Beware of the High Yield ETF Trap 9 - March 2018

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Beware of the High Yield ETF Trap 9 - March 2018
Beware of the High Yield ETF Trap
                                                    9 – March 2018

Global interest rates are at record lows. The lowest the world has seen. The US Federal Reserve however, is gearing
up to raise interest rates by 3 or 4 times this year. Don’t be fooled. Even with these rate hikes, interest rates will still be
historically low. Australian rates on the other hand, will remain near historical lows for years, with inflation unlikely to
hit 2% until the end of 2019 at least.

That’s quite a conundrum for yield hungry investors who will have no other choice but to look else where for returns in
excess of the measly couple of percent they can get on their bank deposits. Retirees in particular have done it tough.
A large bulk of their savings are in interest bearing assets. You can understand why they feel hard done by. With
interest rates so low, retirees take on more risk by chasing higher returns. Rather than doing proper research and
searching for quality investments, some retirees have pursued a less desirable alternative: High Yielding ETFs. The
low interest rate world has led to a new breed of investments devised to solve the yield problem. These instruments
attempt to give yield hungry investors the high yield they’re so desperately seeking. But it all comes at a hefty cost.
These investments are called High Yield Exchange Traded Funds.

                                      Firstly what are High Yielding ETFs?
They are exchange traded funds listed on the ASX. Billed as simple to use and cost-effective instrument, these
securities allow investors to implement an equity income investment strategy over a portfolio of 20 blue-chip Australian
shares. The ETF peddlers highlight their ‘attractive income’ as their key quality. And they’re right. These High Yielding
ETFs are capable of earning quarterly income (including franking credits) that exceeds the dividend yield of its
underlying share portfolio over the medium term. For this article we’ll used the Betashares Equity Yield Mazimiser
Fund (YMAX) or the BetaShares Australian Dividend Harvester Fund (HVST) as an example.

YMAX has a 12 month distribution yield of 8.5% which grossed up is 10.30% and has 49.8%
                                        franking.
That yield is exceptionally high and very attractive but here’s the catch. What the ETF peddlers don’t tell you is that all
that is gained on the distribution yield is given back in capital losses. The Harvester uses a 'dividend harvest' strategy.
What that means is that it buys shares that are about to payout a high dividend, such as a bank or infrastructure
company. The sad truth is when buying pre dividend shares are usually higher. When selling ex dividend, shares will
Beware of the High Yield ETF Trap 9 - March 2018
have already fallen by the dividend amount. This results in a capital fall every time it is done. You can see it in the
funds performance. Both the YMAX and HVST are carrying huge capital losses since inception. This makes the
attractive distribution claim a little bit of a con. At inception, 29 October 2014, the HVST Fund NAV was $24.86. Today
it is trading at a NAV of $16.00. That’s a 36% loss since inception. The fund lost 17.90% in the year to the 31 January
whilst it paid out a distribution yield of 11.40%. So in effect the fund actually lost you 6.50%. The fund seems to have a
hedging strategy in place to minimize downside volatility. However the hedging doesn’t seem to be working with the
fund still amassing huge losses.

However the fund does have some appeal to retirees. It pays its high dividend monthly and straight into your bank
account at the middle of every month. Therefore living off dividends makes it very easy. But the only drawback is the
harvesting strategy in a bull market. Using the dividend harvesting technique results in less upside when markets are
going up. But what we’ve also noticed, is that the HVST fund also fell during downturns in the ASX 200. That makes
us somewhat question the firm’s risk management strategy.

                                               Don’t fall in the trap
The bottom line is that the HVST fund is a dividend trap, it delivers income at the expense of capital growth. The fund
basically pays you back part of your capital with every distribution, until they’ll be nothing left. Whilst the fund
publishes its distribution as 11.40%, it’s really -6.50%. As mentioned above, one of the reasons for the capital loss is
buying cum dividend shares at their high and selling ex dividend shares at their low. We think a buy and hold equity
strategy will reap far better rewards. Look for real yield over fake yield and have absolute certainty over the capital
value of the investment. The table below shows yields on a range of Australian investments.

                   What I should look for when buying shares for dividend yield?

