Newsletter - Austock Group

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Newsletter - Austock Group

Austock Group

Newsletter

Issue 54 – Monday 15 March 2011

SECURITIES | CORPORATE | LIFE | PROPERTY


The Week in Review

Michael Heffernan, Austock Securities

While the full implications of the tragedy in Japan are yet to be

counted, continuing uncertainty over the Libyan situation, a slight

downgrade of Spain’s credit rating, a skirmish in a Saudi Arabian

town of al-Qatif, combined with the absence of substantive

company news following the end of the half yearly reporting

season, led to the market retreating last week to finish at the

lowest level since 2 December last year.

11/03/2011 04/03/2011 % Change

AU$ versus US$ 101.41 101.36 +0.04

ASX 200 Index 4644.8 4864.3 -4.5

90 Day Bank Bill Rate 4.99 4.96 +0.6

Aust 10 year bond 5.45 5.56 -2.0

US 30 year bond 4.60 4.61 -0.2

Dow Jones Index 12044.4 12169.9 -1.0

FT 100 Index 5828.7 5990.4 -2.8

Nikkei Dow Index 10254.4 10693.7 -4.1

Hang Seng Index 23249.8 23408.4 -0.7

Moreover at the local level confusion about the carbon price/

tax issue and the inquiry and draft legislation in relation to the

Australian banking system, added to market nervousness.

While the late Friday tragic Japanese earthquake and tsunami

occurred after local trading, it resulted in measured but not

substantial declines in world markets.- However the full costs

are yet to be assessed

In this environment there is always a gravitation to perceived

safe havens and again this leads to the US. And so, despite

international tensions and tragedies, the American economy

continues to show increasing robustness with last week’s

sharp decline in their unemployment rate (which still remains

high however). This comes on top of good news about the

further recovery in their manufacturing sector, which has flowed

through to a relatively buoyant showing on their share market

Indeed on an international comparison basis, and while the

Japanese tragedy sent markets sharply down on Friday, the

American market weathered the situation best, declining by

1.0% over the week. European markets suffered more being

down 2.2% in France, 2.8% in Germany, and the same in

London. As expected Japan has suffered significantly, and fell

away by 4.1% over the week. The Australian market topped

them all being down by almost 4.5%- and that was before the

impact of the Japanese earthquake and tsunami.

In relation to local sources of market moving data, last

week saw the labour market figures, which showed that the

unemployment rate remains stubbornly low at just 5% of the

labour force.

This performance is somewhat curious given the fact that many

of the partial indicators of demand in the Australian economy

including retail turnover, motor vehicle sales and activity in

the residential building sector are all fairly muted. The major

contributing factor to the reasonably tight labour market

situation can be ascribed to the continuing robust health in

physical activity (as opposed to share market activity) in the

resources sector.

Elsewhere, the Australian Industry Group’s (AIG) figures on the

construction sector showed a continuing weakness in February,

but the AIG advised that the weakness in February was due

to weather related disruptions. Of the four major industry sub

sectors the strongest conditions were recorded in engineering

construction.

Figures on housing finance pointed to this sector remaining

fairly sluggish, although recent months have shown an

improvement from the low point around the middle of last year.

Now finally on the economic front the National Australia Bank’s

Business Confidence and Conditions surveys released during

the week showed that business confidence was buoyant and

Westpac’s Consumer Confidence survey also pointed in the

same direction.

A major event on the corporate scene last week was Austock’s

very successful Sustainable Productivity Annual Conference in

Sydney involving energy, chemicals and agricultural companies.

This unique conference featured senior representatives of 18

companies across the various sectors outlined above, and

clearly positions Austock as the leading broker in this growing

and important sector of the market.

Austock Group Newsletter 2


The companies presenting were key players in these sectors

including Linc Energy, Carnarvon Petroleum and Ridley

Corporation among others.

Looking to the company reporting front, Rio Tinto has

continued on its spending “spree” and it advised that it will

increase its offer for Riversdale Mining by 50c to $16.50 per

share if Rio obtains more than a 50% interest by the 23rd

March. Riversdale Mining has significant coal deposits in Africa.

