Australian Market Strategist, Saxo Bank Group
Saxo Bank's in-house developed quant model, Equity Radar, is our propriety tool for screening the global equity market. It scores the 1,200 largest stocks on six equity factors (value, yield, quality, momentum, reversal, and volatility) normalised within each industry, thus providing an inspirational conviction list of equity picks.
AUSTRALIA – TOP 20 SORTED BY MOMENTUM
Knowing what factors to select is half the battle. What factors drive performance on the ASX?
When analysing returns on the ASX 200 Index on a sector neutralised bias, certain factors are systemically rewarded over others.
From my analysis looking at a time series of monthly factor returns on the ASX200, momentum is the factor that consistently drives returns. The top quintile of the momentum factor outperforms other factors both year-to-date and over the past seven years. In fact, in the past seven years, momentum factor has been the key driver in contributing to equity returns on the ASX 200 universe of stocks.
For that reason, I have chosen to sort the Equity Radar conviction list by the momentum factor. High momentum in our model tells us the stock has performed well over the past year, and with momentum being a key driver of returns on the ASX this should be noted.
The Equity Radar is designed to pick out equities which perform well relative to other equities in the same industry.
The equity universe is the S&P Global 1200 Index, comprised of S&P 500, S&P Europe 350, S&P/TOPIX 150 (Japan), S&P TSX 60 (Canada), S&P/ASX 50 (Australia), S&P Asia 50 and S&P Latin America 40. Equity Radar scores equities based on six different factors: Value, Yield, Quality, Momentum, Reversal, and Volatility. All factors are industry normalised so all factor scores are relative to their respective industries. Furthermore, all factor scores are designed so that higher is better.
Value: Based on the ratios: EBITDA-to-EV, book-to-price, earnings-to-price, cashflow-to-price, and sales-to-price. For financials, the factor is only based on book-to-price and earnings-to-price. For real estate, ‘funds from operations’-price is used instead.
Yield: Based on dividend yield for financials and real estate and on shareholder yield for other equities. Shareholder yield is a measure of total returned capital to shareholders which is the sum of dividends paid, net capital stock and net change in long-term debt.
Quality: Return on equity (ROE), return on assets (ROA) and return on invested capital (ROIC). ROIC is not used for financials.
Momentum: Based on the 252-day minus 21-day price change. A high score indicates a large price increase, and a low score indicates a large price decrease. Reversal Inverse of 21-day price change. So stocks that have fallen a lot get a high score.
Volatility: 360-day volatility using the Rogers and Satchell Model. A low volatility is indicated by a high score.
Total: A score for comparing equities across all the factors above. It is calculated as the average of the six factor scores above.
Note: The Equity Radar should not be interpreted as trade recommendations but merely as inspirational lists.
The Saxo quant model scores Qantas highly on the momentum factor and concurrently indicates positive value and yield. The Equity Radar model uses shareholder yield to evaluate the yield factor, this measures the cash flow returned to shareholders through dividends, buybacks, or debt reduction.
On May 2, 2018 Qantas announced its 3QFY18 results highlights were:
• Revenue up $4.5bn up 7.5% pcp
• 6 additional dream liners ordered
• New 787-9’s are 20% more fuel efficient
• Domestic revenue increased 8%, International 5.2%
• End of April 2018 Qantas has hedged 70% of FY19 fuel costs
• At 30 April the $378m buyback was 51% complete, once finished
Qantas will have bought back estimated 24% of its stock since Oct 2015. Increasing cash flow will increase possibility of higher dividends and further buybacks.
Qantas should continue to report robust profits as it maintains its dominance in Australia and expands international operations. The expansion of Jetstar operations should bolster earnings further as leisure travel yields increase, any budget tax cuts may also have a positive effect on this. Increasing air travel demand in Asia could also be a key driver of growth opportunities within Jetstar Asia. Jetstar has also emerged as a shielded revenue stream as they operate in an effective duopoly in the low-cost carrier space.
The resource sector recovery continues in Australia boosting corporate travel expenditure, which Qantas is poised to benefit from.
The Qantas loyalty unit has a dominant market position within Australia and provides strong earning with capacity for monetisation to provide shareholder value. As a stand-alone entity this loyalty business could be valued upwards of $2 billion.
A key risk is the rising costs of fuel which will seriously undermine profit despite fuel hedging strategies as operating costs could be pushed significantly higher … watch this space WTI Crude Future $71.61 USD at time of writing (18/05/2018).
The Saxo quant model rates Aristocrat highly on the momentum factor.
Aristocrat Leisure is a manufacturer, developer and distributor of slot machines, online gaming content and casino management software. With operations in ANZ and the Americas.
Global Casinos are now creating whole gaming rooms full of Aristocrat's top selling 'Lightning Link' and 'Dragon Link' machines, which continue to do 3 times the average turnover of existing games. Aristocrat are so ahead of the game that competitors in the space have stopped competing and are now looking ahead in how to replicate the company's products. Aristocrat has strong recurring revenues and is consistently gaining market share in North America in both their traditional and digital business.
Aristocrat is now the second largest player in social casinos and the fifth in overall social/mobile gaming, with mobile gaming contributing most to growth in digital. Mobile gaming makes up US$50bn of the US$116bn total pie and will grow much faster than PC/console. Aristocrat now have eight million daily active users, two years ago they had two million.
Interestingly, Aristocrat filed more patents than any other Australian company last year, three times the second largest (CSIRO). Aristocrat expenses all R&D and customer acquisition costs in year one and is still generating over 35% EBITDA margins.
Aristocrat’s push to take a portion of ongoing gaming revenues per machine as opposed to selling each box outright and the outstanding growth continuing in their digital business (social gaming/online casinos) has now pushed their recurring revenues to around 60%, helping to propel their earnings growth 37% in FY17. The digital segment is expected to be the largest single revenue contributor for Aristocrat reducing Aristocrat's reliance on cyclical outright sales of hardware and equipment.
Key downside risks materialise as per capita gaming expenditure has been declining over the last ten years in Australia, this shift of preference could favour emerging industries like virtual reality gaming, however, Aristocrat is focusing on diversifying into the digital gaming space.
Aristocrat is susceptible to FX risk as revenue is generated in multiple currencies, particularly USD,i n the month to date the USD has been strong, with the dollar index breaking its 12-month SMA.