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Is the game getting over for these heavily priced stocks?

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Recently, market experts have raised an alarm for few ASX-listed growth stocks to the likes of CSL, which saw a record high lately, and now look overpriced relative to their earnings outlook. The premise of the risks is based on any future earnings disappointments that may impact stock prices. Key growth stocks that have been highlighted to dominate the growth sector, and have accounted for a significant per cent of the S&P/ASX200 Index are being the cases for discussion here.

CSL Limited (ASX: CSL) is a health care stock and is currently trading at a market price of $186.23 (as at June 01, 2018) with a market cap of $84 billion. The annual dividend yield of 1.03% is not franked while the P/E ratio of the stock is quite high and is about 42x and the EPS is 4.452 AUD. For the half year 2018,  revenue was up by 11% to $4,147 million. Earnings before income tax of $1,476 million were up 31% at constant currency with NPAT at $1,086 million with a rise of 31%. Interim dividend increased to $0.79 per share, up 23%. The group benefitted from the 13% rise in Immunoglobin sales, and now it seems that many of the positives have already been factored in the high price.

Cochlear Limited (ASX: COH) is another health care sector stock which is currently trading at a market price of $203.35 and has a market capitalization of $11.29 billion. The annual dividend yield is 1.43% which is fully franked. The P/E of the stock is about 50 and EPS is 3.882 AUD. The performance change of positive 8% is seen over the past 6 months with respect to the stock price. In FY17, Cochlear invested over A$150 million in Research and Development and Medical Affair. As identified in many recent studies, over 50% of people with severe-to-profound hearing loss (70-90 db) get poor results with hearing aid and this sets a good ground of requirement for COH.

Treasury Wine Estates Limited (ASX: TWE) is a consumer staple stock which  is currently trading at a market price of $16.67 and has a market capitalization of $11.9 billion. The annual dividend yield of 1.7% is franked at 75%. The P/E of the stock is 38 and the EPS is 0.436 AUD. In FY17, TWE delivered EBITS of $455.1 million representing growth of 36.2% and the company completed the integration of Diageo Wine business and commenced resetting the acquired brands for growth. The group is paying shareholders dividends within its payout range of between 55-70% of Net profit after tax over the fiscal year.

Aristocrat Leisure Limited

(ASX: ALL) is a consumer discretionary stock which is trading at a current market price of $29.95, and has a market capitalization of $19.16 billion. The annual dividend yield for the stock is 1.3% while P/E of 38.070 and EPS of 0.788 AUD are noted. The stock has moved up by 35% in the past six months. Its H1 FY18 normalized profit after tax and before amortization of acquired intangibles of $361.5 million for the period represented a 32% increase compared to $273 million in the prior corresponding period and revenue increased by more than 33% driven by growth in Americas, in broadly flat markets. Normalized fully diluted earnings per share before amortization of acquired intangibles of 56.6c represents a 33% increase.

ResMed Inc

(ASX: RMD) is trading at a current market price of $13.57 and is a large cap health care stock with a market cap of $19.3 billion. The annual dividend yield for the stock is 0.94% with P/E of 35.870 and EPS of 0.377 AUD. The group’s 3Q FY18 revenue increased by 15% to $591.6 million, up 10% on a constant currency basis with GAAP diluted earnings per share of $0.76 and non-GAAP diluted earnings per share of $0.92. The stock has been doing well in terms of its return on equity and capital invested.

Looking at the above, the price to earnings levels for the stocks discussed are quite up from head to foot while they have already inched towards their respective 52-week high levels. When correlated with bond yields, any rise in yields will bring on challenges to the price to earnings levels while global exposure otherwise has helped these stocks in the earlier periods. However, these have started looking quite expensive and investors are eying for more resources stocks in the wake of current landscape and commodity prices. While it might be prudent to keep an eye on these stocks for any potential dip given the array of developments expected from some of these, at the moment investors might want to look at relatively cheap options.

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Basic Normalised EPS (Source: Thomson Reuters)


Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.