There’s an old adage, “if it sounds too good to be true, it probably is”. It’s a phrase that indicates pessimism but it’s
one that can save investors from getting caught in yield traps. When an investment is yielding +10% there’s good
reason to be concerned because in some cases the yield will come at a cost. A yield trap means buying a company
that promises to pay a high dividend but don't have the cash flow to support the payments. The aim is to look at higher
quality companies that pay a sustainable and consistent dividend yield that is attractive. Grossed up yields of around
6%-9% that are sustainable. Anything above that and it gets risky. Here are some rules to picking good dividend
stocks:

            o   Sustainability is a primary consideration in estimating dividend yields.
            o   Avoid companies that borrow to pay dividends. It’s not sustainable and will eventually lead to a
                dividend cut.
            o   The quickest way to see whether a dividend is sustainable is to use the “payout ratio” — The
                relationship between the company’s annual dividend payout per share and the company’s annual
                earnings per share.
            o   A low payout ratio means the dividend is more sustainable and the company is reinvesting for growth.
            o   A payout ratio +70% is worth further investigation.
            o   A payout ratio of 100% is usually a good sign that the company has a looming growth challenge and
                its dividend is ripe for a cut.
            o   A bank with higher levels of capital, a lower payout ratio and no sign of bad or doubtful debts is not
                under pressure to cut dividends.
            o   Newly listed companies generally have lower payout ratios because they want to reinvest more of
                their earnings in order to keep growing.
Beware of the High Yield ETF Trap 9 - March 2018
o   Keep an eye out for dividend cover. It is the inverse of the payout ratio. It’s he ratio of company's net
                 income over the dividend paid to shareholders. EPS divided by the DPS. It indicates how sustainable
                 a dividend is. Dividend Cover of less than 1.5 may indicates the danger of a dividend cut while more
                 than 2 is viewed as healthy.
             o   Debt to Equity ratio is below 2.00 but preferably below 1.50. Below 1.00 is excellent.

ASX Code         Company         Price Gross Yield Payout Ratio Dividend Cover Debt to Equity Dividend Growth Risk of a Cut
GMA        GenworthMortgage        $3.13   13.50%      85.6          1.168          10%            9.70%          High
TCL        Transurban Group       $12.67    6.71%     290.4          0.344         305%            8.90%        Medium
RIO        Rio Tinto              $71.54    7.00%      55.6          1.799          34%            -4.30%         Low
MQG        Macquarie Group        $99.50    5.90%      71.1          1.406         408%            4.10%          Low
NAB        National Aust Bank     $29.38    9.60%      83.8           1.19         394%            0.00%          Low

As you can see from the above table GMA has the highest Grossing Yield. But it is a dividend trap. GMA has fallen in
share price by 30% over the last three months alone more than offsetting this dividend yield. It’s payout ratio is close
to 90% and is at risk of a cut. TCL is also at risk of a dividend cut, it is funding its payments by debt. If interest rates
rise, its dividend may not be sustainable. Dividend cover is 0.34. RIO and MQG both have fairly sustainable dividends.
Dividend cover is above 1.00, payout ratio is above 60 but below 100 and the yield isnt too high. NAB and MQG have
a high debt to equity ratio. Naturally, banks have relatively high levels of debt compared with other large companies
because taking deposits is their core business.

                                Here are two low risk high yielding alternatives

Our solution to attaining a reasonable and sustainable yield is to look at fixed interest cash and floating rate bond
products. Bond yields are the simplest real form of yield around. Like a loan, a bond pays interest periodically and
repays the principal at a stated time, known as maturity. A bond’s price always moves in the opposite direction of its
yield and interest rates.

