The time to consider buying stock is when proven performers appear under valued. Astute investors identify value after concluding a company’s brighter longer-term outlook outweighs short-term difficulties.
Companies within the financial sector are worthy of attention as they have taken a back seat to more appealing minerals and energy firms. Concerns about regulatory risk emerged after the major banks pushed interest rates beyond the Reserve Bank’s .25 percentage point rise in November 2010. The public backlash weighed heavily on financial stocks. As a result, Richard Batt, of Shadforth Financial Group, has established a portfolio of diversified financials he believes offers good long-term value backed by healthy dividend yields. (See dividend table below).
What Batt likes about ANZ Bank is its Asian strategy of becoming a super regional player, which differentiates it from the other majors. The ANZ plans to generate 20 per cent of group earnings from Asia within five years. The ANZ’s full-year 2010 cash profit of $5 billion beat analysts’ expectations, as did the higher than expected final dividend of 74c a share. Batt says growing trade and capital flows between Asia and Australia work in ANZ’s favour, as about 50 per cent of the bank’s domestic customers depend on Asia for more than 25 per cent of its business. Batt says: “The ANZ is supporting customers to do business in the Asian region, while stgeloping relationships to work both ends of the trade flows.” In Australia, ANZ now fully owns ING to boost its wealth management presence, and it’s also acquired the loan and deposit books of agribusiness, Landmark Financial Services. “There’s plenty of upside for investors if ANZ’s Asian strategy works,” Batt says.
Keep ASX Limited on alert amid an $8.4 billion merger proposal with the Singapore Stock Exchange. Batt says the merger faces regulatory hurdles, but any sniff of a deal will be positive for ASX Limited’s share price. The $8.4 billion deal values the ASX at $48 a share. On February 2, 2011, ASX shares closed at $37.10. “The merger with the Singapore Stock Exchange is logical as both entities have many complementary business features, and it’s expected that the bulk of future capital flows into Australian investment projects will come from Asia,” Batt says. “The deal will go a long way to improving ASX’s position in the market place and alleviate concerns regarding possible competitors entering the equities trading business.” Batt also likes ASX Limited’s numbers in response to increasing listing activity post the global financial crisis. The ASX lifted full-year net profit after tax to $332.6 million, up 6.1 per cent for the 12 months to June 30, 2010. A full-year dividend of $1.73 a share represented a 5 per cent increase.
Australian financial services provider IOOF lifted funds under management by $3 billion – from $99.1 billion to $102.3 billion – between June and September 2010. Its acquisition of Australian Wealth Management in 2009 broadened distribution reach and enabled earnings diversification. “The increased scale allowed the company to reduce overheads, which underpinned earnings,” Batt says. Stockmarket performance influences net inflows and funds under management, which can directly impact revenues. Batt says growing net inflows demonstrates how strong and competitive IOOF is – even in volatile markets. IOOF has a strong balance sheet enabling it to pursue opportunities with excellent long-term growth prospects. “Australia’s compulsory superannuation regime should improve profitability,” he says.
QBE Insurance Group posted a 39 per cent fall in net profit to $US440 million for the six months to June 30, 2010. Lower interest yields, weaker equity markets and a strong Australian dollar were blamed for the profit fall compared to the previous corresponding period. But QBE, known for its seamless acquisitions, has agreed to buy the Australian operations of US-owned CUNA Mutual Group to build its presence in the Australian financial services sector. Batt says QBE diversifies to reduce risk by spreading exposures across product and geography. “Diversification has been fundamental to the company’s success,” he says. “QBE management knows how to underwrite risk at an effective and profitable price.” Batt expects more acquisitions and organic growth to deliver above average growth in earnings and dividends. “The strong management team and a robust balance sheet make QBE an ideal stock for inclusion in long-term growth portfolios,” he says.Batt says corporate activity also backs the argument that some financial sector stocks may be undervalued. An improving global economy may spark more consolidation similar to AMP and National Australia Bank’s tussle for AXA Asia Pacific, or private equity firm KKR’s indicative proposal to acquire Perpetual, which has since been rejected. Batt says the financial sector has underperformed the ASX 200 by more than 5 per cent in the past 12 months. “The opportunity is there for investors to benefit,” he says. “It won’t be too long before we see money coming back to financials.”
Macquarie Group’s net profit after tax for the six months to September 30, 2010, fell 16 per cent to $403 million in response to subdued market conditions weighing on several divisions, including Macquarie Capital, Macquarie Securities Group and FICC (fixed income, currencies and commodities). However, Batt says the company’s multiple earnings streams makes Macquarie an appealing investment as global economies improve. “Macquarie’s expansion overseas provides further diversification and potential for growth as the company can duplicate its successful Australian model offshore,” he says. “The company has also strengthened its capital base well above current business requirements. It’s ready to take advantage of improving capital markets, and potential merger and acquisition activity.”
Batt says Treasury Group lifted funds under management to $15.51 billion at December 31, 2010, an increase of 2.9 per cent on the previous quarter and an annual rise of 7.3 per cent. Batt says Treasury Group has a solid track record of identifying successful fund managers and investing in them. He says stronger net inflows show market sentiment is shifting towards Treasury Group’s fund managers. “Treasury Group has a strong balance sheet with no debt, providing it with ample capacity to invest in new boutique mangers for longer term earnings growth,” he says.
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Table: Source: Morningstar. January 31, 2011.