Question: With the banks paying good dividends, and CBA going ex div in August, are they a good buy, or do you feel the pressure on the banking sectors will cause their prices to drop?

Answer (by Paul Rickard): I am probably in the school that Banks aren’t a great buy yet. I think the market needs to be convinced that:

a) they won’t need to do further capital issues. The position of APRA on Basel IV won’t be known till much later in the year;

b) they have a path to increasing revenue (difficult with interest rates and margins still falling); and

c) the bad debt cycle is not going to rear its ugly head.

Most importantly, Australian banks are following leads from the US and Europe. We are starting to see sentiment improve marginally in those markets – and that might be the catalyst we need. Also, a strong report from CBA in August could be really important.

That said, while I am not bearish, I don’t think they are going to run away from you in the short term – I think you can be patient.

Question: What is your opinion about MFG and VIT?

Answer (by Paul Rickard): With Magellan (MFG), I am a little more attracted to it at these levels (very low $20s), although on a multiple basis, it is still reasonably expensive at 19.6 times FY16 earnings and 19.4 times FY17 earnings. Performance fees are the great unknown – and are correlated to the direction of the equities markets. You would expect Magellan to do well if equity markets rise, and conversely, struggle if markets fall.

Bottom line – I prefer BTT to Magellan on valuation grounds. As far as the brokers are concerned, according to FN Arena, sentiment for Magellan is +0.6 (scale -1.0 most negative to +1.0 most positive), with a consensus target price of $23.29.

On Vitaco (VIT), the brokers have a target price of $2.06 (range $1.90 low to $2.25 high), with sentiment sitting at +0.3.

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