Tag Archives: Banks

article 3 months old

BOQ Selling Overdone?

- BOQ tops up provisions, warns on profit
- Five ratings downgrades follow
- Bad debts remain an issue
- Long term picture still positive


By Greg Peel

After management issued a profit warning on Friday, Bank of Queensland ((BOQ)) shares fell over 5%. They're down 4% again today mid-afternoon. The warning comes ahead of the bank's FY12 upcoming earnings result.

It wasn't so much about BOQ's second half profit guidance per se, which at $220-225m is roughly in line with consensus. The issue is with a $15m top-up to provisions for bad and doubtful debts (BDD). The market believed BOQ's first half review of its loan book and $160m provision increase, followed by a substantially dilutive capital raising, signalled the end of the BDD issue. The amount itself is not so ominous, and analysts concede it is likely a one-off, but just when the market was becoming more comfortable with BOQ (which had rallied around 17% since mid-July), more BDD problems prove disappointing.

The provision “top-up” follows “ongoing challenges that exist in the broader economy and property market,” management explained, “particularly in South East Queensland”. BA-Merrill Lynch suspects the problems are at the “smaller end,” and RBS Australia is happy to believe the top-up is a one-off given the bank's portfolio review is now over 80% complete. Deutsche Bank believes the $15m is indicative of increased provisioning for existing impaired assets rather than a sign of further deterioration in the ratio of non-performing loans – a view supported by Macquarie.

Analysts may be playing down the BDD issue, but it hasn't stopped them reconsidering their recommendations. All of Merrills, Credit Suisse, RBS and Deutsche have now downgraded their ratings for BOQ to Hold from Buy (or equivalent), while UBS has hung on to its previous Hold rating.

Merrills had thought BOQ had troughed now that the raising had been digested, provisioning had been assumed to be sound and a new strategy had been put in place. But Merrills now fears the BDD top-up may suggest a further “drip feed” of problems, especially given the deteriorating macro backdrop in Australia. The analysts find BOQ's upside case no longer attractive relative to the ongoing risks.

Credit Suisse finds the top-up disappointing, coming so soon after the first half provision increase, and bemoans the end of what had up to now been positive newsflow. There's no longer scope for an upside surprise at the official result release, CS assumes.

For RBS the real issue is not the provisioning but the fact revenue growth now looks much weaker than the analysts had expected. While fresh reported profit guidance was roughly in line, underlying profit guidance falls short of forecasts. BOQ's balance sheet looks much safer post-raising and the bank's provisioning levels and capital ratios are sector-leading, but the second half update to revenue and margins suggests BOQ has struggled to find top line momentum, the analysts believe.

Deutsche Bank analysts are prepared to take the provision top-up as a one-off but are concerned that recent signs of economic weakness may drive a higher level of impairments in FY13-14. Deutsche has adjusted its forecasts accordingly.

UBS suggests the top-up has undermined the market's conviction of provision adequacy, and believes stability in asset quality will have to be exhibited in the first half of FY13 if the stock is to sustain a re-rating.

Brokers have noted that the $70-75m in BDDs expected in the second half is 20% higher than consensus, which was sitting at $60m. While this may have been the consensus figure, it appears to be very much the average of a wide range of BDD forecasts. UBS seems rather caught out on a forecast of $35m, while Goldman Sachs overshot at $85m. It just goes to show that predicting BDDs is no stroll in the park. On a $50m range among brokers, $15m seems less material.

While Citi was sitting on a forecast of $78m, the analysts have downgraded BOQ to Sell from Neutral despite maintaining their price target. BOQ is trading at 0.9x book value, they note, and delivering well below cost of capital on the forecast horizon.

Conversely, JP Morgan has upgraded to Neutral from Underweight. The JPM analysts had watched the BOQ share price rally strongly and suspected the market was underestimating the potential for further impairments. Now that another $15m has been thrown at those impairments, the risk/reward trade-off is more evenly balanced, JPM suggests.

The above is a good example of why less experienced stock market investors must appreciate the difference between absolute earnings performance and the gap between that figure and what the market forecasts that figure to be. Stock prices do not wait for earnings results and guidance upgrades before they move up or down, rather ongoing forecast manipulation determines today's price. Consensus forecasts are reflected in the share price, but the individual views which define consensus can vary greatly. That's why some brokers have had to upgrade their BDD assumptions for BOQ post-warning and others downgrade, and why resultant earnings forecast downgrades range from 60% (on a small figure) to 2%. RBS has also downgraded its dividend forecasts by 2%.

Then there's the matter of how one looks at the bigger picture, or greater horizon.

Goldman Sachs has retained its Buy rating, noting management's suggestion that, despite the top-up, the bank's arrears trend has actually improved in recent months. Goldmans also notes a recovery in Gold Coast-Brisbane property prices according to the RP Data-Rismark measure. The analysts still believe long term upside is evident for BOQ given the bank is well placed for a Queensland recovery, its portfolio is being further de-risked, and cost restructuring is yet to provide benefits.

Macquarie (Outperform) could not agree more. The analysts calculate the $15m top-up was worth four cents per share, yet yesterday the market fell 40cps (and is down another 30cps today). BOQ's bad debt provision coverage is now 89%, the analysts note, which puts it in the middle of the Big Four pack and well ahead of fellow Queenslander Suncorp ((SUN)). “The BOQ story is not about balance sheet and provisioning,” rails Macquarie, “It's about the turnaround”. The analysts see provisions declining in FY13.

Macquarie upgraded BOQ straight to Outperform from Underperform last month.

There is little doubt, however, the gloss has come off Bank of Queensland. As a new government tries hard to turn the state around, nationally the economy appears to be sinking into the mire. Further provisioning, no matter how inconsequential, only serves to stoke nervousness with regard to SEQ bad loans. BOQ shares have now taken an even bigger hit post five ratings downgrades (and one upgrade) and are seen as good value by at least a couple of brokers. It will take a while, and some more encouraging news from BOQ in FY13, for confidence to improve.

One for the longer term investor.

After all the ratings changes, The FNArena database now shows one Buy, six Holds and one Sell on BOQ. The consensus target has fallen to $7.68 from $8.05 in a range from Citi at $7.15 to RBS at $8.28. Consensus suggests upside of 6% at the current price, plus dividends.
 

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article 3 months old

Weekly Broker Wrap: Banks Are Being Squeezed, Telstra Turns Around

By Eva Brocklehurst

So the Reserve Bank has cut the official cash rate by 25bps to 3.25%.

What this means has come to be quite different for various business sectors and elements of the population. Once upon a time the word rate cut was pretty universally welcomed. Mortgage rates would come down, albeit with a bit of a lag, people would spend the extra money on purchases rather than pay down their debt and companies would feel more comfortable adding a bit of leverage. In terms of the RBA's desire to provoke a sluggish economy to move up a gear,  it worked.

Now, the community observing these moves is more sanguine and analysts and economists see it working less smoothly. Why? Well, it's probably all to do with the Global Financial Crisis, which five years ago ushered in a financially more sombre world.

Goldman Sachs analysts consider stocks that outperformed in the wake of the GFC were those that are typically called defensive, or those that could benefit from the rash of interest rate easing that was triggered worldwide. Safe as a bank? Not anymore it would seem. This sector, heavily entangled with Europe's debt problems, is still a long way from pre-crisis peaks. Ahead, Goldman thinks this will continue as long as these sovereign risks play out in Europe.

How are the Aussie banks faring? We've been told they are at the top of the heap when it comes to beating the European contagion. Well, they are, but they're still feeling the pinch. Many brokers agree that the business banking margins of the major banks are under pressure, and this is primarily due to an inability to re-price debt (Macquarie and JP Morgan) and, on the ground, a potential shortage of high margin business from Western Australia and to a lesser degree Queensland  (Macquarie). Macquarie has downgraded the banks' earnings forecasts by 1-2% in FY13, adjusting ANZ Banking Group ((ANZ)) and Commonwealth Bank ((CBA)) earnings the least (up 0.4% and down 1% respectively) and Westpac ((WBC)) and National Australia ((NAB)) the most (down 1.5% and 1.2% respectively). The broker continues to prefer ANZ and NAB, although wary of NAB's Western Australia and Queensland exposure. For CBA, while the return on equity decline theme remains intact, Macquarie's recent analysis has shed a relatively more positive light on the stock. This, along with its safer book, is enough for Macquarie to shift CBA to a Hold from Underperform.

