Tag Archives: Health Care and Biotech

article 3 months old

Weekly Broker Wrap: The Strong Dollar, Sober Advertising And The Aldi Effect

-Higher $A with low cash rate
-Pharma tops popularity stakes
-Advertising spending just modest
-Aldi gives Woolies a headache
 

By Eva Brocklehurst

What's going on with the cash rate in connection with the Australian dollar? JP Morgan asks the question as the cash rate starts 2013 at a record low of 3% and the Australian dollar sits well above parity against the US dollar. Normally, the lowering of the cash rate in turn lowers the attractiveness of Australian investments and hence the Australian dollar weakens. Now JP Morgan believes the Australian dollar is set to remain high regardless, retarding domestic growth as it weighs on non-mining, trade-exposed sectors.

Historically speaking, a cash rate of 3% would imply that monetary conditions are very loose but, based on the JP Morgan monetary conditions index, conditions in the real economy appear restrictive. Why? There has been a breakdown in the transmission mechanism that has seen the currency remain elevated despite a lower cash rate. This is in large part because major central banks are implementing unconventional easing programs, flooding their economies with cash and low interest rates for a sustained period. JP Morgan contends that even if the RBA eases Australia's cash rate further, high foreign demand for Australian bonds, a still favourable interest rate differential, and higher relative growth prospects, are likely to keep the local dollar well supported.

The disconnect in the transmission of softer cash rates to the currency is highlighted by an analogy the analysts present regarding the Bank of Japan's policy predicament. Japan badly needs to fuel growth in its stagnant economy and has set a new inflation target. Although JP Morgan is not predicting this, if the BoJ is able to achieve its FY14 inflation target of 0.9% and 2% beyond 2014, over time USD/JPY could reach 105, which is equivalent to an Australian trade weighted index in the vicinity of 81, a new all-time high. The Australian dollar would stay elevated and the pressure on the local exporters would increase. Such a scenario would place the RBA in a difficult position, perhaps needing to offset tightening economic conditions with an even lower cash rate.

There is a potential alternative scenario. It all depends on whether Japan's new inflation target is achieved via an improvement in broader Asia-Pacific growth prospects. This would lift local exports and make the argument for a lower cash rate weaker. It would also mitigate, to some extent, the effect of the higher Australian dollar. Over the coming year, in JP Morgan's view, the key will be whether the pick up in Japan's economy spills over to the rest of the region, and whether achieving higher inflation is the result of simple currency effects or stronger real growth.

BA-Merrill Lynch has conducted a global fund manager survey and found investor sentiment is quite optimistic this month. Last month the majority thought the next big event was likely to be be a US debt downgrade or a Spanish bail-out. In February, it is more likely to be the breaking of the 100 level in the US dollar-yen exchange rate. Unchanged at a multi-year high of 48, BA-ML's Risk & Liquidity Index indicates clients are risk bullish, as does the fact that only 5% of those surveyed see lower long-term yields in 12 months time. Asset allocators are overweight equities, underweight bonds and cash. The emerging market overweight rating remains high. There was some small rotation from European to US equities and optimism edged up toward Japanese equities.

Many measures of market sentiment in BA-ML's new Bull & Bear Index are warning that risk assets are now vulnerable to bad news after a seven-month rally. Growth expectations rose to their highest level since February 2011. The index shows investors want companies to pursue growth, as 48% say companies should use cash to increase capital expenditure versus just 12% demanding debt repayments. While inflation expectations continue to rise, two thirds of clients still believe both the rate of global economic growth and inflation is likely to be below trend in 2013.

Pharmaceutical is now the world’s most popular sector, according to the survey. Investors are moving out of energy, materials and technology, which is down to its lowest overweight rating since Feb 2009. The positioning in both banks and consumer discretionary sectors rose to multi year highs but weightings in both telecom and utilities dropped close to their lowest levels since 2004. If you're a contrarian, BA-ML tips you should take profits in US real estate plays, reduce allocations to emerging markets, look for some upside to laggard commodity and resource plays, buy telcos and utilities and continue adding to Japanese equities on any dips.

JP Morgan has conducted an Australian media buyer interview and found out that advertising spending is expected to track GDP in 2013, growing 2-3% in real terms. Ratings performance in the next few months is expected to determine how much volume growth does materialise. Longer term, the TV market share is expected to remain steady. TV advertising spending is expected to average a similar level of growth in 2013 as the overall ad market. Sports are also likely to continue taking a large share of TV advertising dollars, although the buyer differentiated between the major sporting events, which should continue to sell at large premiums, versus secondary sports products. The buyer also thinks ratings declines are more likely to be from fragmentation of viewing onto other platforms.

For Deutsche Bank, 2012 was sobering for advertising. It's likely to stay that way. A flat-lining market is expected in the first half of 2013, with about 2.6% growth in the second half. This will benefit from a recovery in the economy and federal elections. Within the ad categories, Deutsche Bank expects online to grow at 17% in 2013, offset by weakness in traditional media, down 4.6%. It's the traditional media, especially publishers such as Fairfax ((FXJ)) and APN News ((APN)), that will continue to find the going hard. They are expected to report 24% and 27% earnings decline respectively. Within the broadcasting space, whilst Prime ((PRT)) is expected to report 10% earnings growth on strong market share gains, Seven West Media ((SWM)) and Southern Cross ((SXL)) are expected to report earnings decline of 18% and 23% respectively.

So, which media stocks does Deutsche Bank prefer? News Corp ((NWS)). The broker considers it has the fastest long term growth prospects among the majors, with a sizable buyback as well as valuation upside in the planned separating of publishing from broadcasting. Deutsche Bank is joined by three others on the FNArena database that consider News a Buy. The broker also maintains a Buy recommendation on Prime given its attractive market position and valuation relative to the rest of the sector. Again, there are three other Buys on the database.

