Newsletter - Austock Group
Newsletter - Austock Group
Newsletter - Austock Group
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<strong>Austock</strong> <strong>Group</strong><br />
<strong>Newsletter</strong><br />
Issue 65 – Monday 6 June 2011<br />
SECURITIES | CORPORATE | LIFE | PROPERTY
The Week in Review<br />
Michael Heffernan, <strong>Austock</strong> Securities<br />
The battle between domestic forces and overseas jitters saw the<br />
latter come out on top in determining market moves last week.<br />
On the home front, we saw economic activity retract as expected in<br />
the March quarter; Fortescue unveil some grand iron ore plans; BHP<br />
win an “nice little refund” from the Australian Tax Office and Tabcorp<br />
secure the demerger of its casinos and wagering business – all<br />
reasonably positive.<br />
But overseas, weak US manufacturing data sent our market sliding<br />
over 2% last Thursday – the biggest one day fall for a year.<br />
The net result saw the market retreat by 1% over the 5 trading day to<br />
finish at 4583, which takes us back to September last year. In other<br />
words the market has progressed little in the last nine months. But if<br />
we want to look back even further, we actually passed this level “on<br />
the way up” in September 2005.<br />
Of most overall economic significance last week were the national<br />
accounts figures released by the Australian Bureau of Statistics,<br />
although the outcome, which showed that the economy went<br />
backwards in the March quarter by 1.2%, surprised no-one.<br />
The reason being that the $11 billion production loss in coal and<br />
agricultural produce, following the floods and cyclones in Queensland,<br />
had been well flagged to the community over the past few months,<br />
and referred to explicitly in the Commonwealth Budget papers.<br />
However, if one puts the natural disaster effects to one side, the<br />
overall economy showed a moderate 0.8% expansion in the March<br />
quarter to be 2.9% up over the last year. This outcome reflects<br />
sluggish economic growth and as such does not provide the Reserve<br />
Bank with any ammunition to move interest rates at their meeting on<br />
Tuesday.<br />
Moreover, when one examines the figures in more detail, inflation<br />
is also clearly not a significant issue. While the National Accounts<br />
inflation measure the so called “Consumption Deflator” rose by a<br />
“flood affected” 1.3% in the March quarter, over the year as a whole<br />
the increase was only 2.5% – in line with the underlying March quarter<br />
Consumer Price Index result.<br />
For those of us who can remember, annual inflation increases of<br />
8-15% were not uncommon in the 70’s and 80’s. Inflation which is<br />
now running at around 2.5% or 3% per annum is like nirvana.<br />
Last week movements<br />
6/06/2011 % Change<br />
AU$ versus US$ 1.075 +0.4%<br />
ASX 200 Index 4583 -2.2%<br />
90 Day Bank Bill Rate 5.02 -0.3%<br />
Aust 10 year bond 5.25 +0.3%<br />
US 30 year bond 4.22 -0.5%<br />
Dow Jones Index 12151 -2.3%<br />
FT 100 Index 5855 -1.4%<br />
Nikkei Dow Index 9492 -0.3%<br />
Hang Seng Index 22950 -0.7%<br />
Last week top winners<br />
Top ASX 50<br />
% Change<br />
IAG Insurance Australia +3.4%<br />
ORI Orica Limited +1.5%<br />
FGL Foster's <strong>Group</strong> +1.4%<br />
MAP Map <strong>Group</strong> +1.0%<br />
FMG Fortescue Metals Grp +0.9%<br />
Mid-cap (50-100)<br />
% Change<br />
IOF Investa Office Fund +4.0%<br />
CPA Commonwealth Prop +3.8%<br />
ILU Iluka Resources +2.6%<br />
TWE Treasury Wine Estate +2.1%<br />
DXS Dexus Property <strong>Group</strong> +1.7%<br />
Small ORDS (100-300)<br />
% Change<br />
CFU Ceramic Fuel Cells +22.7%<br />
PXS Pharmaxis Ltd +22.3%<br />
WEC White Energy Company +11.3%<br />
AMX Ampella Mining +9.5%<br />
AAX Ausenco Limited +8.0%<br />
<strong>Austock</strong> <strong>Group</strong> <strong>Newsletter</strong> 2
If any further material was needed to encourage the<br />
Reserve Bank to do nothing about interest rates in the<br />
next six months, figures on building approvals, retail sales<br />
and subdued investment from areas other than the mining<br />
sector, should do the trick.<br />
While the “interest rate hawks” headlined about an interest<br />
