RESEARCH & MARKET COMMENTARY


Harvey Norman Holdings (HVN) - FY15 dividend 20.0 cps is slightly above our estimates 

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Woolworths (WOW) - Reports steady NPAT for FY15 

  • Segment EBIT:
    • Australian, Food, Liquor, and Petrol up 2.1% to $3439.8m( reflecting subdued sales growth in H2'15); EBIT margin up 22bps to 7.2%
    • NZ super markets up 5.2% to $326m; EBIT margin up 15bps to 5.55%
    • General Merchandise down 25.3% to $114.27m; EBIT margin down 73 bps to 2.8% o Hotels down 14.9% to $234.5m; EBIT margin down 281bps to 15.9%
    • Home Improvement ($224.7m) as compared to ($169m) in pcp (Approx 20% of Masters stores are now in the new format with average sales per store >30% higher than original format stores. However, Home Improvement lost $225 million in FY15).
  • Net operating cash flow down 3.7% to $3345m

Outlook:

"As previously disclosed, we will not provide profit guidance for FY16. We expect investment in price and service to continue to exceed cost savings with the impact of this most pronounced in H1'16 as we look to restore the rate of comparable sales growth in our Australian Food business. We are ensuring that all our divisions are focused on improving sales momentum over the key Christmas trading period."

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IOOF Holdings - A tidy FY15 result 

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Ramsay Healthcare (RHC) - FY15 net profit in line with our estimates 

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Flight Centre (FLT) - FY15 result in line and outlook comment stronger than market expectations 

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Nine Entertainment Co (NEC) - FY15 result broadly in line with our estimates 

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Perpetual (PPT) - A strong FY15 result 

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Boral (BLD) - FY15 EBITDA in line but dividend slightly below our estimates 

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Orora (ORA) : FY15 result slightly ahead of our estimates, double digit EBIT growth in both segments. 

Segment EBIT: Australasia up 11.8% to $181.6m, EBIT margin up from 8.2% in FY14 to 9.5% in FY15 (driven by cost improvement initiatives;  North America up 25.4% to $71.6m, EBIT margin up from 4.5% in FY14 to 4.9% in FY15 (market share gains and improved efficiencies in the box conversion business). B9 delivered incremental cost reduction and innovation benefits of $18.4m over pcp, taking the cumulative benefits delivered to $21.4m which was slightly ahead of guidance. Operating cash flow up 19% from $219m to $261m.Net debt $607m, leverage 1.9x from 2.2x at pcp

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Healthscope (HSO) - FY15 result 

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Spotless Group (SPO) - FY15 result exceeds prospectus forecast and management expects FY16 to “materially exceed” FY15 

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Scentre Group (SCG) - Interim Result 

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Oil Search (OIL) - Interim profit in line with consensus and our estimate 

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Amcor (AMC) - FY15 result in line and expects higher earnings in FY16 

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Fixed Interest Weekly - 21 August 2015 

Get the bite on the $2.25bn Apple iBonds issue

The strength and depth of the Australian corporate bond market is reinforced by one of the world's biggest and most profitable companies undertaking the largest issue of non-financial corporate debt since BHP in October 2012.

With bond issues currently in USD, EUR, GBP, JPY and CHF, Apple is seeking to diversify its global funding by offering debt in the Australian market. Since May 2013, Apple has raised US$50bn (A$68bn) of debt. Apple is currently the world's largest company by market capitalisation, and is sitting on cash of US$200bn, more than twice the market cap of the ASX's largest company CBA.

