australian equity strategy - macquarie · australian equity strategy singin’ in the rain what...

Please refer to page 15 for important disclosures and analyst certification, or on our website

www.macquarie.com/research/disclosures.

AUSTRALIA

A new valuation paradigm has emerged...

Equities are not expensive relative to the decline in bond yields....

The equity risk premium is not sending a sell signal...

Source for all above: IRESS, Macquarie Research, May 2016

19 May 2016 Macquarie Securities (Australia) Limited

Australian Equity Strategy Singin’ in the Rain What price for yield?

A new valuation paradigm. One where earnings and return on capital don’t

matter so much for PE multiples which keep rising on the back of a falling

discount rate. It’s an uncomfortable equilibrium, because we know it cannot

continue ad infinitum. However for now, lower rates mean higher multiples

and the potential for yield-sensitive sectors to all trade above “fair value” as

positioning trumps fundamentals.

Equities are expensive but not relative to bonds. At 16.4x forward

earnings, the ASX200 is at a 15 year high. However, the 10 yield bond yield is

at an all time low and we expect it to fall below 2.0% as the RBA takes the

cash rate down to 1.0%. This will squeeze an already expensive yield trade

even higher – what else is the alternative? The base case is that yield stocks

continue to outperform – include REIT’s. The risk case is that these stocks

“melt-up” on the back of even more aggressive policy easing that by passes

the domestic cyclicals.

PE multiples have been tightly correlation with bond yields post GFC.

The recent move higher is entirely consistent with the magnitude of the

decline in yields with the equity risk premium still in neutral territory. We

estimate that a sub-2% bond yield translates into a forward PE multiple of

~18x (~10% capital appreciation from the current level). Bottom up, our

analysts estimate the decline in long-term growth and interest rates is adding

between 3-5% to valuations. While not material, yield stocks have in general

become proxy plays on earnings certainty (i.e. REIT’s, Infrastructure and

Utilities) which against a muted domestic demand backdrop will continue to

justify a reasonable premium.

Our portfolio is already long yield (Banks, TCL, TLS) but we have not

fully captured the beta trade within REIT’s due to our concerns around

residential housing. We are raising our yield exposure even further by adding

SYD. We do not think it is the end of the trade even if pure valuations upside

is not transparent. From here we want to own quality yield stocks which have

strong distribution growth and minimal exposure to earnings/lower reset risk.

Our pecking order therefore becomes Infrastructure & Utilities (CEN, SYD,

TCL) over Property (GMG, LLC, WFD) over Telco’s (TLS) over Banks (ANZ,

CBA, WBC).

How will it all end? Via stronger growth and not a sell-off in bonds.

Domestically we remain focused on areas of structural growth (CAR, ECX,

OML) while still avoiding areas reliant on a cyclical upswing given a

continuation of very narrowly based growth. Globally we maintain our

underweight on miners and overweight on energy (CTX, OSH, STO).

We are downgrading our year-end price target on the ASX200 from 5900

to 5700. While lower yields are providing greater valuation support and allow

us to maintain our forward multiple expectation of 16.4x set in January, the

earnings backdrop has deteriorated much more than we expected. We have

revised down our FY16 growth estimate from 8% to 5% which accounts for

the decline in our capital return expectation.

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0xAverage PE during Bond Yield Period

(ASX300 PER)

Pre GFC

Current

1.0

2.0

3.0

4.0

5.0

6.0

7.0

10.0x 12.0x 14.0x 16.0x 18.0x 20.0x

Nominal Bond Yield vs PER (fwd) - ASX200

2001-2007

2012-2016

Current PE

Expected bond yield

trough

http://www.macquarie.com/research/disclosures

Ma

cq

ua

rie W

ea

lth M

an

ag

em

en

t A

ustra

lian E

quity

Stra

tegy

19

Ma

y 2

01

6

2

Fig 1 Macquarie Strategy – Recommended Australian Portfolio

Source: Factset, Macquarie Research, May 2016

Share price Portfolio ASX 200 ActiveSector Company Ticker 17 May 16 Weight (%) Weight (%) Weight (%)