rate rise when last week’s retail sales figures showed a 1%<br />
jump in April, what they failed to recognize is that in March<br />
retail sales actually fell by 0.3%. A 0.7% rise in two months<br />
is not a super result!<br />
Predating the National Accounts data were the figures on<br />
corporate profits, which were released last Monday, that<br />
showed a 2% fall for the March quarter.<br />
Similarly the balance of payments figures on the next day<br />
showed that exports fell by 10% in the March quarter.<br />
Accordingly a marked contraction in the gross domestic<br />
product figures for the recent March quarter became a<br />
certainty.<br />
Finally on the economic front the Australian Industry <strong>Group</strong>’s<br />
manufacturing index showed a further fall in May to 47.7%<br />
(a reading below 50% indicates a contraction in activity).<br />
Moving to the corporate front there were in fact a range<br />
of quite positive corporate announcements. First BHP<br />
was given an early Christmas present from the High Court<br />
when it decided that approximately US $580 million will be<br />
refunded to BHP in relation to a dispute concerning its Hot<br />
Briquetted iron ore plant in Western Australia, from several<br />
years ago. To rub salt into the wound The High Court<br />
ordered costs in BHP’s favour.<br />
Also last week saw Transfield Services announce that<br />
its New Zealand telecommunications business has<br />
been awarded a NZ $260 million contract to provide<br />
telecommunications services to a business called<br />
“Enable Networks”. This work is part of the New Zealand<br />
government’s commitment to invest $1.5 billion over ten<br />
years to rollout their Ultra Fast Broadband network to 75%<br />
of the population – (similar to our National Broadband<br />
Network).<br />
In addition and as has been flagged for some time now,<br />
Tabcorp has successfully demerged its casino business<br />
from its wagering business following an overwhelming<br />
approval at a recent special meeting of shareholders.<br />
Again on the mining front, Fortescue released details of<br />
its accelerated expansion plans, which advised that the<br />
commissioning of its Christmas Creek ore processing<br />
facility remains on target. In addition all its major approvals<br />
have now been received for its “Solomon” project which<br />
supports a ten year plus mine life for its iron ore deposit.<br />
Potential beneficiaries of these investments include Mineral<br />
Resources, a stock which our <strong>Austock</strong> analyst considers to<br />
be a high conviction buy.<br />
Finally <strong>Austock</strong> itself announced last week a national<br />
expansion of its <strong>Austock</strong> Private Wealth business and entry<br />
into the Separately Managed Account (SMA) market. At<br />
the core of the SMA business is a sophisticated portfolio<br />
management platform that enables all investors’ holdings to<br />
be pooled together to attract the benefits of shared dealing<br />
and custody services. Readers are encouraged to contact<br />
their <strong>Austock</strong> advisor for further details about this initiative.<br />
Looking forward on the corporate front next week we will<br />
see the final year’s report from Metcash, and on Wednesday<br />
the Annual General Meeting of Sigma Pharmaceuticals.<br />
On the economic front there are a number of important<br />
events. One to be watched with interest, is the Reserve<br />
Bank’s decision on interest rates on Tuesday which is<br />
expected to leave interest rates unchanged.<br />
Also on Tuesday we have the National Bank’s Business<br />
Confidence and Business Conditions Survey; both of<br />
which are expected to show a subdued environment.<br />
On Monday we will see the Australian Industry <strong>Group</strong>’s<br />
Performance Index for the construction sector, and the ANZ<br />
job advertisements series. On Wednesday the Westpac<br />
Consumer Confidence survey figures, together with home<br />
loans and investment loan figures are due out. Rounding<br />
out the week on Thursday we will have the very important<br />
labour market data, which will probably show that the<br />
unemployment rate has edged up from last month.<br />
