Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Financial economics wikipedia , lookup
Syndicated loan wikipedia , lookup
Shadow banking system wikipedia , lookup
Private equity secondary market wikipedia , lookup
Stock valuation wikipedia , lookup
Interbank lending market wikipedia , lookup
Financialization wikipedia , lookup
Investment management wikipedia , lookup
Public finance wikipedia , lookup
Monday 15 May 2017 The Big Four banks A recent media release warned that there are “significant risks” of which ETF investors might not be aware. In today’s note, I share my take on this and the active manager versus ETF story. Also in the Switzer Super Report, following last week’s bank levy announcement in the Budget, Paul Rickard looks at how the Big Four are performing and ranks them in order of preference. Plus, James Dunn has six non-resource floats to watch. Sincerely, Peter Switzer Inside this Issue 02 Are ETFs really a Big Short problem? ETFs and managed funds by Peter Switzer 04 Which bank? How they perform by Paul Rickard 07 5 floats to watch Float pipeline by James Dunn Which bank? 10 What to consider by Graeme Colley by Paul Rickard 04 Super reforms checklist – are you ready? 14 Buy, Sell, Hold – what the brokers say Upgrades and downgrades by Rudi Filapek-Vandyck Switzer Super Report is published by Switzer Financial Group Pty Ltd AFSL No. 286 531 36-40 Queen Street, Woollahra, 2025 T: 1300 SWITZER (1300 794 8937) F: (02) 9327 4366 Important information: 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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual's objectives, financial situation and needs and, if necessary, seek appropriate professional advice. Are ETFs really a Big Short problem? by Peter Switzer Fund managers are worried about Exchange Traded Funds because they are losing business to these lower-cost alternatives. And they’re also worried because the media plays up ETFs as being the best investment option for busy people, who can’t do their own research or who don’t want to pay for advice. oblivious to its weaknesses, reminds us of the CDO market featured in The Big Short,” says Norden. Last week, an alarming media release alert was sent out with the warning that “Many ETF investors are unaware of a range of significant risks to their investments, according to a group of experienced traders.” “Opportunities like these do not come along regularly. We see this as a once in a decade opportunity to offer our investors a way to participate in the crisis that will engulf the ETF market,” says Norden. This is what the media release said: This is alarmist and it’s unfair to compare all ETFs to Collateralized Debt Obligations, which were a prime cause of the GFC. “Gary Norden of Australian-based Organic Financial Group, Nam Nguyen of Canadian firm Harbourfront Technologies and Larry Gazette, a US based trader have between them nearly 80 years of market experience. “Both our quantitative analysis and market experience tell us that the huge growth in ETFs will end badly for many,” says Norden. “Many investors wrongly believe that all ETFs are simple, passive structures with low risk,” says Gazette. If your ETF is exotic, it could be linked to derivatives and these come with relatively more risk. But if the ETF is based on say the S&P/ASX 200 index, where the fund manager buys the 200 stocks when you invest in them, the only risk with these would be a crash, where everyone runs for the exits at the same time. “In reality though, many have a range of weaknesses that can significantly hurt investors,” according to Gazette. However, that always happens with a crash, though ETFs could result in more and faster selling when the ‘you know what’ hits the fan. “Even though we have only investigated a small percentage of ETFs so far, we have identified a number of vulnerabilities,” said Nguyen. I’m going to test out this proposition with experts this week on my TV show. But what about ETFs versus managed funds? “Timing when these vulnerabilities will strike is not easy, however, we are confident that we have a definable statistical edge in the set up for the trades we have already identified,” said Nguyen. “The current market for ETFs, with huge amounts of capital chasing a relatively new type of structure, Monday 15 May 2017 Back in 2015 Morningstar data showed that for the year through to October 31, roughly 58.6% of actively managed funds had failed to beat their benchmarks. And over the last 10 years, 73% of actively managed funds had fallen short. 