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South 32 (S32) FY15 Results 

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Spark Infrastructure (SKI) - Distribution guidance of 12.5cps for FY16 

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Fortescue Metals (FMG) - A result below market consensus but ahead of our numbers 

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Caltex Australia (CTX) - 1H2015 result in line but dividend ahead of expectations 

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Lend Lease Group (LLC) - FY15 Results 

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Duet Group (DUE) - FY15 result in line with consensus and maintains FY16 distribution forecast 

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Coca-Cola Amatil (CCL) - Interim result: volume growth across all regions 

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Santos (STO) - Interim result below our estimates. Launches strategic review and CEO steps down 

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Medibank Private (MPL) - A pleasing FY15 result 

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Sims Metal Management (SGM) - FY15 result consistent with our expectations 

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Insurace Australia Group (IAG) - FY15 result below consensus 

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Tatts Group (TTS) - FY15 result in line; Strong performance in Lotteries division 

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Qantas Airways (QAN) - FY15 transformation benefits ahead of guidance, $505m capital return announced 

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Origin Energy (ORG) - FY15 result slightly below estimates 

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Wesfarmers (WES) FY15 Result 

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Qube Holdings (QUB) FY15 Results 

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Brambles (BXB) - FY15 result in line and FY16 EBIT growth of 6-8% 

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ASX - FY15 Results 

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AMP - A tidy and solid 1H15 result 

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Seven West Media (SWM) - FY15 net profit slightly above our estimates 

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Treasury Wine Estate (TWE) - FY15 Results 

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Seek (SEK) - FY15 NPAT in line but FY16e net profit guidance below consensus 

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Woodside Petroleum (WPL) - Interim Result 

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Stockland (SGP) - Delivers a strong FY15 result 

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Recall Holdings (REC) - FY15 result in line with our estimates 

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Sonic Healthcare (SHL) - FY15 result in line with July 2015 earnings update 

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Iluka Resources (ILU) Interim Result 

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Challenger (CGF) FY15 Result - A lot to be happy about 

Challenger's COE Margin, despite some concerns, actually went up by 10bps from 1H15 to 2H15. They have reintroduced a Care Annuity product called CarePlus, which we noted in a recent report as a major key catalyst for the company given its strong sales potential. In addition to new CarePlus product, there is the new VicSuper white label, and Colonial Platform annuity product - which should add to growth in the September quarter. DRP introduced given move to 100% franking and strong growth rates in business. Funds Management FY15 EBIT of $44m, vs our $45m estimate.

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GPT Group (GPT) - Interim Result 

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QBE Insurance Group (QBE) - Interim result: Improvement across the board 

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Asciano (AIO) - Net profit up 19% and board approves $12b takeover 

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FelxiGroup (FXL) - FY15 result in line with our estimates 

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Newcrest Mining (NCM) - FY15 Results 

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Aurizon Holdings (AZJ) - Dividend slightly above our estimates 

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Tabcorp Holdings (TAH) - FY15 net profit up 15%, slightly ahead of our estimates 

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Crown Resorts (CWN) - FY15 result 

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Fairfax Media (FJX) - FY15 result largely in line with our estimates with Domain delivering robust revenue and earnings growth 

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Mirvac Group (MGR) - FY15 result in line and FY16 distribution guidance range of 9.7-9.9cps 

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Telstra Corporation (TLS) - FY15 result in line with consensus with profit down 1% 

Telstra has guided to mid-single" digit revenue growth and "low-single" digit EBITDA growth in FY16e. Free cashflow is expected to be between $4.6bn-$5.1bn, and as previously disclosed, capex at 15% of sales on "increased mobile network investment". The company also noted that if the draft determination on Fixed Line Services were to be implemented from October onwards, FY16 will see an EBITDA reduction of up to $90m.

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Goodman Group (GMG) - FY15 operating profit up 9%; forecasts FY16 distribution of 23.8 cents per security 

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Primary Healthcare (PRY) - FY15 result in line; flags expansion plans as part of its strategic review outcomes 

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CSL - FY15 result in line but a weak FY16 guidance 

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Computershare (CPU) - A slight miss in FY15 result and substantially lower FY16 guidance 

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AGL Energy (AGL) - FY15 result at top of management guidance range 

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Carsales.com (CAR) - FY15 profit up 8% and dividend up 10% including a special dividend of 1.4 cents 

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Commonwealth Bank of Australia (CBA) - FY15 result in line with consensus, announces capital raising  

Commonwealth Bank (CBA)

