- Alesco lower 1H12 guidance only a month into the year
- Brokers cut forecasts, ratings downgraded
- Citi sees implications for other companies in similar markets
- Downgrades both GUD Holdings and GWA Group as well

By Chris Shaw

It was only a month ago Alesco Corporation ((ALS)) reported full year earnings for FY11 but trading conditions since the profit result have been bad enough to force management to quickly lower earnings guidance for FY12.

Revenue for the first half of FY12 is now expected to be 6% lower than for the corresponding period in FY11, while management's guidance suggests net profit for the half will be between 26-39% lower than for the same half last year. This implies a profit for the period of $6.2-$7.5 million.

JP Morgan notes the main reason for the downgrade to earnings guidance is a significant deterioration in the renovations market in Victoria in particular. This is impacting on earnings in the Functional and Decorative Products division in general and specifically for the Parbury kitchen laminates operations. 

According to RBS Australia, the update also means the challenge in reclaiming lost market share in the Parbury division is proving more difficult than had been expected. While Alesco intends to counter the weak conditions with more cost cutting and labour reductions, RBS expects these won't be nearly enough to prevent the fall in earnings implied by the new guidance.

Brokers have been quick to make significant changes to earnings estimates, with RBS cutting its earnings per share (EPS) forecasts by 35% through FY13 and Citi and JP Morgan dropping its numbers by similar percentages.

Consensus EPS forecasts for Alesco now stand at 24.7c for FY12 and 31.6c for FY13. The impact of revisions to forecasts has been felt in price targets, the consensus target according to the database falling to $2.18 from $3.35 previously.

As conditions in some of Alesco's markets have fallen to a level where management can't offset the impact through efficiency improvements, the chances of share price outperformance prior to any improvement in market conditions has been greatly reduced according to JP Morgan.

As a result JP Morgan has downgraded to a Neutral rating from Overweight previously, a move matched by both Citi and RBS Australia. This leaves Alesco rated as Buy once and Hold four times by brokers covering the stock in the FNArena database.

Goldman Sachs is not in the database but has similarly downgraded to a Hold rating from Buy previously, while dropping its target by 46% to $2.01.

The downgrade to earnings guidance by management at Alesco has implications elsewhere, as other stocks exposed to the building products and consumer related sectors such as GUD Holdings ((GUD)) and GWA Group ((GWA)) are also likely to find the going tough.

To factor this in Citi has lowered earnings forecasts and downgraded ratings for both companies to Hold from Buy. Price targets have also been cut, by 22% to $7.68 in the case of GUD and by 12% to $2.45 for GWA. 

Citi has been the first to push through changes to numbers for GWA and GUD, but following the Alesco update there is scope for other brokers to soon follow suit. Currently GUD is rated as Buy four times and Hold twice, while GWA Group scores three Buy ratings and three Hold recommendations. 

Shares in Alesco today are weaker and as at 1.00pm the stock was down 7c at $1.715, which compares to a range over the past year of $1.705 to $3.63. Compared to Friday, shares in both GUD and GWA were little changed at the same time.
 
 

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- Flight Centre delivers record FY11 earnings
- Guidance is for further growth in FY12
- Forecasts little changed, targets trimmed on lower market multiples
- Buy ratings continue to dominate

By Chris Shaw

While the consumer discretionary sector is doing it tough at present not all companies are finding the going so difficult, as travel group Flight Centre ((FLT)) has been able to shrug off adverse conditions to record underlying profit growth of 18.6%.

Flight Centre recorded full year earnings of $170.7 million, the result driven by both attractive ticket prices and a rising Australian dollar. The record result has been followed by management guiding to another year of double-digit earnings growth in FY12.

As RBS Australia notes, this guidance comes despite difficult trading conditions in both the US and UK markets and a weak domestic tourism market in Australia. What should help in achieving guidance is the expectation of a further recovery in the corporate travel market.

An advantage of growth in corporate travel according to Citi is a lower cost structure, which supports the view the decline in income margin recorded across FY11 is not a major concern.