WBC now becomes the broker's least preferred bank. Macquarie says pressure on margins is unsurprising given the lack of demand for credit, the excess liquidity available at the larger end of the market and the reluctance to write business below investment grade. Australian banks have benefited from strong loan growth and margin from the mining/energy boom and a slowdown in that quarter implies a more subdued growth outlook. Business banking margin decline was also exacerbated by a shift towards safer, but  higher cost, term deposits. Macquarie has introduced its 'Spotlight 4' -- a scorecard which provides a view on the outlook for loan growth, margins and lending fees. Analysis shows that on a relative basis, unlike the other majors, the loan growth outlook for CBA appears to be improving, albeit off a low base.

JP Morgan observes that deposit competition, and 'maxed-out' wholesale markets, are blunting the impact of rate cuts, and creating a vicious circle such that the official easing is compelled to continue. The broker noted that, as the overnight cash rate declines, an increasingly larger pool of deposits will become the subject of margin compression as asset yields push closer to low-rate deposits.This dynamic gets worse the lower the cash rate falls, given more of the deposit base is re-priced towards zero. Now, extrapolating this, according to the broker, could even mean rate cuts do not get passed on at all!

The calculation looks like this: Each 25bp reduction in the overnight cash rate requires around 4bps of re-pricing on the mortgage book to be fully recovered. Put lower returns on free funds and deposit compression into the mix and this re-pricing looks like being placed in the too-hard basket. JP Morgan maintains the banks have a long-established track record of re-pricing loans to manage higher funding costs and the mortgage book (accounting for 55% to 65% of loan portfolios) has been the primary re-pricing mechanism. So, the broker believes Australian banks are fully valued at current levels and there is no discount for the probability of an elevation in loan losses above current consensus estimates. Hence,  no Overweight recommendations.

In this brave new world of tight credit Goldman has analysed the potential for a residential building recovery. The broker maintains a more modest rate of household mortgage lending does not preclude a recovery in residential construction activity, as new residential construction represents only a small proportion of credit growth. Transactions associated with the established housing market and structural leveraging trends are a far bigger driver of credit growth both in absolute size and variability, it would seem. Indeed, Goldman is forecasting a 30% recovery in housing starts out to 2014, which could be accommodated by an acceleration in credit growth of just 1.0ppt-1.5ppt. Moreover, credit growth would not need to accelerate at all if the savings rate increased by a further 1.5ppt.

The broker maintains changes in the Queensland state budget have strengthened first home buyer subsidies for new construction in that state at the expense of established housing. Additionally, evidence is building that the downtrend in house prices has stabilised with tentative signs of recovery. The thesis is that falling house prices can act to discourage an individual’s decision to build a new home. As such the cessation of house price declines should act as an important catalyst for a pick-up in construction, given the other fundamentals in place.

And now for something completely different?

Well, perhaps not completely as it's still about money. As the billions are being spent rolling out the National Broadband Network across Australia RBS has looked at the market share of Telstra ((TLS)) and Optus ((SGT)) and TPG ((TPM)). Telstra is seen increasing market share by 0.6ppt in six months to June 2012. Meanwhile, TPG added 0.2ppt and Optus lost 0.3ppt.

RBS estimates fixed broadband revenue grew by 3.9% in the six months to 30 June 2012, an improvement on the 1.8% growth in the prior half. Household penetration grew to 65.3% in the second half from 64.2% in the first. Telstra’s Average Revenue Per Unit (ARPU) growth has made a material turnaround at 3.2% in 2H12, versus 0.3% in 1H12 and minus 5.6% in 2H11. It's seen as stable and RBS has a Hold recommendation and target price of $3.85. Meanwhile, iiNet ((IIN)) is acquiring market share and has become the broker's preferred pick in the sector with a Buy rating and target price of $3.93. 


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article 3 months old

Icarus Signal New Entries: Oz Banks Even Higher Priced

Update on share prices and consensus price targets.

By Rudi Filapek-Vandyck

In mid-August, I concluded that Australian banking shares had started to look rather expensive with most share prices trading above or near consensus price targets. I also suggested that, contrary to historical observations, this time elevated valuations probably would not trigger a sell-off for the sector and/or for the share market in general. That was before Uncle Ben at the US Fed opened all spigots of monetary liquidity to remove any downside to risk asset prices.

Nearly two months later and what have we gained in knowledge and insights? Well, bank share prices first weakened, a little bit, but they have become simply more expensive since as the rotation into cyclicals proved short-lived and still today lacks conviction. I think there's a real risk that defensives and financials will continue to carry the weight of pushing the market higher leading into 2013, unless we see some genuinely solid economic improvements and a general reduction in skepticism and concerns. What are the chances?

No wonder recent indications are that global funds managers are participating in today's rallies with an ever so shorter time horizon. Bank share prices may yet continue revisiting higher price levels driven by ongoing dividend appeal and expectations of more rate cuts by the RBA, but the conundrum for longer term oriented investors remains that buying at elevated valuations virtually never leads to fantastic returns further down the track. Yes, it is a true conundrum. Just ask any fund manager you can talk freely to.

In the meantime, one easy to draw conclusion is that Westpac ((WBC)) has regained the second position in Mr Market's rankings for Australian banking shares. Westpac shares trading well above consensus target may serve as the ultimate evidence for this. ANZ Bank ((ANZ)) is now equally above target. Yet THE big surprise from the past weeks has been National Australia Bank ((NAB)). Believe it or not, but NAB shares are now trading above target too. I cannot even remember the last time this has happened.

All this poses the ever so ubiquitous question: is this market finally ripe for a pull back? Elevated valuations for major banks in Australia certainly would suggest this is the case, but elevated valuations alone are never enough. The market needs a catalyst, something to trigger profit taking without the banks losing their dividend appeal. Any guesses anyone?

Over the next month, the banks (except CommBank ((CBA))) will release full year results and prior to this, starting this Monday, the third quarter profits season starts in the US. Maybe we don't need anything from Europe or China to temper the overall enthusiasm? It's a big IF, given the short term orientation of present market participants and the absence of long term investors in today's share market.

Maybe the conundrum simply continues until investors finally have a concrete reason to start loading up on cyclicals again... (could take a while though).

In the meantime, Icarus reports Bank of Queensland ((BOQ)) too is now approaching price target, as is insurer QBE ((QBE)), but so is gold and copper producer Newcrest ((NCM)) as well as gold producer Evolution Mining ((EVN)). In fact, there are now 42 stocks near target and another 91 stocks are trading above target. The latter group includes all big four banks (see above) as well as Woolworths ((WOW)), Wesfarmers ((WES)), The Reject Shop ((TRS)), Oceana Gold ((OGC)), Kingsgate ((KCN)) and Insurance Australia Group ((IAG)).

I am sure everybody else can see a few similar themes in both lists.

In the Bottom 50 we find the usual suspects: biotechs and many smaller and micro cap energy and mining hopefuls. Plus, increasingly, engineers and resources services providers as they really are doing it tough right now. Incredible but true, between late last year and March this year this used to be the Go To sector in the Australian share market. If you do have a strong stomach, take a peek as to what has happened to share prices of Boart Longyear ((BLY)), Mastermyne ((MYE)) and Ausdrill ((ASL)) since, among others.

I would suggest there is a broader lesson in all of this. It's okay to jump on current market momentum to seek a few extra gains from what's happening in the share market, but better not mix short term with longer term horizons. Investors who did pre-March through joining the Bubble in resources services providers are still licking their wounds today, with no compensation in sight for those beaten down share prices.

