Newsletter - Austock Group

Newsletter - Austock Group

Austock Group


Issue 45 – Monday 6 December 2010


The Week in Review

by Michael Heffernan, Austock Securities

A likely interest rate holiday, muted economic growth, a seemingly

irrepressible Rio Tinto’s capital expenditure programme and a

mixture of comments at Annual General Meetings took the

headlines last week.

But first, the trading week was happily punctuated on

Thursday by the best daily rise that our market and

overseas bourses have seen for many months. This

better performance owes much to better than expected

employment data in the United States, as well as more

authoritative comments by Mr Trichet head of the European

Central Bank in respect to certain economically ailing

European countries and banks.

The major highlight of the week was the underwhelming

figures for economic activity or Gross Domestic Product

which were released on Wednesday. These showed a

rise of only 0.2% in the quarter to be 2.7% higher than the

September quarter last year - an anaemic result by any

standard. Indeed were it not for the booming agricultural

sector (due largely to better seasonal conditions) the

economy would have actually gone backwards by 0.2%.

However before one gets too alarmed by this outcome it

needs to be recalled that in the June quarter the economy

expanded by 1.1%. Consequently one should no place

undue emphasis on one quarter’s result.

The bottom line of all this is that the economy is certainly

not “shooting the lights out”. Had this information been

available to the Reserve Bank prior to Melbourne Cup Day

it is almost certain that there would have been no rise in

interest rates then.

Indeed comments made by the Governor of the Reserve

Bank last Friday week were, and to translate and

paraphrase the Governor’s fairly obscure language, he does

not anticipate any further change in interest rates for some

time, on the basis of current information.

Given the relative softness of the economy, my view is

that rates should not be changed until well into the March

quarter of next year.

The only catalyst which may change this view is the

Consumer Price Index figures for December which will

be out in late January, and economic growth data for the

December quarter which will not be available until early

March. However I expect nothing untoward in either of

these two economic indicators which would encourage the

Bank to lift rates.

Also during the week we saw figures on building approvals

which continued the easing trend which has been apparent

for most of the year, with total building approvals over

the 12 months to October rising by only 1.2%. Private

sector housing approvals fell by 15.7% while other

dwellings, which account for about a third of approvals,

showed a strong rise of 67.3%, although this latter sector

is considerably more volatile than the residential housing


And rounding out the economic data, the Australian

Industry Group’s Manufacturing index showed that the

strong Australian dollar, rising interest rates and skill

shortages have been restricting manufacturing growth.

The result being that the index fell 1.8 points in November,

to below 50 - a level which separates expansion from


As indicated one of the major corporate highlights of the

week was the decision by Rio Tinto to approve a further US

$1.2 billion investment in the Pilbara region, to lift iron ore

capacity there to 283 million tonnes per annum.

Quite incredibly Rio Tinto have now announced new

investment decisions totalling $7.2 billion (Rio Tinto’s share

is US$5.1 billion) in Pilbara since July this year. Clearly this

major resource company is counting on continuing growth

particularly in the Asian region and more particularly in

China over the course of the next year and beyond.

Elsewhere Metcash advised of their half yearly profit result

which was on the light side. Underlying earnings increased

by only by 2.1%, but within the guidance provided to the

market earlier this year. As far as the future is concerned,

Metcash advised of “extremely tight trading conditions

being experienced throughout the current period which puts

pressure on the group’s ability to achieve guidance for the

year as a whole.”


This result from Metcash, confirms the softness which has

been apparent in retail sales for some time now, confirmed

by the recent official ABS data released on Thursday.

These showed that retail sales declined by 1.1% in October,

to be only 2.2% above the level in October 2009.

Continuing on the corporate front Crown advised at their

Annual General Meeting that they believe that Australia

needs to meet the challenges created by a fast growing

tourism market from Asia in particular. But to progress this

matter Crown said it will be necessary for Federal and State

Governments, the Board of Tourism, and tourism operators

such as Crown, to work more closely together.

And finally TPG advised at their AGM they achieved an

additional 24,000 net broadband subscribers so far in just

in the first four months of this current financial year alone.

