Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

Sandfire Resources Limited / Event-Driven

On 23 September pre-market open, <a href="https://www.smartkarma.com/entities/sandfire-resources-limited" target="_blank" data-smartkarma-citation="entities:1259:1" rel="noopener">Sandfire Resources Limited (SFR AU)</a> requested for a trading halt. A short time later, the company announced the acquisition of the MATSA mining complex from Mubadala and Trafigura for US$1.865bn (A$2.572bn).The acquisition is expected to be completed in the March 2022 quarter and is subject to Spanish Foreign Direct Investment Approval and anti-trust merger control approval.The acquisition will be funded by an A$120m strategic placement to AustralianSuper, a A$165m institutional placement, a A$963m fully underwritten 1 for 1 accelerated non-renounceable entitlement offer (ANREO), debt and cash on hand.Just over 231m shares will be issued at A$5.40/share, a 13.2% discount to the last close of A$6.22/share, and a 6.2% discount to TERP.The increase in market cap as a result of the placement and entitlement offer will result in <a href="https://www.smartkarma.com/entities/sandfire-resources-limited" target="_blank" data-smartkarma-citation="entities:1259:1" rel="noopener">Sandfire Resources Limited (SFR AU)</a> becoming a high probability inclusion to the <a href="https://www.smartkarma.com/entities/s-p-asx-200" target="_blank" data-smartkarma-citation="entities:22901:1" rel="noopener">S&amp;P/ASX 200 (AS51 INDEX)</a> at the December rebalance.With a number of M&amp;A deals targeting <a href="https://www.smartkarma.com/entities/s-p-asx-200" target="_blank" data-smartkarma-citation="entities:22901:1" rel="noopener">S&amp;P/ASX 200 (AS51 INDEX)</a> constituents, there will be more changes to the index over the next couple of regular rebalances (and in the interim as well).

On 23 September pre-market open, Sandfire Resources Limited (SFR AU) requested for a trading halt. A short time later, the company announced the acquisition of the MATSA mining complex from Mubadala and Trafigura for US$1.865bn (A$2.572bn).The acquisition is expected to be completed in the March 2022 quarter and is subject to Spanish Foreign Direct Investment Approval and anti-trust merger control approval.The acquisition will be funded by an A$120m strategic placement to AustralianSuper, a A$165m institutional placement, a A$963m fully underwritten 1 for 1 accelerated non-renounceable entitlement offer (ANREO), debt and cash on hand.Just over 231m shares will be issued at A$5.40/share, a 13.2% discount to the last close of A$6.22/share, and a 6.2% discount to TERP.The increase in market cap as a result of the placement and entitlement offer will result in Sandfire Resources Limited (SFR AU) becoming a high probability inclusion to the S&amp;P/ASX 200 (AS51 INDEX) at the December rebalance.With a number of M&amp;A deals targeting S&amp;P/ASX 200 (AS51 INDEX) constituents, there will be more changes to the index over the next couple of regular rebalances (and in the interim as well).