At the lowest risk side is Strategy Money Investments.The Fund manager is a is a leading independent, active fixed-
income manager established in 2011 by Christopher Joye, Darren Harvey and their team of portfolio managers and
analysts. They manage all of Smarter Money’s funds via Coolabah Capital Investments. The fund is called the
Smarter Money Higher Income Fund and is a low duration, short-term fixed-interest investment solution that targets
returns that outperform the RBA’s cash rate by 1.5%-3.0% per annum after all fees, over rolling 12 month periods.
That means the total return is somwhere betwseen 4.0%-5.50%. Smarter Money Higher Income invests in a portfolio
of Australian deposits, Australian investment-grade bonds (mainly issued by banks) and hybrids issued by banks and
companies. SMHI does not invest in fixed-rate bonds, equities or overseas bonds. Bonds are low duration. Investors
should be aware that higher duration funds are riskier because longer maturity bonds are more sensitive to rate
changes. They are however useful during a softening interest rate cyclce.
Beware of the High Yield ETF Trap 9 - March 2018
Since inception, September 2014, the gross return has been 4.7% p.a, including interest income and movements in
the price of the bond portfolio after all fund fees. The annualised volatility estimate of 0.57% p.a. Just to highlight, a
standard deviation of 0% to less than 0.50% is very low. You cant go wrong with the Smarter Money Higher Income
Fund. It pays up to 5.50% in yield without the risk of losing your capital.

                                   The second alternative is a bank hybrid.
Hybrid securities issued by banks are listed on ASX but they are not the same as investing in the bank's ordinary
shares. Banks will issue hybrids to raise money that can count as regulatory capital under the prudential standards.
Capital notes and convertible preference shares are very similar in that they pay regular interest payments, called
distributions or dividends. On a fixed date, around 8-10 years in the future, you should receive ordinary shares in the
bank that issued the hybrid or the $100 facevalue in cash. We think the CBA Perls X (CBAPG) issue is an attractive
investment opportunity yielding the BBSW rate plus a margin in the indicative range of 3.40% to 3.60% per annum.
That equates to somewhere between 5.22%-5.42% per year. That’s a fair price for a a hybrid investment. However
investors are exposed to an equity like component and losses can occur. This means they should not be viewed as
traditional fixed-income products, nor should they be considered a substitute for low-risk investments such as term
deposits. An investment in CBAPG should only be considered by investors with a medium to high investment risk
tolerance. The securities are scheduled to begin trading on a deferred settlement basis on April 9.
Beware of the High Yield ETF Trap 9 - March 2018
The bottom line is, don’t blow up your capital chasing high yield securities such as ETFs.
In order to find the right opportunities, focus on a sustainable yield rather than a high yield. Focus on quality. Whether
you’re investing on your own or with a money manager, you might want to consider bonds and hybrids. As we see
bond yields rise, it could signal the beginning of the end of the dividend equity run. Be picky in regard to high-dividend
flyers as many are borrowing cash to pay their dividends. Don’t get caught in the trap.
Beware of the High Yield ETF Trap 9 - March 2018
Platinum’s next frontier - China

This week the UWJ team attended Platinum Asset Management’s annual adviser luncheon. Whilst legendary founder
and CEO Kerr Neilson stepped down from the top job last month, he still has considerable input on the company’s
vision and framework. Nielson hands the reins over Andrew Clifford, Platinum's chief investment officer, who will
succeed Mr Neilson from July 1 this year.
                                                It’s all about China
Platinum’s luncheon was a packed house held at Melbourne’s Sofitel Hotel. What was striking was that the entire
presentation was based on one thematic. China. The first speaker was portfolio manager Dr Joseph Lai. Think back a
couple of years ago. Remember that 60 minutes report on China’s Ghost cities back in 2013? Here’s the link if you
missed it. To recap, China built massive cities. Brand new skyscrapers, apartment blocks, roads, bridges and shops.
Everything needed for a modern, urban lifestyle. Everything except one major thing. People. These cities were empty.
Almost like ghost cities. Everyone thought China was crazy and labelled it a huge housing bubble. Fast forward to
today and Ordos Kangbashi, China's largest ghost city, is now full. It’s a thriving metropolis that is occupied by more
than two million people. It’s a remarkable achievement that no one imagined possible. Lai says more than 20 million
people have now moved into these ghost cities as the middle class migrate from farms and villages into these urban
cities. In doing so, they’re actively buying up land and property. In-fact some cities have introduced a lottery system for
the sale of new houses as demand is overtaking supply. The lottery guarantees transparent and fair distribution of
homes. These ghost cities made headlines for nearly a decade with many sitting empty for years. Economists and
analysts saw this as a sign that they country was almost certainly headed for a massive property crash. They were
wrong. This was merely China’s style of urban expansion required for a giant population and giant economy.

