Newsletter - Austock Group

Newsletter - Austock Group

Austock Group


Issue 57 – Monday 4 April 2011


The Week in Review

Michael Heffernan, Austock Securities

Investors at last seeing, then acting upon ”the whites of the

eyes of genuine value in the share market” is one reasonable

explanation for the share price surge that has occurred in major

listed stocks in recent weeks.

Investors at last seeing, then acting upon ”the whites of the eyes of

genuine value in the share market” is one reasonable explanation for

the share price surge that has occurred in major listed stocks in recent


Indeed the level of the index of the ASX 200 index is now higher than

it was prior to the earthquake hitting Japan on Friday 11 March this

year. The surge has been particularly notable in major resources and

materials stocks.

Not surprisingly, attitudes to the mining of and use of uranium as an

energy source has been a focus of attention recently. However in the

short term, the need for an energy replacement for uranium power in

Japan has fuelled demand for liquefied natural gas stocks in our own

market. -This has been a key factor in the massive hike of around

14%, which has been seen in the share price of Woodside Petroleum

since the 11th March.

But Woodside was not “Robinson Crusoe”. We also saw other major

resource stocks such as Rio rising by about 7% over the same period,

BHP by almost 6% and Newcrest Mining also up by almost 7%.

And not to be overlooked, one former “pariah” of the share market,

particularly in recent times, namely Telstra, has also seen its share

price spike by over 6% since the 11th March. However the boost

in Telstra’s share price, owes much to the fact that all the legislative

hurdles to the establishment of the National Broadband Network

would now appear to be overcome. Hitherto this was seen as a

restraint on Telstra’s share price. As of last Friday, Telstra’s share price

was up almost 10% from its low of $2.57 reached on Wednesday 17


An observation of the top 20 stocks over the last month shows that

all except one have seen strong rises in share price. An exception

being Westfield. Of the top 200 stocks over the same period, more

than three quarters have seen rises and indeed strong rises in share

price since the earthquake. Highly represented in the one quarter that

actually showed declines were (as one might have expected) uranium

stocks including Paladin and Extract Resources.

Looking more broadly, the market last week delivered the second

strongest weekly rise so far this year. As a result, at the end of last

week the market was at the highest level it has been for over 5 weeks,

and 2% higher than at the end of last year.

Last week movements

1/04/2011 % Change

AU$ versus US$ 103.85 +1.2%

ASX 200 Index 4861.80 +2.5%

90 Day Bank Bill Rate 4.90 +0.4%

Aust 10 year bond 5.54 +1.6%

US 30 year bond 4.48 -0.4%

Dow Jones Index 12376.72 +1.3%

FT 100 Index 6009.92 +1.8%

Nikkei Dow Index 9708.39 +1.8%

Hang Seng Index 23801.90 +2.7%

Last week top winners

Top ASX 50

% Change

IPL Incitec Pivot +2.1%

FMG Fortescue Metals Grp +2.0%

MGR Mirvac Group +2.0%

QBE QBE Insurance Group +1.9%

BSL Bluescope Steel Ltd +1.8%

Mid-cap (50-100)

% Change

EQN Equinox Minerals Ltd +28.4%

LYC Lynas Corporation +5.7%

MCC MacArthur Coal +4.2%

PRY Primary Health Care +3.4%

PDN Paladin Energy Ltd +3.3%

Small ORDS (100-300)

% Change

EWC Energy World Corpor. +11.2%

MMX Murchison Metals Ltd +10.8%

WTP Watpac Limited +9.6%

IRN Indophil Resources +9.0%

PNA Panaust Limited +7.7%

Austock Group Newsletter 2

Continuing on the corporate front, major resource stock

Rio Tinto advised that it has extended its takeover offer for

the African coking coal company Riversdale Mining until 6

April 2011. If Rio achieves an interest in more than 47% of

the shares by that date its takeover offer price will rise to

$16.50 compared with the previous price listed which was


The airline industry continues to face problems with Qantas

announcing a range of cost cutting measures to respond

to the difficulties created by high oil prices and the impact

of the natural disasters in Japan and New Zealand and


The announcement from Qantas follows on similar recent

comments made by Virgin Blue.

On a brighter note, and on the heels of the high profile

BHP “off-market share buy back”, JB Hi-Fi also announced

an attractive off-market buy back. Such buy backs are of

special interest to superannuation funds particularly in the

allocated pension phase which pay little or no tax, and for

other investors whose tax rate is zero or minimal. Investors

should contact their Austock adviser for further details on

the buy back.

Also on the corporate reporting front Nufarm announced its

interim result, which delivered a profit of $22.7million for the

6 months ending January 2011 - turnaround from the loss

in the same period of a year ago.

