COUNTRY PERFORMANCE AUSTRALIAN SECTOR PERFORMANCE · According to UBS Global Real Estate Bubble Index – Sydney has been highlighted as the among the cities most at risk of a housing

Market Indicators Week ending 6 October 2017

What we liked

The Dow Jones Index rallied 370 points (+1.65%) this week as US markets overcame the Las Vegas massacre and focused its attention on Trump’s tax reforms and upbeat expectations for third-quarter corporate results.

Asian spot LNG prices rose by more than 10% on bullish tender results, but rises may be as prices near oil-link contract parity levels ahead of a public holiday in China and South Korea next week. Two major tender awards this week boosted demand. Strong Chinese demand has also helped spot prices rise some 55% from their 2017 lows.

China's has ordered North Korean businesses operating in the country to close within 120 days as it enforces UN sanctions after Pyongyang's continues to fire missiles. China is North Korea's largest trading partner and has become more willing to take steps to reprimand North Korea for its ongoing non-compliance.

Australian Treasurer Scott Morrison is confident Australians will receive a pay rise as the government promises to introduce a new wave of reforms to expand productivity growth and investment. Wages have remained low as a result of the end of the mining boom but conditions are on the mend and things are looking good.

House prices are finally falling. CoreLogic’s Home Prices index showed that Sydney fell 0.1% in the first month of the spring selling season. It is the first fall in prices for Sydney since 2015. Overall, capital cities rose 0.3% against 1.0% last year. Melbourne remains the strongest, growing 0.9% for the month but lower than last year’s 2.3% monthly rise.

The RBA kept rates on Hold again at 1.5%. It was a copy and paste statement with no real talk of hiking next year. However the central bank was optimistic on the state of the economy but is keeping its eye on wage growth and inflation which remain low. Markets are pricing in a one-in-four chance of a rate rise by the February next year. By the end of the 2018 markets are pricing in the RBA to have increased twice.

CoreLogic released an interesting article that says investors are moving away from Sydney and Melbourne and investing their money in the Brisbane property market. With sentiment at its peak and property prices sky high, more investors see Brisbane as the new property hot spot with a growing population and improving job prospects making it an appealing place.

Lithium stocks are booming after a number of lithium exporters have landed offtake deals with car and battery companies and the lithium spot price continues to soar. To add to it, China has announced that it will ban fossil fuel cars. Stocks in the sector include Orocobre (ORE), Pilbara MInerals (PLS), Galaxy Resources (GXY), AVZ Minerals (AVZ) and Mineral Resources (MIN).

The Australian dollar extended its fall dropping below US77c on the back of a surprisingly weak August retail sales report which has raised doubts that the RBA will hike anytime soon.

ASX 200 0.37% Health Care 3.16%

ALL ORDINARIES 0.42% Utilities 1.31%

ASX 300 0.43% Banks 0.94%

SMALL ORDS 1.55% Energy 0.47%

US DOW JONES 1.65% Materials 0.47%

S&P 500 1.29% Telcos 0.19%

STOXX 50 0.74% IT 0.09%

FTSE 1.76% Cons Staples -0.34%

GERMANY 1.09% Gold -0.39%

FRANCE 0.93% Cons Discretionary -0.68%

CHINA -0.10% Financials -0.84%

HONG KONG 3.36% Metals & Mining -1.14%

INDIA 1.58% Industrial -1.54%

SINGAPORE 1.79% REITS -2.59%

NEW ZEALAND 0.54%

COUNTRY PERFORMANCE AUSTRALIAN SECTOR PERFORMANCE

What we didn’t like

US Federal Reserve chair Janet Yellen’s fate will be known soon. President Donald Trump said he will soon decide on who replace her when her term finishes up in February 2018. So far he has narrowed his list to four potentials: Gary Cohn, Kevin Warsh and Jerome Powell. Online betting site PredictIt has Warsh and Powell in front of everyone else.

A mass shooting in Las Vegas has become the worst shooting in US in history. At least 58 people were killed and about 515 were injured when a gunman opened fire Sunday night on people attending a country music festival in Las Vegas. It is being called the deadliest mass shooting in modern US history.

According to UBS Global Real Estate Bubble Index – Sydney has been highlighted as the among the cities most at risk of a housing bubble as cheap lending has pushed up property prices to eye watering levels. Toronto, Stockholm, Munich, London and Hong Kong were the most at risk. Chicago on the other hand, was the most undervalued city.

Oil took a pause this week after US government data released showed its shale gas drillers lifted output almost 9% during the past three weeks, the biggest three-week increase in half a decade. The increase in supply might offset any supply curbs by OPEC and Russia. Not great news for our local oil producers.

Gold has fallen to its lowest point in almost seven weeks after a Federal Reserve interest rate hike in December looks more and more likely. The US dollar has also risen against most currencies.

US president Donald Trump has dismissed any chance of negotiating with North Korea and labelled it as a waste of time.

Toyota has shut its Victorian car manufacturing plant this week. Ford closed in October last year and Holden closes its plant on October 20. It’s a sad day for Australian car manufacturing. After Holden closes, the country will be without a car manufacturing industry. The Toyota factory will end the jobs of 2,700 workers.

Platinum Asset Management’s Kerr Neilsen is betting big on China, in-fact the company has over a quarter of its funds ($6.5bn) invested in Chinese-related stocks. The company believes China’s debt problems aren’t an issue. Mr Neilson's optimism on China is supported by his confidence in the macro-economic outlook. Many don’t have the same outlook. S&P downgraded China’s debt rating recently.

