Macquarie’s Conviction And More FY11 Previews

This story features RIO TINTO LIMITED, and other companies. For more info SHARE ANALYSIS: RIO

By Greg Peel

Macquarie is pleased with its more recent conviction calls. (Just to recap, a broker's conviction call means rather than just Buy, for example, a rating is really Buy With Ears Pinned Back).

Rio Tinto ((RIO)) went on the list in April at Outperform and has now outperformed the market by 2%. Westpac ((WBC)) went on last month and has provided 3% outperformance.

The broker has now added Stockland ((SGP)) as an Underperform with conviction. The stock is trading 3% above the broker's target price but the company's residential communities business is under pressure from slowing housing finance demand, slowing building approvals, slowing auction clearance rates, and lower house prices. The situation is worst in Victoria where the broker expects an outright house price correction in Melbourne later in the year as housing affordability plummets and immigration drops. Stockland is 25% exposed to Victoria by number of lots in its pipeline.

Macquarie also has Brambles ((BXB)) on the Underperform list, becoming more convinced after the analyst spoke to manufacturers, competitors and customers of CHEP in Europe and the US.

The ASX ((ASX)) is also on the Underperform list while the Outperform conviction list features Boart Longyear ((BLY)), News Corp ((NWS)), and Rio. Westpac and Commonwealth Bank ((CBA)) are also there on Outperform as a switch play out of ANZ ((ANZ)) which the broker has at Neutral.

Looking at the engineering and construction contractor sector, Macquarie expects flat FY10 results but 10% sector growth in FY11 given stronger revenues from increased order books, as well as slight improvement in margins. Some 70-75% of FY11 orders have already been secured, which is to the high end of the historical scale.

The replacement of the RSPT with the MRRT has Rio and BHP Billiton ((BHP)) off and running again, and the contractor sector stands to benefit from planned Pilbara expansions.

Macquarie has United Group ((UGL)) and Leighton Holdings ((LEI)) as preferred on Outperform, while Downer EDI ((DOW)), Transfield ((TSE)) and WorleyParsons ((WOR)) score Neutrals.

RBS Australia also expects flat FY10 results and few surprises in the transport sector, given softer trading conditions and profit downgrades to date.

The broker expects FY11 outlooks to be positive but cautious, given airfreight volumes are growing, business air travel is recovering, container volumes at ports are back to 2008 levels and coal demand remains strong, plus the global economy is growing again.

Qantas ((QAN)) and Asciano ((AIO)) are the broker's top picks in the sector with Toll Holdings ((TOL)) also on Buy. Brambles and Virgin Blue ((VBA)) score Hold ratings.

Morgan Stanley is more circumspect on transport, suggesting cheap valuations are balanced by most industrial companies holding back until there are signs of a sustained recovery.

MS agrees on Qantas however, and has it at Overweight. Thereafter Asciano and Toll only score Equal-weights along with Brambles and Virgin.

Citi has noted the new UK government has produced a white paper which outlines its five-year plan for reform of the National Health Service.

Key to the plan is an element of “patient choice”, based on surveys which suggest most Poms blindly accept a GP's recommended medical service provider without realising the GP can offer options. The government wants to specifically educate that choice is up to the patient.

This could be a positive for Ramsay Health Care's ((RHS)) hospital volumes, Citi suggests, and for Sonic Healthcare's ((SHL)) diagnostic services. But there are a couple of caveats.

One is that pathology reform has been on the agenda since 2002, and Sonic is still waiting, and the other is that the government also wants to change its tariff payment system to reward “excellent care” rather than just using an average price. This might impact on Ramsay – not because it offers poor care but because who on earth is going to be the arbiter?

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