Tag Archives: Consumer Discretionary

article 3 months old

Weekly Broker Wrap: Global Investor Confidence Rising

By Chris Shaw

A survey of nearly 700 institutional clients by Barclays Capital has shown global investor confidence has risen significantly over the past three months. The lift reflects the expectation prospects for the US economy are likely to continue improving as well as the fact asset valuations are not a major concern at current levels.

While confidence has improved, Barclays notes clients are not overly bullish, which is acknowledgement many risks remain such as the sovereign debt crisis in Europe. The survey showed 38% of respondents expect at least one country will leave the euro zone this year. Barclays views this number, down from 50% in the same survey last year, as still uncomfortably high given the potential significance of such an outcome.

Among its clients, Barclays notes 37% view equities as likely to be the strongest performing asset class, followed by credit at 18%. This compares to December survey results that showed 34% viewed bonds as the likely best performer compared to 19% for equities. 

For clients that are equity market investors, the survey showed 71% expect equity prices will increase by 5% or more by the end of this year. This measure is up from 25% last December. Only 10% of such clients expect a fall of at least 5%.

Confidence has also improved in other asset classes, with Barclays noting 39.5% of investors in credit markets expect US high yield securities to be the best performer. Foreign exchange investors see best results coming from G10 currencies, followed by emerging market commodity currencies.

While investors were also fairly confident about the coming year in the first quarter survey last year, Barclays suggests conditions are somewhat different now, as while concerns over the euro zone crisis remain they have diminished somewhat.

A positive is both within and outside the US, monetary policy is expected to remain loose, which should prove to be supportive of economic growth. 

BA Merrill Lynch has conducted a similar survey, finding while global equities have risen 28% from their lows of last October, sentiment is far from overly bullish. Cash levels remain high, while March allocations to equities, Europe and Banks rose only modestly from the previous month.

From a macro perspective, BA-ML notes its survey shows investors are now pricing out fresh central bank liquidity measures, as 47% now say there will be no QE3 in the US, which is up from 36% in the previous survey. It is a similar story in Europe as 43% expect no new European Central Bank QE, up from 23% previously.

In terms of asset allocations, BA-ML notes investors remain overweight equities and commodities and are underweight bonds and cash. Among equity markets, emerging market positions remain very overweight, long US equities remains popular and underweight European equities is still the case for most investors. Allocations to Japan rose strongly from the previous month.

In the view of BA-ML, the reluctance of investors to trim emerging market allocations may partly reflect an improving macro outlook, as a net 28% of investors see the global economy strengthening over the next 12 months. This is up from 13% last month.

Among Asia Pacific investors, BA-ML notes while overweight China remains a dominant position allocations fell to a five-month low of plus 26%. Hong Kong is the next most favoured market at plus 18%. Australia remains the least loved market in the region at a minus 13% position.

With respect to the Australian market, Deutsche Bank suggests conditions for a recovery in deposit margins for the major banks are emerging, which could deliver significant upside surprise to profits going forward.

This can be explained by the correlation between falling wholesale funding costs and improving deposit spreads of 0.8x, so the recent 70-80 basis point reduction in wholesale funding costs should see deposit rates reduce, so boosting industry margins.

For every 20-basis point improvement in spreads there is a 5-7 basis point improvement in group margins, which Deutsche suggests would translate to a 3-4% upgrade in earnings per share. The broker suggests ANZ Banking Group ((ANZ)), Commonwealth Bank ((CBA)) and Westpac ((WBC)) should benefit by around the same amount from this theme, while National Australia Bank ((NAB)) would lag given its UK operations.

Among the major banks Deutsche rates ANZ and NAB as Buy, while ascribing Hold ratings to CBA and Westpac.

UBS has looked more closely at the impact of department stores on Australian REITs, especially those involved in leasing retail space. This market is significant given department stores contribute around 5% of total rent, occupy about 20% of gross lettable area and pay rent of around $200-$250 per square metre.

At present, UBS notes the two major department stores in Australia are at opposite ends of the spectrum. Myer ((MYR)) is focused on trying to optimise its store network and returning space to landlords when possible, while David Jones ((DJS)) has a relatively small current footprint but is committed to growing its store network.

By income, UBS estimates CFS Retail Property ((CFX)) has 7.5% exposure to department stores, Westfield Retail ((WRT)) 6.0%, GPT ((GPT)) 4.0% and Centro Retail ((CRF)) 2.1%. The importance of these exposure levels, in the view of UBS, is concerns from retailers on rents are unlikely to go away anytime soon.

This suggests to UBS a cautious stance on those stocks where there is no capital management or capital recycling to prove up net asset value is appropriate. Among the REITs the broker's order of preference remains Westfield Group ((WDC)) and Charter Hall Retail ((CQR)) as the top picks, following by mid-weightings on CFS Retail, GPT, Centro Retail and Westfield Retail. UBS continues to prefer CS Retail to Westfield Retail.

Still in relation to retail in Australia, BA-ML notes earnings growth for food and beverage producers and retailers has been in decline for the past two to three years, this rate of decline picking up sharply over the last six to 12 months.

While the retailers have attributed weaker earnings to cyclical factors such as adverse weather and weak consumer spending, BA-ML sees the issue as more structural. These include over-investment in an already crowded market, a large proportion of investment being on property developments and renovations and the effective entry of a new major competitor given the resurgence in Coles over the past couple of years.

BA-ML argues the consumer sector is currently experiencing margin pressure from price deflation and increasing costs, with these stemming more from over-investment than from cyclical factors. This implies a lengthy period of margin pressure for the Australian food and beverage sector. 

On BA-ML's numbers, the three main food retailers in Australia need to lift earnings before interest and tax (EBIT) by around $1.3 billion over the next three years to make an acceptable rate of return. A concern in achieving this is retailers are likely to step up what are already intense efforts to boost earnings via measures such as price cuts, which could cause a worsening outlook for both consumer products and the retailers.

Given price deflation is expected to stay for at least some time, BA-ML suggests Australian consumer companies are likely to realise, at best, low single digit earnings growth over the next two to three years. 

For BA-ML a key will be owners and managers adjusting growth expectations to reflect the new market reality. This means not acting in an overly ambitious manner by investing to sustain abnormal growth rates, as such action could generate material dilution to returns on investment.

BA-ML notes the leading consumer stocks in Australia – Woolworths ((WOW)), Wesfarmers ((WES)) and Coca-Cola Amatil ((CCL)) are all trading on earnings multiples of 14-15 times at present, while dividends are better than 4.5%.

A company offering 3% growth with a cost of equity of 10% and a dividend yield of around 5% should have a price to growth multiple of around 1.2 times on BA-ML's numbers. This equates to an earnings multiple of around 10 times, well below current multiples for the sector leaders. This highlights BA-ML's caution in terms of investing in the sector at current levels.

JP Morgan has reviewed its coverage of emerging companies, noting since the start of 2012 the Small Industrials accumulation index has risen 15%. This is outperformance relative to an 8% increase in the Small Resources index and the 4% and 5% gains for S&P/ASX100 Industrials and Resources indices.