Investors should consider the information and data are provided for research purposes only.

Stocks <3% Below Consensus

Order Symbol Current Price($) Consensus Target($) Difference(%)
1 DXS $ 0.98 $ 0.986 0.61%
2 NCM $ 28.24 $ 28.455 0.76%
3 SIP $ 0.68 $ 0.681 0.89%
4 SLR $ 3.80 $ 3.84 1.05%
5 BOQ $ 7.96 $ 8.053 1.17%
6 pbg $ 0.62 $ 0.631 1.77%
7 FLT $ 25.46 $ 25.965 1.98%
8 ASX $ 30.09 $ 30.741 2.16%
9 ORL $ 6.69 $ 6.836 2.18%
10 OTH $ 0.53 $ 0.54 2.86%
11 QBE $ 13.49 $ 13.89 2.97%

Stocks Above Consensus

Order Symbol Current Price($) Consensus Target($) Difference(%)
1 NAB $ 26.15 $ 26.05 - 0.38%
2 ANZ $ 25.30 $ 25.174 - 0.50%
3 IOF $ 2.97 $ 2.953 - 0.57%
4 tcl $ 6.16 $ 6.124 - 0.58%
5 CCP $ 6.60 $ 6.50 - 1.52%
6 FBU $ 5.87 $ 5.74 - 2.21%
7 SRX $ 10.18 $ 9.30 - 8.64%

Top 50 Stocks Furthest from Consensus

Order Symbol Current Price($) Consensus Target($) Difference(%)
1 HIG $ 0.16 $ 0.25 61.29%
2 MYE $ 1.68 $ 2.65 58.21%
3 ASL $ 2.79 $ 4.389 57.31%
4 MDL $ 5.63 $ 8.80 56.31%

To see the full Icarus Signal, please go to this link

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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article 3 months old

FlexiGroup Attracts More Interest

By Eva Brocklehurst

Leasing and rental finance company FlexiGroup Ltd ((FXL)) has piqued the attention of several brokers recently with a strong outlook amidst a difficult operating environment. Overall reactions to the stock's trajectory have been substantially positive with Buy ratings from the four brokers which cover the stock on FNArena. The key finding is that this company has been able to steer a course of increasing profitability. It is adding to its accounts receivable on its interest free loans and retail point of sale leasing at a time when retailers are floundering and obtaining credit from the major lenders is a vexed issue.

FXL  has been characterised over recent years by firm and profitable growth as it expanded its financing and telecommunications offerings, which it has in Australia, New Zealand and Ireland. It provides point of sale services within diverse industries and has a network of around 11,000 merchants and strong relationships with its retailer partners, such as Harvey Norman ((HVN)).

This stock has ticked the right boxes for Deutsche Bank which has initiated coverage. It joins the others in the FNArena database which are upbeat with Outperform and Buy ratings. Deutsche has set a target of $3.70 with a Buy signal, against the consensus target price of $3.60. Consensus earnings per share (EPS) are for 25c in FY13 and 25.6c in FY14. The database shows consensus forecast earnings growth of 16% in FY13, flattening out to 2.4% in FY14. Dividends are expected to grow by 8.2% in FY13 (4.1% yield) and by 9.8% in FY14 (4.5%). Deutsche believes FXL's access to capital, bank and asset backed securities has allowed it to meet demand for credit that its competitors have been unable to provide. This sort of access and growth much mean FXL is winning increasing market share. Forecasting annual EPS compound growth of 13% over the next three years and an average return on equity of 29% over the last six years, Deutsche believes FXL should trade at a premium to its peer group average of 12.6 times.

The company operates one of its businesses under the brand Certegy Ezipay in Australia. That entity's cash net profit rose in FY12 by 60%. Since it was acquired for $31m three years ago it  has doubled its receivables to $357 million. According to Deutsche, that business has been successful on several measures as it delivered a return on capital of 42% and group earnings per share growth of 50% over that time. Meanwhile, the company's Lombard division, acquired in July this year, provides interest free finance through a number of retailers and Visa cards, and cross selling of Visa card into the FlexiGroup base started last month. Deutsche said the Lombard business is in a similar vein to Certegy although it lacks the capital underpinning it. Nevertheless, with FXL's access to capital, IT and marketing the broker forecasts a success story along the Certegy lines.

Another key business, Flexirent, a retail point of sale leasing business, has diversified into the non-retail business-to-business sector and posted improved receivables of $358m in FY12. FlexiGroup also diversified into the large online market with its 2012 acquisition of Paymate (an online payment processing business). Certegy,  Paymate and the start-up Flexi Commercial and Blink mobile broadband businesses today contribute 45% of FlexiGroup's net profit. The company outperformed broker estimates for FY12 profits. It offered a fully franked final dividend of 6.5c per share which, together with the 6c interim dividend, represents dividend growth of 19%. Macquarie has given the stock an Outperform rating underpinned by its earnings outlook - its profit guidance growth of 11-16% for FY13 - and potential for new initiatives. Managing director John DeLano, who joined FlexiGroup in September 2003, will depart at the end of this year. UBS notes this does provide an element of risk going forward but the stock does still retain much value with its high quality earnings. DeLano will remain a consultant to FlexiGroup in 2013 and 2014.

Several analysts suggest the main risk to its outlook, of course, is a further deterioration in retailing. Consumers have restrained spending in their new conservative leanings towards less debt but there are still items that need to be bought and the cash-less society is well established. A company with substantial share of the transaction market should not be worried. An upswing in unemployment, also, could cause a ballooning in bad debts. Nevertheless, the market in which FXL operates is significant in size and it should be able to withstand such a scenario. 


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article 3 months old

The Overnight Report: Earnings Cloud Rolls Into View

By Greg Peel

The Dow closed up 12 points, or 0.1%, while the S&P gained 0.4% to 1450 as the Nasdaq jumped 0.6%.

It was global service sector PMI day yesterday, and the worst result of all kicked off the proceedings. Following on from a very weak manufacturing PMI release on Monday, yesterday's Australian services PMI showed a fall to 41.9 in September from 42.4 in August – a level of rapid contraction. The shrinking financial services industry in particular has impacted on the figure and retrenchments are unlikely to be showing up in the official unemployment rate.

To add insult to injury, Australia's trade deficit blew out in August after a 3% fall in the dollar value of exports and only a 1% fall in imports.

It's China's manufacturing industry that is meant to suck up our exports and there the sector remains in slight contraction. China's service sector had been the fast growing offset in prior months, but recent results have shown the pace of non-manufacturing expansion slowing. Yesterday, the official number showed a fall to 53.7 from 56.3, while HSBC's independent survey showed 52.0, down from 53.1.

The eurozone continued to slide, with a drop to 46.1 from 47.2, while the apparent rebound honeymoon is over in the UK after its PMI dropped to 52.2 from 53.7. It was thus left to the US service sector to post the only improvement for the month, and improvement into solid expansion territory. The US PMI rose to 55.1 from 53.7.

Adding to the positive tone in the US was last night's ADP private sector jobs report for September, which showed an increase of 162,000 new jobs when 140,000 were expected. The real numbers are out on Friday night with non-farm payrolls, and Wall Street has become wary of reading too much into the ADP results. Between the PMI and the ADP however, the Dow managed to be up 51 points by midday. Apple continued to regain ground, which is why the Nasdaq was strong and the S&P was dragged along in the slipstream.

But if the “new tech” world of Apple is on the ascendancy, the “old tech” world of PC-maker and Dow component Hewlett Packard should in theory be a victim. Last night HP delivered fresh earnings guidance for 2013, and suffice to say HP shares closed down over 12%. Hewlett Packard shares are down 50% from their February high.