It doesn’t stop there though, China’s good fortunes are spreading throughout the economy. The country is no longer
just a manufacturing economy. It’s a country teeming with entrepreneurs and innovators who are driving a tech
revolution. Over the past 20 years, Shenzhen has been transformed into a booming Silicon Valley. The country is
adopting tech on a massive scale. And if you think about it, it makes sense. For a start, China is massive. Lai says the
country produces 4 million technological engineers every year. The talent pool is huge. Which means its ability to
produce new tech companies and disrupt is more than anywhere else in the world. Here’s an interesting fact: 15
Chinese startups had reached unicorn status last year. Effectively 30% of the world’s billion-dollar companies were
created in China in 2017. What we are witnessing is a tech revolution and it’s only just starting. China is re-shaping
itself as a tech innovator and its long-term strategy is to lead the world in technologies such as machine learning,
blockchain, EV and energy.

To highlight this even further the Platinum team used mobile payments as an example. They visited a small town
called Chengda. What they found was that a movie theatre did not accept cash only payments via smartphone. Alipay
(Ali Baba) and WeChat (Tencent) Pay rank as the top payment options. Mobile payments have made massive inroads
as a medium of payment in Chinese cities. So much so that convenience stores, shopping malls, fine dining and even
vegetable markets have switched to mobile payments. It’s fast becoming a completely cashless society. China’s
mobile payment sector topped 29.5 trillion yuan in the third quarter of 2017. That completely dwarfs mobile payments
in the US. And the opportunities don’t end there. Think insurance. The insurance market is still in its infancy however
its adoption of cutting edge tech is first class. A company called Ping An with a market capitalisation of US$200bn
uses disruptive tech for its claims. For example a customer can use the Ping An smartphone app to lodge a claim on
the spot and submit a photo of the accident. The company then assesses the damage using artificial intelligence and
within minutes an assessment is delivered followed by the payment if applicable. In comparison, this process in
Australia is a costly and lengthy procedure that can take weeks if not months to complete.

Platinum’s next speaker was Portfolio Manager Clay Smolinski and for him it’s all about electric vehicles (EVs). Forget
the US. China is vying to become the world’s first all-electric vehicle ecosystem. In an effort to reduce pollution and
Beware of the High Yield ETF Trap 9 - March 2018
smog which is choking some of China's biggest cities, the country has decided to make a change. Air pollution is
responsible for as many as one million excess deaths per year in China. For China to clean its air quality it will need
systemic change and that’s going to come from its auto industry. Motor vehicles are the largest source of pollution so
it makes sense to transform to an all-electric society. Chinese automakers churned out 680,000 all-electric cars,
busses and trucks in 2017, more than the rest of the world combined. And China's output is growing faster than the
rest of the world's. As more and more EV’s are churned out, the prices will continue to fall. The running cost of an
electric car is $2.30 per 100kms compared to $12-$14 in a petrol car. That’s 80% cheaper. It’s also cheaper to
service. An EV has 35 moving parts whereas most combustion engines have +200 moving parts. But the big best part
is that EV’s are 50% cleaner for the environment than their petrol counterparts. And that’s huge.

Sure there are teething problems such as the time it takes to recharge an EV battery and the maximum 300km range
a car can travel before running out of energy. But these teething problems will be ironed out as EVs become more
widely accepted. Innovation is bringing down the cost of batteries and that’s the key. The sticking point however is
regulation. Within the four years every auto manufacturer will need to manufacture at least 5-10% of their fleet as
electric vehicles or simply will not meet global omission standards. If the cars they produce don’t sell, they’ll need to
drop prices dramatically to sell them until the 5% is reached. That’s great news for consumers. Smolinski points out,
that investors can benefit not from just buying Chinese auto makers but also from battery manufacturers and from the
mining companies that supply them. LG Chem supplies batteries globally and is about to open Europe’s largest
factory for building lithium-ion batteries for use in electric cars. The facility will be able to supply as many as 100,000
EV batteries per year beginning next year. Inside each battery are similar compounds of either Cobalt, Nickel and
Copper. Over the next five years demand for these three products is tipped to skyrocket. Platinum’s exposure to this
area is via Glencore. The miner is the number 1 producer of Cobalt and number 3 producer of Nickel and Copper.
Beware of the High Yield ETF Trap 9 - March 2018
Platinum could have kept talking for hours on end about the merits of their investment strategy but it’s plainly clear
their sole focus is on China. China’s fortunes have improved dramatically over the last decade driven by a tech
revolution that we think is still in its infancy. Which-ever way you look at it, China is fast becoming the global leader in
tech. It’s already grown four of the world’s largest tech stocks Baidu, Alibaba, Tencent and JD.com. Pretty soon the
BATs will soon rival the FANG s of the world. They’re not far behind in market capitlisation.