02 So, on those numbers, there is a good argument for ETFs that copy the index but, simultaneously, there is argument for looking for the fund managers who consistently beat the index. Of course, they don’t have to beat the index every year but they need to do well over three, five and 10 years. And they are there, but the smart wealth-builder has to go looking for them. Warren Buffett has told retail investors that they are better off in ETFs but that doesn’t mean that a better strategy might be a core investment in a passive fund that mirrors a good market index augmented by a satellite strategy where you go looking for alpha or higher returns with a mixture of funds or individual shares. Personally, I have relied on an ETF for the S&P/ASX 200 index, which I’ve bought when the index has slid to very low levels. So when I told you to “buy the dips,” that’s what I did. The AFR recently looked at active managers versus ETFs and the story isn’t as bad as some might think. “Over the past decade, the average annual return from the S&P ASX 300 Accumulation Index has been 4.1 per cent per cent, says Mercer, while the median annual return from an active manager was 5.7 per cent (after fees),” Phil Baker reported. “The past five years shows that the median performance from local fund managers was 11.8 per cent per annum (before fees), compared to 10.4 per cent from the benchmark index.” I think the age of the ETF is good for investors but they have not created an argument that says active managers should be condemned to the waste bin of stock market history. I have also gone long my own fund because that’s how I always invest — buy dividend-paying stocks in companies where they grow their dividend. My super fund this year has shot the lights out and it was part strategy on my behalf — going long BHP and Rio at low share prices, as well as investing in an IPO that beat expectations — but my commitment to ETFs has also given me a solid foundation. In addition, Donald Trump and the overall market’s response have helped deliver a great return for the past year. Of course, my Switzer Dividend Growth Fund, or SWTZ, is an ETF but an active one and that’s because we believe that selecting companies that can grow their dividends — 30 or 40 — actually takes a bit of human judgment. That said, there have been recent years when the overall return of the fund was only OK because markets went sideways and my exposure to small cap fund managers, who beat the index, was too small. We hope to beat the dividend-payment from an ETF based on the index, which has been around 4% plus franking. We hope to pocket 5-6%, with an extra bit from franking credits. And because we chase capital gain as well, we should get another lift when the market trends higher. There is a case for ETFs, direct shares and active fund managers and as Aristotle once advised: “Nothing in excess, except moderation!” I think our fund and a market-index ETF gives a pretty good core strategy and for my own super fund, I’ve been buying good companies when the market has unfairly beaten them up. 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. Clearly, when CSL dropped to $95 on December 5 was a case in point and those who believe in this strategy would be very happy with their $134 share price right now. Monday 15 May 2017 03 Which bank? by Paul Rickard The Treasurer’s announcement that the major banks and Macquarie will pay a levy on their liabilities was the catalyst for a material sell off in bank shares last week. The tax, which is set to raise $1.5bn pa or just under 5% of total bank profits, will apply from 1 July. Although the fine details are still being developed, retail deposits and tier 2 capital will be exempt from the tax. Hence, it will impact the banks differently, with Deutsche estimating that it would cause a 5.9% hit to earnings for ANZ, 4.9% for NAB, 3.4% for Macquarie and 3.9% for both CBA and Westpac. This is the worst-case scenario and assumes that the banks won’t pass the cost on to customers. While they will be under pressure not to do so in the short term and their smaller competitors will act as a competitive break, the likelihood is that over time, customers will end up sharing some of the pain. Adding to the negativity last week were underwhelming half year and quarterly earnings reports from Westpac and Commonwealth. As a result, CBA shed 3.23% over the week, Westpac lost 3.81% and ANZ 4.67%. The fall in ANZ included going ex an 80c dividend, which brought its “real” loss down to 2.05%, while NAB was the “star” losing just 0.58%. 5.0% (see table at the end of this article). Earnings multiples have expanded, with the banks moving from an average of 12.9 times to 13.8 times forecast earnings. In 2017, the Australian sharemarket market has returned 4.51%. The financials sector (which comprises the major banks, regional banks and the insurers) is still up 2.95%, notwithstanding that it has given up 4.65% so far in May. Local banks have followed the lead of financial stocks in the USA and Europe, which have risen strongly as the prospect of higher interest rates should allow banks to increase profitability from higher margins. However, local banks are seeing ongoing margin pressure as offshore funding becomes a little more expensive and the RBA keeps interest rates on hold. Further, APRA is making noise about the banks having “unquestionably strong” capital ratios, the Government is imposing a new tax on liabilities, business credit growth remains tepid and the banks are under pressure to restrict investor home lending. Revenue growth is anaemic. So, with bank reporting season out of the way, and the banks having to deal with a new tax, do bank stocks still represent good value? And, let’s pose that perennial question – which bank? With the four major banks making up 27.4% of the S&P/ASX 200 index, it is hard, but not impossible, for the index to advance through 6000 unless the banks do their share of the heavy lifting. So, given a positive disposition on the