Alpha POWER Shares (Aegis) Portfolio - June 2008
Monthly Stock Returns (including dividends)
Aegis Market Commentary
After staging a modest recovery in April and May, the domestic equities market again turned ugly in June, with the S&P/ASX 100 Accumulation Index down 7.1% for the month (or 5.6% for the period to 26 June, the POWER shares review date). The market was driven lower by renewed concerns of further losses by US and European banks and fears of a deeper and longer economic downturn in the US and UK. The continued rise in the oil price did not help, with concerns that this would also push down consumer demand domestically as well as internationally. Given these concerns, consumer discretionary stocks were the worst hit, with the sector down by 14.8% for the month. Utilities fell by 13.3% as the market continued to focus on debt levels and financials fell by 12.2%. The energy and materials sectors again fared much better, with energy up by 1.6% and materials down by just 1.4%. There were no changes in interest rates in the US or Australia, although there were some concerns that an increase in inflationary pressure in the US and Europe could put pressure on the relevant authorities to increase interest rates. In fact, following the end of the quarter, the European Central Bank increased rates by 0.25%. Given the mounting losses from the global banks, a dramatic decline in the US housing sector and prospects for recession in the key developed economies, we maintain a cautious approach to the market. We still see the Australian economy as being in better shape than the US and Europe, but remain concerned about the impact of a slowdown in consumer demand, a weak domestic housing market and margin pressure in sectors exposed to rising input costs. We expect the tight credit markets and concerns about high debt levels will continue to impact companies with high gearing or nearterm refinancing requirements. Although Chinese growth appears to have slowed slightly, demand for commodities remains strong and we maintain our favourable outlook for resources, energy and related sectors, such as infrastructure construction.
Aegis’ Comments on Portfolio Stock Performance
Main outperformers
- Westfield Group – WDC (+1.3%). There was no major news from WDC in June, although the group reconfirmed its FY08 distribution guidance of 106.5 cents per security. In May, WDC released its first-quarter operational review, which revealed that operating performance was strong, with high occupancy levels and solid comparable specialty rental growth. Retail sales growth was strong across the board, with the exception of US specialty stores. Although the outlook is for slowing retail sales in Australia, the US and UK, we note that more than 98% of WDC’s rental income comes from contracted minimum base rents that are not affected by short-term movements in retail sales. This makes its earnings and distributions relatively resilient in a slowing economic environment.
- Wesfarmers – WES (-1.3%). WES shares held up relatively well in June following the successful May completion of its $2.5B equity raising. In May, WES also announced it had achieved contract price increases of c. 230% for metallurgical coal sales from its Curragh coal mine in Queensland. This will have a positive impact on earnings, particularly in FY09. Offsetting some of this positive news, WES announced that earnings would be adversely impacted by around $20M per month (pre tax) as a result of the Varanus Island gas explosion in WA, although this is relatively small in the context of WES’ overall earnings.
- Orica – ORI (-3.4%). Although ORI’s share price fell through June, it still managed to outperform the overall market. The key news from ORI during June was the approval of the establishment of a 300Kt ammonium nitrate plant in Bontang, Indonesia at an estimated capital cost of around US$550M. We had already assumed the plant would go ahead, so it doesn’t alter our view of ORI. We continue to expect ORI to benefit from its exposure to the resources sector as a supplier of explosives and other mining services. Main underperformers
- Transurban Group – TCL (-22%). TCL continued to suffer from negative sentiment towards the infrastructure sector. During the month, the group also announced a major financial review of the business, encompassing a capital raising of around $1B, including a $659M security placement, and a significant reduction in the distribution from FY09. While these initiatives place TCL in a better financial position, the stock fell further after the announcement, as yield investors appeared to desert the stock. Given the much lower yield we also decided to exit the stock at the quarterly portfolio review given our view that negative sentiment towards the sector is unlikely to change for some time.
- Babcock & Brown Infrastructure – BBI (-20.6%). BBI was also impacted by negative market sentiment towards infrastructure stocks as well as concerns about the financial health of its manager, Babcock & Brown. The company continued to emphasise the strength of its underlying asset portfolio and announced it had secured commitments to refinance the $518M Australian Energy Transmission & Distribution acquisition facility that matures in August 2008. BBI also reconfirmed its distribution of 15cps for FY08; however, given the tight credit markets and high cost of equity capital, the group announced it would initiate a capital-management review. Future distribution levels would be considered as part of this review. Given the increased volatility of this stock and the ongoing negative sentiment towards the sector, we exited BBI at the June quarterly review.
- Goodman Fielder – GFF (-18.3%). GFF fell on concerns that a slowing economy and reduced consumer demand will make it difficult for the company to pass on higher prices of its key inputs, particularly agricultural commodities. Despite the difficult market conditions, GFF did better than we expected in 1H08 and, as recently as April, reaffirmed its guidance for FY08 profit to be similar to FY07, plus or minus 5%. While we acknowledge that there are some risks to earnings, valuation metrics are not stretched and we see the stock as defensive in nature. At current levels it also has a high dividend yield.
IMPORTANT NOTE:
Aegis Investment Partners Pty Ltd (ABN 98 096 109 125, AFSL 226 957) (“Aegis”) is the stock selector for the Alpha Model Portfolio – Aegis. The information contained in this document is prepared by Aegis for use solely by professional investment advisers and is not intended to be provided to retail clients. In preparing this information, it is not possible to take into consideration the investment objectives, financial situation or particular needs of any individual recipient. Investors should obtain individual financial advice from their investment advisor to determine whether information contained in this document is appropriate to their investment objectives, financial situation or particular needs before acting on that information. Prior to deciding whether to acquire, hold, or sell the Alpha Model Portfolio - Aegis, you should obtain and consider the Alpha Customised Portfolio Service Product Disclosure Statement dated 19 December 2006 (now closed for new investments but still actively being managed for existing investors) and the Alpha Customised Portfolio Service Product Disclosure Statement dated 3 March 2008 (to be read in conjunction with individual financial advice), available on request from Alpha Structured Investments (1300 769 694 or www.alphainvest. com.au). While all information is provided by Aegis in good faith, Aegis makes no warranties as to its accuracy, reliability, completeness or whether it is free from error or omission. Subject to statutory limitations, Aegis, together with its directors, officers, employees and related body corporates, do not accept any responsibility or liability arising from decisions made relying upon information contained within this document. This document is only to be distributed to Australian residents. All intellectual property relating to this document vests with Aegis unless otherwise expressly agreed.