With that in mind, we think the Platinum International Brands managed fund is a great way to play the China thematic
and to gain exposure to the fastest growing major economy in the world.
Beware of the High Yield ETF Trap 9 - March 2018
3 Stocks from the herd – CSL, TLS, SGR

In this section we provide readers with three stocks that have attracted the interest of the broking community or
the ‘herd’. Broker recommendations tend to be biased and highly optimistic. We try and breakdown these barriers
and give our own honest opinion. It is important to keep in mind that technical analysis is only one part of the
investment process and any recommendations do not give consideration to the underlying fundamentals of each
business.

CSL – $163.48 – Delivered a robust profit result last month. It posted a NPAT rise of 35% to US$1.086bn which was a
huge beat on an expected US$901m. It also upgraded guidance. Revenue was up 11% to $4.147bn, EBIT was up
31% to $1.476bn and EPS rose 32% to $2.40. CSL also upped its dividend by 23% to $0.79. Here are some dot
points:

       Immunoglobulin sales up 13% on trailing period
       Exceptionally strong demand for Idelvion® (rFIX-FP)
       Specialty Products sales up 19% on trailing period
       Seasonal influenza vaccine sales up 43% – strong QIV growth
       Holly Springs cell culture facility – output up four fold
       FLUAD® approved in the UK

           NOT BAD
                                                                                                         CSL
                               StockOmeter                                        CSL Ltd               $163.48

 DEEP
VALUE      62           BUY    PE FY0 35.92x     Dividend        1.17%     52 Week High    $165.84   Short term   46%

            62
                               PE FY1 35.42x     Gross yield     1.67%     52 Week Low     $119.01   Long term    77%
                               ROE FY0 46.67%    Franking        0%        Price 1M %      +16.36%   RSI          72
                               ROE FY1 44.60%    Debt / Equity   125.65%   Price 1Y %      +33.46%   PEG Ratio    1.96
 NO GOOD             GOOD      EPS FY0 2.99c     EPS FY1         3.61c     EPS Grow th     +20.82%   Market Cap   $73.94bn
                               Intrinsic Value   $89.56                    Current Ratio   2.84

Broker View: Credit Suisse (OUTPERFORM $170.00) – The broker has a positive view on the stock following what
was a robust first half result. It says CSL’s Seqirus product is well placed to compete for market share due to the shift
towards higher margin products. A break even result in FY18 is dependent on the level of flu vaccine returns.

Unconventional View: We agree with Credit Suisse. CSL is the stock that keeps on giving. The earnings beat has
driven a 15% share price rise with shares trading at around $163 up from $142 mid-February. CSL’s profit guidance is
now forecast to hit US$1.5bn-US$1.6bn. Whilst the doubters have asked time and time again whether an expensive
Beware of the High Yield ETF Trap 9 - March 2018
CSL can deliver growth? Yes it can. It truly is the market darling and sits at the top of this reporting season’s winners
list. There should always be a space for CSL in your portfolio, especially this year. CSL is one that you can buy with
your eyes closed. Its lofty premium is justified by its growth in earnings year after year. CSL’s ROE sits on a whopping
46% driven by its commitment to investing in R&D and production. CSL has a market leading position and has a
number of upside catalysts that allow it to continue growing. We think it is well positioned to continue to grow into
fiscal 2019. As long as CSL can grow earnings, its share price will tick higher.

On the chart, CSL does look a little ritzy following the recent upside break out and could be hitting resistance. Those
wanting to buy might want to wait for an upside break out before buying. The stock has run hard, so we’re just being
mindful. All in all, the fundamentals are good and the chart is in a solid uptrend. CSL ticks all the right boxes.