Looking ahead the highlight will be the Reserve Bank’s

decision on interest rates on Tuesday, which is almost

certain to provide for no change - a situation which may

well subsist until possibly March next year at the earliest.

On Monday we have the ANZ job advertisement series, on

Wednesday home loans and investment lending and, on

Thursday the very important labour market statistics. These

are likely to show the unemployment rate has, more likely

than not, crept up in November, to closer to 6% than 5%.

Overseas there is a similar lack of data with the ABC

Consumer Confidence Survey on Wednesday, Initial Jobless

Figures on Friday and the University of Michigan Confidence

Index on Saturday morning our time.

In conclusion the lack lustre month of November is now

been “done and dusted”. The usually more positive

December sentiment started on the right foot on

Wednesday, and on Thursday we saw the best rise in the

index for several months.

Although the market still remains about 5% lower than

a year ago, more positive sentiment may well supplant

uncertainties about Europe and China, and hopefully will

see the market improve steadily before the year is out.

Michael Heffernan, Austock Securities


Chris Caton

BT Financial

Neville Norman

University of Melbourne

Steven Keen

University of Western Sydney

Bill Evans

Westpac Bank

Michael Heffernan

Austock Securities

ASX 200


Dec 2010

ASX 200


Jun 2011


Annual Growth


Reserve Bank

Cash Rate

Dec 2010


Dec 2010

CPI Annual


Dec 2010



Dec 2010

4750* 5500 3.0 4.75 82 3.4 5.0

5100 5500 2.4 5.25 89.5 3.5 5.8

4000 4000 2.2 4.00 75 N/A 6.0

4750 5000 3.0 5.00 90 3.3 4.9

5000** 5600 2.8 4.50 85 3.2 5.5

Age Consensus 4832 4939 2.8 4.75 89.5 3.0 5.2

Source: The Age 3 July 2010

* Revised 13 Sept 2010 from 5250

** Revised 11 Sept 2010 from 5200

Key Data

Latest Level

% move over year

GDP $1302bn September Quarter Annualised +2.7%

CPI 173.3 September Quarter +2.8%

ASX 200 Index 4694.2 3 December 2010 -1.7%

Unemployment rate 5.4% October 2010 5.7% level October 2009

90 Bank Bill Rate 5.0 3 December 2010 4.05% level 3 December 2009


Stock Selection

Mineral Resources



Risk Rating


Dividend $0.20

Dividend Yield 1.9%

Current Share Price $10.47

12 Month Price Target $12.50


Heath Andrews

Aristocrat Leisure



Risk Rating


Dividend $0.49

Dividend Yield 1.8%

Current Share Price $2.62

12 Month Price Target $2.73


Rohan Sundram

MIN has a lot of growth options that are close to moving into

an earning capacity, being:

• The 25mtpa crushing plant at Christmas Creek (Mar’11);

• The 200ktpa Lithium plant in JV with RDR (Mar’11);

• The Utah Point port is now operating and throughput is

ramping up, a 2H’11 driver;

• Nicholas Downs Managenese JV with Hancock Prospecting

made its first shipment recently;

• MIN has won additional crushing capacity with RIO at

Namuldi (FY’12);

• The 2mtpa Poondano iron mine (100% MIN) is expected to

be operating by Feb’11; and

• MIN is expected to secure 4mtpa of port shipping rights

in Kwinana that would support its Carina operation (MIN’s

largest catalyst).

While this represents a large pipeline, the projects appear

to be on schedule and nearing completion. MIN will soon

be looking to commence development of other projects

such as the Utah Point expansion and developing its Ant Hill

Manganese mine (64% owned).

One of MIN’s strengths is its management team. Most of the

key people have been together since the mid 1990’s and

own sufficient stock to stay incentivised.

Investment view: Buy

When we do a sum of the parts analysis, we see significant

value in MIN. We believe that MIN is likely to be:

• A 6mtpa iron ore exporter in FY’12 (peer MGX at $2.25bn

market cap);

• A exporter of >1mtpa of Manganese in FY’12 (peer OMH at

$0.7bn market cap);

• We believe the mining services operations are likely to

generate $80m EBITDA in FY’12 – worthy of a valuation of


Using a SOTP, we estimate MIN could be worth ~$3.5bn or

double its market cap. MIN has some obstacles to overcome

and has to deliver on projects; however its track record on

delivering is excellent.