Looking overseas to the Unites States, figures will become<br />
available on mortgage applications on Wednesday, and on<br />
Friday, the import price index and wholesale inventories.<br />
This data is not likely to provide any significant lead either<br />
for its economy or its share market.<br />
In conclusion all that one can say with any sort of conviction<br />
at the moment is that the Australian market remains<br />
extraordinarily good value for medium term investors looking<br />
for a very cheap entry into some solidly performing blue<br />
chip and mid capitalization stocks.<br />
Michael Heffernan, <strong>Austock</strong> Securities<br />
<strong>Austock</strong> <strong>Group</strong> <strong>Newsletter</strong> 3
<strong>Austock</strong> Global Dealing Desk<br />
<strong>Austock</strong> is able to provide clients cost effective execution<br />
only dealing in international securities from the worlds major<br />
markets including London, New York, Toronto, Hong Kong<br />
and Johannesburg.<br />
The Australian stock market represents<br />
only approximately two percent of<br />
global securities traded. Furthermore, a<br />
few large stocks such as BHP Billiton,<br />
Rio, Telstra and the four major banks<br />
represent about 40% of the value of the<br />
stock market; and a number of exciting<br />
industries such as technology and<br />
pharmaceutical companies are not well<br />
represented in Australia.<br />
There are approximately twenty times<br />
as many listed securities on global<br />
stock markets as on the Australian<br />
stock market and global stock markets<br />
are approximately sixty times larger by<br />
market capitalisation.<br />
Custody<br />
<strong>Austock</strong> does not charge separate<br />
custody fees for its counterparty<br />
custodian service, providing corporate<br />
action and dividend administration and<br />
therefore, can provide this part of the<br />
overseas transaction for free.<br />
Markets<br />
Asia Pacific<br />
Kuala Lumpur Stock Exchange<br />
New Zealand Exchange<br />
Singapore Exchange<br />
Stock Exchange of Hong Kong<br />
Tokyo Stock Exchange<br />
United Kingdom<br />
London Stock Exchange<br />
AIM<br />
OFEX<br />
Canada<br />
Toronto Exchange<br />
Settlement<br />
<strong>Austock</strong> provides settlement in Australian<br />
Dollars for all overseas transactions.<br />
Charges<br />
Overseas equity transactions 1%,<br />
subject to a minimum of $95 negotiable<br />
Summary<br />
• Efficient and cost effective dealing in<br />
overseas securities<br />
• Safe custody of all holdings<br />
• Administration of Corporate Actions<br />
and Dividends<br />
• Settlement in Australian Dollars<br />
• Personal contact with your portfolio<br />
manager<br />
• Exposure to growth economies and<br />
industries not available in Australia<br />
Europe<br />
Deustsche Borse<br />
Euronext Amsterdam<br />
Euronext Paris<br />
Italian Exchange<br />
Swiss Exchange<br />
USA<br />
American Exchange<br />
NASDAQ<br />
New York Stock Exchange<br />
South Africa<br />
Johannesburg Stock Exchange<br />
Contact<br />
If you would like to find out more or<br />
become an <strong>Austock</strong> client, please call:<br />
Nicholas Pereza-Mathews<br />
F Fin Chartered MCSI MSAA<br />
+61 3 8601 2694<br />
npmathews@austock.com<br />
Nicholas has held senior positions within<br />
the Australian and UK financial services<br />
industry, bringing to <strong>Austock</strong> Securities over<br />
20 years experience in funds management,<br />
institutional equity sales and research, 14<br />
years of which were in London working as<br />
an Analyst at Morgan Stanley, Investment<br />
Manager with NatWest Stockbrokers and<br />
Branch Manager for Killik Stockbrokers.<br />
Having relocated to Australia in 2002,<br />
Nicholas achievements include Managing<br />
Director and Fund Manager of the top<br />
quartile performing Australian Natural<br />
Resources UCITS III Fund, Head of<br />
Global IMA at Patersons Securities and<br />
Head of Institutional Global Equity Sales<br />
& Asset Management at DJ Carmichael<br />
Stockbrokers.<br />
Nicholas qualifications include those from<br />
the Chartered Institute for Securities &<br />
Investment, Securities & Investment Institute<br />
