Question 1: What factors do you think are driving the strong performance of the major banks and can they continue to outperform?
Answer: There are three factors driving the current strong performance of the major banks:
- Share markets globally are at record highs (USA, Japan, European markets have all recently traded at records).
- Australian resource stocks have been a little on the “nose”, due to softening commodity prices and a gloomy outlook for China; and
- Because the Australian market is dominated by two sectors – financials and materials – it is very hard for the market to go higher if one or both of the major sectors aren’t firing. With material stocks under pressure, institutions are scared to sell the banks.
On a positive note, banks are seen as reliable, attractive dividend payers and relatively low risk. Results during the recent reporting season were a touch better than expected. Can the marginal outperformance continue? I don’t think so. Firstly, they have become quite expensive. Secondly, I think the story for resource stocks (and China) could be a bit better than the market’s current very gloomy assessment. Finally, I don’t think the market (in the long term) will pay a premium for an industry (banking) which has almost negligible earnings growth.
Question 2: I would like to know your thoughts on Star Entertainment Group (SGR) going forward. They have the new Brisbane casino opening soon. Do you think that will be a positive for the company? I have a small holding I got in at just over $1.
Answer: I thought that Star Entertainment Group (SGR) was in the “too big to fail category”, but after the announcement of a second inquiry by the NSW Independent Casino Commissioner, I am not so sure. We should find out by June whether they are going to let Star manage the casino, or potentially, hand the licence back.
The new Brisbane casino (Treasury Wharf) starts to open from August, although it may be some months before we get a handle on how it is trading. Certainly, the analysts feel it has the potential to be a gamechanger. In the short term, they are more worried about the NSW enquiry and Austrac, and the lacklustre trading performance of Star Sydney. Collectively, they see value in SGR, with a consensus target price of almost 72c, about 38% higher than the current ASX price of 52c. The range of target prices is a low of 57c through to a high of 90c. My sense is that it will be quite a long time before your Star shares will be back “in the money”.
Question 3: We have an investment in Bendigo Capital Notes 2 (BENPG). They are about to be repaid and there is opportunity to re-invest in Bendigo Capital Notes 4 (BENPI). What are your thoughts in terms of risk and return?
Answer: I think the margin of 3.20% over the 90 day bank bill rate for the new capital notes (BENPI) is a little tight, but that is where the market has priced it, and I am sure they will get it away. You will be trading down from a margin of 3.75% over the 90 day bank bill rate (BENPG). As an existing holder, I am sure you understand the risks of investing in bank capital notes. Apart from the capital risks, one of these is that if short term interest rates fall, your income return will also fall.
Question 4: I don’t understand why APA shares are their lowest in five years! After all they provide energy in renewables as well as gas. Is it an opportunity to buy?
Answer: I think the market is cautious on companies involved in the renewables/energy transition, and APA in particular due to its high debt and ongoing capex program. One of the fears is that they made come back to the market for more capital. This is reflected in the broker ratings, where there are 4 “neutrals” and only 1 “buy” (according to FN Arena). The consensus target price is $8.71, about 10% higher than the last ASX price of $7.93. Yes, an opportunity to buy and pick up an attractive yield of 7.1%. But you will need to be patient.