Sandfire Resources (SFR AU): Acquisition, ANREO and ASX200 Inclusion

S&amp;P Dow Jones Indices will announce changes to the S&amp;P/ASX 100 and <a href="https://www.smartkarma.com/entities/s-p-asx-200" target="_blank" data-smartkarma-citation="entities:22901:1" rel="noopener">S&amp;P/ASX 200 (AS51 INDEX)</a> as part of the December index review on 3 December and the changes will be effective after the close of trading on 17 December.The review period for the rebalance ends on 19 November, so we are exactly two-thirds of the way through the review period.As of the close on 20 September, we see <a href="https://www.smartkarma.com/entities/pilbara-minerals-ltd" target="_blank" data-smartkarma-citation="entities:7460:1" rel="noopener">Pilbara Minerals (PLS AU)</a> as a potential inclusion to the S&amp;P/ASX100 and <a href="https://www.smartkarma.com/entities/link-administration-holdings-ltd" target="_blank" data-smartkarma-citation="entities:970:1" rel="noopener">Link Administration Holdings (LNK AU)</a> as a potential deletion.For the <a href="https://www.smartkarma.com/entities/s-p-asx-200" target="_blank" data-smartkarma-citation="entities:22901:1" rel="noopener">S&amp;P/ASX 200 (AS51 INDEX)</a>, potential inclusions are <a href="https://www.smartkarma.com/entities/imugene-ltd" target="_blank" data-smartkarma-citation="entities:20276:1" rel="noopener">Imugene Ltd (IMU AU)</a>, <a href="https://www.smartkarma.com/entities/paladin-energy-ltd" target="_blank" data-smartkarma-citation="entities:10117:1" rel="noopener">Paladin Energy (PDN AU)</a>, <a href="https://www.smartkarma.com/entities/amalgamated-holdings-ltd" target="_blank" data-smartkarma-citation="entities:20978:1" rel="noopener">Event Hospitality and Entertainment (EVT AU)</a>, <a href="https://www.smartkarma.com/entities/liontown-resources-ltd" target="_blank" data-smartkarma-citation="entities:20488:1" rel="noopener">Liontown Resources (LTR AU)</a> and <a href="https://www.smartkarma.com/entities/arena-reit" target="_blank" data-smartkarma-citation="entities:12209:1" rel="noopener">Arena Reit (ARF AU)</a>, while potential deletions are <a href="https://www.smartkarma.com/entities/kogan-com-ltd" target="_blank" data-smartkarma-citation="entities:23575:1" rel="noopener">Kogan.com (KGN AU)</a>, <a href="https://www.smartkarma.com/entities/redbubble-ltd" target="_blank" data-smartkarma-citation="entities:24321:1" rel="noopener">Redbubble Ltd (RBL AU)</a>, <a href="https://www.smartkarma.com/entities/monadelphous-group-ltd" target="_blank" data-smartkarma-citation="entities:553:1" rel="noopener">Monadelphous (MND AU)</a>, <a href="https://www.smartkarma.com/entities/omni-bridgeway-ltd" target="_blank" data-smartkarma-citation="entities:8840:1" rel="noopener">Imf Bentham Ltd (OBL AU)</a> and <a href="https://www.smartkarma.com/entities/spark-new-zealand-ltd-3dcc706a-f086-4dd4-882b-2a42a36ccf8d" target="_blank" data-smartkarma-citation="entities:26915:1" rel="noopener">Spark New Zealand (SPK AU)</a>.With multiple M&amp;A deal pending, including <a href="https://www.smartkarma.com/entities/afterpay-limited" target="_blank" data-smartkarma-citation="entities:26940:1" rel="noopener">Afterpay Touch (APT AU)</a>, <a href="https://www.smartkarma.com/entities/sydney-airport" target="_blank" data-smartkarma-citation="entities:19063:1" rel="noopener">Sydney Airport (SYD AU)</a>, <a href="https://www.smartkarma.com/entities/ausnet-services" target="_blank" data-smartkarma-citation="entities:10293:1" rel="noopener">Ausnet Services (AST AU)</a>, <a href="https://www.smartkarma.com/entities/oil-search-ltd" target="_blank" data-smartkarma-citation="entities:773:1" rel="noopener">Oil Search Ltd (OSH AU)</a> and <a href="https://www.smartkarma.com/entities/spark-infrastructure-group" target="_blank" data-smartkarma-citation="entities:595:1" rel="noopener">Spark Infrastructure (SKI AU)</a>, there could be more additions to the index if deals are completed or highly likely to be completed by end November.Short interest on most potential inclusions is quite low, while the short interest on many potential exclusions is quite high.

S&amp;P Dow Jones Indices will announce changes to the S&amp;P/ASX 100 and S&amp;P/ASX 200 (AS51 INDEX) as part of the December index review on 3 December and the changes will be effective after the close of trading on 17 December.The review period for the rebalance ends on 19 November, so we are exactly two-thirds of the way through the review period.As of the close on 20 September, we see Pilbara Minerals (PLS AU) as a potential inclusion to the S&amp;P/ASX100 and Link Administration Holdings (LNK AU) as a potential deletion.For the S&amp;P/ASX 200 (AS51 INDEX), potential inclusions are Imugene Ltd (IMU AU), Paladin Energy (PDN AU), Event Hospitality and Entertainment (EVT AU), Liontown Resources (LTR AU) and Arena Reit (ARF AU), while potential deletions are Kogan.com (KGN AU), Redbubble Ltd (RBL AU), Monadelphous (MND AU), Imf Bentham Ltd (OBL AU) and Spark New Zealand (SPK AU).With multiple M&amp;A deal pending, including Afterpay Touch (APT AU), Sydney Airport (SYD AU), Ausnet Services (AST AU), Oil Search Ltd (OSH AU) and Spark Infrastructure (SKI AU), there could be more additions to the index if deals are completed or highly likely to be completed by end November.Short interest on most potential inclusions is quite low, while the short interest on many potential exclusions is quite high.

ASX100/​200 Index Rebalance Preview: Potential December Changes With Large Impact

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

Morningstar provides data on more than 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 16 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $180 billion in assets under advisement or management as of June 30, 2015. We have operations in 27 countries.