Ten ((TEN)) and Southern Cross are suffering from poor ratings performance in a challenging ad market. Ten has four Sell ratings on the database, three Hold and one Buy. Back in December Credit Suisse raised it to a Buy, punting on the potential for a buy-out. Deutsche Bank believes Seven West Media is highly leveraged to the ad market and the macro environment. In an environment where interest rates are low and there is potential for the economy and the ad market to improve, the broker thinks risks remain to the upside. Interestingly, on the FNArena database SWM has a complete suite of Buy recommendations.

What has Aldi done? Given the supermarket chains a headache for one. Feedback obtained by UBS suggests Aldi had a very strong finish to 2012 and customer acceptance of the foreign brand is strong. UBS estimates Aldi grew sales by around 20% in 2012 and the newcomer is currently taking between 40 and 80 basis points of growth from the major chains per annum. This could escalate to 50-90 basis points once the South and Western Australian roll-out begins. ABS estimates put its share to around 6% down the east coast of Australia. UBS believes Woolworths ((WOW)) is most affected, noting industry surveys suggest one in two new shoppers to Aldi do a main shop at a Woolworths. The broker expects sales growth and customer take-up in SA/WA to accelerate at a faster rate than the initial launch in the eastern states, given the increased brand awareness.

For the sector as a whole, UBS finds consumer staples continue to look expensive and Wesfarmers ((WES)), the owner of Coles, is its preferred exposure. UBS believes the supermarkets are expensive. Earnings upgrades are needed to drive out-performance, which the broker thinks is unlikely near term.
 

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article 3 months old

Questions Mount Over Cochlear’s Top Status

-Cochlear facing some competition
-Brokers prefer ResMed
-More Sell ratings
-China tender the main positive


By Eva Brocklehurst

Cochlear ((COH)), at the top of the market for hearing implants, is getting some push and shove. A competitor looms, the first serious one in over a decade according to UBS. The company reported flat revenue in the first half, with profit of $77.7 million around 4-5% below broker consensus. Moreover, the road ahead is expected to feature slower established market gains, while the large tender win from China stands out as the main support to earnings growth.

UBS thinks competitor Advanced Bionics' new 40% smaller processor, and thin electrode implant, is arguably better than Cochlear's for the first time in more than a decade. While the broker does not underestimate Cochlear's ability to respond, it notes Advanced has an aggressive 150% sales growth target by 2015. The competitor has matched the features of Cochlear’s N5 behind-the-ear (BTE) processor, in size and directional microphones but has added more, with wireless/inbuilt connectivity to a variety of platforms. UBS finds Cochlear's 67% market share and franchise well entrenched and, despite the recent recall of N5, does not believe Advanced would be in contention for more market share without this new processor. However, the broker sees Cochlear's market share retreating to 60-65%.

BA-ML has delved into Cochlear's high price earnings/valuation metrics. The broker notes the investment case is often made on a pure discounted cash flow basis, struck on such themes as low levels of penetration, market leader status and high barrier to entry with a technology in relative infancy. In this instance the immediate share price value seems to be ignored. However, this is changing. BA-ML believes Cochlear is no longer a pure play, medical technology company. Efficiency factors need to be included in its valuation. This is because developed market growth rates have slowed compared with previous years and volume is more dependent on emerging markets. These markets are focused much more on price.

This will result in greater scrutiny of Cochlear's R&D spending and the scalability and utilisation of the Macquarie University manufacturing hub. The broker does not shy from the possibility that a company can grow earnings in line with volumes, mixing medical technology with efficiency, but with this comes a lower barrier to entry and defensibility from relying on lower price markets for growth. However, if it were that simple, the broker would move to a Sell rating. BA-ML still makes a case for upside risks to out-year earnings and the investment case. Here, Cochlear's ability to capture tender sales in other emerging markets, based on the Chinese tender example, could be quite strong and have a material impact on out-year volumes. Furthermore, BA-ML expects new product launches in 2013 could support and improve developed market growth for the near to medium term.

The upshot is the broker has changed its valuation approach for Cochlear, retaining a Neutral rating and taking a blended price/earnings premium to peer ResMed ((RMD)) with a discounted cash flow. The PE premium to ResMed, the sleep disorder specialist, is set at 20% which provides for 23.9 times against RMD's long term average of 19.9 times. The 20% is in consideration of the two main differences seen between ResMed and Cochlear. Cochlear's area has higher barriers to entry technologically and, in terms of approval processes for new devices, more complex in the cochlear implant versus the sleep apnea space. The second is the lower regulatory risk for Cochlear.

Others make a comparison with ResMed too, mostly in favour of ResMed. Deutsche Bank is wary about Cochlear's earnings growth, with pricing pressure due to emerging markets growth, evidence of share loss, plus the recent competitor product news. The focus on cost containment should support margins, in this broker's view, but it suggests a less confident view on future growth. Deutsche rates Cochlear as a Sell and ResMed as a Buy.

Citi finds the price/earnings multiple too high for the more modest growth outlook. It also prefers ResMed, given its significantly higher earnings growth. Citi forecasts limited earnings growth for Cochlear in FY13 and FY14, due in large part to the roll-off of FX hedging gains, but admits it is difficult to find comparatives given the large China tender win in FY13. The broker believes there is downside risk to its forecasts if Sonova/Advanced Bionics is particularly successful in gaining market share with new products over the next 12-24 months. So, despite Cochlear's price decline after the results, the broker finds the shares still too expensive and retains a Sell rating.