Small-cap stocks – Beware of stagnant yields and investor sentiments

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Small-caps are generally riskier than your average ‘blue-chips’ like Westpac, Telstra or BHP Billiton, but many of them have got the power to explode your wealth in just months, sometimes weeks! Small cap stocks have a market capitalization ranging from $300 million to $2 Billion.

These are all those companies that sit outside of the largest 100 on the ASX by market cap. Companies in this index generally are riskier than their other counterparts who have a market cap higher to a few billion dollars or over.

Let’s consider an example of an IT small-cap here – ReadCloud Limited (ASX: RCL) is an information technology small cap stock with a current market price of $0.355 (as at May 31, 2018) and has seen a change of 20.37% over the past 4 months. It is a complete digital solution for eLearning and management of digital content. RCL is said to have a strong sales pipeline in the history and has expanded its sales team since the IPO to further accelerate the momentum. User number growth has increased more than doubling in 9 months from 21,800 in FY17 to 50,200 in Q3 FY18. However, the stock has no dividend yields to boast about currently.

Another small-cap stock is NetComm Wireless Limited (ASX: NTC), and this stock has a current market price of $1.17 and a performance change of 1.3% over the past 6 months but fell about 16.2% in last three months despite the rise in group’s revenue, EBITDA and NPAT (compared to previous year loss). Strong balance sheet, with good net cash and no debt have been key attributes. On the other hand, we have seen Xero Limited (ASX: XRO) that has transitioned from a small-cap category to a mid-cap category with about 800% rise in stock price since listing.

First factor to keep in mind – Stock movement is many a times driven by investor sentiments

These small-cap stocks are full of huge potential. Some of these stocks can see price rises in excess of 100%, 200%, 500%, and sometimes even more than 1,000% driven only by investor sentiments. While on the flip side one negative news or a tweet from President Trump or any geopolitical movement, can also make these stocks tumble. On the other hand, just a small investment in small-cap stocks could pay off massively. That’s the risk/reward payoff here. Investor sentiment is the biggest swing factor for small caps, thus, an array of comments can pull the stock price in different directions. However, investors should always keep a check and conduct a thorough search while not simply relying on some hyped speculation.

Second factor to keep in mind – Stagnancy needs to be watched out

In general, one may avoid stocks with stagnant yields or earnings, especially if other shareholders are on the register for the yield, and if growth is the key objective. However, ‘Don’t be greedy’ is the most important rule in small caps – don’t let your positions outsize the defined framework. Traditionally, small-cap stocks are associated with growth, not value. Hence, it is important to look for investments that can fit into the portfolio requirements. Investors can thus look for developing a balanced portfolio with exposure to small-cap stocks that can build attractive returns while stocks with stable yields might still be retained when investors try to manage volatile conditions.


Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.

The story of Big UN Limited

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While investors look through the fate of the troubled Technology company, Big UN, Nick Jordan, the chairman has been asked to be the executive chairman effective this week while the company has been on the hunt of a new chief executive for quite some time. The group is undertaking negotiations in relation to identifying a prospective buyer for the Big Review business. Amidst all the developments and downfall, the group that was once valued at $700 million towards the end of 2017, was seen to crumble to about half of the market capitalisation; and investors by now, know that their hard-earned money has been wiped off. From what was seen as an investment of just over $40,000, punters could make returns over $1 million with support from growth of the initially labelled penny stock.

It is only a few days earlier that Big Un’s CEO Mr. Richard Evertz resigned from the company after its main business unit, Big Review TV was placed into voluntary suspension. The Board has accepted his resignation. Recently, Big Un informed the market that the directors of Big Review TV Ltd (BRTV), a wholly owned subsidiary of BIG UN, have placed BRTV into voluntary administration. The purpose of BRTV entering into voluntary administration is to allow for the restructure of its business through a Deed of Company Arrangement and protect the value for investors of BIG Un Limited. BRTV has primarily received notice that FC Capital has assigned all its interests in the Sponsorship Agreement dated August 2017 with BRTV to AS Capital Ventures Pty Ltd. Further, FC Capital has advised the Board of BIG that it has agreed to assist AS Capital in its efforts to work with the Board of BIG to help the group restructure and preserve value for shareholders of BIG. The board of BIG thus started conducting ongoing negotiations with AS Capital to effect, an agreement that is intended to release each other from all claims and under which the debt owing to AS Capital by BRTV (pursuant to the Sponsorship Agreement) will be discharged. Big Un Limited will operate the BHA Media Pty Ltd and Food and Beverage Media Pty Ltd businesses, which will continue to be run by existing management, from existing premises.