In JP Morgan's view the primary reason for the recent outperformance has been earnings multiple expansion, as the Small Industrials are now trading at a premium of around 10% relative to the S&P/ASX100 Industrials on a 12-month forward basis.

Among the emerging cap stocks under coverage, JP Morgan rates Asciano ((AIX)), Aristocrat ((ALL)), Ausdrill ((ASL)), Blackmores ((BKL)), Bradken ((BKN)), Credit Corp ((CCP)), Dulux ((DLX)), Fantastic Holdings ((FAN)), Flight Centre ((FLT)), Henderson Group ((HGG)), iiNet ((IIN)), Jetset Travelworld ((JET)), Miclyn Express ((MIO)), Norfolk ((NFK)), NIB Holdings ((NHF)), Programmed Maintenance ((PRG)), QRxPharma ((QRX)), REA Group ((REA)), SAI Global ((SAI)), Silex Systems ((SLX)), Seven Group ((SVW)), Transfield Services ((TSE)), Thinksmart ((TSM)) and Wotif.com ((WTF)) as Overweight.

Among the REITs, JP Morgan has Overweight ratings on Astro Japan ((AJA)), Carindale Property Trust ((CDP)), Charter Hall Group ((CHC)) and FKP Properties ((FKP)), while for the resource plays Overweight ratings are ascribed to Australian Worldwide ((AWE)), Aston Resources ((AZT)), Grange Resources ((GRR)), Hillgrove Resources ((HGO)), PMI Gold ((PVM)), Roc Oil ((ROC)), Silver Lake ((SLR)), Venture Minerals ((VMS)) and YTC Resources ((YTC)).

Among JP Morgan's Underweight recommendations are REIT plays Bunnings Warehouse Property ((BWP)) and Charter Hall Retail and resource plays Aurora Oil & Gas ((AUT)) and Sandfire Resources ((SFR)).

Among the emerging industrials, JP Morgan is Underweight on Austar ((AUN)), Billabong ((BBG)), Envestra ((ENV)), Gunns ((GNS)), Hastie ((HST)), Matrix Composites ((MCE)), Nufarm ((NUF)) and PaperlinX ((PPX)).


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article 3 months old

A Tale Of Three Retailers

By Greg Peel

“The retail store is not dead,” says Alison Paul of Deloitte, “but is likely to evolve as the lines between the physical and virtual worlds begin to blur”. There are four things retailers should keep in mind as they build a store in the new environment, suggests Ms Paul: (1) refresh strategy; (2) improve the in-store customer experience; (3) revive talent management strategies; (4) connect with customers virtually in the physical store.

It is perhaps no surprise, therefore, that struggling department store retailer David Jones ((DJS)) yesterday announced a new three-point strategy, “requiring the company to invest heavily in technology, people and processes over the next year or two”, as BA-Merrill Lynch puts it, or as Citi puts it, “a three year strategy plan with a focus on online shopping enablement, more staff service and continued store investment”.

Alison Paul could have been DJ's advisor, except that her above comments were made in reference to US retailers and noted by Citi's analysts across the Pacific. What does this tell us? Well, it tells us that struggling Australian retailers are not struggling simply from being Australian. Retailers are facing the same transitional issues in the US, and no doubt the story is the same across the Western world.

That is not to say that Australian retailers don't have their own unique problems as well, because they do. Australians were always going to be fast embracers of the internet and online shopping, but the strong Aussie dollar has accelerated that shift. A strong Aussie should help local importers of consumer goods, but rather consumers have found they can buy the same products online with very reasonable delivery times and freight charges for a lower net price. A much lower price.

And that is problem one that DJ's and co have had to wake up to, that which is known as “global price harmonisation”. 

When I were a lad the Aussie was weak and freight charges from across the seas quite stiff, so everything imported was very expensive. And we got used to it. So used to it that every overseas trip was seen as a shopping expedition. And it lasted so long that even Apple recognised Australia as somewhere the base price of its iThings could be that much higher than in America. Us muppets would pay the price anyway. But global price harmonisation means prices around the globe for the same item must now fall into line because of the power and convenience of the internet.

This is a challenge for David Jones. Another problem for David Jones, and for many long established, large Australian retailers, is that the internet is not a fad. Online sales may represent only a small percentage of all sales at this point but it's where all the growth is. DJ's has not caught up, and must now catch up from a standing start. And another reason Australians are embracing the internet is because they're sick of walking into stores and not finding anyone to serve them. Or at least not finding anyone to serve them who could honestly care less. DJ's has treated Aussie shoppers with contempt and now they have to win those customers back with good ol' fashioned store service.

I have recently bought a few different things on the internet from both offshore and local suppliers. In the local case, I needed to ask a couple of questions so I rang, and was answered straight away by a human who fell about themselves to be helpful. I did this with three different suppliers and the experience was the same each time. Makes a difference, doesn't it?

David Jones saw its profits fall 20% in the first half of FY12 and no one was the least bit surprised. Analysts expected the second half to see another 20% fall, but management has alerted the market that the figure will be more like 40% as the company spends money to improve service and systems both in-store and on-line and because the company's credit card earnings will halve.

It's a funny thing about local retail analysts. After the GFC hit they assumed a period of consumer stagnation but were naively adamant it would not be long before pre-GFC spending frenzy levels would be back. It took a while, but eventually they realised those days are history, and adjusted down to simply expecting a return to more modest, historical spending trends by next year. That next year was unfortunately always next year, and now finally analysts have conceded that we may start spending again one day, but no one knows when that day will be. It is in this environment DJ's has to pick itself up and attempt to return to growing profits. Can they do it?

If the analysts agree on one thing, it is that David Jones' new strategy is a step in the right direction. However, as Deutsche Bank laments, if only DJ's had spent this money with some foresight back before the GFC when the company was rolling in it and trampling on rival Myer ((MYR)). Myer now has a big head start in doing exactly what DJ's now plans to do. But DJ's didn't use the money wisely, and now has to battle back through the headwinds of a still-weak consumer and growing internet use.

As for the longstanding DJ's credit card, it is a creature of a bygone era. Consumers are no longer buying on credit, having been severely burnt in the GFC. And if they are, the DJ's card with its lack of reward points and high charges is no match for the plethora of other offerings.

David Jones earnings expectations now have to be rebased, which means taking these new strategy costs into consideration and starting from a much lower level in forecasting earnings for the years ahead. RBS Australia does not believe the market is appreciating this rebasing, even after selling the stock down yesterday. Every analyst agrees that even a good strategy provides for extensive execution risk, and most believe DJ's strategy spending will have a long way to go, thus risking downside to management's current expectations of “flat” earnings growth in FY13-14. With little to be hopeful about in the near term, DJS is currently worth not much more than the value of its properties, Merrill Lynch suggests.

Yet the market remains hopeful, it would seem. Perhaps it was because DJS offered such great yields back in 2009 (which it achieved through cost-cutting, that's why customers have to send out search parties to find a shop assistant) that investors are loathe to fully abandon the stock. Analysts agree that DJ's valuation discount to the index is insufficient, and to that end both RBS and Deutsche have today downgraded the stock to Sell to join Merrills, JP Morgan and Credit Suisse (and Goldman Sachs who isn't in our database), while Citi, UBS and Macquarie are so far siting on Neutral. No one has a Buy rating. 