Macquarie didn't like the sales figures in the half year, noting core markets, accounting for 79% of sales, were anaemic, growing just 3.8% on the prior corresponding half. What makes this broker even more concerned is that the previous corresponding period was soft because of the N5 recall, resulting in customer de-stocking. Also, cochlear implant sales, the company's most important product area, were soft, once the China tender is taken out, with units falling 4%. Also, there was no update at the briefing for the reinstatement of N5.

Macquarie says management comment that a high dividend pay-out remains sustainable is "interesting". The broker notes the first half dividend of $1.25 represents a payout-ratio of around 92%. The broker also finds interesting management belief that dividend payments can come from cash reserves. Macquarie admits cost controls were good and had limited impact on margins and Asia Pacific sales were strong, up 33% in constant currency terms. Nevertheless, Macquarie has downgraded Cochlear to Sell, taking the number with that rating to six on the FNArena database. Two retain Hold ratings, CIMB and BA-ML.

A database consensus target of $63.10 sits around 10% below the current trading price.
 

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article 3 months old

No Stopping CSL


Bottom Line 29/01/13

EW Trend: Impulsive
Price Trend: Up
Trend Strength: Strong

Technical Discussion

LAYMANS:

Some stocks have been trending very nicely of late with CSL ((CSL)) definitely being one of them.  In fact since September 2011 this company has added over 110.0% in value which is no mean feat for a heavyweight.  And as we’ve been mentioning in recent reviews there is no reason to expect anything other than further strength over the months ahead.  The odd pull-back is inevitable though the broader trend remains firmly intact with no reason why our medium term target circa $65.00 can’t be achieved over the coming months.  And that’s the least we’d expect with scope for even higher levels to be attained over the longer time frame.  There’s no doubting the fact that the trend is looking a little overstretched though that in itself doesn’t portend to a significant retracement.  Buyers are more than willing to chase price higher and whilst this trait continues the bullish outlook remains firmly intact.  It would take a probe beneath $50.00 to start thinking in terms of an interim top being in position though there is no evidence suggesting those levels are going to be tested any time soon.  The best strategy here is to continue to align ourselves with the trend until there is evidence that a top is imminent.   


TECHNICAL:

We were focusing on a micro triangle during our last review with the expectation that price would resolve itself to the upside.  These types of patterns statistically break in the direction of the prior trend though in this instance the exact opposite occurred.  However, very importantly the leg lower was short-lived with buyers once again stepping up to the plate early.  And this has been the case all the way up from the lows made just over a year ago.  That is any small dips or consolidation patterns have been sought after aggressively by traders and investors alike.  In regard to our wave count nothing changes with wave-(v) continuing to subdivide very nicely indeed.  Should recent strength continue then smaller degree wave-iii should be in position over the coming weeks which should be followed by another consolidation pattern which again can only be viewed in a bullish light.  Remember, the wave equality projection of the much larger pattern sits up at $65.00 as already mentioned with the potential for a larger impulsive movement to develop should that target be overcome.  However, that’s something for much further down the track and as always much will depend on how the smaller patterns evolve.  At the moment they are continuing to subdivide very nicely which always provides clarity from an Elliott perspective.  The other pattern of interest here is the rising channel with the recent retracement more or less tagging the lower boundary which is something that’s transpired on several occasions from the low of wave-(iv).  The channelling technique wasn’t actually discovered by Elliott himself though he certainly improved on it.  In relation to the charts here we’ll be looking for wave-(v) to terminate at the upper boundary of the channel a little further down the track.

Trading Strategy

Despite the strength of the trend there is no point jumping on just for the sake of it with a low risk entry required before getting involved.  Today’s gap higher may well need to be filled which in itself would provide a low risk entry.  Should yesterday’s high be tagged and rejected positions could be initiated immediately with a view to trading price up toward our aforementioned target circa $65.00.  On the flip side, if the upper boundary of the rising channel is tested immediately, then rejected we need to be on alert for a retracement back down toward the lower boundary of the pattern.  This would present another buying opportunity although it’s going to take two or three weeks for the smaller degree patterns to run their course.  The small micro pattern we were looking at during the last review failed to break out in the required direction though this doesn’t mean we have to move away from the strategy.  Consolidation patterns within strong trends are always reason to look for opportunities.

 

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.

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

Bionomics On Threshold Of Discovery

-Eclipse acquisition adds potential
-Strong drug development pipeline
-At centre of key cancer therapeutics
-Broker sees stock as undervalued


By Eva Brocklehurst

Drug discovery company, Bionomics ((BNO)), has acquired a cancer stem cell venture called Eclipse Therapeutics and Bell Potter believes the company's increased potential is underestimated. Bionomics obtains two pre-clinical drug programs as a result of the acquisition and these concern antibodies to cancer stem cell targets. The first is due to enter the clinic in 2014.

The acquisition highlights Bell Potter's opinion that Bionomics is playing an increasingly important part in cancer therapeutics. However, the company's two lead compounds are also attracting interest. Bionomics' anti-anxiety drug, BNC210, has shown that it can relieve without the side effects of addiction or drowsiness. A year ago the company partnered with Ironwood Pharmaceuticals to further develop the drug. This deal, worth US$345 million in up-front payments and milestones, has, according to Bell Potter, de-risked the company. Bionomics is considered self-sustaining at its current cash burn rate of $5.9m per annum. It is currently capitalised at US$204 million. The second major compound, BNC105, has been shown to dismantle the vascular structures of tumours, leaving healthy blood vessels undisturbed. Bell Potter believes there is potential for this compound to be licensed after the Phase II results in renal cancer and interim data from the ovarian cancer trial become available in in the first half of 2014.