BA Merrill Lynch agrees given expectations of an increase in sales efficiency through an improvement in operating systems. Further cost efficiency measures are also expected, something BA-ML anticipates will likely see margins return to more normal levels of 13-14% over the coming years.

For shareholders there is also potential for capital management, Goldman Sachs seeing a special dividend as a possibility given an ungeared balance sheet and cash in excess of regulatory requirements of $50-$100 million at present.

On the back of the profit result Flight Centre has enjoyed some increases to the earnings estimates of brokers, with Goldman Sachs lifting its earnings per share (EPS) forecasts by 2-3% in coming years and Macquarie lifting its FY12 forecast by 4%. 

Consensus EPS estimates according to the FNArena database now stand at 187c for FY12 and 201.3c for FY13. This compares to the 169.6c achieved in FY11.

Price targets have generally come down however, Citi seeing this as a reflection of a compression in peer multiples following recent market weakness. The consensus price target according to the database now stands at $23.79, compared to $25.38 prior to the result. Targets range from Macquarie at $19.00 to Deutsche Bank at $25.50.

For most in the market the expectation of further solid earnings growth for Flight Centre is enough to justify a positive view, the database showing Seven Buy ratings and only one Neutral recommendation, this courtesy of Macquarie.

Outside of the database both Goldman Sachs and Morgan Stanley rate Flight Centre as a Buy, the latter within an In-Line view on the Australian Emerging Companies sector. Buy ratings are also valuation calls, Morgan Stanley suggesting an estimated earnings multiple of 10.1 times for FY12 is attractive given Flight Centre is a market leader enjoying structural tailwinds at present.

RBS agrees there is value at current levels, while also pointing out a fully franked dividend yield of around 5% in FY12 is attractive. Macquarie is simply more cautious, seeing a softening demand environment and the fact Flight Centre will be cycling record numbers in FY12 as enough to make continued outperformance more difficult.

Shares in Flight Centre have traded within a range over the past year of $17.44 to $25.12. The current share price implies upside of around 23% to the consensus price target in FNArena's database. 

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- Super Retail delivers standout result
- FY12 trading has also started solidly
- Improved value implies upside, ratings upgraded

By Chris Shaw

Super Retail Group ((SUL)) has managed to buck the weak retail trend in Australia, delivering a 46% increase in FY11 net profit to $55.6 million. The result was helped by better than expected gross margins, which more than made up for a 52-week trading period compared to a 53-week period last year.

According to Credit Suisse, the improvement in gross margins was the result of improved trading terms, supply chain efficiencies and better purchasing rates. The improvement carried across all the divisions of Super Retail and, as Morgan Stanley notes, came despite the tough retail environment.

The solid performance has to date carried through to FY12. UBS notes like-for-like sales for both the Super Cheap Auto and BCF divisions are up 5% in year-to-date terms for 1Q12. Growth is expected to continue in both divisions thanks to extensions to existing product categories and further improvements in sourcing.

The result was a standout in UBS's view, as it highlighted strong brands and good momentum from the product sourcing strategy of management. The other plus is a strong balance sheet, as UBS sees this as allowing for further expansion to product categories. Possible examples for the broker include the sports/fitness and hardware/tools sectors of the market.

Post Super Retail's full year result market forecasts have seen some adjustments, UBS increasing its earnings per share (EPS) forecasts by 3-4% through FY14 but both Goldman Sachs and Credit Suisse have trimmed estimates by a similar percentage.

Consensus EPS forecasts for Super Retail according to the FNArena database now stand at 51.6c for FY12 and 58.4c for FY13, which suggests solid growth from the result of around 43c delivered in FY11.

Looking ahead, Credit Suisse suggests apart from further growth in both the core Super Cheap Auto and BCF divisions, the Ray's Outdoor division is also expected to lift returns as ongoing synergies with BCF are realised. RBS Australia also expects better things from Ray's, as previous legacy issues with respect to inventory and stock levels appear to have been sorted out.