Financials 41.7 45.9 -4.2

Banks 29.8 27.9 1.9

ANZ Banking Group ANZ 24.5 6.5 5.1 1.4

Commonwealth Bank of Australia CBA 78.7 12.7 9.5 3.2

Westpac Banking Corporation WBC 30.2 10.6 7.1 3.5

Diversified Financials 1.0 3.7 -2.7

Eclipx Group Limited ECX 3.4 1.0 0.0 1.0

Insurance 2.1 5.2 -3.1

Suncorp Group Limited SUN 12.9 2.1 1.2 0.9

Real Estate 8.8 9.1 -0.3

Goodman Group GMG 7.3 2.8 0.8 2.0

Lend Lease Group LLC 13.4 2.6 0.5 2.1

Westfield Corporation WFD 10.6 3.4 1.4 2.0

Cyclical Industrials 22.8 16.5 6.3

Consumer Discretionary 8.9 4.9 4.0

Aristocrat Leisure ALL 12.6 1.0 0.0 1.0

Carsales.com Limited CAR 12.6 1.7 0.2 1.5

Fairfax Media FXJ 0.9 1.7 0.2 1.5

Mantra Group Limited MTR 4.0 1.2 0.1 1.1

oOh Media! Limited OML 5.2 1.5 0.0 1.5

The Star Entertainment Group SGR 5.6 1.8 0.3 1.5

Industrials 13.9 11.6 2.3

Amcor Limited AMC 16.2 3.2 1.3 1.9

James Hardie Industries JHX 19.2 1.6 0.6 1.0

Orora Limited ORA 2.8 1.7 0.2 1.5

Qantas Airways Limited QAN 3.4 2.1 0.5 1.6

Sydney Airport SYD 7.3 2.1 1.1 1.0

Transurban Group TCL 12.4 3.2 1.8 1.4

Defensive Industrials 21.1 22.2 -1.1

Consumer Staples 4.5 7.1 -2.6

Wesfarmers WES 43.3 4.5 3.4 1.1

Health Care 6.4 7.1 -0.7

Cochlear Limited COH 119.3 1.9 0.5 1.4

CSL Limited CSL 113.0 4.5 3.7 0.8

Telcos, Infrastructure & Utilities 10.2 8.0 2.2

AGL Energy Limited AGL 18.7 2.9 0.9 2.0

Contact Energy Limited CEN 4.8 1.0 0.0 1.0

Telstra Corporation TLS 5.8 6.3 5.0 1.3

Resources 14.4 14.8 -0.4

Energy 6.3 4.0 2.3

Caltex CTX 34.2 2.2 0.7 1.5

Oil Search OSH 7.0 2.1 0.6 1.5

Santos Limited STO 4.4 2.0 0.5 1.5

Miners 8.1 10.8 -2.7

BHP Billition BHP 19.2 4.2 4.4 -0.2

Rio Tinto RIO 45.9 3.9 1.4 2.55.2

Total 100.0 100.0 0.0

Focus List and Sector Preferences

U/W N O/W

Financials

Banks

Diversified Financials

Insurance

Real Estate

Cyclical Industrials

Consumer Discretionary

Industrials

Defensive Industrials

Consumer Staples

Health Care

Telcos, Infrastructure, Utilities

Resources

Energy

Miners

Key Portfolio Changes

Stocks Added Stocks Removed

ANZ 6.5 IPL 1.4

SYD 2.1 NAB 7.2

Total 8.6 8.6

Performance ending Date

3

Months

(9%)

6

Months

(%)

Month

to Date

(%)

Quarter

to Date

(%)

Year to

Date (%)

Portfolio 12.1 10.8 4.0 7.0 5.7

ASX200 Accum 12.3 7.8 3.4 6.9 3.9

Relative -0.2 3.0 0.6 0.1 1.8

17-May

Macquarie Wealth Management Australian Equity Strategy

19 May 2016 3

Singin’ in the Rain – What price for yield?

Australia has entered the global deflation flight that it managed to hold off on for longer than most

other developed and/or commodity driven economies. Declining inflation expectations have driven

our economic team to make significant downgrades to interest rate and inflation forecasts (link). We

have lowered our cash rate expectation to 1%, our nominal 10-year bond yield forecast to

below 2% (shifting the entire term structure lower) as well as pulling back our long-term cash and

long bond yield expectations on the back of a more benign inflation trend.

Fig 2 The market PE is moving in line with the decline in bond yields...

Fig 3 ...pushing the forward PE to its highest level since the tech bubble

Source: Factset, Bloomberg, Macquarie Research, May 2016 Source: Factset, Bloomberg, Macquarie Research, May 2016

Ten-year bond yields recently hit their lowest level in history. Earnings multiples have now hit their

highest level in 15 years (16.4x forward earnings). The lower bond yields go the higher the PE goes

– for now. Admittedly, the extent of multiple expansion (0.8x PE points year to date) is difficult to

square with weak earnings fundamentals and a declining return on capital.

However, despite being in uncharted territory, the market does not appear particularly concerned

with why bond yields are declining. We estimate that a sub 2% bond yield equates to a market PE of

~17-18x. This is uncomfortable territory, but probably not a self-correcting level in the absence of

more severe growth deterioration and with other valuation metrics such as the equity risk premium

and internal rate of return not sending expensive sell signals.

Unfortunately valuations are only half the story. While lower yields are providing multiple support, we

have been surprised on the downside by the decline in 2016 earnings expectations (bottom up

estimates started the year at 7% versus the current -2%) and think 2017 are optimistic given the

extent of domestic demand weakness which is limiting pricing and potentially driving some

absorption of margin pressures relative to where we started the year. Consequently we are

downgrading our year-end target on the ASX200 from 5900 to 5700. We have not altered our PE

assumption (~16.3x) which is being supported by the fall in yields but we have brought down our

earnings expectations from 7% to 5% (1H from 3% to 0%).

Ultimately we believe the willingness to expand the PE multiple will hit a constraint as the decline in

long term inflation expectations drive a reassessment of long term earnings growth expectations (i.e.

the terminal growth rate for valuation models). Unless the profit share is rising, we don’t see how this

divergence will persist if interest rates continue to decline. We think the adjustment mechanism is

that earnings growth expectations shift lower and normalize somewhere ~4% which would be

marginally below where the combination of long term real growth and inflation expectations sit (the

market average sits below nominal growth will trend due to how some sectors (i.e. REIT’s and

Energy) discount by the inflation rate).

1.0

2.0

3.0

4.0

5.0

6.0

7.0

10.0x 12.0x 14.0x 16.0x 18.0x 20.0x

Nominal Bond Yield vs PER (fwd)

2001-2007

2012-2016

Current PE

Expected bond yield

trough

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0xAverage PE during Bond Yield Period

(ASX300 Forward PER)

Pre GFCCurrent


19 May 2016 4

Fig 4 shows our probability weighted target. We have a base case of a stable multiple on 5%

earnings growth (0% over 1H and 5% over 2H). Our bull case is based on the multiple rising in line

with a sub 2% bond yield but no change to longer-term nominal growth expectations. We think the

likelihood of this outcome is greater than the bear case through year end. As the table illustrates, the

market is far more sensitive to a change in the PE multiple than earnings which are already at

relatively low levels. Our bear case is that consensus earnings growth expectations halve from the

current level (12% for FY2017). This would see the market trade roughly 5% lower over the year and

back to the PE highs seen through 2013-14.

Fig 4 Probability weighted market target ... Fig 5 ... A stable multiple but weaker earnings growth


This drives a number of investment conclusions through year end:

1. Yield sensitive areas will continue to outperform despite what are already high

absolute and relative valuations. However, relative performance will increasingly reflect

two factors:

The distinction between those who can sustain dividend growth versus those where

payout ratios are closer to limits (i.e. Banks). The yield trade still requires an

defensive and growth element to it particularly given how far valuations have risen;

and

Relative value within the yield cohort. For instance, REITS are trading at a 50%

premium to Banks, and a 30% discount to the Infrastructure sector.

Our portfolio has been overweight yield (Banks, Telco’s, Infrastructure and Utilities) but we have

had the wrong sector allocation call on REITs which YTD have been the strongest performing yield

sector. We think further declines in the discount rate will benefit all yield proxies through year end but

our pecking relies heavily on dividend growth (defensiveness). Our preference is 1) Infrastructure

(SYD, TCL); 2) Property (GMG, LLC, WFD), 3) Telecoms (TLS) and finally 4) Banks (ANZ, CBA,

WBC).

