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BAFI1042 Australian Securities Exchange Develop a Robust Portfolio

You are an equity portfolio manager investing within the ASX and will be using the functions from Thomson Reuters Eikon online (web version).
• The active portfolio is created based on your group selected securities. Your initial fund to be invested is $100,000,000 AUD.
• You must conduct an active style of portfolio management using fundamental analysis and technical analysis in an attempt to outperform the benchmark S&P/ASX 20.
 
• You need to identify yourself as a value or growth investor, a combination of both. You will also need to justify your choice
• You must select 9 out of the ASX20 securities (list is on CANVAS) from the benchmark to create your equity portfolio.
Dealing Session Task
• To make it easy, here is the timeline for your investment analysis:
 
At the end of Week 10 and Week 11 you are required to identify your portfolio total return (gain/loss), the contribution of the top and bottom securities as well as those of the largest positions (weightage) to your portfolio return.
• You will also need to identify whether you are underweight/overweight compare to the ASX20 benchmark. If so,
provide the sectors and securities in detail.
 
• You are also required to determine the total risk/active risk of your portfolio as well as its sources.
• You will also need to provide an explanation as to your securities allocation and selection with respect to value and growth investing strategies.
In order to conduct a more thorough and indepth analysis of the securities that you have selected, you can select to conduct a detailed fundamental analysis at a security level. This will provide you with all highlights and summary of
key accounting measures ?

Answer:

The objective of the assessment is to find a suitable combination of stocks of companies listed in Australian Securities Exchange (ASX) to develop a robust portfolio. The portfolio must have a balanced combination between growth and value stocks to ensure maximum possible return to the portfolio holder / holders. Fundamental analysis of these stocks along with technical evolution on the expected returns from the stocks shall be provided in the document to understand the recommendations and justifications behind selection of particulars stocks. Based on the historic returns and expected growth of selected 9 stocks the weightage of different stocks in the portfolio shall be decided to maximize the return and growth from the portfolio.   

Evaluation of stocks:

The stocks shall be selected on the basis of industrial and economic growth in the country. Often it has been seen that a particular industry in a country has more potential of growth in comparison to other industry or industries in the country. In Australia, Banking, mining and materials, energy, consumer staples and telecommunication industry have huge potential of growth and has grown extensively over the years as compared other industries.

Effective Government rules and regulations have led to the immense growth of these industries as compared to other industry (Weber, Alfen, and Staub-Bisang, 2016). The increased amount of government regulations and political interference in many countries have restricted the growth of the Banking industry in those countries whereas Australia has always been a country with strong banking industry. Thus, in selecting stocks for the portfolio in this document, the industry and economic growths attached to the industries have been in mind.

It is important to conduct a detailed analysis, both fundamental and technical, before taking investment decisions to minimize the risk of incurring loss on investments (Liu, Zhang and Tang, 2015). Hence, a portfolio must be created after adequate calculation to reduce the risk of losses from such portfolio. As already measured that the portfolio shall be mainly divided into two components, value and growth components. Accordingly, the following nine stocks have been selected for the portfolio purpose.


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Value components in the portfolio`

Growth components in the portfolio

BHP Billiton Limited (BHP)

Bellamy’s Australia Limited (Bellamy)

Commonwealth Bank (Commonwealth)

Altium Limited

Woolworths Group Ltd (Woolworths)

Flight Centre Travel Group Limited (Flight Centre)

Wesfarmers Ltd (Wesfarmers)

A2 Milk Company (A2)

Telstra Corporation (Telstra)

 

Fundamental analysis:

Fundamental facts and information are provided by The Thomson Reuters Eikon online. Taking into consideration the

Fundamental analysis is the analysis conducted on the basis performance yardsticks of different companies. In this case, the fundamental analysis of the 9 stocks shall include analysing the dividend yield of these stocks, return on capital employed or equity, gross profit margin, net profit margin, solvency position, liquidity position of the companies and the expected growth in the future (Jehiel, 2018).

The fundamental analysis shall indicate how the companies have performed over the years and the expected growth of these companies in the future. Analysing the profitability position of the companies over the years would be helpful in assessing the ability of these companies to earn profit from their business operations (Maillet, Tokpavi and Vaucher, 2015). Based on the past performances and trends in the market the expected future performances of these companies can be measured with substantial reliability.

