Australia | Oct 13 2006
By Chris Shaw
Bank of Queensland (BOQ) may have beaten market forecasts, again, and its own earnings guidance with its profit result yesterday, but it wasn’t enough to stop brokers from downgrading ratings on the stock. Basically, little has changed since FN Arena News wrote an in-depth feature story on the regional banker in April this year: it’s all about valuation and investors tend to value their Bank of Queensland stock highly.
The company reported a profit of $82m, which was 3% better than JP Morgan had anticipated and 5% above Merrill Lynch’s estimate, resulting in the latter increasing its earnings per share estimate for FY07 to 90c from 84c previously and the former by 2.4% to an even better 93.4c.
While this is a positive it doesn’t offset the valuation concerns, JP Morgan pointing out the stock is on a forward Price/Earnings (P/E) multiple of 19x in FY07, which is not seen as justified despite the expected 10-12% growth in earnings per share.
SB Citigroup offered the same argument in downgrading its rating to Hold from Buy, suggesting even though earnings were better than expected the result doesn’t justify the current share price.
ABN Amro similarly cut its rating to Hold from Buy on valuation grounds, though it points out the ongoing rollout of Owner/Manager branch network may see earnings per share come in higher than is currently anticipated. The broker also notes the focus on delivering above system growth is likely to continue producing above average earnings growth in the future.
Both Merrill Lynch and JP Morgan place the stock at the bottom of the list in terms of the regional banks, Merrill Lynch suggesting Adelaide Bank (ADB) given it is not convinced the Owner/Manager branch strategy is viable in the longer-term, a view with potentially some substance given the recent closure of five such branches in Sydney.
On the plus side the broker notes the management team has done a decent job in addressing concerns regarding the rate of deposit growth and the bank’s capital position, meaning its overall financial condition is stronger.
Following the result the FN Arena database shows the stock as receiving eight Hold ratings and two Sell recommendations, with an average share price target of $15.74, up from $15.13 prior to the profit result. Thomson One Analytics shows a median price target of $15.00.
This highlights the valuation issue, as despite trading down 15c in the first 45 minutes of trading today the bank’s share price of $16.20 remains well above broker targets and valuations.