Economic Insights In this section, we look at the economic news affecting global markets this week. Australia

Private sector credit was up 0.5% in August with annual growth at 5.5%. Housing credit was up 0.5% for a 6.6% annual gain. Business credit rose by 0.5% for a 4.5% annual gain. Residential building approvals for August was up 0.4% m/m against expectations of a 1.0% increase. AMP

says Building approvals peaked a year ago and are on the way down for the next 6-12 months. Expect slowing dwelling construction ahead.

The CBA manufacturing PMI survey was up to 53.8 in September from 53.5 in August. The CBA services PMI survey fell to 53.2 points from 54.2 points in August. Retail sales fell in August. Sales fell 0.6% in August from July well below the 0.3% rise that was expected.

US

The New York Federal Reserve narrowed its forecast of 3Q US GDP at an annualized pace of 1.46% lower than the 1.56% last week. Its GDP estimate for the 4Q was lowered to 1.95% from 2.01% a week earlier.

US private employers added 135,000 jobs in September which beat expectations despite Hurricane Harvey and Irma which impacted smaller retailers.

Europe

Spain – Catalonia’s referendum for independence has been thrown in to chaos with Catalonians clashing with Spanish police. The Spanish Government has declared the vote illegal. Videos were shown of police ripping out ballot boxes at polling booths and hitting people in crowds with batons. 90% of the 2.26 million Catalans who voted on Sunday voted in favour of independence. The region has 5.3 million voters. 770,000 votes were lost due to polling stations being raided by Spanish police. Catalonia is a wealthy region of 7.5 million people in Spain and has its own language and culture. Barcelona is part of Catalonia. But it is not recognised as a separate nation under the Spanish constitution.

China

China's Manufacturing PMI rose at the fastest pace since 2012 in September. The official Purchasing Managers' Index rose to 52.4 in September up from 51.7 in August. It now marks the 14th straight month of expansion for the manufacturing industry.

Expect Chinese data over the coming weeks to be exactly what leaders want to hear. That’s because the Communist Party Congress starts on Oct. 18. President Xi Jinping will set the political and economic policy tone for China for the next five years.

Market Insights

In this section we look at all the important announcements affecting companies this week.

Costa Group (CGC) – Higher citrus export prices are likely to more than offset cheaper berries. JP Morgan

says expects deflation in blueberries to continue but the potential for higher citrus export pricing to offset margin declines in the berry category is expected.

Pilbara Minerals (PLS) – Has landed a supply and investment agreement with a major Chinese car company to ship 150k tonnes of lithium a year. It is the first deal where an Australian miner will supply an electric vehicle manufacturer with lithium.

OrotonGroup (ORL) – Posted a $14.3m loss with earnings and sales hit by massive losses at the Gap stores, discontinued Oroton categories, lower sales and adverse currency movements. ORL has announced that it will exit all Gap store lease commitments at the end of the first half of 2018. It also booked impairment charges relating to disappointing sales during key sale periods since Boxing Day 2016 and the soft retail outlook.

QBE – Expects a US$600m impairment charge to hit its bottom line due to hurricanes Harvey, Irma and Maria and an earthquake in Mexico. This has investors losing faith in the stock. QBE is down more than 20% this year.

TechnologyOne (TNE) shares were hit after the company issued a profit downgrade. It downgraded its guidance to 7%-9% for 2017 which is down from its previous guidance range of 10%-15%. The downgrade comes on the back of a longer than expected return to profitability in the consulting division.

Healthscope (HSO) – Shares were up this week after rumours did the rounds of private equity groups and property players were in talks with the company in regards to a potential takeover.

CBA - Bell Potter have upgraded the stock to a Buy from Hold. The broker believes is back and the recent pullback is a good buying opportunity.

A2 Milk (A2M) – Continued its solid upward march after it was upgraded to buy at Goldman Sachs. Synlait has received registration which will allow exports of the a2 Milk Company Limited’s China label infant formula to China to continue. All manufacturers of infant formula are required to register brands and recipes with the China Food and Drug Administration (CFDA) in order to import products into China, through traditional import channels, from 1 January 2018.

Ramsay Health Care (RHC) – Shares are down some 20% since reporting season. FNArena says it’s due to Ramsay’s FY17 report which disappointed. But to add to it, higher bond yields have weighed in on expensive domestic healthcare stocks and regulatory risks in France and UK have affected probability. There are also a significant number of shorters who are adding to the downward pressure. RHC is scheduled to hold its AGM on 16 November. Another upgrade to guidance or major acquisition will lift shares back on track.

AuMake (AU8) - Shares in the country’s first listed Chinese Daigou business have doubled. The stock listed this week at a listing price of 8c via a backdoor listing. It’s trading now at 19.5c. 18% of its book were individual daigou shoppers, generally Chinese nationals who purchase cosmetics and healthcare products in Australia and take them back to family in China. The business is a one-stop-product shop for the estimated 40,000 daigou shoppers who funnel Australian products back to family and friends in China. It’s interesting how some of these companies

Woodside Petroleum (WPL) has three new exploration blocks off the north-west coast that are well placed to supply gas into the Pluto LNG project or LNG infrastructure in WA. This acreage adds significant inventory to its Carnarvon Basin portfolio.

Reece Group (REH) – Has completed the acquisition of the Viadux business. The business supplies large pipes and equipment to the civil construction industry, water utilities and local councils. Viadux generated revenues of $100 million-plus in 2016-17. No price was disclosed.