Now, with cancer stem cell therapy in its portfolio, the company should benefit from more investor interest, according to the broker. Bell Potter expects pre-clinical and clinical developments over the next 12 months will drive upside for the stock. The broker has revised the numbers and finds the stock undervalued. Bell Potter values it on a probability-weighted, discounted cash flow base case at $1.67, and at $2.25 on an optimistic case, and has a 12-month target price of $1.70.

What Eclipse brings to the mix is its pedigree, as well as extending the cancer therapeutic range. The founding shareholder of Eclipse, Biogen Idec, reported US$3.8 billion in product revenue in 2011, and was a pioneer in the biotech industry. Eclipse shareholders, including Biogen, will end up with around 6.5% of Bionomics' scrip. Biogen decided to exit oncology and cardio-vascular disease research and this was how Eclipse became available to Bionomics.

Why cancer stem cells? According to Bell Potter this area of cancer research has moved along rapidly. Cancer stem cells are capable of reproducing themselves and producing new cancer cells. Traditional chemotherapy kills cancer cells but is not so good with stem cells and killing these can prevent the tumour from recurring. Cancer stem cells are easy to identify and in recent years the big pharmaceutical companies have started to take notice. Bell Potter thinks it's only a matter of time before a big partner comes knocking at Bionomics' door, ready to unlock substantial value from the company.

Bell Potter notes that Bionomics' is being tight lipped about the targets Eclipse is working on, reluctant to signal to competitors at this stage. This may make some investors reluctant but the broker believes their concerns will be eased, citing the fact that Bionomics paid $12 million in scrip to acquire Iliad Chemicals in 2005 and this acquisition has now helped Bionomics to over $100m in enterprise value. 
 

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article 3 months old

Can ResMed Continue To Deliver?

-December quarter beats estimates
-But how much upside?
-Solid earnings should continue
-Stock should withstand competition


By Eva Brocklehurst

Sleep disorder product specialist ResMed ((RMD)) has received a warm reception from brokers as it delivered a strong December quarter. However, there are some doubts as to how much further upside can be expected as the stock has bettered forecasts substantially.

Margin was again the driver, at 61.8% in the second quarter it was 90 basis points higher than Macquarie had expected. Product mix and supply chain efficiencies contributed to revenue growth of 14%. Citi maintains some of this must also be attributed to market share gain, and has upgraded FY13-14 earnings forecasts by 3% and 4%, lifting its price target to $5.26 from $4.81. The result was 10% better than what JP Morgan was expecting and that broker has lifted earnings estimates too, raising the price target to $4.91 from $4.51.

Deutsche Bank believes solid earnings growth will continue, underpinned by margin expansion. This broker sees upside coming from better pricing outcomes from the CMS round 2 competitive bidding and market share gains. Downside is seen in adverse foreign exchange moves and a bigger impact from competitive bidding. UBS, meanwhile, believes the company has important growth in its high margin products and this should stand it in good stead in the face of competitive bidding price negotiations. JP Morgan also believes ResMed has sufficient brand power to hold the competition at bay.

JP Morgan and BA-ML note ResMed's momentum is driven by factors such as the ongoing move to Home Sleep Testing (HST) while the production shift to Singapore and Malaysia is supportive of further growth. Citi highlights the fact that, as Singapore manufacturing increases so the tax rate falls. Macquarie has reduced tax rate assumptions to 20.8% from 22%, citing the increasing manufacturing initiatives in Singapore.

ResMed faces competition but the brokers are expecting it to withstand this, however, some question the sustainability of its growth. CIMB feels this way, as does BA-ML. So, these brokers, while raising earnings estimates, are reluctant to hype the call. CIMB retains a Hold rating and sets its target to $4.22 from $3.88. BA-ML has downgraded ResMed to Hold from Buy, citing a lack of sufficient new valuation upside. A 7% share price rally has eclipsed BA-ML's price objective hence, while the broker has raised its target to $4.64 from $4.40, the rating was downgraded. Deutsche Bank has maintained a Hold rating, citing limited upside for its price target, while UBS also keeps it at Hold.

Macquarie finds the US market is healthy and reckons growth in this area has some way to run. The broker was particularly impressed with US mask growth of 16%, which it said should alleviate concerns around Medicare's mask replacement guidelines crimping growth. However, Macquarie remains concerned about competitive bidding in the round 2 negotiations.

Pulling this together FNArena's database has consensus earnings forecasts at up 31.3% for FY13 and 13.6% for FY14. There are now six Hold recommendations and two Buy (JP Morgan and Citi). The price target ranges from $4.22 (CIMB) to $5.26 (Citi), giving a consensus target price of $4.70 reflecting 2.5% upside. 
 

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article 3 months old

Healthcare Is Expensive, May Be Time For Profits

-Healthcare sector expensive
-Need to view stocks individually
-Disparity with public health exposure
 

By Eva Brocklehurst

The healthcare sector has become expensive. In Deutsche Bank's view there is limited earnings risk for the larger healthcare companies in FY13, as strong demand from the ageing population and relatively stable funding underpin the attractive earnings outlook. CIMB has a Sell ticket on the larger capitalised stocks but emphasises the importance of looking at each individually rather than taking a broad sector view. In this broker's view, it may be time to take profits.

