Investment advice for the smart SMSF. 5 Big Investment Ideas for your Smsf in the New Financial Year BROUGHT TO YOU BY THE SWITZER SUPER REPORT

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1 5 Big Investment Ideas for your Smsf in the New Financial Year BROUGHT TO YOU BY THE SWITZER SUPER REPORT

2 WELCOME As we head into a new financial year, it s a good time to look at the trends that will be driving the markets over the next 12 months. Despite the uncertainty that plagued the second half of last financial year, most major markets performed well in FY The total return on Australian shares as measured by the S&P/ASX 200 Accumulation Index was over 17.4%. These are the best back-to-back returns for investors in seven years. Other markets have performed well too, with residential dwellings up by around 10.3%¹ and bond markets returning just over 4%. So this financial year may be slightly more volatile, but any savvy investor knows that good companies will outperform no matter what. In this limited edition ebook, we ve identified five long-term investment trends that we think you should get on board in We also mention a number of companies that are well positioned to benefit from these trends. They aren t the only companies in each of the sectors, but they should offer a helpful guide to the kind of companies you should be looking for. ¹ Source: RP Data-Rismark Daily Home Value Index, 30 June 2013 to 30 June 2014 At the Switzer Super Report, we now expect interest rates in Australia to be on hold for some time and believe that the sharemarket will end 2014 higher, moving towards The first half of calendar 2015 may be a little more challenging for markets so much depends on the Central Banks and whether they continue with their policy to provide very accommodative monetary policy.

3 CONTENTS Healthcare Construction Privatisations Online Services Financial Services 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.

4 Health care AUSTRALIA, LIKE MANY countries around the world, is grappling with a rapidly ageing demographic. The proportion of the population aged 65 years or more is forecast to increase from around one in seven Australians in 2012 to one in four Australians by It will then rise to close to 1 in 3.5 at the turn of the next century, according to a recent Productivity Commission report into an Ageing Australia. More people living longer, means there will be a higher demand on health care services. And the way all Australians, including older Australians, use health care is changing. We all now demand a better standard of care. medicare-subsidised diagnostic imaging revenue, although they only account for 14.2% of the population. So they are also using preventative health care services as well as reactive treatment services. Australian companies in this space hold their own on the world stage. Most of the companies in this sector are in fact competing in global markets. They also tend to have a high share of earnings in US dollars and sector PE for health also tends to be high, partly due to the macro growth factors. While most investors will be familiar with Cochlear, there are quite a few companies in this space that are worth considering. Research by IBISWorld shows that people aged 65 and over account for over 35% of COMPANY Cochlear (COH) CSL Ltd (CSL) Primary Health Care (PRY) Ramsay Health Care (RHC) Resmed (RMD) Sirtex Medical (SRX) Sonic Healthcare (SHL) Virtus Health (VRT) TYPE OF BUSINESS Bionic ears Blood products GP Clinics Hospitals Sleep Disorder Cancer treatment Pathology & radiology IVF Source: Switzer Super Report 03

5 health care Private hospital operator Ramsay has dominated its market and is also expanding offshore. It has major operations in the UK, France and since July last year, Malaysia. Its first half numbers were very positive and Chief Executive Officer Chris Rex is on the record as saying they will continue to look at opportunities in offshore markets. Its share price growth over the past 10 years is also commendable (see graph below). CSL has also done well over the past decade and more recently, sales from its speciality products for wound healing and peri-operative bleeding experienced a 16% increase in the half-year to December. It has recognised increasing competition for its traditional plasma products and is focussing on expanding its product range to diversify away from this risk where possible. Other smaller players in the sector like IVF provider Virtus and cancer treatment company Sirtex are also doing well. Virtus has understood there is a growing demand for pregnancy services, and demography plays a role here as well. Women are waiting longer to have children, which increases the chances they will need medical assistance to get pregnant in the first place. And if trials for Sirtex s cancer treatment continue to go well, the company s, growth potential is big. Ramsay Healthcare (RHC) Source: Yahoo 04