With the US quarterly earnings result season at the door, this news sent Wall Street reeling. And then around about the same time, a drifting Brent crude broke down through its 200-day moving average and West Texas followed. The technical selling triggered belied the weekly US inventory data, which showed a decrease, and soon it was a stampede. Brent closed down US$3.17 to US$108.17/bbl and West Texas fell US$3.91, or over 4% to US$87.98/bbl. In subsequent electronic trading, prices are lower still.

Fundamentally, the oil price should be lower rather than higher on the basis of demand expectations. Monday's global manufacturing PMIs are just one set of data providing a hint. Yet as the war of words between Israel and Iran flares up every month, in come the speculators. They have to be wary, because the US and UK governments are ready to release strategic reserves together if they have to. When the rhetoric over sanctions and pre-emptive attacks dies down again for the time being, oil loses its momentum, resulting in sessions like last night's.

With Spain still playing politics by shrugging of any bail-out request, the euro was again lower last night, pushing the US dollar index up 0.2% to 79.94 with the help of the positive US data. The stronger greenback helped give oil a nudge, but this was not reflected in base metal prices, which saw insignificant moves. Gold appears to be consolidating again for the moment, as it rose US$4.00 to US$1778.20/oz.

The Aussie is down another half a cent to US$1.0214 having tested out support below the 102 level. Yesterday's PMI and trade data gave the currency another shove and again encouraged talk of another RBA rate cut on Cup Day. And of course, all media attention was focused on when or if the Big Banks might drop their mortgage rates, and by how much. What the sensationalist media either is ignorant of or chooses to ignore, however, is the new regime.

The banks are attempting to disconnect their lending rates with the RBA rate, and particularly the 20-year mortgage rate compared to the 24 hour rate. ANZ ((ANZ)) now resets rates only on the second Friday of the month, so it won't pipe up till next week, while NAB ((NAB)) has committed to having the lowest SVR, so it will have to wait until at least the week after. That leaves Westpac ((WBC)) and CBA ((CBA)), but all banks are cognisant of maintaining solid domestic deposit levels to offset the risks inherit in offshore funding, hence they may not wish to drop deposit rates at all or at least not by much. To maintain margins, which are already under pressure, the banks thus may not give way on their mortgage rates. The level of mortgages in Australia now roughly equates to the level of deposits.

So sorry Wayne/Joe, your mortgage belt, swing-seat targeted rants may get you nowhere.

The SPI Overnight was up 13 points, or 0.3%, despite the assumption the local energy sector will be under pressure today. There's a bit of a “QE” thing going on in Australia at present, given weakening local data are only resulting in a stronger share market. It's the “bad news is good news” theme we've come to know and love from the Yanks, with expectations of more RBA action fuelling the fire.

We'll see how we go with the local August retail sales result out today. Tonight sees an ECB policy meeting, but presumably there's little more Draghi can say or do at this point while Rajoy plays cat and mouse. The minutes of the last Fed meeting are also out tonight, from which Wall Street will be looking for more colour on the new unlimited QE policy.

Rudi will appear on Sky Business today at noon, and again for the Switzer Super Report at 7pm.

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article 3 months old

Banking Sector To Push Higher?


Bottom Line 02/10/12

EW Trend: Corrective (?)
Price Trend: Up
Trend Strength: Strong

Technical Discussion

LAYMANS:

The Banking Sector index ((XXJ)) continues to look strong here with price breaking higher once again over the past couple of weeks or so. Remember, the ideal situation was to come back and test old resistance/new support which has pretty much been the way forward. It now seems likely that our target just above 5400 is going to be approached over the coming weeks. Of course the ideal situation is to break up through that level with a degree of attitude as it would suggest something much more bullish is going to unfold over the medium term.

However, there’s no point looking too far ahead at this stage of proceedings, especially with the smaller degree patterns (which we’ll discuss below) continuing to unfold very nicely.  It’s been no secret that the XXJ has been helping to lead the broader market higher of late though if the ASX 200 ((XJO)) is to break out with a degree of attitude we’re going to need the help of the Materials Sector which isn’t looking anywhere near as strong. This trait could change though further confirmation is required. The one thing we don’t want to see is for price to head below 5000 as it would suggest the bounce that kicked into gear in August 2011 has run its course which could only mean more frustrating times ahead. Definitely something we don’t want to see.   

TECHNICAL:

The subdivisions from the low of wave-B are a little difficult to decipher though the best interpretation is that the recent pivot high completes intermediate degree wave-(iii).  The subsequent correction could well have run its course though the door is open for price to come back down and retest the line of support once more before heading higher.  Possible, though either way the wave equality projection should be the next port of call.  Rejection at the target would suggest a 5-leg movement completes wave-C and quite possibly a larger degree wave-(A).  Should this be the way forward then further weakness would be anticipated though not necessarily a deep retracement.  It could well be that more of a flat or even a triangle unfolds from those higher levels meaning the line of support will manage to hold. 

Indeed, 5000 needs to hold to keep the medium term bullish case alive and well.  As we’ve been mentioning over recent reviews the larger degree patterns lack clarity though they are clearly corrective in nature from the low of wave-[C] which is a fact that cannot be challenged.  Not absolutely ideal as it means a much larger corrective pattern is unfolding though it doesn’t detract from the upside potential that remains over the longer term. In fact assuming a larger 3-leg corrective phase is unfolding from the March 2009 low (which appears to be the case) there is no reason why price can’t continue up toward the wave equality projection circa 6800.  However, the way the patterns have been unfolding it’s highly unlikely to be a straight line rise with the series of overlapping wave structures continuing to dominate.  Yes, price action has been impulsive from the early June low though it’s only a fractal of a larger corrective pattern.

Trading Strategy

Many of the Banks have either tagged or are approaching target areas which is reflected in the chart shown here. It doesn’t automatically mean that a retracement is around the corner although we have to be open to the possibility that it is.  Much is going to depend on the reaction seen as price hits the wave equality projection. A straight probe up through that region without pause would put a much more positive spin on the larger degree patterns and likely means wave-C is going to subdivide and extend. Definitely not out of the question though there is no strong evidence implying the more bullish case is going to prove to be the path of least resistance at this juncture. As always price needs to prove itself meaning we have to remain slightly cautious in regard to the current trend morphing into something much more substantial.


Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not FNArena's (see our disclaimer).

Risk Disclosure Statement

THE RISK OF LOSS IN TRADING SECURITIES AND LEVERAGED INSTRUMENTS I.E. DERIVATIVES, SUCH AS FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER YOUR OBJECTIVES, FINANCIAL SITUATION, NEEDS AND ANY OTHER RELEVANT PERSONAL CIRCUMSTANCES TO DETERMINE WHETHER SUCH TRADING IS SUITABLE FOR YOU. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF SECURITIES AND DERIVATIVES MARKETS. THEREFORE, YOU SHOULD CONSULT YOUR FINANCIAL ADVISOR OR ACCOUNTANT TO DETERMINE WHETHER TRADING IN SECURITES AND DERIVATIVES PRODUCTS IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CIRCUMSTANCES.

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article 3 months old

Weekly Broker Wrap: RBA, Banks And Swan’s Surplus Challenge

By Eva Brocklehurst

As the Reserve Bank board meets on October 2 for its monthly mulling over the forces in the economy, and ponders whether to carve off some more points from its official interest rates (and a number of economists suggest they will), the markets are doing their best to muddy the picture.

The overriding emphasis has been on mining, and coal and iron ore prices. It is now a case of, well, the peak has passed, where will any gap/opportunity come in the country's continued wealth creation?

A lot has been said about other sectors and how they struggle in the midst of all this focus on mining investment. Do they stand ready to pick up any opportunity? Can they take advantage of lower interest rates? According to economists at Bank of America Merrill Lynch, it might be not be all gloomy in the commodity country for its tourist industry, fraught for several years by the high Australian dollar which has made tourist arrivals slump.

The hallmark was Cyclone Yasi's devastating impact a couple of years ago on its psyche. After all, Far North Queensland, with its large economic dependence on tourism felt the financial devastation. However, the analysts are now mentioning ...tailwinds!