BHP Billiton Limited:

One of the largest mining companies in all across the globe, BHP Billiton Limited is an Anglo-Australian company. In terms of market capitalization it is one of the largest mining companies in the world. In order to provide relative strength and to diversify the portfolio, investment in BHP Billiton should be considered after evaluating its performance in last few years (Wadhwa, Phelps and Kotha, 2016).

BHP Billiton Ltd

         

 Except per share items all amounts are in $' million

   
 

 2013-06

 2014-06

 2015-06

 2016-06

 2017-06

 2018-06

 Gross revenue 

   53,860.00

   56,762.00

   44,636.00

   28,567.00

   36,135.00

   43,638.00

 Gross profit %

           68.90

           75.30

           72.50

           66.30

           76.30

           75.00

 Operating profit

   19,702.00

   21,437.00

   11,684.00

     4,941.00

   12,578.00

   16,089.00

 Operating profit %

           36.60

           37.80

           26.20

           17.30

           34.80

           36.90

 Net profit 

   11,223.00

   13,832.00

     1,910.00

   (6,385.00)

     5,890.00

     3,705.00

 EPS

             2.10

             2.59

             0.35

           (1.20)

             1.10

             0.69

 Dividend per share 

             1.13

             1.15

             1.24

             0.78

             0.55

             0.96

Despite being one of the largest mining companies in the world, the ability of the company to perform efficiently is clearly visible in the table above. The gross revenue line in the chart below indicates that the company is very stable in its business life cycle.

There has been slight ups and downs in revenue and operating profit which is quite understandable considering the size and scope of operations of the company. The net profit line of the company as can be seen in the chart below once dropped to negatives has again recover to indicate the strengths of the company in earning profit from business.

Recommendation: Holding the shares of the company will increase the strength of the portfolio.  

Commonwealth Bank 

       

 Amounts are in $'million 

       
 

 2013-06

 2014-06

 2015-06

 2016-06

 2017-06

 2018-06

 Revenue 

   21,389.00

   22,873.00

   23,805.00

   24,225.00

   25,089.00

   25,630.00

 Net income 

     7,677.00

     8,631.00

     9,063.00

     9,227.00

     9,928.00

     9,329.00

 EPS

             4.62

             5.19

             5.29

             5.29

             5.59

             5.17

 Dividend per share 

             1.64

             3.92

             3.99

             4.32

             4.22

             4.24

             

 Gross Margin

           30.83

           30.67

           30.94

           31.85

           30.86

           29.18

 Earnings before tax margin

           37.87

           40.44

           39.93

           39.88

           42.59

           53.09

Commonwealth has continuously managed as sustainable growth over the last 10 years, the information in the table contains only of last 6 years. Thus, the bank is a prime entity to invest one’s money. The following graph clearly explains the ability of the bank to keep on growing despite huge competition in the banking industry (Kolm, Tütüncü and Fabozzi, 2014).  

The ever growing EPS and dividend per share of the bank is another important factor that would inspire investors to invest on the stock of the company.

Recommendation: To invest in the shares of the bank by buying additional shares.

Woolworths Group:

The table below contains important financial data about the performance of the company since 2013.

Woolworths Group Ltd

All amounts are in $' millions

       
 

2013-06

2014-06

2015-06

2016-06

2017-06

2018-06

Gross Revenue

58,674

60,952

60,868

58,276

55,668

56,965

Gross Margin %

26.9

27

27.1

26.8

28.6

29.3

Net Income

2,259

2,451

2,146

-1,234

1,534

1,724

Earnings Per Share AUD

1.82

1.95

1.7

-0.98

1.19

1.32

Dividends AUD

1.29

1.36

1.39

1.16

0.67

0.93

The company has more or less managed to hold on to its market share and have paid dividend to the shareholders without failing a year. There is definitely room for improvement in the performance however, the company’s robust performance over the years makes it one of the companies to keep in mind while investing (Zeng, Li and Gu, 2016).

The ever improving gross margin of the company along with its regularity in paying dividends to the shareholders are certainly two key aspects to be kept in mind.

Recommendation: The investors should hold on to the investment made in the company.    