market, I don’t think it is time to go materially underweight the banks. However, they have had a good run and there are enough negatives to warrant a more cautious approach: indexweight. Banks look close to fully valued Earnings season Since I reviewed the banking sector last November (see here), the four major banks have returned on average just over 10%. NAB leads the way with a return of 16.3%, while Westpac is the laggard with Looking at the bank results, they showed: Monday 15 May 2017 Cash earnings up marginally, but this half largely flat when compared with the second 04 half of 2016. Earnings were boosted by trading and markets income their institutional business; The “growth challenge” is best illustrated by the cash profit in their Australian retail banking operations. Apart from the CBA, each of the other three majors saw profit decline by between 1% and 2% in the latest half compared to the preceding six months; Bad debt expense remains low by historic standards. Forward indicators are satisfactory, although there has been a slight tick up in housing and personal loans in arrears; Risk weighted asset growth is negligible, and in the case of ANZ and NAB, declined in the half year; The net interest margin (NIM) remains under pressure. Most banks saw NIM decline in the current half compared to the preceding half; Return on equity has dropped – the new norm seems to fit in the 13% to 15% range; All Banks have capital ratios in excess of their (current) target range. ANZ, NAB and Westpac each have common equity tier 1 (CET1 ) ratios of 10.0% (prior to the payment of their dividend); Expense discipline was strong, with ANZ reducing operating expenses by 1.5% compared to the preceding half, while Westpac kept growth flat; and Banks maintained their dividends. Commonwealth Bank increased its dividend by 1c to 199c. The Brokers The table below shows each major broker’s recommendation and target price for the four major banks (source: FN Arena).The bank(s) with their highest recommendation is highlighted in yellow. For example, Citi has a neutral on ANZ, but a sell on CBA, NAB and Westpac. Most banks are trading close to their consensus target price. For example, the consensus target price for Commonwealth Bank is $80.85, which was 1.0% lower than its closing price on Friday of $81.67. On this metric alone, ANZ represents the best value. Broker Recommendations and Target Prices as at 12 May 17 Bank results * Versus 2H16. NIM excludes treasury & markets ** ANZ is with pro-forma adjustments Australian Retail Profits Monday 15 May 2017 From this table, it is clear that the major brokers see little difference in value or price potential for the major banks. There is no standout. The table below shows the consensus broker FY 17 and FY18 forecast earnings multiples and forecast dividend yields. It also shows earnings per share growth between FY18 and FY17. On pricing multiples, the gaps are narrow. CBA is the most expensive, trading at 14.7 times FY17 earnings, while 05 ANZ, having gone ex-dividend, is now the cheapest at 12.7 times (13.1 times adjusted for the dividend). I expect CBA to retain a premium, and for this reason, continue to rate it as my preferred pick. Forecast Earnings Multiples and Dividend Yields ANZ seems to have been harshly punished by the market following its result, possibly because expectations from some analysts were too high. While it is hard to “shrink to greatness”, ANZ is doing the most to cut costs. Its lack of investment in technology during the “Asian years” might ultimately be its undoing, but it is now the cheapest bank. Meanwhile, Westpac is now investing in technology, but with its multi-branding strategy, the benefits may still be some years away. It is also likely to face some challenges with growing its home loan book, as the proportion of interest only loans at 50% is well above APRA’s new cap of 30%. Two other points to note. Earnings per share growth is very low, with CBA the highest at 3.6% forecast between FY18 and FY17, while virtually no growth is forecast for the NAB. Also, most brokers now see dividends as stable, although a couple of brokers still forecast a small cut to NAB’s dividend. My view Last November, I commented: “In a very tight race, my order is: 1. Commonwealth Bank 2. National Australia 3. Westpac 4. ANZ” This is largely as it has turned out (see table below), although NAB has been the clear outperformer, and Westpac the laggard. In a very, very tight race, my order is: 1. Commonwealth 2. ANZ 3. NAB 4. Westpac 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. It remains a very tight race, with almost no difference in strategy between the major banks, only minor differences in pricing metrics, and as the brokers observe, very little difference in growth prospects. Commonwealth Bank, however, does still enjoy a leadership position in technology, market shares in key retail markets, funding base and return on equity. Historically, CBA has traded at a material premium to the other banks, however the gap from it to the cheapest bank, the ANZ, is now down to 16%. Against the NAB, it is into an adjusted 14%. Monday 15 May 2017 06 5 floats to watch by James Dunn The float pipeline at the Australian Securities Exchange (ASX) continues to swell, presenting