Newsletter - Austock Group

Newsletter - Austock Group

Austock Group


Issue 65 – Monday 6 June 2011


The Week in Review

Michael Heffernan, Austock Securities

The battle between domestic forces and overseas jitters saw the

latter come out on top in determining market moves last week.

On the home front, we saw economic activity retract as expected in

the March quarter; Fortescue unveil some grand iron ore plans; BHP

win an “nice little refund” from the Australian Tax Office and Tabcorp

secure the demerger of its casinos and wagering business – all

reasonably positive.

But overseas, weak US manufacturing data sent our market sliding

over 2% last Thursday – the biggest one day fall for a year.

The net result saw the market retreat by 1% over the 5 trading day to

finish at 4583, which takes us back to September last year. In other

words the market has progressed little in the last nine months. But if

we want to look back even further, we actually passed this level “on

the way up” in September 2005.

Of most overall economic significance last week were the national

accounts figures released by the Australian Bureau of Statistics,

although the outcome, which showed that the economy went

backwards in the March quarter by 1.2%, surprised no-one.

The reason being that the $11 billion production loss in coal and

agricultural produce, following the floods and cyclones in Queensland,

had been well flagged to the community over the past few months,

and referred to explicitly in the Commonwealth Budget papers.

However, if one puts the natural disaster effects to one side, the

overall economy showed a moderate 0.8% expansion in the March

quarter to be 2.9% up over the last year. This outcome reflects

sluggish economic growth and as such does not provide the Reserve

Bank with any ammunition to move interest rates at their meeting on


Moreover, when one examines the figures in more detail, inflation

is also clearly not a significant issue. While the National Accounts

inflation measure the so called “Consumption Deflator” rose by a

“flood affected” 1.3% in the March quarter, over the year as a whole

the increase was only 2.5% – in line with the underlying March quarter

Consumer Price Index result.

For those of us who can remember, annual inflation increases of

8-15% were not uncommon in the 70’s and 80’s. Inflation which is

now running at around 2.5% or 3% per annum is like nirvana.

Last week movements

6/06/2011 % Change

AU$ versus US$ 1.075 +0.4%

ASX 200 Index 4583 -2.2%

90 Day Bank Bill Rate 5.02 -0.3%

Aust 10 year bond 5.25 +0.3%

US 30 year bond 4.22 -0.5%

Dow Jones Index 12151 -2.3%

FT 100 Index 5855 -1.4%

Nikkei Dow Index 9492 -0.3%

Hang Seng Index 22950 -0.7%

Last week top winners

Top ASX 50

% Change

IAG Insurance Australia +3.4%

ORI Orica Limited +1.5%

FGL Foster's Group +1.4%

MAP Map Group +1.0%

FMG Fortescue Metals Grp +0.9%

Mid-cap (50-100)

% Change

IOF Investa Office Fund +4.0%

CPA Commonwealth Prop +3.8%

ILU Iluka Resources +2.6%

TWE Treasury Wine Estate +2.1%

DXS Dexus Property Group +1.7%

Small ORDS (100-300)

% Change

CFU Ceramic Fuel Cells +22.7%

PXS Pharmaxis Ltd +22.3%

WEC White Energy Company +11.3%

AMX Ampella Mining +9.5%

AAX Ausenco Limited +8.0%

Austock Group Newsletter 2

If any further material was needed to encourage the

Reserve Bank to do nothing about interest rates in the

next six months, figures on building approvals, retail sales

and subdued investment from areas other than the mining

sector, should do the trick.

While the “interest rate hawks” headlined about an interest

rate rise when last week’s retail sales figures showed a 1%

jump in April, what they failed to recognize is that in March

retail sales actually fell by 0.3%. A 0.7% rise in two months

is not a super result!

Predating the National Accounts data were the figures on

corporate profits, which were released last Monday, that

showed a 2% fall for the March quarter.

Similarly the balance of payments figures on the next day

showed that exports fell by 10% in the March quarter.

Accordingly a marked contraction in the gross domestic

product figures for the recent March quarter became a


Finally on the economic front the Australian Industry Group’s

manufacturing index showed a further fall in May to 47.7%

(a reading below 50% indicates a contraction in activity).

Moving to the corporate front there were in fact a range

of quite positive corporate announcements. First BHP

was given an early Christmas present from the High Court

when it decided that approximately US $580 million will be

refunded to BHP in relation to a dispute concerning its Hot

Briquetted iron ore plant in Western Australia, from several

years ago. To rub salt into the wound The High Court

ordered costs in BHP’s favour.

Also last week saw Transfield Services announce that

its New Zealand telecommunications business has

been awarded a NZ $260 million contract to provide

telecommunications services to a business called

“Enable Networks”. This work is part of the New Zealand

government’s commitment to invest $1.5 billion over ten

years to rollout their Ultra Fast Broadband network to 75%

of the population – (similar to our National Broadband


In addition and as has been flagged for some time now,

Tabcorp has successfully demerged its casino business

from its wagering business following an overwhelming

approval at a recent special meeting of shareholders.

Again on the mining front, Fortescue released details of

its accelerated expansion plans, which advised that the

commissioning of its Christmas Creek ore processing

facility remains on target. In addition all its major approvals

have now been received for its “Solomon” project which

supports a ten year plus mine life for its iron ore deposit.