Wesfarmers Limited:

Again the financial information about the company in the table below will explain how the company has performed over the years to decide the future course of action in relation to buy, hold or dispose of the shares of the company (Berutich et. al. 2016).

Wesfarmers Ltd

         

All amounts are in $' millions except per share amount

 
 

2013-06

2014-06

2015-06

2016-06

2017-06

2018-06

Gross Revenue

59,422

59,893

62,102

65,512

68,015

66,594

Gross profit margin %

33.3

30.8

30.7

30.5

31.8

31.3

Operating profit

4,043

4,080

4,162

3,778

4,683

4,570

Operating Margin %

6.8

6.8

6.7

5.8

6.9

6.9

Net Income

2,261

2,689

2,440

407

2,873

1,197

Earnings Per Share

2.02

2.38

2.16

0.36

2.54

1.06

Dividends

1.77

1.93

2.21

2.02

1.98

2.23

Constant growth in the amount of revenue of the company is a clear indication of the ability of the company to contribute to the growth to a portfolio consisting of the shares of Wesfarmers Limited.

The company despite suffering slight decline in earnings per share (EPS), clear from the above linear graph, has maintained its constant growth in dividend each year barring 2017. Thus, it is recommended to hold on to the shares of the companies (Aziz et. al. 2016).

Recommendation: Hold on to the shares of the company.

Flight Centre Travel Group Limited:

A rapidly growing company in Australia Flight Centre has its shares listed in the ASX. Talking a look at the information below about the performance of the company since 2013 lets recommend the course of action with regards to the shares of the company (Hoesli and MacGregor, 2014).  

Flight Centre Travel Group Ltd

       

 Except per share data all amounts are in $' millions

   
 

 2013-06

 2014-06

 2015-06

 2016-06

 2017-06

 2018-06

 Revenue AUD Mil

   1,945.00

   2,207.00

   2,363.00

   2,625.00

   2,544.00

   2,921.00

 Gross Margin %

      100.00

      100.00

      100.00

      100.00

      100.00

         95.60

 Operating profit

      352.00

      429.00

      403.00

      407.00

      300.00

      466.00

 Operating Margin %

         18.10

         19.40

         17.00

         15.50

         11.80

         16.00

 Net profit 

      246.00

      207.00

      257.00

      245.00

      231.00

      263.00

 Earnings Per Share

           2.44

           2.06

           2.54

           2.42

           2.28

           2.59

 Dividends 

           0.55

           2.17

           1.99

           1.96

           1.54

Considering the information provided about the performance of Flight Centre, it is pretty clear that the company is in its growing stage thus, there would be no better to invest in the shares of the company but now. The chart below explains how the company has grown over the years (Ilin, Koposov and Levina, 2014).   

The significant growth in the revenue of the company and its profits are all indicating towards increasing the investment in the shares of the company (Beck et. al. 2017). The investors would especially be eager to invest in the shares of the company as the company has managed sustainable growth in earnings per share and dividend per share since 2013 as can be seen in the linear graph below.  

Recommendation: Additional shares of Flight Centre to be brought to improve the growth and return of the overall portfolio.

A2 Milk Company Limited:

Listed in ASX 200, A2 Milk commercializes intellectual properties in relation to the A2 Milk. In Australia and New Zealand, the company is one of most rapidly growing companies. Taking into consideration the financial performances of the company over the years, recommendation is provided below (Chandra, 2017).

A2 Milk Co Ltd

         

 Except per share data all amounts are in NZ $' million

 
 

 2013-06

 2014-06

 2015-06

 2016-06

 2017-06

 2018-06

 Gross revenue

        94.00

     111.00

     155.00

     353.00

     549.00

     922.00

 Gross Profit Margin %

        35.70

        36.00

     100.00

        42.80

        48.00

        50.30

 Operating profit

          8.00

        12.00

          9.00

        76.00

     139.00

     302.00

 Operating profit Margin %

          8.70

        11.10

          5.80

        21.40

        25.40

        32.80

 Net profit

          4.00

               -  

        (2.00)

        30.00

        91.00

     196.00

EPS

          0.01

   

          0.04

          0.12

          0.26

Gross revenue of the company has grown each year at a significant pace. The linear graph below clearly show the increasing trend of revenue that the company has managed for number years (Matiin, Ratnawati and Riyadi, 2018).

