Newsletter - Austock Group

Newsletter - Austock Group

The Week in ReviewMichael Heffernan, Austock SecuritiesInitial enthusiasm following the assassination of Osama BinLaden last Monday, quickly evaporated and the market soonresumed its more sluggish performance evident since Easter.Indeed over the last 2 weeks since Good Friday our market hasretreated by 3.5%, which contrasts sharply with overseas marketperformances over the equivalent time. For instance the Dow Jonesindex rose by 1.1%, Germany by 2.7%, France by 0.9% and evenJapan lifted by 1.8%. The only major market keeping us company hasbeen Hong Kong which is down 4.1% over the same time.Taking a longer term view our market has struggled to keep its headabove water this year (we’re actually down marginally by 0.05%),whereas all other major markets except Japan and Hong Kong are upby between 6% and 10%.Close on the heels of the “Osama Bin Laden effect” the AustralianReserve Bank showed that it was not spooked by the previous weekslarger than expected Consumer Price Index increase and kept interestrates on the hold.My assessment of the words used by the Bank in its media releaseis that interest rate rises are now all but ruled out at least until theSeptember quarter of this year.The reasons for saying this are that the Bank said that any futureinterest rate changes will depend on the ‘evolving outlook for growthand inflation” – So first with respect to growth- the Bank expects “adecline in real GDP (economic activity) in the March quarter GDP” -wehaven’t had a decline in GDP since the December quarter 2008! – Sono near term inflation catalyst here..In relation to inflation the Bank said that over this year inflation will be“close to target (2-3%) over the year ahead”. Accordingly there seemsto be no compelling reason for interest rates to be increased for atleast the next 6 months, barring unforeseen events.Indeed partial indicators of economic activity i.e. retail sales andbuilding approvals which were released last week point to a verysubdued economy. Seasonally adjusted retail sales fell 0.5% in March,and while building approvals increased in March they remain 18%lower than 12 months ago.Also the Australian Industry Group’s index of the manufacturing sectorshowed that despite a slight rise in April, the index remains below the50 point level - a level which separates expansion from contraction.The reason for the lack lustre manufacturing sector relates to thestrength of the Australian dollar across the transport equipment,textiles and miscellaneous sub sectors. Mining related sub sectorsLast week movements9/05/2011 % ChangeAU$ versus US$ 1.073 -2.2%ASX 200 Index 4743 -1.7%90 Day Bank Bill Rate 5.01 +2.2%Aust 10 year bond 5.45 +0.2%US 30 year bond 4.29 -2.6%Dow Jones Index 12639 -1.3%FT 100 Index 5477 -1.5%Nikkei Dow Index 9854 +0.1%Hang Seng Index 23159 -2.4%Last week top winnersTop ASX 50% ChangeTCL Transurban Group +2.6%NAB National Aust. Bank +2.6%QAN Qantas Airways +2.4%CCL Coca-Cola Amatil +2.3%TLS Telstra Corporation. +2.1%Mid-cap (50-100)% ChangeLYC Lynas Corporation +7.7%AQP Aquarius Platinum. +7.3%ILU Iluka Resources +6.5%ALL Aristocrat Leisure +3.4%RMD ResMed Inc. +2.7%Small ORDS (100-300)% ChangeHST Hastie Group Limited +21.1%MSB Mesoblast Limited +13.5%EXT Extract Resources +12.3%MNC Metminco Limited +7.6%CNP Centro Properties +7.4%Austock Group Newsletter 2