Credit Suisse finds a disparity between the large healthcare companies unimpeded by government competition, such as CSL ((CSL)), ResMed (( RMD)) and Cochlear ((COH)) and those subject to competition by the public health sector in Australia and overseas, such as Ramsay Health Care ((RHC)) Sonic Healthcare ((SHL)) and Primary Health Care ((PRY)). The broker notes, while the market is valuing most stocks on relatively similar levels, there is a large distinction in unleveraged return on equity (ROE). Credit Suisse explains this as RHC, SHL and PRY, being subject to fewer competitive pressures and with lower risk operations, can gear themselves to a higher level than their higher quality peers.

CIMB continues to view longer-term sector drivers favourably, as population growth, demographic shift in population age and innovation will underpin growth. However, near-term challenges remain, with slowing earnings growth and stretched valuations. There is also the potential for ructions if there is a change in the Australian government later in the year, given potential changes to private health insurance and recurring pathology funding negotiations. In the US there are weak utilisation rates and structural reimbursement changes. CIMB sees upside for PRY and downside for RHC and COH. The broker sees a defensive growth theme holding throughout the first half, with sentiment shifting toward capital appreciation and earnings momentum in the second half limiting strong sector gains.

Deutsche favours PRY, given its domestic focus, strong earnings growth profile and relatively attractive valuation metrics. Credit Suisse finds PRY should meet market expectations and has a Hold recommendation. In some ways the broker finds the stock overvalued but admits there's no near term catalyst that would result in a downgrade in rating. PRY is also a favourite of CIMB, hence a move to a Buy rating on improving profitability.

Meanwhile, SHL's funding pressures cloud its outlook, Deutschesuggests, and growth will likely slow in in the second half due to funding cuts across all major regions. Credit Suisse sees the stock as overvalued relative to ASX200 on price/earnings measures. On the FNArena database SHL has three Buy and five Hold ratings and its price target is comparatively narrow, from $13.45 to $14.55.

For CSL attractive growth is fully priced and, given the recent guidance upgrade, Deutsche has little doubt it will deliver a remarkable first half result. Credit Suisse notes CSL presents as materially undervalued proposition against the ASX200 and retains a Buy recommendation. CIMB also finds upside potential for this stock. On the FNArena database there are five Buy ratings, two Hold and one Sell (Citi). Last month Citi noted that good news was well priced in, before the potential has been realised. The target range is from $45.33 (CIMB) to $62 (Macquarie).

RHC has attractive growth and potential corporate activity reflected in a premium price, according to Deutsche, but the broker is confident the group can continue to deliver strong earnings growth for the foreseeable
future. Credit Suisse has a Hold on the stock while CIMB sees it, along with CSL, offering the most earnings certainty. Nevertheless, the broker believes it's probably time to take profits and has a Sell recommendation. Others on the FNArena database with a Sell recommendation include UBS and Citi.

RMD may surprise on the upside, according to Credit Suisse, in company with CSL and RHC, because of favourable industry and market dynamics. The broker finds a case for being long RHC and retains a Hold recommendation. Deutsche finds risk from competitive pressure and funding reform weighing on the outlook but continues to recommend holding the stock.

The one most at risk with a first half/second half skew in earnings is Ansell ((ANN)), according to CIMB. Deutsche also expects tough economic conditions will weigh on the first half and relying on the second half to achieve guidance may test investor confidence. ANN is a mixed bag on the FNArena database with three Buys, three Holds and one Sell.

Finally, COH is the wildcard stock in the sector, given a lack of earnings visibility, CIMB maintains. Deutsche says it looks overvalued and first half earnings will likely contract due to falling upgrade revenues and a smaller FX hedge gain. Credit Suisse sees some risks with COH but believes it is nearing undervalued compared with ASX200 stocks and notes it is cheaper than other healthcare stocks, bar CSL.
 

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article 3 months old

Weekly Broker Wrap: Slowly, Slowly Grinds The Recovery

-Recovery will be slow in 2013
-Mid cap resources making headway
-Opportunity in software
-Tough times in healthcare


By Eva Brocklehurst

Domestic recovery is coming, slowly. CIMB has launched a semi-annual survey of its analysts to see how their macro views are tracking. A domestic cyclical recovery seems to be in the early stages but the momentum is fairly weak. Firms are focused on reducing costs. CIMB notes cost reduction has been weak in the basic materials sector, but this could be changing with Boral’s ((BLD)) announcement of staff cuts. Retail, food & beverage and infrastructure sectors have also been less aggressive on costs. The mining sector has an improved outlook for margins, given a combination of cost mitigation and stronger demand. CIMB says business conditions are unchanged, or have weakened, for the small-cap stocks exposed to domestic housing and consumer spending.

Of course any meaningful dip, say 10%, in the Australian dollar would have a large positive effect on earnings for S&P/ASX 200 companies in the broker's coverage. Miners would have the most to lose from further appreciation of the Australian dollar and transport and infrastructure stocks would see relatively little impact, CIMB notes. The analysts believe 36% of investors are neutral on the market, while 35% are underweight and 25% overweight. Large-cap diversified miners are seeing a pick-up in demand and some margin expansion. However, the broker is seeing the mid-cap iron ore, uranium, zircon and rare earths stocks (led by iron-ore miners) making up the most ground. Demand in the mid-cap coal and gold sector is relatively weaker.

The market will be fighting to sustain the rally in the year ahead, BA-ML contends. While small caps rallied in 2012, resources were a weak spot. Despite this, small-cap valuations are still attractive to the broker, but investors need to be selective. Small-cap industrials are attractively valued at a 1% discount relative to the broader market, despite a vast majority of quality stocks having re-rated in 2012. Industrial goods & services dropping materially within the index. Preferences are for energy over resources. Mining services have run too hard and consequently the broker downgraded Bradken ((BKN)) and Sedgman ((SDM)) to Underperform. Super Retail ((SUL)) is considered a quality play and other BA-ML favourites include Automotive Holdings ((AHE)), Ainsworth ((AGI)), Henderson ((HGG)) and Technology One ((TNE)). Goldman Sachs also favours Henderson with a Buy rating.