Our overweight view on Banks is largely underpinned by relative valuation support and attractive

dividend yields. We take profits on and exit our holdings in NAB (1.9% active weight). We see limited

relative upside in NAB from current levels – NAB’s valuation upside vs. peers has diminished

following recent re-rating, and its earnings growth is likely to be impacted by a reduction in insurance

earnings and convergence in impairment charges. The stock was recently downgraded to Neutral

(link). We add ANZ (1.4% active weight) to our portfolio. ANZ’s ongoing cost management should

support earnings throughout a period of more challenged revenue growth as ANZ looks to reduce its

exposure in Asia. On an underlying basis, ANZ delivered respectable 1H16 earnings growth of ~5%

on HoH and its domestic franchise delivered a sector leading performance of ~7% HoH (this was

largely underpinned by tight cost control). ANZ offers a FY17 dividend yield of 6.7%.

12 Month

Fwd PE

12 Month Fwd

Earnings

Market Fair

Value Probability

Weighted

Fair Value

Bull 18.00 346 (6%) 6234 30% 1870

Base 16.40 343 (5%) 5626 50% 2813

Old 16.30 361 (8%) 5900

Bear 15.00 337 (3%) 5048 20% 1010

Probability Weight Fair Value ASX 200 6.2% 5693

Dividend Yield 4.5%

TSR 10.8%

4.0% 4.5% 5.0% 5.5% 6.0%

15.0 5097 5121 5146 5170 5195

15.5 5267 5292 5317 5342 5368

16.0 5436 5463 5489 5515 5541

16.5 5606 5633 5660 5687 5714

17.0 5776 5804 5832 5860 5887

17.5 5946 5975 6003 6032 6060

18.0 6116 6145 6175 6204 6234

18.5 6289 6316 6346 6377 6407

EPSg

P/E


19 May 2016 5

2. A rebound in the A$ is some way off. While the trough will not get deeper (we estimate

US$0.65 in mid 2017), the dollar is unlikely to turn from a tailwind into a headwind for stocks

benefiting from translation gains for some time to come. Our exposure to this theme remains

primarily in paper and packaging (AMC, ORA) but also via JHX. We are removing IPL (1.0%

active weight), given the stock faces near-term earnings headwinds from a combination of

subdued fertiliser prices and weak US coal demand.

3. There is more pressure coming on domestic cyclicals (particularly spending sensitive

areas such as Retail). Weak domestic demand driving a lack of pricing power and the pass

through of a lower exchange rate continue to be absorbed via margins. These pressures will

not alleviate in the near term are likely to get worse particularly as rate cuts are working

against both an overleveraged consumer and significant excess capacity. We stick with our

structural consumer growth angle preferring ALL, CAR, OML and SGR or those areas

where there is value but a more transparent catalyst FXJ. We avoid taking on the more

consumer cyclical retail and building and construction related areas;

4. Infrastructure and utilities, while expensive, are in a sweet spot. Private sector demand

will remain elusive despite a declining cost of capital. However, public sector spending will

continue to underpin this trade. We think the government ultimately being called upon to

provide more comprehensive fiscal support for monetary policy but this remains some way

off. We hold AGL and TCL and are adding SYD. While the stock remains fully valued trading

at an EV/EBITDA of ~21.7x, SYD is increasingly leveraged to international traffic growth

(which continues to be buoyed by once in a generational type double digit capacity growth)

and its forecast dividend yield in FY17 is 4.8%, ex franking.

5. Stronger growth and not a sell-off in bonds will end the yield trade. We cannot see the

signals that this is underway. Domestically this implies we remain focused on areas of

structural growth – online and outdoor media (CAR, OML); tourism (QAN, SGR);

outsourcing services (ECX) - while avoiding areas reliant on a cyclical upswing (Consumer

and Construction related). Globally we maintain our underweight on Miners and overweight

on Energy. While positioning is causing us some pain on our commodity related

underweight, we think fundamentals continue to support this call (earnings will matter over

positioning in the medium term).

Fig 6 Velocity of money keeps dropping… Fig 7 Velocity of money and CPI go hand in hand…

Source: RBA, Bloomberg, Macquarie Research, May 2016 Source: RBA, Capital Economics, Macquarie Research, May 2016

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jun-70 Jun-80 Jun-90 Jun-00 Jun-10

Australia: Velocity of money(Nominal GDP/M3)

Ratio

Broad Money

M3

0

1

2

3

4

5

6

7

8

0

5

10

15

20

25

30

Mar-85 Mar-90 Mar-95 Mar-00 Mar-05 Mar-10 Mar-15

M3 YoY %

CPI YoY %

M3 vs CPI


19 May 2016 6

Valuations – Accepting the unacceptable

Earnings multiples for the overall market have now hit their highest level in 15 years. Bond

yields have hit their lowest level in history. To date, the increase in the PE appears quite

consistent with the decline in the discount rate especially given more than 50% of the ASX200

market capitalization is yield sensitive (REITS and Utilities are trading at peak multiples – see Fig

12). The inconsistency (yet to be proven but which remains our suspicion) is that lower bond yields

are also inferring a lower long term earnings outlook which is yet to be factored into expectations for

the market (both via lower long term inflation expectations and real growth).

Fig 8 The equity risk premium is around average... Fig 9 ...with absolute earnings metrics expensive


At this stage, the decline in bond yields has given valuations for the yield sensitive sectors (in

particular REIT’s and utilities) some more breathing space with our analysts forecasting the net

impact of our recent changes to bond yield and inflation expectations will between 2-5% to overall

valuations. Optically, absolute PE levels are difficult to digest (Fig 10). However, we don’t think the

decline in yields is complete or the rise in the PE multiple inconsistent for the yield driven sectors

(banks in particular have seen a negative relationship post GFC with declining bond yields – Fig 11).