Merrills says, despite soft consumer confidence and challenging market conditions, "we are seeing potential tailwinds emerging in the domestic travel market". Domestic airfare prices are expected to hit new levels of affordability and drive an increase in passenger numbers (expected to be up 6-7%). So, they suggest a pairs trade strategy - Buy on Flight Centre ((FLT)) and go Underperform on Wotif.com ((WTF)).

The airlines team is forecasting domestic yield compression of 2.5% for Qantas in FY13 as a result of capacity additions and subsequent discounting. Nevertheless, declining yields are positive for the domestic travel industry and act as a proxy for airfare prices. Merrills continues to prefer Flight Centre as FY12 trading comments were supportive for growth in FY13. FLT remains a heavily shorted stock, however days short has decreased and the broker continues to view the short as an overplayed theme. As for Wotif.com, the analysts see some lift in the domestic travel market but are cautious on WTF given the structural challenges remain heightened and this translates into a muted EBIT (earnings before interest and taxes) growth forecast of 4.6% in FY13.

Another sector that has fallen hard is media and the upcoming AGM season (Oct/Nov) will likely tell the tale of woe. JP Morgan expects consensus downgrades across traditional media names.

There are several reasons for this including a subdued advertising market start, a lack of visibility on FY13 revenue as well as structural challenges. JPM analysis has highlighted FY13 EBITDA (earnings before interest, taxes, depreciation and amortisation) downside risk for Ten Network (-21%), Fairfax (-18%), Southern Cross Media (-13%), Seek (-9%) & Seven West (-8%).

So, stresses and strains in several sectors but a bit of hope in one that has been terribly stressed? Yes, it's muddy waters.

Lastly, what about the role of the banks?

According to UBS banking analysts, one thing that all the bank boards are likely to acknowledge is, that in tight times and with higher risks of a blow-out in defaults, cutting the ordinary dividend should be avoided wherever possible. The sector holds a big key to sentiment as a huge number of the retail shareholders are reliant on dividends as a form of income. UBS asks the question as to what bad debts could each bank sustain without needing to cut payouts.

The stockbroker notes that, with a large corporate default, banks are more likely to look through the issue than if the overall debt defaulting is a result of a broader economic slowdown. It seems, given the nature of this economic downturn, that banks have less ability to look through a deterioration in asset quality than in other cycles.

Then, a hint of a wish list.

UBS says the banks are now strong generators of free cash flow and, given the franking credit regime in Australia and shareholder desire for yield investments, there is a significant incentive for the boards to return much of this to shareholders in the form of higher dividend payout ratios. However, the question must still be asked whether this is a prudent approach in the current environment? Bank earnings are very highly leveraged to changes in asset quality and, while this is relatively benign, the higher levels of non-performing loans are not dissipating quickly.

Deputy Prime Minister Wayne Swan has a big task at hand for his mid-year economic report, which is likely to be delivered in the next six weeks. According to Goldman Sachs there are big challenges for the commitment to a Commonwealth budget surplus. Indeed, the economists flagged the RBA's Financial Stability Review, recently released, which noted increased financial system vulnerability, but continued to characterise the ongoing consolidation in corporate and household balance sheets as desirable.

This means less money is coming into the government's coffers.

Goldman says the bigger issue since mid-year is the degree to which the adverse, and unusual, falling bulk commodity prices and strong Australian dollar, both have undermined the outlook. The economists have tested the sensitivity of Australian tax revenues to a terms of trade-driven negative income shock of around 2% of nominal GDP and find there is around $20bn downside risk to forecast Commonwealth tax revenues over FY13 and FY14 - mostly via a weaker company tax take.

In contrast, a commodity price shock presents a comparatively modest downside risk to state government goods and services tax receipts, with a much larger threat posed via the outlook for mining royalties. Moreover, the economists flag that absent new efforts to claw back revenue and restrain spending, fiscal projections will fall materially short of budget. However, sufficient revenue and mitigating expenditure cuts should be found to preserve existing sovereign credit ratings.. phew.

Yes, a hard task wading through muddy water.

 
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article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

The past week has been fairly evenly balanced in terms of ratings changes by the eight brokers in the FNArena database, with seven ratings upgraded and ten downgraded during the period. Total Buy ratings now stand at 44.64%.

Among the upgrades were two resource plays, Atlas Iron ((AGO)) and Regis Resources ((RRL)). Atlas was upgraded by UBS to Neutral from Sell, as despite the weaker iron ore price the broker suggests Atlas has enough liquidity to meet its capex, dividend and tax requirements in FY13. Recent share price weakness has improved the value on offer enough for UBS to upgrade.

For Regis Resources, full year earnings showed a strengthening of the group's balance sheet, while Deutsche continues to see value as production increases from the combination of the Moolart Well and Garden Well projects and dividends from the company come closer to reality. Deutsche has lifted its rating to Buy from Hold, while also lifting its price target on the stock.

Among the industrials, UBS upgraded Breville Group ((BRG)) to Buy from Neutral given the expectation the company can continue to grow its share of the US market. Breville's profit result prompted changes to earnings forecasts and the result was an increase in UBS's price target for the stock.

While forecasting lower average income growth in the office sector in FY13, JP Morgan continues to like the quality of Dexus's ((DXS)) portfolio, while the broker also sees scope for an increase in payout ratios in coming years. This is enough for an upgrade to a Neutral rating from Underweight previously.

Sigma Pharmaceuticals ((SIP)) delivered a better interim profit result than Macquarie had forecast, the result being increases to estimates in coming years. Macquarie's price target increased as well and on valuation grounds the broker has upgraded to a Neutral rating from Sell.

Deutsche Bank upgraded both Leighton Holdings ((LEI)) and Myer ((MYR)) to Buy ratings this week, in both cases from Hold previously. For Leighton, Deutsche suggests the market is pricing in too much risk, particularly given the company is primarily exposed to low cost mines and committed LNG projects within its resource sector activities. There are also some potential balance sheet positives such as a sale of NextGen, which is enough to justify a more positive view at current share price levels.

With respect to Myer, an improvement in gross margin was the highlight of the full year profit result in Deutsche's view. Top line growth continues to look difficult to achieve but the stock offers an attractive yield and some longer-term value at current levels in the broker's view, which supports the upgrade in rating.

On the downgrade side of the ledger UBS has cut its rating on Ansell ((ANN)) to Sell from Neutral, the change something of a relative valuation call given the company is seen to have less defensive earnings than others in the sector. The downgrade in rating comes despite an increase in price target.

UBS also downgraded Brambles ((BXB)) to a Hold rating from Buy, again on valuation grounds following an 8% rally in the share price since full year earnings were announced in August. As UBS notes, the stock is now trading broadly in line with valuation.

Aquarius Platinum ((AQP)) has been downgraded by BA Merrill Lynch to Sell from Hold as part of a reinstatement of coverage. With two mines on care and maintenance the broker sees a turnaround as reliant on improving operations at Kroondal, which is currently operating at a loss. When political risk is added to the equation BA-ML sees little upside for the stock in the shorter-term.

Credit Suisse has similarly downgraded Envestra ((ENV)) to Sell from Hold, this coming after changes to estimates to account for expectations of upcoming draft regulatory decisions. The cuts to forecasts impacted on the broker's price target, while the rating downgrade is a valuation call by Credit Suisse.

The Reject Shop ((TRS)) was also downgraded to Sell from Hold by Credit Suisse, this after recent share price outperformance suggests limited further upside from current levels. While group gearing should improve with Ipswich DC flooding claims being finalised, Credit Suisse expects tough operating conditions will continue for some time.

Recent share price strength has been enough for Citi to downgrade Insurance Australia Group ((IAG)) to Hold from Buy, as even allowing for an increase in price target the broker doesn't see enough upside from current levels to justify a more positive rating. 