Meanwhile, the company provided an update on corporate spotlight offering with Big review TV Limited wherein HotCopper had entered into a partnership agreement with Big Review TV Limited, for the joint marketing and sale of video licensing package to each party’s respective clients. This agreement was said to be non-binding and did not contain any restrictiveness conditions or otherwise tie HotCopper to BIG or BRTV other than income share arrangements for services jointly sold. Since HotCopper does not have any reason to believe that the details set out in the BIG announcement dated 22nd May 2018 concerning the voluntary administration of BRTV has any material impact on HotCopper, it continues to offer video services to its clients and these services are delivered by service providers other than BRTV or BIG. HotCopper does not expect any revenue or profit impact related to announcements by BIG.

Big Un Limited’s shares that are under suspension, traded last on February 16, 2018 at the price of $2.22, implying a market capitalization of 388.85 Mn. The shares were suspended from official quotation after the ASX enquired about its unusual financial arrangement with FC Capital that advanced funds to Big Review TV before customers had agreed to use its service.


Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.

Why investors look for stocks that have wide geographical reach?

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Diversification in terms of investing means spreading your risks across different assets or asset classes or across geographies while values can be achieved from different zones. If you are an equity investor, one strategy to invest is to look beyond equities that target business in just one country. There are stocks that are either listed in other countries too or have business points in multiple countries which merit some attention. But before adding assets in another currency to your portfolio, think through the pros and cons.

Benefits of investing in international assets, and adding international assets can be done in the form of stocks or you could buy bonds of overseas companies, currencies or even property. While liquidity surplus globally has insured some linkages between financial markets in different economies, the return trend in assets from different countries is still varied. Historical data shows that while Indian equities tend to outperform in an uptrend; when there is bearish sentiment, they almost always fall much more than Europe- and US-based equity indices. By having exposure to the latter, you can smoothen out some volatility in returns. Then there have been years like 2013 when global indices like the MSCI Europe and the S&P 500 were up roughly 25-30% and BSE Sensex fell around 2%.

Another proposition is to look at having exposure to stocks that have fangs in multiple geographies in terms of businesses for benefitting from varied environments in the respective geographies. This on the fall-side, can have some risks as well. Further, the risks at domestic level get mitigated when you look for stocks with a global exposure. In such a scenario, markets like Europe and Asia look a bit cheaper while US provides decent earnings growth. However, individual markets may have their own risks. Thus, investors try to grab stocks that have a balanced domestic and global exposure to benefit from respective cycles and broad-based experience.

Blue-chip with diverse reach: RHC

One health care stock of the above category is Ramsay Health Care Ltd (ASX: RHC), which was seen trading at $61.310 as at opening session on May 29, 2018, and has a market cap of $12.39 billion. Ramsay operates about 235 hospitals, treatment facilities, rehabilitation and psychiatric units and nursing college across six countries. The group is Australia’s largest private hospital operator and has its reach in the United Kingdom, France, Indonesia, and Malaysia. Ramsay is expected to benefit through support from governments towards private health insurance and geographical spread that can help achieve economies of scale. Lately, the company inked an agreement on setting a joint venture with Ascension, which is the largest private, tax-exempt, non-governmental health organisation in the United States to develop a new global supply chain. Meanwhile, its 1H 2018 result entailed a 7.5% rise in Core net profit after tax to $288.0 million while revenue grew 3.0% to $4.4 billion and group EBIT was up 1.5% to $470.4 million in 1H 2018.

