GIVEN the tough times, stockbrokers will no doubt still welcome the tepid start to the new financial year, but they could have some way to wait before the sharemarket turns positive.
Retail stockbroking powerhouse Bell Financial Group the owner of Bell Potter has become the latest brokerage to issue a profit warning on the back of the terrible June-quarter market.
Bell has warned it will post a first-half loss of between $1.8 million and $2 million, mainly after being buffeted by slowing trading volumes. The warning comes on the heels of a string of retail brokers cutting staff as part of efforts to cut costs.
Bell has been no exception, with the broker quietly cutting research and sales roles over the past six months. Indeed, Bell's profit warning includes $2 million for one-off payments and non-recurring charges, although the broker was not specific on the nature of the costs.
The Brisbane-based Wilson HTM last month warned its full-year loss could blow out to as much as $8 million after being hit by asset write-downs and a sharp fall in trading volumes.
For Bell's part, the downturn was felt most on its retail broking arm and through its equity capital market business another area that has ground to a halt.
While conditions remain volatile, investors have opted to park spare funds in the bank rather than risk the market. Shares in Bell Financial lost another 3? yesterday to 41?, levels last traded at the depths of the financial crisis.
Still, any meaningful recovery in stockmarket turnover could be a little way out. As most of Bell's stockbrokers know, investors are likely to sit on their money until at least mid-to-late August, waiting to get a clearer picture of the health of corporate Australia through the lens of reporting season. Only then will investors get a sense of whether equities are undervalued and should be snapped up or beaten down further.
Ugly ducklings appeal
WITH persistent uncertainty in global markets, it might be worth turning attention to high-yielding, if slightly unglamorous, stocks.
That is the view of Deutsche Bank's utilities analysts who are spruiking the merits of the regulated utilities.
While levels of capital growth seen last year are unlikely to be repeated, sector yields consistently above 7 per cent make pipeline operator APA Group and power line interest Spark Infrastructure among the bank's utilities analysts' favourite picks. Remember, yields are calculated on dividend payments as a percentage of share price.
The Macquarie-backed DUET Group offers the highest yield in the regulated utilities sector, with the company's latest distribution guidance implying a yield of 8.7 per cent on current share price levels.
With the company aiming for 3 per cent annual distribution growth, that yield could reach 9.5 per cent by 2015, the analysts say. APA, Spark and SP AusNet another power line operator are forecasting yields of between 7 and 8 per cent.
Compare this with the 5 per cent yield the S&P/ASX200 Index is currently trading on. The current favourite among yield chasers Telstra is trading on the equivalent payout of 7.5 per cent.
Of course, the key investment consideration is the sustainability of yields.
Put simply, companies must be able to have enough cash to fund promised dividend payouts into the future. And yet prudent cash management must be balanced with ensuring enough investment is being made to ensure the company continues to grow and remain competitive.
Spark recently confirmed it had lost out in the bidding for the privatised Sydney desalination plant, while APA is currently bidding for Hastings Diversified Utilities Fund. The current offer, about $2.50 a share, is forecast to be cash-flow accretive though this could change if it were forced to up its bid.
NAB's short story
IS NATIONAL Australia Bank going short?
A recent survey by ratings agency Fitch of US Money Fund exposures suggest that Australian banks have been cutting back their reliance on short-term US money market funds. Total exposures are down 10 per cent on a US dollar basis from May.
However, among the majors NAB remains a major borrower of funds from US money markets. Indeed NAB accounts for just under half of the US fund exposure to Australia.
The focus on cheaper short-term money is likely to provide a benefit to net interest margins, but it flies in the face of demands from regulators to lengthen the term of wholesale funds.
NAB's most recent accounts show the weighted average remaining maturity of its term funding the average payback time is indeed shortening. It pulled back slightly during the March half to 3.2 years from 3.5 years in the September half.
With PHILIP WEN
Frequently Asked Questions about this Article…
What did Bell Financial Group’s profit warning say and why should investors care?
Bell Financial Group warned it will report a first‑half loss of about $1.8–$2.0 million, driven mainly by slowing trading volumes. The broker has quietly cut research and sales roles and said the result includes roughly $2 million of one‑off payments and non‑recurring charges. Everyday investors should care because the warning reflects weaker retail broking activity and broader market caution that can affect share prices and liquidity.
How have weak June‑quarter markets affected retail brokers like Bell and Wilson HTM?
The poor June quarter hit trading volumes across the sector, prompting retail brokers to reduce staff and cut costs. Bell flagged a first‑half loss, and Brisbane‑based Wilson HTM warned its full‑year loss could widen to about $8 million after asset write‑downs and a fall in trading. The result is thinner market turnover and greater volatility for investors.
When might stockmarket turnover recover and why is reporting season important?
According to brokers quoted in the article, many investors are likely to sit on cash until at least mid‑to‑late August to get a clearer picture from reporting season. Earnings reports will show corporate Australia’s health; only then might investors judge whether equities are undervalued and trading activity will pick up.
Which utility stocks are being suggested for income investors and what yields do they offer?
Deutsche Bank’s utilities analysts are highlighting regulated utilities as high‑yield options. The article names APA Group, Spark Infrastructure, SP AusNet and the Macquarie‑backed DUET Group. These sector yields are commonly above 7%; DUET was cited as offering the highest yield (about 8.7% at current prices) and Telstra was mentioned as trading on an equivalent payout of roughly 7.5%.
Are high yields on utilities like DUET, APA and Spark sustainable?
The article stresses that yield sustainability is the key issue: companies must generate enough cash to fund promised dividends while still investing to grow and remain competitive. High headline yields can be attractive, but investors should consider cash flow, distribution guidance and whether payouts are prudently managed.
What did the article say specifically about DUET Group’s yield and distribution guidance?
DUET Group was described as having the highest yield in the regulated utilities sector, with its latest distribution guidance implying a yield of about 8.7% at current share prices. Deutsche Bank’s analysts noted DUET aims for around 3% annual distribution growth, which could lift the yield toward about 9.5% by 2015, assuming guidance is met.
What is APA Group’s position on the Hastings Diversified Utilities Fund bid and what could it mean for cash flow?
APA Group was reported to be bidding for the Hastings Diversified Utilities Fund at roughly $2.50 a share. Analysts suggested that at that level the deal would be cash‑flow accretive for APA — although that outcome could change if APA were forced to raise its bid.
How are Australian banks using US money market funds and what does that mean for bank funding risk?
A Fitch survey noted Australian banks have been cutting reliance on short‑term US money market funds, with total exposures down about 10% since May. However, NAB remains a major borrower from US money markets, accounting for just under half of US fund exposure to Australia. The article points out that leaning on cheaper short‑term money can help net interest margins but conflicts with regulator pressure to lengthen wholesale funding, and NAB’s weighted average remaining maturity has shortened to about 3.2 years from 3.5 years.
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