The line clearly suggests that the gross revenue of the company has continuously increased. This is a clear indication that the company is performing exceptionally well in the market. Along with gross revenue of the company, the net profit of the company has also increased in each year (Gliedt and Hoicka, 2015).   

Recommendation: Considering the growth capability of the company and its ever improving financial performance it is recommended to buy additional shares in the company to improve overall return from the portfolio (Hua et. al. 2015).

Bellamy’s Australia Limited:

A major food and beverage company in Australia, Bellamy’s Australia has a huge potential to grow in the market as within a period of 5 years since its inception in 2014 the company has made significant mark in the food and beverage industry in the country. Following table contains financial information about the company’s performance since its inception in 2014 (Kindig, and Milstein, 2018). 

Bellamy's Australia Ltd

     

 All amounts are in $' millions except per share data

 
 

 2014-06

 2015-06

 2016-06

 2017-06

 2018-06

 Gross revenue 

        51.00

     125.00

     245.00

     240.00

     329.00

 Gross profit margin %

        36.20

        32.90

        45.70

        38.10

        37.40

 Operating profit 

          2.00

        27.00

        82.00

        57.00

        75.00

 Operating Margin %

          3.60

        21.40

        33.40

        23.80

        22.80

 Net Income AUD Mil

          1.00

          9.00

        38.00

        (1.00)

        43.00

 Earnings Per Share AUD

          0.02

          0.09

          0.38

        (0.01)

          0.37

 Dividends AUD

 

          0.07

          0.08

 

Constant growth in revenue of the company is an indication that the company has been very successful in achieving sustainable growth in revenue since its inception. Since the company is in its initial stage of operations investing in the company would enable the portfolio to earn significant return from the market in the future (Arrow, 2017).

The above graph depicting the growth in gross revenue of the company is a major indicator of company’s sustained growth since its inception (Hoesli and MacGregor, 2014). 

Recommendation: To invest in the shares of the company.   

Telstra Corporation:

The largest telecommunication company in Australia, Telstra Corporation has been quite successful in providing its investors value for their investment in the shares of the company (Huisman and Kort, 2015). The performance of the company since 2013 is documented in the table below.

Telstra Corp Ltd

         

 Except per share amount other items are in $' million 

   
 

 2013-06

 2014-06

 2015-06

 2016-06

 2017-06

 2018-06

 Gross revenue

   25,502.00

   25,119.00

   25,845.00

   25,834.00

   25,912.00

   25,667.00

 Gross profit %

           74.80

           74.10

           73.40

           71.90

           57.70

           52.00

 Operating profit 

     7,698.00

     7,789.00

     7,729.00

     7,110.00

     2,067.00

      (685.00)

 Operating profit %

           30.20

           31.00

           29.90

           27.50

             8.00

           (2.70)

 Net profit

     3,813.00

     4,275.00

     4,231.00

     5,780.00

     3,891.00

     3,563.00

 EPS

             0.30

             0.34

             0.34

             0.47

             0.33

             0.30

 Dividend per share 

             0.28

             0.28

             0.30

             0.31

             0.31

             0.23

Being the largest telecommunication company in the country, Telstra has been quite successful in providing telecommunication services to the customers in the country and in other parts of the globe where it operates. Annual revenue and net profit chart of the company since 2013 shown below are clear proof of company’s stability in the market (Grant, 2016).   

The company has paid dividend regularly without failure. The chart below depicts how the company has earned income per share and paid dividend per share.

Despite fluctuations in earnings per share the company has managed stability in paying dividend. Considering the position of the company in the market it would significantly improve the profile of a portfolio containing the shares of Telstra Corporation. Thus, the shares in the company should be hold on to in the future to improve the stability of the portfolio (Graham, Harvey and Puri, 2015).            

Recommendation: It is recommended to hold on to the shares of the company.

Altium Limited:

An Australian domiciled American Company, Altium Limited provides software design for engineers for computer and electronic items. The company is medium sized enterprise with its shares are listed in ASX (DeFusco et. al. 2015).