investors with new opportunities all the time. While there is an unavoidable level of risk in new initial public offerings (IPOs), as evidenced by recent floats such as dried fruit producer Murray River Organics – which is down 52% on its issue price after revealing that it will miss its prospectus forecasts – and auto parts company Automotive Solutions Group, which has lost 63% of its value in its first five months on the ASX, having posted a major earnings downgrade and seen its CEO depart, investors like the opportunity of getting into potential good performers at the ground floor. Here are five interesting non-resources float opportunities in the market at present. Oliver’s Real Foods Oliver’s Real Foods is a fast-food chain with a difference: it describes itself as the world’s first certified organic fast food chain. At its 21 stores on Australia’s major eastern seaboard highways, Oliver’s Real Food serves fresh, steamed or grilled food, which is free of additives, preservatives and artificial ingredients, to more than two million customers a year. Founder Jason Gunn was inspired to deliver healthier roadside fast food choices, along with nutritional information. The organic range has been extended to gluten-free, dairy-free and vegan options. Oliver’s supports its restaurants through has three distribution centres at Wyong, Brisbane and Melbourne, dedicated central kitchens, loyal suppliers and its own proprietary OliVerse technology system. The company says it has 5% of the $1 billion arterial highway service centre fast-food market. Monday 15 May 2017 Oliver’s aims to have 60 company-owned stores running along the nation’s highways, from Adelaide to Cairns, over the next four years. Sales have been growing at an impressive double-digit rate for five years, with revenue tipped to reach more than $28 million this financial year, yielding normalised operating earnings of $823,000. Proceeds from the share offer will be used to fund the acquisition or development of new stores already identified along the New South Wales, Victorian, Queensland and South Australian highways. Oliver’s is looking for up to $15 million, but says its store roll-out plan is achievable with the minimum $9 million subscription. The company is also looking to buy back its remaining seven franchised stores. Oliver’s Real Foods is raising up to $15 million through the issues of shares at 30 cents, and would be valued at listing at up to $49.7 million. Oliver’s does not intend to pay dividends immediately, but says it will pay dividends when its board decides that the company is sufficiently profitable and cash-flow positive, after taking into account the capital required for the continued expansion of the Oliver’s store network. Oliver’s Real Foods is expected to list by mid-June. Veritas Securities is acting as lead manager. The company looks to have good growth prospects, standing out in its market segment as the healthiest alternative, and riding the growing popularity of healthier eating. Eagle Health Holdings Chinese company Eagle Health Holdings makes a range of health and nutrition products including protein powder, throat lozenges and vitamins at its manufacturing base in Xiamen in south-east China, 07 selling into most of the country’s provinces. It wants to source Australian products to add to its range, looking to capitalise on the same “clean and green” perceptions of Australia that helped to drive growth in China of Australian vitamins brands Blackmores and Swisse. CyberGym Eagle Health, which is chaired by former Federal Sports and Tourism Minister Andrew Thomson, is looking to raise up to $30 million in fresh capital and list on the ASX, where it would be capitalised at $130 million at its maximum raise. The company is offering up to 75 million shares to new investors at 40 cents. CyberGym bills itself as the global leader in cyber-defence solutions and training for financial organisations, critical and sensitive governmental, infrastructure and production companies. The company offers clients comprehensive IT security services and real-world cyber defence training, on the basis that an organisation’s personnel are, if not trained this way, the weakest link in its cyber-defences: CyberGym places staff in simulated cyber-attack situations and coaches them on how to respond. Eagle Health operates from a 28,000 square-metre manufacturing and warehousing facility in Xiamen. It sells its products through pharmacies and trading companies, and has a large presence on online platforms such as Tmall, Alibaba and JD.com. The company has 18 patents and 50 trade marks in China. Eagle Health makes 24% of its annual sales from amino acid liquids, which Chinese people take to enhance their immune systems, and 23% from its range of protein powders. Throat lozenges account for 19% of sales, with vitamins and minerals supplements representing about 5%. A range of other products including ginseng, dietary fibre, herbal teas and edible bird’s nests make up the balance. According to the prospectus, Eagle Health generated revenue of $84.2 million in calendar 2016, up from $72.5 million in 2015. From that it earned net profit after tax of $15.9 million, up from $14.0 million in 2015. Its net profit margin was 18.8% in 2016, down