such as base metals, construction materials and machineryand equipment expanded in April.The corporate scene last week was much more upbeatthan the before mentioned economic data.For instance 3 of the 4 major banks (CBA excluded)released results during the week with each showing strongprofit growth on an underlying basis in the year to theMarch quarter. Also each bank delivered solid increases individends of between 15-20% compared to the dividendspaid in the equivalent period paid last year.Nevertheless Westpac and ANZ results were treated harshlyby the market but NAB escaped this market wrath.Trawling through the commentary for each of the banks, itwould seem that a major reason for the better performanceof the National Bank was that they were much more upbeatabout their recent results and the future, than were theother two banks, and they have increased their share of themarket as well!Specifically the NAB advised that the global economicrecovery is continuing and that the Australian economy issolid, although floods will impact near term growth.Also last week saw the interim result from Orica whichdelivered a workmanlike outcome. Excluding the DuluxGroup, after tax profit was up by 5% and Orica advisedthat this represented another good result for the companyand “its strategy of concentrating on the mining andinfrastructure markets has proved resilient”. As far as theoutlook is concerned Orica expects “profits in 2011 to behigher than 2010 on a comparable basis subject to therate of global economic recovery and the extent of futureadverse movements in the exchange rates”.Coca Cola’s annual general meeting was sober. Whilestating that their performance had been very sound, theyadvised that they may not be able to grow their earnings by10% each year as has been the case in recent years andtheir expectation is that they now are targeting a 5% netgrowth in profit for the first half of 2011.Fairfax also released their trading and strategic plan updatewhich was disappointing, with revenues currently running4.5% lower than last year, and the company advising ofsignificant staff reductions in the near future.Aristocrat Leisure also advised at their annual generalmeeting that the year ahead was challenging, but they willstrive to “ensure that Aristocrat is positioned for growthand well placed to chart a successful path through theopportunities ahead”.Finally Asciano released its March quarter operating updatewhich, not unexpectedly, advised that coal volumes inparticular were “significantly affected by adverse weatherconditions in Queensland and NSW.Looking ahead on the corporate calendar this weekwe will see Incitec Pivot’s interim results on Monday,Commonwealth Bank’s trading update, CSR’s financialyear results, and the annual general meetings for OilSearch, on Wednesday, while on Friday Boart Longyear’sannual general meeting and Paladin’s first quarter result arescheduled..On the economic front the highlight of course will be thefederal budget on Tuesday with the budget expected todeliver a large 2010-11 budget deficit of around $50 billionand hopefully much less next year. The bottom line is thatprobably little in the budget will move the economy andmarkets one way or another.Other events such as the fate of the carbon tax and theNational Broadband Network are the most significant policydecisions likely to impact the economy in the near term.Also on Tuesday we will see The National Bank’s BusinessConditions and Confidence surveys, while on Thursday thisweek the very important Labor market data will be available.Indeed the strength of the Labor market has been oneof the most puzzling features of the Australian economyover the last 18 months. For instance while the Australianeconomy remains tepid the Labor market has remainedvery strong, and this cannot only be due to the strength inthe resources sector in Western Australia!Looking overseas, in the Unites States we will seeinformation on their inflation figures with Producer PriceIndex and Consumer Price Index figures due out later in theweek together with retail sales.In conclusion the performance of the Australian market inrecent times has been a disappointment. This is despite thefact that corporate results which have been coming throughcan mostly be described as quietly impressive. Neverthelessthis has obviously not been enough to convince investorsgenerally about the value inherent in the Australian market.One possible explanation for the weakness in our marketcould be related to the strength of the Australian dollaradversely impacting profits of export oriented companies,as well as creating uncertainty about future prospects.Also and importantly we may well have seen foreigninvestors taking profits on a range of major Australian listedcompanies.- However when one area of the marketplacesells good stocks down, this simply provides opportunitiesfor astute investors!Michael Heffernan, Austock SecuritiesAustock Group Newsletter 3

