Prime Australian Equities Growth SMA – March 2017

Portfolio Objective

To achieve capital growth with moderate tax-effective income via franked dividends through investment in listed Australian securities.

The Model Portfolio is managed by selecting primarily those securities with moderate growth potential but robust cash-generating capacity. These securities are expected to deliver an above-market average income yield, together with a relatively moderate level of capital growth. The portfolio benchmark is the S&P/ASX200 Accumulation Index.

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Market Summary

Utilities were the standout performer rising 5.96% with much of this outperformance attributed to AGL Energy (AGL) and the positive impact of rising electricity prices.

Consumer staples (+4.83%) backed up their previous month’s strength assisted by heavyweights Wesfarmers (WES) +5.50% and Woolworths (WOW) +2.87%

Telecommunications (-2.87%) continue to lag the index as increased competition in mobile and fixed line networks continued to drive margins lower. Miners (-0.77%) were down for the second consecutive month as iron ore prices continue to ease on increased China stockpiles and a forecast for waning demand.

Banks once again underpinned our market performance adding 3.67%. However, despite recent improvements in credit quality, forward earnings momentum appears flat. Ongoing issues surrounding household leverage and employment data that continues to show significant shifts in the numbers of full-time workers to part time highlight the increased difficulty in servicing home loans. 

APRAs (Australian Prudential Regulation Authority) decision to limit the percentage of interest-only home loans coupled with low interest rates continues to point towards a subdued period ahead and as a result we remain underweight and comfortably so. ANZ Consumer Confidence figures dropped to a 12 month low signalling a continuation in sub-trend levels of growth.

 Offshore, the US raised interest rates a further 0.25% on the back of strong employment data. 

Portfolio Commentary & Positioning

The PRIME Australian Equity GROWTH portfolio added 4.03% in March beating ASX200 Accumulation Index gain of +3.32%

Qube Holdings (QUB) was the biggest contributor to performance adding 10.8% following a competitors decision to raise prices for its stevedoring services. Were QUB to follow suit, we would expect a 6-7% earnings uplift. Qube remains a long-term holding in our portfolio given the benefits we expect to gain from its Moorebank precinct.

Blackmores (BKL) rose 9.8% following news China would treat cross border e-commerce imports of vitamins and health products as personal goods. As a result BKL products do not require official registration in mainland China meaning more beneficial tax treatments. With next to no debt on its balance sheet and much of the de-stocking issues of last year now bygone we maintain a positive outlook on BKL.

Mantra (MTR) also bucked its recent trend rising 8.15%. Having reaffirmed guidance at its Half Year results a month prior only to be largely disregarded, it was due to industry talk of it being a potential takeover target that sent the stock on a rampage. Hotel chains such as InterContinental and the Marriott have been mentioned and despite both denying any formal interest, this news was well received.

We established a new 5% position in Healthscope Limited (HSO). HSO own and operate hospitals and medical centres in Australia and a pathology business in New Zealand and South East Asia. The anticipated completion of its flagship Northern Beaches hospital in NSW in late 2018 ahead of schedule will add another 450 beds to its already expanding portfolio. 

We also decided to allocate a 5% weight to the OC Small Companies Fund given the 20% outperformance of large caps relative to small caps since August. We have been waiting patiently for the right opportunity to invest with OC and funded this from cash having reduced another 1% across our three bank holdings.

Telstra (TLS) was again the largest negative performer. Recent network outages coupled with increased competition to its mobile services division and the rollout of NBN saw TLS lose 3.3% in March. TLS now trades on an FY18 P/E of 14x with a forecast gross yield of nearly 10%. We maintain TLS is worth more than its current share price suggests but are mindful of reducing some of our weight above $5.

Transactions for the month

Trade               Stock

BUY                 Healthscope Limited (HSO)
BUY                  OC Premium Small Companies Fund (OPS0002AU)
REDUCE            ANZ Banking Group (ANZ)
R
EDUCE            National Australia Bank (NAB)
R
EDUCE            Westpac Banking Corporation (WBC)
REDUCE            Transurban Group (TCL)

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DOWNLOAD the Prime Separately Managed Account (SMA) Report, March 2017

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Disclaimer: This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.

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