Newsletter - Austock Group

Newsletter - Austock Group

Austock Group


Issue 32 – Monday 6 September 2010



The Week in Review

by Michael Heffernan, Austock Securities

A strong market rebound and better than expected economic

growth figures were highlights of last week on the market. Indeed

the coalescing of locally robust economic results and positive, yet

still fairly lack lustre overseas data, produced the best across the

board weekly rise this year!

But first the better than expected domestic situation.

A generally accepted economic maxim is that “investment is

the engine of economic growth”. If this is the case, then in

Australia’s case China is clearly “the driver of the locomotive”.

If any evidence was needed for this it is in the recent figures

for Gross Domestic Product and the Balance of Payments.

These showed in clear and unequivocal terms that a major

driver of the strong economic performance in the June

quarter was the strength of Australia’s exports. Indeed of

the 1.2% economic growth recorded in the June quarter

0.4% was due to the boom in exports, of which China is

a major recipient.. This significant external trade result was

due to booming prices for coal and iron ore. In the quarter

according to the Australian Bureau of Statistics (ABS),

minerals prices (predominantly iron ore) rose by 39%, while

prices for coal increased by a stunning 52%.

More particularly the ABS reported that the so called terms

of trade (i.e. export prices divided by import prices rose) by

14% in the quarter and 24.5% over the year as a whole.

The key significance of this “terms of trade” figure is that it

is something that the Reserve Bank keenly watches when

determining what to do with interest rates. In the past, such

strong rises in the terms of trade have encouraged the bank

to lift interest rates.

However I would argue that another key piece of data in

the above mentioned national accounts figures is of equal

importance. This is what they call the Consumption Price

Deflator -another measure of an increase in consumer prices

which showed a rise of 0.6% in the quarter and 3.1% over

the year. Coincidently this 3.1% rise is precisely what the

Consumer Price Index rose by in the June quarter – in other

words inflation is not showing any signs of a breakout in an

upward direction.

This latter result did not encourage the Reserve Bank to lift

interest Rates at their August meeting and in my view should

not cause the Reserve Bank to lift interest rates in the current


Indeed the Reserve Bank’s forecast for next year is that

underlying inflation will be at around about 2.45% over the

year and the headline rate above 3% over the next year.

In other words despite what the terms of trade may show,

the fact is that inflation is certainly not showing any decisive

uptick. Accordingly interest rates should remain on hold for

some time yet - and that is good for the market generally.

Finally in relation to these National Account’s figures, and

apart from the surge in exports, the remainder of the

economy while being pleasingly positive is not decidedly so.

As far as consumption expenditure was concerned a major

impact was the strong growth in motor vehicle sales in the

June quarter. While dwelling investment increased sharply

in the June quarter this largely reflected building approval

figures of late last year. Recent figures of building approvals

which were released last week, continued to show an easing

in growth on a trend basis.

Also retail sales, while showing a seasonally adjusted

increase of 0.7% in the month of July, remain 4.0% up over

the last year. Wrapping all the above economic data together

provides a picture of an economy progressing nicely, - albeit

not booming- despite our strong performance on the export


And rounding out the extraneous pieces of economic

data was the Australian Industry Group’s survey of the

manufacturing sector. This showed that manufacturing

growth weakened in August due to uncertainty surrounding

the federal election among other matters.

On the corporate front a major item of significance was

the announcement by RIO to approve a US$1.6 billion

investment in the Hope Downs 4 Iron Ore Mine. The

estimated capital cost is US$1.2 billion (RIO’s share US$607

million), to be shared equally by the joint venture partners

Hope Downs Iron Ore Pty. Ltd. RIO also advised that they

will commit an additional US$425 million to fully cover the

capital cost of the rail, rolling stock and power infrastructure

owned by RIO required for development.

Clearly an investment of this size is likely to have beneficial

effects for a range of companies in the mining services area

possibly including Bradken Mineral Resources, Decmil,

Monadelphous, Leighton Holdings and United Group just to

name a few.


Another item of market significance was the update

provided by AWB in relation to the proposal from Canadian

company Agrium to acquire AWB for $1.50 per share.

The board of AWB advised that it was their unanimous

view that the Agrium offer was superior to the previous

merger announcement with Graincorp. Accordingly AWB

have withdrawn their recommendation and support of the

Graincorp merger and now recommended the Agrium

proposal as being in the best interest of shareholders, in the

absence of a superior offer emerging.

Also of significance, was the result by Kingsgate

Consolidated. Kingsgate advised of a strong increase of

120% in net profit after tax over the year with low cash costs

of US$335 per ounce.

