Weekly Broker Wrap: AGM Season To Highlight Interesting Times

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This story features ARIKA RESOURCES LIMITED, and other companies.
For more info SHARE ANALYSIS: ARI

By Eva Brocklehurst

The next few weeks herald the annual general meeting (AGM) season, when those that observe companies sift through the long list of achievements and updated guidance reeled off by CEOs to try to find what is really going on. To twist an old Chinese curse – we are living in interesting times.

The global economic backdrop is drab and Australia's companies are likely to find it hard to position their outlook in a good light. Citi's view is that profits are slowing around the world and earnings expectations need to be cut further. This suggests the downgrading of profits and outlook at the upcoming AGMs will continue. On the flip side, valuations are cheap and the opportunity to find some potential upside abounds with any hint a stock is handling the current conditions well. Macquarie, meanwhile, says this AGM season shouldn't be dire, but that could be because expectations are set rather low. In other words, there may be some nice surprises or analysts may be so desperate for some good news that just confirmation of prior guidance is seen positively. Macquarie does not expect many upgrades to company outlook in this AGM season and has a market target for the S&P ASX200 of 4,542, implying little capital growth over the next 12 months.

Citi notes it is a buyer of Australia/UK mining companies – describing them as 'beaten down', so any positive comments by the big miners will be firmly welcomed. This will be particularly important after a raft of projects were shelved over recent months. Brokers will want to know if more rot is setting in. Amongst the sectors, Citi has upgraded global materials and taken profits on global energy. The switch here reflects its views that base metal prices should drift higher over the next 12 months, while oil prices will drift lower.

UBS is tactically overweight resources/mining, supported by expectations of a moderate improvement in Chinese economic momentum and further gains in iron ore and gold prices (the latter via quantitative easing). It notes the downside risk for the resource sector, evident in early September, has subsided. This has come with the sharp bounce in the iron ore price and strength in most other commodity prices. UBS believes that, in the medium-term, the local market's emphasis on resources and banking limits the scope for overall earnings growth. However, it does note, if the RBA makes further rate cuts over the next year, then this may give the "yield heavy" Australian equities market a prod.

In terms of AGMs, Macquarie highlights Arrium ((ARI)) as one to watch, and will be looking for whether the expansion in its iron ore business remains on track. Macquarie said the mining consumables division continues to perform well. Moreover, if the company has been able to return its Australian manufacturing to positive cash flow, it will be good for sentiment. Macquarie expects Beach Energy ((BPT)) to reconfirm production guidance provided at the FY12 result, with an update on the construction of the western flank pipeline. Meanwhile, mining services provider Monadelphous ((MND)) is likely to be scrutinised for just how it sees the work-in-hand over the next 12 months. Macquarie forecasts 17% FY13 revenue growth for Monadelphous, driven by a high volume of secured work. The broker notes that, in August, the company said a flattening in new project demand may actually provide some relief to an overheated market.

Macquarie believes Telstra ((TLS)) is likely to re-affirm guidance at its AGM. The broker notes the company's strategy day, two weeks after the AGM, may see the company hold off any operational updates until then.What is transfixing the outlook for telcos is the new high speed broadband network (NBN) as it rolls out over 2013. Here, Deutsche expects carrier strategies to converge – focusing on building subscriber scale. The broker expects that, in the early phases, new entrants will attempt to gain share with new NBN-based offerings but, in the longer term, the main protagonists will prevail. Deutsche's revised NBN framework incorporates higher payments for Telstra, as there is further certainty of the company receiving some form of compensation. Furthermore, Deutsche has factored in cost savings as Telstra de-commissions the copper network. This has resulted in a 15% increase in the broker's target price to $3.80 and it has maintained a Hold rating. A look at the FNArena database shows a Hold rating pretty universal, with only one in the eight differing. In this case its Bank of America-Merrill Lynch with a Sell signal. Deutsche has also revised iiNet's ((IIN)) price target to $4.10, driven by margin expansion as it is seen benefiting from on-net migration from the roll-out. It has a Hold on the stock. In summary, Deutsche expects Telstra should suffer the highest margin erosion offset by NBN compensation payments while iiNet is likely to be the only carrier to benefit from margin expansion.

Amid the AGMs, Woolworths ((WOW)) and Wesfarmers' ((WES)) Coles will both also report first quarter FY13 sales figures. Morgan Stanley expects both Woolworths and Coles to report stronger like-for-like sales growth, based on improving prices in the fresh food segment. It notes deflation has eased and fresh prices are above pre-flood levels of earlier this year. Also, dry grocery prices have started to move up. The broker highlights the fact that these prices tend to move inversely to the Australian dollar. With the currency in a holding pattern prices are now edging up, Morgan Stanley prefers Wesfarmers to Woolworths. UBS sees 4.1% and 4.6% growth in Wesfarmers and Woolworths' Q1 retail sales respectively. For Woolworths the improvement will comprise food and liquor as well as new stores and acquisitions in hardware. For Wesfarmers it will be driven by similar sized growth in both Bunnings and Coles (around 5%). UBS also expects food deflation will have eased, aided by higher vegetable prices. Wesfarmers remains UBS' preferred exposure. 

 
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