of Australia, Financial Planning Association,<br />
Securities & Derivatives Industry Association<br />
and Deakin University.<br />
Nicholas is a Chartered fellow member<br />
of the Chartered Institute for Securities<br />
& Investment, a Fellow member of the<br />
Financial Services Institute of Australasia<br />
and a Master member of the Stockbrokers<br />
Association of Australia Inc SDIA.<br />
<strong>Austock</strong> <strong>Group</strong> <strong>Newsletter</strong> 4
Stock selection<br />
Ridley Corporation (RIC)<br />
Recommendation<br />
Buy<br />
Risk Rating<br />
High<br />
Dividend 7.50<br />
Dividend Yield 5.9%<br />
Current Share Price $1.25<br />
12 Month Price Target $1.70<br />
Zicom (ZGL)<br />
Recommendation<br />
Buy<br />
Risk Rating<br />
High<br />
Dividend $0.006<br />
Dividend Yield 1.1%<br />
Current Share Price $0.53<br />
12 Month Price Target $0.75<br />
Analyst<br />
Paul Jensz<br />
Analyst<br />
Heath Andrews<br />
RIC is likely to give its delayed FY’11 NPAT guidance over<br />
the next few weeks. We suspect it will be $27m to $29m vs.<br />
PCP of $29.5m. Consensus of $30m is about 7% higher than<br />
guidance mid-point.<br />
We stay at high end ($28.8m) because Camilleri’s EBIT<br />
contribution should counter the fall from prolonged wet<br />
weather affects on Salt and Feed Milling.<br />
We remain confident that there will be progress on revaluing<br />
the two coastal Geelong land assets (Corio, Moolap) in the<br />
next six months, and this should allow all land to be backed<br />
out of FY’12 P/E to give a very low 8.3x.<br />
We believe RIC will be positively affected by M&A as it is:<br />
a natural target for a food chain owner wanting East Coast<br />
position; seller of high value land assets; and, a low cost<br />
platform acquirer of processing bolt-ons.<br />
Investment view<br />
We continue to rate RIC a Buy with a PT of $1.70/share.<br />
The strong 10%pa underlying growth story has not been<br />
changed by a severe confluence of external events and<br />
significant turnaround in salt operations.<br />
The short term risk remains further wet weather affecting FY’11<br />
logistics and operations and/or competitors pushing hard for<br />
sales to recoup some cash flow.<br />
The “overhang” argument of GPG being a short term seller of<br />
21% stake in RIC does not ring true to us.<br />
We suggest that GPG will know the value of the land assets<br />
(and RIC’s improvement path) and have some patience. GPG<br />
was a previous owner of Cheetham Salt (and surplus Geelong/<br />
Adelaide land).<br />
We see GPG’s 21% stake in RIC as strategically valuable and<br />
unlikely to be sold down to investors at a “low” price.<br />
We have researched several of ZGL markets, and believe the<br />
growth potential is better than we first thought:<br />
• New offshore Oil & Gas rigs (that use ZGL products) are<br />
undergoing a surge in orders (May’11). The increase in safety<br />
standards means new equipment is required; and<br />
• The gas market in Bangladesh (where ZGL operate) is not<br />
that appealing until you realise that Bangladesh is very reliant<br />
on gas for electricity generation, and that it is coming off a<br />
low base in terms of installed infrastructure – this is a high<br />
growth market.<br />
ZGL has several elements such as reporting in S$ and having<br />
operations mostly in Asia that mean a multiples discount will<br />
apply. Much of the previous discount was liquidity related, but<br />
now significantly improved. In our opinion, a FY’12F PE of<br />
7.2x’s looks too low and further re-rating potential exists.<br />
The rapid increase in margins in the Construction division is<br />
due to strong demand in foundation equipment and moving<br />
the concrete mixer construction business to Thailand (from<br />
Australia). To us, higher margins seem sustainable, with a<br />
turnaround in the Australian construction market (probably not<br />
till FY’13), a future driver.<br />
The Precision Engineering division has doubled its floor space<br />
recently and the flow on of high demand for oil rigs should see<br />
ZGL post strong growth in FY’12.<br />
Investment view<br />
We believe that Ventrade is still a seller, with still over 4%.<br />