from 19.3% a year earlier. Eagle Health offers investors exposure to the strong long-term fundamentals of the health supplements and nutrition sector in China, through a powerful distribution platform. China’s growing consumer wealth is being accompanies by a greater awareness of overall wellness, and this should lead to ongoing growth for Eagle Health. The company has a long and solid earnings track record, and expects to pay a minimum of 10% of its net profit as a dividend. The offer closes on 31 May and the shares are expected to list on the ASX on 14 June. The lead manager is Melbourne corporate finance firm Beer & Company. Monday 15 May 2017 There has been a rush of Israeli companies on to the ASX in the last couple of years, and a mini-rush of cyber security companies to list – and CyberGym is involved in both. The company has impressive credentials: its founder and chief executive, Ofir Hason, was formerly the head of the Israel Shin Bet security agency’s cyber unit. CyberGym is a joint venture of Israel Electric Corporation and CyberControl, Israel’s leading cyber-security consultancy, established by ex-NISA (Israel’s National Security Authority) operatives and security experts. CyberGym is forecasting gross profit of $10.1 million for 2017, rising to $14.3 million for 2018. EBITDA (earnings before interest, tax, depreciation and amortisation) is estimated at $3.1 million this year, and $5.8 million next year. CyberGym is targeting a $30 million raising, and an initial ASX market capitalisation of $80 million. The company will also move its global headquarters to Melbourne. Bell Potter is lead manager on the initial public offering. Quick Service Restaurant Holdings Also in the fast food market – and in fact a competitor of Oliver’s Real Foods – is Quick Service Restaurant (QSR), the largest Australian owned quick service restaurant operator. QSR operates three brands: Red Rooster (360-plus restaurants), Oporto (160-plus restaurants) and Chicken Treat (60-plus restaurants). The company backs this with a central corporate 08 operation handling intellectual property, restaurant operations, supply chain, franchising, IT, marketing, store design and construction, food innovation, and customer satisfaction. QSR is owned by private equity firm Archer Capital, which bought it from Quadrant Private Equity for $450 million in 2011. Archer could be floating the company for $500 million, but is considered likely to keep an equity stake: investors buying floats from private equity are very keen to see this, as some private equity floats – think Dick Smith, Spotless and Myer – have proven very disappointing for retail investors in recent memory. Just under two-thirds of QSR’s sales come from Red Rooster, which generated $477 million in revenue in the 2015-16 financial year. The company believes home delivery – which currently represents 10% of Red Rooster’s sales – is its major growth area: it reckons it can boost that proportion to the kind of levels that Domino’s Pizza has, at about 50%. Goldman Sachs and Morgan Stanley are handling the share sale, which is being marketed to institutional investors at the moment: plans for the retail component of the sale have not yet been revealed. Freestyle Technology Limited Macquarie Group-backed Freestyle Technology works in specific technology for the Internet of Things (IoT), the term used to describe the increasing connectedness of machines and devices, monitoring each other, swapping and processing information in real time – and generating ‘big data’ for humans to analyse. This mega-network of devices and machines, which can be controlled by apps from anywhere in the world, is only just getting started, but is increasingly spoken of as nothing short of the next industrial revolution. The company holds 32 patents with another 50 pending. It has already secured major contracts in Taiwan and China for utility services including data collection, remote automated meter management, billing, pressure management and leak detection. Last month, Freestyle signed a $5.8 million contract with the South Korean province of Gochang for smart water meters and a management platform. The contract will cover 24,000 households by the end of the year. Freestyle’s machine-to-machine technology will allow the smart water meters in Gochang province not only to detect a water leak, but determine how to fix it based on the external environment and temperature. The meters will also alert council workers of any unexpected occurrences in the system, for example if an elderly person has not used their water for two days, they will receive an alert and someone will go and check on them. The precise timing, valuation and size of Freestyle’s capital raising is not yet known, but it is likely to be in the second half of the year, with the funds to be used to accelerate its growth across Asia-Pacific and in particular, to launch into the Indian market. 