Fig 10 REITs PE go up when bond yields fall… Fig 11…Banks’ PE behave quite the opposite…


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10 Jan-13 Jan-16

ERP

Average of 3.0%

Average of 5.0%

5.4

3.1

4.6

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

Jul-91 Jul-94 Jul-97 Jul-00 Jul-03 Jul-06 Jul-09 Jul-12 Jul-15

ASX300 1 yr forward PER deivation from Average

Implied PE deviation from 1.9%

bond rate fcst

1.0

2.0

3.0

4.0

5.0

6.0

7.0

10.0x 12.0x 14.0x 16.0x 18.0x 20.0x

Nominal Bond Yield vs PER (fwd) - REIT's

2001-2007

2012-2016

Current PE

Expected bond yield

trough

1.0

2.0

3.0

4.0

5.0

6.0

7.0

10.0x 11.0x 12.0x 13.0x 14.0x 15.0x 16.0x

Nominal Bond Yield vs PER (fwd) - Banks

2001-2007

2012-2016

Current PE

Expected bond yield

trough


19 May 2016 7

Over the coming 12 months we expect the entire term structure to reset lower with ultimately a

steepening of the curve around mid 2017 as the RBA takes the short end down to 1.0%. On a

risk-reward basis, and given how far the economy is operating below potential (the IMF estimates the

output gap is equivalent to 1.5% of GDP), lower rates are potentially in place for even longer than

consensus currently expects – or put differently, we see little risk that we will be surprised by an

adverse move higher in yields that are driven by domestic factors alone.

We admit that the idea of further multiple expansion is difficult to envisage against a backdrop of

already elevated readings, anaemic earnings growth and a declining return on equity. However,

valuations have not yet reached self-correcting levels in the absence of a growth shock or sharp sell-

off in bonds. Similarly, other valuation based metrics such as the equity risk premium (ERP) are not

sending a strong signal that the market is expensive (Fig 8).

Fig 12 Utilities, Resources & REITs at peak multiples Fig 13 REITs trade at a 50% premium to Banks

Source: Macquarie Research, May 2016 Source: IBES, Bloomberg, Macquarie Research, May 2016

We think the PE can expand from the current level in line with our expectations for a further decline

in bond yields. A sub 2% bond yield translates into a PE of ~17.5x (currently 16.4x) which is

potentially begins to act as a ceiling without evidence that the profit share is rising and/or that return

on capital is also beginning to improve, which given margins are the largest driver is unlikely over the

coming 12 months.

0.0

0.2

0.9

1.6

4.4

4.6

-1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Industrials

Banks

ASX 300

REITs

Resources

Utilities

YTD change in P/E multiple

1.5

0.5

0.7

0.9

1.1

1.3

1.5

1.7

May-02 May-05 May-08 May-11 May-14

REITs PE relative to Banks


19 May 2016 8

Fig 14 How big a bubble do we need to generate positive returns when the PE is >16x?

Source: IBES, Macquarie Research, August 2015

As a sector level, there is now little “valuation” headroom based on current bottom up expectations.

The weighted TSR for the market is less than 5% from the current level and for the yield sensitive

sectors only Banks and Utilities have a positive return excluding the dividend yield, but even this is

now only low to mid single digit levels. Valuations do make us uncomfortable particularly given the

extent of dispersion within the market (in excess of 7 PE points between the 25th and 75th

percentiles) and that it is rare for the to generate positive returns once the ASX200 hits 16x earnings

having done so only four times in the past 25 years and for very brief periods (1994, 1999, 2009 and

2015). This wouldn’t matter if forward returns were positive when the multiple hit these levels. But

this has not been the case with four of the five episodes posting negative returns in the following 12

months (the tech bubble being the exception). We are reluctant to suggest that this time is different,

but the bond yield is telling us this is the case until the point when Australia also reaches its monetary

policy limits and/or a lack of earnings growth/low return on capital begins to overshadow the benefits

from a declining discount rate.

Low yields and low growth does not mean lower volatility. We think a convergence of growth

and interest rate expectations towards a lower bound will be accompanied by higher and not lower

asset price and earnings volatility. Central banks have been injecting higher volatility into financial

markets by the increasing unpredictability of policy direction. With uncertainty around the upcoming

election and a lack of transparency on how effective the monetary transmission mechanism is

working given elevated leverage and asset prices (housing), we think it is safe to assume that

conviction levels remain low with positioning as important as earnings in driving relative performance

while volatility remains high.

60

70

80

90

100

110

120

8

10

12

14

16

18

20

May-93 May-96 May-99 May-02 May-05 May-08 May-11 May-14

Australian market (ASX300) 1yr forward PERx

-

+11.4%

-14.5%

-41.0%

-1.7%

Market 1yr forward PER

Equity market return (RHS)


19 May 2016 9

Fig 15 Volatility remains elevated at current levels… Fig 16 Dispersion across Industrials remains wide


Fig 17 Top 20 screened for 2016 div yield > 4%, DPSg >5% for 2017-18 and steady p/out ratio

Company name Stock code

Div yield (%)

DPSg Payout ratio

2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E Estia Health EHE 4.7 5.3 5.8 106% 13% 9% 100 100 100 IPH IPH 3.3 4.2 4.9 74% 27% 16% 83 85 85 QBE Insurance QBE 4.8 5.3 5.8 42% 11% 9% 81 65 63 Magellan MFG 3.9 4.2 4.7 24% 5% 13% 80 80 80 Japara Healthcare JHC 4.5 4.9 5.5 16% 9% 12% 103 103 103 Amcor AMC 3.4 4.1 4.6 15% 19% 14% 71 71 71 Transurban Group TCL 3.7 4.0 4.4 14% 10% 10% 345 232 205 Henderson Group HGG 4.1 4.6 5.2 14% 11% 14% 63 62 62 Spark SKI 6.0 6.7 7.1 12% 12% 7% 560 421 388 TABCorp Holdings TAH 5.2 5.9 6.8 11% 14% 16% 104 99 99 BT Investment BTT 4.3 4.8 5.6 10% 11% 17% 80 84 85 AGL Energy AGL 3.7 4.5 5.1 9% 20% 14% 67 69 65 JB Hi-Fi JBH 4.1 4.5 4.7 9% 8% 6% 65 66 65 Sydney Airport SYD 3.6 4.5 5.0 8% 25% 11% 1914 249 226 National S REIT NSR 4.6 5.3 6.0 7% 14% 14% 100 100 100 GPT Group GPT 4.3 4.6 4.8 6% 7% 5% 86 85 85 Regis Healthcare REG 3.6 4.1 4.5 4% 12% 10% 100 100 100 Pact Group PGH 3.6 4.1 4.4 4% 13% 8% 65 65 65 Southern Cross SXL 5.1 6.1 6.6 3% 20% 8% 61 69 69 IRESS IRE 3.5 4.5 4.9 0% 29% 9% 97 96 97 GUD Holdings GUD 4.8 5.5 6.0 0% 14% 8% 73 77 79 SAI Global SAI 4.4 4.7 5.0 -5% 7% 6% 51 52 52 Wesfarmers WES 4.6 5.2 5.6 -11% 11% 8% 93 93 93 Spotless SPO 7.0 7.7 8.6 -15% 11% 11% 71 70 70 Incitec Pivot IPL 2.9 4.1 5.7 -15% 40% 39% 50 58 60 Cover-More Group CVO 4.5 5.5 6.5 -29% 23% 19% 78 78 81 Harvey Norman HVN 5.2 5.6 5.8 -29% 8% 5% 82 83 82 Woodside WPL 3.9 4.7 6.5 -56% 18% 40% 79 79 79 Myer MYR 2.3 4.7 5.2 -62% 107% 10% 29 63 65 Gateway Lifestyle GTY 3.9 4.9 5.3 26% 10% 63 75 75

