Australia | Sep 12 2007
By Chris Shaw
While the spread of the sub-prime crisis in US housing to global credit markets resulted in sharp falls in equity prices in late July and early August the Australian market has been one of the best in terms of recovering the losses of that period.
Not so good in recovering the losses have been the financial engineering stocks such as Macquarie bank (MBL), Babcock & Brown (BNB) and Allco Finance Group (AFG), Intersuisse noting the latter has been by far the worst performer of the three in recent months.
The broker points out since the middle of March this year the stock has lost 28.9%, which is more than double the share price falls in both Macquarie (down 12.7%) and Babcock & Brown (down 11.7%).
One factor that may have contributed to the price fall in the broker’s view was the failure of the private equity takeover of Qantas (QAN), as Allco stood to be a beneficiary if the deal had proceeded.
Intersuisse also suggests the market may have been disappointed with management’s guidance of 20% annual profit growth from its equipment leasing, securitisation and funds management operations over the next three to five years, with some investors believed to have been looking for more optimistic numbers.
In addition, the broker was among many in the market to have a questionable view of the company’s floating of a number of offshoots such as Allco Max (AXQ), Allco Equity Partners (AEP) and Allco HIT (AHI) before it had established a solid track record of performance.
None of these factors take away from the value on offer at current levels in the broker’s view, as earnings for FY07 were strong, funds under management growth has also been strong and the company has no direct impact from the sub-prime issues in the US.
Taking a conservative approach the broker has cut its earnings forecasts in both FY08 and FY09 by 10% to factor in a worst-case outcome given current market volatility, meaning it now expects profit to grow from FY07’s $201.3m to $210.2m in FY08 and $248m in FY09.
In earnings per share (EPS) terms this equates to outcomes of 60.6c and 71.4c respectively, meaning the stock is on forward P/E (price to earnings) ratios of 13x and 11x times respectively. Add in a forecast fully franked yield of 5.6% this year and 6% in FY09 and it is no secret why Intersuisse now rates the stock Strong Buy.
The FNArena database shows the broker is not alone in recommending the stock as it is currently rated as Buy five times and Hold once, two of the Buy ratings being upgrades following the company’s profit result last month.
The average price target in the database is $12.84 and the median price target according to Thomson One Analytics is $12.43, which implies significant upside potential given the share price closed at less than $8.00 yesterday. The stock has done little today and as at 2.30pm was trading 1c lower at $7.86.