3D printing stocks –The Head of international trade analysis at ING says, 3D printing could wipe out almost one-quarter of cross-border trade by 2060. The mass production of goods will disrupt the global flow of goods.

Private Health Insurers – Rising mental health claims are causing sharp losses on disability income policies on the big insurers such as – NIB Holdings (NHF), QBE, IAG, AMP and Medibank Private (MPL).

Galaxy Resources Ltd 19.62% HT&E Ltd -10.68%

Orocobre Ltd 15.44% APN Outdoor Group Ltd -7.01%

a2 Milk Company Ltd 11.77% Origin Energy Ltd -6.60%

Western Areas Ltd 11.35% Southern Cross Media Group Ltd -5.62%

Sirtex Medical Ltd 10.03% Australian Agricultural Company Ltd -5.98%

Mineral Resources Ltd 9.16% Myer Holdings Ltd -5.61%

Healthscope Ltd 8.38% Trade Me Group Ltd -4.24%

Independence Group NL 7.51% Fletcher Building Ltd -4.06%

Syrah Resources Ltd 6.40% Aveo Group -3.55%

Isentia Group Ltd 5.62% APA Group -4.28%

ASX 200 MOVERS & SHAKERS THIS WEEK

How to invest in Equity Crowdfunding

You’ve probably heard of the term ‘crowdfunding’ but might not be familiar with its inner working or its purpose. In a nutshell here’s how it works. Let’s say you wanted to start a Mexican restaurant but you don’t have the capital to get it off the ground. You could go to a bank and ask for a loan however that can be a daunting process as banks are reluctant to lend to high risk start-ups. You could ask family, friends or an angel investor to fund your restaurant but the chances here are equally as hard. So that leaves one more option: Crowdfunding. Crowdfunding is the modern day Gen Y way of raising capital. Investors join together via a platform and each make a small financial contribution toward a project. When you add all these small contributions up, they form the base required to get a new project off the ground. Now there are two types of crowdfunding: Rewards crowdfunding and Equity crowdfunding. Here’s the difference:

Rewards Based – Investors contribute money towards a project and in return they receive a ‘reward’. For example, investors might receive free Mexican meals for the first year. The only downside here is if the project becomes a huge success, investors won’t receive a share of the profit. Two platforms that allow this type of crowdfunding are: Kickstarter and IndieGogo.

Equity Based – Investors contribute funds but instead of a reward they receive an equity stake. This is a much better option for investors. If the project or company becomes hugely successful, investors will receive a share of its profits which can be substantially higher than a reward.

Recently the Australian Federal Government passed legislation which legalised Crowd Source Funding in Australia. Public unlisted companies can now use platforms to raise up to $5 million per year in the same way a public listed company does via floating on the ASX. Retail investors can only tip in $10k to limit their risk. Companies will still have to produce a simplified prospectus but they won’t have the continuous disclosure obligations that ASX companies are required to abide by. The Government is considering the extension of Crowd Sourced Funding to proprietary companies also. Prior to this legislation, Australian equity crowdfunding platforms were only open to sophisticated investors. That means those that have assets worth over $2.5 million or income above $250,000 a year. Now anyone can be an investor.

It’s a big step in allowing Australian start-ups to turn to crowdfunding to raise funds. So far the space has been unregulated but as of September 29, new legislation will come into effect. It will be a game changer for new small businesses. A regulated place where entrepreneurs and investors can work together. To qualify for equity crowdfunding, the company must tick a few boxes. It will need a minimum of two directors, produce financial reports in accordance with accounting standards and follow restrictions on related party transactions. These laws finally bring Australia in line with other leading countries such as the UK, United States and New Zealand who have equity crowdfunding in place. The new laws will change the way SMEs raise capital and allow everyday investors to access a new asset class. One of the biggest headaches from this legislation is that a company SEKing crowdsourced equity must convert to a publicly unlisted entity to undertake a funding round. The government has since said that it would amend the legislation to allow private companies to undertake an equity crowdfunding round but nothing has come of it so far. Another hurdle is that companies that raise more than $3m will be required to an audit. The can cost up to $20k which makes the capital raising less attractive. There are a number of platforms both investors and entrepreneurs can go for Equity Crowdfunding. Here are a few:

PledgeMe VentureCrowd Equitise Birchal Sharequity

Whilst it’s an exciting time for investors to be part of the start-up scene, first consider the fee structure, background of the platform and understand the project. Start-up projects are high risk and there’s a good chance that the project may result in failure. The maximum you can lose is $10k. The new rules also allow Self Managed Super Fund’s to invest in start-ups via a crowd-sourced equity funding platform and it’s starting to resonate with SMSF trustees. As a new era of crowd-source equity funding gets underway, every SMSF will have an opportunity to invest in potentially high-growth unlisted companies. The start-up emerging asset class in SMSFs can improve diversification, complement SMSF investment strategies and produce high returns on a gross and after-tax basis.

It’s a win win for both SMSFs, investors and start-ups with the SMSF sector potentially becoming the capital base for Australian emerging companies. But as with everything, SMSF trustees should always do due diligence on equity crowdfunding sites and on the project they are undertaking. Investments are highly speculative and carry substantial risks.

Pure act of evil – What next?