Source: Bloomberg, Macquarie Research, May 2016

0%

1%

2%

3%

4%

5%

6%

7%

8%

Aug-06 Aug-08 Aug-10 Aug-12 Aug-14

Trailing Volatility (26wks) Trailing Volatility (12wks)

Trailing Market Volatility

-4

-2

0

2

4

6

8

Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12 Jan-16

12 Month Fwd PEs for Industrials (25th percentile & 75th percentile vs median)


19 May 2016 10

Earnings – Lower yields providing little upside to earnings kicker

We are downgrading our CY16 earnings growth expectations from ~7% down to ~5%. This

downgrade is driven by two factors. First, we are marking to market 1H expectations which have

fallen from 7% at the beginning of the year down to -2% at present) and second we are making slight

downgrades to our 2017 expectations where we think bottom up expectations remain on the

optimistic side via both revenue and margin assumptions.

We continue to see weak domestic revenue generation through 2017 (Fig 19). The consequence of

de-leveraging on the part of households, businesses and governments, continues to drive a more

conservative approach to spending and investment, and with this the end result is continued weak

demand and comparatively anaemic top line growth across most segments of the Australian market.

Over the last 20 years, consumers have generally responded positively to the commencement of any

interest rate cutting cycle (reflected in positive consumer sentiment data), which has led to an

upswing in mortgage demand and, in turn, a housing construction pick up. While this is usually the

“normal” response, we have doubts as to whether current interest rate cuts are likely to gain traction

in driving an upswing in household borrowing and spending. We think the growth rebound will remain

narrowly based – resource exports the primary driver – with the fiscal trajectory pointing towards

further consolidation rather than expansion.

Our base case is that the RBA will find it hard to drive aggregate demand by further cost of credit

declines particularly against a backdrop where money velocity is falling. It is questionable whether

the RBA can be successful when other central banks have not following the same policy direction. If

the RBA can arrest deflationary pressures and drive a reasonable growth trajectory through 2017/18

than it will be the exception rather than the norm. On the other hand, we don’t think it is unreasonable

for the burden of proof to be put on those who think the RBA will be successful rather than on those

who take the view that this is just the first step toward zero rates as in many other global economies

particularly given Australia is subject to one of the more pervasive global deflationary forces – excess

capacity within commodity markets – that does not appear to be easing.

Fig 18 2016 estimates beginning to stabilize but 2017 estimates turning lower...

Fig 19 A second year of negative revenue growth for Domestic Industrials...

Source: Factset, Macquarie Research, May, 2016 Source: Factset, Macquarie Research, May, 2016

While Fig 19 illustrates the pervasive nature of weak top line revenue growth over the coming 24

months, in aggregate, dollar weighted revenue growth appears reasonable at ~6% in 2017 and ~5%

in 2018 (Fig 20). However, the majority of this growth is being driven by just a handful of stocks.

AMC, BXB, CIM, FSF, LLC, QBE and WES contribute almost half of the top line growth in 2017. Ex

these outliers sees revenue growth fall to only 3.7% in both FY17 and FY18.

-15

-10

-5

0

5

10

15

20

25

Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16

Monthly

FY10

FY09

FY11

FY12 FY13

Industrials (Mkt ex Res, Banks & LPTs) EPSg

FY14

FY15

FY16EFY17E

-9.0

-3.0

5.4

-1.2

6.8

8.89.5

13.3

10.0

-1.9

13.7

12.5

3.8

6.8

1.4

6.57.5

1.5

5.5

3.52.7

6.5

-1.4 -1.0

2010 2011 2012 2013 2014 2015 2016 2017

Revenue Growth Domestic vs. International Industrials

International Industrials Top 25 International Industrials


19 May 2016 11

In addition, we continue to see a divergence between International and Domestic Industrials (four of

the seven outliers have significant global exposure - AMC, BXB, LLC, QBE). International Industrials

are forecast to grow revenue by 9.5% and 13.3% in FY16 and FY17, respectively, versus Domestic

Industrials forecasts, which have fallen to -1.4% and -1.0% in FY16 and FY17, respectively. For the

Domestic universe, top line weakness is fairly broad based and reflects the continued weakness in

both pricing power and volume growth.

Fig 20 Underlying revenue growth is weak...

Source: Factset, Macquarie Research, May 2016

Where rate cuts will count most is on reducing upward pressure on the A$ through relative interest

rate differentials. We now believe the A$ will remain at its lows for longer (a shallower trajectory)

given an unwind of the recent strength and our view that further A$ depreciation is required to secure

the economy’s transition. We estimate that A$ sensitive stocks account for ~21% of 2016 earnings

(including resources) with this forecast to rise to ~28% in 2017 (Fig 22) as the resource sector

earnings contribution begins to pick up. We think this will keep the translation tailwind going for the

International Industrials for a little longer particularly give the weak revenue growth backdrop for

domestic stocks.

Fig 21 Profit margins around “average” for past 7 yrs Fig 22 A$ sensitive stocks ~28% of 2017 earnings

Source: Factset, Macquarie Research, May, 2016 Source: Factset, Macquarie Research, May, 2016

Weak domestic demand is driving a lack of pricing power and we suspect that the pass through

of a lower exchange rate for importers is actually being absorbed via lower margins

(potentially a downside surprise coming in the upcoming FY16 result season). These pressures are

not likely to alleviate in the near term and given no clarity around improving incomes and or spending

capacity, are likely to get worse as rate cuts push up against both an overleveraged consumer and

significant domestic and global excess capacity.

