ACCUMULATE QBE Insurance Group (QBE) $10.33 QBE disappointed the market with expectations that claims relating to the recent hurricanes in the US and Mexican earthquake would impact earnings by $US600 million. We don’t expect the increase of claims costs to repeat in 2018. Over the longer term we expect QBE to benefit from stronger global economic conditions and rising interest rates. QBE is undervalued and is trading below our fair value of $13. REDUCE Flight Centre Travel Group (FLT) $43.63 Since April, FLT has risen more than 50 per cent with the strong AUD benefiting Australians travelling overseas. Over the longer term, higher mortgage rates are likely to put pressure on household consumption and may lead to consumers cutting back on holidays which would negatively affect FLT. The stock is now trading well above our fair value of $33 and we recommend reducing holdings. SPECULATIVE BUY Kalamazoo Resources (KZR) $0.145 KZR has just announced an option to acquire three Pilbara tenements prospective for gold, cobalt and base metals to add to its existing project portfolio. The three projects are close to the recent flurry of activity in the gold space in the Pilbara. The region is poorly tested but highly prospective. We maintain our speculative buy on KZR, given the low market capitalisation and anticipate plenty of news flow from the new ground. For high-risk investors only. BUY Bendigo and Adelaide Bank (BEN) $11.44 BEN’s fundamentals are looking solid and overall outlook appears positive. Lending growth has returned and the retail funding base remains strong. BEN’s higher business lending component, including broad-based agribusiness lending through Rural Bank, provided diversification from traditional mortgages. Ongoing cost discipline is expected to continue and it remains on track to meet the APRA capital requirement by 2020. The dividend of 5.7 per cent is compelling. BUY Premier Investments (PMV) $12.81 PMV has experienced strong growth momentum in the Smiggles brand. In the UK, 38 stores have opened with a further 30 to 40 outlets targeted for 2018. New stores have also opened in Malaysia, Hong Kong and Ireland. Management expect revenue growth to continue and are planning to enter the Netherlands and Belgium. Online sales have achieved significant growth and expected to exceed original targets. BUY Qube Holdings (QUB) $2.460 QUB has now reached an agreement with Target Australia for both logistics and warehousing at its Moorebank facility. This contract is an important step that will assist further take-up and the development of supply chain efficiencies at Moorebank. Gearing levels are below the company target range, giving QUB options for further development of warehousing projects and strategic infrastructure assets. EQUAL-WEIGHT ANZ Banking Group (ANZ) $29.48 We have reduced confidence in ANZ's revenue recovery and believe its loan loss gap to "normalised" loss rates is greater than its peers. At the same time its cost focus and relative capital strength are well understood, while benefits of the "ANZ Solution" are reflected in the price. We have recently downgraded our rating to equal-weight. OVERWEIGHT Treasury Wine Estates (TWE) $14.08 TWE is well placed to benefit from the proposed US Federal corporate tax rate cut from 35 per cent to 20 per cent during 2018. We estimate that TWE generates 33 per cent of group profits from the US. The proposed big reduction in the US corporate tax rate could drive 2019 earnings 7 per cent higher. OVERWEIGHT Eclipx Group (ECX) $4.10 At its recent investor day, ECX showcased its strategy to leverage its leading corporate fleet business with high-growth adjacencies. Management highlighted the company's ability to provide corporate and consumer customers a platform to fully manage their motor vehicle needs. This supports our view of more growth, lower residual value risk at a discounted P/E ratio.
Morgan Stanley Ian Clarke
Paul Adams DJ Carmichael
Heather Zampatti Bell Potter Securities