FYI | May 26 2006
By Greg Peel
Tower (TWR) management said NZ$28-32m, market consensus was NZ$28-31.5m, but the first half result came in at NZ$32.5m and everyone got a shock. The next step was a spate of earnings forecast and target price increases, but despite the catch-up not every broker is convinced of ongoing success.
The big news was Tower’s increase in operating margins which were up 40% on the pcp and ahead of forecasts. Growth in Australia was healthy, and an ailing NZ market appears to have turned a corner. The biggest stumbling block for Tower has been its acquisition of PrefSure in NZ, which was quickly shot down by the loss of the substantial Colonial mandate.
However, Citigroup suggests the subsequent performance of PrefSure indicates the acquisition was cheap even considering the Colonial loss, and the analysts are confident management’s 15% return on equity target for FY06 can be reached. Citi has increased its target by 18% from NZ$2.85 to NZ$3.35.
While sounding the most optimistic in its report, Citi is not convinced a 15% ROE is enough for all investors to be excited about, and has retained its Hold recommendation. This is not the case for Credit Suisse, the analysts deciding to upgrade to Outperform.
CS also views 15% as achievable, and sees upside as long as revenue momentum is maintained and cost reductions and synergies continue. CS has hiked its target 25% from NZ$3.00 to NZ$3.75.
Not convinced is ABN Amro. The analysts have shifted their target a mere 3.6% to NZ$2.90 and cite concerns that PrefSure will suffer negative growth after the loss of Colonial and that new business levels remain lacklustre. Cost reductions have played a part in growth and these may not be sustainable, says ABN. Hold retained.
Also retaining Neutral is Macquarie, on the basis that the stock price is still above its now revised target price. At NZ$2.33, Macquarie’s target implies a lack of excitement by comparison to other brokers.
Tower closed yesterday at NZ$2.55.