Telstra (TLS) – $3.39 – Delivered a welcomed earnings beat last month followed by the payment of its dividend. The
result was driven by an increase in its subscriber numbers and lowered fixed costs. The result however did contain a
costly write-down. Underlying NPAT came in at $1.976bn which was up 10.3% and above an expected $1.946bn. This
excluded an impairment charge for Ooyala (its disastrous US-based intelligent video business) of $273m as it wrote
down the business to zero. NPAT was $1.703bn. Telstra also reaffirmed it expectation for its total payout for the year
to come in at 22c a share fully franked, including ordinary and special dividends. It also reconfirmed 2018 FY guidance
with income of $27.6bn- $29.5bn and EBITDA of $10.1bn-$10.6bn. Telstra added 454,000 NCN connections and has
maintained a 51% market share. About 57,000 retail bundled customers were added during the half, with one third of
these bundles including an entertainment component.

           NOT BAD
                                                                                                         TLS
                               StockOmeter                                 Telstra Corporation Ltd       $3.39

 DEEP
VALUE       44          BUY    PE FY0 10.58x     Dividend        6.78%     52 Week High    $4.72     Short term   57%

            44
                               PE FY1 11.88x     Gross yield     9.69%     52 Week Low     $3.26     Long term    1%
                               ROE FY0 25.59%    Franking        100%      Price 1M %      -2.44%    RSI          49
                               ROE FY1 23.82%    Debt / Equity   118.86%   Price 1Y %      -26.67%   PEG Ratio    NaN
 NO GOOD             GOOD      EPS FY0 0.32c     EPS FY1         0.30c     EPS Grow th     -6.71%    Market Cap   $40.32bn
                               Intrinsic Value   $4.35                     Current Ratio   0.86

Broker View: Morgan Stanley (UNDERWEIGHT $3.40) – The broker has a bearish view on the stock despite the
recent results. It says Telstra needs to act soon because it is facing rising competition in key core markets particularly
mobiles. An idea could be to enter the energy market. Juniors such as Vocus (VOC) and Amaysim (AYS) have
already acquired energy retailing businesses to offset weaker sales. To fill in its post-NBN gap in core earnings of
around $1 billion to $2 billion, Telstra may have to spend capital of up $10-20 billion.

Unconventional View: We disagree with Morgan Stanley. We were bearish on Telstra but after its recent results
we’re a lot more confident going forward. The telco increased its subscriber numbers, lowered fixed costs, reduced the
NBN impact and posted a solid profit result. But the highlight of the results was the accelerating pace that Telstra is
making on 5G. Change is on the way. The telco is stuck in a sentiment hole having cut its dividend following growth
concerns. This caused a massive 50% fall in its share price.

However we think markets have over-reacted and the risk is now to the upside. The market is watching and waiting for
Telstra to up its game and we think 5G is the answer. It is ramping up preparations for the rollout of 5G, it has already
showcased a range of applications and staged a live demonstration of 3.1Gbps download speeds. Telstra delivered a
world first 5G data call on 26Ghz spectrum and delivered Internet of Things (IoT) capability on its mobile network with
Cat M1 and Narrowband IoT. Without getting too technical, Telstra’s 5G network will run faster than the NBN. In-fact
real world tests show speeds 60 times faster than those offered by the NBN. With an explosion in mobile data traffic
and connected devices, it means demand for a new generation of wireless infrastructure has never been higher and
will continue to grow. This is why 5G promises to beat its predecessor by offering faster speeds and lower latency.
Verizon and Ericsson recently tested a 5G network on a moving target, a car being driven around a racetrack and
were able to record a 6.4gb/s connection. To put this into perspective, the NBN is capable of delivering speeds up to
100mb/s, which means the 5G network is more than 60 times faster. Even though Telstra’s rollout of 5G is a little while
off, it is game changer and will quickly propel the telco back into box seat.

On the chart, TLS still looks horrible. So buying Telstra now is really taking a leap of faith and believing that 5G will
pay off. The stock is still in a downtrend and needs to break $3.60-$3.80 before a new short term uptrend is
confirmed. The RSI is at 46 which is showing the stock as oversold.