Goldman Sachs sees positive markets ahead and early signs of a turn in flows, which should deliver earnings upgrades. Models have been adjusted to reflect the strength in equity markets during the December quarter. However, the size of earnings upgrades depends on each stock's leverage to markets. Again, the theme is selective. In financial services the broker sees AMP ((AMP)) with the lowest leverage and BT Management ((BTT)), Henderson and Perpetual ((PPT)) with the highest. In summary, the broker is Neutral on AMP but sees upside in the AXA synergies. BTT is Neutral rated, with a downside in the UK slowdown. Henderson is a Buy, as mentioned, IOOF ((IFL)) is Neutral while Perpetual is rated a Sell.

The year has started with a triumph of hope over earnings, at least in building materials and steel, according to JP Morgan. The sector has enjoyed a particularly strong performance over the past six months, outperforming the ASX 200 by 20%. Drivers of this strength are the growing expectations for material cost cutting at Boral and Fletcher Building ((FBU)) and the ongoing momentum in the US housing recovery for Boral and James Hardie (( JHX)). The broker believes Boral and Fletcher share prices are ahead of the rationalisation prospects and so has downgraded both to Underweight from Neutral. On the FNArena database Boral got the rounds of the kitchen this week. The stock received two rating upgrades (Deutsche Bank and Credit Suisse) to Buy and two downgrades to Sell (CIMB and JP Morgan). Upgraders cite the reduced costs while downgrader CIMB takes a more cynical view of the longer term impact.

In contrast, the US housing recovery is seen gathering momentum and a strong order book raises Hardie to Neutral from Underweight for JP Morgan. Adelaide Brighton ((ABC)) remains Overweight and is JP Morgan's preferred pick in the sector. The broker notes ABC is trading at a deep discount to the sector on most valuation metrics, as well as offering a relatively defensive cash flow profile. However, on FNArena's database, BA-ML takes a dimmer view, expecting growth to slow. It has downgraded the stock to Underperform from Neutral. For JP Morgan, CSR ((CSR)) remains in Neutral and Deutsche Bank and Macquarie's ratings concur. After hitting an all-time low in July last year, CSR has staged a strong rebound, based on an improved aluminium price and JP Morgan sees limited upside to the current share price.

Macquarie has taken a snapshot of Christmas trading trends to see the outfall for retailers. The first two weeks in December were particularly weak but it was a strong Boxing Day clearance through to the first week of January. Hot weather drove air-con and refrigeration sales. Seasonal appliance sales were seen up in excess of 40% in December and refrigeration sales grew high single digits. Department store feedback favours Myer ((MYR)) over David Jones ((DJS)) at Christmas, Macquarie said. Due to the significant improvement in weather in December and trade feedback indicating over 40% improvement in seasonal appliance sales during the month, Macquarie upgraded Harvey Norman ((HVN)) earnings estimates for FY13 by 4.7%. The remainder of the Christmas trading feedback was largely in line with expectations and no other significant changes were made to earnings or valuations of the other discretionary retailers.

Morgan Stanley can see pockets of opportunity in a tough software industry exposed to soft corporate and government expenditure. CSG's ((CSV)) turnaround and Reckon's ((RKN)) expected growth profile stand out. However, job vacancies and business confidence continue to languish. Morgan Stanley says industry feedback from both IT providers and client firms suggests pressure on budgets and uncertain project timing. Individually, CSV has rallied 22% from its late September low and the broker's 80c targets reflects a 10% upgrade to FY14 earnings estimates a re-rating towards industry peers. Consulting and services stocks like SMS Management ((SMX)), Oakton ((OKN)) and ASG Group ((ASZ)) face negative first half earnings momentum due to soft demand and increased uncertainty relating to delays and deferrals. Morgan Stanley cut SMX earnings 9% for FY13 estimates but expects it is best positioned to take advantage of any rebound in demand.

UBS notes that the Australian healthcare sector is unlikely to repeat its 2012 performance this year. Sector earnings risk is low but improving demographics are now factored in and price catalysts are scarce. Upside is seen in any broader market weakness and stock specific events. In view of the fact the next Australian federal election must be held by November domestic healthcare service providers such as Primary ((PRY)), Ramsay ((RHC)) and Sonic ((SHL)) are quite exposed. UBS suspects there won't be unnecessary policy change/confrontation this year. On FNArena's database BA-ML has singled out Primary as a Buy, at high risk, noting synergies with the Symbion merger are starting to deliver. Australian names deriving revenues globally, such as CSL ((CSL)), Cochlear ((COH)), ResMed ((RMD)), Sonic, Ramsay, Ansell ((ANN)) and Sirtex ((SRX)) are all likely to confront similar headwinds and Europe has never been tougher, UBS maintains.

 

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article 3 months old

Australian Stocks: What Happened Today?

By Max Ludowici, Equities & Derivatives Advisor, 708 Capital

The scoreboard:

-          The ASX200 closed down 10 points or 0.23% to 4623

-          The AUD fell sharply lower at midday.. Currently reading 1.0451 vs the USD

-          Total volume for the day was $8.3B. Less the influence of premarket options exercise ($3.3) gives a real volume figure of $5B.

It was a rollercoaster ride on the final major trading day for the year as the ASX reversed early gains at midday after an 11th hour vote was pulled by House of Representatives speaker John Boehner who was unable to muster majority support  to avert a possible fiscal cliff disaster.  The vote was supposed to extend Bush era tax cuts on incomes below $1m and allow higher tax rates for incomes above $1m. Boehner and Obama remain at loggerheads over the threshold at which the tax hikes will come into effect. Obama wants higher taxes on income above $400,000 where Boehner remained fixed on only agreeing to increases above $1m.