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Long-term Strategy (Source: Company Reports)

Thus, we see that Ramsay’s Australian and Asian businesses have achieved good revenue and earnings growth while European businesses have been a challenge. Ramsay’s Malaysian and Indonesian facilities now continue to perform well even in challenging circumstances thanks to a focus on cost control. Thus, the group aims to manage its profile through multiple levers with a disciplined approach towards their business. Further, expansion across geographies is expected to add to the growth trajectory going forward.

 A speculative domestic play trying to expand its reach: PFP

Propel Funeral Partners Ltd (ASX: PFP) which is at a market price of $3.01, as at May 29, 2018 and market capitalization of $294.49 million, demonstrated its 1HFY18 revenue growth of 84% to $38.9 million against 1H FY17 figure of $21.2 million. Funeral volumes are up 85% to 5,053 from 2,729 in 1H FY17. Operating EBITDA and NPAT are up 79% and 90% to $11.0 million and $6.3 million, from $6.1 million and $3.3 million. Also, its operating cash flow increased by 73% to $11.0 million from $6.4 million in 1H FY17.

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PFP’s growth trajectory (Source: Company Reports)

The group has lately focused on entering WA via some fruitful acquisitions, expansion in NSW/VIC (Brindley Group), launching a takeover offer for Norwood Park, and delivering on the investment strategy. Given that death volume in Australia grew by 0.9% per annum between 1990 and 2016, and is expected to increase by 1.4% pa from 2016 to 2025 and 2.2% from 2025 to 2050, PFP has some opportunities lined up at domestic front. PFP completed its successful initial public offering in November 2017, raising $131.2 million. Its 1H FY18 operating full year EBITDA of $21.1 million, was up 15% on the prospectus forecast. The company intends to pay dividend payout ratio in the range of 75% to 85% of pro-forma distributable earnings after completion of the year. The group is now using its acquisition strategy to help expand its footprint in other geographical areas.

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PFP’s geographical presence (Source: Company Reports)

Overall, the firms that go beyond the extent of being recognized as local to a geographically dispersed level might add value, though subject to efforts at group level and macro factors.


Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.

How stock pickers see the needle moving for Netflix?

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Blue-chip American entertainment company, Netflix Inc. (NYSE: NFLX) is close to touching its 52-week high price level and has witnessed a walloping rally of 115.45% in last one year (as at May 25, 2018). The group’s return on equity is on a higher side (about 20%) with a decent profit margin. While some bearish sentiments have started weighing the stock on the downside, the group still has some momentum that can help touch levels above $400. The stock was priced at $351.29 as at closing hours of May 25, 2018 and has a P/E multiple of about 210, however there is no dividend yield for the stock currently. The rise of about 70% since January has helped it attain a market capitalization of nearly $152.7bn while return on equity has improved to 20.4% in 2017 from 7.6% in 2016 and is well above the industry median of 5.4%.

Let us understand where this recent fizz is coming from –

The Internet television network provider, which operates mainly through Domestic streaming, International streaming and Domestic DVD, allows consumers to watch original series, documentaries, feature films, as well as television shows and movies directly on their Internet-connected screen, televisions, computers and mobile devices. In order to expand further, the group has grabbed a multimillion-dollar deal with Barack and Michelle Obama to use their newly created TV production house, Higher Ground Productions, to create shows. Thus, with this news, the recent lift in stock prices revealed the confidence bestowed by investors on the stock and the future of the world’s largest paid online video service. In fact, the group was said to have exceeded the value of Disney. Netflix is also setting itself to co-finance and distribute Michael Bay’s next film, “Six Underground”, featuring Ryan Reynolds and this brings Netflix snapping up the deal against Michael Bay’s long standing relationship with Paramount Studios. In a way, Netflix is able to get hold of good talent pool and enhance its reputation with more value content being provided.

However, the group’s cash flow burn rate has been on the rise as the company is catching up on its international expansion while many questions have been raised on gross profit margins and operating margins. Netflix 2017 operating margin of 7.2% is above industry median but the same level also prevailed in 2014. Further, the gross profitability margin of 34.5% has been below 48.5% of industry median. On the other hand, the trailing 5-year EPS growth is above 100% well above its peers.

