For your interest, attached is my monthly 'Over the Horizon' share market commentary for October 2013.

1. October 2013 — ‘Over the Horizon’ market commentary by David Offer
October was a particularly strong month for the Australian share market, rising 3.9% to close at 5,420. For the first 4
months of the year, the market has risen 13.5% and 15.1% when dividends are included. This compares favourably to
global markets such as the American Dow Jones up 4.3%, the Chinese Shanghai Composite up 8.2% and the British
FTSE 100 up 8.3%.
At the current time, it is starting to appear that a number of sectors of our share market are appearing fully valued,
including Australia’s banking sector. As illustrated in the chart below, in less than 16 months, our major banks have
appreciated 45% in value, with Westpac appreciating 55%.
The following table summarises the forecast two year change (from June 2012 to June 2014) of bank price earnings ratios
(PE) and dividend yields.
Bank
ANZ
CBA
NAB
WBC
Price
$22.03
$53.10
$23.54
$21.13
June 2012
PE Ratio
Dividend Yield
10.10
5.9%
12.20
6.3%
10.01
7.1%
10.01
6.7%
June 2014 Forecast
Current Price
PE Ratio
Dividend Yield
$31.48
12.8
5.5%
$76.57
15.2
4.9%
$33.82
12.7
5.9%
$32.29
13.4
5.7%
Approximately one third of the bank’s share price growth can be attributable to profit growth, with two thirds attributable to
PE expansion as share investors look at the banking sector, and all things yield orientated, more favourably.
When analysing the profit growth of the big 4 banks, which collectively rose from $25 billion in 2012 to $27.3 billion for
2013, it is interesting to note that against a backdrop of minimal credit growth, profits have grown from cutting costs. In
particular, a reduction in bad debt provisioning, which is now at a cyclical low.
On current earnings multiples and dividend yields, the banks are priced for growth. Universally, all the banks are optimistic
about a recovery in lending growth next year (and we don’t disagree with their viewpoint) but in the event the credit growth
does not materialise to the extent expected then the banks will disappoint the market. Even if the banks do meet market
expectations, given the current ‘growth’ earnings multiples that apply, this will not necessarily translate into further material
share price growth in the short to medium term.
Likewise, it is unlikely that bank dividends will continue to rise strongly with banks already paying out 75% of reported
profits in dividends and new regulatory requirements likely to be imposed on banks that are ‘too big to be allowed to fail’
which will force them to hold extra capital on their balance sheets. This new additional capital requirement for
‘domestically systemically important banks’ is likely to be 1% which would amount to an extra $15 billion in capital being
retained by our big 4 banks. Given our majors are presently annually retaining approximately $7 billion in profits after
dividends, this infers two years of zero dividend growth and reinvestment within their businesses to meet this requirement