Analysts have all taken a knife to earnings forecasts and the average target has fallen to $2.37 from $2.60, however both UBS and Macquarie are yet to update their forecasts.

The only other reason the market may be maintaining a bit of interest in DJ's is because of recent private equity interest in Australian retailers, with Billabong ((BBG)) the latest to draw attention and Myer having already been through the private equity turnaround. Credit Suisse's view on that subject is that DJS is simply not cheap enough to be attractive, unlike the other two.

David Jones is not dead – yet.

New Zealand-based Kathmandu Holdings ((KMD)) is a company that knows all about spending money, it would seem. Kathmandu has spent the last couple of years plying funds into promotion, new brands and store rollouts, and every time the company reported sales numbers it blew analysts away – until yesterday. Oh how the mighty have fallen. It seems KMD's spending has finally caught up with the retailer. DJ's beware.

There was nothing wrong with KMD's sales result yesterday. At 15.4% growth it was another great result. But what shocked analysts, and the market, was the disproportionate growth in KMD's costs. Margins in the period crumbled, with margins in Australia falling all the way to 9.1% from 18.4%. KMD spent money on a new distribution system, on new brand and store rollouts, and was stung with hefty local rent increases. It also spent an awful lot on inventory.

Did KMD get too cocky? Analysts agree that money spent has not been spent unwisely, and that it sets the retailer up for solid earnings growth if (and this is the perennial “if”) consumer confidence bounces back. But such result suggests now might be a good time for KMD just to settle back a bit and concentrate on what it's achieved so far.

The question analysts are asking is as to whether KMD's great sales results of previous periods were simply representative of all this spending, and that perhaps the music has stopped with not enough chairs. If that's the case then KMD is now going to find it just as tough as everyone else out there. As a cold weather and outdoor clothing supplier KMD's sales numbers are very weather sensitive, and conditions in Australia have been pretty favourable for a while, including, for example, Sydney's missing summer. A warm Easter and an unseasonably mild winter could impact severely on KMD's numbers which now have to stack up to those impressive numbers of past periods.

Kathmandu's result did not provoke any ratings downgrades from the five brokers in our database covering the stock, and they remain at three Holds and two Buys. But KMD's average target price has been cut to $1.41 to $1.92 and the stock has been hammered by the market.

Is there any joy at all in the Australian retail world? Well consider this observation from UBS:

“Oroton is benefiting from its investment in multi-channel retailing, with online sales up 70% year on year and now around 8% of sales.”

David Jones can only cringe with envy at such prescience. And Kathmandu can take note that OrotonGroup ((ORL)) has also been spending money on promotion and has been starting up outlets in Asia, but has managed to keep its operational costs tightly under control thus reducing its Cost of Doing Business beyond the Asian start-ups. Every analyst agrees that Oroton is a very, very well managed company.

Oroton's sales rose 9% in the period and there is little doubt promotional spend was needed to achieve this result, which means margins were impacted. Yet gross profit dollars still increased in the period, Citi notes. The Asian start-ups have cost money but analysts see Asia as a market of great promise for the little Aussie retailer.

In short, Oroton has shown other local retailers how it should be done. Analysts have cut forecast earnings on reduced margins but have little but praise for the company and faith in its potential to keep on growing sales. Unfortunately the market has not underestimated Oroton either, such that three of the five brokers in our database can only afford the stock a Hold rating. Merrills, on the other hand, suggests ORL “seems to be a rare commodity in the consumer discretionary environment” and retains Buy. Credit Suisse also has an outperform but is yet to update its view.

Oroton's average target has also slipped, but only to $8.85 from $8.95.

A tale of three retailers – how not to do it, how it can all go somehow wrong, and how to do it wisely.
 

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article 3 months old

The Short Report

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By Chris Shaw

While the week from March 6 was relatively quiet in terms of changes in short positions among ASX-listed stocks, some of the changes were of interest given the companies involved.

Among the reductions in short interest of more than 1.0 percentage points were three retail plays – Myer ((MYR)), Billabong ((BBG)) and David Jones ((DJS)). All saw shorts fall to levels now around the 10% mark from more than 11% previously. Despite the falls in shorts for the three companies mentioned, top short positions in the Australian share market continue to be dominated by consumer discretionary plays. JB Hi-Fi ((JBH)), Harvey Norman ((HVN)), Flight Centre ((FLT)) and The Reject Shop ((TRS)) are still among the top-20 shorts in the market.

Among other declines in short positions for the week from March 6 was Beach Energy ((BPT)), where positions fell to 5.29% from 7.21% the week before. This was prior to the company announcing production at a project in Egypt had commenced.

Shorts in Tatts ((TTS)) fell to 1.4% from 2.69% previously, as post a solid interim result Deutsche Bank suggested the second half has started well for the company. Deutsche sees scope for some upside from the recent Tote Tasmania and Lotteries acquisitions.

QBE Insurance ((QBE)) is raising some funds to help with the recent acquisitions of Hang Seng Bank and HSBC Argentina, moves that were generally well received. Shorts have fallen to 3.25% from 4.44% previously as the market adjusts to the transactions and capital raising, though some brokers continue to have some concerns with respect to QBE's capital position. Others, however, are willing to take a more optimistic stance.

On the side of increases in shorts the most significant in the week from March 6 was registered for Singtel ((SGT)), where positions rose to 7.06% from 5.37% previously. The increases follow some broker visits and come post the acquisition of Amobee, a mobile advertising business.

The other largest increase was in Wesfarmers partly protected shares ((WESN)), where shorts rose to 2.61% from 1.56% previously. Shorts in Wesfarmers ordinary shares were largely unchanged.

In terms of monthly changes from February 13 the most significant increases were in Echo Entertainment ((EGP)) and Beach. Echo's shorts increased to more than 7.4% from less than 0.9% previously, as the market continues to question whether Crown ((CWN)) will move on the group from its current stake of around 10%. Beach's shorts have risen over the month to nearly 5.3% from 1.79% previously.

Among stocks where shorts have fallen over the past month were OneSteel ((OST)), where positions have declined to 2.9% from just over 6.0% the month before. Brokers remain positive on the company from a valuation perspective, supported by some increases to forecasts post last month's interim profit result.

Shorts in Seek ((SEK)) fell in the month to just more than 4.1% from just over 6.0% previously, this as brokers have in general lifted forecasts and price targets post the recent interim profit result. Goodman Fielder ((GFF)) also saw short positions for the month fall solidly, total positions now standing at 2.7% from 4.49% previously. The decline is likely related to Singapore agribusiness group Wilmar taking a stake of just over 10% in the company, potentially implying Goodman Fielder is in play.

Elsewhere, an increase in shorts in CSL ((CSL)) of nearly 1.4% in recent weeks to around 1.45% is significant to RBS Australia. The broker is cautious on the stock given moderating sales and growing competition and as CSL appears to be transitioning to a more research-driven organisation. This shift is likely to take time and involve a number of development challenges and regulatory risks.