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Five year EPS Growth (Source: Thomson Reuters)

Coming back to the recent deal with the Obamas, Netflix is thus aiming to adopting well with the vision of the former president who said, “We hope to cultivate and curate the talented, inspiring, creative voices who are able to promote greater empathy and understanding between peoples, and help them share their stories with the entire world”. Under the new move, scripted and unscripted series, documentaries and feature films will be covered.

However, these shades of positivity are also accompanied by sneering relation between Netflix and Disney with Disney licensing some content to Netflix and the agreement between the two setting to expire as Disney pushes deeper into subscription-streaming territory. Then there are concerns over the high level of content production that many other players including Apple, Google and Amazon, are eyeing given the competitive space that entails creative talent. This has started pinching in terms of costs.

Nonetheless, it is worth noting that Netflix subscribers totaled 125 million as of March 31 and the stock is set to come up with its earnings report with market expectations of the significant upwards movement. As of now, the stock looks touch expensive at the current price while we have a watch on the same.


Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.

Where are the Lithium prices tracking to?

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With the electric vehicles market zooming high, the demand in lithium sector trended up at a soaring level in the last two years but soon the headwinds on supply outweighing the demand scenario capped this advancement, as seen since the beginning of year 2018. While the ups and downs in the lithium sector are not done with yet, let us grab a look at how the sector dynamics appear at the moment given the widening of gap between bulls and bears.

  • Mining sector has seen a growth spurt in the recent years and lithium was one good play
  • Lithium share prices that advanced last year have stalled now and retreating
  • Heavy sell-off and supply overweighing demand has ruined the rally

The fluctuating lithium prices: Lithium Prices were seen to be falling to 131.24 points as at May 23, 2018 from 131.76 points at the previous trading day. The prices that were at an all-time high of 156.80 in January of 2018 had zoomed up from a record low of 62.79 in February of 2016, and are below the high levels now. However, Lithium prices have remained decent on a year-on-year basis as the demand was greater than supply. Now what is seen that there was a small fall of 12% in lithium carbonate prices in China in the first four months of 2018, but the lithium hydroxide prices have risen slightly by 1%. Overall, the lithium hydroxide and lithium carbonate prices still managed to rise on a year on year basis.

Demand Drivers: The key market drivers for lithium are electric vehicles and energy storage. The demand arose due to the emergence of electrification in the generation, storage and usage of energy. There has been a significant growth in global Electric Vehicles (EV) volumes, particularly in China, which is the most significant market driver for lithium-ion batteries. The Global EV penetration is projected to reach c.15%+ by 2025, due to the consumer demand and supportive policy. There is further demand upside due to the electrification of large commercial and industrial vehicles (buses, trucks, etc.). Moreover, Battery storage or Energy Storage has become a key resource in managing the grid stability and promoting deeper penetration of renewable energy. The Lithium-ion has emerged as the dominant rechargeable battery technology. Further, many experts have forecasted that the energy storage market could double 12 times by 2030, which means that there is an attractive investment play. Overall and as projected by many lithium players and market experts, Lithium demand is estimated to grow up to 5x from historical c.200kt LCE per annum to over 1,000kt LCE by 2025, primarily driven due to increased global electric vehicle penetration forecasts and an increase in global energy storage demand. Therefore, the industry might be required to bring online a potential c.800kt of incremental supply to meet the demand balance. Even the world’s number three lithium miner, SQM is enhancing the production in next three years and believes that demand growth of about 20% in 2018 and 2019 can balance the additional supply issues.

Growth in China: With China targeting for 20% New Energy Vehicles’ penetration by 2025, there is a good chance of generating additional demand by 2025.

Supportive Government Policies: Federal policy implementation is supportive of increased New Energy Vehicle penetration. The provincial and local support has begun to be implemented throughout major global regions, including initiatives from various cities to ban internal combustion engine (ICE) vehicles prior to the federally stated production phase out. As a result, greater penetration rates and technological advancement have continued to push NEV prices towards cost parity with ICE vehicles.

