Across client accounts that have selected the “Income” Australian equity option, we have increased the weighting to existing positions in Coca-Cola Amatil (CCL), Caltex (CTX) and Tabcorp Holdings (TAH), funded from the sale of ASX Limited (ASX).

While not expected in the short term, our view on Coca-Cola Amatil remains that i) the Australian division will stabilise, albeit initially at least at lower profit margins following significant investment in price and required product development; and ii) that Indonesia, a key growth market will deliver volume growth and hence margin expansion as a result of operating leverage given its modern, low-cost production facilities that provide scale and capacity without requiring significant capital expenditure.

In Caltex, we see a very well-run company which operates in an attractive market characterised by high barriers to entry and attractive medium-term growth opportunities via the roll-out of its convenience offering. Apparent disappointment at the lack of capital management (i.e. special dividend to release franking credits and/or share buyback) following the decision not to sell its infrastructure assets and scale back its sale and lease-back of retail fuel sites, presents an opportunity to buy the stock of a company where management is focused on business optimisation and growth through both acquisition and cost out at a discount to the broader market.

Finally to Tabcorp which following the merger with Tatts enjoys dominant market positioning with long-term exclusive licenses, and stands to benefit from the more supportive regulatory environment because of the ban on synthetic lotteries and the point of consumption tax. The recent reporting season also reiterated i) the substantial opportunity for earnings growth through synergies related to cost duplication, and ii) the potential for margin expansion given strong leverage from the move to digital.

There is no doubt that ASX Ltd offers a reliable earnings stream given its strong competitive position which enables high margins and strong cash flow generation. That said, the company is looking increasingly expensive following outperformance of the broader market in recent months despite earnings growth slowing considerably over the second half of FY18 and cost growth expected to increase dramatically in the year ahead as the company invests to develop longer-term revenue streams.