Avoiding the crowds and finding value

Over the past 18 months, we have demonstrated a higher allocation to large cap Australian securities in line with the view that in many cases large cap stocks currently represent better value relative to small or mid cap stocks. Small and mid-cap stocks have rallied considerably, and we believe that large caps, such as the banks have been left behind.

The major banks have recently upgraded provisions for remediation costs relating to their advice businesses and we are of the view that the provisioning has been based on a worst-case scenario. We consider that the banking sector has reached the peak of its regulatory oversight, and while there is a risk that a change in government may see renewed focus on the sector, this is likely to be tempered by a need to maintain appropriate access to credit. Telstra also represents good value with its focus on simplifying the business and removing cost.

PIC also has a 6.0% exposure to Woolworths Group Limited (ASX:WOW). The core supermarkets business remains dominant within the Australian and New Zealand operating environment, with both countries characterised by a largely duopolistic and increasingly rational marketplace dynamic. Latest quarterly sales outcomes have WOW back in ascendancy after a weak start to FY19, and together with good cost management should allow meaningful bottom line profit growth going forward.

More generally WOW continues to refashion its portfolio of businesses. Under this current management team, the Masters misadventure has been closed down and the petrol business sold with proceeds to be distributed to shareholders via an off-market buyback over coming weeks - in itself significant at around 4% of issued capital. Other actions are yet to transpire, most notably resolution of Big W’s future (where we note 3Q19 sales growth of +2.6%) and new undertakings into convenience and online are yet to hit the bottom line.