While Goldman Sachs suggests the market may be disappointed by the decision to retain the Goldcross business, losses for this division are likely to be reduced going forward in the broker's view. UBS agrees.

The revised earnings forecasts for Super Retail continues to suggest value in the stock, as Credit Suisse notes its forecasts imply a FY12 earnings multiple of around 12 times. Morgan Stanley is similarly positive, as along with solid comparable sales growth potential, Super Retail is also expected to deliver a meaningful expansion in store footprint in coming years.

Recent share price weakness has also factored into the views of RBS and UBS, both brokers upgrading to A Buy rating on Super Retail from Hold previously. This leaves Super Retail as rated Buy by five of the six brokers in the FNArena database who cover the stock. 

Morgan Stanley and Goldman Sachs (not in FNArena's regular group of stockbrokers) are similarly positive, both retaining the equivalent of Buy ratings on Super Retail post the result. Morgan Stanley's Buy is relative to an In-Line view on the Australian Emerging Companies sector.

The consensus price target for Super Retail has come down slightly, now standing at $7.36 against $7.58 prior to the result. The consensus price target implies upside of around 17% from current share price levels.

Shares in Super Cheap today are trading higher and as at 12.05pm the stock was up 14c at $6.26. This compares to a trading range over the past year of $5.48 to $7.49.

Also note the prospective dividend yield on the basis of consensus forecasts is for 5.1% this year and for 5.9% next year, at today's share price (100% franked).

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- Full year earnings from carsales.com better than expected
- Company remains well placed to deal with increased competition
- Forecasts lifted post the result
- Brokers remain unanimous with Buy ratings

By Chris Shaw

Consensus forecasts for FY11 net profit for carsales.com ((CRZ)) leading into Tuesday's result was around $56.2 million, so the actual result of $58.3 million was well received by the market. The result was an increase of 35% relative to FY10.

Driving earnings was stronger than expected revenue growth, particularly in the second half of FY11. Dealer and data services was also a key area of outperformance observes Deutsche Bank, while additional investment into the operating platform was largely responsible for limiting margin expansion through the year.

A key feature of the result, according to RBS Australia, was while revenue from dealer advertising was up 16% in FY11, growth from non-dealer ad spend came in at 38%. This now accounts for 53% of revenue for carsales.com and means there is less reliance on dealer advertising as a driver of future revenue growth.

This is a positive in the view of RBS as it means the market position of carsales.com is strong enough to deal with increased competition such as the joint venture between Carsguide and auto dealers.

Deutsche Bank makes a similar argument, pointing out innovation in its product offering is allowing carsales.com to entrench its leading market position. As an example, Deutsche notes the carsales.com.au mobile platform now generates more page impressions that the desktop platforms of all three major competitors combined.

This leading market position makes attracting potential buyers to competing sites increasingly difficult, something Deutsche sees as a positive with respect to market traction for carsales.com going forward.

On the back of the better than expected profit result, brokers across the market have lifted earnings forecasts. Increases by BA Merrill Lynch have been modest at 1-2% through FY13, while Deutsche has lifted its earnings per share (EPS) estimates by 3% over the same period and Credit Suisse by 3.5-4.5%.

UBS has also made minor increases to estimates, lifting revenue forecasts by 1-2% to reflect both FY11 results and a solid start to FY12 while offsetting this to some extent with higher depreciation and amortisation charges and lower margin expansion assumptions to reflect a higher level of competition.

Consensus EPS forecasts according to the FNArena database now stand at 28c for FY12 and 31.6c for FY13, which compares to the 24c generated in FY11. The changes to earnings estimates have had only a minor impact on price targets, the database showing a consensus target now of $5.48, up from $5.45.

What hasn't changed are positive views on the stock, the FNArena database showing carsales.com scores a perfect six-for-six Buy ratings. There are two factors supporting positive ratings, one being a share buyback of up to 10% of issued capital. As RBS notes, this should be accretive to EPS by around 4%.

