing

data from the Institute of Supply Management, motor

vehicle sales, factory orders and the University of Michigan

Confidence Index scheduled for release.

As pointed out in previous newsletters the American

economy is taking a “two steps forward one step backward

approach” but its trajectory is in the right direction.

In conclusion as we move into the new financial year one

can only hope that a combination of fewer so called factor

X’s, no interest rate changes and a bit more stability in

foreign markets can see our market claw back the losses

incurred in the early part of this year and finish the year with

gusto.

Michael Heffernan, Austock Securities

Austock Group Newsletter 3


Austock Managed Accounts

Austock is now able to offer clients Separately Managed Accounts

(SMA’s) combining the benefits of your own fully administered

portfolio with professional investment management.

Austock Managed Accounts is a direct

share portfolio investment product.

You delegate the daily investment

decision making and administration to

a professional investment team. By

selecting one or more Model Portfolios

you determine how your portfolio will be

managed. Alternatively, you can retain

some or all of the investment decision

making and delegate only the portfolio

administration.

Investment Menu

Austock Managed Accounts offers you

a range of Model Portfolios managed by

boutique investment managers. Each

Model Portfolio operates according

to a defined investment strategy, risk

profile, objective and investment universe

across:

• Australian equities

• International equities

• Options

• Fixed income securities

• Cash investments

You can also build and operate your own

Client Choice portfolio of investments

outside of the Model Portfolios where

you or your adviser retain the portfolio

decision making.

Benefits

• Combine the benefit of your choice

of a range of professional investment

managers of your own individual

portfolio with your own Client Choice

portfolio on a single account.

• Avoid the time consuming paperwork

typically involved with direct share

investment – we take care of all the

administration for you.

• You can transfer in or out your existing

share investments to and from

Austock Managed Accounts without

crystallising unwanted capital gains

tax.

• Full, transparent, online access to your

portfolio makes it easy to monitor your

investments and produce reports all in

the one, secure location.

Fees

Full details of the fees applicable to

investments are outlined in the Product

Disclosure Statement (PDS) for Austock

Managed Accounts. To obtain a copy

please contact your Austock adviser.

Minimum Investment

The amount you need to initially invest

depends on your choice of Model

Portfolio, but is typically a minimum of

$25,000 which can include the value of

any existing share investments you may

already own.

Contact

To find out more please call

Ben Hughes

Principal, Austock Capital Management

+61 3 8601 2655

bhughes@austock.com

Ben has an 18 year career in funds

management and institutional

stockbroking. Ben co-founded specialist

investment manager Austock Capital

Management in 2009 following his role

as a portfolio manager for a leading

global fund manager. He previously

co-founded Australian absolute return

fund manager Affinity Capital Partners in

2000, which generated a track record of

outperformance of the Australian equity

market over its seven year life. Prior

to funds management, Ben’s career

in institutional stockbroking included

roles as Head of Growth Companies for

BNP Paribas Equities (Australia) and as

Associate Director of Research for ANZ

Investment Bank.

John Aldersley

Principal, Austock Capital Management

+61 2 9233 9617

jaldersley@austock.com

John’s career spans 34 years in global

and Australian funds management and

stockbroking. In the seventies in the

UK he managed pension fund portfolios

for BBC, Ford Europe and Blue Circle.

In Australia he advised on corporate

takeovers and then as an institutional

stockbroker, including as Head of

Derivatives at a major firm. In 1992, John

pioneered Separately Managed Accounts

as a more tax efficient form of managed

fund in Australia, launching ShareInvest in

1994. Following the sale of control of his

original business in 2007, John co-founded

Austock Capital Management in 2009.

Austock Group Newsletter 4


Austock Global Markets Desk

Austock is able to provide clients cost effective execution

only dealing in international securities from the worlds major

markets including London, New York, Toronto, Hong Kong

and Johannesburg.

The Australian stock market represents

only approximately two percent of

global securities traded. Furthermore, a

few large stocks such as BHP Billiton,

Rio, Telstra and the four major banks

represent about 40% of the value of the

stock market; and a number of exciting

industries such as technology and

pharmaceutical companies are not well

represented in Australia.

There are approximately twenty times

as many listed securities on global

stock markets as on the Australian

stock market and global stock markets

are approximately sixty times larger by

market capitalisation.