While there are forces to pull the lithium prices and thus the lithium stocks in either directions, we believe that the scenario is still not very discouraging. One ASX-listed lithium play that we believe has the potential to witness the downfall but gear up on fundamentals with any favorable boost coming from the macro environment is Galaxy Resources Limited (ASX: GXY), which has been down 22% this year to date. On the other hand, we do have Kidman Resources Ltd (ASX: KDR) that has been up 20.5% this year to date and lately got a boost from offtake agreement with Tesla.


Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.

Is Oil Price backtracking to Doldrums?

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The price of oil has been seen to climb in the past few months, despite record-high U.S. production this year. Brent crude oil prices settled at slightly higher levels earlier this week after a volatile session in which concerns on potential shortfalls in supply were raised with respect to Venezuela and Iran. Then, US President Donald Trump expressed his displeasure on US-China trade talks and this turned the situation in a different direction. With this, Brent futures rose 35 cents to settle at $US79.57 a barrel, a 0.44 per cent gain; and as at reports on May 23, 2018, Brent crude was up 0.2% to $US79.75 a barrel. On the other hand, US oil slipped by 0.6% to $US71.80 a barrel. Last week, the global benchmark topped $US80 for the first time since November 2014. US West Texas Intermediate (WTI) crude futures fell 11 cents to settle at $US72.13 a barrel, a 0.15 per cent loss. They earlier touched $US72.83 a barrel, the highest since November 2014.

However, with the threat from the step up in production coming in from OPEC members on Thursday, benchmark Brent futures slipped down to $79.53 per barrel and U.S. West Texas Intermediate (WTI) crude futures dropped to $71.67 a barrel.

Trump’s latest remarks on trade talks between the United States and China with door open for further negotiations, was a big topic for discussion with many believing that trade is positive for energy demand. Further, with the collapse of oil prices in 2014 at the back of US shale production, a new-found belief that prices would remain lower for longer prevailed. However, investors are now on their toes considering the speculation related to any rise in oil output starting from June as Russia and Saudi Arabia have some upcoming talks lined up to easing the output cut.

The heavy build-up in inventories in the United States, at the same time, has started hurting the prices. It is reported that domestic stockpiles have advanced by 5.8 million barrels last week (as per Energy Information Administration).

Amidst this volatile scenario, BHP Billiton Limited (ASX: BHP) is a key resource stock that has benefitted by the recent oil prices and rose up by 21.2% in last six months. Various US stocks to the likes of Chevron were also rising up on the cup base post offering entry opportunities.

However, the changing landscape is not in consensus with the earlier known concept of a ‘shale price band’ within which the majority of US shale producers could turn a profit without the risk of the industry growing so fast, and the concept now seems to be crumbling under the various geopolitical scenarios. The yester-years inventory fall found support from strong demand growth and the Opec/non-Opec deal to curtail output since January 2017. But the latest imbalance with US inventories on high and declines in Venezuelan and Angolan production is bringing oil prices on doldrums. It is worth a watch whether the themes that emerged with investors relying on new-found interest in exposure to energy and narrative dominated by electric cars are there to stay and alter the trajectory for global oil demand in the long term.


Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.

Is Investing in the Safe Haven Gold Not So Safe anymore?

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Throughout history, gold has been viewed as an asset class with high intrinsic value which can be turned to during market downturns. The price of gold typically fluctuates with political, economic and inflationary threats, generally falling during booming markets and rising in recessions. Since the precious metal doesn’t generate cash flow as such (‘nonyielding bullion’), its value has been closely tied to the status of the economy. Yet, gold has been exhibiting quite the opposite tendencies in recent years.

With the news on easing of fears on trade war between China and the U.S., U.S. withdrawing from the Iran nuclear deal, Israel and Iran pouncing on each other and many looking at the possibility of World War III, it is expected that investors might resort to gold in such times. However, whether it is a good time to buy safe havens like gold, becomes a pertinent question, particularly, in the event that geopolitical tensions start to put pressure on asset prices and economic growth.