Austock Global Dealing DeskAustock is able to provide clients cost effective executiononly dealing in international securities from the worlds majormarkets including London, New York, Toronto, Hong Kongand Johannesburg.The Australian stock market representsonly approximately two percent ofglobal securities traded. Furthermore, afew large stocks such as BHP Billiton,Rio, Telstra and the four major banksrepresent about 40% of the value of thestock market; and a number of excitingindustries such as technology andpharmaceutical companies are not wellrepresented in Australia.There are approximately twenty timesas many listed securities on globalstock markets as on the Australianstock market and global stock marketsare approximately sixty times larger bymarket capitalisation.CustodyAustock does not charge separatecustody fees for its counterpartycustodian service, providing corporateaction and dividend administration andtherefore, can provide this part of theoverseas transaction for free.MarketsAsia PacificKuala Lumpur Stock ExchangeNew Zealand ExchangeSingapore ExchangeStock Exchange of Hong KongTokyo Stock ExchangeUnited KingdomLondon Stock ExchangeAIMOFEXCanadaToronto ExchangeSettlementAustock provides settlement in AustralianDollars for all overseas transactions.ChargesOverseas equity transactions 1%,subject to a minimum of $95 negotiableSummary• Efficient and cost effective dealing inoverseas securities• Safe custody of all holdings• Administration of Corporate Actionsand Dividends• Settlement in Australian Dollars• Personal contact with your portfoliomanager• Exposure to growth economies andindustries not available in AustraliaEuropeDeustsche BorseEuronext AmsterdamEuronext ParisItalian ExchangeSwiss ExchangeUSAAmerican ExchangeNASDAQNew York Stock ExchangeSouth AfricaJohannesburg Stock ExchangeContactIf you would like to find out more orbecome an Austock client, please call:Nicholas Pereza-MathewsF Fin Chartered MCSI MSAA+61 3 8601 2694npmathews@austock.comNicholas has held senior positions withinthe Australian and UK financial servicesindustry, bringing to Austock Securities over20 years experience in funds management,institutional equity sales and research, 14years of which were in London working asan Analyst at Morgan Stanley, InvestmentManager with NatWest Stockbrokers andBranch Manager for Killik Stockbrokers.Having relocated to Australia in 2002,Nicholas achievements include ManagingDirector and Fund Manager of the topquartile performing Australian NaturalResources UCITS III Fund, Head ofGlobal IMA at Patersons Securities andHead of Institutional Global Equity Sales& Asset Management at DJ CarmichaelStockbrokers.Nicholas qualifications include those fromthe Chartered Institute for Securities &Investment, Securities & Investment Instituteof Australia, Financial Planning Association,Securities & Derivatives Industry Associationand Deakin University.Nicholas is a Chartered fellow memberof the Chartered Institute for Securities& Investment, a Fellow member of theFinancial Services Institute of Australasiaand a Master member of the StockbrokersAssociation of Australia Inc SDIA.Austock Group Newsletter 4

Stock selectionSlater and Gordon (SGH)RecommendationBuyRisk RatingMediumDividend5.2cpsDividend Yield 2%Current Share Price $2.4012 Month Price Target $2.90OceanaGold Corporation (OGC)RecommendationBuyRisk RatingHigh RiskDividendN/ADividend YieldN/ACurrent Share Price $2.5412 Month Price Target $4.78AnalystPaul JenszAnalystAnna KassianosAustralia’s first listed legal firm, SGH is a consumer law firmwith 75 year history. Specialising in Personal Injury ‘no win, nofee’ work, the company has a leading position in Victoria &Qld and now NSW following the Keddies acquisition. A strongproject litigation practice provides capacity to take on lucrativeclass action cases.Drivers are:1) Core Personal Injury practice (~80% of revenues) isdefensive & scalable; 2) Brand presence is strong &underpinned by established referral channels & marketing3) Growth opportunities outside of Victoria are strong & wellpositioned with existing scale and access to capital to driveconsolidationWe set our 12-month price target at $2.90/share, whichimplies an FY’12 PER of 11.0x EPS.While we are mindful SGH is trading towards the higherend of its historical PER trading range, we believe there aresustainable reasons for this, including:• The company changing acquisitions of Trilby and Keddies;• More liquidity and a larger market cap.;• Better investment community understanding of the business;and• A solid listed history of earnings delivery.Investment view. We maintain a Buy on SGH with a pricetarget of $2.90/share. Our DCF is $3.20/shareNear term catalysts to drive share performanceFurther drill results and substantial Resource/Reserve growthin 2Q/3Q expected to extend NZ operational mine plan andpotentially an expanded Didipio open pit and processingplant. With Didipio construction activities, fully funded andrecommencing mid year (with regular 6 week progressupdates), we expect this will provide a further boost.Cheapest gold on all metricsCurrent price not factoring in current operations:• 66% of NZ operations and ZERO value in for Didipio (we onlyinclude 85% of cashflows)• 40% discount to our NAV; bottom end of 0.86x P/NAV peeraverage.Current trade mis-pricing relative to peer trading:• 50% discount to peer’s Mineral Resource; bottom end ofA$124/oz EV/Resource peer average.• 36% discount to peer’s Ore Reserve; bottom end of A$241/oz EV/Reserve peer average.• 58% discount to CY11 PER; bottom end of 25x PER peeraverageOur conservatism might prove to be shortlived. At NZ$1878/oz gold price, we conservatively expect US$162m operatingcashflow generated in CY11:• In 1Q’CY11, 30% of our full year expectation was realised,we’re potentially undercooking.• Accelerated waste stripping at Macraes open pit nowcommencing in 2Q (wet weather delay), but partiallycountered by cost saving with shift to owner mining atReefton. We factor in both.• We exclude any equipment availability efficiencies, andestimate above guidance; 2Q: US$744/oz, 2H: $696/oz,assuming cost inputs & FX remain at highs.• Globe Deeps (down dip of currently mined Globe open pit atReefton) study expected during 2Q’CY11, along with a highergrade Mineral Resource, both excluded from estimates.Austock Group Newsletter 5