Download the Morningstar Fact Sheet : http://corporate.morningstar.com/US/documents/MarketingFactSheets/AboutMorningstarFactsheet.pdf

Thematic (Sector/Industry)

<div class="content-highlight">New government funding package will benefit child care providers</div><hr><h2>Executive Summary</h2>The Australian early childhood education and care, or ECEC, sector will soon receive a boost from higher federal government funding via the introduction of the child care subsidy under the Jobs for Families Child Care legislation. From July 2, the new funding system will increase subsidies for most families, and government forecasts project a 16% increase in subsidies in fiscal 2019 alone. In aggregate, the government expects annual funding to increase by around 40%, or AUD 3 billion, over the next three years. As around 60% of child care fees are funded by government subsidies, we expect this to materially benefit ECEC providers. Although we don't explicitly forecast government subsidies, our analysis suggests government forecasts could be conservative, considering subsidy growth averaged 15% between fiscal 2011 and fiscal 2016. Higher subsidy growth is unlikely to impact our REIT EPS forecasts but would improve the credit quality of their tenants. Operators, such as <a href="https://www.smartkarma.com/entities/581" target="_blank" data-smartkarma-citation="entities:581:1">G8 Education Ltd (GEM AU)</a>, would benefit from higher earnings, akin to our bull-case forecasts but we are reluctant to adopt a more bullish stance until the CCS begins in fiscal 2019 and we have more information about its impact. Investors can gain exposure to this funding boost via ASX-listed equities we cover including ECEC centre operator G8 Education, and ECEC real estate investment trusts, or REITs, including <a href="https://www.smartkarma.com/entities/8288" target="_blank" data-smartkarma-citation="entities:8288:1">Folkestone Education Trust (FET AU)</a> and <a href="https://www.smartkarma.com/entities/12209" target="_blank" data-smartkarma-citation="entities:12209:1">Arena REIT (ARF AU)</a>. Our preferred exposure is via Arena REIT, which offers an attractive discount to our fair value estimate, an internalised management structure, and a high-quality diversified portfolio with relatively long triple-net leases.<hr><h2>Key Takeaways</h2><ul><li>We expect the federal government's Jobs for Families Child Care Package, which will be introduced in July, to drive an increase in ECEC industry revenue of around 40% over the next three years which will benefit ECEC providers.</li><li>ECEC demand is also supported by population growth, a rising proportion of children using child care, and growing female workforce participation.</li><li>Child care centre REITs offer low-risk exposure to the ECEC sector and benefit from relatively long triple net leases. ECEC centre operators provide higher-risk exposure due to their relatively high earnings volatility. However, operators also have attractive characteristics, such as capital-light business models, which should enable strong cash flows albeit with higher volatility.</li></ul>

New government funding package will benefit child care providersExecutive SummaryThe Australian early childhood education and care, or ECEC, sector will soon receive a boost from higher federal government funding via the introduction of the child care subsidy under the Jobs for Families Child Care legislation. From July 2, the new funding system will increase subsidies for most families, and government forecasts project a 16% increase in subsidies in fiscal 2019 alone. In aggregate, the government expects annual funding to increase by around 40%, or AUD 3 billion, over the next three years. As around 60% of child care fees are funded by government subsidies, we expect this to materially benefit ECEC providers. Although we don't explicitly forecast government subsidies, our analysis suggests government forecasts could be conservative, considering subsidy growth averaged 15% between fiscal 2011 and fiscal 2016. Higher subsidy growth is unlikely to impact our REIT EPS forecasts but would improve the credit quality of their tenants. Operators, such as G8 Education Ltd (GEM AU), would benefit from higher earnings, akin to our bull-case forecasts but we are reluctant to adopt a more bullish stance until the CCS begins in fiscal 2019 and we have more information about its impact. Investors can gain exposure to this funding boost via ASX-listed equities we cover including ECEC centre operator G8 Education, and ECEC real estate investment trusts, or REITs, including Folkestone Education Trust (FET AU) and Arena REIT (ARF AU). Our preferred exposure is via Arena REIT, which offers an attractive discount to our fair value estimate, an internalised management structure, and a high-quality diversified portfolio with relatively long triple-net leases.Key TakeawaysWe expect the federal government's Jobs for Families Child Care Package, which will be introduced in July, to drive an increase in ECEC industry revenue of around 40% over the next three years which will benefit ECEC providers.ECEC demand is also supported by population growth, a rising proportion of children using child care, and growing female workforce participation.Child care centre REITs offer low-risk exposure to the ECEC sector and benefit from relatively long triple net leases. ECEC centre operators provide higher-risk exposure due to their relatively high earnings volatility. However, operators also have attractive characteristics, such as capital-light business models, which should enable strong cash flows albeit with higher volatility.

