Prime Australian Equities Income SMA – February 2017

Portfolio Objective

To generate a grossed-up dividend yield at least equal to the one-year bank deposit rate and capital value targeted to grow at least in line with CPI.

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.

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


Market Summary

Banks were again solid performers (+3.27%). Like their peers globally, the local banking sector continues to ride the Trump optimism and has added +11% in the last 6 months. Most of the banks’ performance was attributed to improving ‘bad debt’ levels and moderate improvements in credit quality which was reassuring. However, we remain cautious over elevated household leverage and a stagnant employment market, and after this recent burst of outperformance we again feel the sector to be fully valued at these levels. Coupled with poor earnings momentum and low interest rates impacting net interest margins we maintain the sector is fully valued at these levels.   

Leading the way in February, consumer staples was the standout adding +4.86%. Heavyweights Wesfarmers (WES) and Woolworths (WOW) both reported ahead of analyst expectations. Fortunately for WES its group-level performance mitigated the underperformance in its Coles supermarket business.

The mining sector lost -3.66% in February and in doing so ended 8 months of consecutive gains. Chinese steel inventories are now at 3-year highs, and we think this will begin to weigh on the sector in the backend of the year.

Also lagging the index was telecommunications (-3.13%) which is also the worst performing sector for the year to date. Poor results in Telstra’s (TLS) mobile division due to network outages and increased competition underpinned the sectors weakness.

Portfolio Commentary & Positioning

The PRIME Australian Equity INCOME portfolio added +1.75% in February relative to the ASX200 Accumulation Index which increased by +2.25%

Woolworths (WOW) continues to go from strength to strength (+4.72%) with like-for-like sales growth of 3.1% far exceeding analyst expectations. Cash flows were strong and its turnaround strategy appears to be working well with WOW beating Coles in the crucial Christmas trading period. The sole limitations on WOWs results was the weaker performance across its Big W stores. We remain increasingly comfortable in the WOW strategy and it continues to be one of the larger holdings in our portfolio. At $28 we would look to reduce some of our holding and we remain confident that we will see these levels soon.

Wesfarmers (WES) reported strong results (+6.11%) driven by strong performance in its Bunnings and Officeworks businesses. The announcement of a possible IPO of its Officeworks business was well received by the market. However, weaker results across its Coles supermarkets limited the overall group performance.

Telstra (TLS) was unfortunately a disappointment this month with the stock losing -3.60% during February. Weak profitability within the mobile division was the culprit, and though this is unlikely to ease anytime soon, we do feel that with the stock now yielding almost 7% fully-franked (10% gross) TLS is unlikely to fall much further.

Diversified wealth management company IOOF Holdings Ltd (IFL) was the biggest drag on portfolio performance. The stock was down -4.95% after missing profit figures as a result of deteriorating margins on its administration platform. Whilst this had been anticipated, the result came in a shade worse than had been expected. Like Telstra, it offers an attractive yield, fully franked and at these levels is simply too cheap to offload. We remain shareholders for the time being whilst we wait to hear more on a potential bid for the ANZ wealth advisory business.

We also took the opportunity to reduce our AGL holding by 2% during the month. AGL has added 50% since we included it in the Income portfolio and although we remain comfortable with the business, the stock looks increasingly fully valued.

Transactions for the month

Trade               Stock

REDUCE           AGL Limited (AGL)

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


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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