Another result during the week from another gold miner

Resolute which advised that underlying profits before tax

were up 28% over the course of the year, and Group

guidance was for 380,000 ounces of gold for production at a

cost of $870 per ounce(at $A/US 90c).

At the macro level, the market (ASX 200 Index) showed a

strong rebound last week after the dismal performances of

the previous month or so, with an increase of 3.9% over the

week to reduce the deficit this year to just 6.8%.

Nevertheless the Australian market continues to lag major

overseas markets. In particular the New York market is

actually up 0.2%, London also up by 0.3% but Hong Kong

down 4%. Ironically given European concerns this year, the

German market is actually up 3%, but “dragging the chain” is

Japan down 14%.

Looking ahead we have now reached the conclusion of what

has been a most satisfactory overall June end year reporting

season for the bulk of ASX listed companies. We can now

look forward to the three major banks namely Westpac,

National Bank and ANZ making their reports in about 6

weeks time.

On the economic scene we will see the ANZ job

advertisement series out on Monday, and the Reserve Bank’s

decision on interest rates on Tuesday which is likely to be

a “no change” outcome. And finally on Wednesday figures

on home loans become available, which are expected to

continue the relative softness which has been apparent for

the better part of this year.

In the United States there is a range of economic data

scheduled for release including Consumer Confidence on

Wednesday, Initial Jobless on Thursday and Wholesale

Inventories on Saturday morning our time. These figures

are not expected to have any material effect on the market

unless the Initial Jobless figures show a marked increase.

On the other hand, an increase will provide a spur to their

market and the Australian market as well.

With election uncertainty now out of the way, we should see

the market’s momentum track more in line with underlying

economic and corporate fundamentals. These mostly show

positive strands, despite the Jeremiahs who pop their heads

up every time there is a negative piece of economic news.

These strands are evident in Australia, indelibly so in Asia,

hesitatingly positive in the USA and clearly strengthening in


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

5250 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

5200 5600 2.8 4.50 85 3.2 5.5

Age Consensus 4832 4939 2.8 4.75 89.5 3.0 5.2

Key Data

Latest Level

% move over year

GDP $1242bn June Quarter Annualised +3.3%

CPI 172.1 June Quarter +3.1%

ASX 200 Index 4541.2 3 September 2010 +2.5%

Unemployment rate 5.3% July 2010 5.8% level July 2009

90 Bank Bill Rate 4.74 3 September 2010 3.38% level 3 September 2009

Source: The Age 3 July 2010



Asset Class Returns

We summarise below major asset class returns over the

last 3 months, 1 year, 3 year, 5 year and 10 year periods to

the end of August 2010.

The statistical data table to 31 August 2010 highlights the

volatility of financial market returns in major asset classes

over the last few years in particular.

Short term past returns over the last 12 months have been

significantly impacted by a weak June quarter in 2010

for growth asset markets of property and shares. In the

first 2 months of the 2010/11financial year, returns have

been positive for domestic property and share assets and

hedged property and global shares (ie. 2% to 9% positive

return range).

Fixed interest markets have generally performed strongly

during periods of growth asset market weakness reflecting

in part a flight to quality at times of extreme financial

market volatility or heightened risk. Cash and fixed interest

investments remain important to dampen overall portfolio

volatility, provide diversification benefits relative to growth

assets and thereby enable investors to better manage

investment risk through the cycle.

Real estate investment trust markets .have performed

strongly relative to broader equity markets during the

quarter and year ended 31 August 2010. This follows the

significant restructure of the listed property trust sector

over the last couple of years and the return to fundamental

property investment with lower gearing and returns based

largely on underlying property rental income.

Currency markets continue to remain volatile. The

strengthening of the Australian dollar in the August quarter

had a positive impact on hedged global equity (and

property) investments for Australian investors.

Please note that past performance is not necessarily

indicative of future performance. This is highlighted in the

above chart.

We continue to recommend that investors retain an

appropriately diversified portfolio relative to their personal

circumstances and investment time horizon. In this regard,

we would expect, for example, balanced portfolios to

average returns around 5% per annum above inflation over

the next 10 years. This comprises average cash and fixed

interest returns of around 5% to 7% per annum, property

and sharemarket average returns of around 8% to 10% per

annum and the rate of inflation of around 2.5% to 3.0% per

annum over the next 10 years.

We invite you to contact your Austock adviser for an

introduction to one of the Certified Financial Planners TM to

ascertain whether we can assist you in relation to your

financial planning including strategic asset allocation,

diversification and overall investment planning.