Custody

Austock does not charge separate

custody fees for its counterparty

custodian service, providing corporate

action and dividend administration and

therefore, can provide this part of the

overseas transaction for free.

Markets

Asia Pacific

Kuala Lumpur Stock Exchange

New Zealand Exchange

Singapore Exchange

Stock Exchange of Hong Kong

Tokyo Stock Exchange

United Kingdom

London Stock Exchange

AIM

OFEX

Canada

Toronto Exchange

Settlement

Austock provides settlement in Australian

Dollars for all overseas transactions.

Charges

Overseas equity transactions 1%,

subject to a minimum of $95 negotiable

Summary

• Efficient and cost effective dealing in

overseas securities

• Safe custody of all holdings

• Administration of Corporate Actions

and Dividends

• Settlement in Australian Dollars

• Personal contact with your portfolio

manager

• Exposure to growth economies and

industries not available in Australia

Europe

Deustsche Borse

Euronext Amsterdam

Euronext Paris

Italian Exchange

Swiss Exchange

USA

American Exchange

NASDAQ

New York Stock Exchange

South Africa

Johannesburg Stock Exchange

Contact

If you would like to find out more or

become an Austock client, please call:

Nicholas Pereza-Mathews

F Fin Chartered MCSI MSAA

+61 3 8601 2694

gm@austock.com

Nicholas has held senior positions within the

Australian and UK financial services industry,

bringing to Austock Securities over 20 years

experience in funds management, institutional

equity sales and research, 14 years of

which were in London working as an Analyst

at Morgan Stanley, Investment Manager with

NatWest Stockbrokers and Branch Manager

for Killik Stockbrokers.

Having relocated to Australia in 2002, Nicholas

achievements include Managing Director

and Fund Manager of the top quartile performing

Australian Natural Resources UCITS

III Fund, Head of Global IMA at Patersons

Securities and Head of Institutional Global

Equity Sales & Asset Management at DJ

Carmichael Stockbrokers.

Nicholas qualifications include those from

the Chartered Institute for Securities &

Investment, Securities & Investment Institute

of Australia, Financial Planning Association,

Securities & Derivatives Industry Association

and Deakin University.

Nicholas is a Chartered fellow member of

the Chartered Institute for Securities & Investment,

a Fellow member of the Financial

Services Institute of Australasia and a Master

member of the Stockbrokers Association

of Australia Inc SDIA.

Austock Group Newsletter 5


Austock Global Markets

Nicholas Pereza-Mathews, Austock Securities

Man Group

Man Group is a global alternative investment management

(hedge fund) business, providing investment solutions to private

investors and institutions. Its flagship investment offering is the

AHL trend-following fund using computer modeling to identify

and follow trends in highly liquid financial futures contracts

based on assets such as equities, commodities, currencies

and fixed interest.

Last year, the group acquired GLG Partners, the US-listed

alternative investment manager which offers over 40 funds

across equity, macro, emerging markets, credit and convertible

bond investment products. The integration process has created

cost synergies and a sales pipeline providing support for strong

revenue synergies to develop.

The group is well placed to benefit from a number of

developing factors. Pressure on government budgets due to

an expanding aging population, reducing retirement funding

subsidies, is increasing demand for and awareness of younger

population to save more for their future retirement. The benefit

of hedge fund techniques – namely more active management

of downside risk and more varied ways of capturing upside

potential – are being increasingly appreciated, leading to

growth in the industry.

Funds under Management (FUM) as at 31 March 2011 are

currently estimated at $69.0bn, slightly ahead of the $68.6bn

as at 31 December 2010. During the quarter, the group

expects to have seen net inflows of c. $0.7bn, with $5.3bn of

sales (predominantly in open-ended alternatives and long-only)

just about offsetting redemptions of $4.6bn. The split of assets

is now: AHL (33%); GLG (46%); and Multi-Manager (21%).

Man has a strong balance sheet, with a regulatory capital

surplus of around $350m. This position has recently been

enhanced by the sale of its c. 25% interest in BlueCrest for

$633m in cash and loan notes. The proceeds will add over

$500m to Man’s regulatory capital surplus, while net cash will

be $900m. Although the deal is dilutive to earnings, it is in line

with the strategic focus and release capital to invest in internal

investment management capabilities.

