Currency Impacts On Aussie Stocks

This story features INCITEC PIVOT LIMITED, and other companies. For more info SHARE ANALYSIS: IPL

By Chris Shaw

Given the recent weakness in the Australian dollar, Credit Suisse has taken time to examine what impact the falling currency would have on earnings across its basic materials coverage universe. The broker's review takes into account the moves in the dollar against both the US dollar and the euro.

On balance, Credit Suisse has found a falling Aussie dollar against the greenback is a positive for companies in the sector, with Paperlinx ((PPX)) and Incitec Pivot ((IPL)) being the key beneficiaries. The low earnings base for the former means a 5c move in the Aussie dollar against its US counterpart equates to an almost 18% boost to earnings.

For Incitec Pivot the benefits are both translational and transactional, Credit Suisse estimating a 5c move down in the dollar would add between 7-9% in net earnings benefit. CSR ((CSR)) also benefits form a weaker Australian dollar, the broker estimating a 5c fall in the AUD/USD rate would add around 6-7% to group earnings in FY11. The level of hedging applied by CSR would have an impact on the exact magnitude of any benefit in the broker's view nevertheless.

In contrast, Boral ((BLD)) is negatively impacted from an earnings perspective, Credit Suisse noting it suffers from a translation of US dollar operating losses. This would be boosted by higher debt levels, so it estimates net profit would be cut by 3-4% for each 5c fall in the Aussie dollar against the US dollar.

There would also be some positive valuation impacts from a weaker Australian dollar against the US dollar, Credit Suisse pointing out those companies in the sector operating in US dollar terms would benefit from currency translation.

The major beneficiaries in this regard are Boart Longyear ((BLY)) and James Hardie ((JHX)), though the broker notes the valuation impact would be somewhat offset by a corresponding decline in US dollar earnings from Australian operations.

For the Australian dollar against the euro, the primary beneficiary of a weaker Aussie currency is Amcor ((AMC)), Credit Suisse estimating every 5c decline in the dollar adds about 4-5% to net profit from a translation impact, with a 1% offsetting impact from higher net interest costs.

Paperlinx again has significant earnings leverage to a falling AU/EUR rate as Credit Suisse estimates each 5% move adds 20-25% to earnings. As with the moves against the US dollar the broker notes the earnings impact comes from a much lower base.

Orica ((ORI)) also gains from Aussie dollar weakness generally, Credit Suisse estimating a 5% depreciation of the currency against all other currencies would increase earnings by around $25 million in net profit after tax terms.

In the basic industries sector Credit Suisse rates CSR, Fletcher Building ((FBU)), Amcor, Incitec Pivot, Orica, Downer EDI ((DOW)) and United Group ((UGL)) as Outperform, while Boral, James Hardie, Leighton Holdings ((LEI)) and WorleyParsons ((WOR)) are all rated as Neutral. 

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