Buyers still have the potential to pick up stock easily and once<br />
the stock overhang is gone, potential exists for ZGL to rally.<br />
Our DCF based target of $0.75/share represents an FY’12F<br />
EPS multiple of 10.2x’s and looks fair to us. The Balance Sheet<br />
is solid, ZGL pay a dividend, they are leveraged to offshore and<br />
onshore oil & gas, and ZGL has several start up products that<br />
offer potential to the upside.<br />
We rate ZGL a high beta stock for investors prepared to own<br />
micro-cap stocks – Buy.<br />
<strong>Austock</strong> <strong>Group</strong> <strong>Newsletter</strong> 5
<strong>Austock</strong> <strong>Group</strong> Limited<br />
www.austock.com<br />
info@austock.com<br />
1800 806 362 (Toll Free)<br />
Melbourne Office<br />
Level 12, 15 William Street<br />
Melbourne VIC 3000<br />
Phone: 61 3 8601 2000<br />
Fax: 61 3 9200 2270<br />
Sydney Office<br />
Level 9, 56 Pitt Street<br />
Sydney NSW 2000<br />
Phone: 61 2 9233 9600<br />
Fax: 61 2 9251 9368<br />
Disclaimer<br />
Risk Rating<br />
<strong>Austock</strong> Securities Limited has a four tier<br />
Risk Rating System consisting of: Very High,<br />
High, Medium and Low. The Risk Rating is<br />
a subjective rating based on: Management<br />
Track Record, Forecasting Risk, Industry<br />
Risk and Financial Risk including cash flow<br />
analysis.<br />
Important Notice<br />
This publication contains a summary only<br />
of our research reports on the subject<br />
companies. It has been prepared for your<br />
convenience only and should not be used as<br />
the basis of an investment decision. Please<br />
contact your adviser to obtain a copy of the<br />
full research report on each company.<br />
Disclosure of Economic Interests<br />
The views expressed in this publication<br />
include the personal views of a number of<br />
<strong>Austock</strong> research analysts. Some analysts<br />
hold securities of the subject companies or<br />
derivatives. Please refer to the full research<br />
reports for disclosure of any economic<br />
interests held by the author of the report.<br />
Disclaimer/Disclosure<br />
This publication has been prepared solely for<br />
the information of the particular person to<br />
whom it was supplied by <strong>Austock</strong> Securities<br />
Limited (“<strong>Austock</strong>”) AFSL 244410. This<br />
publication contains general financial product<br />
advice. In preparing the advice, <strong>Austock</strong><br />
has not taken into account the investment<br />
objectives, financial situation and particular<br />
needs of any particular person. Before<br />
making an investment decision on the basis<br />
of this advice, you need to consider, with or<br />
without the assistance of an adviser, whether<br />
the advice in this publication is appropriate<br />
in light of your particular investment needs,<br />
objectives and financial situation. <strong>Austock</strong><br />
and its associates within the meaning of the<br />
Corporations Act may hold securities in the<br />
companies referred to in this publication.<br />
<strong>Austock</strong> believes that the advice and<br />
information herein is accurate and reliable,<br />
but no warranties of accuracy, reliability<br />
or completeness are given (except insofar<br />
as liability under any statute cannot be<br />
excluded). No responsibility for any errors or<br />
omissions or any negligence is accepted by<br />
<strong>Austock</strong> or any of its directors, employees<br />
or agents. This publication must not to<br />
be distributed to retail investors outside of<br />
Australia.<br />
Disclosure of Corporate Involvement<br />
<strong>Austock</strong> Securities Limited has not in the<br />
previous 12 months been involved in a<br />
publicly-announced transaction involving<br />
the payment of a fee to <strong>Austock</strong> Securities<br />
Limited by the corporate issuer described<br />
in this report. <strong>Austock</strong> Securities does<br />
and seeks to do business with companies<br />
covered in its research.<br />
We value your comments<br />
and suggestions, please<br />
forward these to:<br />
newsletter@austock.com<br />
<strong>Austock</strong> <strong>Group</strong> <strong>Newsletter</strong> 6