The Kwinana Port is a near term catalyst and if we unrisked

this project, our DCF valuation would be $15.15/share (from

$12.50 currently). We rate MIN as a high conviction Buy.

ALL announced that its CY’10 operating profit would be as

low as $50-60m, vs. consensus for ~$90m. Each of ALL’s

key markets are experiencing cyclical issues, however we

believe structural issues are at play in Australia and Japan.

Key points:

North America – Market contraction to continue into 2011

due to limited new casino openings and expansions, which

will more than offset any potential modest improvement in

replacement sales. ALL expects no improvement from its

recurring revenue base until 2011.

Australia – is falling off a cliff. 2H’10 earnings are expected

to be in line with depressed levels in 1H’10 (which were 46%

below pcp). We forecast $27m EBIT from Australia + NZ vs.

$86m pcp (-69%), attributable to: i) capital preservation from

gaming operators due to regulatory uncertainty (Gillard/Wilkie

proposal to phase in pre-commitment technology nationally

by 2014), ii) underperformance from some key game releases,

and iii) new entrants - ongoing sales momentum from WMS

(on target to achieve its FY’11 target of 1,000 sales in NSW).

Bally will commence sales in NSW in early CY’11.

Japan – a non event. 2010 sales volumes will be ~50% below

CY’09 trough cycle levels. Mgmt cited the self restriction

period during the APEC meeting as a key contributor,

however we view the recent acceleration in market demand

towards top 5 licensed (blockbuster) titles as the key driver

(ALL’s titles are largely 2nd and 3rd tier titles).

Balance sheet is stretched. Mgmt indicated that it was still in

compliance with covenants, however our CY’10F and CY’11F

gross debt / EBITDA of 4.3x and 2.9x seems tight. S&P has

reduced its rating on ALL from BBB- to BB+ and placed it on

credit watch.

Investment view: Sell

Retain Sell ALL trades on 28x & 21x CY’10F & CY’11F EPS.

This improves to

15x in CY’12F upon an anticipated recovery in North America

and Australia, however visibility around this remains low. At

these multiples, ALL trades on a significant premium to the

ASX200 (13x and 12x) and US peers (18x and 16x). In our

view, Friday’s trading update re-iterates that this story does

not warrant premium multiples, especially given low earnings

visibility, risks around strategic plan execution (now 12-18

months in to its 3-5 year plan) and now tight balance sheet.


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

Australia. Austock Life Limited (Austock Life)

AFSL 225048 is the issuer of Imputation

Bonds. The Product Disclosure Statement

should be considered in deciding whether to

acquire, or continue to hold, the product.

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.

Austock Life Disclaimer

These information has been produced

by Austock Life Limited AFSL 225408

(Austock Life, we) and is based upon a

general understanding of Australian taxation

laws and other applicable legislation, rules

and guidelines applicable at the time of

production. Whilst, Austock Life believes

this information is correct and the case

studies and opinions have been made upon

a reasonable basis, we do not warrant the

accuracy of any material in this document

and to the fullest extent permitted by law,

disclaim all responsibility for any loss or

damage which may be suffered by any

person directly or indirectly, through relying

on this information or any aspect of it,

whether that loss or damage is caused by

the fault, negligence or omission of Austock

Life or otherwise. This material provides

information only, and does not take into

account any particular person's objectives,

financial situation or needs. Before acting

on it Austock Life recommends investors

consider its appropriateness having regard

to their own situation, and also seek the

help of an adviser. None of Austock Life,

nor its parent entity, Austock Group Limited

ABN 90 087 334 370, make any guarantee,

warranty or representation as to the accuracy

or completeness of the general advice and

information contained in this document, and

you should not rely on it. No responsibility for

any errors or omissions or any negligence is

accepted by Austock Life or Austock Group

Limited. The Product Disclosure Statement

should be considered in deciding whether

to acquire, or continue to hold Imputation


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