Actually, there does not seem to be a straight forward answer to this. Many experts, like the ones from the Bank of New York Mellon have in fact recently said that history shows varied trends. It has been further reported that a bullish case for gold could have been made a few weeks ago, before the dollar’s current rally that kicked off in the recent times. Thus, during bouts of international tension, many a times gold prices tend to underperform as deflationary drag hovers around the minds of investors. These days as well, gold seems to be steadying as the U.S. dollar is dropping from its five-month high. There was little support from the risks prevailing in the broader financial markets. All eyes are now set to the U.S. elections which might impact dollar and eventually there might be an improvement in gold. On the other hand, rise in U.S. interest rates as the Fed meeting approaches do pose risks to gold.

All in all, gold becomes expensive when dollar becomes strong as it is a dollar-denominated asset; and it faces risks of U.S. interest rate hikes. As of now, dollar looks a bit weak and this may help investors grab gold stocks with good fundamentals. This trend might prevail in medium term while short term scenario seems to be wary of interest rates. As at May 23, 2018 reporting, spot gold was flat at $US1292.24 at 3.13 pm New York time.

At the same time, we have gold stocks like ASX listed Dacian Gold Ltd (ASX: DCN), which was seen to move up by 3.2% on May 23, 2018, in early trading session. The group’s 100% owned Mt Morgans Gold Project has witnessed strong shallow and deeper drilling results demonstrating growing potential of the Cameron Well discovery. The stock has thus bucked the trends and moved up. Thus sometimes, investors should look beyond the macro pictures while evaluating equities that can provide good returns over different time frames.

On the other hand, and given the prevailing uncertainty, many eye BetaShares exchange traded funds on the Australian Securities Exchange (ASX). Exchange traded funds are simple to use, liquid, transparent and low cost investment products; and as a result, are one of the fastest growing investment vehicles in the Australian Market. Particularly, Betashares gold bullion ETF thus become popular among investors trying to have an exposure to gold.


Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.

Why market feels that Royal Commission is bad for bank equities?

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  • Public hearings of the Hayne royal commission seem to enforce lower leverage and simpler business models in the financial segment that may have an impact on equities
  • Return on Equities (ROE) coming close to cost of equity is worth looking at for investments

What makes the question particularly difficult is the four big banks – Australia and New Zealand Banking Group Limited (ASX: ANZ), National Australia Bank (ASX: NAB), Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corporation (ASX: WBC) caught in the cross-hairs of the Hayne royal commission, and coming under increasing attack for poor behavior. Many analysts are concerned that bankers could respond to the findings of the Hayne royal commission by raising their lending standards, particularly in the critical home-loan market. The problem comes on the supply of bank credit which could put downward pressure on housing prices, and in turn could harm the balance sheets of Australian households – many of whom have loaded up on debt to buy homes and investment properties.

In terms of equity, March was a month of misery for the country’s big four banks as they watched their share prices tumble significantly. But the banks’ woes have left many investors wondering whether the sell-off means the big four are coming as an interesting investment opportunity. For example, if you have invested money in the Balanced Fund in Australia’s Super fund Industry, they put around a quarter of your money into Australian shares. That will include shares in the banks. So, when Australian stock prices fall, your super savings shrink a bit.

While we do feel that banks like ANZ and NAB do stand a chance to be grabbed at low levels, many other financial sector stocks still look to be sitting in the potholes. For example, AMP Ltd, which seems to be in gross breach of their code of conduct, portraying the fall-side of the sector’s operations. Staff are even asked to be nonpolitical in their work while Australians have been told for decades that they are fortunate for their highly profitable-but-stable and ethical financial institutions. However, the recent dents in the system take a toll on investors who seem to be changing their style of investing now.

The key thing to ponder about is the reputational damage but at the wake of the Royal Commission, new or evolving business models may take a prevalence. With an impact on the stockbroking industry as well, many are eying the upcoming annual Stockbrokers and Financial Advisers Association conference at Melbourne discussing the changing market infrastructure and dealing with some of the misconduct unveiled by the royal commission.