Cleared for take-off

$5bn capital raising - now "unquestionably strong". CBA plans to raise $5bn capital through a pro rata renounceable 1:23 entitlement offer (in response to APRA's higher residential mortgage risk weight requirement).  The offer price is $71.50 (10.5% discount to 11 August dividend adjusted closing price, 10.1% discount to dividend adjusted TERP of $79.55).  The offer is fully underwritten and ~71m shares (~4.3%) will be issued.  The pro-forma June 2015 CET1 capital ratio will then be 10.4% (we estimate 9.8% after payment of 2H15 dividend), placing CBA in the top quartile of its global peer group.  Pro-forma 2015 EPS dilution will be 2.7% and ROE dilution will be 140bp to the 16-17% range (still ahead of its major bank peers).  CBA has maintained its full year 70-80% target payout ratio.

Fundamentally sound. CBA's key headline 2015 results were: (1) reported NPAT $9,063m [+5%] (BP $8,991m, consensus $9,040m); (2) cash NPAT $9,137m [+5%] (BP $9,099m, consensus $9,146m); (3) cash EPS 561cps [+5%] (BP 558cps, consensus 561cps); (4) final dividend 222cps (BP 223cps, consensus 222cps) implying 80% final and 75% full year payout ratio (fully franked); and (5) NIM 2.09% (BP 2.10%, consensus 2.10%).

The result was underpinned by 5% PCP total operating income growth (strong volume growth and higher fees, commissions and sales-related trading income) and 5% PCP expense growth (both in line with 3Q15 trends) leading to neutral "Jaws".  On an underlying basis, total operating income growth was 6% and expense growth was 3% resulting in +3% "Jaws".  The DRP will apply without a discount.

Price target rebased to $89.00, Buy rating reinstated. While there have been minor changes to our estimates at the P&L level, we have reduced EPS and ROE by ~3% and ~120bp respectively across the forecast horizon as a result of capital dilution.  This has also resulted in a rebased price target of $89.00 (previously $91.00).  With an expected 12-month TSR in excess of 15% over the dividend adjusted TERP of $79.55, we reinstate the Buy rating (previously Hold).

 

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Cochlear (COH) - FY15 result weaker than expected 

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Domino's Pizza Enterprises (DMP) - A strong result & ahead of BP estimates/Guidance 

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Transurban Group (TCL) - FY15 proportional EBITDA up 38% and FY16 distribution guidance of 44.5 cps 

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Bendigo Adelaide Bank (BEN) - FY15 results in line with consensus 

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JB HI-FI (JBH) - A strong result 

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Ansell (ANN) - A soft outlook for FY16 

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LIC Quarterly  

Our report provides detailed coverage of 37 LICs (and two LIC hybrids) including historical performances over a periodical accumulation basis; reported portfolio composition; investment strategy; dividend history; and risk/return gauges.

Based on our filters of investment performance, dividend yield and the current indicative premium/discount to NTA, our preferred LICs currently are:

1.AUI - Offers exposure to the ASX 300, with a yield of 4.0% fully franked;

2.DUI - Provides a more broad based domestic exposure with the inclusion of medium and small cap stocks and international ETFs in its portfolio, yields 4.0% fully franked, and has outperformed the ASX300 Accumulation Index by 0.7% pa over the last 10 years; and

3.PGF - Investment performance has matched its benchmark, the MSCI World Accumulation Index over the last 12 months, and has indicated it aims to pay a dividend in Feb 2016.

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Suncorp Group (SUN): Travelled each and every highway, and still going strong. 

SUN's headline 2015 results were largely ahead of consensus.  The key headline items were: (1) cash NPAT $1,191m (BP $1,185m, consensus $1,143m); (2) cash EPS 93cps (BP 93cps, consensus 89cps); (3) final ordinary dividend 38cps and special dividend 12cps (BP 45cps and special dividend 15cps, consensus 33cps and special dividend 23cps) - all fully franked; (4) GWP $8.9bn (BP $8.8bn, consensus $8.8bn); and (5) reported margin 11.4% (BP 9.7%, consensus 10.6%). We have made immaterial changes to overall Group earnings with little change in General Insurance numbers and upgrades in SUN Bank offsetting downgrades in the Life business.  However, the price target is increased to $15.50 (previously $14.50) after lowering the discount rate from 11% to 10% in line with a lower risk free rate.  The Buy rating is maintained for this rejuvenated "Cash and Growth" story.

