Weekly Broker Wrap: Not So Bad And Not So Wet

This story features NATIONAL AUSTRALIA BANK LIMITED, and other companies. For more info SHARE ANALYSIS: NAB

By Andrew Nelson

Aside from covering the run of interim earnings reports last week, stockbrokers took their turns addressing a number of sectors to discuss impacts ranging from wet weather to RBA policy. Earnings forecasts and stock strategies also featured, plus we’ll also look at a rundown of fund managers and the latest on print to web migration plans.

Last week Bank of America-Merrill Lynch came up with a new one, introducing the first issue of its new series of Fund Manager surveys. With this new service, the broker aims to get an idea as to Australian fund manager perceptions and positions on a quarterly basis.

The inaugural results show local investors are more overweight insurers than banks, although the gap isn’t that big between the two. Amongst the big financials, National Australia Bank ((NAB)) was best liked by those surveyed, with 31% saying it comprised the biggest chunk of their portfolio. Next was QBE ((QBE)) at 18%, while Commonwealth Bank ((CBA)) was the largest underweight stock followed by Macquarie ((MQG)).

Where investors saw the best potential for upside surprise was quite similar to their preferred holdings. QBE topped the list, with 36% of respondents expecting some sort of good news. CBA, with 25% of respondents led the list of likely downside surprisers, although Suncorp ((SUN)) came in second on this list with 18% expecting bad news. Those surveyed also believed that the market in general was being a little too optimistic about the prospects of Macquarie and weren’t paying enough attention to Westpac ((WBC)). Note all this was before some of the banks, including Westpac, released interim market updates.

60% of those surveyed thought that insurance sector  EPS growth estimates will be lifted by somewhere between 1%-10% in the next 6 months, while 43% were expecting EPS forecasts for the banks to fall the same amount. About 36% expected no material changes to forecasts.

Margin contraction was identified as the largest threat to bank earnings, with slowing credit growth coming in second. Low interest rates and the premium rate cycle were seen as the biggest threats to insurers. Most believed bank and insurer capital positions were sufficient and that dividends would remain sustainable across both sectors.

As you’ll recall, the RBA cut its cash rate by 50pbs last week, with the reduction coming in bigger than most in the market were expecting. The analyst team from JP Morgan pointed out that general insurers are going to be impacted by the rate cut, with IAG ((IAG)) the most likely to take the biggest hit.

The broker points out that where IAG will feel the pinch is on new business and on shareholder funds. On the broker’s numbers, a 50bp reduction in yields on assets held would hit FY13 insurance profits by $36m pre tax, or 3.2% of the company’s pre tax earnings. Suncorp also feature’s in JP Morgan’s assessment for the same reasons, with the broke estimating the same size reduction in yields will hit group pre tax earnings by 2.9%, while QBE would lose 1.5% on the same measures.

There was some good news from Citi, whose analysts are predicting FY12 earnings downgrades for Australian companies will be lower than what’s been seen in recent years. As we’ve tended to see this time of year over the last few years, quarterly production reports, retailer sales and funds under management numbers from fund managers start guiding for lower FY earnings. Last week was no different.

Citi notes that earnings have also been hit by wet weather and subdued macro conditions outside of the resources sector, but other trends have been favorable. The broker cites factors like improved financial markets and what has been a more stable Australian dollar. If you follow Citi, expect downward FY earnings revisions of about 5%. Stocks considered at risk of larger downgrades by Citi include: Incitec Pivot ((IPL)), Fairfax ((FXJ)), Aristocrat ((ALL)), Sigma Pharmaceutical ((SIP)), Lend Lease ((LLC)), CSR ((CSR)), Downer EDI ((DOW)), Crown ((CWN)), Orica ((ORI)), Harvey Norman ((HVN)), Billabong ((BBG)), and Cochlear ((COH)).

For FY13, the broker is penciling in growth of 5-10%, predicting that some of the current negative influences, like wet weather could well pass, while some of the favorable trends could continue on. This FY’s limited downgrading and earnings growth in FY13 underpins the broker’s forecast for the ASX200 to reach 4750 by end 2012.

The analyst team at Deutsche is of a similar opinion, saying despite downgrades to company earnings forecasts outnumbering upgrades by about 2:1 last week, the size of the downgrades remains quite subdued. Ultimately, the broker thinks the lack of earnings upside is well captured in market prices, given Australia already has been underperforming  global markets for the last 6 months.

The big difference for Australia is that it has not been earnings, but rather valuations that are causing the problem. Thus, Australia has only re-rated only 2/3 as much as the rest of World, according to the broker.

Deutsche predicts local shares will see some support coming from bond yields, which it notes are testing new lows. This mean that dividend yields are now higher than bond yields, an occurrence that has only happened 3% of the time over the past 40 years.

Goldman Sachs took out the calculator last week to start adding up the damage caused by unseasonal wet weather on Queensland coal production. All up, volumes for the March 2012 quarter were down 11% on the December Quarter, which the broker notes will unsurprisingly take the biggest toll on earnings of Engineering and Construction companies leveraged to coal production.

Thus, the broker has moved to downgrade forecasts for both Emeco ((EHL)) and Sedgman ((SDM)), given they have the largest exposure to Queensland coal production in the broker’s coverage. FY12-14 EPS cuts for Emeco are 4.4%, 2% and 2%, while Sedgman’s FY12 forecasts slips 3.8%, although the price target is lifted a little on recent increases in the stock’s market multiple. Bradken ((BKN)) and Imdex ((IMD)) are also covered by Goldman’s and are also exposed to Queensland coal, but the broker had already re-based its FY12 forecasts for these post recent market updates.

There was better weather news for insurers from JP Morgan, who notes weather forecasts for the 2012 Atlantic hurricane season are milder than recent years. In fact, if the current forecasts pan out, it would be a big positive for QBE given 41% gross earned premiums  come from the US. The broker also notes forecasts out of the US for a neutral La Nina risk, with an increasing chance of moving to El Nino, which is a positive for IAG and Suncorp.

Lastly, Goldman Sachs has tweaked its online migration model, accelerating the forecast pace of classifieds moving from print to online across the real estate, employment and autos verticals. As a result, online’s share of classified dollars goes up and print’s goes down. Earnings estimates and price targets for Carsales ((CRZ)), Realestate.com, ((REA)) and Seek ((SEK)) were lifted last week and earnings estimates were lowered for Fairfax ((FXJ)) and APN News and Media ((APN)). Realestate.com and Seek remain at Buy, while APN sits at Sell.

A final word of wisdom from Goldman’s when looking at the media space: Stick with structural winners, or companies that boast strong franchise and/or business model and that possess a differentiated and/or sustainable competitive advantage. Avoid structural losers, such as companies that are facing mounting structural headwinds, despite the perceived value that may seem to be on offer.

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