Austock Group Limitedwww.austock.cominfo@austock.com1800 806 362 (Toll Free)Melbourne OfficeLevel 12, 15 William StreetMelbourne VIC 3000Phone: 61 3 8601 2000Fax: 61 3 9200 2270Sydney OfficeLevel 9, 56 Pitt StreetSydney NSW 2000Phone: 61 2 9233 9600Fax: 61 2 9251 9368DisclaimerRisk RatingAustock Securities Limited has a four tierRisk Rating System consisting of: Very High,High, Medium and Low. The Risk Rating isa subjective rating based on: ManagementTrack Record, Forecasting Risk, IndustryRisk and Financial Risk including cash flowanalysis.Important NoticeThis publication contains a summary onlyof our research reports on the subjectcompanies. It has been prepared for yourconvenience only and should not be used asthe basis of an investment decision. Pleasecontact your adviser to obtain a copy of thefull research report on each company.Disclosure of Economic InterestsThe views expressed in this publicationinclude the personal views of a number ofAustock research analysts. Some analystshold securities of the subject companies orderivatives. Please refer to the full researchreports for disclosure of any economicinterests held by the author of the report.Disclaimer/DisclosureThis publication has been prepared solely forthe information of the particular person towhom it was supplied by Austock SecuritiesLimited (“Austock”) AFSL 244410. Thispublication contains general financial productadvice. In preparing the advice, Austockhas not taken into account the investmentobjectives, financial situation and particularneeds of any particular person. Beforemaking an investment decision on the basisof this advice, you need to consider, with orwithout the assistance of an adviser, whetherthe advice in this publication is appropriatein light of your particular investment needs,objectives and financial situation. Austockand its associates within the meaning of theCorporations Act may hold securities in thecompanies referred to in this publication.Austock believes that the advice andinformation herein is accurate and reliable,but no warranties of accuracy, reliabilityor completeness are given (except insofaras liability under any statute cannot beexcluded). No responsibility for any errors oromissions or any negligence is accepted byAustock or any of its directors, employeesor agents. This publication must not tobe distributed to retail investors outside ofAustralia.Disclosure of Corporate InvolvementAustock Securities Limited has not in theprevious 12 months been involved in apublicly-announced transaction involvingthe payment of a fee to Austock SecuritiesLimited by the corporate issuer describedin this report. Austock Securities doesand seeks to do business with companiescovered in its research.We value your commentsand suggestions, pleaseforward these to:newsletter@austock.comAustock Group Newsletter 6

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