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The Collins Street farmer - Agricultural sector review 

 

Key commodity trends and stock implications:

Livestock: Price and volume indicators remain strong in cattle markets, with the EYCI up +30% YOY (R12M basis) and national saleyard volumes up +20% YOY (R12M basis). Despite recent headlines concerning Indonesian live export quota reductions in the September quarter, live export volumes have continued to track ahead of 2014 levels, up +24% YOY (R12M basis), with strong levels of demand emerging in Vietnam. At this late stage of the year all major volume and price indicators in cattle markets are exceeding our expectations.

Dairy: Dairy prices have continued to weaken with continued growth in supply among the Top 5 global producers (+2.9% YOY in May15) and subdued demand for WMP by importers. The GDT Index is down 41% YOY in USD terms and YTD (June YE) down 21% relative to average 2014/15 levels in AUD terms. Globally milk price to feed ratios have fallen to the lowest level since Mar'13 (~1.29x) and at levels that would typically be associated with moderating supply growth, which suggests a turnaround in pricing is likely at some point. Opening Victorian farmgate prices have been announced at A$5.60/KgMS for the 2015/16 season, with closing estimates in a range of A$5.80-6.20/KgMS.

Water markets: In general water prices in the Murray Darling Basin have demonstrated a material uplift in a tight market since March. Current prices for permanent water in the Murrumbidgee Irrigation Area (MIA) have demonstrated ~40% YOY gains in both High and General Security. Meanwhile prices for temporary water in the MIA have almost tripled YOY (+186%) to ~$200/ML. Water prices are currently trading at levels above that utilised in the independent expert reports utilised in the now complete WBA/TAN merger.

Key picks in agriculture: Our key picks remain: (1) ELD on leverage to favourable trends in livestock and wool markets and the benefit of 8PP initiatives beginning to deliver more meaningfully in 2H15e; (2) WBA on a continued strategy to maximise the value of its water resource in aggregating the asset base towards higher margin horticultural crops; (3) BGA on corporate appeal of the assets as well as seeing the current weakness in milk prices as more a cyclical than structural event, that is likely to reverse as global supply responds to deteriorating farmgate economics.

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iSelect (ISU): Upgrade in price target. 

ISU announced it has come to an agreement to receive a cash settlement for its outstanding NIA Health loan facility. We believe this is a very good outcome for the following reasons:

Higher value than anticipated - We valued the NIA loan facility separately at $39.6m vs $42.1m cash to be received; and

Enhanced product suite - This deal has further enhanced ISU's depth of health insurance product by adding GMHBA as well as retaining Health.com.au on a cash upfront commission basis.

Based on this announcement, we have made minor upgrades to FY16 & FY17 earnings due to changes in interest revenue assumptions. We have updated our Price Target for the NIA loan settlement and rolled forward our DCF ahead of next month's FY15 result. We have also added a 15% premium to our valuation to account for the prospect of capital management initiatives. As a result our Price Target has increased to $2.10 (previously $1.65). We retain our BUY recommendation.

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Macquarie Group (MQG): X’mas in July 

MQG held its AGM last week and provided a positive 1Q16 trading update. We have upgraded our price target for MQG and reinstated our Buy recommendation.

Watch our video summary by analyst TS Lim >

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Bank Note$: Enough room now to swing a cat. 

APRA announced an increase in the capital requirements for residential mortgages under the IRB approach. This move should come as no surprise with the major banks already having extensively gamed a 25-30% mortgage risk weight scenario. Our view remains that the major banks will not need to raise external capital but rather they will be creative in terms of adjusting their respective DRPs in the coming years. Our analysis suggests MQG and NAB are the clear winners while the impact on ANZ is not as detrimental as the market has been led to believe. The resilience of NAB and ANZ relative to WBC and CBA is also underpinned by much lower earnings dilution. Finally, regional banks on the way to accreditation are clear winners while BOQ should also benefit in due course.

