Buy BOQ for northern exposure

Chief Investment Officer and founder of Aitken Investment Management
Print This Post A A A

I remain a major bull on Queensland under the Newman government. I feel the combination of a business-friendly government and macro tailwinds will drive GDP growth outperformance from the Sunshine State.

South East Queensland effectively was ‘Australia’s Florida’ in the GFC. The residential property market was hit hard after years of speculative over-build, with residential prices experiencing a deep correction. To add insult to injury, the actions of the US Federal Reserve sent the Australian Dollar into a new orbit, all but destroying the inbound tourism market into Queensland, because it became bad global-relative value. A series of severe weather events that got global coverage didn’t help either.

The right exposure

All those headwinds have now turned to tailwinds, even bellwether Noosa beachfront apartment sales are up, and I want to keep the foot to the floor on listed Queensland exposures. The massive Gladstone LNG developments and their long-term contribution to state GDP are also underestimated. In very basic terms, this leads me to liking the Queensland stocks that got hit hardest in the GFC, namely the mortgage banks Suncorp (SUN) and Bank of Queensland (BOQ).

Suncorp has been in my high conviction buy list since inception and continues to deliver strong total returns. Bank of Queensland has been in my 20/20 portfolio since inception and also continues to deliver strong total returns. But the returns generated by both SUN and BOQ over the last few years were simply mean reversion from near-death experiences. What happens from here is “normalisation of cycle P/E” as it becomes more widely accepted that Queensland is returning to business as usual. That’s the next leg up of both SUN and BOQ.

Bank of Queensland

Today I again want to focus on the $3.3 billion market cap Bank of Queensland. Top down, bottom up and technicals are all aligned for BOQ and that is a very powerful share price combination.

BOQ: 1 year..breakout

BOQ: 5 years…breakout

BOQ: 10 years.. breakout

Despite the recent rally, BOQ remains cheap. FY14 has just commenced for BOQ. PEG ratio 1x, price to book 1:1x, dividend yield 5.7% fully franked. Followed by more of the same in FY15.
But here’s the feature that attracts me the most to BOQ and the other regional mortgage banks: their underperformance of the Big Four banks. Sure, some underperformance was warranted, but this gap is now unjustified and too wide. It will close in favour of BOQ.

BOQ vs. ASX Bank Index (XXJ) 10 years: buy the gap

The contrarian play

Only six out of 18 bank analysts recommend buying BOQ. The median price target is $10.09, 88 cents below the current share price. Consensus EPS for FY14 is 83 cents, we are at 85 cents. Consensus FY14 yield is 5.45%, we are at 5.70%.

Via percentage of Queensland-based lending of the total portfolio BOQ is the purest play you can buy on my pro-Queensland growth theme.

We believe the FY13 result, due 10 October, will pass market expectations and we can collect a final 28 cents fully franked dividend. That result should also drive consensus FY14 upgrades as the market starts to believe in Stuart Grimshaw’s execution.

BOQ remains a standout buy from a trading and investment perspective. I am thumping the table on this one because it fits every strong domestic theme I believe in. Also, I like the fact nobody else in brokerland ever seems to mention the stock.

Foreign investors who have been caught underexposed to the Big Four Australian banks should be looking at the cheaper regional names such as BOQ.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Also in the Switzer Super Report:

Also from this edition

View More Articles