The Star Entertainment Group (SGR) - $5.46 – Delivered what was a mixed profit result. NPAT came in at $120m
up 12.4% with trading in Sydney coming in softer than expected in the early parts of this year. Results were also
impacted by low actual International VIP Rebate business win rate and significant items from USPP debt restructuring
costs. Here are some dot points:

       Strong revenue beat in VIP.
       In-line domestic revenue growth of +5.7% YoY driven by QLD (+8.7% YoY vs. NSW +4% YoY) but was offset
        by higher than expected operating expenditure from the higher volumes, G/Coast opening costs, resumption
        of bonus payments and wage inflation and higher VIP commissions due to increased revenue share
        arrangements.
       Net operating cash flow up 12.3% to $287.1m.
       Outlook: No financial guidance was provided, consistent with prior management practice.
NOT BAD
                                                                                                       SGR
                               StockOmeter                                 Star Entertainm ent
                                                                                Group Ltd              $5.46

 DEEP
VALUE      48           BUY   PE FY0 29.12x     Dividend        2.93%    52 Week High    $6.40     Short term   67%

            48
                              PE FY1 18.79x     Gross yield     4.19%    52 Week Low     $4.88     Long term    56%
                              ROE FY0 8.63%     Franking        100%     Price 1M %      -9.60%    RSI          37
                              ROE FY1 7.20%     Debt / Equity   31.90%   Price 1Y %      +7.91%    PEG Ratio    7.51
 NO GOOD             GOOD     EPS FY0 0.28c     EPS FY1         0.24c    EPS Grow th     -12.16%   Market Cap   $4.51bn
                              Intrinsic Value   $5.51                    Current Ratio   0.73

Broker View: Macquarie (OUTPERFORM $5.46) – The broker has reviewed its forecasts for the casino operator and
has upgraded its operating earnings estimates for FY18-20 after taking into account the Sovereign Resort expansion
completion in FY20.

Unconventional View: We agree with Macquarie. Whilst the result was a touch on the disappointing side the reason
it was softer than expected was an overall weakness in trading conditions for the sector. Star realises gambling at
tables in private VIP rooms was down from last year and trading in Sydney was softer. An abnormally low win rate of
1.06% was recorded, much lower than the 1.35% expected. As a result the company is aggressively trying to turn this
around. Weaker conditions were also due to different timings of the Chinese Lunar New Year which fell earlier in
2017. The highlight was the company’s Queensland properties which posted pleasing results. Star will officially open
its new hotel at the Star Gold Coast later this month ahead of the Commonwealth Games. The new 17-storey hotel
features 57 rooms is currently undertaking a $345 million refurbishment of The Star Gold Coast in Broadbeach. The
casino is also undergoing a $220m facelift of its Sovereign VIP facility in Sydney with the refurbishment tipped to open
before Crown’s Barangaroo opening in 2021. Its capital

       Sydney – commence Sovereign Resort upgrade preparations, progress lobby and Porte Cochere
        redevelopment
       Gold Coast – complete current phase of Gold Coast expansion and leverage Commonwealth Games to
        successfully launch expanded and improved property
       Queen’s Wharf Brisbane – complete demolition, commence excavation, fine tune property plans
       Progress JV developments with Chow Tai Fook and Far East Consortium in Sydney (The Ritz-Carlton Hotel)
        and the Gold Coast (Masterplan)

Whilst this result was on the softer side, we think Star will have a better second half. FY2018 priorities remain focused
on improving earnings across the group, sustaining domestic growth through capital development program and
delivering on the next stage of its capital program. Although no guidance was given, we think Star will be a huge
beneficiary from the Commonwealth Games and its results next half will surprise on the upside. On the chart, SGR is
sitting near its uptrend support line. The recent pullback has put SGR at an attractive valuation. With the RSI at 42 the
stock is oversold.
Wattle Partners Pty Ltd
Unit 10, 3 Bromham Place
Richmond Victoria 3121
Australia
T + 61 3 8414 2909
www.wattlepartners.com.au

 General advice disclosure
 Any recommendations given in this document is General Advice only. We have not considered clients’ personal or
 individual circumstances. All clients and readers should seek professional advice before acting on any
 recommendation. You should also obtain a copy of and consider the Product Disclosure Statements for any
 product discussed before making any decision.
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