To me, investing is all about letting your winners run and ruthlessly cutting losers. We all have a finite pool of investment capital and it needs to be working as hard as possible, all the time.
From West to East
My number one strategic theme remains betting on a rebalancing of Australian economic growth from West to East. I remain a major structural bull on the East Coast of Australia, feeling the combination of new Federal and State Governments, record low interest rates, a property-led wealth effect, large scale transport infrastructure projects, a new home construction cycle, increased tourism (Aussie dollar down), red and green tape cutting and immigration will drive a traditional and extended East Coast economic growth cycle.
I am particularly bullish on households and consumers, feeling that growing confidence will spill over into asset allocation away from cash, a falling household savings rate, and increased discretionary spending. The RBA in recent times seems to agree with that view, if not trying to generate the outcome itself by guiding to a medium-term period of ultra-low cash rates. Banks are also helping this process by offering record low fixed rate mortgages and term deposits, with margins over the cash rate for both falling sharply (yet maintaining overall bank net interest margins).
This means strategically, at the sector level, I remain bullish about discretionary retailers, property developers, building materials, transport, steel, tourism, asset managers and mortgage banks.
I do get plenty of questions on the Australian mortgage banks after the run they have had, but I still think we can generate solid total absolute returns from East Coast-focused mortgage banks over the next 12 months. I am “still banking on it”.
I think it’s best to remind you of my “self-fulfilling virtuous circle of bank demand in an ultra-low interest rate environment”. This is my own theory that has helped me be on the right side of Australian banks for the last few years. It’s as valid today as it was two years ago in predicting demand for Australian bank equities and bank profit/dividend growth.
Bank of Queensland
Inside our bullish bank sector call, “Banking on Queensland” has been one of our key strategic themes for three years now. We believed Queensland was “Australia’s Florida”, with the likelihood of a post GFC housing and economic recovery.
This has started to unfold, after a change of state government and record low interest rates that saw the South East Queensland property oversupply cleared and prices rise. The fall of the Australian dollar has also seen inbound international tourist numbers rise into South East Queensland.
While Suncorp (SUN) and Bank of Queensland (BOQ) have been two of our best total return ideas ever off the lows, I strongly want to stick with both stocks.
I think regulatory change could go in their favour (equalisation of mortgage capital holding rules) and both could be corporate targets. I always thought this would end with a break-up of SUN or a takeover of BOQ, or most likely, both, once it was obvious to predators that their businesses had stabilised and were growing once again.
Today, I want to focus on BOQ, where we are number one rated on Bloomberg for accuracy of recommendation and price target. At the end of the day, what else matters when you are writing stock research?
Below is our two-year track record of recommendation and price target.
At the moment, there are seven buys, nine holds and two sells on BOQ with a median price target of $12.42. I feel the major bank analysts pay very little attention to BOQ and only write “research” after results. That provides us with an opportunity to write high conviction bottom up opinion on BOQ and wait for consensus to come to us. This is how the last three years have worked out in the stock and it continues to this day.
At the fundamental level, the investment arithmetic remains supportive, with forecast EPS growth better than all four major Australian banks, yet trading on half the price to book multiple of the majors.
There might also be the opportunity for a potential acquisition for the bank.
Recent press reports suggest Investec could be planning to divest its Australian loan book ($2-3 billion portfolio likely sourced from its asset finance, leasing and professional finance businesses). Structured as a portfolio sale instead of as a going concern, it is unlikely the operating cost base will be transferred to any potential acquirer.
Market interest appears to be keen, with the larger lenders unsurprisingly in a stronger position given their relative acquisition firepower. However, we believe the transaction should be attractive and highly value accretive to BOQ on the off-chance the regional is successful in its bid.
BOQ looks to me a stock that can generate another 15% plus total return this year before the value of franking credits.
It remains a classic East Coast recovery play, as all fiscal and monetary policy aims at creating East Coast growth.
CEO Stuart Grimshaw is doing an excellent job maximising BOQ’s risk adjusted leverage to that growth recovery.
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:
- Roger Montgomery – Carsales has plenty of potential [1]
- Staff Reporter – Buy, Sell, Hold – what the brokers say [2]
- Fundie’s Favourite – Domino’s delivers for shareholders [3]
- Penny Pryor – Short ‘n’ Sweet – the mining giants [4]
- Tony Negline – What to do when all SMSF trustees die [5]
- Questions of the week – Worley Parsons and BHP – buy, sell or hold? [6]