Nufarm advised that the improvement owed much to

Nufarm’s product portfolio being expanded beyond

glyphospate to other herbicides, insecticides, fungicides,

seeds and seed treatment products.

Sigma also announced its full year results during the week,

the highlight of which was a substantial and a surprise

dividend 15c per share – (up 12c per share from the

dividend of last year) - equivalent to a dividend yield of over

30%! The ex dividend date is this Tuesday 5 April.

On the economic front figures on retail trade and building

approvals as well as job vacancies were released during

the week. The first two sets of data provide evidence of an

economy continuing to show sluggish growth.

Total dwelling approvals in February were 21.8% lower than

in the same month last year. Retail trade figures increased

0.5% in February on a seasonally adjusted basis, but

only up 0.2% on a trend basis, providing an annual rise

is only around 3%. Given the overall subdued economy,

the robust job vacancy numbers appear to be an enigma.

On a trend basis, vacancies increased in the 3 months to

end February, by 3.6%, a massive 20.8% higher than in

February last year. Finally the Australian Industry Group’s

manufacturing Index eased again in February to 47.9. – A

reading below 50 indicates a contraction in activity.

When the Reserve Bank comes to look at interest rates on

Tuesday of this week, there are scant grounds for the Bank

to contemplate raising interest rates.

My view is that interest rates are likely to be on hold until

some time in the third quarter of this year. By this time I

believe that interest rate rises will be resumed, and that by

the end of this year we may well see official rates at about


No major corporate announcements by listed corporations

are scheduled this week. On the economic front we have

the ANZ job advertisements series and the Australian

Industry Group’s survey of the services sector out on

Monday. On Tuesday the Reserve Bank decision on interest

rates, on Wednesday the Australian Industry Group’s

Construction survey together with figures on home loans

and investment loans, and on Thursday figures on the

labour market. The most closely watched indicator will

be the figures on the unemployment rate and it can be

anticipated that the rate has most likely remained steady in

February, but if there is any movement either up or down, it

is likely to be minimal.

In the United States there is a number of important data

releases due out on Wednesday the Institute of Supply

Managements Non-Manufacturing survey, on Thursday

figures on the initial jobless figures, and on Friday

information about consumer credit and chain store sales.

In conclusion the market has now showed considerable

resilience over the past two months. This performance

supports the view that if the market is left to rely on

economic fundamentals and corporate performance, the

market should be progressing steadily upwards.

Indeed, to reiterate some points made in previous weekly

reviews, the market currently remains 30% lower than it was

at its high point in November 2007 - expressed another way

the market can still increase 41% before it reaches that level


Finally, the forward price earnings ratio for the ASX 200

index for 2012 is the lowest that has been achieved since

the late 1980’s!-(excluding GFC year 2008) Using this latter

measure as an indicator of opportunities in the market, it

would appear that average valuations of major companies

listed on our market remain very attractive indeed.

Michael Heffernan, Austock Securities

Austock Group Newsletter 3

Overseas Markets

Nicholas Pereza-Mathews, Austock Securities

Global securities markets consolidation is

inevitable for survival or is it?

As global security exchanges around the world merge,

the remaining exchanges must consider their future with

the prospect of either merging or being taken over. As

to be competitive, size is everything for exchanges to be

successful in the ever growing global market place.

We have seen the London Stock Exchange offer for

Canada’s Toronto Stock Exchange, the Deutsche Boerse’s

bid for NYSE Euronext both attract premiums of around

eight percent and now we have to ponder a nineteen

percent premium being put on the table by Nasdaq OMX to

rival Deutsche Boerse’s bid for the NYSE Euronext.

As for the Australian Stock Exchange we have to wait

for Treasurer Wayne Swan, the Australian Securities

and Investments Commission (ASIC), and the Monetary

Authority of Singapore to approve the merger with the

Singapore Stock Exchange.

Last October when the merger was announced, the

effective friendly takeover by SGX valued the ASX Group

at an attractive premium of over thirty five percent. Both

parties expect necessary shareholder meetings and court

proceedings to take place in the first half of 2011, and the

merger to be implemented in the second half of the year.

If the merger is allowed to go ahead, this will create the

second largest exchange in the Asia Pacific region with

the combined market capitalisation of the two groups

about $13 billion. The deal will benefit both the ASX and

SGX creating a $1.8 trillion market that will be attractive to

companies seeking capital with over 2700 listed companies

from over twenty countries making the exchange the Asian

gateway for international listings.

Under the $8.4 billion plan, SGX will buy all the shares in

ASX through a scheme of arrangement, paying $22 cash

and 3.473 new SGX shares for each ASX share.

The ASX has thrived as a monopoly in Australia and now

faces the reality of having to change, as new entrants to the

market challenge for listings, such as the Chi-X, expected

towards the end of year.

