Newsletter - Austock Group

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Newsletter - Austock Group

While the profit result was in line with guidance, investorsattention was very much focused on the attractivedividend yield which, on an annual basis, is equivalentto a fully franked yield of around 6.6% (roughly similar tothat provided by Myer in its recent report). However, andas expected, David Jones commented that the outlookremained uncertain. Finally, and subject to no furtherdeterioration in consumer sentiments and no furtheradverse change in the macro economic environment, itreaffirmed its 5-10% profit growth guidance for the currentand the next financial year.Clearly, the retail sector will be underpinned if interest ratesremain on hold for the better part of this year and not raisedagain until the Australian economy shows clear and decisivesigns of stronger economic growth – and that’s not likelyuntil the second half of this year.Another major event on the corporate calendar last weekwas the Australian Education Trust, - a property trustspecialising in childcare properties and educational realestate assets in Australia and New Zealand - announcinga fully underwritten capital raising by way of a 3 for 10non renounceable entitlement offer at an offer price of 75cper unit. This capital raising seeks to raise approximately$30 million, - the purpose of which is to repay debt - anoutcome that is expected to add further stability to the fund.The Australian airline sector continues to remain underpressure, as evidenced by Virgin Blue advising that it hasagain downgraded its full year profits, due in no small partto global fuel prices currently being at the highest level since2008. Moreover, Virgin added that in the last six weeks theoil price has risen even further, adding an extra $50 millionto the company’s fuel costs for the second half of thefinancial year.As far as the outlook is concerned Virgin Blue reiteratedthat the second half of the current financial year continuesto be “challenging”. In a similar vein and in response tohigh oil and fuel prices, Qantas announced it would againincrease domestic and regional airfares. It added that thesituation today was very different to the last fuel crisis, whenthe economy was strong, while today the world is emergingfrom the crisis and demand is still only recovering.On a brighter note a smaller company in the mining servicesarea, NRW Holdings Limited, announced that the companyhas been awarded a “Car Dumper and Bulk Earthworkscontract” by Rio Tinto for the Cape Lambert Port B Projectwhich has a value of approximately $101 million. Theannouncement of this contract win saw an immediate spikein the share price of this stock from $2.55 to a high duringthe week of $2.88.Looking ahead on the corporate front we will see Nufarm’sinterim result on Monday, while on the economic frontwe have job vacancies on Wednesday, building approvalfigures on Thursday and the Australian Industries GroupManufacturing Performance index on Friday.Figures on building approvals will be watched carefully tosee if the continuing easing trend in building approvals hascontinued in the month of February.In the United States there is, as usual, a large range ofimportant economic data scheduled for release, whichincludes figures on pending home sales on Tuesday, whichare expected to show that the US housing market remainssoft, on Wednesday Consumer Confidence figures, onThursday initial jobless figures, on Friday factory orders,average weekly earnings and the unemployment rate,while on Saturday morning our time, the Institute of SupplyManagements Manufacturing index together with motorvehicle sales are scheduled for release. As has beencommented in this review in previous weeks, the Americaneconomy continues to make small steps on its path tosustained recovery.In conclusion, the market was in a more relaxed frame ofmind last week and has enabled investors to get back tolooking more at the fundamentals of listed companies ratherthan worrying about external and unpredictable, mainlyinternational events. When objective judgments are madeabout the state of the Australian market, one is compellinglyled to the conclusion that there is a range of major stockson our market which are severely under valued. A statisticalepilogue to this conclusion is that currently our market is40% below its high point in November 2007 - put anotherway, our overall market can increase by over 50% before itreaches the level that it obtained almost 3 ½ years ago!Michael Heffernan, Austock SecuritiesAustock Group Newsletter 3


Stock selectionAusenco (AAX)RecommendationSELLRisk RatingHighDividend $0.10Dividend Yield 3%Current Share Price $3.5012 Month Price Target $3.00Newcrest Mining (NCM)RecommendationBUYRisk RatingMediumDividend31cpsDividend Yield 0.8%Current Share Price $38.7612 Month Price Target $61.01AnalystCraig StrangerAnalystAnna KassianosAusenco (AAX) is a high leveraged play on new mine builds.In theory the Company is very well positioned, but theirwin rate has dropped it appears and delays continue onawarding of new work.Valuations +$4/share require 20% sales growth for thenext few years …possible, but not probable in our view. Itis dangerous looking at peak earnings because they wereinflated by the lucrative Equinox Lumwana new mine build.The CY’10 result didn’t add a lot to the case. We expectmarket to trim forecasts again. CY’11F forecasts wereEBITDA of $45m-$60m. We stay at $40m & around 20x’sEPS.Whilst near term earnings aren’t the driver for engineersright now - we need contract wins to be more comfortableinvesting.Investment View – Sell, 12 month price target $3.00/share.The stock has been an underperformer versus the SmallIndustrials for some time and would prefer Mining Servicescompanies that we can forecast with conviction (at largerend BLY, MIN, MND (not covered) and smaller MCE, RCR)DPS consistency could widen investor base• DPS will continue to be assessed on regular half year basis,dependent on the capital commitments for years ahead, butno formal payout set.• We see potential for board to lock in 40 – 50% EPS payoutrange, once capital commitments reduce.• For DPS certainty and consistency, we’d expect investorbase to include those seeking yield and not just index andgrowth players.Secondary listing could raise NCM’s profile• NCM guided potential for secondary listing to raise its profile,we expect most likely TSX.• If secondary listing receives green light, we see our 12 monthPT as conservatively priced at 1.28x NAV (vs. Nth Americansenior global golds who historically trade at 1.5 to 2.5x NAVpremium).We continue to see value being unlocked…1. Out of “old LGL” operations, and also those we see as noncorein the NCM fold, and2. Golpu underground evolving similar to Cadia East for scale,long mine life and low cost block caving underground miningmethod.• We conservatively value NCM’s 50% share in Wafi open pitand Golpu underground on EV/Resource at $3bn (more than50% less than Cadia East NAV).Lower end guidance is achievable• We see its all about 4Q for meeting 750koz/quarterdrumbeat, with 3Q around 700koz.• We expect 2.87Moz (Guidance: 2.85 to 2.95Moz) goldproduced for FY11, but 2.7Moz @ A$452/oz cash costbooked to profits for completion timing of LGL merger.• We maintain our Buy recommendation and price our 12month PT of $61.01/share at 1.28x NAV.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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