Waking up this morning to the horrific news out of Las Vegas, has left me somewhat baffled by US gun laws. If you haven't seen the news already, a mass shooting in Las Vegas left at least 58 dead and +500 people injured. The gunman opened fire at a packed festival with some 22k attendees. A chilling YouTube video shows thousands of people attempting to flee or take cover, when bursts of gunshots are fired into the crowd at a music festival. It's so frightening. This is now the deadliest shooting in US history. You have to ask yourself, 'What is on earth is wrong with Americans?' Why are people allowed to buy semi-automatic weapons? I’m so glad I live in country where guns are banned. It took one massacre in Australia and that was it. Remember Johnny Howard? He’s the reason we don’t have this problem. In little over half an hour Martyn Bryant killed 35 people making it the third worst recorded killing worldwide. But what followed was historic. Twelve days after the Port Arthur massacre, PM Howard banned the importation and sale of automatic and semi-automatic weapons in the country. Since that day there has not been a single mass shooting in Australia. Not one. There’s a lesson to be learnt here. Obama said it numerous times ‘When Australia had a mass killing – I think it was in Tasmania – about 25 years ago, it was just so shocking the entire country said ‘well we’re going to completely change our gun laws’, and they did. And it hasn’t happened since.” In one emotionally-charged address, Obama wiped back tears and referenced a quote from Martin Luther King Junior and said “we need to feel the fierce urgency of now, because people are dying.” But what follows in financial markets after mass shootings in the US, baffles me even more. Gun stocks always rise after mass shootings. Last night they did exactly that. Shares in Sturm Ruger (RGR) known for its semi—automatic weapons was up +6%, American Outdoor Brands (AOBC) former Smith & Wesson was up +7%, Olin (OLN) who owns the Winchester brand of ammunition was up +6% hitting an all-time high. Why do gun stocks rise? Because investors start betting that mass shootings will bring about tougher gun laws and people will start buying more guns in the fear that laws will change. The end result is higher gun sales as fearful Americans start stocking up on firearms to defend themselves. It’s absolute madness. The Dow Jones Industrial Average closed +152 points last night. It finished in record territory on Monday. President Donald Trump addressed the nation saying the shooting was "act of pure evil". Las Vegas casino stocks were all lower. Trump has repeatedly said how much he loves the Second Amendment. When he took Presidency he even started rolling back Obama’s gun restrictions. Whilst he has condemned this attack, he was silent on calls for gun control. We all know it's unlikely that he will implement any form of gun control. Hillary Clinton however is using the opportunity to led calls for Americans to stand up to the gun lobby and for tougher gun control. Nevada laws do not require people to hold a permit to purchase or carry rifles and shotguns. It will be interesting to see if these laws are changed.

UWJ’s rules to picking VALUE stocks

Value and Growth are two fundamental approaches in stock picking. Using the Growth approach, the stocks that are chosen are ones that offer strong earnings growth potential. The Value approach selects stocks that appear undervalued. The best approach is to combine the two approaches, which is the approach we take. In this article, we’ll look at the Value approach. Firstly it’s important to define what a value stock is. Investopedia says “A value stock is a stock that tends to trade at a lower price relative to its fundamentals (e.g., dividends, earnings and sales).” Common traits of value stocks include a high dividend yield, low price-to-book ratio and low price-to-earnings ratio. Value investing isn’t easy. When looking for a value stock, you’re looking for a stock that the market has valued incorrectly. A stock that is cheaper than it’s really worth in the faith that the market will reprice the stock. The problem with this type of investing is that you might be waiting years for the market to recognise its true value. The share price might also fall further before rising. Then there is the likelihood that you may have missed something and the market has valued the stock correctly. A cheap stock is usually cheap for a reason. So many value fund managers fail to achieve superior results because of these reasons. Contrarian or deep value fund managers look for value in stocks that have been absolutely smashed in the belief that there is something the market has missed and this will eventually come to light and reverse course. On the flip side, if done right, value investing can yield substantial gains. The pay-off can be huge. High-profile value investors like Benjamin Graham and Warren Buffett live and breathe value investing. So there message here is to pick value not cheap rubbish. We know, it’s easier said than done. So to help you, we’ve put together a list of 10 UWJ rules to help you pick value not rubbish. 10 Value Rules

1. Intrinsic Value – Use Thomson Reuters intrinsic value. Only buy when the stock’s market value (share price) is less than its intrinsic value.

2. PE ratio - The P/E ratio shouldn’t be above the market’s PE. According to Benjamin Graham, invest in companies with a PE ratio of 15x or less.

3. ROE – ROE is more than a measure of profit, it's a measure of efficiency. A rising ROE suggests that a company is increasing its ability to generate profit without needing as much capital. So check to see if next year’s forecast ROE is higher.

4. EPS Growth – Look for companies with positive EPS growth during the past five years. 5. Current Ratio – Ensure ratio is over 1.50. This makes sure the company has enough cash and other current

assets to see out any shocks in the economy. 6. ROE – Must be greater than 15%. 7. Market Capitalisation – Must be greater than $100m 8. Dividend yield - Should be at least two-thirds more than the 90 Bank bill swap rate. 9. Debt to equity ratio - There should be no more debt than equity (D/E ratio < 1).

10. Free Cash Flow - Which is simply the earnings of the company, before financing costs and depreciation but after tax, working capital changes and capital expenditures. You want to see positive free cash flow.

Here is a stock that ticks most value rules:

1. Intrinsic value is $5.30. Share price is $4.73 2. PE Is 13.49x. Market’s PE is 17x. 3. Rising ROE. 4. EPS growth is 7.27%. 5. Current Ratio = 1.43 almost over 1.50 6. ROE is greater than 15% 7. Market cap is $2.39bn 8. Dividend yield is 7.84% 9. Debt to Equity ratio is 7.21% 10. Free Cash Flow = $73.1m (from annual report).