How to Play the Australian Child Care Bonanza

Equity Bottom-Up

We are initiating coverage of <a href="https://www.smartkarma.com/entities/12209" target="_blank" data-smartkarma-citation="entities:12209:1">Arena REIT (ARF AU)</a> with a AUD 2.50 fair value estimate, a no-moat rating, and a medium fair value uncertainty rating. At the current market price of AUD 2.18, we believe the securities are undervalued. Arena’s fair value estimate of AUD 2.50 per security, implies a fiscal 2018 distribution yield of 5.1%, a 35% premium to net tangible asset backing of AUD 1.84 per security as at June 30, 2017, and a P/E ratio of 18. Our valuation is derived using a discounted cash flow model with a weighted average cost of capital of 7.3%.Arena REIT is the second-largest listed childcare centre-focused real estate investment trust, or REIT, in Australia, after <a href="https://www.smartkarma.com/entities/8288" target="_blank" data-smartkarma-citation="entities:8288:1">Folkestone Education Trust (FET AU)</a> and owns a portfolio of 188 long day care centres which provide preschool care for children aged from 0 to 5 years. Arena’s childcare centres comprise 80% of its portfolio by book value, with the remainder comprising seven healthcare centres. The Australian childcare and healthcare sectors both receive significant government funding which we expect to continue, and even increase significantly near term, due to the essential nature of the services they provide.We expect Arena to generate average annual like-for-like rental growth of 3% over the next decade from its portfolio of Australian childcare centres, underpinned by robust long-term demand growth for Australian childcare services. Arena benefits from several supportive trends such as population growth and growing government subsidies in addition to attractive characteristics such as an occupancy rate of around 100%, high tenant renewal rates, triple net leases, and a relatively long weighted average lease expiry of 13 years. Childcare centre valuations tend to have a relatively high proportion of land backing due to the regulated ratios of floor space to children. Arena is internally managed which aligns management and security holders' interests better than if it were externally managed.The childcare sector benefits from positive long-term tailwinds including a growing population of 0 to 5 year olds, an increasing proportion of children using childcare, an increasing female workforce participation rate, an increasing time spent by children in care each day, and increasing childcare fees. On average, around 60% of childcare costs are ultimately borne by federal government subsidies which have consistently increased in recent decades. Subsidies will increase materially in 2018 under the federal government’s Jobs for Families legislation and we expect support for childcare subsidies from all major political parties to continue due to the politically sensitive nature of the sector.Analyst: Gareth James

We are initiating coverage of Arena REIT (ARF AU) with a AUD 2.50 fair value estimate, a no-moat rating, and a medium fair value uncertainty rating. At the current market price of AUD 2.18, we believe the securities are undervalued. Arena’s fair value estimate of AUD 2.50 per security, implies a fiscal 2018 distribution yield of 5.1%, a 35% premium to net tangible asset backing of AUD 1.84 per security as at June 30, 2017, and a P/E ratio of 18. Our valuation is derived using a discounted cash flow model with a weighted average cost of capital of 7.3%.Arena REIT is the second-largest listed childcare centre-focused real estate investment trust, or REIT, in Australia, after Folkestone Education Trust (FET AU) and owns a portfolio of 188 long day care centres which provide preschool care for children aged from 0 to 5 years. Arena’s childcare centres comprise 80% of its portfolio by book value, with the remainder comprising seven healthcare centres. The Australian childcare and healthcare sectors both receive significant government funding which we expect to continue, and even increase significantly near term, due to the essential nature of the services they provide.We expect Arena to generate average annual like-for-like rental growth of 3% over the next decade from its portfolio of Australian childcare centres, underpinned by robust long-term demand growth for Australian childcare services. Arena benefits from several supportive trends such as population growth and growing government subsidies in addition to attractive characteristics such as an occupancy rate of around 100%, high tenant renewal rates, triple net leases, and a relatively long weighted average lease expiry of 13 years. Childcare centre valuations tend to have a relatively high proportion of land backing due to the regulated ratios of floor space to children. Arena is internally managed which aligns management and security holders' interests better than if it were externally managed.The childcare sector benefits from positive long-term tailwinds including a growing population of 0 to 5 year olds, an increasing proportion of children using childcare, an increasing female workforce participation rate, an increasing time spent by children in care each day, and increasing childcare fees. On average, around 60% of childcare costs are ultimately borne by federal government subsidies which have consistently increased in recent decades. Subsidies will increase materially in 2018 under the federal government’s Jobs for Families legislation and we expect support for childcare subsidies from all major political parties to continue due to the politically sensitive nature of the sector.Analyst: Gareth James

