Treasure Chest: Post Season Conviction Call Changes

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By Greg Peel

Stock analysts were under no illusion this was going to be a bumper six-monthly corporate earnings result season, but BA-Merrill Lynch notes large caps did not even manage to clear the low hurdles set. Small caps provided much better performances, particularly in mining services and consumer discretionary. In the case of the former, one might suggest, analysts were caught out by the strength of margin gains despite having a positive view, while in the latter case, a pervading negative view was found not to be appropriate in all cases.

The best results for the season, Merrills suggests, were posted by Super Retail ((SUL)), Webjet ((WEB)) and Automotive Holdings ((AHE)) in the consumer space, Beach Energy ((BPT)), Horizon Oil ((HZN)) and ROC Oil ((ROC)) in energy, and Cochlear ((COH)) and ResMed ((RMD)) in healthcare.

The worst results came from telco Telstra ((TLS)), utility Infigen ((IFN)), and Atlas Iron ((AGO)), PanAust ((PNA)), BlueScope ((BSL)) and Mt Gibson Iron ((MGX)) in materials.

Cost management was very much in focus with margin pressure a prominent theme, Merrills notes. The analysts suggest forecasts remain too optimistic, particularly outside of materials and financials, and that consensus margin forecasts for Cochlear, Myer ((MYR)), Woolworths ((WOW)) and Metcash ((MTS)) are too high.

Capital management news was also mostly missing, much to the disappointment of investors, with Westfield ((WDC)) and Telecom NZ ((TEL)) the only companies to announce new buybacks. Companies falling well short of dividend expectations included Goodman Fielder ((GFF)), Atlas Iron and James Hardie ((JHX)).

The current consensus forecast for ASX 200 earnings growth for FY12 stands at 2% but Merrills sees a downside risk if expectations of a stronger second half are not met. Sales pick-up expectations in the second half seem too high for OneSteel ((OST)), Brambles ((BXB)), Mermaid Marine ((MRM)) and Seek ((SEK)), the analysts suggest. But at 14% growth, it is the current forecast for FY13 growth which offers the most downside risk, Merrills believes. The analysts estimate the market PE to currently be around 12.5x, and fair value.

Merrills has made some changes to its Small Caps Conviction List post season. Out go Flight Centre ((FLT)) and Ausdrill ((ASL)) on now overblown valuation, and SAI Global ((SAI)) on a lacklustre first half. In go Super Retail and Sedgman ((SDM)), while Wotif ((WTF)) enters as an Underperform conviction (all others are Buys).

Remaining in the list are McMillan Shakespeare ((MMS)), Bradken ((BKN)), Fletcher Building ((FBU)), Saracen Minerals ((SAR)), Telecom NZ, and Sky City Entertainment ((SKC)). Micro-cap convictions are represented by Technology One ((TNE)) and Mastermyne ((MYE)).

Macquarie has similarly been re-addressing its high conviction call list with regard to all the stocks under coverage (~300), which it calls Marquee Ideas.

In goes AGL Energy ((AGK)), which the analysts like on a low PE as well as seeing synergies offered by the proposed Loy Yang A full acquisition, CSL ((CSL)) due to clear market share gains in plasma, CFS Retail ((CFX)) on a geographically high quality retail portfolio and solid yield, and Virgin Australia ((VAH)) on expected continuing momentum.

Out go Woodside ((WPL)), Tap Oil ((TAP)), Amcor ((AMC)), GPT Group ((GPT)) and Telecom NZ.

Looking at emerging leaders, Macquarie has identified five of its key picks post reporting season. They are Breville Group ((BRG)) based on the medium term potential of international sales growth, Clough ((CLO)) on the strong oil and gas services outlook, RCR Tomlinson ((RCR)) on IT growth potential from the key resources, petroleum and power markets, SAI Global ((SAI)) on a contrary basis following a soft result and a suggestion organic growth potential is not factored in, and Skilled Group ((SKE)) on cost reductions tracking ahead of schedule.

UBS has also reassessed its Model Portfolio post season. 

The strategists have decided to trim the mining sector weightings from Overweight to Neutral. Although fears of a hard landing in China have now largely eased, a certain soggy outlook for steel production and thus iron ore demand remains. Moreover, global equities altogether look a bit overbought, UBS suggests (writing before last night's Wall Street correction).

UBS expects defensive stocks to continue to underperform, although subdued global growth should lead investors to consider higher quality names despite reduced risk aversion in 2012.

UBS has been riding the resource services wave although accelerated performance has prompted the strategists to reassess specific stock names, particularly the “pure-plays”. As many of these names have taken off lately, larger caps with non-exclusive services and capex components have been left behind and should now be worth a look.

As far as the UBS Model Portfolio is concerned, in goes Crown ((CWN)), Leighton Holdings ((LEI)), Nufarm ((NUF)) and ResMed. Out goes AMP ((AMP)), Bradken, JB Hi-Fi ((JBH)), Orica ((ORI)) and Sydney Airport ((SYD)).

Deutsche Bank is not necessarily in agreement with UBS when it comes to those pure play resource service names. The analysts continue to see upside for certain stocks as conditions improve in the next 12-24 months. Deutsche prefers Ausenco ((AAX)), Ausdrill, Bradken and NRW Holdings ((NWH)).

Deutsche's top cyclical picks are Ardent Leisure ((AAD)), Adelaide Brighton ((ABC)), Flight Centre, GWA Group ((GWA)), Prime Television ((PRT)), Skilled Group and Transpacific Industries ((TPI)). The analysts like IOOF Holdings ((IFL)) for financial market leverage and SAI Global as a defensive.

Companies for which Deutsche has a longer term Buy rating but foresee near term headwinds are Programmed Maintenance ((PRG)) and Premier Investments ((PMV)). Carsales.com ((CRZ)) is looking interesting but is not quite a Buy at this point, while Deutsche is cautious on Iress ((IRE)), Navitas ((NVT)), Salmat ((SLM)) and Wotif.
 

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