The group has reiterated its commitment to pay a dividend

of at least 22c per share in the current financial year. This is

just about covered by earnings forecast of 24c and leaves the

shares on a yield of around 5.6%.

Share Price Over Three Years

Tesco

Tesco is the world’s third largest food retailer with annual sales

in excess of £60bn. It is the market leader in the UK and

the bellwether for the sector operating in thirteen overseas

markets. The group has also expanded into non-food and

other retail services such as banking and telecoms.

Tesco’s group sales for the thirteen weeks ending 28 May 2011

increased by 7.8% including petrol (8.4% at constant exchange

rates), reflecting broad-based growth across the Group.

Growth excluding petrol was 6.7% (7.3% at constant exchange

rates).

The group recently appointed CEO Philip Clarke who remains

committed to the current strategy and growth. He has made

the point since his appointment that although Tesco’s current

strategy is a good one, and the group is well placed for global

growth, there will be some changes given the recent underperformance

in parts of the business and the has outlined

six immediate objectives around performance. Of the six

objectives, two and four stand out for future growth. Objective

two, to be outstanding internationally and objective four, to

deliver on the potential of Retailing Services, especially in

Banking should prove the most rewarding if achieved which

Tesco is well placed to deliver.

Broadly the new six objective strategy aims to: improve the

shopping trip for customers; increase productivity; winning

market share – whilst at the same time investing for long term

growth in important new products, new space and in online

capability.

Tesco has strong pricing power and generates industry-leading

returns with over 90% of profits generated in markets where

the group has a top two position. Overall, the new CEO has

made a promising start and he has plenty to do to prove that

the group can achieve its targets.

Tesco remains attractive to investors looking for a quality

leading retailer with global expansion planes and new product

offerings. The shares are trading on 9.8x February 2013

consensus earnings and offering a 4.0% dividend yield.

Share Price Over Three Years

Source: Bloomberg L.P

Austock Group Newsletter 6


Stock selection

Map Group (MAP)

Recommendation

Hold

Risk Rating

Medium

Dividend

21.0 (FY’11)

Dividend Yield 6.4%

Current Share Price $3.27

12 Month Price Target $3.40

Matrix C & E Ltd (MCE)

Recommendation

Strong Buy

Risk Rating

High

Dividend 20.1

Dividend Yield 2.8%

Current Share Price $6.89

12 Month Price Target $10.90

Analyst

Andrew Chambers

Analyst

Heath Andrews

We find the price of the asset swap proposal by OTPP as

valuation dilutive for MAP by 21cps or using the MAP Directors

own 31 Dec 10 valuations the swap proposal is ~15cps

dilutive.

The asset swap is indicatively EPS dilutive by -8% in FY’12

to Austock forecasts assuming MAP do not reinvest the cash

proceeds into other airports or more of Sydney.

If MAP used the $850m cash proceeds to acquire more of

Sydney at 10% discount to our DCF (i.e. if $850m got 13%

of Sydney AP) from other Sydney airport minority sellers (e.g.

Hochtief, MTAA) then the EPS dilution in FY’12 would be

approx -4%.

We can see why OTPP proposed this swap, it enables OTPP

to sell Aussie assets into AUD strength, buy Euro assets during

weakness and move from a modest Sydney AP stake into an

influential stake in Copenhagen and Brussels.

So why did MAP sign an exclusivity agreement to swap assets

where OTPP appear the winner. We see a few good reasons

for MAP:

1. Simplified and focused single asset entity;

2. Funding and flexibility for MAP to acquire other minority

stakes in Sydney Airport;

3. Reduce FX and European risk;

4. Provides cash for large capital management (say 75cps

special dividend) potentially helping bridge the security price

gap between DCF valuations and the security price; and

5. Highlights MAP’s confidence in its key asset.

Investment View

Our current view is that whilst this proposed asset swap is

value and earnings dilutive for MAP it is likely that MAP will

trade closer to our DCF valuation due to the excess cash

balance providing capital management opportunities. Hence

despite our pre swap DCF of $4.05 likely falling to a post swap

DCF of $3.84, we believe a $3.40/security price target is still

appropriate to account for the MQG overhand and Productivity

Commission review uncertainty. Hold $3.40pt.