2. or substantial capital raisings including more hybrid note issues, which do come at a cost as the banks meet the interest
requirements on such securities.
Finally, if growth does materialise, then this would confirm we are at the bottom of the current interest rate easing cycle.
Future interest rate rises would open up alternative options for investment and this would dull the current shine that exists
for yield orientated share market investments.
While we share the almost universal view that Australian banks are largely ‘bullet proof’, our view is that the majority of the
current share price run in the banking sector is behind us. We are not averse to lightening investor’s exposures where
overweight and we would like to see a drop of at least 10% in bank share prices before revisiting accumulating them.
Wesfarmers is another share that features prominently within our portfolios that has also had a strong share price run.
Jun-13
Jun-14*
Jun-15*
Jun-16*
$39.63
$44.23
$44.23
$44.23
Earnings per Share
$1.96
$2.23
$2.37
$2.67
Dividends per Share
$1.80
$2.00
$2.10
$2.40
Avg Annual P/E Ratio x
20.3
19.9
18.7
16.6
Share Price
Dividend Yield %
4.5%
4.5%
4.7%
5.4%
* Forecast earnings per share and dividend yield.
On current earnings, Wesfarmers is on a historically expensive price earnings ratio of 22.5 times and low dividend yield of
4%. While Morningstar research forecasts strong profit growth for the next few years and Wesfarmers is conservatively
geared, in the event Wesfarmers does not deliver this growth, coal prices weaken or the company makes another
acquisition, the share price could come under pressure.
The majority of investors hold Wesfarmers protected shares (WESN) and the downside protection offered on these shares
has been a key reason for being overweight. If Wesfarmers trade for 20 consecutive days above $43.11, then these
protected shares will convert back to ordinary shares. With Wesfarmers currently trading at $44.23, it appears likely the
downside protection offered by the ‘N’ series will be lost. Coupled, with Wesfarmers being aggressively priced for growth,
we recommend moving back to a more neutral weighting within portfolios.
It is interesting to note the upturn in analyst expectations for profit growth across most sectors of the Australian economy
over the next few years. While in broad terms we agree with the more optimistic outlook for corporate Australia, with many
shares keenly priced, it may not take much to dampen the current enthusiasm towards the market. The US revisiting
raising the debt ceiling in January could be one such trigger as would a tapering of quantitative easing measures by the
US Federal Reserve.
Flowing on from a strong share market, the frequency of new floats is also increasing and Horizon Investment Solutions is
presently participating in two opportunities.
The first is a new income security (NAB CPA II) being issued by National Australian Bank, which is looking to raise $750
million with the ability to raise more or less. The offer involves the issue of convertible, transferable, redeemable,
subordinated and perpetual unsecured notes by NAB at a margin of between 3.25% to 3.40% p.a. above the 90 day Bank
Bill Rate. This rate compares favourably to existing listed hybrid securities and other available variable interest rate
securities.
While the securities do not have a fixed maturity date, NAB may elect to Convert, Redeem or Resell the securities on 17
December 2020. Subject to certain conditions relating to the solvency of NAB and share price of NAB shares, NAB must
convert the securities into ordinary shares on the 19 December 2022. Given the track record of all the banks that issue
hybrid securities, unless there are extreme unforeseen circumstances, the notes will be redeemed on 17 December 2020
and will thus have a life of 7 years.
Given the strength of the banking sector, we believe this income security is suitable for conservative investors seeking a
reasonable return (currently 5.83% that will rise should interest rates rise) from a low volatility investment. More information
can be found from the Term Sheet and for those investors interested we will email the Product Disclosure Statement once
available.
The second and considerably more speculative small cap float is child care provider Affinity Education which is raising
capital to purchase 57 childcare centres and the management rights to an additional 11. The company has bought these

3. childcare centres on an attractive earnings before interest, tax, depreciation and amortisation multiple of 4.1 times.
Onlisting the company will be debt free and trading on a prospective price earnings multiple of 10.75 times. While a small
company and integration risks exist with the amalgamation of the centres the company has acquired, this prospective price
earnings multiple compares very favourably to G8 Education, the only other listed childcare provider, which is trading on a
prospective price earnings ratio of 25 times.
While a new company, providing Affinity Education successfully amalgamates the businesses it has acquired and
continues to successfully acquire additional quality childcare centres, from the $1 listing price the share offers considerable
prospects for share price appreciation. Please review the Product Disclosure Statement for more information.
If either of these opportunities is of interest to you, please promptly call James Cawdell on 9791 9188 or email
james.cawdell@horizonis.com.au to reserve your allocation.
The final point to mention for this month is that the new Liberal Government has announced they will not follow through
with Labour’s announced changes to superannuation. The most significant of the proposed changes was the taxation of
income within superannuation where a member’s annual taxable income exceeded $100,000. While SMSF investors will
be relieved that the size of annual taxation refunds will not reduce, the current caps on what investors can concessionally
contribute to superannuation at $25,000 per annum for those under age 60 and $35,000 for those above is still
disappointing and needs to be addressed.
If you would like to discuss any of the above or would like to discuss any aspect of your portfolio, please do not hesitate to
contact our office.
Sincerely
David Offer
AUTHORISED REPRESENTATIVE 259188
Director
HORIZON INVESTMENT SOLUTIONS PTY LTD
SUITE 1, POST OFFICE PLAZA, 153 VICTORIA STREET, BUNBURY WA 6230
T. 08 9791 9188 F. 08 9791 9187
E.david.offer@horizonis.com.au www.horizoninvestmentsolutions.com.au
Horizon Investment Solutions Pty Ltd, ACN 083 142 438, ABN 79 668 035 212, AFSL 405897
GENERAL ADVICE WARNING:
Please note that any advice provided in this newsletter is GENERAL advice only, as the information or advice given does not take into account your
particular objectives, financial situation or needs. Opinions, conclusions and other information expressed in this email are not given or endorsed by
Horizon, unless otherwise indicated. Therefore, before you act on any of the information provided in this newsletter, you must consider the
appropriateness of the information having regard to your particular objectives, financial situation and needs and if necessary, seek appropriate
professional advice.
This newsletter is confidential. If you are not the intended recipient, you must not view, disseminate, distribute or copy this document without our consent.
Horizon does not accept any liability in connection with any computer virus, data corruption, incompleteness, or unauthorised amendment of this
newsletter.