Alpha POWER Shares (Aegis) Portfolio

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Alpha POWER Shares (Aegis) Portfolio - August 2008

Monthly Stock Returns (including dividends)

Aegis 08 August

Aegis Market Commentary

During August the domestic sharemarket recovered some lost ground, with the S&P/ASX 100 Accumulation Index up 4.3% for the month. Financials (+3.9%) helped drive the market performance with most of the major banks and some property stocks recovering from their lows. However, Healthcare (+17.4%) was the best performing sector, as the market responded positively to a good profit result and acquisition announcement by blood products group CSL. Consumer Discretionary (+8.9%) was another strongly performing sector, driven by expectations of an interest cut that would possibly stop the decline in retail sales. Energy (+8.8%) was also a strong performer, despite the downward trend in oil prices. Telecommunications (-4.1%) was the worst performing sector, which is surprising given the largest telecommunications stock, Telstra, delivered a profit result in line with expectations and upgraded its medium-term earnings outlook. Utilities (-1.3%) continued to suffer from market concerns about highly leveraged stocks. Overall, the reporting season did not deliver too may surprises given that a lot of companies, particularly those with bad news, had already updated the market ahead of reporting season. However, the outlook statements confirmed that most companies are expecting a difficult macro environment to lead to tough operating conditions in FY09. There were no changes in interest rates in the US or Australia during August, however, since month end, the Reserve Bank of Australia cut domestic interest rates by 25 basis points. Given the weakness in the domestic economy, we expect a further 25 basis points reduction before the end of 2008. The market is likely to remain volatile over coming months. We expect large cap stocks with good businesses and strong balance sheets to outperform, while smaller cap stocks and those with stretched financial positions are expected to remain out of favour. Despite the slowing global economy, we expect continued strong growth in the key Asian economies to drive demand for Australian commodities, particularly bulk metals such as coal and iron ore. However, given the change in market sentiment towards the resources sectors, we maintain a close eye on China and its demand for Australian resources.

Aegis’ Comments on Portfolio Stock Performance

Main outperformers

WorleyParsons – WOR (+15.9%). WOR’s share price performed exceptionally well during August as the market responded positively to the company’s strong FY08 earnings and favourable outlook statement. The company reported a 53% increase in earnings and lifted the full year dividend by 41%. The result benefited from a strong workflow across WOR’s key businesses, with the hydrocarbons business being a key contributor. WOR is leveraged to the strongly performing hydrocarbons sector and buoyant commodity and infrastructure industries. Although the share price has retreated since the end of August, we maintain a positive view of the stock given the company’s continued success in securing new contracts.
Goodman Fielder – GFF (+13.0%). GFF made a good recovery in August after the company reported a “normalised” FY08 profit result broadly in line with its guidance that FY08 earnings would be within 5% of the FY07 result. However, we were disappointed with the result as the profit included $22M in one-off benefits. After restructuring costs and a $170M impairment of the New Zealand business, reported NPAT was $27.7M, 88.4% down from FY07. The result highlighted that GFF’s margins remain under pressure due to higher commodity and distribution costs, and difficulty in fully passing on these costs. However, the company is attempting to address this by cost efficiencies and new acquisitions.
Woolworths – WOW (+12.5%). WOW continued to build on the gains made in July after releasing a very strong FY08 profit result. FY08 NPAT of $1.626B was up 25.7% on FY07, led by strong sales growth of 10.7% supported by margin growth, with earnings before interest and tax (EBIT) up 19.8% to $2.528B. Australian Food & Liquor, WOW's biggest earnings contributor was again a stand out with sales growth of 9.9% (7.9% normalised) and EBIT growth of 19.8%. A final dividend of 48cps was declared, bringing the full year dividend to 92cps, up 24% on FY07. WOW's FY09 earnings guidance is for growth in the range of 9% to 12% compared to FY08. We maintain a positive view of this quality retailer.
Commonwealth Bank of Australia – CBA (+10.5%). CBA released its FY08 profit result in August and, while earnings growth slowed to 5% for the year, the result showed the underlying momentum in CBA’s core businesses. Revenue grew by 10% but, disappointingly, costs also experienced strong growth at 9%. Management indicated there were a number of costs relating to new investments in growth, particularly in its business banking division. CBA moves into FY09 well capitalised with robust risk-management systems, conservative provision levels and strong market positions in key products and services. In our view, the bank is well placed to deal with the current difficult environment.

Main underperformers

Wesfarmers – WES (-6.5%). WES reported its FY08 result in August and, while its traditional businesses did well, the result lacked transparency given the first time inclusion of Coles in a full year result. The Coles business turned in a result below our expectations, but it was distorted by significant costs associated with the acquisition by WES. We continue to expect that WES will extract good returns from Coles, but this is more a medium-term expectation. In the short-term, WES will benefit from the significant increase in the price of its metallurgical coal exports. We maintain a positive view of WES on a medium- to long-term basis.
Telstra – TLS (-0.2%). TLS shares marked time during August, which was disappointing given it reported a solid FY08 result. Net profit of $3.692M was up 13% in FY07, in line with company guidance and our expectations. The full year dividend was kept flat at 28cps as expected. More importantly, the company upgraded its guidance out to FY10. We continue to believe TLS will focus on organic growth and improving cost efficiencies in its current markets by leveraging scale economies through the consolidation of legacy networks. In our view, TLS has been oversold and is fundamentally undervalued. We think it offers a good defensive position in the current market with a high, fully franked 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.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.