Altium Ltd

         

 All amounts are in $' millions except per share information

 
 

 2013-06

 2014-06

 2015-06

 2016-06

 2017-06

 2018-06

 Gross revenue 

        66.00

        75.00

     104.00

     126.00

     144.00

     188.00

 Gross profit %

        97.50

        96.60

        97.50

     100.00

     100.00

     100.00

 Operating profit

        (7.00)

          2.00

        11.00

        20.00

        21.00

        30.00

 Operating profit %

     (11.00)

          3.30

        10.10

        15.90

        14.40

        16.00

 Net profit

          1.00

        12.00

     120.00

        31.00

        37.00

        51.00

 EPS

          0.01

          0.11

          0.97

          0.24

          0.28

          0.39

 Dividend per share

          0.08

          0.12

          0.16

          0.18

          0.21

          0.25

Gross revenue of the company has continuously showed an upward trend since 2013. The linear graph below shows how the company has increased in revenue year after year since 2013.

Conclusion:

The above weights have been decided by taking into consideration the value, growth and stability aspects of these stocks. The stocks that are expected to provide highest amount of return have been allocated with a weightage of 15% each. Similarly the stocks that are expected to render stability to the overall profile such as Telstra and BHP again 15% weightage has been allocated to each of these stocks. Others with relatively modest return and stability qualities have been attached with less weightage. This would help in diversification of the portfolio.

References:

Arrow, K.J., 2017. Optimal capital policy with irreversible investment. In Value, capital and growth (pp. 1-20). Routledge.

Aziz, A., Lasternas, B., Alschuler, E., Loftness, V., Wang, H., Mo, Y., Wang, T., Zhang, C., Sharma, S. and Stevens, I., 2016. Supporting Building Portfolio Investment and Policy Decision Making through an Integrated Building Utility Data Platform (No. DOE-CBEI-4261-14-112). Carnegie Mellon University.

Beck, A.K., Behn, B.K., Lionzo, A. and Rossignoli, F., 2017. Firm Equity Investment Decisions and US GAAP and IFRS Consolidation Control Guidelines: An Empirical Analysis. Journal of International Accounting Research, 16(1), pp.37-57.

Benjamin, S.J., Mohamed, Z.B. and Marathamuthu, M.S., 2018. DuPont analysis and dividend policy: empirical evidence from Malaysia. Pacific Accounting Review, 30(1), pp.52-72. 

Berutich, J.M., López, F., Luna, F. and Quintana, D., 2016. Robust technical trading strategies using GP for algorithmic portfolio selection. Expert Systems with Applications, 46, pp.307-315.

Cervelló-Royo, R., Guijarro, F. and Michniuk, K., 2015. Stock market trading rule based on pattern recognition and technical analysis: Forecasting the DJIA index with intraday data. Expert systems with Applications, 42(14), pp.5963-5975. 

Chandra, P., 2017. Investment analysis and portfolio management. McGraw-Hill Education.

DeFusco, R.A., McLeavey, D.W., Pinto, J.E., Anson, M.J. and Runkle, D.E., 2015. Quantitative investment analysis. John Wiley & Sons.

Dupont, E. and Jeanmart, H., 2017. " A Dynamic Function for the Energy Return on Investment (EROI) of Wind Energy. In Wind Energy Science Conference (WESC-2017). 

Edwards, R.D., Magee, J. and Bassetti, W.H.C., 2018. Technical analysis of stock trends. CRC press.

Gliedt, T. and Hoicka, C.E., 2015. Energy upgrades as financial or strategic investment? Energy Star property owners and managers improving building energy performance. Applied Energy, 147, pp.430-443.

Graham, J.R., Harvey, C.R. and Puri, M., 2015. Capital allocation and delegation of decision-making authority within firms. Journal of Financial Economics, 115(3), pp.449-470.

Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.

Hoesli, M. and MacGregor, B.D., 2014. Property investment: principles and practice of portfolio management. Routledge.

Hoesli, M. and MacGregor, B.D., 2014. Property investment: principles and practice of portfolio management. Routledge.

Hu, Y., Feng, B., Zhang, X., Ngai, E.W.T. and Liu, M., 2015. Stock trading rule discovery with an evolutionary trend following model. Expert Systems with Applications, 42(1), pp.212-222. 

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