JP Morgan has made two downgrades over the week, lowering ratings on both Southern Cross Media ((SXL)) and Toll Holdings ((TOL)) to Sell from Hold. For Southern Cross, still tough TV conditions lead the broker to suggest further cuts to consensus earnings estimates are unlikely, something that will act to limit potential share price upside.

In Toll's case, JP Morgan suggests a focus on market share is generating some domestic margin pressure and this suggests earnings headwinds are likely to remain in place for some time. Along with the downgrade in rating, the broker has trimmed earnings forecasts and price target.

OnTheHouse Holdings ((OTH)) delivered a result better than RBS Australia had forecast for FY12, but the broker expects FY13 will see earnings pumped back into the online business an in attempt to ensure longer-term growth. This is enough to prompt a downgrade to a Hold rating from Buy.

Macquarie has similarly downgrade Woodside ((WPL)) to Hold from Buy, this as a result of taking a less bullish view on the outlook for Australian LNG plays given the expectation of increasing competition in the global market. This view prompted cuts to earnings estimates and the broker's price target for the stock.

With respect to changes to price targets, the largest increases were seen in Webjet ((WEB)) and Sigma, while the largest decrease was in NRW Holdings ((NWH)). Only the latter saw a change of more than 10%.

Changes to earnings estimates were more significant, with Aquarius seeing the largest increase in forecasts and Panoramic Resources ((PAN)), Lynas ((LYC)) and Gindalbie ((GBG) experiencing the largest cuts to earnings expectations.  

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup
Suisse,Deutsche<*br*>Bank,JP<*br*>Morgan,Macquarie,RBS<*br*>Australia,UBS&b0=114,91,103,91,74,130,140,116&h0=76,116,91,130,97,100,154,125&s0=50,26,38,9,45,36,10,15" style="border-bottom: #000000 1px solid; border-left: #000000 1px solid; border-top: #000000 1px solid; border-right: #000000 1px solid" />

 

Broker Rating

Order Company Old Rating New Rating Broker
Upgrade
1 ATLAS IRON LIMITED Sell Neutral UBS
2 BREVILLE GROUP LIMITED Neutral Buy UBS
3 DEXUS PROPERTY GROUP Sell Neutral JP Morgan
4 LEIGHTON HOLDINGS LIMITED Neutral Buy Deutsche Bank
5 MYER HOLDINGS LIMITED Neutral Buy Deutsche Bank
6 REGIS RESOURCES LIMITED Neutral Buy Deutsche Bank
7 Sigma Pharmaceuticals Ltd Sell Neutral Macquarie
Downgrade
8 ANSELL LIMITED Neutral Sell UBS
9 AQUARIUS PLATINUM LIMITED Neutral Sell BA-Merrill Lynch
10 BRAMBLES LIMITED Buy Neutral UBS
11 ENVESTRA LIMITED Neutral Sell Credit Suisse
12 INSURANCE AUSTRALIA GROUP LIMITED Buy Neutral Citi
13 ONTHEHOUSEHOLDINGS LIMITED Buy Neutral RBS Australia
14 SOUTHERN CROSS MEDIA GROUP Neutral Sell JP Morgan
15 THE REJECT SHOP LIMITED Neutral Sell Credit Suisse
16 TOLL HOLDINGS LIMITED Neutral Sell JP Morgan
17 WOODSIDE PETROLEUM LIMITED Buy Neutral Macquarie
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 PAN 67.0% 100.0% 33.0% 3
2 BRG 67.0% 100.0% 33.0% 3
3 SIP - 14.0% 14.0% 28.0% 7
4 DXS - 29.0% - 14.0% 15.0% 7
5 BSL 43.0% 57.0% 14.0% 7
6 RRL 57.0% 71.0% 14.0% 7
7 AGO 50.0% 63.0% 13.0% 8
8 WEB 25.0% 33.0% 8.0% 3

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 AQP 40.0% 20.0% - 20.0% 5
2 CTX - 33.0% - 50.0% - 17.0% 6
3 ARI 83.0% 67.0% - 16.0% 6
4 GPT - 14.0% - 29.0% - 15.0% 7
5 NWH 86.0% 71.0% - 15.0% 7
6 BXB 86.0% 71.0% - 15.0% 7
7 ANN 29.0% 14.0% - 15.0% 7
8 IAG 38.0% 25.0% - 13.0% 8
9 NCM 38.0% 25.0% - 13.0% 8
10 SUN 88.0% 75.0% - 13.0% 8
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 WEB 3.580 3.917 9.41% 3
2 SIP 0.627 0.681 8.61% 7
3 BRG 5.683 6.117 7.64% 3
4 RRL 4.686 4.844 3.37% 7
5 ANN 15.060 15.226 1.10% 7
6 GPT 3.500 3.534 0.97% 7
7 IAG 4.079 4.098 0.47% 8
8 CTX 14.060 14.110 0.36% 6
9 CHC 2.656 2.663 0.26% 6

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 NWH 3.924 3.516 - 10.40% 7
2 PAN 1.175 1.083 - 7.83% 3
3 ARI 1.238 1.172 - 5.33% 6
4 AGO 2.299 2.236 - 2.74% 8
5 SXL 1.501 1.471 - 2.00% 8
6 WPL 40.359 40.171 - 0.47% 8
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 AQP 2.608 3.387 29.87% 5
2 COH 274.738 281.325 2.40% 8
3 SIP 4.657 4.757 2.15% 7
4 GPT 23.957 24.129 0.72% 7
5 QRN 21.075 21.200 0.59% 7
6 RMD 19.962 20.004 0.21% 8
7 WPL 223.107 223.443 0.15% 8
8 WDC 63.775 63.813 0.06% 8
9 SGP 28.914 28.929 0.05% 7
10 HZN 2.081 2.082 0.05% 4

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 PAN 4.400 0.125 - 97.16% 3
2 LYC 1.800 0.600 - 66.67% 5
3 GBG 4.567 3.617 - 20.80% 6
4 AGO 12.763 11.513 - 9.79% 8
5 FMG 53.948 49.840 - 7.61% 8
6 RRL 60.529 56.286 - 7.01% 7
7 GRR 6.933 6.517 - 6.00% 6
8 MGX 24.363 22.963 - 5.75% 8
9 NWH 41.086 39.543 - 3.76% 7
10 BHP 280.180 271.866 - 2.97% 8
 

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article 3 months old

The Short Report

By Andrew Nelson

For the week to 05 September 2012, significant increases in short positions far outweighed significant decreases, both in terms of the numbers and in terms of the average magnitude of the changes. Just one stock saw its short position pull back by more than one percentage point over the period, while nine stocks experienced a greater than one percentage point increase.

We’ll start our coverage on the decrease side of the ledger, as it is a fairly short list of just one. After last week sitting on the top of the increase list, Allied Gold ((ALD)) finds itself on top of the weekly short decrease leader board this week, with total shorts decreasing by 2.49 percentage points from 2.81% to 0.32%. Investors have seemingly come to grips with the St Barbara Mines ((SBM)) merger that was approved by the High Court a few weeks back.

St Barbara, who were number two on the increase list last week right behind Allied didn’t respond in the quite the same fashion. Shorts in SBM actually increased a further 0.87 percentage points from 3.60% to 4.47% over the period. The stock remains Neutrally regarded by brokers in the FNArena database, with one Buy, Hold and Sell call recorded. The company’s FY result was reviewed by all three brokers towards the end of August, with Macquarie noting some doubts about the risk/reward profile of the merger.

Number eight on this week’s Top 20 list (that being a list of the 20 most shorted stocks on the Australian market) also booked a decline in its overall short position, albeit a minor one. Shorts in the shares in Cochlear ((COH)) declined 0.42 percentage points to 9.51% from 9.53%. The stock is negatively regarded by brokers in the FNArena database, with 4 Sells and 4 Neutrals. Yesterday, the company announced new N5 failure rates from US data that most brokers saw as a sign of improvement. Of course, this news would have had no impact on short position moves up to Sept. 5.

