Issue 65 – Monday 6 June 2011
SECURITIES | CORPORATE | LIFE | PROPERTY
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
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
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%
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)
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
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only dealing in international securities from the worlds major
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The Australian stock market represents
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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.
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stock markets as on the Australian
stock market and global stock markets
are approximately sixty times larger by
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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
Ridley Corporation (RIC)
Dividend Yield 5.9%
Current Share Price $1.25
12 Month Price Target $1.70
Dividend Yield 1.1%
Current Share Price $0.53
12 Month Price Target $0.75
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
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.
We continue to rate RIC a Buy with a PT of $1.70/share.
The strong 10%pa underlying growth story has not been
changed by a severe confluence of external events and
significant turnaround in salt operations.
The short term risk remains further wet weather affecting FY’11
logistics and operations and/or competitors pushing hard for
sales to recoup some cash flow.
The “overhang” argument of GPG being a short term seller of
21% stake in RIC does not ring true to us.
We suggest that GPG will know the value of the land assets
(and RIC’s improvement path) and have some patience. GPG
was a previous owner of Cheetham Salt (and surplus Geelong/
We see GPG’s 21% stake in RIC as strategically valuable and
unlikely to be sold down to investors at a “low” price.
We have researched several of ZGL markets, and believe the
growth potential is better than we first thought:
• New offshore Oil & Gas rigs (that use ZGL products) are
undergoing a surge in orders (May’11). The increase in safety
standards means new equipment is required; and
• The gas market in Bangladesh (where ZGL operate) is not
that appealing until you realise that Bangladesh is very reliant
on gas for electricity generation, and that it is coming off a
low base in terms of installed infrastructure – this is a high
ZGL has several elements such as reporting in S$ 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.
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
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Austock Group Newsletter 6