Australia | Oct 07 2009
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
As the global economic recovery supports sharemarket activity around the world, the Australian Securities Exchange ((ASX)) has been a beneficiary, September data showing average daily cash market volumes rose by 12.4% compared to the previous corresponding period while total futures and options turnover was also higher than in August.
Another potential kicker for earnings, according to RBS Australia, is from a pick-up in initial public offerings (IPO) such as the Myer float, as there are signs activity on this side of the market is beginning to increase. As the broker notes, while there were only six new listings in September they raised a total of $1.9 billion, the highest for a month since December of 2007.
Not all the news was good as JP Morgan notes average daily cash market value, which is the main driver of the company’s cash market trading revenue, was down 2.7% on the previous corresponding period, while year to date average daily value traded is down 3.9% from FY09.
Despite this the broker saw enough in the September numbers to lift its forecasts slightly, bumping up its earnings per share (EPS) estimates by 2.2% this year, 3.5% in FY11 and 3.6% in FY12 to 190.4c, 206.7c and 229.4 respectively. This leaves the broker looking conservative compared to RBS Australia, the broker forecasting EPS of 193.3c, 219.3c and 242.9c respectively.
RBS Australia suggests there remains upside earnings risk not only from a revival in IPO activity but from the potential for an increase to the rebate threshold from FY11, a view shared by Bank of America Merrill Lynch. It suggests the stock’s recent underperformance has been because it currently has low earnings leverage to rising markets, but it expects a faster replenishment of rebate pools in FY10 should address this situation somewhat and so deliver solid earnings growth in FY11.
The broker is forecasting EPS of 189c in FY10, 219c in FY11 and 242c in FY12, while consensus forecasts according to the FNArena database stand at 187.5c in FY10 and 211.6c in FY11. There is scope for these consensus numbers to change in coming days as not all brokers have yet updated for the company’s September trading data.
The recent underperformance of the shares has created some value and Merrill Lynch retains its Buy rating on the back of the September trading data, noting the stock is currently trading on an earnings multiple of around 15.3 times for FY11, which is a 40% discount to its historical average.
Even allowing for the threat of increased competition, such a discount is not justified in the broker’s view and given it expects investors to increasingly turn their attention to FY11 in coming months it sees potential for outperformance in the stock. Given its view there is possible earnings upside ahead RBS also rates the stock as a Buy.
JP Morgan is less bullish though and retains its Neutral rating, this despite the shares trading at a discount to its valuation of $38.71. The reason is it cannot see a catalyst to drive the share price higher in the near-term as FY10 won’t see significant earnings growth and increasing capital intensity means a cut in dividends remains a possibility.
As well the broker suggests the fact competition is creating some negative sentiment for the stock is an issue, as is uncertainty with respect to the cost structure of the business now the market supervision role has been transfered to the Australian Securities Investments Commission (ASIC).
The FNArena database shows two Buy ratings on the stock along with one Accumulate and seven Holds, while the average price target is $38.61, up from $37.82. Shares in ASX today are stronger and as 1.10pm the stock was up 60c at $34.00, which compares to a range of $23.52 to $37.90 over the past 12 months.
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