Feedback is that MCE is the industry leader in terms of

production efficiency and automated production techniques

– i.e. most efficient, highest quality producer. We believe the

market has not priced this advantage in.

The market has recently been characterised by uncertainty, and

MCE has been aggressively sold off – down ~15% since the

$8.50/share capital raising.

In the last several months, new orders for deep-sea Semi-

Submersibles and Drillships have escalated. It would appear

that demand for riser buoyancy products has a bias to

increase.

MCE has hired a key person to run their Houston distribution

and marketing operations (ex. senior Trelleborg manager, their

main competitor).

Production buoyancy and other developing markets outside

riser buoyancy place MCE in good stead for the longer term.

The ramp up of Henderson during FY’12 still leaves plenty of

growth for FY’13 and stage 2 at Henderson is not factored in.

The flat FY’13 EPS growth reflected in consensus seems

unrealistic to us, particularly as the cost out story and top line

growth from the new Henderson factory also flow into FY’13.

There are several short term concerns in the market on MCE

and a lot of “hot money” has gone into the stock due to its

share price performance. An investment in MCE is about

forward earnings and the “quick buck” money is leaving. We

believe those investors prepared to look through short term

noise will be rewarded.

Investment view

Global peers are trading on 14.7x’s FY’12F EPS (MCE

11.8x’s). Our DCF of $10.90/share represents 17.9x’s FY’12

EPS. Whilst high, this is due to the 333% forecast NPAT

growth in FY’13 over FY’10.

MCE ticks the boxes in what we look for in small cap stocks:

competitive advantage, high barriers to entry, leverage to a

high growth sector and founding management with plenty of

skin in the game. We upgrade our recommendation to Strong

Buy (from Buy) due to share price weakness.

Austock Group Newsletter 7


Austock Group Limited

www.austock.com

info@austock.com

1800 806 362 (Toll Free)

Melbourne Office

Level 12, 15 William Street

Melbourne VIC 3000

Phone: 61 3 8601 2000

Fax: 61 3 9200 2270

Sydney Office

Level 9, 56 Pitt Street

Sydney NSW 2000

Phone: 61 2 9233 9600

Fax: 61 2 9251 9368

Disclaimer

Risk Rating

Austock Securities Limited has a four tier

Risk Rating System consisting of: Very High,

High, Medium and Low. The Risk Rating is

a subjective rating based on: Management

Track Record, Forecasting Risk, Industry

Risk and Financial Risk including cash flow

analysis.

Important Notice

This publication contains a summary only

of our research reports on the subject

companies. It has been prepared for your

convenience only and should not be used as

the basis of an investment decision. Please

contact your adviser to obtain a copy of the

full research report on each company.

Disclosure of Economic Interests

The views expressed in this publication

include the personal views of a number of

Austock research analysts. Some analysts

hold securities of the subject companies or

derivatives. Please refer to the full research

reports for disclosure of any economic

interests held by the author of the report.

Disclaimer/Disclosure

This publication has been prepared solely for

the information of the particular person to

whom it was supplied by Austock Securities

Limited (“Austock”) AFSL 244410. This

publication contains general financial product

advice. In preparing the advice, Austock

has not taken into account the investment

objectives, financial situation and particular

needs of any particular person. Before

making an investment decision on the basis

of this advice, you need to consider, with or

without the assistance of an adviser, whether

the advice in this publication is appropriate

in light of your particular investment needs,

objectives and financial situation. Austock

and its associates within the meaning of the

Corporations Act may hold securities in the

companies referred to in this publication.

Austock believes that the advice and

information herein is accurate and reliable,

but no warranties of accuracy, reliability

or completeness are given (except insofar

as liability under any statute cannot be

excluded). No responsibility for any errors or

omissions or any negligence is accepted by

Austock or any of its directors, employees

or agents. This publication must not to

be distributed to retail investors outside of

Australia.

Disclosure of Corporate Involvement

Austock Securities Limited has not in the

previous 12 months been involved in a

publicly-announced transaction involving

the payment of a fee to Austock Securities

Limited by the corporate issuer described

in this report. Austock Securities does

and seeks to do business with companies

covered in its research.

We value your comments

and suggestions, please

forward these to:

newsletter@austock.com

Austock Group Newsletter 8

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