Overall Average Median Overall Average Median

FY17 6.1% 8.0% 6.2% 3.7% 7.7% 6.1%

FY18 4.5% 6.1% 5.0% 3.7% 6.1% 5.0%

*Outliers are AMC, BXB, CIM, CSL, FSF, LLC, QBE, WES

Market x OutliersMarket

8

10

12

14

16

18

20

22

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017E

Industrials Profit Margins

Averag

Domestic industrials

29%

International Industrials

15%

Resources13%

Banks36%

LPTS7%

Composition of FY17 Earnings


19 May 2016 12

Fixing this requires a sustained boost to domestic demand and the restoration of pricing power. Cost

out (which has been an ongoing theme for as long as there has been a revenue problem), gives

leverage to a stronger top line but is not a dominant or sustainable driver of earnings growth as is

starkly illustrated by the fact that corporate earnings are still 18% below their 2007 peak despite

nearly a decade of cost reductions and we have seen no improvement in margins since 2010

and they are forecast to remain around their long term average of ~17% (Fig 21).

Fig 23 Stocks with the highest revenue growth (3yr CAGR) are unsurprisingly those with the highest PEs ...

Fig 24 ...although a few stocks stand out given higher revenue growth vs. their valuation (and vice versa)

Source: Macquarie Research, May 2016 Source: Macquarie Research, May 2016

Fig 25 Market & sector EPSg (%) & P/E multiples

Macquarie bottom up EPSg (%) Macquarie bottom up PERs(x)

Macquarie EPSg (%), June pro-rated FY15A FY16E FY17E FY18E FY15A FY16E FY17E

All Companies -2.3 -11.0 13.2 9.5 15.8 17.6 15.6

Market (ex res) 5.9 -2.4 7.4 6.9 16.2 16.5 15.3

Banks 2.0 -4.3 3.9 3.6 12.4 12.9 12.4

Property Trusts 6.1 5.6 5.0 6.8 19.9 18.8 17.9

Resources -30.7 -55.7 79.7 27.8 13.4 31.1 17.3

Industrials (All Cos ex Res, LPTs, Banks) 9.7 -1.9 11.1 9.8 19.0 19.3 17.4

S&P/ASX 100 -2.0 -11.6 12.0 8.8 15.6 17.5 15.6

Small Companies -6.9 -1.9 27.2 17.4 17.8 19.4 15.2

Small Industrials 1.4 3.3 8.2 8.9 17.1 16.7 15.5

Small Resources -35.9 -31.7 153.8 41.3 22.4 36.9 14.6

Source: IRESS, Macquarie Research, May 2016

CBAWBC

ANZNAB

TLSWES

WOW

CSL

SUN

AMP

IAG

AMC

BXB

QBE

RHC

CWN

AZJ

SGPGMG

AGL

LLC

ORI

RMD

SHLGPT

ASXCCL

MGR

DXS

SEK

REA

AIO

BEN

CPU

TTS

IPL

JHX

AST

BOQ

FLT

COH

HVN

BLD

CGF

PTM

QAN

DUE

TWE

TAH

ANN

IFL

HGG

MTS

QUBPRY

ABC

DLX

PPTIOF

ALQ

BTT

BKW

DOW

GNC

NVT

SVW

FXJ

CSRCMW

SWM

IRE

JBHGOZ

SUL

SRX

CQR

MIN

NHF

AAD

IVC

NUF

VRLSCP

MYRMND FXL

BRG

GWA

SAI

MMSAGIAPN SXL

AUB

LEP

KMD

MRM

CAB

VRT

PPC

CVW

CWP

GUD

0

5

10

15

20

25

30

-20 -15 -10 -5 0 5 10 15 20 25 30

3yr revenue CAGR (%)

1yr fwd PER (x)

Mkt ex Res, mkt cap > $500m

See next chart

CBA

WBC

ANZNAB

TLSWES

WOW

CSL

SUN

AMP

IAG

AMC CWN

AZJ

SGP

GMG

AGL

LLC

SHLGPT

ASX

MGR

DXSAIO

BEN

CPU

TTS

IPL

JHX

AST

BOQ

FLT

HVN

BLD

CGF

PTM

QAN

TAH

ANNIFL

HGG

MTS

QUBPRY

ABC

DLX

PPTIOF

ALQ

BKW

DOW

NVT

SVW

FXJ

CSR

SWM

JBH

GOZ

SUL

CQR

NUF

VRLSCP

MYR

SAI

AGIAPN

SXL

AUB

KMD

VRT

PPC

CWP

GUD

4

6

8

10

12

14

16

18

20

-4 -2 0 2 4 6 8 10 12 14

3yr revenue CAGR (%)

1yr fwd PER (x)

Market ex Resources, mkt cap > $500m

Quartile 1

Quartile 2

Quartile 3

Quartile 4


19 May 2016 13

Fig 26 Sector PE Relatives

Sector Current PE PE Rel

ASX300 3 Yr

Median 3 Yr

Std Dev 5 Yr

Median 5 Yr

Std Dev Score Max Min

S&P/ASX Small Ords - Utilities 10.91 0.71 1.02 0.13 1.10 0.28 1 1.74 0.71

S&P/ASX 300 - Diversified Financials (4020) 13.67 0.89 1.02 0.05 0.99 0.06 2 1.08 0.84

S&P/ASX 100 Ind 14.68 0.95 1.04 0.04 1.04 0.04 3 1.09 0.94

S&P/ASX 300 - Banks (4010) 11.82 0.77 0.93 0.07 0.93 0.06 4 1.01 0.74

S&P/ASX 300 Ind 14.72 0.95 1.04 0.04 1.04 0.03 5 1.08 0.94

S&P/ASX 100 - Financials ex REITs 12.26 0.79 0.93 0.06 0.93 0.05 6 1.00 0.77

S&P/ASX 300 - Financials ex REITs 12.29 0.80 0.93 0.06 0.93 0.05 7 1.00 0.77

S&P/ASX 300 - Chemicals (151010) 12.48 0.81 0.90 0.06 0.95 0.10 8 1.14 0.76

S&P/ASX 300 - Transportation (2030) 11.14 0.72 1.16 0.31 1.24 0.28 9 1.63 0.72

S&P/ASX 100 - Information Technology 15.94 1.03 1.20 0.12 1.24 0.13 10 1.46 0.99

S&P/ASX Small Ords - Financials ex REITs 13.70 0.89 1.06 0.12 1.01 0.11 11 1.29 0.87