Elsewhere Australia’s rare earth company Lynas advised

that it has completed the acquisition of the fully permitted

Kangankunde rare earth resource in Malawi, Africa, for the

contract sum of US$4million. Rare earths companies have

been market favourites in Australia for the better of the last

year.

Another significant corporate announcement was by Ardent

Leisure which has been a very strong performer on the share

market in recent times. Specifically it advised that it has

completed the acquisition of three Re-Creation health clubs in

Melbourne and secured three new development opportunities

for its health club and bowling portfolios. It further advised that

it is continuing to “roll out opportunities” across its bowling,

health club and main event divisions – this company has been

a stand out performer in the retail sector over recent times.

And finally on the corporate front Oz Minerals announced that

it has signed an agreement to purchase the Carrapateena

Copper Gold Project in South Australia from Tek Australia

Pty Ltd, Rudy Gomez and various other minorities. This is a

potential huge gold copper resource but there is a very large

amount of capital expenditure required and a few years of

development before the mine becomes a producing asset. The

consideration for the purchase was US $250 million. However

and importantly Oz Minerals advised, that after payment of

the US $250m, the company will still have US $750m in cash

to fund future growth and opportunities in line with its overall

strategy.

On the corporate front this week we will see Karoon Gas final

year figures out on Wednesday, while on Thursday interim

reports from Kathmandu, Myer and Oroton are due out. On

Friday ANZ’s group strategy update will become available.

In the United States there is a range of important data

scheduled which should give a very good indication about

whether the increasing tempo of their overall economy can

continue. On Tuesday we have the New York Empire State

Manufacturing index, on Wednesday figures on housing

starts and the Producer Price index, followed on Thursday

by the Consumer Price index. On Friday figures on industrial

production and capacity utilisation, as well as leading indicators

due out. There would seem to be nothing in this range of

American data which is likely to detract from its definitive

improving trend.

In conclusion the performance of the Australian market over

the past couple of weeks and last week in particular has been

nothing short of disappointing. Clearly the actions in Libya

has had an impact, but also decisions by the Government

in relation to carbon pricing and the enquiry and proposed

legislation in relation to the banking sector have coalesced to

restrain our market, from what otherwise looks to be a positive

market environment.

Michael Heffernan, Austock Securities

Looking ahead on the economic front, Tuesday sees figures

on motor vehicle sales, and on Wednesday Westpac’s Leading

index. It is expected that motor vehicle sales will continue on

a slowly increasing trend while the Leading Index will probably

show an easing in line with the retraction in sharemarket

prices..

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.

Custody

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.

Markets

Asia Pacific

Kuala Lumpur Stock Exchange

New Zealand Exchange

Singapore Exchange

Stock Exchange of Hong Kong

Tokyo Stock Exchange

United Kingdom

London Stock Exchange

AIM

OFEX

Canada

Toronto Exchange

Settlement

Austock provides settlement in Australian

Dollars for all overseas transactions.

Charges

Overseas equity transactions 1%,

subject to a minimum of $95 negotiable

Summary

• 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

manager

• Exposure to growth economies and

industries not available in Australia

Europe

Deustsche Borse

Euronext Amsterdam

Euronext Paris

Italian Exchange

Swiss Exchange

USA

American Exchange

NASDAQ

New York Stock Exchange

South Africa

Johannesburg Stock Exchange

Contact

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

npmathews@austock.com

Nicholas has held many senior positions

within the Australian and UK financial

services industry, bringing to Austock

Securities over 20 years experience in

investment management, dealing and

research, 14 years of which were in

London at Morgan Stanley (Analyst),

NatWest Markets (Institutional Equity

Sales & Fund Manager) and Killik

Stockbrokers (Branch Manager &

Investment Manager).

Having relocated to Australia in

2002, Nicholas achievements include

Managing Director and Fund Manager

of the top quartile performing OAM

Australian Natural Resources Fund,

Head of Global IMA at Patersons

Securities and Head of Global Equity

Sales & Asset Management at DJ

Carmichael Stockbrokers.