 

Top 20 Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 20692605 98850643 20.94
2 FXJ 262136108 2351955725 11.15
3 ISO 606809 5703165 10.64
4 BBG 26397994 255102103 10.29
5 DJS 52963906 524940325 10.07
6 MYR 58546325 583384551 10.02
7 FLT 9470628 100017679 9.43
8 COH 5228051 56929432 9.16
9 LYC 151906891 1714396913 8.89
10 EGP 51244627 688019737 7.44
11 GNS 62413343 848401559 7.34
12 SGT 12516986 176974336 7.06
13 WTF 14766631 211736244 6.96
14 HVN 72641318 1062316784 6.84
15 CRZ 14934741 233674223 6.36
16 TEN 63516058 1045236720 6.07
17 TRS 1577120 26071170 6.04
18 PPT 2428858 41980678 5.77
19 ILU 23052563 418700517 5.48
20 BPT 58854487 1113497051 5.29

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.

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

Oz Business Sales Suggest Positive Outlook

 - CBA's BSI rose again in February
 - Data suggest a recovery is gathering momentum
 - Further good news would encourage consumers to lift spending further

By Chris Shaw

Australia appears to be experiencing a firm recovery in spending, as the Commonwealth Bank Business Sales Indicator (BSI) once again showed positive growth for February.

The bank's BSI measures economy-wide spending by tracking the value of credit and debit card transactions processed through CBA point-of-sales terminals, which reflects around 30% of the total market.

In February the BSI rose by 0.7% in trend terms, this following rises of 0.9% in both December and January. CBA executive general manager of Local Business Banking, Matt Comyn, said the figures indicate the recovery is gathering momentum as the willingness to spend is becoming more defined monthly.

While spending habits remain weak when compared to pre-GFC standards, the BSI data show the intention to continue spending is there. This is a positive for the broader economy in Comyn's view. Despite this, confidence overall remains low and Comyn notes consumers continue to be spooked easily. This means any negative economic news has the potential to quickly change the outlook for spending.

BSI author Craig James, who is chief economist at CommSec, suggests the recovery continues to be framed by how various sectors and states and territories are performing. Factoring this in, James suggests the overall picture is now much more positive than was the case for much of 2011.

As an example, James notes the sectors where the most negative news had been concentrated were the key beneficiaries of increased spending in February. These sectors include the Wholesale Distributors and Manufacturers, Retail Stores and Clothing Stores. 

In contrast, only thee sectors recorded lower numbers in February – Hotels and Motels, Mail Order and Telephone Order Providers and Business Services. Two other sectors – Automobile and Vehicles and Miscellaneous Services were broadly flat.

James notes for the fifth straight month no states or territories recorded weaker sales in trend terms, though the BSI in Western Australia was largely flat. ACT and South Australia delivered the strongest results.

It is James' view that Australian consumers will want to see more good news to increase the amount they spend, with stability in Europe, job growth and calm financial markets all considered key factors with respect to consumer sentiment.


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article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

Changes to broker stock ratings have slowed down significantly post the recent interim profit season, the eight brokers in the FNArena database delivering just six downgrades and nine upgrades over the past week. Note that this week marks a reversal in trend as upgrades outnumbered downgrades. Total Buy recommendations now stand at 51.83%.

Among the upgrades airline stocks feature, as Macquarie lifted its ratings on both Air New Zealand ((AIZ)) and Qantas ((QAN) to Buy. The former was an upgrade from Sell and the latter from Neutral, the changes stemming from adjustments to forex assumptions that boosted earnings estimates and price targets.

Building material stocks also featured, with Credit Suisse upgrading both Boral ((BLD)) and James Hardie ((JHX)) to Buy from Neutral recommendations previously. For Boral the broker is attracted to cyclical leverage and has lifted estimates and price target, while for James Hardie the attractions include additional capital management initiatives, strong free cash flow and a net cash position.

Elsewhere, Macquarie has upgraded Dexus ((DXS)) to Buy from Neutral given recent share price weakness, while Citi has lifted its rating on FKP Property ((FKP)) to Neutral from Sell for similar reasons as the stock has lost more than 19% over the past month.

Deutsche Bank sees enough value in Tatts Group ((TTS)) to upgrade its rating to Buy from Neutral. Along with a positive valuation, Deutsche sees potential for some upside from the recent Tote Tasmania and Lottery acquisitions.

For United Group ((UGL)) Credit Suisse has turned more positive following increases to earnings estimates across the Engineering and Construction sector. An improved earnings outlook is enough for the broker to lift United to its top pick in the sector.

Citi has reviewed the supermarket plays and lifted forecasts and price target for Woolworths ((WOW)) as a result. Scale benefits relative to Coles should provide Woolworths with an ongoing advantage in the broker's view, enough for Citi to upgrade to a Buy rating.

Among the downgrades, Macquarie has moved to a Neutral recommendation from Buy on Ampella Mining ((AMX)) citing valuation grounds, this given a cut to forecasts and price target from factoring in revised forex and commodity price assumptions.

Similarly, Macquarie has moved to a Sell rating on St Barbara ((SBM)) from Neutral previously post revisions to its model assumptions. The downgrade has been supported by a cut to the broker's price target.

Beach Energy ((BPT)) has more risks associated with the Nappamerri shale project than the market is pricing in according to BA Merrill Lynch. These risks include costs, competition and technology and see BA-ML's rating downgraded to Sell from Neutral.

BA-ML has also downgraded Carsales.com ((CRZ)) to a Neutral rating from Buy previously, largely due to valuation issues given recent share price strength. As well, the broker has some minor concerns about the recent Torpedo7 investment as it is outside the traditional focus on classifieds businesses.

Relative valuation has prompted JP Morgan to downgrade Centro Retail ((CRF)) to Neutral from Buy, this following 9% outperformance since last December. Value is also the catalyst for Macquarie's downgrade of Qube Logistics ((QUB)) to Sell from Neutral, as on the broker's numbers the stock is trading at twice the earnings multiple of the small cap index at present.

Aside from the cut to St Barbara's price target by Macquarie the major target price change during the week was for Beadell Resources ((BDR)), UBS cutting its target to $1.40 from $1.50 largely to reflect a recent equity raising.

While earnings forecasts for Sandfire Resources ((SFR)) were adjusted significantly post the recent interim result this needs be kept in perspective, JP Morgan pointing out the company remains in the development phase for its key DeGrussa project.

