Australia | Aug 15 2006
By Chris Shaw
Bendigo Bank (BEN) is in the unique situation of falling short of consensus earnings forecasts yet finding its share price moving higher in subsequent trading, as at 11.15am the stock was trading 15c higher at $12.95 after yesterday reporting a profit of $100.8m.
This raises the question as to who is actually buying the stock, as the FN Arena database shows it is the lowest rated bank in the sector, with a sentiment indicator of minus 0.2. This compares to Westpac (WBC) at 0.3, National Australia Bank (NAB), St George Bank (SGB) and ANZ Banking Group (ANZ) at 0.2, and regional competitor Adelaide Bank (ADB) at 0.1.
Bank of Queensland (BOQ) has a reading of 0.0 on the Sentiment Indicator.
The database shows Bendigo Bank is rated as Buy by only one broker, Merrill Lynch, who remains positive on the longer-term potential of the bank’s Community Banking model. It suggests the strategy is likely to deliver better than industry average earnings growth in the future.
Short-term the broker acknowledges the earnings outlook is not as buoyant given the combination of higher costs and lower volume growth, which has led the broker to trim its earnings per share growth in coming years by 3-4%. As a result it is forecasting earnings of 82c in FY07, 90c in FY08 and 98c in FY09, which compares to the median estimates according to Thomson One Analytics of 81c, 88c and 95c.
It is the expectation of higher costs that has other brokers questioning management’s guidance of 10% earnings per share growth in FY07 though, UBS suggesting such an outcome will be difficult given costs are tipped to increase by as much as 10% in the coming year. Making it more difficult will be disappointing volume growth, leading the broker to suggest the company will need to create a more performance-based culture to arrest its falling market share in the business and mortgage sectors of the market.
Following the result the broker has cut its earnings estimates in FY07 to 79c from 83c and in FY08 to 88c from 92c, supporting its decision to cut its price target to $13.50 from $14.00. There is no change to its Neutral 1 rating.
Deutsche Bank also questions the company’s lower growth, noting it reflects a willingness to lose market share as the focus remains on profitable growth. In the broker’s view this below system volume growth is not a problem shorter-term, but may develop into a longer-term problem given the potential negative impact on earnings.
Additionally, it points out the bank has been growing its share of the consumer lending market, but questions whether such a move is appropriate given the rising interest rate environment. UBS agrees, noting the bank has experienced an increase in past 90 days due loans, which is a concern.
The broker also suggests the current share price already implies strong earnings growth, as its price to earnings multiple is in excess of 15 times based on its FY07 earnings forecasts. But as the profit result implied, below system volume growth makes achieving strong earnings growth more difficult, leading the broker to imply there is some downside valuation risk.
It is a view shared by SB Citigroup, who while upgrading its rating to Hold from Sell to reflect recent share price weakness, agrees there is an apparent mismatch between the stock’s current high multiple and the shorter-term outlook of profit growth in line with that of its peers.
Of longer-term concern to the broker is the fact others are now copying the bank’s strategy of providing local market retail operations via the Community Banking rollout, meaning some of the advantages of being the first-mover in this market are now being eroded, so earnings growth in the medium-term may be constrained.
The FN Arena database shows an average price target on the stock of $12.92, while the median price target according to Thomson One is $13.00.