Number 19 on this week’s Top 20 list, Carsales ((CRZ)), also featured near the top of the decliners list, with short positions coming off 0.47 percentage points to 7.59% from 8.06%. Full year earnings in mid-August were well received. Again, while having no bearing on last week’s short position moves, Macquarie noted this Monday that it seems the threat from News Ltd’s ((NWS)) Carsguide that many were expecting to take a chunk out of Carsales has pretty much proved a non event.

Switching focus to the other side of the table, we see that three of the top 4 biggest increases in short position over the week were booked by retailers. Shorts in The Reject Shop ((TRS)) advanced 2.77 percentage points from 7.87% to 10.64%, seeing it now sit at number 5 on the Top 20 list. The company’s FY efforts were fairly well received by brokers late August; with Credit Suisse even lifting its call to Neutral post release. The Reject Shop would likely be higher on the list were JB HiFi ((JBH)), Flight Centre ((FLT)), or Fairfax ((FXJ)) to relax their grip on their seemingly permanent Top 5 spots a little.

Fellow retailer Myer finds itself at number two on the increase list, helping it to easily maintain its position in the Top 20. Short positions in the company increased by 2.70 percentage points from 7.23% to 9.93% over the week. The company reports FY numbers today and just this Monday analysts at Citi voiced their concerns about falling margins. The guys across the street at David Jones also saw their short position increase significantly, rising 2.27 percentage points from 7.18% to 9.45%.

Cabcharge saw its short position grow by 2.57 percentage points from 1.61 to 4.18%. In-line FY results were fairly well recieved in the last week of August and the stock is Neutrally regarded by brokers in the FNArena database, boasting one Sell, one Buy and four Holds.

Engineering services companies also featured amongst the biggest increasers, with Downer EDI ((DOW)), UGL ((UGL)) and Monadelphous ((MND)) all seeing their short position increase by more than 1%. Shorts in both Downer and UGL lifted by 1.71 percentage points, taking Downer to 3.69% shorted and UGL to 5.84%. Monadelphous’ short position rose 1.45 percentage points to 5.88%.

While there has been little of note from Downer over the past few weeks, last week saw UGL host analysts in Shanghai to talk about the new strategy. The response was fairly positive for the most part. Both stocks are regarded positively by brokers in the FNArena database, although out the two, Downer is the more favoured. UGL had to issue a profit warning in August.

The weekly Top 20 list looks pretty much the same as last week, with a only a few minor position changes of note.

Discretionary retail plays continued to dominate the top 20 most shorted list, with investors and brokers remaining concerned about the uncertain consumer outlook. Significant short positions were maintained by JB Hi-Fi ((JBH)), Flight Centre ((FLT)), The Reject Shop, Harvey Norman ((HVN)), Myer and David Jones. All remain in the top 10.

Resources and resources services stocks also maintain their prominent positions in the top 20.  Lynas ((LYC)) and Iluka ((ILU)) remain in the Top 10, while numbers 11-20 are dominated by base materials plays of various description such as CSR ((CSR)), Alumina ((AWC)), Paladin ((PDN)) and Fortescue ((FMG)).

The picture was quite similar looking at the monthly changes to short positions, with 21 stocks booking an increase of 1 percentage point or more, while just eight stocks enjoyed a better than 1 percentage point decrease in position.

The most prominent move on the decrease side of the ledger was booked by Discovery Metals ((DML)), with its short position falling 3.02 percentage points from 5.31% to 2.29%. The latest broker commentary on the stock came from Citi at the end of August, with the broker worried that costs will come in much higher than expected. The broker has DML at Sell, versus two Buys and a Neutral that are also recorded in the FNArena database.

Carsales was number two on the decrease list, down 2.74 percentage points from 10.33% to 7.69% shorted. Next was Seven West ((SWM)), whose short position declined 1.93 percentage points from 3.77% to 1.84%.  The stock is very positively regarded in the FNArena database, with broker’s positively reviewing the company’s FY effort on the 23-24 of August.

The most significant monthly decrease was posted by Silver Lake Resources ((SLR)), with JP Morgan liking the FY result last week and seeing potential upside from the Integra Mining ((IGR)) acquisition.

APA Group ((APA)) was next on the list, with short positions pulling back 2.80 percentage points to 4.51%, while Whitehaven Coal’s ((WHC)) short position improved by 2.43 percentage points to 3.92% shorted. The latter stock enjoys across the board Buy call in the FNArena database.

Monadelphous and Mesoblast ((MSB)) round out the top 5 decliners list. Both companies enjoy marginally positive ratings in the FNArena database and neither have drawn broker commentary over the past three weeks.

Looking at the week to 10 September, analysts from RBS note short positioning across the market remains at a record high average of 2.4%. Small to mid-cap resource stocks like Iluka and Panoramic Resources ((PAN)) remain key targets. The broker also points out that shorts in both Gold and Iron Ore stocks have doubled in the past six months, while Capital Goods stocks have also seen a recent spike in short interest.

On the other hand, short covering in banks has been the recent trend, with short decreases in Westpac ((WBC)) and Commonwealth Bank ((CBA)) more than offsetting the rise in shorts booked by National Australia Bank ((NAB)), which the broker notes has gone from 0.4% to 1.0% over the past two weeks.

Top 20 Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 19697908 98850643 19.93
2 FLT 12714644 100072666 12.71
3 LYC 194606019 1715029131 11.35
4 FXJ 263096984 2351955725 11.19
5 TRS 2808625 26092220 10.76
6 ILU 42481692 418700517 10.15
7 MYR 58213554 583384551 9.98
8 COH 5509152 56972605 9.67
9 DJS 50142816 528655600 9.48
10 HVN 97646834 1062316784 9.19
11 CSR 45278798 506000315 8.95
12 LNC 45070275 504487631 8.93
13 AWC 211621322 2440196187 8.67
14 PDN 65993967 835645290 7.90
15 FMG 241608127 3113798659 7.76
16 SGT 10509671 154444714 6.80
17 GNS 55105305 848401559 6.50
18 MSB 18505035 284478361 6.50
19 CRZ 14981006 233689223 6.41
20 WTF 13557185 211736244 6.40

To see the full Short Report, please go to this link

IMPORTANT INFORMATION ABOUT THIS REPORT

The above information is sourced from daily reports published by the Australian Investment & Securities Commission (ASIC) and is provided by FNArena unqualified as a service to subscribers. FNArena would like to make it very clear that immediate assumptions cannot be drawn from the numbers alone.

It is wrong to assume that short percentages published by ASIC simply imply negative market positions held by fund managers or others looking to profit from a fall in respective share prices. While all or part of certain short percentages may indeed imply such, there are also a myriad of other reasons why a short position might be held which does not render that position “naked” given offsetting positions held elsewhere. Whatever balance of percentages truly is a “short” position would suggest there are negative views on a stock held by some in the market and also would suggest that were the news flow on that stock to turn suddenly positive, “short covering” may spark a short, sharp rally in that share price. However short positions held as an offset against another position may prove merely benign.

Often large short positions can be attributable to a listed hybrid security on the same stock where traders look to “strip out” the option value of the hybrid with offsetting listed option and stock positions. Short positions may form part of a short stock portfolio offsetting a long share price index (SPI) futures portfolio – a popular trade which seeks to exploit windows of opportunity when the SPI price trades at an overextended discount to fair value. Short positions may be held as a hedge by a broking house providing dividend reinvestment plan (DRP) underwriting services or other similar services. Short positions will occasionally need to be adopted by market makers in listed equity exchange traded fund products (EFT). All of the above are just some of the reasons why a short position may be held in a stock but can be considered benign in share price direction terms due to offsets.

Market makers in stock and stock index options will also hedge their portfolios using short positions where necessary. These delta hedges often form the other side of a client's long stock-long put option protection trade, or perhaps long stock-short call option (“buy-write”) position. In a clear example of how published short percentages can be misleading, an options market maker may hold a short position below the implied delta hedge level and that actually implies a “long” position in that stock.