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Broker Rating

Order Company Old Rating New Rating Broker
Upgrade
1 AIR NEW ZEALAND LIMITED Sell Buy Macquarie
2 BORAL LIMITED Neutral Buy Credit Suisse
3 DEXUS PROPERTY GROUP Neutral Buy Macquarie
4 FKP PROPERTY GROUP Sell Neutral Citi
5 JAMES HARDIE INDUSTRIES N.V. Neutral Buy Credit Suisse
6 QANTAS AIRWAYS LIMITED Neutral Buy Macquarie
7 TATTS GROUP LIMITED Neutral Buy Deutsche Bank
8 UNITED GROUP LIMITED Neutral Buy Credit Suisse
9 WOOLWORTHS LIMITED Neutral Buy Citi
Downgrade
10 AMPELLA MINING LIMITED Buy Neutral Macquarie
11 BEACH PETROLEUM LIMITED Neutral Sell BA-Merrill Lynch
12 CARSALES.COM LIMITED Buy Neutral BA-Merrill Lynch
13 CENTRO RETAIL AUSTRALIA Buy Neutral JP Morgan
14 QUBE LOGISTICS Neutral Sell Macquarie
15 ST BARBARA LIMITED Neutral Sell Macquarie
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 AIZ 50.0% 100.0% 50.0% 4
2 BDR 33.0% 67.0% 34.0% 3
3 FKP 50.0% 67.0% 17.0% 6
4 CDI 50.0% 67.0% 17.0% 3
5 DXS 29.0% 43.0% 14.0% 7
6 UGL 57.0% 71.0% 14.0% 7
7 WOW 25.0% 38.0% 13.0% 8
8 BLD 25.0% 38.0% 13.0% 8
9 QAN 75.0% 88.0% 13.0% 8
10 TTS - 25.0% - 13.0% 12.0% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 SBM - 33.0% - 67.0% - 34.0% 3
2 AMX 100.0% 75.0% - 25.0% 4
3 SFR 40.0% 20.0% - 20.0% 5
4 ORL 60.0% 40.0% - 20.0% 5
5 BPT - 20.0% - 40.0% - 20.0% 5
6 CRZ 33.0% 17.0% - 16.0% 6
7 CRF 33.0% 17.0% - 16.0% 6
8 PRY 63.0% 50.0% - 13.0% 8
9 ARP 25.0% 20.0% - 5.0% 5
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 QAN 2.066 2.158 4.45% 8
2 ARP 8.663 8.818 1.79% 5
3 BPT 1.354 1.378 1.77% 5
4 CDI 0.573 0.583 1.75% 3
5 WOW 26.905 27.143 0.88% 8
6 CRF 1.955 1.958 0.15% 6

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 BDR 1.217 1.117 - 8.22% 3
2 SBM 2.363 2.197 - 7.02% 3
3 AMX 2.083 2.033 - 2.40% 4
4 PRY 3.314 3.289 - 0.75% 8
5 IIN 3.380 3.367 - 0.38% 6
6 TTS 2.515 2.509 - 0.24% 8
7 ORL 8.974 8.954 - 0.22% 5
8 BLD 4.430 4.425 - 0.11% 8
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 BPT 7.360 8.060 9.51% 5
2 CRF 9.600 10.383 8.16% 6
3 QAN 14.225 14.625 2.81% 8
4 TSE 23.829 24.457 2.64% 5
5 IAG 23.450 23.875 1.81% 8
6 FMG 48.439 49.138 1.44% 8
7 AIZ 3.248 3.291 1.32% 4
8 VAH 3.260 3.300 1.23% 5
9 QBE 130.464 131.907 1.11% 8
10 NUF 40.513 40.888 0.93% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 SFR 17.260 - 12.100 - 170.10% 5
2 SBM 40.433 38.300 - 5.28% 3
3 BDR 6.567 6.233 - 5.09% 3
4 IIN 25.750 24.917 - 3.23% 6
5 PBG 7.925 7.688 - 2.99% 7
6 ILU 248.038 242.525 - 2.22% 8
7 WDC 65.350 64.225 - 1.72% 8
8 WHC 17.383 17.217 - 0.95% 6
9 CSR 15.950 15.813 - 0.86% 8
10 BOQ 96.288 95.513 - 0.80% 8
 

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article 3 months old

In The Myer

 - Myer interim slightly below most forecasts
 - Weak sales growth still an issue
 - Yield attractive, earnings outlook not so much
 

By Chris Shaw

Myer ((MYR)) delivered an interim net profit of $87.3 million, which was a 20% decline in year-on-year terms and marginally below most forecasts in the market. Guidance is for full year earnings to decline by 10%, a target seen as somewhat optimistic by some brokers covering the stock.

As an example, Deutsche Bank suggests while the interim result showed an improvement in gross margins despite a tough trading environment, the big issue for Myer is weak sales growth. This weakness has been compounded by news of further delays to Myer's store pipeline and management's goal of rationalising existing space.

This has played into revisions to earnings estimates, as UBS has lowered its FY13 estimates by 4% and its FY14 numbers by 8% to reflect the store roll-out delays. Deutsche has reacted in a similar matter and cut outer year forecasts by more than 5.0%.

Also impacting earnings estimates is increasing costs, as BA Merrill Lynch notes Myer is now reinvesting back into service. As Citi points out, Myer increased staff hours in the first half by 450,000 or 6% but this remains 11% below FY10 levels. 

Citi estimates staff costs would need to increase by $60 million or 190 basis points to match that level, something expected to put some pressure on margins. Short-term BA-ML doesn't see this as an issue as costs elsewhere are being pulled back, but the ability to continue to cut costs to sustain gross margins remains in question for the broker.

Post the interim result, consensus earnings per share (EPS) forecasts for Myer according to the FNArena database stand at 24.5c for FY12 and 25.2c for FY13. The consensus price target is $2.44, which is unchanged from before the interim. Targets cover a wide range, from Credit Suisse at $2.80 to BA-ML at $1.80. 

The range in targets is reflected in a range of views on Myer, with the FNArena database showing the stock is rated as a Buy three times, Hold four times and Sell once. The Sell recommendation comes from BA-ML and reflects the broker's view challenges facing Myer are likely to mean earnings a year from now will be lower than reported in the first half of FY12.

This is based on the view online sales will continue to pressure prices, on further upward cost pressures for the group and a step change down in the Myer-One loyalty scheme. As well, BA-ML sees department stores as suffering from an ongoing loss of relevance in general. Such a combination of factors makes share price outperformance unlikely in BA-ML's view.

Deutsche agrees a share price re-rating is unlikely given a significant improvement in sales growth remains unlikely, especially given delays to the store roll-out program. Citi also rates Myer a Hold, suggesting while the dividend yield of better than 8% fully franked is attractive the earnings outlook is not when the combination of weak sales trends and rising operating costs is expected to continue.

UBS argues the Buy case for Myer by suggesting while full year guidance is challenging it is also achievable. Assuming management's earnings guidance is met, and when factoring in the yield on offer, the broker sees the stock as attractive at current levels. 

Shares in Myer today are weaker and as at 10.40am the stock was down 6c at $2.23. This compares to a trading range of $1.92 to $3.35 over the past year and implies upside relative to the consensus target in the FNArena database of a little more than 6%.


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article 3 months old

Goldman Attracted To Breville Success

 - Goldman Sachs upgrades to Buy rating on Breville
 - Broker attracted to growth potential from international operations
 - Sees value and an attractive yield at current levels

By Chris Shaw

Breville Group ((BRG)) last month delivered a strong interim earnings result, one that saw both UBS and Credit Suisse lift their price targets for the stock while retaining Buy ratings. Today Goldman Sachs has turned similarly positive, lifting its target and upgrading its rating on Breville to Buy from Hold.

The driver of the more positive view of Goldman Sachs is the international operations of Breville, which accounted for 69% of group EBIT (earnings before interest and tax) in the first half of FY12. North America makes up the largest component of the international business, accounting for 51% of group EBIT in the period.

