Brokers See Earnings Risk Increasing For ASX

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This story features ASX LIMITED.
For more info SHARE ANALYSIS: ASX
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

With volatility an increasing factor in equity markets of late it would suggest good conditions for the Australian Stock Exchange ((ASX)) as the group clips the ticket on trades going through the market while also benefiting from extra revenues as more companies join the bourse.

But despite reporting strong trading volumes for January the picture is not quite so clear cut according to analysts in the marketplace, as leading into the group’s half-year profit result next week there remains a divergence of opinion as to the stock’s prospects.

Credit Suisse takes the view while market volatility is good for volumes in the short-term if it continues in coming months and leads to sustained weakness in equities the company would face increased earnings headwinds, especially given the change in its pricing mechanism last year that placed more emphasis on equity values rather than volumes.

The broker also suggests growth in new listings would slow if equity prices struggled for any length of time, so given the shares are trading on 21x forward earnings and are at a 63% premium to the market the broker rates the stock as Underperform, notwithstanding it expects a result next week in line with (buoyant) consensus forecasts.

Deutsche Bank is forecasting a half-year profit result of $188.4 million, seeing a strong result as likely given the strong trading volumes in January and recent months. The broker agrees with Credit Suisse that the shares don’t offer compelling value at current levels, particularly as the earnings risk in the medium-term now appears to be to the downside; the falling market capitalisation means growth in equity market turnover should slow.

While retaining its Hold rating leading into the earnings report Deutsche has acknowledged the increased earnings risk by dropping its price target to $50.00 from $60.00. Macquarie is now the high marker in terms of price targets at $62.21, so it is little surprise the broker rates the stock as Outperform.

Macquarie suggests its confidence is justified as while the Australian equity market lost around 8% in value last month the traded value of equities rose 30% and this is what the new pricing regime is based on.

As a result the broker sees little threat to earnings and suggests instead there is value in the stock at current levels, particularly given the group’s lowly geared balance sheet. Its forecasts call for earnings per share (EPS) this year of 223.5c and in FY09 of 246.1c, which is a little above Credit Suisse’s numbers of 214.8c and 242.1c respectively, while Deutsche is forecasting EPS of 220c this year and 238c in FY09.

Following the trading update for January there have been no changes to ratings in the FNArena database, meaning the stock scores two Buys, one Accumulate and one Sell compared to six Holds. The average price target is $54.97, down from $56.24 prior to the update.

Shares in ASX today are weaker in line with the broader market and as at 1.30pm were down almost 5% or $2.47 at $47.03.

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