CSR

$4.73

PE FY0 13.49x Dividend 5.49% 52 Week High $5.24 Short term 93%

PE FY1 11.33x Gross yield 7.84% 52 Week Low $3.50 Long term 40%

ROE FY0 15.72% Franking 50% Price 1M % +14.25% RSI 78

ROE FY1 16.57% Debt / Equity 7.21% Price 1Y % +26.13% PEG Ratio NaN

EPS FY0 0.38c EPS FY1 0.40c EPS Growth +7.27% Market Cap $2.39bn

$5.30 Current Ratio 1.43

StockOmeter CSR Ltd

Intrinsic Value

70

NO GOOD

NOT BAD

BUY

GOOD

DEEPVALUE

70

BHP Billiton Ltd

Ferrari Portfolio – Out with the old, in with the new

We recently introduced the Ferrari Portfolio. Just to recap – The portfolio is a challenge to turn $100k into enough to buy Jamie Nemtsas, founding partner, his long desired Ferrari 246 GT Dino. This classic is around the $400k mark. It’s not cheap. Now this is real and it is a live portfolio. Selling Sigma

We’ve bought a few stocks in the portfolio that haven’t performed well and have hindered our performance. It’s time to cut losses and get rid of them.

Origin Energy (ORG) – We are holding. The stock is still in uptrend and tracking along ok. Ripple Currency (XRP) – Is still underwater but we’re holding on. Stop loss set at 0.21. CIMIC (CIM) – Chart is ok. Share price has rallied rather hard but we’re keeping an eye on it. Stop loss set at

$38.25. Orocobre (ORE) – Is doing well. We’ve moved our stop loss up to $4.25. Sigma Group – (SIG) – SELLING. After falling the stock has done nothing over the past few weeks. We’ve

lost patience. We’re out. Western Areas – (WSA) – We’re holding. Shorts have unwound from 20% of the register to 14%. We were

reading an article by Shaw and Partners that had a bullish BUY on WSA. It said to buy on the dips as the backdrop for nickel prices was firming.

Fisher & Paykel – (FPH) – Holding. Chart looks ok. The stock is making higher highs. LiveHire (LVH) – We are holding. Chart is ok. Alderan Resources (AL8) – Holding. Whilst we’re disappointed in the stock’s performance, we realise that

we bought right at the top. If you look at the chart, the stock is still in an uptrend formation and hasn’t broken its support line. In-fact it looks to have bounced. We’ll be watching it closely. If it breaks this support line, we’re out.

Stocks sold

Code Description Bought Price Paid Price NowTotal

ReturnStop Loss Holdings Value Sold

SIG Sigma Group 07-Sep-17 $0.90 $0.84 -6.7% $0.71 22222 $18,666.48 4/10/2017

We’re buying two lithium stocks ($30K)

Galaxy Resources (GXY) – Shares have been on a strong run after the AFR put out an article that the lithium miner has landed a deal with Tesla’s battery supplier Panasonic. For that reason we’re jumping on the bandwagon and riding this boom.

Avz Minerals (AVZ) – Recently signed a Memorandum of Understanding with Shanghai Greatpower Industry Co for potential investment in the Company and off-take opportunities from the Manono Lithium Project. Greatpoweris an integrated commodity group with a focus on sourcing and producing battery raw materials and products for the China battery sector Shanghai Greatpower and a number of other parties for a potential investment and off-take opportunities from its Manono Lithium Project. We’re buying.

Stocks bought


ReturnStop Loss Holdings Value Bought

GXY Galaxy Resources 04-Oct-17 $2.90 $2.90 +0.0% $2.47 5172 $15,000.00 4/10/2017

AVZ AVZ Minerals 04-Oct-17 $0.12 $0.12 +0.0% $0.10 130435 $15,000.00 4/10/2017


ReturnStop Loss Holdings Value

ORG Origin Energy Ltd 18-Aug-17 $7.10 $7.21 +1.5% $6.56 2052 $14,785.47

XRP Ripple Cryptocurrency 29-Aug-17 $0.29 $0.26 -9.8% $0.21 68351 $18,038.47

CIM CIMIC Group Ltd 07-Sep-17 $43.37 $44.41 +2.4% $38.25 461 $20,479.59

ORE Orocobre Ltd 07-Sep-17 $4.10 $4.93 +20.2% $4.25 2439 $12,024.39

WSA Western Areas Ltd 07-Sep-17 $2.89 $2.85 -1.4% $2.48 3460 $9,861.59

FPH Fisher & Paykel Healthcare Corporation Ltd 07-Sep-17 $11.24 $11.57 +2.9% $9.59 890 $10,289.15

LVH LiveHire Ltd 12-Sep-17 $0.80 $0.89 +10.6% $0.79 11753 $10,401.41

AL8 Alderan Resources Ltd 12-Sep-17 $1.99 $1.63 -18.3% $1.62 4725 $7,678.13

GXY Galaxy Resources Ltd 04-Oct-17 $2.90 $2.97 +2.4% $2.47 5172 $15,360.84

AVZ AVZ Minerals Ltd 04-Oct-17 $0.12 $0.13 +13.0% $0.10 130435 $16,956.55

CASH - $24,296.87

Total $140,172.46

Profit / Loss $40,172.5

Ferrari Portfolio

Totals +40.2%

Under the Microscope - SEEK In this section we place one stock under the microscope and give it the unconventional assessment. SEEK (SEK) – Is a market leading website for job advertisements. The company runs an online employment classifieds platform providing in 12 countries with three main business divisions: SEEK Employment, SEEK Learning and SEEK International. It entails a strong portfolio of employment, education and volunteer businesses which span across Australia, New Zealand, China, South East Asia, Brazil, Mexico, Africa and Bangladesh. SEK receives over 450 million visits to its sites every month and has over 4 million job opportunities available at any given time and relationships with over 150 million candidates.