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. Even diluting the hype accordingly, it seems fairly clear that the IoT will start to pervade our lives in the near future. Freestyle Technology is in the thick of it already, deploying IoT solutions in the water, gas, electricity markets, street lighting, waste management, healthcare, agriculture and markets, particularly in the Asia-Pacific region. Monday 15 May 2017 09 Super reforms checklist – are you ready? by Graeme Colley Before the sun sets on this financial year and the new dawn rises, there are a number of things to consider before the superannuation landscape changes forever on 1 July. This guide and checklist provide an overview of things to take into account by 30 June this year and what needs to be done from 1 July, even if your superannuation balance may be less than $1.6 million. Things to do before 30 June 2017 Contributions There are no changes to the concessional and non-concessional contribution limits and rules for this financial year. However, from 1 July, the caps on these contributions will be reduced and for anyone with more than $1.6 million in super on 30 June 2017, non-concessional contributions cannot be made to super. Therefore, review your superannuation contributions if you wish to maximise the opportunity you have available until 30 June 2017. Concessional contributions include salary sacrifice, personal deductible contributions and superannuation guarantee contributions. If you are at least 49 at the beginning of the financial year, the concessional contribution maximum is $35,000 and for everyone else it is $30,000. Pension balance reduction If you have more than $1.6 million providing your superannuation pensions it will be necessary to reduce your pension balances to no more than $1.6 million by 30 June 2017 otherwise a tax penalty may apply. As you don’t know the exact value of your pension balance prior to that time any adjustment to the fund’s accounts that is required can be made at the time the fund’s accounts are written up sometime Monday 15 May 2017 after 1 July 2017. However, you need to take action now to tell the trustee of the fund that you expect the pension balance to be greater than $1.6 million but don’t exactly know how much that will be on 30 June 2017. Once you know the exact amount the accounts can be adjusted to reduce the pension balances to the required amount(s). SuperConcepts has a member request on its website www.superconcepts.com.au which you can use free of charge for the purpose of notifying the fund about the required adjustment. Things to do from 1 July 2017 Contributions Reduced concessional cap to $25,000 per annum From 1 July 2017, if you want to make extra concessional contributions, ensure that the combined total of your employer SG superannuation contributions and any salary-sacrifice payments made to superannuation, and any contributions claimed as an income tax deduction do not exceed $25,000 for the financial year. Reduced non-concessional cap to $100,000 per annum, with the three-year bring forward figure to $300,000 Generally, non-concessional contributions are contributions made to an SMSF that are not included in its assessable income; most commonly, personal contributions for which no income tax deduction is claimed. As the contribution cap will be reduced from 1 July 2017, there will be less scope in future income years to make non-concessional contributions. If you have a total superannuation balance in excess of $1.6 million 10 as at 30 June, you will not be able to make a non-concessional contribution in the next income year. Where you have triggered their three-year bring forward entitlement in either 2015/16 or 2016/17, and you don’t fully utilise the bring forward entitlement by 30 June 2017, from 1 July 2017 you may find your entitlement to the remaining unused amount will be reduced in line with the reduction in the non-concessional contributions cap. incur capital gains tax (CGT), which would not have otherwise been payable if the Transfer Balance Cap had not been introduced. To compensate members, CGT relief measures have been introduced. This treats certain assets as being sold and re-acquired on the date of the roll-back to accumulation and reset the cost base of the asset. The CGT reset date must be 30 June 2017 unless the fund has segregated assets, in which case the CGT reset date can be between 9 November 2016 and 30 June 2017. The $1.6m Transfer Balance Cap Resetting the cost base is optional: From 1 July 2017, a lifetime cap will apply to the value that can be transferred to the pension phase of super. This cap is known as the ‘Transfer Balance Cap’ and will start at $1.6 million. This cap will be indexed periodically in $100,000 increments in line with the consumer price index. The cap applies to: your combined pension balance so that if you have multiple pension accounts, either within the same fund or in multiple funds, it’s the total combined value of these pensions that is counted against the cap pensions commenced both before and from 1 July 2017. Provided the eligibility criteria are met, resetting the cost base is optional and is applied on an asset-by-asset basis. Elections to claim CGT relief are irrevocable. This means the deemed sale and repurchase of an asset cannot be reversed. This is especially relevant for funds where an asset’s future performance turns out to be unexpectedly unfavourable or where the fund’s proportion of exempt pension income in the income year of disposal is greater than the percentage in 2016/17. It is worthwhile to seek professional tax advice