The Hong Kong Exchange is now trying to lure Australian

companies to their exchange to trade, providing new

sources of capital and competitive fees which is attracting

companies such as Fortescue Metals to consider a dual

Hong Kong and Australian Stock Exchange listing.

Whilst politicians argue about the future of the Australian

Stock Exchange and the uncertain future continues to be

debated in the media, other exchanges around the world

are expanding through mergers and acquisitions with the

aim to create bigger platforms for companies to raise capital

with attractive cheaper fees to entice listings for smaller


The Australian Stock Exchange will have merge, if not with

the Singapore Stock Exchange, then another rival exchange

for its long term survival.

Nicholas Pereza-Mathews, Austock Securities

ASX 1 Year

ASX 10 Years

Source: IRESS

Austock Group Newsletter 4

Austock Global Dealing Desk

Austock is able to provide clients cost effective execution

only dealing in international securities from the worlds major

markets including London, New York, Toronto, Hong Kong

and Johannesburg.

The Australian stock market represents

only approximately two percent of

global securities traded. Furthermore, a

few large stocks such as BHP Billiton,

Rio, Telstra and the four major banks

represent about 40% of the value of the

stock market; and a number of exciting

industries such as technology and

pharmaceutical companies are not well

represented in Australia.

There are approximately twenty times

as many listed securities on global

stock markets as on the Australian

stock market and global stock markets

are approximately sixty times larger by

market capitalisation.


Austock does not charge separate

custody fees for its counterparty

custodian service, providing corporate

action and dividend administration and

therefore, can provide this part of the

overseas transaction for free.


Asia Pacific

Kuala Lumpur Stock Exchange

New Zealand Exchange

Singapore Exchange

Stock Exchange of Hong Kong

Tokyo Stock Exchange

United Kingdom

London Stock Exchange




Toronto Exchange


Austock provides settlement in Australian

Dollars for all overseas transactions.


Overseas equity transactions 1%,

subject to a minimum of $95 negotiable


• Efficient and cost effective dealing in

overseas securities

• Safe custody of all holdings

• Administration of Corporate Actions

and Dividends

• Settlement in Australian Dollars

• Personal contact with your portfolio


• Exposure to growth economies and

industries not available in Australia


Deustsche Borse

Euronext Amsterdam

Euronext Paris

Italian Exchange

Swiss Exchange


American Exchange


New York Stock Exchange

South Africa

Johannesburg Stock Exchange


If you would like to find out more or

become an Austock client, please call:

Nicholas Pereza-Mathews

F Fin Chartered MCSI MSAA

+61 3 8601 2694

Nicholas has held senior positions within

the Australian and UK financial services

industry, bringing to Austock Securities over

20 years experience in funds management,

institutional equity sales and research, 14

years of which were in London working as

an Analyst at Morgan Stanley, Investment

Manager with NatWest Stockbrokers and

Branch Manager for Killik Stockbrokers.

Having relocated to Australia in 2002,

Nicholas achievements include Managing

Director and Fund Manager of the top

quartile performing Australian Natural

Resources UCITS III Fund, Head of

Global IMA at Patersons Securities and

Head of Institutional Global Equity Sales

& Asset Management at DJ Carmichael


Nicholas qualifications include those from

the Chartered Institute for Securities &

Investment, Securities & Investment Institute

of Australia, Financial Planning Association,

Securities & Derivatives Industry Association

and Deakin University.

Nicholas is a Chartered fellow member

of the Chartered Institute for Securities

& Investment, a Fellow member of the

Financial Services Institute of Australasia

and a Master member of the Stockbrokers

Association of Australia Inc SDIA.

Austock Group Newsletter 5

Stock selection

Dyesol (DYE)



Risk Rating

Very High

Dividend 0

Dividend Yield 0%

Current Share Price $0.85

12 Month Price Target $1.45

Linc Energy Ltd (LNC)



Risk Rating



~$0.10 on Teresa sale

Dividend Yield 3.3%

Current Share Price $2.95

12 Month Price Target $4.10


Paul Jensz


Paul Jensz

Investment View

We rate Dyesol (DYE) a Buy with a 12 month price target of

$1.45/share. Our DCF valuation of $3.00/share should be

delivered if Tata-Corus Roof Dye Solar Cell commercialisation

milestones are met over next 12 months. We estimate, with

many dynamic assumptions, that DYE P/E is 6x in FY’13.

We rate DYE’s Intellectual Position as reasonable, and

Commercial Position as strong due to its “own the application

technology know how” focus and partnerships with top tier


TATA-CORUS Announcement

Tata-Corus announced last week that it would accelerate

commercialisation. This raises the likelihood of Tata-Corus

making a mid-year Final Investment Decision for a £50m

commercial scale Roof Dye Solar Cell. This timing allows

rolling mill to be producing by July 2012.