EMPLOYMENT: Provides online employment classified advertising services through the SEK website. LEARNING: Markets, sells and distributes vocational training and education training courses in Australia. INTERNATIONAL: JobsDB (South East Asia), Zhaopin (China), Brazil Online (Brazil) and OCC (Mexico).

SEK was founded by Andrew Bassat, Paul Bassat and Matt Rockman. Bulls

First mover advantage. In Australia SEK has a monopoly position on the employment recruitment space. There is still significant opportunity for SEK to expand through volume and price increases.

New Corp and Fairfax have both been unable to disrupt SEK’s dominance. SEK now captures some 90% of total time people spend online looking for jobs. It dominates the Australian market.

Is expanding globally via acquisitions. This business offers strong upside growth potential. There is a low internet penetration in many of the countries it has exposure to. If one takes off, earnings could be substantially higher than that of Australia.

Bears

SEK’s business is ripe for disruption. Companies such as Livehire, Airtasker, Linkedin and other social media platforms are pulling business away from SEK.

The online job advertisement market could break apart due to specialist sites that offer differentiated industry opportunities.

The internet landscape can change rapidly. Whilst SEK has dominance, big tech firms such as Google or Apple can enter the job advertising space and cause disruption.

Fundamentals

On fundamentals SEK stacks up OK. The StockOmeter ranking came in at 68 which is just shy from the Buy mark. The stock is trading on a PE of 16.97x which means it’s neither cheap nor expensive. SEK’s ROE is relatively high but is dropping which is a little concerning. Dividend yield is OK and debt is quite low. Intrinsic value is lower than its share price, which suggests the stock is overvalued. EPS growth is also positive. On fundamentals, we’d say the stock is fairly valued. Technical Analysis On the chart, SEK looks to be in an up-trending pennant flag. The stock has held its uptrend support line for quite some time. We don’t think it will disappoint on the downside and break support. Instead we think it might bounce at around $15.50-$16.00. For that reason, we suggest investors buy at these levels. The stock is attractively priced and should continue to track along this uptrend support line.

SEK

$16.49




ROE FY1 13.64% Debt / Equity 65.37% Price 1Y % +6.46% PEG Ratio 2.76



StockOmeter Seek Ltd

Intrinsic Value

68

NO GOOD

NOT BAD

BUY

GOOD

DEEPVALUE

68

Broker Views

Morgans has a Hold recommendation with a target price of $17.39. We broker has a positive view on SEEK. The company offers investors exposure to the global rising hiring cycle and the increasing migration of employment advertising to the online market. So far SEK has risen and responded to competitive threats.

Citi has a Sell recommendation with a target price of $13.75. The broker believes SEK is tied too much towards the Australian housing cycle. Job ads for architects have subsided a while ago. Citi sees this as a problem, hence the downgrade.

Unconventional View: SEK’s August reporting season didn’t shoot the lights out. In-fact it missed expectations and its guidance was a little short of consensus forecasts. Australian & New Zealand Employment revenue was up 14% to $313.1m, EBITDA up 11% to $197.9m due to 4% vol growth. Seek International revenue was up 6% to $629. Zhaopin was flat, Brazil Online down 8% and Asia steady. Seek Education revenue up 9% to $109.4m. Its outlook guidance is for NPAT to be flat despite expecting revenue growth of 20-25% in FY18. EBITDA growth of approximately 10% and reported NPAT in the range of $220m to $230m. Its Chinese Online Zhaopin job portal has signed a deal with two private equity firms to privatise it and delist it from the NYSE. This is now complete. Zhaopin is the largest and most popular Chinese jobs portal, with about 36.9 million job postings in the year to June, 2016. SEK currently owns 61.2% of Zhaopin. Despite what has been a choppy market, SEK has held up quite well. Revenue is still growing and the company appears to be expanding internationally. But its market leading position in Australia is at risk of disruption from startups, social media such as Linkedin and other small players such as Livehire (LVH). What keeps us optimistic is its international exposure. Its Seek Asia and Zhaopin stake will be the main driver of growth going forward. Zhaopin already generates more revenue than the Australian business, $372.9m vs $355.9m. The company has said it will provide an update on its outlook at its AGM on 24 November. With its Zhaopin venture, SEK is entering a new phase and growth channel. We think the move to privatise the Chinese jobs website was a positive one and the upside potential is huge. Zhaopin is now the most popular career website in China and it’s very probable that it will soon become a much bigger business than the Australian business. Its Australian business is mature so it’s all about Zhaopin. On fundamentals, SEK has really traded sideways for the last two years. But in that time its earnings have gone up. That means its PE has dropped from 32x earlier this year to roughly 16.97x. We like the SEK story and we think it’s trading at an attractive level, but we advise investors to hold off until the AGM in November. SEK will provide further clarity on its outlook and there will be ample time to buy then. Otherwise we think it’s a solid stock to have in your portfolio.