In terms of the North American market, Goldman Sachs sees scope for Breville to double sales over the longer-term. This should come primarily via expansion, as the group achieves greater penetration and opens more stores. New product categories such as the Breville Mini Smart Oven should also deliver some growth in coming years.

A focus on high product quality, product innovation and limited distribution sets Breville up well to win market share in the view of Goldman Sachs, especially as market positioning is different to that of competitors and should prove supportive to margins.

International distribution earnings should also recover in 2H12 thanks to a stronger forward order book and expansion into new regions, which supports the outlook for the international business overall.

In Australia the outlook is for lower earnings growth but Goldman Sachs points out the domestic business will at least be cycling a low base of earnings and there will be benefits from new products and some cost cutting. As well, the Australian business has already felt the full impact of reduced sales to Kmart. 

An additional positive for Breville in the view of Goldman Sachs is a strong balance sheet, as the company had net cash of $23.6 million at the end of the December half year. These funds could be used for either expansion initiatives or capital management, something the broker notes should benefit shareholders in either case.

To reflect stronger international growth expectations Goldman Sachs has followed the lead of the other brokers covering Breville and lifted its earnings per share (EPS) forecasts modestly. Estimates now stand at 32.3c this year and 37c in FY13, which compares to consensus EPS forecasts according to the FNArena database of 32.3c and 34.6c respectively.

Movements in market multiples and a reduction in the relative discount to the Small Industrials earnings multiple sees Goldman Sachs lift its price target for Breville to $4.20 from $3.60. This puts the broker above price targets in the FNArena database, which range from Macquarie at $4.10 to Credit Suisse at $3.80.

On the numbers of Goldman Sachs, Breville is trading on a FY13 earnings multiple of 9.7 times while offering a yield of 6.7%, both of which are regarded as attractive. Dividends should be fully franked at least through FY13.

Macquarie's Buy rating on Breville is based on similar reasoning to that of Goldman Sachs in that growth in international operations and a strong brand suggest the stock is undervalued at current levels. As a reflection of this Macquarie lifted earnings estimates slightly earlier this week, though there was no change in the broker's price target. 

Breville shares closed yesterday at $3.60, which compares to a trading range over the past year of $2.51 to $3.67. The latest share price implies upside relative to the $3.97 consensus price target in the FNArena database of around 10%.


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article 3 months old

The Short Report

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By Chris Shaw

The week from February 28 saw a number of significant increases in short positions on the Australian market, while reductions in short positions were far more modest. Increases of more than five percentage points were experienced by three stocks and of more than two percentage points by eight companies, while only three companies saw short positions fall by more than one percentage point.

On the increase in short positions side the largest was in Echo Entertainment ((EGP)), total shorts increasing from a negligible 0.79% to 7.0% during the week. The change came after an interim earnings report that fell short of some expectations and was regarded in some quarters as a low quality result. Corporate activity remains a possibility with Echo but the likes of JP Morgan question whether there are enough synergies for a deal to be completed.

Beach Energy ((BPT)) saw total shorts increase to 7.21% from 1.74% previously, as while the company continues to try and develop its unconventional gas resources some brokers are cautious in terms of whether the resources can be brought to a successful financial conclusion.

Uncertain end markets remain an issue for Gunns ((GNS)) and this is reflected in short positions continuing to rise to 6.98% for the week from February 28 from 5.0% previously. Shorts also rose in QBE Insurance ((QBE)) to 4.44% from just over 3.0% previously, this coming prior to some modestly accretive acquisitions in the Hong Kong and South American markets.

Shorts increased in Mesoblast ((MSB)) post a slightly disappointing interim earnings result to 4.88% from 1.94% previously, while news of a stem cell trial by Baxter also indicates competition in the group's markets is increasing.

Having trended down in recent weeks shorts in Billabong ((BBG)) turned higher for the week from February 28, rising to 11.47% from 8.82% the previous week. This came on the back of news of Billabong management turning away interest from private equity.

Billabong has moved to number three in terms of the market's largest short positions overall, trailing only JB Hi-Fi ((JBH)) and Fairfax ((FXJ)). Consumer discretionary stocks continue to dominate overall short positions as the top 20 include Myer ((MYR)), David Jones ((DJS)), Harvey Norman ((HVN)) and the likes of Wotif.com ((WRF)) and Carsales.com ((CRZ)).

The Reject Shop ((TRS)) is another consumer discretionary stock where short positions rose for the week from February 28, increasing to 6.19% from 3.62%, while shorts in JB Hi-Fi rose for the week to 21.56% from 19.4% previously.

On the other side of the ledger shorts in Seek ((SEK)) fell to 4.51% from 5.69% in the week from February 28, this change coming post an interim profit result that was slightly better than most in the market had expected.

Shorts have also declined in both Treasury Wine Estates ((TWE)) and OneSteel ((OST)) by a little more than one percentage point for the week, to less than 2.4% for the former and to just over 3.2% for the latter.

With respect to monthly increases for the period from February 6, Iluka ((ILU)) was among the more significant as shorts rose from less than 3.6% to more than 6.1%, while shorts in Bradken ((BKN)) also increased to a more significant 3.09% from 1.21% previously.

The former may reflect the risk of weaker zircon prices if the Chinese property market falls, while for the latter the market may still be adjusting to a slightly weaker than expected interim result.

Bank of Queensland ((BOQ)) experienced one of the more significant declines in short positions for the month from February 6, falling to 3.33% from 5.36%, this despite brokers continuing to trim earnings estimates to reflect the expectation of further increases in bad debt charges.

 

Top 20 Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 21293893 98850643 21.56
2 FXJ 276796151 2351955725 11.79
3 BBG 29367544 255102103 11.47
4 MYR 66772210 583384551 11.42
5 DJS 58619085 524940325 11.14
6 ISO 602790 5703165 10.57
7 FLT 9710768 100017679 9.68
8 COH 5364695 56929432 9.41
9 LYC 154027177 1714396913 8.99
10 BPT 80158446 1113497051 7.21
11 EGP 48132371 688019737 7.00
12 GNS 59345650 848401559 6.98
13 HVN 73307885 1062316784 6.88
14 WTF 14261629 211736244 6.73
15 CRZ 14511701 233674223 6.19
16 TRS 1616407 26071170 6.19
17 ILU 25664725 418700517 6.13
18 TEN 61383524 1045236720 5.89
19 WSA 10332252 179735899 5.76
20 PPT 2357879 41980678 5.61

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

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

With reporting season behind us, changes in broker ratings have declined over the past week, the eight brokers in the FNArena database making just five upgrades and 12 downgrades for the period. Total Buy recommendations now stand at 51.31%. Note downgrades continue outnumbering upgrades (and by a wide margin). Note also most upgrades were from Sell to Neutral.

Incitec Pivot ((IPL)) was among the stocks upgraded, Deutsche Bank moving to a Neutral view from Sell previously on valuation grounds. The change follows a period of share price underperformance and comes despite the broker trimming earnings estimates slightly. Others in the market also adjusted earnings estimates and price targets over the week.