to determine whether your fund is eligible for this relief and its pros and cons. Trustees can choose when to pay Any amounts in excess of the cap must be transferred to an accumulation account or withdrawn from the fund. For pensions commenced prior to 1 July 2017, this must occur on or before 30 June 2017. Some exceptions apply to pensions, which under the legislation are not permitted to be commuted (converted to lump sums). These new rules limit the amount that can be held in the tax-free pension environment. Earnings on pension balances are tax free while earnings on accumulation balances are taxed at 15%. The SMSF has the choice of either recognising any notional capital gain or loss in the 2016/17 income year, or deferring it until the asset is sold. Tax changes to Transition to Retirement (TTR) pensions TTR pension no longer exempt from fund tax exemption Capital Gains Tax (CGT) Relief From 1 July, investment earnings within a TTR pension will no longer be tax exempt and will instead be taxed at the concessional rate of 15%. As a result of the introduction of the $1.6 million Transfer Balance Cap and the new requirements applying to Transition to Retirement (TTR) Pensions, some funds that sell assets after 1 July 2017 may Members transitioning to retirement will still able to commence a TTR pension upon reaching preservation age and access their preserved superannuation balances prior to retirement. The Monday 15 May 2017 11 earnings of the pension account won’t be exempt from tax until a full condition of release has been satisfied. The value of the TTR pension will not count towards the Transfer Balance Cap until such time that a full condition of release has been satisfied. Checklist Here’s our checklist to help you stay on top of the super changes coming into effect from 1 July 2017. 1. $1.6m Transfer Balance Cap Members with pension balances in excess of $1.6 million – If you have more than $1.6 million in the pension phase of super, any pension balance in excess of $1.6 will need to be removed from super or transferred to accumulation phase on or before 30 June 2017. Some exceptions apply to pensions, which under the legislation are not permitted to be commuted. The ATO has released guidelines which explain how an SMSF member can request a pension commutation prior to 1 July 2017 to comply with the Transfer Balance Cap, even though the amount of the member’s excess pension balance may not be known at the time of the request. Members with multiple pensions – If you have multiple pensions you will need to choose which pension to commute, if the total of value of the pensions exceeds $1.6 million Strategies for spouses – Spouses with uneven super balances may consider implementing contribution-splitting strategies in 2016/17 and beyond. This may not apply in all cases subject to the contribution rules. for CGT relief to apply for a CGT asset in the approved form. The choice is irrevocable, and must be made on or before the day a trustee is required to lodge their fund’s 2016/17 income tax return. This decision should also be documented through a trustee resolution. Defer or not to defer – Where there is a notional capital gain, trustees will need to decide whether to treat the proportion of notional capital gain as assessable in the 2016/17 year or defer until the asset is actually sold. Keep records – Trustees need to keep appropriate records for the assets subject to CGT relief, and the exempt portion of any deferred capital gain. Records need to be maintained to ensure that capital gains or losses on the subsequent realisation of these assets can be accurately determined. You may need an actuary certificate – Where applicable an actuary certificate would need to be obtained to determine the portion of the fund’s assets in pension phase for the 2016/17 financial year. This will be needed in order to determine the portion of the notional capital gain that will be taxable on assets for which the CGT cost base has been reset. 3. Tax Changes to transition to retirement (TTR) Pensions You may be need to make adjustments to remain within the cap – Once a full condition of release is met, such as retirement, the value of a TTR pension will count towards the Transfer Balance Cap at that point. Members may be required to make adjustments to remain within the cap once the pension converts to an account-based pension. 4. Limits to non-concessional contributions 2. Capital Gains Tax (CGT) relief Which assets to reset to market value – If there are members in the fund affected by the introduction of the $1.6 million Transfer Balance Cap or the changes to TTR pensions, trustees will need to decide which assets, if any, to claim CGT relief for. Make a valid choice – Trustees must choose Monday 15 May 2017 Consider maximising contributions during 2016/17 – Remember to consider maximising your non-concessional contributions during the 2016/17 financial year. Close out any unused bring-forward entitlements – If your client has triggered the bring-forward rule in either 2015/16 or 2016/17, ensure they have fully utilised their 12 bring-forward entitlement by 30 June 2017. Strategies for spouses – Spouses with uneven super balances may consider implementing contribution-splitting strategies in 2016/17 and beyond. Remain within the applicable cap – Ensure that your client’s non-concessional contributions are not higher than the applicable cap post 1 July 2017. 