6 Construction THE END OF the mining boom means there will be a drop off in engineering related construction, but that is likely to be picked up by residential and commercial property construction and, to some extent, road and transport projects. The Australian Industry Group Construction Outlook for May shows the sectors that are expected to do well (see graph), and apartments and commercial (non-residential property) construction can expect robust growth rates in 2014, and the trend to continue in Like shares, the property market has enjoyed a good year, but it takes a while for demand to filter through to construction for new properties which means supply and the construction that necessitates of new residential homes and apartments will come on the market over the next 12 months. Source: Australian Industry Group 05

7 Construction The Australian Industry Group is forecasting apartment construction growth of 10% in 2014 and 9.6% in Recent government announcements around spending on new roads and transport projects will start to filter through to actual construction in 2015, and the NBN will see ongoing growth in transmission and telecommunications construction. The listed companies in this sector most likely to be able to leverage this growth, and who are less exposed to mining construction (which is forecast to fall), include the likes of Leighton Holdings (LEI), Downer EDI (DOW) and Boral (BLD). For Leighton Holdings, mining contracting only accounts for 24% of operating revenue and construction-contracting revenue is growing. But potential investors need to keep an eye on how controlling shareholder Hochtieff (and its Spanish parent ACS) restructures and sells off parts of the business. Downer EDI has more exposure to the infrastructure sector but also has operations in rail. Mining accounts for a smaller percentage of revenue. It has been undergoing an efficiency drive and appears to be dealing with declining revenue in mining. Boral and CSR don t operate in mining services and are pure construction plays. Boral has just signed a JV with USG in gypsum that is expected to help its outlook, and CSR s building products are performing well, with a slight drag in the glass and aluminum divisions. Source: Australian Industry Group 06

8 Privatisations FEDERAL TREASURER JOE Hockey has indicated on more than one occasion that privatisation of government-owned assets would be a key focus for this government. These often work well for investors, for example Commonwealth Bank I, II and III, Telstra I and III, QR National (now Aurizon), NSW TAB (now Echo Entertainment) and GIO (now IAG) delivered strong returns. Medibank is the only company that the government has officially confirmed will be privatized probably in the final quarter of this year but keep an eye out for others as there will be more. Privatisations can do well for investors because once a company is privatized it has the ability and potentially the will to increase efficiencies, raise prices and expand and restructure into other markets. Looking more closely at Medibank, it is Australia s largest private heath insurer, with 3.8 million customers and a market share of 29%. It may be more constrained with premium price increases, as the government will continue to regulate price rises. However, it has also diversified its revenue stream with its Health Solutions business, which provides healthcare services to businesses, Medibank Private Ltd Profit/ Loss Private Health Insurance Revenue $5,062m $5,344m Health Insurance Revenue $279m $498m Other $16m $18m Total Revenue $5,357m $5,861m Operating Expenses $5,195m $5,676m Operating Profit $162m $185m Investment & Other Income $35m $130m Profit before Tax $197m $315m Less Tax $71m $82m Profit After Tax $127m $233m Source: Switzer Super Report 07

9 Privatisations government and communities across Australia and New Zealand. Private health insurance premium revenue of $5.3 billion accounted for 91% of gross revenue in the year to 30 June It also earned $498 million in revenue from its Health Solutions business. Medibank also provides life insurance, travel insurance and pet insurance, which it sells on a commission basis. Applying a multiple of around 13 to 16 (similar to its main listed competitor NIB Holdings) to a 2014 profit estimate of around $225 million, values Medibank in the range of $3 billion to $3.6 billion. As the first privatization under the Abbott government, and therefore one they will most definitely want to succeed, the Medibank listing is likely to be priced competitively for investors. Other businesses that have been proposed as potential privatization opportunities by the National Commission of Audit include Australian Hearing, the Australian Securities and Investment Commission s registry arm, the Royal Australian Mint and Defence Housing Australia. A scoping study to examine the potential risks and benefits of privatization for Australian Hearing is to begin in July and others will follow shortly after. 08

10 Online services AUSTRALIA IS MOVING from a country that makes things to one that provides services and online services are playing a key role here. Online activity accounts for an increasing amount of business revenue and, according to Australian Bureau of Statistics data, the value of Australian businesses income derived by sales via the internet is now close to $250 billion, and has been rising, up from $188 billion just two years ago (see table below). Companies such as Freelancer.com, Xero, REA Group and Carsales.com.au were the first companies to enter and dominate this space. Early investors in these companies would be pleased, although they are starting to get a little expensive now. Freelancer has dropped from ridiculous levels seen just after its IPO towards the end of the financial year to much better value but there are plenty of smaller companies also looking to leverage online delivery that have not yet been discovered. iproperty Group (IPP), like REA Group, is an online property advertising company. But it also has significant operations in Asia. It operates 10 property websites (nine residential, one commercial) across Malaysia, Hong Kong, Macau, Indonesia and Singapore, and has investments in sites in India and the Philippines. Source: ABS 09