Deutsche also upgraded National Australia Bank ((NAB)) to Buy from Neutral, seeing potential for a review of the bank's UK assets to drive as much as 10-15% valuation upside from potentially positive review outcomes. Deutsche lifted its target to reflect this potential, though UBS saw things differently and last week downgraded NAB to Neutral from Buy. A case of "value" is in the eye of the beholder?

A solid interim profit result and potential for earnings growth from the Pizza Capers acquisition saw RBS Australia upgrade Retail Food Group ((RFG)) to Buy from Neutral, while earnings estimates and price target were also lifted.

Here too the move by RBS was at odds with others, as the previous week JP Morgan had downgraded earnings, price target and rating to Neutral from Overweight given the interim result fell short of its expectations.

The acquisition of the Lounge Lizard project saw UBS lift its estimates for Western Areas ((WSA)), the changes enough for the broker to upgrade to a Neutral rating with the stockbroker citing valuation grounds. No other ratings were changed, though brokers did lift earnings forecasts modestly to reflect the acquisition.

Valuation was behind Citi's upgrade to a Buy on Woodside Petroleum ((WPL)), the broker suggesting recent share price weakness means the base business is priced in and investors are now getting effectively a free option on the Browse and Sunrise projects.

This was it, as far as upgrades for the week are concerned.

On the downgrade side of the market, UBS lowered its rating on Adelaide Brighton ((ABC)) to Neutral from Buy to reflect both a lack of obvious short-term catalysts and the potential for some short-term underperformance if the stock enters the ASX100 index.

While the rest of the market is positive JP Morgan has downgraded Ausenco ((AAX)) to Neutral from Overweight given significant share price gains in recent months, while the broker has similarly downgraded Bank of Queensland ((BOQ)) to Underweight from Neutral given concerns margins may come under renewed pressure in coming months. Earnings and price target for BOQ were also lowered.

Recent outperformance by DuluxGroup ((DLX)) has been enough for UBS to downgrade to a Neutral rating from Buy previously, while the broker makes the same downgrade on Gloucester Coal ((GCL)) to reflect revised valuation on the back of adjusted merger proposal terms.

The news Kagara Zinc ((KZL)) may not be able to continue as a going concern prompted both UBS and Macquarie to downgrade to Sell ratings from previous ratings of Buy and Neutral respectively, both brokers also slashing earnings estimates and price targets.

Oroton Group ((ORL)) also experienced two downgrades during the week, though the changes from UBS and RBS were to Neutral recommendations from Buy previously. The changes reflect the similar view the apparel category will continue to experience tough trading conditions and increasing cost pressures. In a similar vein, UBS also downgraded The Reject Shop ((TRS)) to Neutral from Buy.

For Sandfire Resources ((SFR)) Citi has moved to a Neutral rating from Buy previously as while progress continues at the DeGrussa development, there appears little scope for short-term upside in the broker's view. Earnings forecasts were also adjusted across the market, though UBS noted earnings for the company at present are largely immaterial as the focus is on moving into the production phase of operations.

While there were no significant increases in price targets over the past week, brokers have lowered targets for Hutchison Telecommunications ((HTA)) to reflect a weaker FY11 result that also showed a continuation of subscriber losses.

 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Broker Rating

Order Company Old Rating New Rating Broker
Upgrade
1 INCITEC PIVOT LIMITED Sell Neutral Deutsche Bank
2 NATIONAL AUSTRALIA BANK LIMITED Neutral Buy Deutsche Bank
3 RETAIL FOOD GROUP LIMITED Neutral Buy RBS Australia
4 WESTERN AREAS NL Sell Neutral UBS
5 WOODSIDE PETROLEUM LIMITED Neutral Buy Citi
Downgrade
6 ADELAIDE BRIGHTON LIMITED Buy Neutral UBS
7 AUSENCO LTD Buy Neutral JP Morgan
8 BANK OF QUEENSLAND LIMITED Neutral Sell JP Morgan
9 DULUX GROUP LIMITED Buy Neutral UBS
10 GLOUCESTER COAL LTD Buy Neutral UBS
11 KAGARA ZINC LIMITED Neutral Sell Macquarie
12 KAGARA ZINC LIMITED Buy Sell UBS
13 OROTONGROUP LIMITED Buy Neutral RBS Australia
14 OROTONGROUP LIMITED Buy Neutral UBS
15 SANDFIRE RESOURCES NL Buy Neutral Citi
16 THE REJECT SHOP LIMITED Buy Neutral UBS
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 RFG 33.0% 67.0% 34.0% 3
2 AZT 80.0% 100.0% 20.0% 5
3 WSA 17.0% 33.0% 16.0% 6
4 QBE 50.0% 63.0% 13.0% 8
5 IPL 50.0% 63.0% 13.0% 8
6 RMD 50.0% 63.0% 13.0% 8
7 WPL 13.0% 25.0% 12.0% 8
8 SGN 67.0% 75.0% 8.0% 4
9 NVT 29.0% 33.0% 4.0% 6

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 GCL 60.0% 20.0% - 40.0% 5
2 ORL 80.0% 40.0% - 40.0% 5
3 VAH 100.0% 60.0% - 40.0% 5
4 TAP 75.0% 50.0% - 25.0% 4
5 PAN 75.0% 50.0% - 25.0% 4
6 HGG 60.0% 40.0% - 20.0% 5
7 AAX 100.0% 80.0% - 20.0% 5
8 SFR 40.0% 20.0% - 20.0% 5
9 RSG 50.0% 33.0% - 17.0% 3
10 DLX 57.0% 43.0% - 14.0% 7
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 RFG 2.917 3.067 5.14% 3
2 RSG 1.750 1.833 4.74% 3
3 QBE 12.979 13.410 3.32% 8
4 WSA 5.967 6.133 2.78% 6
5 PAN 2.090 2.137 2.25% 4
6 ARP 8.663 8.818 1.79% 5
7 RMD 3.180 3.213 1.04% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 HTA 0.080 0.055 - 31.25% 3
2 GCL 9.225 8.875 - 3.79% 5
3 VAH 0.493 0.476 - 3.45% 5
4 BOQ 9.345 9.024 - 3.43% 8
5 IPL 3.725 3.681 - 1.18% 8
6 TAP 1.085 1.075 - 0.92% 4
7 SGN 1.240 1.230 - 0.81% 4
8 ABC 3.339 3.326 - 0.39% 8
9 ORL 8.974 8.954 - 0.22% 5
10 AAX 4.485 4.478 - 0.16% 5
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 SYD 0.682 7.082 938.42% 6
2 PAN 4.400 5.050 14.77% 4
3 TAP 3.100 3.300 6.45% 4
4 WSA 30.750 32.333 5.15% 6
5 RRL 15.700 16.375 4.30% 4
6 RSG 26.350 27.200 3.23% 3
7 IAG 23.450 23.975 2.24% 8
8 QBE 130.559 131.524 0.74% 8
9 AAX 33.960 34.140 0.53% 5
10 AMC 50.963 51.188 0.44% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 SFR 17.260 - 12.100 - 170.10% 5
2 AWE 8.286 3.371 - 59.32% 7
3 IGO 6.420 4.080 - 36.45% 5
4 QUB 7.600 6.700 - 11.84% 4
5 VAH 3.500 3.260 - 6.86% 5
6 HGG 18.310 17.685 - 3.41% 5
7 PBG 7.925 7.688 - 2.99% 7
8 IPL 29.600 28.730 - 2.94% 8
9 BOQ 97.425 95.538 - 1.94% 8
10 ORI 189.525 186.938 - 1.36% 8
 

Technical limitations

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article 3 months old

Weekly Broker Wrap: More Model Portfolios Adjustments

By Chris Shaw

With Australia's interim reporting season out of the way investment banks and equity brokers continue making adjustments to their recommended exposures and model portfolios. The week past saw Macquarie, Goldman Sachs, Citi and Credit Suisse update their views and macro-recommendations (top down), while JP Morgan and Deutsche Bank undertook in-depth reviews of companies in the building materials sector.