The second positive for carsales.com is valuation, as at current levels RBS estimates the stock is trading on a lower multiple to online media sector peers. As an example, RBS calculates while carsales.com is trading on a FY12 earnings multiple of 16 times, Realestate.com.au ((REA)) is trading on a multiple of 19 times for next year. Relative to its historical earnings multiple carsales.com also looks attractive according to RBS.

An added attraction for BA-ML is the auto classifieds market in general and for used cars in particular is at the more defensive end of advertising, so is more likely to remain resilient even in a tough economic environment.

This suggests little downside share price risk, so supporting BA-ML's Buy rating. As RBS also points out, the yield on carsales.com of around 5% fully franked for FY12 is also attractive.

Carsales.com shares had a trading range over the past 12 months of $3.79 to $5.40. At current levels the stock offers upside of around 15% to the consensus price target in the FNArena database.

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- Domino's Pizza FY11 result better than expected
- European operations improving, impacted by forex moves
- FY12 guidance suggests more solid growth
- Brokers lift forecasts, targets and ratings

By Chris Shaw

After guiding to a 15% increase in earnings for FY11, full year net profit for Domino's Pizza ((DMP)) came in at $21.4 million. This was a 20% increase from FY10; better than most in the market had expected.

Credit Suisse notes all result metrics were good, as Domino's reported a 51% increase in cash flow, the balance sheet has strengthened to a net cash position of around $12.5 million, return on capital increased 27% and European earnings appear to be delivering solid growth. 

The breakdown of same store sales (SSS) growth was also good, Credit Suisse noting for the Australian and New Zealand operations SSS rose 13.2% for the year and by 15.1% in the second half, while in Europe the increases were 5.9% in annual terms and 6.8% for the second half.

The pick-up in Europe in particular was important, as Credit Suisse expects economies of scale in this market should now be realised by Domino's. This is expected to deliver ongoing leveraged growth in coming years.

The European contribution to earnings could have been even more significant but as JP Morgan notes, much of the improvement was cancelled out by adverse forex movements and some restructuring costs. Looking ahead, JP Morgan expects new store openings in Europe will support solid growth in that market.

Further growth in the Australian and New Zealand operations is also expected, Macquarie pointing out this will come not only from additional stores but from the digital business which includes online and mobile sales, new menu items and a store refurbishment program.

Management at Domino's has guided to FY12 net profit growth of around 15%, a target seen as achievable given a strong first four weeks of FY12 trading. Domino's has also advised a target for new store openings this year of 60-70, while long-term the goal now is for 2,000 stores, up from a previous target of 1,620. This would be more than double the 866 stores in place at the end of FY11.

To reflect both the guidance offered by management and the better than expected FY11 result, brokers have lifted earnings estimates across the market. As examples, Goldman Sachs has increased its earnings per share (EPS) estimates by 6-9% for FY12-FY14, while UBS has lifted its numbers by 5-6% across the same period.

Consensus EPS estimates for Domino's according to FNArena's database now stand at 35.3c for FY12 and 39.9c for FY13. This compares to the 31c delivered in FY11. Increases to forecasts have also seen price targets move higher, the consensus target according to the database now $6.97, up from $6.65 previously.

UBS is now forecasting capitalised annual growth in EPS of 16% for FY11-FY14, which implies Domino's is offering value at current levels. As a result, UBS has upgraded to a Buy rating from Neutral previously, attracted not only to strong fundamentals but the ability to expand in a resilient category with relatively little capital outlay.

Others have reacted similarly to the result and FY12 guidance, as RBS Australia and Macquarie have also upgraded to Buy ratings from previous Hold recommendations. This means Domino's is now rated as Buy by five of the six brokers in the FNArena database to cover the stock. Goldman Sachs also rates Domino's as a Buy.

The exception to Buy ratings comes from JP Morgan, which has retained its Neutral recommendation. This is a valuation call, as while Domino's is regarded as a premium stock, JP Morgan suggests an expected FY12 earnings multiple of 15.4 times already factors in a price premium.

Over the past 12 months Domino's shares have traded in a range of $5.10 to $6.68. The current share price implies upside of around 13% to the consensus price target in the FNArena database.

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