In FY’13 Tata-Corus is likely to produce 10m m2 of roof panels

(from one mill) and its customers can generate ~1GW/annum

of electricity. This would be equivalent ~10% of today’s global

solar energy production.

There are the usual scale-up and implementation risks with

this project. Many have been mitigated with 10 years of

technology development by DYE; two years of pilot plant work

by Tata-Corus/DYE; and, detailed case study.

There is also significant Dye Solar Cell technology upside

with: Roof Panels – one mill is only 10% of Tata Corus total

roof panel production and just 1% of global

roof panels; Windows – DYE has a US partner

in Pilkington and several Asian partners; Car and Electronic


Investment View

LNC remains our highest conviction Buy in Sustainable Energy

sector due to: control over its destiny with cash, 80bnt coal

resource, 130 personnel, proven technology (with potential for

US$2/GJ cost base) and ability to manage CO2 emissions.

The main risks are regulation and execution. LNC mitigates

these through flexible options across many regions and

processes; and, maintaining high safety, environmental and

quality standards.

Valuation Breakdown

Conventional Coal Asset Sales – worth ~$2.80/share of cash

at bank by December 2011 (and $0.18/share of future US and

Qld Assets)

• Cash at bank ~$420m ($0.82/share)

• Teresa Coal Asset - We risk value at $409m .

Unrisked $665m

– Next update – We expect sale for cash and royalty by end

of April

• Carmichael (Adani – Galilee) Royalty – We risk value at $435m

. Unrisked value $700m

– Next update – we expect milestones on supply chain and

securitisation of royalty by December 2012

Conventional Oil/Gas – worth $0.75/share of DCF value as

energy operator

• USA Oil – risk valued at $219m ($0.43/share) in our valuation

at 10,000bpd production and project financed A$550m

investment in oil fields and UCG

– Next update – we expect two more purchases in next three


• Alaskan Gas – risk valued at $159m

UCG Technology and 80bn of “UCGable” Coal – worth $0.58/

share of DCF valuation

• The push from USA Oil should enable LNC to become a

global leader in UCG in Developed Countries. This unlocks

significant value from its own coal resource.

Austock Group Newsletter 6

Austock Group Limited

1800 806 362 (Toll Free)

Melbourne Office

Level 12, 15 William Street

Melbourne VIC 3000

Phone: 61 3 8601 2000

Fax: 61 3 9200 2270

Sydney Office

Level 9, 56 Pitt Street

Sydney NSW 2000

Phone: 61 2 9233 9600

Fax: 61 2 9251 9368


Risk Rating

Austock Securities Limited has a four tier

Risk Rating System consisting of: Very High,

High, Medium and Low. The Risk Rating is

a subjective rating based on: Management

Track Record, Forecasting Risk, Industry

Risk and Financial Risk including cash flow


Important Notice

This publication contains a summary only

of our research reports on the subject

companies. It has been prepared for your

convenience only and should not be used as

the basis of an investment decision. Please

contact your adviser to obtain a copy of the

full research report on each company.

Disclosure of Economic Interests

The views expressed in this publication

include the personal views of a number of

Austock research analysts. Some analysts

hold securities of the subject companies or

derivatives. Please refer to the full research

reports for disclosure of any economic

interests held by the author of the report.


This publication has been prepared solely for

the information of the particular person to

whom it was supplied by Austock Securities

Limited (“Austock”) AFSL 244410. This

publication contains general financial product

advice. In preparing the advice, Austock

has not taken into account the investment

objectives, financial situation and particular

needs of any particular person. Before

making an investment decision on the basis

of this advice, you need to consider, with or

without the assistance of an adviser, whether

the advice in this publication is appropriate

in light of your particular investment needs,

objectives and financial situation. Austock

and its associates within the meaning of the

Corporations Act may hold securities in the

companies referred to in this publication.

Austock believes that the advice and

information herein is accurate and reliable,

but no warranties of accuracy, reliability

or completeness are given (except insofar

as liability under any statute cannot be

excluded). No responsibility for any errors or

omissions or any negligence is accepted by

Austock or any of its directors, employees

or agents. This publication must not to

be distributed to retail investors outside of


Disclosure of Corporate Involvement

Austock Securities Limited has not in the

previous 12 months been involved in a

publicly-announced transaction involving

the payment of a fee to Austock Securities

Limited by the corporate issuer described

in this report. Austock Securities does

and seeks to do business with companies

covered in its research.

We value your comments

and suggestions, please

forward these to:

Austock Group Newsletter 7

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