Alpha POWER Shares (Aegis) Portfolio - May 2008
Aegis Market Commentary
The domestic equities market continued to build on the April recovery, with the S&P/ASX 100 Accumulation Index up by 1.4% in May. However, the market remains well down from its highs and volatility remains high. Despite the slightly more positive tone through May, the market continued to be driven by the Materials and Energy sectors. Energy (+19.7%) was by far and away the best performing sector, driven by the relentless rise in the oil price. Information Technology (+6.1%) and Telecommunications (+4.2%) were the next best performing sectors. The Telco sector benefited from Telstra’s solid share price performance. Materials was again a strong contributor with a rise of 3.7%. Financials was the worst performing sector, driven down by a poor performance from the property sub-sector. This sector is still suffering from concerns about debt levels and the potential for slowing retail sales both in Australia and the US. Industrial stocks again underperformed, with the sector generally under pressure from rising costs and tightening margins. The Reserve Bank of Australia left interest rates on hold after its recent meeting but continues to maintain a close watch on inflation. GDP figures released in early June contain mixed signals about the direction of the Australian economy. While GDP growth has clearly slowed, it remains buoyed by activity in the resources sector. We continue to expect market volatility to remain high and expect the emerging slowdown in the Australian economy will continue to have adverse implications for certain sectors, such as housing and discretionary spending. We retain our positive view of Chinese growth and the favourable outlook this has for the resources, energy and related sectors.
Aegis’ Comments on Portfolio Stock Performance
Main outperformersSt.George Bank – SGB (+28.7%). SGB rose significantly after it announced an agreed merger with Westpac (WBC), with SGB shareholders to receive 1.31 WBC shares for each SGB share. While it is possible an alternative bid could emerge, we think it likely the merger with WBC will proceed. We already have WBC in the portfolio and, given the strong rise in the share price, we expect to remove SGB from the portfolio at the end of June.
Orica – ORI (+5.5%). ORI performed well during May following the release of the company’s 1H08 result at the end of April. The result was below our forecasts, but a solid result nonetheless, driven by good performance from the mining services division, which contributed around 70% of earnings. There have also been suggestions the company may be about to sell its previously underperforming Chemnet division and this has probably been a factor in the share price strength.
Telstra Corporation – TLS (+4.2%). Telstra continue to improve on its positive performance from last month and has now recovered well from its recent lows. There was no major news from the company during May, although in a presentation to an investment banking conference TLS reaffirmed its upgraded earnings guidance for FY08. We continue to view TLS as a good defensive stock in the current uncertain market environment.
Main underperformers Transurban Group – TCL (-17.1%). There were no major announcements from TCL in May, however the stock fell as market sentiment towards infrastructure stocks with high debt levels turned sour. We remain comfortable with TCL due its sound portfolio of toll roads and strong, sustainable cash flows. In our view, debt levels are comfortable given the strong cash flows. At current levels the stock offers a very attractive yield of around 11%.
Babcock & Brown Infrastructure – BBI (-9.1%). BBI was also impacted by the market sell-off of infrastructure stocks in May. In May, BBI provided an update in relation to Dalrymple Bay Coal Terminal noting that around 45% by cost of the Phase 2/3 expansion is still anticipated to be completed by December 2008, with the balance completed by 3Q09. There has been no material change to the total budgeted cost and no new financing is required. BBI also reconfirmed its distribution guidance of 15cps for FY08 and 16cps for FY09. At current levels this implies a dividend yield close to 15% in FY09.
Westfield Group – WDC (-6.5%). WDC was caught up in the sell-off of stocks in the property sector. The outlook for many stocks in this sector remains weak due to high debt levels, increased funding costs and lower retail sales. However, in our view, WDC, a global leader in the retail property sector, is very well placed in the current environment. Although retail sales are expected to slow, we note that more than 98% of WDC's rental income comes from contracted minimum base rents, which are not affected by short-term movements in retail sales. In its first-quarter operational review for calendar 2008, WDC reported 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 specialties. WDC is well capitalised and, in our view, is well placed to opportunistically acquire assets from distressed sellers.
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.
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