Australia | Jul 10 2006
By Greg Peel
Current broker consensus is that the Australian stock market will push forward from here but won’t be quite as spectacular as last year. This would tend to suggest less spectacular volumes on the Australian Stock Exchange (ASX). However, M&A activity is rampant which is a plus, and interest rate and derivative activity usually chimes in when things aren’t quite so buoyant, which is also a plus now the Sydney Futures Exchange (SFE) is on board.
So how will the new ASX/SFE fair?
FN Arena’s brokers are split 5/1/3 on the Buy/Hold/Sell stakes. But then we haven’t heard a peep out of ABN Amro (Sell), UBS (Reduce), GSJB Were (Marketperform), or Deutsche Bank (Hold) since the ratification of the merger.
Macquarie has been quiet as well, although the analysts did suggest earnings upgrades would follow the merger when it happened and have held an Outperform rating. Aspect Huntley also upgraded to Accumulate last month.
Of the remainder, Merrill Lynch and SB Citigroup are maintaining Buy recommendations following the merger being cemented. While Citi doesn’t have much to say, Merrills points out that the dividend announcement, a requisite of the merger agreement, was positive with 62.7c being above consensus. This implies that FY06 profit will be slightly better as well, the analysts suggest.
The focus will be, says Merrills, on how much of this positive profit result is due to cost reduction, as clearly strong trading volumes are a given and well priced in. This focus will carry forward as the market assesses integration success.
JP Morgan appears to be most bullish of the group, upgrading from Neutral to Overweight following a review of the merged entity’s potential. Morgans has long been a fan of the SFE, the analysts having stuck their necks out up to two years ago suggesting volume growth would be in the order of 20%. Their colleagues laughed this off for a while, until slowly but surely falling into line with successive volume assumption increases.
Morgans likes the ongoing earnings prospects of both businesses as stand-alones, so it has bumped merged earnings up by 2%, 10% and 14% in FY06-08. Why does the stock appeal so much? Because it is "a monopoly business with significant pricing power, high fixed cost leverage, a more diversified revenue base, and minimal capital/capex requirements".
In setting a price target of $38.00, Morgans adds that its trading volume assumptions are conservative and its cost assumptions possibly overstated.
Credit Suisse would like to let the air out of Morgans’ balloon. The analysts cite the old chestnut of integration execution risk and synergy concerns ahead of the bottom-line benefits being achieved not until FY08. In the meantime, CS points out that ASX is overpriced at 24x and now has debt on its balance sheet. CS is the stick in the mud with an Underperform rating.
The average target now stands at $33.03 with the outliers being Morgans at $38.00 and CS at $28.00. The stock closed yesterday at $33.95. We may yet see some shift in opinion if the missing brokers care to weigh into the argument.