Your Contacts

John Short 03 8601 1960

Carol Hay 03 8601 1961

Administration enquiries

Karen Chua 03 8601 1963

Nicole Wilmann 03 8601 1964

Asset Class Index Returns

Asset Class 3 mths 1 year 3 years 5 years 10 years

Cash 1.23% 4.21% 5.48% 5.74% 5.53%

Fixed Interest - Aust 3.59% 9.10% 7.90% 6.25% 6.57%

Fixed Interest – Gbl (Hedged) 4.47% 10.78% 9.95% 7.69% 8.21%

Property – Aust # 3.91% 6.18% -23.41% -7.89% 3.19%

Property – Global (Hedged) # 5.20% 24.47% -10.44% -0.82 n.a.

Shares – Aust 0.79% 2.73% -6.86% 4.42% 7.38%

Shares – Global (Unhedged) -5.40% -3.52% -11.93% -3.02% -4.63%

Shares – Global (Hedged) -1.97% 2.82% -9.38% -0.37% -1.49%

# Listed property indices Source: Index data to 31 August 2010


Stock Selection


Risk Rating


Medium risk

Dividend $0.151

Dividend Yield 2.9%

Current Share Price $5.15

12 Month Price Target $6.10


David Grossman

CRZ delivered a very strong FY10 NPAT of $43m, 41%

above pcp. At an EBITDA level the result was above

guidance and market expectations at ~$65m and 14%

above its prospectus forecasts.

Key Highlights

Private Classified revenues were 43% higher than pcp and

reflected both a strengthening in the overall demand for car

(new and used) by private buyers, but also some market

share capture during the period.

Display Advertising revenues grew by 31% and by 55% in

the 2H10 as conditions in the advertising market continue

to improve.

Margins improved ~600bps to 52% with expenses growing

modestly during the period and predominantly in labour

expenses and wage inflation and new hires are funded.

Cash flow generation remains very strong with conversion

of EBITDA approximately 100%. The CRZ balance sheet is

now net cash (~$14m), underpinning a ~80% dividend pay

out ratio.

We expect CRZ will be active in looking M&A opportunities

to both bulk up its existing classified business as well as

expand into new classified vertical opportunities.

The company has not provided specific FY11 guidance, but

expects to update the market at its October AGM.

We have upgraded our FY11F NPAT forecast by 10% to

~$56m, mainly on the back of increased private classified

and display advertising assumptions.

Investment View

CRZ retains strong momentum with the vehicle market

upbeat, advertising income improving and a range of

website and platform innovations further entrenching their

market position.

Our updated price target of $6.10/share is set on 25x FY11

EPS, which we believe is well supported by our ~25%

average EPS growth profile over the next 2 years, CRZ’s

strong balance sheet and latent growth potential.

Newcrest Mining


Risk Rating



Dividend $0.21

Dividend Yield 0.6%

Current Share Price $38.07

12 Month Price Target $50.69


Anna Kassianos

Medium risk gold leverage; estimates revised up

• Multiple, large scale ops to achieve guidance

• Potential for would-be predators to strike if ‘price is


• Plenty of cash to fund organic growth; $1.14bn cash

($4.09bn cash end FY14), incl. ‘old LGL’

• We’ve revised risk rating from High to Medium

• We revise FY11-14 for guidance & Ore Reserve

1. +28% NAV to $32.92/share

2. up to +28% EPS (27 to 20x PE).

3. up to -28% DPS (21 to 32cps)

Merger metrics & expected re-rate sets our target

• Applying 0% premium to 30th August last trade,

market pricing LGL consideration as 12% cash,

remainder scrip

• We’ve repriced our NCM 12 month target at $50.69/

share on expected re-rate of combined entity (NCM-LGL)

post merger. This implies a 1.54x (previous 1.8x) NAV

multiple to our target

Expected 12 month catalysts

• Organic growth from Wafi open pit, Golpu underground

and Gosowong second mining front

• Value add at Lihir Island and potential rationalisation


• +15Moz gold equiv. Ore Reserve growth for 2011

update, underpinning Mine life extensions of up to 4

years expected

• Cadia East in production late FY11


Imputation Bonds and

Child Advancement Bonds

Investing in the share market can without

doubt produce good outcomes. But this first

needs stock selection, then there’s constant

monitoring, ongoing buying and selling and

the hassle of CGT management and annual

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Austock Group Limited

1800 806 362 (Toll Free)

Melbourne Office

Level 1, 350 Collins 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 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.


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


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 Bonds.

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