However, we also note that the return on equities with the challenges laid out for banks have reduced from about 15%-18% to 10%-12%, over the last few years, which now looks closer to the cost of equity. This deleveraging would stem down to the impact on returns to shareholders.

On the other hand, while Royal Commission might seem to bring the strings down, the latest relief in the rise of the yield on US 10-year Treasury note, has helped many investors sticking to equities, in general. Though we do feel bank dividends are under the claws of the latest investigations, but stocks like ANZ can still weigh over many given the capital position. ANZ has fallen about 3.8% in last six months but rose by 5.7% in one month with support from its decent financial update.


Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.

 

Should You Ponder over Dividend Growth Rate?

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  • Dividend yields are of importance for value stocks but dividend growth rate is equally important
  • To name a few, Westpac and BHP Billiton provide good dividend play scenarios

When doing a stock research and looking at good dividend payers, it’s not just the yields that need to be seen, it is equally important to see the dividend growth rate to assess long term potential. The dividend growth rate is a measure that relates to the value of a stock on the basis of expected dividends, and is defined as annualized percentage rate of dividend growth over a period of time. It supports the calculation of present value and helps in reaching the determination of stock trading over or under its fair value. This also supports an approach that assumes dividends to grow at a constant rate in long term. The dividend stocks thus become favorite among the value investors and the dividend growth rate becomes an integral part of the whole dividend story discussed often in investing principles. In view of these, let us compare a few stocks on the basis of their dividend paying scenario.

Australian entities that trade as American Depository Receipts (ADRs) on US Stock Exchange would be worth looking at. A key example is that of Westpac Banking Corp (ASX: WBC), which has a 5 year Dividend Per Share Growth of 2.63% and dividend yield of 6.46%. While the stock is under pressure owing to the Royal Commission into the Australian Financial Sector, various other factors including mortgage lending also weigh on the stock price movement.

Another interesting dividend stock trading as ADR on US Exchange is BHP Billiton Limited (ASX: BHP), which has about -0.01% as its 5 year Dividend Per Share Growth post the lull period around 2016. BHP has a dividend yield of 3.59% and is enjoying the rally in oil price and other commodities as seen in the last 2 years. The stock has surged up 43% in last one year (as at May 17, 2018) and pays good returns to shareholders.

ASX-listed Woodside Petroleum Limited (ASX: WPL) has an annual dividend yield of 3.66% which is fully franked like BHP. The stock has a dividend history available and the dividend growth rate can be calculated accordingly, which comes out to be in negative zone. Then there is this high dividend small-cap stock, Dicker Data Limited (ASX: DDR), which in line with last financial year and to provide consistency and certainty for investors, proposed to have interim dividends for FY18 of 4.40 cents per share fully franked. This would bring total proposed dividends to be paid in the FY18 to be 18.00 cents per share, reflecting an increase of 9.8% from FY17 dividend of 16.40 cents per share. If you average out the dividends paid in last five years, the group sits comfortably with over 20% as its 5 year Dividend Per Share Growth.

dividednd growth.png

Dividend Per Share for BHP, WBC, WPL, DDR (Source: Thomson Reuters)

Another stock, Insurance Australia Group Limited (ASX: IAG), has a good dividend history and lately reported for a decent 1H FY18 performance. The group has a dividend payout ratio of 52.5% of cash earnings and dividend rise of 7.7% as compared to previous corresponding period. Looking at historical dividend performance, we believe that the company will maintain its dividend payout ratio in the range of 50-80% in future while this might be subject to the forthcoming financial performance.

dvd

IAG Dividend History (Source: Company Reports)

Thus, this measure that refers to the annualized percentage change that a stock’s dividend undergoes over a specific period of time can help investors evaluate the future scenario. Dividend growth talks a lot about a company, and it is one of the principal ways businesses communicate financial health and shareholder value. Thus, when looking at annual dividend growth rate for over a range of fiscal years, a negative or zero value for the last few years for instance makes the stock look a bit irrelevant from value-based investment standpoint unless other catalysts come into play to boost the returns.


Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.