Another popular trading strategy is that of “pairs trading” in which one stock is held short against a long position in another stock. Such positions look to exploit perceived imbalances in the valuations of two stocks and imply a “net neutral” market position.

Aside from all the above reasons as to why it would be a potential misconception to draw simply conclusions on short percentages, there are even wider issues to consider. ASIC itself will admit that short position data is not an exact science given the onus on market participants to declare to their broker when positions truly are “short”. Without any suggestion of deceit, there are always participants who are ignorant of the regulations. Discrepancies can also arise when short positions are held by a large investment banking operation offering multiple stock market services as well as proprietary trading activities. Such activity can introduce the possibility of either non-counting or double-counting when custodians are involved and beneficial ownership issues become unclear.

Finally, a simple fact is that the Australian Securities Exchange also keeps its own register of short positions. The figures provided by ASIC and by the ASX at any point do not necessarily correlate.

FNArena has offered this qualified explanation of the vagaries of short stock positions as a warning to subscribers not to jump to any conclusions or to make investment decisions based solely on these unqualified numbers. FNArena strongly suggests investors seek advice from their stock broker or financial adviser before acting upon any of the information provided herein.

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article 3 months old

Weekly Broker Wrap: Banks, Retail and Earnings Forecasts

By Andrew Nelson

While it’s fairly easy to say that recent FY results beat market expectations by a little this reporting season, the statement can nonetheless be a little misleading. As while top line numbers may have come in a little better than forecasts, things weren’t as clear cut for forward estimates.

Last week, Goldman Sachs totalled up the number and found that while results from the August 2012 reporting season were 2.3% ahead of the analysts' forecasts, downgrades going forward were an overriding feature. In fact, the broker has downgraded FY13 earnings for almost half of the companies under coverage, while upgrading forecasts for only 21% of companies.  

And there weren’t just more downgrades than upgrades either, as the average size of downgrades also outpaced the average size of upgrades as well. The median upgrade to FY13 EPS forecasts was 4.3%, while the median downgrade size was 5.9%.

The sectors that experienced the largest downgrades to FY13 forecasts, on a market cap adjusted bias were Steel, Gold, Diversified resources, Gaming and Building materials. Upgrades were recorded across the Energy, Info tech and Transport sectors.  

The good news is the broker continues to see significant earnings leverage across the market given current earnings forecasts are based on margins that are close to their 10-15 year lows.  It’s all about the cycle turning, but Goldman Sachs still sees a number of structural issues such as slower credit growth, high household savings levels, tight financial conditions and the strong AUD that it feels will continue to keep margins under pressure and thus forestall any earnings recovery. This is especially so in for Industrial sector earnings, notes the broker.

Overall, the broker points out the best looking stocks were the ones best able to confirm an ability to grow given industry positioning and continuing investment, and the ones that demonstrated the ability to maintain secure income streams and attractive yields. On the broker’s numbers, such stocks included, but are not limited to ANZ Bank ((ANZ)), Brambles ((BXB)), CSL ((CSL)), Santos ((STO)), Telstra ((TLS)) and Wesfarmers ((WES)). Among the smaller capped companies, the broker liked Bradken ((BKN)), Domino’s ((DMP)) and REA Group ((REA)).

Goldman Sachs' overall post-reporting season bottom-up FY13 ASX300 EPS forecast is for growth of 9.1% for the Industrials sector, 8.5% for Resources Sector and 6.6% for the Major Banks.

Now let’s talk about a few issues facing the banks. Analysts at Macquarie note that gearing levels may well come under increasing pressure, as impaired assets don’t really have to increase to have BDDs (bad & doubtful debt) increase or stay flat, given BDD top-ups. Thus, a protracted run of declining asset values and extension risk could lead to the need for provisions to be increased.

What’s worse is the size of the downgrades could even be more than 10%, were declining asset values and extension risk working in unison.

The silver lining in the broker’s tale is that it seems the Big-4 have taken a fairly intelligent approach to impaired loans, with workouts undertaken to recover debt rather than the fire sale approach of days gone by. The broker notes this lesson was learnt back in the early 1990s, although there is risk if others don’t play ball and move to exit positions early at substantial discounts. There could also be disadvantage if the market for second tier assets remains closed, although, Macquarie thinks a “weaker for longer” scenario will lend itself to the provisioning of top-ups.

And here’s another bit of news for the banks, this time from Credit Suisse. The broker notes that the most recent survey of Australian bankrupts, from 2011, shows the actual incidences of bankruptcy were at their lowest level since 2002. The broker notes there is support coming from the fact that home ownership among bankrupts is increasing, thus providing collateral, while there has also been an increase in the overall ability to realise assets.

On the other hand, the broker notes there is a growing proportion of bankrupts with more than $50,000 of unsecured debt, while the instance of  bankrupts re-offending has lifted to 16%. The broker notes that fewer bankrupts are unemployed and the income of bankrupts continues to increase. All up, this makes for a concerning picture, thinks Credit Suisse, as the trends imply that bankrupts are increasingly found among the employed.

South East Queensland is home to the highest incidences of bankruptcy, with  7.7%  of  total  personal  insolvencies  and  8.2%  of  all  bankruptcies.  This number puts South East Queensland well ahead on the leader board, as number two and three, while the NSW South Coast and the Qld Central Coast were at 6.2% and 6.4% respectively.

In 41% of the cases, economic conditions were to blame. Next is unemployment, which contributes 34% to overall numbers for both business related and non-business related bankruptcies.

Analysts at Deutsche Bank gave us a bit more seemingly bad news for the Australian retail sector. After sorting through recent results and outlook statements from a number of retailers, the broker just can’t see a consumer recovery in 2013.

With that said, Deutsche does see a few bright spots such as a improving gross margins, especially in clothing, while rents and online sales also look to be on the up. The broker continues to like exposure to companies that possess drivers outside the general macro environment. Number one on this list is Premier Investments ((PMV)) given a nice cost cutting buffer and an undemanding valuation. Super Retail ((SUL)) and Domino’s also fit the broker’s criteria, but current valuations do not present attractive entry points, it feels.

Citi also sees an emerging problem for retailers in Australia, at least those involved in the gadgets and gizmos business, and it’s called Apple. In total, the company’s sales in Australia and NZ are over $4.8bn and they are shifting profit away from consumer electronics retailers.

Apple’s sales have tripled in the past three years on the back of iPhone and iPad sales, while the sales in the broader sector were fairly flat. Yet Apple's sales account for 20% of JB Hi-Fi’s Australian sales and 2% of Harvey Norman’s sales and at much lower margins than most other products. Thus while the broker expects consumer electronics spend will likely remain strong in tablets and smartphones, the shift is negative for retailers given lower margins on Apple products.

And with Apple and JB Hi-Fi continuing to build more stores, as well as Masters ((WOW)) and Bunnings (WES) expanding whitegoods offerings, there is actually $468m in new sales expected for the industry in FY13, which offsets the estimated $414m to be saved via store closures. Thus the broker sees only limited sector benefit via sector rationalisation and store closures, with Citi believing more store closures are needed to restore consumer electronics industry profits.

This general trend will also see no help on the macro front in the short-term. UBS noted last week that the August employment figures came in weaker than expected, with the trend continuing its downward trajectory. Most of the downturn came from the part-time segment of the workforce, with full-time numbers remaining fairly flat.

Jobs growth is now clearly softening, with the broker citing the net fall over the last three months, which it notes has now fully reversed the more optimistic tone that was generated earlier in the year. Hours worked are also weakening and UBS sees this as a good leading indicator of a further slowing in household income growth.

Yet despite the apparent slowing in jobs growth, the broker notes that a drop in the participation rate at least saw the unemployment rate at 5.1%, which remains within the range of the last few years. All in all, the broker thinks the “big picture” fundamentals have certainly worsened over the past month and this in turn increases the likelihood of the RBA making a further easing move.

 
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