Initiating Coverage on Arena REIT with AUD 2.50 FVE and No-Moat Rating

As a consequence of increasing global risks, tougher regulatory demands, intensifying pressure on net interest margins, higher bad debts and lower than expected returns on equity we reduce earnings forecasts, fair value estimates and rebase medium- to longer-term dividend payout ratios lower to more sustainable long-term levels for three of the four wide moat-rated Australian banks: Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation. We cut Australia and New Zealand Banking Group's earnings forecasts and fair value estimate in March 2016 and now rebase its longer-term dividend payout ratio lower. Our preferred banks are the big retail-focused, New South Wales-based, banks Westpac and Commonwealth Bank due to their lower risk profiles, higher ROEs, higher NIMs, lower cost/income ratios, consistently lower-loan-loss rates, less volatility in earnings, and larger exposures to the strongly performing New South Wales economy.Analyst: David Ellis

As a consequence of increasing global risks, tougher regulatory demands, intensifying pressure on net interest margins, higher bad debts and lower than expected returns on equity we reduce earnings forecasts, fair value estimates and rebase medium- to longer-term dividend payout ratios lower to more sustainable long-term levels for three of the four wide moat-rated Australian banks: Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation. We cut Australia and New Zealand Banking Group's earnings forecasts and fair value estimate in March 2016 and now rebase its longer-term dividend payout ratio lower. Our preferred banks are the big retail-focused, New South Wales-based, banks Westpac and Commonwealth Bank due to their lower risk profiles, higher ROEs, higher NIMs, lower cost/income ratios, consistently lower-loan-loss rates, less volatility in earnings, and larger exposures to the strongly performing New South Wales economy.Analyst: David Ellis

Challenges Mount for the Wide Moat-Rated Australian Banks

Australia

Arena REIT operates as a real estate investment trust. The Trust owns a portfolio in sectors such as childcare, healthcare, education and government tenanted facilities in Australia.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Arena Reit (ARF AU)

Sandfire Resources (SFR AU): Acquisition, ANREO and ASX200 Inclusion

Sandfire Resources is buying the MATSA mine in Spain and conducting a placement and entitlement offer to raise funds. This will lead to a big jump...

Brian Freitas

ASX100/200 Index Rebalance Preview: Potential December Changes With Large Impact

There could be 1 change to the ASX100 and 5 changes to the ASX200 at the December rebalance. With a long M&A pipeline, there could be additional...

Brian Freitas

How to Play the Australian Child Care Bonanza

New government funding package will benefit child care providersExecutive SummaryThe Australian early childhood education and care, or ECEC, sector...

Morningstar, Inc.

Initiating Coverage on Arena REIT with AUD 2.50 FVE and No-Moat Rating

We are initiating coverage of Arena REIT (ARF AU) with a AUD 2.50 fair value estimate, a no-moat rating, and a medium fair value uncertainty...

Morningstar, Inc.

Challenges Mount for the Wide Moat-Rated Australian Banks

As a consequence of increasing global risks, tougher regulatory demands, intensifying pressure on net interest margins, higher bad debts and lower...

Morningstar, Inc.

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Sandfire Resources (SFR AU): Acquisition, ANREO and ASX200 Inclusion

Sandfire Resources is buying the MATSA mine in Spain and conducting a placement and entitlement offer to raise funds. This will lead to a big jump...

Brian Freitas

ASX100/​200 Index Rebalance Preview: Potential December Changes With Large Impact

There could be 1 change to the ASX100 and 5 changes to the ASX200 at the December rebalance. With a long M&A pipeline, there could be additional...

Brian Freitas

How to Play the Australian Child Care Bonanza

New government funding package will benefit child care providersExecutive SummaryThe Australian early childhood education and care, or ECEC, sector...

Morningstar, Inc.

Initiating Coverage on Arena REIT with AUD 2.50 FVE and No-Moat Rating

We are initiating coverage of Arena REIT (ARF AU) with a AUD 2.50 fair value estimate, a no-moat rating, and a medium fair value uncertainty...

Morningstar, Inc.

Challenges Mount for the Wide Moat-Rated Australian Banks

As a consequence of increasing global risks, tougher regulatory demands, intensifying pressure on net interest margins, higher bad debts and lower...

Morningstar, Inc.

ASX100/200 Index Rebalance Preview: Potential December Changes With Large Impact