CHARTS OF THE WEEK

Here’s an interesting chart that shows rising house prices driven higher and higher by soaring private debt. The growing chorus of economics experssing concerns\about soaring house prices, staggering domestic debt levels and weak wage growth is starting to hit record levels. Even the IMF has stepped in. In its October financial stability report it warned that “in the short term, an increase in the household debt-to-GDP ratio was typically associated with higher economic growth and lower unemployment, but the effects are reversed in three to five years”. Charts that are attractive

3 stocks from the herd – RCR, A2M, PLS

In this section we provide readers with three stocks that have attracted the interest of the broking community or the ‘herd’. Broker recommendations tend to be biased and highly optimistic. We try and breakdown these barriers and give our own honest opinion. It is important to keep in mind that technical analysis is only one part of the investment process and any recommendations do not give consideration to the underlying fundamentals of each business. RCR Tomlinson (RCR) – Current Price - $4.30 – Is diversified engineering and infrastructure company providing

integrated solutions to clients in the resources, energy and infrastructure sectors. RCR's services include design, manufacture, fabrication, construction, installation, maintenance and off-site repair operating across Australia, New Zealand and Asia. RCR has three business sectors comprising RCR Resources, RCR Energy and RCR Infrastructure. These include power generation plants (solar, wind, battery and hydro), water and waste treatment systems, rail and road tunnel infrastructure, rail signalling and overhead wiring systems, mineral processing and material handling plants, integrated oil & gas services (both onshore and offshore), supply of RCR proprietary materials handling and process equipment, and property services including facilities management, HVAC and electrical services. Some of its latest projects include: The Daydream and Hayman Solar Farms in QLD and the Pilbara Minerals (PLS) Lithium processing plant.

Broker View: Macquarie (OUTPERFORM $4.64) – The broker has re-instated its coverage with bullish rating. Following a $90m capital raising it believes RCR is now ideally placed to capitalise on the growing renewable sector and other infrastructure projects. It is also leveraged to any upside in the resources sector. Unconventional View: We agree with Macquarie. The company posted a bumper August profit result. Both profit of $25.7m and Revenue of $1.3bn beat expectations. Net debt was reduced to $25.2m with its gearing ratio remaining quite low. RCR has a strong order book of $1.4bn in work and has been awarded multiple large contracts. To add to it, the company completed a $75m capital raising @ $3.55. The funds raised will help provide balance sheet flexibility to take advantage of growth opportunities and it will support growth and development in solar and rail. What we like about RCR is its high exposure to the renewables sector. The renewables energy industry is forecast to be the fastest growing energy sector. It has some 12.7Gw in the pipeline of solar power projects. It also has $1.3bn in major rail and tunnel projects across Australia and NZ. Its renewables portfolio is growing, it consists of: 200MW Daydream & Hayman solar farms, 125MW Sun metals, 110MW Darling downs and another 191MW under construction. To add to it, RCR has won new contracts and work to shut down AGL’s Liddell power station and Origin’s Eraring Power Station. With an Order Book of $1.4B and Preferred Contractor Status of $1.6B, RCR upside growth potential is staggering. We expect further revenue and earnings growth in FY18 just from its pipeline of projects. On the StockOmeter the company pulls up OK at 67. Its ROE is increasing and its EPS is high. Debt to equity is low but then so is its dividend. On the chart – RCR has rallied quite hard since its results and it trading significantly higher than its support line. Its intrinsic value is around $3.80, which seems about right when you look at the chart. For that reason, we advise investors to Buy RCR on a dip closer to the $3.80 mark. Otherwise it’s a Buy.

RCR

$4.28







StockOmeter RCR Tomlinson Ltd

Intrinsic Value

67

NO GOOD

NOT BAD

BUY

GOOD

DEEPVALUE

67

A2 Milk (A2M) – Current Price - $6.50 – Synlait (ASX: SM1) has received registration which will allow exports of a2 Milk’s China label infant formula to China to continue. All manufacturers of infant formula are required to register brands and recipes with the China Food and Drug Administration (CFDA) in order to import products into China, through traditional import channels, from 1 January 2018. The rigorous process included raw materials and finished products testing, certification of manufacturing standards and formulation assessment, as well as packaging changes in response to labelling and branding requirements.

Broker View: Deutsche Bank (HOLD $6.17) – The broker has downgraded A2M from Buy to Hold. The reason for its downgrade is because of the strong move in its share price for both SM1 and A2m. Deutsche now finds its value is harder to obtain. Unconventional View: We disagree with Deutsche. As we’ve seen with Bellamy’s, momentum in the baby formula space is running red hot and bar any unforeseen hurdles, A2M can continue its upward march, higher and higher. The latest announcement only cements A2M’s outlook. Synlait Milk’s CFDA registration for A2M’s infant formula to be sold in China adds to A2M’s in-market credibility. Both A2M and Wattle Health (WHA) have strengthened their regulatory position in China via this registration. Being approved by the Chinese health regulator is a stamp of approval going forward. We think this approval is a big win for A2M, considering the stringent requirements China imposes on imports. Deutsche seems to be undervaluing its importance. Going forward, most brokers believe A2M is well positioned to expand their offerings both locally and internationally. Underlying demand is still very strong and the company continues to benefit from improved product availability. On the StockOmeter, the company comes in at 71. Yes it is trading on a very high PE of 59x, but it’s easily justifiable on its 48% ROE. Its EPS has also risen by 83%. The company also has no debt. What investors need to be aware of is the fickle nature of the baby formula industry. These stocks are definitely not for the faint hearted. As with seen with Bellamy’s, all it takes is a negative regulatory announcement out of China and all hell breaks loose. Overall, we love the A2 Milk story and have been followers for some time. We think there is a load of value left in the stock. From