The general outlook in Macquarie's view is global economic growth won't be fast and will continue to be impacted by concerns such as Europe and Iran, but growth will continue on an upward trajectory. This suggests 1H12 will be broadly constructive for global equities, with the US market likely to lead the way.

Domestically, Macquarie suggests headwinds for the Australian market are greater than for most given the combination of a strong dollar, relatively high interest rates, negative productivity growth and an inflexible industrial relations framework.

This has left Australia uncompetitive across a wide range of industries and is likely to see corporate management teams look to cut costs in an attempt to restore cash flows. This leads Macquarie to suggest FY12 earnings per share (EPS) growth will be negative by around 5.0% (current consensus expectations are sitting around +4%).

Sectors where above average growth is expected are Energy and Mining Services, Macquarie's recommended portfolio being already overweight both. This position is being extended via the addition of Santos ((STO)), with this position being funded by a move to Underweight on BHP Billiton ((BHP)) given an expectation of negative earnings growth this year.

This means Macquarie's overall resource allocation is unchanged. Other resource and energy stocks in Macquarie's recommended portfolio include Rio Tinto ((RIO)), Atlas Iron ((AGO)), PanAust ((PNA)), Oz Minerals ((OZL)), Woodside ((WPL)), WorleyParsons ((WOR)) and Origin Energy ((ORG)).

Outside of the resource sector Macquarie continues to favour a defensive portfolio, with a concentration on a small number of stocks expected to deliver strong top line growth and companies expected to deliver stable and sustainably high dividend yields.

Among the industrial plays in the first category Macquarie's portfolio includes Campbell Brothers ((CPB)), Mineral Resources ((MIN)), WorleyParsons, Ansell ((ANN)) and Ramsay Health Care ((RHC)), while the second category includes of Telstra ((TLS)), Transurban ((TCL)), Wesfarmers ((WES)), Coca-Cola Amatil ((CCL)), CFX Retail Property ((CFX)) and GPT ((GPT)). 

Commonwealth Bank ((CBA)) and Amcor ((AMC)) are also overweight holdings in Macquarie's recommended portfolio.

Goldman Sachs has made a similar review of its model portfolio and concluded now is an appropriate time to turn more cautious on resources, this given a tougher environment to outperform given volume growth rather than higher commodity prices is currently driving earnings.

Key investment themes for Goldman Sachs are a solid earnings profile, especially when combined with an attractive dividend yield, mining investment, energy and deep value plays where re-ratings are possible as market sentiment improves.

This has brought about some model portfolio changes, with Goldman Sachs reducing its exposure to BHP while exiting positions in Rio Tinto, Iluka ((ILU)) and Origin Energy. This created the issue of where to invest the funds being freed up, with major beneficiaries being Telstra and CSL ((CSL)) for the solid earnings theme and WorleyParsons for exposure to energy and the mining investment theme. Woodside and Oil Search ((OSH)) remain the preferred energy stocks.

Among the deep cyclical exposures, Goldman Sachs has switched out of Myer ((MYR)) and into Super Retail ((SUL)), this reflecting the latter's more attractive growth profile and lower execution risk in relation to growth strategies.

The MSCI AC World Index delivered a gain of 5.1% in February, which followed a return of 5.9% in January. But as Citi points out via its model portfolio, investing in the right market at the right time can deliver even better returns. 

Citi's stock market country selection model, which is based on 22 global markets for which ETFs are available, outperformed the benchmark by 0.6% in February, mainly due to relative outperformance from the Austrian and South African markets during the month. 

Austria retains its place at the top of Citi's rankings for the second month in a row, while Germany has moved up to number two position. Brazil has fallen out of that spot to position seven in Citi's rankings. Completing the top five are Korea at number three, Australia at number four and South Africa at number five spot.

At the bottom of the rankings Citi has replaced Hong Kong and Switzerland with Spain and the US, while Italy, Belgium and Mexico continue to hold their places in the bottom five rankings. The shift into this bottom five for the US reflects unfavourable valuation, while Citi points out Spain's inclusion is a reflection of poor short-term momentum and negative earnings revisions.

Market strategists at Credit Suisse used their final wrap of the February reporting season to warn investors not to get too excited about the short term prospects for Australian equities. The share market is merely "fair value", argue Atul Lele and his team, and there remain plenty of headwinds, the lack of any noteworthy growth in profits is only one of them.

Credit Suisse has decided to remain overweight defensives and USD exposures, neutral banks, slightly underweight domestic cyclicals and underweight resources.

JP Morgan has reviewed the outlook for the Building Materials sector, suggesting conditions remain tough given the Australian environment remains weak and the pace of recovery in the US is still slow. At least there are some pricing tailwinds in Australia, which compares to an expectation of further headwinds for prices in the US market.

In individual stock terms, JP Morgan sees some room for optimism with respect to prices for Boral ((BLD)), which would be a positive given the group's leverage to concrete and aggregate prices. This is enough for an Overweight rating to be maintained, a rating also extended to CSR ((CSR)).

For Adelaide Brighton ((ABC)) FY12 will be the key in JP Morgan's view, as a return to growth is needed after FY11 was the first year of no growth in net profit after tax for six years. Adelaide Brighton is currently rated as Neutral, as is Fletcher Building ((FBU)). This reflects a recent cut to full year earnings guidance and the lack of a significant enough lift in NZ data to drive any change to the broker's view.

James Hardie remains the only Underweight rating in the building materials sector for JP Morgan, this due to pricing headwinds that are offsetting any benefits from volume improvements that are starting to emerge. Prices are expected to remain under pressure in coming months while management attempts to retain or grow category share.

Deutsche Bank has conducted a similar review of the building materials sector, agreeing with the assessment of JP Morgan the current demand environment remains under pressure. Where Deutsche's view differs is it sees some upside potential for companies exposed to the US housing market, though any recovery is likely to be a cautious one given a still somewhat fragile economic recovery.

In terms of the outlook across the sector, Deutsche remains of the view market forecasts for Boral and Fletcher Building remain too high, while there is still some balance sheet risk for both companies at present.

A favourable exposure to mining and engineering projects sees Deutsche retain Adelaide Brighton as its top pick in the sector. The fact the company is significantly overweight Western and South Australia should see better than average demand growth relative to other states, which supports Deutsche's Buy rating. A further positive is Adelaide Brighton appears inexpensive relative to peers. In contrast, Deutsche rates Boral, Fletcher Building and James Hardie as Hold.


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