5. Limits to concessional contributions Consider maximising contributions during 2017 – Remember to consider maximising concessional contributions during the 2016/17 financial year. Remain within the applicable cap – Ensure that your concessional contributions are not higher than the applicable cap for post 1 July 2017. 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. Monday 15 May 2017 13 Buy, Sell, Hold – what the brokers say by Rudi Filapek-Vandyck In the good books AVEO GROUP (AOG) Upgrade to Accumulate from Hold by Ord Minnett B/H/S: 4/0/0 Ord Minnett is more positive about the company’s prospects after an investor briefing. Earnings forecasts are lifted because of higher assumed development completions. The broker now has greater confidence in delivery and increased margins. Ord Minnett assumes 10.7% growth in earnings per share in FY17 and 8.4% for FY18. Rating is raised to Accumulate from Hold. Target rises to $3.70 from $3.40. Upgrade to Outperform from Neutral by Macquarie B/H/S: 2/0/0 Macquarie reviews production forecasts in the light of recent exploration successes. The broker now expects production to exceed 300,000 ounces per annum over the next five years. The broker believes mid-grade, high-tonnage, shallow underground mines can be highly profitable to run. The success at Karari underpins this mode of operation for the company. Rating is upgraded to Outperform from Neutral. Target is raised to $1.30 from $1.00. In the not-so-good books BT INVESTMENT MANAGEMENT LIMITED (BTT) Downgrade to Neutral from Outperform by Macquarie B/H/S: 1/5/0 OCEANAGOLD CORPORATION (OGC) Upgrade to Neutral from Sell by UBS B/H/S: 4/2/0 UBS believes the appointment of a new mining minister in the Philippines has materially reduced the risk of the suspension order on Didipio from being enforced. This should allow the market to re-focus on growth opportunities at Haile and at NZ operations. The broker upgrades to Neutral from Sell. Target is raised to $4.35 from $3.41. First half results beat Macquarie’s forecasts but were in line with expectations after adjusting for one-off items. The company’s key operating metrics are meeting the broker’s fund manager investment criteria. Rating is downgraded to Neutral from Outperform following recent share price performance. The stock is trading at more than 20x FY17 and FY18 earnings forecasts and is the highest-rated fund manager under the broker’s coverage. The downgrade comes despite the broker’s acknowledgement of the company’s capacity and demonstrated ability to deliver net inflows. Target is reduced to $11.70 from $11.92. SARACEN MINERAL HOLDINGS LIMITED (SAR) Monday 15 May 2017 14 Target is reduced to $2.45 from $2.70. The broker believes investment risk has risen and reduces its rating to Hold from Accumulate. VITA GROUP LIMITED (VTG) Downgrade to Hold from Add by Morgans B/H/S: 0/1/0 Vita has suspended its plan to expand its store count until negotiations with Telstra (TLS) on remuneration are finalised, at a time as yet unknown. The company has issued revised FY17 guidance -6% below Morgan’s prior forecast, representing a -16% fall in the second half from the first. As the terms of Vita’s future agreement with Telstra are uncertain, FY18 earnings uncertainty is very high, Morgans notes. Downgrade to Hold for now. Target falls to $1.67 from $3.49. GRAINCORP LIMITED (GNC) Downgrade to Neutral from Outperform by Macquarie B/H/S: 0/5/0 XERO LIMITED (XRO) Downgrade to Neutral from Outperform by Credit Suisse B/H/S: 2/4/0 First half results beat Macquarie’s expectations with a strong performance from the upstream businesses. Credit Suisse observes Australasia remains strong, with no sign subscriber additions have peaked. Meanwhile, UK growth has stepped up and gross margins rebounded. The company has flagged higher gas and electricity costs in FY18 and beyond, relevant for its oil processing & malt businesses. Macquarie factors in a -$7-9m impact to EBIT in FY18 and beyond. The broker suspects further margin expansion is likely thanks to the AWS platform, while the challenge to build scale in North America remains the key uncertainty. The broker downgrades to Neutral from Outperform and reduces the target to $10.00 from $10.50. With the stock having gained 33% in six months, Credit Suisse downgrades to Neutral from Outperform. Target rises to NZ$23.50 from NZ$21.00. HEALTHSCOPE LIMITED (HSO) Downgrade to Hold from Accumulate by Ord Minnett B/H/S: 2/5/0 Ord Minnett raises concerns about the NSW decision to reduce the number of public beds along with a requirement that Healthscope meet private conversion targets from patients entering the new Northern Beaches Hospital. This may prove challenging, in the broker’s opinion, especially in light of the downgrading of private health cover and increased consumer sensitivity to out-of-pocket health costs. The broker reduces FY17 forecast by -1.5% to reflect the likely impact of the Easter/Anzac Day holidays on volumes. Monday 15 May 2017 15 Earnings forecast 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. Monday 15 May 2017 Powered by TCPDF (www.tcpdf.org) 16