11 Online services This means iproperty Group not only has the potential to grow as consumers do more of everything online, but it can also leverage the growth in middle class consumers in the Asia Pacific (households with daily spending of US$10-US$100). These households are estimated to grow from about half a billion in 2009 to 3.2 billion in 2030, according to data in the former Federal Government s Australia in the Asian Century white paper. Also operating in the online real estate space is Onthehouse Holdings (OTH). It has two operating divisions Real Estate Solutions and Consumer Online. It is still relatively small, at a market cap of $38 million and trading under 50 cents but has been very active in the acquisition space. It acquired property data provider Residex and real estate advertising group The Ad Network in The group has obviously been encouraged by the success of Zillow in the US the online real estate database created by former Microsoft executives and the 9.4% investment stake that James Packer took in Zillow last year. In its annual report the Company s Chairperson Gail Pemberton and Managing Director Michael Frederick stated outright Onthehouse.com.au is the Zillow of Australia. Companies like Onthehouse and IProperty Group could also potentially become acquisition targets. There is plenty of consolidation going on in this sector as players try to secure larger and more meaningful market share. 10

12 Financial services THE SUPERANNUATION INDUSTRY in Australia now surpasses $1.8 trillion dollars in funds under management and a superannuation guarantee rate of 9.50%, scheduled to increase to 12% by 2022, also guarantees that money will keep flowing into the sector. Funds under management rose from $1.572 trillion at the end of the March quarter last year to $1.837 trillion. Over the same 12-month period, the number of SMSFs has risen from 505,391 to the current 531,742, and total assets of $560.7 billion mean SMSFs make up the largest share of the superannuation industry. SMSFs may account for the lion s share of superannuation assets but trustees have been notoriously hard to nail down. Fund managers vie for their attention but SMSF trustees are reluctant to be told what to do, after all, for many their distaste of relying on others is actually what led them to start up an SMSF in the first place. One company that has been relatively successful at securing a piece of this market is AMP and that s not through its investment arm, AMP Capital, but rather through its acquisition of administration platforms Cavendish and part ownership of SuperIQ, which also owns Super Concepts. Overview TYPE OF FUND TOTAL ASSESTS ($billion) No. OF FUNDS No. OF ACCTS (mil. June 13) Corporate (a) Industry (a) Public Sector (a) Retail (a) Funds with less then 5 members , Balance of statutory funds 47.8 TOTAL 1, Source: APRA Statistics - March quarter 2014 Note: Only limited data are being released by APRA in Updated data by type of fund may not be available until 2015 (a) as at June quarter

13 Financial services The company s Australian Wealth Management division, which includes the SMSF administration services, was the biggest contributor to group profit after tax in 2013, recording $330 million of the $851 million business unit operating earnings. That was up on the $285 million the previous year and accounted for just under 40% of total business unit operating earnings. Investment companies that have been successful in cornering a segment of the superannuation investment market are also worth a look but just like any other sector, investment trends ebb and flow, which means the golden fund manager of today may not do so well tomorrow. Locally-listed international fund managers Magellan Financial Group (MFF) and Platinum Investment Management (PLA) have performed particularly well over the past 12 months to two years, but investors might be better off finding exposure to the nuts and bolts companies involved in superannuation. Computer registry business Computershare (CPU), for example, is a company that clips the ticket on every share that is bought and sold. It should benefit from increased trading activity. Conclusion Long-term investors should always try to identify long-term trends. Demographic changes, structural movements in industry and new government policies can all eventually lead to new investment opportunities and the end of others. Savvy investors look around and see evidence of these trends and the really smart ones invest at the beginning. This ebook is designed to help you identify some of the trends we believe are going to start playing out over the next 12 months, and also offer some suggestions for companies to invest in that could benefit from those trends. 12

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