Potential beneficiaries of these investments include Mineral

Resources, a stock which our Austock analyst considers to

be a high conviction buy.

Finally Austock itself announced last week a national

expansion of its Austock Private Wealth business and entry

into the Separately Managed Account (SMA) market. At

the core of the SMA business is a sophisticated portfolio

management platform that enables all investors’ holdings to

be pooled together to attract the benefits of shared dealing

and custody services. Readers are encouraged to contact

their Austock advisor for further details about this initiative.

Looking forward on the corporate front next week we will

see the final year’s report from Metcash, and on Wednesday

the Annual General Meeting of Sigma Pharmaceuticals.

On the economic front there are a number of important

events. One to be watched with interest, is the Reserve

Bank’s decision on interest rates on Tuesday which is

expected to leave interest rates unchanged.

Also on Tuesday we have the National Bank’s Business

Confidence and Business Conditions Survey; both of

which are expected to show a subdued environment.

On Monday we will see the Australian Industry Group’s

Performance Index for the construction sector, and the ANZ

job advertisements series. On Wednesday the Westpac

Consumer Confidence survey figures, together with home

loans and investment loan figures are due out. Rounding

out the week on Thursday we will have the very important

labour market data, which will probably show that the

unemployment rate has edged up from last month.

Looking overseas to the Unites States, figures will become

available on mortgage applications on Wednesday, and on

Friday, the import price index and wholesale inventories.

This data is not likely to provide any significant lead either

for its economy or its share market.

In conclusion all that one can say with any sort of conviction

at the moment is that the Australian market remains

extraordinarily good value for medium term investors looking

for a very cheap entry into some solidly performing blue

chip and mid capitalization stocks.

Michael Heffernan, Austock Securities

Austock Group Newsletter 3

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 4

Stock selection

Ridley Corporation (RIC)



Risk Rating


Dividend 7.50

Dividend Yield 5.9%

Current Share Price $1.25

12 Month Price Target $1.70

Zicom (ZGL)



Risk Rating


Dividend $0.006

Dividend Yield 1.1%

Current Share Price $0.53

12 Month Price Target $0.75


Paul Jensz


Heath Andrews

RIC is likely to give its delayed FY’11 NPAT guidance over

the next few weeks. We suspect it will be $27m to $29m vs.

PCP of $29.5m. Consensus of $30m is about 7% higher than

guidance mid-point.

We stay at high end ($28.8m) because Camilleri’s EBIT

contribution should counter the fall from prolonged wet

weather affects on Salt and Feed Milling.

We remain confident that there will be progress on revaluing

the two coastal Geelong land assets (Corio, Moolap) in the

next six months, and this should allow all land to be backed

out of FY’12 P/E to give a very low 8.3x.

We believe RIC will be positively affected by M&A as it is:

a natural target for a food chain owner wanting East Coast

position; seller of high value land assets; and, a low cost

platform acquirer of processing bolt-ons.

Investment view

We continue to rate RIC a Buy with a PT of $1.70/share.

The strong 10%pa underlying growth story has not been

changed by a severe confluence of external events and

significant turnaround in salt operations.

The short term risk remains further wet weather affecting FY’11

logistics and operations and/or competitors pushing hard for

sales to recoup some cash flow.

The “overhang” argument of GPG being a short term seller of

21% stake in RIC does not ring true to us.

We suggest that GPG will know the value of the land assets

(and RIC’s improvement path) and have some patience. GPG

was a previous owner of Cheetham Salt (and surplus Geelong/

Adelaide land).

We see GPG’s 21% stake in RIC as strategically valuable and

unlikely to be sold down to investors at a “low” price.

We have researched several of ZGL markets, and believe the

growth potential is better than we first thought:

• New offshore Oil & Gas rigs (that use ZGL products) are

undergoing a surge in orders (May’11). The increase in safety

standards means new equipment is required; and

• The gas market in Bangladesh (where ZGL operate) is not

that appealing until you realise that Bangladesh is very reliant

on gas for electricity generation, and that it is coming off a

low base in terms of installed infrastructure – this is a high

growth market.

ZGL has several elements such as reporting in S$ and having

operations mostly in Asia that mean a multiples discount will

apply. Much of the previous discount was liquidity related, but

now significantly improved. In our opinion, a FY’12F PE of

7.2x’s looks too low and further re-rating potential exists.

The rapid increase in margins in the Construction division is

due to strong demand in foundation equipment and moving

the concrete mixer construction business to Thailand (from

Australia). To us, higher margins seem sustainable, with a

turnaround in the Australian construction market (probably not

till FY’13), a future driver.

The Precision Engineering division has doubled its floor space

recently and the flow on of high demand for oil rigs should see

ZGL post strong growth in FY’12.

Investment view

We believe that Ventrade is still a seller, with still over 4%.

Buyers still have the potential to pick up stock easily and once

the stock overhang is gone, potential exists for ZGL to rally.

Our DCF based target of $0.75/share represents an FY’12F

EPS multiple of 10.2x’s and looks fair to us. The Balance Sheet

is solid, ZGL pay a dividend, they are leveraged to offshore and

onshore oil & gas, and ZGL has several start up products that

offer potential to the upside.

We rate ZGL a high beta stock for investors prepared to own

micro-cap stocks – Buy.

Austock Group Newsletter 5

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 6

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