Austock Group Newsletter 4


Stock selection

Mineral Resources (MIN)

Ardent Leisure (AAD)

NPAT vs. Forecast

$60.6m vs. $60.9m forecast

NPAT vs. Forecast $26.9m vs. $26.7m forecast

BUY 17% disc. To PT ($14.90)

Market Cap

Thesis

$2.1bn, Monthly t/o: $150m, FY’11F

PE 14.9x’s

MIN has large volume uplift in the volume of iron ore and

manganese it will be selling in FY’11 and FY’12. Volumes are

moving from 1.3mt in FY’10 to around 5mt in FY’11. Securing

additional port access is likely to see further volume expansion.

Key reason for surprise

• MIN delivered FY’10’s underlying NPAT in the 1H’11. With

higher iron ore pricing and greater volumes in the 2H’11, MIN

is expected to continue to deliver.

• The project update was that all projects were on schedule

or completed, testament to the company’s skill in delivering

resource projects.

• MIN still has the Kwinana Port 4mtpa shipping allocation as a

potential future catalyst.

Reasons to BUY

• Our forecasts were above market, consensus is cum

upgrade.

• A key attraction to MIN is the multiple growth options, we

believe MIN is still high growth.

BUY 18% disc. To PT ($1.70)

Market Cap $450m, Monthly t/o: $28m, FY’11F

PE 10.3x’s

Thesis

Diversified leisure operator coming out of a tough consumer

spending environment with an improved cost base, capital

base and product offering, with the balance sheet to grow.

Key reason for surprise

• 1H Theme Park EBITDA flat despite unprecedented wet weather.

• Strong pick-up in all other divisions off a relatively solid base.

• In-line with our numbers but above consensus as a result.

• Commentary on January trading very positive.

Reasons to BUY

• Now cycling 25% 2H’10 EBITDA decline with strong

momentum.

• Balance sheet capacity and management confidence in new

centre openings.

• Some luck with weather in 1H’12 promises strong EBITDA

uplift.

• Sustainable yield remains 9%, albeit unfranked.

Austock Group Newsletter 5


Stock selection

Kingsgate (KCN)

NPAT vs. Forecast

$12m vs. $22m forecast

Matrix Composites and

Engineering (MCE)

NPAT vs. Forecast

$19.3m vs. $19.0m forecast

SELL

Market Cap

Thesis

5% premium To PT ($8.83/share)

$1.25bn, Monthly t/o: $110m,

FY’11F PE 24x

BUY 4% disc. To PT ($9.50)

Market Cap

Thesis

$650m, Monthly t/o: $26m, FY’11F

PE 16.0x’s

~100koz Thailand gold open pit producer, targeting ~200kozpa

expanded production by end 2011. Recently acquired

Dominion Mining, Challenger underground mine, producing

~70kozpa gold.

Key reason for surprise

• Higher operating costs, and also transaction costs associated

with Dominion and Laguna Resources takeover bids.

• 1H’FY11 revenue down 25% to pcp from lower gold

production due to bad weather and inability to access high

grade ore due to government approval delays.

Reasons to SELL

• Short-term debt funding risk remains.

• FY’11 group gold production guidance of 150 - 160koz

(Austock: 132koz @ US$593/oz, FY10: $335). We expect

guidance to be missed for lower grade Chatree ore, and Thai

royalty expected to double.

An Oil & Gas supply company. It has almost completed

construction of its new Henderson factory that will provide a

large increase in production capacity. A high oil price is likely to

lead to further strong demand. Cost out through scale and top

line growth bode well for MCE.

Key reason for surprise

• Result was guided, but the surprise was that the growth

outlook was better than we had factored in. Stock is still

come earnings upgrade in our opinion.

• The poor cashflow result initially saw the stock sold off, but

further explanation leads us to believe that a better cashflow

result is likely in the 2H’11.

Reasons to BUY

• MCE should enter the ASX300 next week and the ASX200

is not that far off. This should put MCE on the radar of more

fund managers.

• Acquisition multiples of international peers are extraordinarily

high (Wood Group division was the last one at 16.9x’s

EBITDA. MCE has very high growth ahead of it and is trading

at 13x’s FY’12F EPS, we expect the re-rating of MCE is going

to continue

Austock Group Newsletter 6


Austock Group Limited

www.austock.com

info@austock.com

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

Disclaimer

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

analysis.

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.

Disclaimer/Disclosure

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

Australia.

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:

newsletter@austock.com

Austock Group Newsletter 7

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