S&P/ASX Small Ords - Telecommunication Services 15.56 1.01 1.15 0.10 1.09 0.12 12 1.57 0.90

S&P/ASX 300 - Food & Staples Retailing (3010) 16.90 1.09 1.20 0.08 1.23 0.09 13 1.40 1.03

S&P/ASX 300 - Telecommunication Services 16.21 1.05 1.12 0.06 1.12 0.07 14 1.28 0.95

S&P/ASX 300 - Telecommunication Services (5010) 16.21 1.05 1.12 0.06 1.12 0.07 14 1.28 0.95

S&P/ASX 100 - Telecommunication Services 16.22 1.05 1.12 0.06 1.12 0.07 16 1.29 0.95

S&P/ASX 100 15.52 1.00 1.01 0.00 1.01 0.01 17 1.02 1.00

S&P/ASX 300 - Industrials 14.27 0.92 1.04 0.11 1.06 0.10 18 1.27 0.91

S&P/ASX 300 - Consumer Services (2530) 18.09 1.17 1.23 0.06 1.24 0.10 19 1.40 0.73

S&P/ASX 100 - Industrials 14.45 0.94 1.10 0.17 1.13 0.14 20 1.44 0.94

S&P/ASX 300 - Consumer Staples 17.49 1.13 1.20 0.07 1.23 0.08 21 1.45 1.06

S&P/ASX Small Ords - Consumer Discretionary 14.63 0.95 1.03 0.08 1.03 0.07 22 1.15 0.89

S&P/ASX 300 Ind ex Fin 17.56 1.14 1.16 0.03 1.16 0.03 23 1.24 1.11

S&P/ASX 100 - Consumer Staples 17.75 1.15 1.20 0.07 1.24 0.08 24 1.46 1.06

S&P/ASX 100 Ind ex Fin 17.99 1.17 1.19 0.04 1.20 0.04 25 1.28 1.14

S&P/ASX 300 - Software & Services (4510) 18.28 1.18 1.22 0.06 1.26 0.07 26 1.42 1.10

S&P/ASX 300 - Consumer Discretionary 16.68 1.08 1.11 0.06 1.08 0.07 27 1.22 0.87

S&P/ASX 300 - Information Technology 18.28 1.18 1.21 0.06 1.25 0.08 28 1.42 1.08

S&P/ASX Small Ords - Consumer Staples 15.58 1.01 1.03 0.06 1.02 0.09 29 1.36 0.76

S&P/ASX Small Ords - Health Care 19.16 1.24 1.27 0.11 1.31 0.23 30 2.24 0.96

S&P/ASX 300 - Media (2540) 14.11 0.91 0.94 0.14 0.93 0.12 31 1.25 0.81

S&P/ASX Small Ind 15.15 0.98 0.98 0.03 0.99 0.04 32 1.06 0.89

S&P/ASX 300 - Insurance (4030) 14.47 0.94 0.94 0.04 0.94 0.04 33 1.06 0.86

S&P/ASX 300 - Construction Materials (151020) 18.09 1.17 1.17 0.12 1.27 0.12 34 1.49 1.07

S&P/ASX 100 - Consumer Discretionary 18.78 1.22 1.21 0.05 1.17 0.11 35 1.31 0.82

S&P/ASX 300 - Retailing (2550) 15.53 1.01 1.00 0.06 0.97 0.06 36 1.11 0.84

S&P/ASX Small Ind ex Fin 15.45 1.00 0.99 0.04 0.99 0.06 37 1.10 0.88

S&P/ASX 300 - Food Beverage & Tobacco (3020) 19.45 1.26 1.24 0.08 1.28 0.11 38 1.62 1.08

S&P/ASX Small Ords - Energy 13.49 0.87 0.80 0.17 0.88 0.22 39 1.41 0.48

S&P/ASX 300 - Health Care Equipment & Services (3510) 21.20 1.37 1.34 0.06 1.37 0.07 40 1.48 1.23

S&P/ASX 300 - Consumer Durables & Apparel (2520) 17.53 1.14 1.01 0.19 0.96 0.18 41 1.39 0.57

S&P/ASX 300 - Commercial & Professional Services (2020) 18.01 1.17 1.13 0.05 1.13 0.07 42 1.25 0.98

S&P/ASX Small Ords - Information Technology 21.24 1.38 1.25 0.12 1.24 0.12 43 1.51 1.02

S&P/ASX 300 - Utilities 22.34 1.45 1.28 0.16 1.31 0.14 44 1.55 1.07

S&P/ASX 300 - Utilities (5510) 22.34 1.45 1.28 0.16 1.31 0.14 44 1.55 1.07

S&P/ASX 100 - Utilities 22.50 1.46 1.28 0.16 1.28 0.14 46 1.56 1.08

S&P/ASX Small Ords - REITs 14.96 0.97 0.93 0.03 0.93 0.09 47 1.04 0.58

S&P/ASX Small Ords - Industrials 13.53 0.88 0.80 0.06 0.83 0.10 48 1.08 0.69

S&P/ASX 300 - Real Estate (4040) 16.71 1.08 1.03 0.04 1.05 0.05 49 1.16 0.95

S&P/ASX 300 - Containers & Packaging (151030) 19.59 1.27 1.15 0.08 1.10 0.08 50 1.31 0.96

S&P/ASX Small Ords 14.72 0.95 0.91 0.03 0.90 0.05 51 1.02 0.77

S&P/ASX 300 - REITs 17.42 1.13 1.05 0.05 1.08 0.05 52 1.20 0.96

S&P/ASX 300 - Pharmaceuticals, Biotechnology & Life Sciences (3520) 24.69 1.60 1.48 0.07 1.53 0.09 53 1.74 1.36

S&P/ASX 100 - REITs 17.81 1.15 1.07 0.05 1.09 0.06 54 1.21 0.97

S&P/ASX 300 - Health Care 23.01 1.49 1.41 0.05 1.46 0.06 55 1.58 1.31

S&P/ASX 300 - Automobiles & Components (2510) 23.78 1.54 1.32 0.13 1.19 0.20 56 1.66 0.82