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Macquarie Group (MQG) FY15 Result Summary  

Macquarie Group (MQG) is our top pick across the broader banking sector. We have a price target of $90.00 and a strong Buy rating on this unique growth story.

TS Lim provides a summary of their FY15 results.

> Read the full report

> Watch the video summary

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Our Fixed Income and Hybrids Analyst Damien Williamson discusses the Buy, Hold or Sell investment case surrounding bank hybrids.

In favour of buying bank hybrids, Damien points out three key arguments: 

1. Bank Hybrids have historically high margins with decreasing levels of default risk

2. Basel III requirements to strengthen capital levels provide a more attractive risk profile for bank hybrids, and

3. On a risk / reward basis, bank hybrids provide an attractive uplift in yield versus what is available from other fixed income investments, such as Government bonds, corporate debt and bank deposits. 

> Read the full report

> Watch the video

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3 Reasons Why We Like Shine Corporation (SHJ) 

Our Industrials Analyst Sam Haddad discusses three key reasons why Shine Corporation (ASX: SHJ) is one of top stock picks in the professional services space.

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BT Investment Management (BTT) interview with Emilio Gonzalez (CEO) 

Lafitani Sotiriou, Diversified Financials Analyst at Bell Potter has interviewed CEO of BT Investment Management (BTT) Emilio Gonzalez post the release of their half year results.

BTT is our top stock in the diversified financials sector, supported by an outstanding multi boutique funds management model, and with funds in key markets of Australia, United Kingdom, Singapore and more recently the United States. The company is achieving strong net flows into its business, locking in $1.4 billion in the March quarter alone. Our price target is currently $12.30 per share and our Buy rating remains.

Driving growth for BTT includes their Equity Income Fund and their Significant Investor Visa (SIV) program and overlay strategy. We are also starting to see growth coming from JO Hambro, a new bunch of funds that have delivered positive net flows every quarter since inception two years ago.

>View the video

> View the research report

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IOOF: Upgrade to Buy  

We have upgraded our recommendation from a Hold to a Buy for the following reasons:

> The business is displaying strong organic growth in the key divisions of Platforms and Advice & Distribution;
> There remains meaningful synergies to be extracted from the SFG acquisition;
> The share price has fallen and Price Target increased since we downgraded to a Hold; and
> We believe the current low interest rate environment remains generally supportive of wealth managers.

Read our report.

Watch Peter Quinton review the stock on YouTube.

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Super Retail Group (SUL): Transitioning to growth 

With the benefit of important business transformation initiatives undertaken over the past two years, and bed-down of execution hick-ups that unfortunately accompanied, we believe SUL is now entering its next earnings growth phase. We are forecasting EPS growth of 18.1%/16.8% in FY16/FY17 driven by the combination of leverage benefits off initiatives recently complete or well advanced (including new DC network, JDA rollout and SAP), the closure of loss-making stores in 2H15 (FCO and 5xRays), cycling of weaker comparatives, and the progressive unwind of investments. Notwithstanding continued pressures stemming from mining, we believe the business will benefit from a number of internal drivers as well as the conducive macro backdrop.  We retain our Buy rating with an unchanged 12-month PT of $11.00.

Read the full report via this link.

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Fixed Interest Weekly - 7 August 2015 

Fixed Interest Weekly: Capital raisings to provide greater protection for hybrids

The past two weeks has seen WBC and ANZ undertake capital raisings in response to APRA international capital comparison study released on 13 July 2015. APRA's target is for the Australian major banks to operate with capital ratios in the top quartile of international banks. To satisfy this requirement, APRA has assessed the major Australian banks, they would need to increase their Common Equity Tier 1 (CET1) ratios by atleast 0.70% and Capital Adequacy ratios by at least 2.00% relative to June 2014.

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The Collins Street farmer - Agricultural sector review  

Our Agricultural Analyst, Jonathan Snape, reviews the agricultural sector, covering 4 major emerging themes and our top stock picks.

Click here to view the report.

An accompanying video summary can be viewed here.

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