A2M

$6.49



ROE FY0 48.40% Franking NULL Price 1M % +25.05% RSI 86




StockOmeter a2 Milk Company Ltd

Intrinsic Value

71

NO GOOD

NOT BAD

BUY

GOOD

DEEPVALUE

71

$6.49, it still could very easily hit the same highs that Bellamy’s once reached. Demand is soaring again in not only China but Australia too. The company is now working with its partner Synlait Milk to increase supply to meet demand. A2 has an 8.2% stake in Synlait. We have confidence in the company being able to deliver 22k tonnes of infant formula sales in FY18 and 25k in FY19. The other big ticket is a possible takeover approach. On fundamentals, A2M looks expensive. For that reason we recommend setting a tight stop loss of around 8%-10%. Just in-case there is a sudden change. The chart is looking a bit like a hockey stick. Therefore buying now, is purely on momentum. We advise this stock for the traders only.

Pilbara Minerals (PLS) – Current Price - $6.50 – Is an emerging lithium and tantalum producer focused on the development of its world-class 100% owned Pilgangoora Lithium-Tantalum Project near Port Hedland in the Pilbara region of Western Australia. Pilgangoora has been confirmed as one of the largest spodumene (lithium pyroxene) and tantalite projects in the world and is set to be developed into one of the world’s largest lithium mines, also producing tantalite as a valuable by-product. Pilbara’s aim is to fast-track Pilgangoora towards production to capitalise on the widely anticipated shortfall of lithium in global markets over the next decade, with the project currently targeting commissioning in March 2018. The size and quality of the Pilgangoora Project also provides the Company with an exceptional opportunity to pursue growth opportunities in downstream lithium markets.

Broker View: Macquarie (OUTPERFORM $0.75) – The broker has upped its target price following an offtake agreement signed with Great Wall Motor Co for up to 150k of spodumene. This agreement will help underpin the company’s Pilgangoora expansion option.

PLS

$0.77

PE FY0 NULL Dividend 0.00% 52 Week High $0.72 Short term 98%

PE FY1 NaN Gross yield 0.00% 52 Week Low $0.31 Long term 18%

ROE FY0 -9.06% Franking NULL Price 1M % +96.15% RSI 75

ROE FY1 1.71% Debt / Equity 62.16% Price 1Y % +59.38% PEG Ratio NaN

EPS FY0 -0.02c EPS FY1 0.01c EPS Growth -129.41% Market Cap $1.12bn

NULL Current Ratio 19.24

StockOmeter Pilbara Minerals Ltd

Intrinsic Value

42

NO GOOD

NOT BAD

BUY

GOOD

DEEPVALUE

42

Unconventional View: We agree with Macquarie. It’s the start of a new boom, the Electric Vehicle / lithium boom. Deutsche. Something remarkable occurred in September; China the largest automobile market in the world announced plans to transition away from petrol to electric vehicles (EV) by 2020. It’s serious and wants to address its pollution problems. India too wants to move to EV by 2030. Norway is moving to full EV by 2025 and France by 2040. With the whole world, planning to move to Electric Vehicles, the demand for materials in these batteries is set to sky rocket. These materials include Lithium, Graphite and Cobalt. Following this announcement China’s Great Wall (US$18b market cap) made an investment in PLS to secure supply of the raw material ingredient. This development has significant implications for the sector. It is likely to be the first of a heap of investments from the Chinese by auto manufacturers to secure supply. You can expect European / German and Italian manufacturers do the same thing by securing both Lithium and Cobalt supply. This is great news for the entire Lithium industry not only PLS. You can include in this equation, Orocobre, Galaxy and Mineral Resources. Pilbara has a very big project which they’re labelling as the world’s biggest, just south of Port Hedland in Western Australia. With lithium remaining the hottest thing in town, we think you can’t go wrong with a trade in PLS despite the share price increase it has already had. There could be the opportunity for PLS to secure more offtake agreements. Stage 1 (2mpta) 10-year 160,000tpa 6% chemical-grade spodumene concentrate offtake has been signed with Ganfeng Lithium and Stage 1 (2mpta) 6-year 140,000tpa 6% chemical-grade spodumene concentrate offtake signed with General Lithium.

Some are calling it the modern day gold rush, others the lithium boom. Either way, the supply/demand fundamentals for lithium put this highly sought-after metal in its own category. With the demand for electric vehicles predicted to sky rocket, it makes sense to include lithium exposure in your portfolio. For that reason we like Pilbara Minerals. It should be noted however that the global lithium producers are all much bigger than the Australian players. In-fact the four heavy weight producers all have market values of $US10 in comparison Orocobre, Galaxy and MIN have market caps of around $1bn.

Wattle Partners Pty Ltd Unit 10, 3 Bromham Place

Richmond Victoria 3121

Australia

T + 61 3 8414 2909

www.wattlepartners.com.au

General advice disclosure

Any recommendations given in this document is General Advice only. We have not considered clients’ personal or

individual circumstances. All clients and readers should SEK professional advice before acting on any

recommendation. You should also obtain a copy of and consider the Product Disclosure Statements for any

product discussed before making any decision.

http://www.wattlepartners.com.au/

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COUNTRY PERFORMANCE AUSTRALIAN SECTOR PERFORMANCE · According to UBS Global Real Estate Bubble Index – Sydney has been highlighted as the among the cities most at risk of a housing