S&P/ASX 100 - Health Care 23.40 1.52 1.42 0.05 1.45 0.06 57 1.59 1.32

S&P/ASX 300 - Energy 20.60 1.33 1.11 0.11 1.16 0.19 58 1.69 0.90

S&P/ASX 300 - Energy (1010) 20.60 1.33 1.11 0.11 1.16 0.19 58 1.69 0.90

S&P/ASX 100 - Energy 21.32 1.38 1.14 0.11 1.19 0.20 60 1.76 0.92

S&P/ASX Small Ords - Materials 13.22 0.86 0.65 0.08 0.65 0.11 61 0.97 0.44

S&P/ASX 100 - Materials 22.23 1.44 0.86 0.22 0.87 0.19 62 1.59 0.75

S&P/ASX Small Res 12.80 0.83 0.60 0.09 0.62 0.13 63 1.03 0.45

S&P/ASX 300 - Materials 20.61 1.34 0.84 0.19 0.84 0.16 64 1.45 0.73

S&P/ASX 300 - Materials (1510) 20.61 1.34 0.84 0.19 0.84 0.16 64 1.45 0.73

S&P/ASX 100 Res 24.33 1.58 0.89 0.25 0.91 0.21 66 1.75 0.81

S&P/ASX 300 Res 22.20 1.44 0.88 0.21 0.88 0.17 67 1.57 0.78

S&P/ASX 300 - Metals & Mining (151040) 22.95 1.49 0.80 0.25 0.81 0.21 68 1.69 0.68

S&P/ASX 300 - Capital Goods (2010) 14.85 0.96 0.68 0.10 0.69 0.11 69 0.96 0.56

Source: IBES, Macquarie Research, May 2016


19 May 2016 14

Companies mentioned in this report:

ANZ Bank (ANZ AU, A$24.70, Outperform, TP: A$28.00, Victor German)

Commonwealth Bank (CBA AU, A$77.62, Neutral, TP: A$77.50, Victor German)

Westpac Banking Corporation (WBC AU, A$29.99, Neutral, TP: A$31.00, Victor German)

Eclipx Group (ECX AU, A$3.38, Outperform, TP: A$3.50, Andrew Wackett)

Suncorp (SUN AU, A$12.85, Outperform, TP: A$12.53, Tim Lawson)

Goodman Group (GMG AU, A$7.17, Outperform, TP: A$7.10, Paul Checchin)

LendLease Group (LLC AU, A$13.24, Outperform, TP: A$15.95, Rob Freeman)

Westfield Corporation (WFD AU, A$10.57, Outperform, TP: A$11.42, Rob Freeman)

Aristocrat Leisure (ALL AU, A$12.39, Outperform, TP: A$12.70, Sam Dobson)

Carsales.com (CAR AU, A$12.35, Outperform, TP: A$12.05, Andrew Levy)

Fairfax Media (FXJ AU, A$0.94, Outperform, TP: A$1.05, Andrew Levy)

Mantra Group (MTR AU, A$4.01, Restricted, Jennifer Kruk)

oOh!media (OML AU, A$5.15, Outperform, TP: A$4.55, Andrew Levy)

The Star Entertainment Group (SGR AU, A$5.51, Outperform, TP: A$6.00, Sam Dobson)

Amcor (AMC AU, A$16.02, Outperform, TP: A$17.50, John Purtell)

James Hardie Industries (JHX AU, A$18.95, Outperform, TP: A$21.30, Peter Steyn)

Orora (ORA AU, A$2.67, Outperform, TP: A$2.95, John Purtell)

Qantas Airways (QAN AU, A$3.31, Outperform, TP: A$4.80, Sam Dobson)

Sydney Airport (SYD AU, A$7.24, Neutral, TP: A$7.20, Ian Myles)

Transurban Group (TCL AU, A$12.32, Outperform, TP: A$12.66, Ian Myles)

Wesfarmers (WES AU, A$42.85, Outperform, TP: A$43.35, Elijah Mayr)

Cochlear (COH AU, A$118.09, Outperform, TP: A$120.00, Craig Collie)

CSL (CSL AU, A$113.91, Outperform, TP: A$115.00, Craig Collie)

AGL Energy (AGL AU, A$18.51, Restricted, Ian Myles)

Contact Energy (CEN NZ, NZ$5.37, Outperform, TP: NZ$5.39, Stephen Hudson)

Telstra Corporation (TLS AU, A$5.72, Neutral, TP: A$5.75, Andrew Levy)

Caltex Australia (CTX AU, A$34.21, Outperform, TP: A$35.00, Kirit Hira)

Oil Search (OSH AU, A$7.03, Outperform, TP: A$8.00, Kirit Hira)

Santos (STO AU, A$4.37, Outperform, TP: A$6.00, Kirit Hira)

BHP Billiton (BHP AU, A$19.43, Underperform, TP: A$15.40, Hayden Bairstow)

Rio Tinto (RIO AU, A$45.82, Outperform, TP: A$52.00, Hayden Bairstow)

Incitec Pivot (IPL AU, A$3.43, Outperform, TP: A$3.85, John Purtell)

National Australia Bank (NAB AU, A$27.52, Neutral, TP: A$31.00, Victor German)


19 May 2016 15

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada

Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be

expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 31 March 2016

AU/NZ Asia RSA USA CA EUR Outperform 50.34% 59.09% 46.67% 44.76% 60.66% 46.12% (for global coverage by Macquarie, 3.72% of stocks followed are investment banking clients)

Neutral 34.14% 25.66% 32.00% 49.90% 30.33% 35.10% (for global coverage by Macquarie, 4.79% of stocks followed are investment banking clients)

Underperform 15.52% 15.26% 21.33% 5.33% 9.02% 18.78% (for global coverage by Macquarie, 2.31% of stocks followed are investment banking clients)

Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.

Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN 58 002 832 126, AFSL 238947, a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN 41 002 574 923 AFSL 237504 ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth’s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) (“MBL”) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Apart from Macquarie Bank Limited ABN 46 008 583 542 (MBL), any MGL subsidiary noted in this research, , is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group‘s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures © Macquarie Group

australian equity strategy - macquarie · australian equity strategy singin’ in the rain what...

Documents