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Alpha POWER Shares (Aegis) Portfolio - February 2008

2008

Aegis Market Commentary

February was another difficult month for the Australian sharemarket. The S&P/ASX 100 Index was only down by 1.2% for the month, but this masks the fact there was significant intramonth volatility, with some extreme individual stock-price movements. There were also divergent performances between sectors, with Financials, the worst-performing sector, down 11.8%, while the best-performing sector, Telecoms, rose by 12.1%. The Energy and Materials sectors also performed strongly. The domestic equity market continued to be affected by concerns of a US economic slowdown, fallout from the crisis in global credit markets and rising inflation and interest-rate pressures in Australia. The rising cost of credit and concerns about deteriorating loan quality were the key reasons for a big sell-off in the Australian banks. February was also corporate reporting season and, while corporate Australia generally remains in good health, there were mixed results from those companies that reported. Companies that reported poor results or that did not meet market expectations were, in many cases, treated savagely. Even some companies that reported exceptional results, such as Woolworths, are now trading at lower prices. Clearly there are some earnings pressures starting to emerge, some of the themes of which are labour-market shortages, rising costs and higher interest expense. These issues are likely to persist and will particularly impact companies with high debt levels and those unable to pass on higher costs. While the outlook for the domestic economy remains good and there is minimal direct exposure to sub-prime by Australian companies, the impact of the global credit crisis and equity market gyrations will obviously have some impact on Australian corporate profitability. Overall, we expect the uncertain global outlook and tighter conditions in the credit markets will continue to negatively impact investor sentiment over the coming months. However, we continue to have a positive view of the resource sector, which is still being driven by the strong demand for Australian commodities. We also expect the market to focus on the more defensive sectors, particularly those companies with relatively stable earnings, strong financial positions and a strong domestic business focus.

Aegis comments on major out-performers:

Tabcorp – TAH (+13.1%). TAH reported its 1H08 result in February and delivered a credible result despite the adverse impact of smoking bans and the equine flu. The result benefited from cost efficiencies and an above-average win rate in the casinos, while the equine flu impact was not as bad as expected. TAH announced a renewed focus on optimising its existing assets and has initiated a number of measures to boost performance, such as Casino refurbishment and developments. FY08 dividend is expected to remain flat before growing in FY09 and FY10 on the back of the benefits of current initiatives. We view TAH as a good defensive stock in the current volatile market environment.

Telstra – TLS (+12.2%). TLS surprised the market with a better than expected 1H08 result. Revenue was up 5%, EBIT +6% and NPAT +14%, with good growth across most divisions. TLS is benefiting from a combination of its own transformation program and poor operational performances by its competitors. The company upgraded its EBIT guidance range by 1% on the back of the strong result. We expect TLS’s transformation program will continue to deliver benefits over the next 2-3 years.

Goodman Fielder – GFF (+11%). GFF’s 1H08 result was better than we had expected, with the company having greater success in passing on rising commodity prices. The company was also able to maintain market share against the looming private brand threat. While margins are likely to remain under threat due to rising costs and pressure from retailers, GFF is undertaking an efficiency drive to help offset these pressures. The company reconfirmed guidance for FY08 NPAT, pre-significant items, to be on par with FY07, plus or minus 5%. With market-leading positions in most of its consumer food products we view GFF as a good defensive exposure.

Aegis comments on major under-performers:

National Australia Bank – NAB (-16.6%). NAB was caught up in the selling of the banking sector as investors became nervous about rising funding costs and the risk of deteriorating loan quality. While the Australian banks have announced exposures to some of the high-profile corporates in difficulty, general asset quality remains good. Funding costs and the availability of funding have become a concern, but funding generally remains available and, to a certain extent, the banks are able to pass on the higher funding costs. Bank revenue growth remains strong on the back of solid lending volumes. At current prices, we think the risks to earnings are built in and do not think dividends are at risk.

QBE Insurance Group – QBE (-16.5%). QBE delivered strong FY07 NPAT growth of 30%, driven by US acquisitions, although the result was below expectations due to the company turning away some business in the US. QBE’s share price has been marked down after not meeting expectations and has been caught up in the discounting of financial stocks. However, in our view, the earnings outlook remains positive. QBE has no direct exposures to weak spots in the financial markets and is well paced to continue its acquisition-driven growth. FY08 earnings will benefit from a full year of US acquisitions and the realisation of synergies, with the US acquisition synergies doubled to $100.

ANZ Banking Group – ANZ (-15.4%). ANZ issued a trading update in February and, while confirming underlying profitability remains strong, its 1H08 result will be impacted by higher bad-debt provisions. The interest margin will also be impacted by rising funding costs. We now expect ANZ’s earnings growth to be relatively flat in FY08. We are currently reviewing ANZ’s inclusion in the portfolio.

IMPORTANT NOTICE: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 (to be read in conjunction with individual financial advice), available on request from Alpha Structured Investments (1300 769 694 or www.alpha-invest.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.