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Tinterim profit-reporting season is an opportunity to assess the good, bad and ugly of Corporate Australia and update ideas featured in this column. I’m pleased that some of the big themes outlined here are being confirmed during the earnings season.

Corporate earnings and dividends are, so far in this reporting period, in slightly better shape than expected. Certainly, there has not been enough deterioration to warrant Australian equities slipping into a bear market this year.

Comments from bank chiefs that the Australian economy is in reasonable shape – reflected in their lower bad-debt provisions – are pleasing. Challenges abound, but the long, slow, grinding recovery in the domestic economy is on track.

Nevertheless, it is still too early to buy shares in mining, energy or highly cyclical growth companies. The energy sector looks oversold but that does not mean it cannot fall further. And more evidence on China’s economic transition is needed before one can get bullish on mining.

Here is an update on three stocks featured in this column: Challenger, Sea Link Travel Group and Aurizon Holdings.

1. Challenger

I analysed the wealth-management group for The Bull in August 2014 when it traded at $7.76. Challenger is superbly leveraged to the ageing population and retirement savings through its dominant position in the promising annuities market.

Challenger rallied to $9 last year and fell to $6.61 at the peak of the sharemarket correction in February 2016. It has risen to $7.46 after a slightly better-than-expected half-year profit. Challenger can recover more of recent share losses by year’s end.

Challenger’s outlook for superannuation caught my attention. In its investment pack, it notes that $73 billion will move from the accumulation (savings) to retirement (spending) phase in 2016-17 and that this will have 12 per cent compound growth over the next 10 years.

Demographic changes and higher retirement savings are huge tailwinds for Challenger as more retirees seek conservative investment products, such as annuities, that provide income. Challenger currently captures less than 4 per cent of annual wealth transfer to the retirement phase, so there is considerable scope to lift market share and benefit from a growing market. 

Moreover, Australians have far too much exposure to shares and property and not enough to bonds, compared with other OECD countries. We allocate around 9 per cent of our wealth to income and bonds, compared with 51 per cent for the OECD average. A culture of fixed-interest investing will take time to build, but Challenger is doing everything right to capitalise on it.

Chart 1: Challenger

Source: The Bull 

2. SeaLink Travel Group

Readers of this column understand my interest in the coming consumption boom in Asia as another 2 billion people there join its middle-class by 2030, on OECD forecasts. For some time, I have favoured tourism-related stocks, such as Sydney Airport, that are ideally positioned to capitalise on rising inbound visitations to Australia.

Casino operator The Star Entertainment Group delivered another good earnings result, and cruise and ferry provider SeaLink Travel Group impressed with a record half-year result that saw underlying earnings before interest and tax (EBIT) jump 23 per cent in the first half of FY16 for its pre-acquisition business compared with the previous corresponding period. 

I covered first SeaLink for The Bull in January 2014, nominating it as one of five top floats from the previous year. SeaLink has rallied from $1.55 to $4.12 since that column, thanks to strong profit growth and astute acquisitions.

SeaLink is due for a share-price pullback after recent gains but has good long-term prospects as more Chinese tourists start their trip in Sydney, head to Circular Quay, and use SeaLink’s popular cruise ships to see the sights. It looks like one of the better run small-cap companies on ASX with strong earnings drivers this decade.

Chart 2: SeaLink Travel Group

Source: The Bull

3. Aurizon Holdings 

My positive view on Aurizon was outlined for The Bull in October 2014. It rallied from $4.50 to a 52-week high of $5.69, but has since fallen to $3.67. Exposure to the troubled coal sector and a disappointing decision to invest in the West Pilbara Iron Ore Project have crunched the Queensland-based rail operator.

Aurizon’s first-half profit for FY16 was a touch ahead of some broker forecasts. But the big unknown is how much further coal and iron ore prices will fall and how that will affect Aurizon’s customer base of resource companies, their profitability, and haulage demand and pricing.

A lot of bad news has been priced in Aurizon. At $3.67, it trades on a forecast Price Earnings (PE) multiple of 14.8 times and is expected to yield 6.9 per cent in FY16, partially franked, consensus analyst estimates show. 

Macquarie Equities Research upgraded its Aurizon recommendation this week to outperform this week, noting that even in a downside scenario of further falls in coal and iron ore haulage rates, Aurizon looks undervalued. Its 12-month target price is $4.73.

Aurizon’s provision of earnings guidance was a good sign. It does not normally announce guidance, so must have more confidence that prices and volumes are stabilising. I see further downside in the next six months as commodity prices weaken, albeit at a slower rate. But a turning point for Aurizon is getting closer and it deserves a spot on portfolio watchlists.

Chart 3: Aurizon Holdings

Source: The Bull 

 

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Tony Featherstone is a former managing editor of BRW and Shares magazines. The column does not imply any stock recommendations. Readers should do further research of their own or talk to their financial adviser before acting on themes in this article. All prices and analysis at February 17, 2016.