The market is all too aware that time is running out to resolve the crisis as most politicians will take holiday from today. Our market jagged 40 points lower on the news before financials and defensives regained traction and slowed the fall in the final two hours of trade. The news sent DOW futures plunging 220 points on the failed vote and remained down around 200 for most of our session.

The finale of this soap opera is anyone’s guess really. The market has a nasty habit on ‘selling the fact’ so perhaps a fall in the US market is likely even if a resolution is reached before the year end. We do know that there won’t be another House of Reps vote before Christmas so any immediate resolution remains up to Senate leader Harry Reid and President Obama. It looks as though the market is in for a good old country and western standoff. Perhaps the pollies have set the market up for one of the greatest bull traps in history. The way the US futures were looking most of the day, Iam not sure why Aussie market thinks they’re only bluffing?

If we put this noise to the side, the GDP news out of the US overnight and the reason for our market’s rise early on was due to a shock upward revision in 3Q GDP in the US from 2.7% to 3.1%.  Existing home sales also rose 5.9% in November from October, the biggest jump since 2009 and in contrast with analyst expectations of a rise of 2.3%. Both data sets are genuinely encouraging and illustrate a US economy genuinely in uptrend.

Bring on 2013, as a US economy hitting its straps and a centralised communist government willing to throw seemingly unlimited dollars on the world’s second biggest economy hopefully make the lingering GFC of ‘07 and Euro Crisis of ‘12 a distant memory.

Cliff uncertainty drove our market lower but saw cyclicals take the brunt of the fall with defensives showing good resilience. Westpac Bank ((WBC)) Commonwealth Bank ((CBA)) and ANZ Bank ((ANZ)) all showed gains of between 0.5-1%.

The big miners were the largest drag on the market. Rio Tinto ((RIO)) falling 0.90% and BHP Billiton ((BHP)) down 0.92%.

Gold struggled again today as it took another substantial hit overnight and continued slide throughout our session to $1641oz. (current pricing). Newcrest Mining ((NCM)) fell 2 cents to $22.47 and closing in on 3 year lows.

Those who remember the little animal chocolate, Yowie ((YOW)) will be pleased to hear it’s about to hit shelves again with a new and improved (child friendly) design and new listing on the ASX. YOW hit the boards today up 19,400% (reconstructed) as it unveiled a new US based production facility and a new confectionary range due out in Q1 2013. Hooray!

DOW futures are pointing to a disastrously weaker opening, currently down 195 points
 

(For a more comprehensive summary of last night’s market action see FNArena’s Overnight Report.)

This article produced at the request of and is published by FNArena with the expressed permission of 708 Capital.

708 Capital is a full service stockbroking and investment advisory firm. 708 offers investment and market advice to high-net-worth Private and Institutional clients in Australia and across the globe. 708's extensive network of contacts gives its clients exclusive access to ground-level fundraising opportunities and new company listings in a variety of small and large cap ASX listed companies. 708 has a longstanding track record of generating exceptional returns for its clients. Click here 708capital.com.au/contact-us/ for a no costconsultation and portfolioreview or to learn more visit www.708capital.com.au. Note: 708 Capital offers wealth management services for Sophisticated and Wholesale Investors only. We can only assist investors who are classified as Sophisticated Investors or have verified assets over AUD$2.5m.

708capital is a holder of AFSL. No. 386279

IMPORTANT DISCLAIMER - THIS MAY AFFECT YOUR LEGAL RIGHTS:

This document is intended to provide general securities advice only, and has been prepared without taking account of your objectives, financial situation or needs and therefore before acting on advice contained in this document you should consider its appropriateness having regard to your objectives, financial situation and needs. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.

Disclosure of Interests: 708capital receives commission from dealing in securities and its authorised representatives, or introducers of business, may directly share in this commission. 708capital and its associates may hold shares in the companies recommended.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Australian Stocks: What Happened Today?

By Max Ludowici, Equities & Derivatives Advisor, 708 Capital

 The scoreboard:

-          The ASX200 closed up 16 points or 0.35% to 4634

-          The AUD broke below 1.05 overnight. Currently reading 1.0479 vs the USD

-          Index and Equity option expiry resulted in $6.4B worth of stock changing hands

Trading on the ASX was surprisingly resilient ahead of the Christmas and New Year break following on from a nervous session offshore as concerns surrounding the Fiscal Cliff weighed on sentiment. Other Asian markets were weaker across the board in today’s session following on from the US session which ended in the red as investors became increasingly pessimistic that a budgetary deal would be reached in time. Republican House speaker John Boehner spooked markets by declaring he would only approve legislation that protected the current income tax rates for Americans earning less than $1m per year.

Strong gains in the defensives offset mild profit taking in the miners as investors appeared unperturbed by the slower trading environment next week.  

Qantas Airways ((QAN)) and Emirates won approval from Australian competition regulators today for their proposed partnership overcoming the biggest hurdle the two companies faces in sealing their alliance. Though the determination as only in draft form, the ACCC announced it had concern that traffic between Australia and New Zealand would be neglected and that the airlines must agree to maintaining minimum flight capacity on the Trans-Tasman route. In other ACCC news, Carsales.com’s ((CRZ)) proposed takeover of the Trading post website was blocked by regulators as it was determined to reduce competition in the online car classifieds market. QAN closed flat at $1.46, CRZ closed down 1.2% to $7.49.

It was hardly earth shattering news but our economic hero Wayne Swan said the federal budget was unlikely to be in surplus by end of this fiscal year breaking the market’s nice uptrend and pushing the market beneath its highs.

Miners BHP Billiton ((BHP)) and Rio Tinto ((RIO)) closed lower down 0.05% and 0.62% respectively. Fortescue Metals ((FMG)) lost 3.43% to close at $4.50.

Dexus Property ((DXS)) closed up 4.5% to $1.055 following an announcement that It had sold the majority of its industrial assets in the US for $560m above their current value.

ANZ Bank ((ANZ)) gained 0.65% to $24.80 and Westpac Bank ((WBC)) put on 0.66% to $25.97.

DOW futures are pointing to a sharply negative opening currently reading down 40 points
 

(For a more comprehensive summary of last night’s market action see FNArena’s Overnight Report.)


This article produced at the request of and is published by FNArena with the expressed permission of 708 Capital.

708 Capital is a full service stockbroking and investment advisory firm. 708 offers investment and market advice to high-net-worth Private and Institutional clients in Australia and across the globe. 708's extensive network of contacts gives its clients exclusive access to ground-level fundraising opportunities and new company listings in a variety of small and large cap ASX listed companies. 708 has a longstanding track record of generating exceptional returns for its clients. Click here 708capital.com.au/contact-us/ for a no costconsultation and portfolioreview or to learn more visit www.708capital.com.au. Note: 708 Capital offers wealth management services for Sophisticated and Wholesale Investors only. We can only assist investors who are classified as Sophisticated Investors or have verified assets over AUD$2.5m.

708capital is a holder of AFSL. No. 386279

IMPORTANT DISCLAIMER - THIS MAY AFFECT YOUR LEGAL RIGHTS:

This document is intended to provide general securities advice only, and has been prepared without taking account of your objectives, financial situation or needs and therefore before acting on advice contained in this document you should consider its appropriateness having regard to your objectives, financial situation and needs. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.

Disclosure of Interests: 708capital receives commission from dealing in securities and its authorised representatives, or introducers of business, may directly share in this commission. 708capital and its associates may hold shares in the companies recommended.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Australian Stocks: What Happened Today?

By Max Ludowici, Equities & Derivatives Advisor, 708 Capital

 

The scoreboard:

-          The ASX200 hit a 17-month high intraday to close up 21 points or 0.5% to 4595

-          The AUD is still holding above 1.05. Currently reading 1.054 vs the USD

-          Total volumes were strong at $4.8B despite many brokers and dealers already taking holidays.

Aussies stocks rose strongly on Tuesday closely tracking Wall Street’s session as positive signs from the US toward a fiscal cliff resolution inspired confidence in investors. A 45 minute meeting between Republican House Speaker, John Boehner and president Obama, the contents of which isn’t even known, was enough to get punters believing progress was being made. Boehner on Friday said he may support increasing income tax on those earning more than US$1m per year and this was likely the main topic of conversation as Republican’s are become increasingly conciliatory as they push for a resolution before the new year.

Iron Ore’s stellar run didn’t slow overnight and this was the big supporting factor for our market over the day. 62% Fe on the Spot market was up another 2.2% overnight to $132.20 a metric ton, a 50% jump from its low 6 months ago. The rise augers well for our resources industry and economy at large given our leverage to commodities and is pointing to a stronger 2013 for our market. Mining services companies are starting to move strongly with the likes of Bradken ((BKN)) up 10% in a week – closing today’s session at $5.28. Other notable rises included NRW holdings ((NWH)) up 7.7% in today’s trade.

The obvious beneficiaries of the continued strength in iron ore had strong moves over the day with Rio Tinto ((RIO)), BHP Billiton ((BHP)) and Atlas Iron ((AGO)) up 0.8%, 1.9%, 5.2% respectively. Fortescue was another standout, rising another 2.9% to $4.60.

The election of the pro-growth Liberal Democratic party in Japan over the weekend has pushed uranium stocks globally through the roof as the new party affirmed their support for the Nuclear power industry in Japan. Paladin Energy ((PDN)) rose 12.4%, Energy Resources Australia ((ERA)) also moved strongly, jumping 7.2%

DOW futures are pointing to another positive opening, currently up 36 points 
 

(For a more comprehensive summary of last night’s market action see FNArena’s Overnight Report.)

 

This article produced at the request of and is published by FNArena with the expressed permission of 708 Capital.

708 Capital is a full service stockbroking and investment advisory firm. 708 offers investment and market advice to high-net-worth Private and Institutional clients in Australia and across the globe. 708's extensive network of contacts gives its clients exclusive access to ground-level fundraising opportunities and new company listings in a variety of small and large cap ASX listed companies. 708 has a longstanding track record of generating exceptional returns for its clients. Click here 708capital.com.au/contact-us/ for a no costconsultation and portfolioreview or to learn more visit www.708capital.com.au. Note: 708 Capital offers wealth management services for Sophisticated and Wholesale Investors only. We can only assist investors who are classified as Sophisticated Investors or have verified assets over AUD$2.5m.

708capital is a holder of AFSL. No. 386279

IMPORTANT DISCLAIMER - THIS MAY AFFECT YOUR LEGAL RIGHTS:

This document is intended to provide general securities advice only, and has been prepared without taking account of your objectives, financial situation or needs and therefore before acting on advice contained in this document you should consider its appropriateness having regard to your objectives, financial situation and needs. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.

Disclosure of Interests: 708capital receives commission from dealing in securities and its authorised representatives, or introducers of business, may directly share in this commission. 708capital and its associates may hold shares in the companies recommended.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.