Tag Archives: Leisure & Tourism

article 3 months old

The Monday Report

By Greg Peel

While downgrades to the credit ratings of US banks have been touted for some time by Moody's, the impending announcement helped Wall Street to a big plunge on Thursday night. There were predictions flying around of just how many notches of downgrade would be suffered in particular by the likes of Citi, BofA, JP Morgan, Morgan Stanley and Goldman Sachs. But when the announcement did eventually come out, long after the close, most banks were spared the depths of downgrade widely anticipated.

The news was not enough to reverse Thursday's fall, nor to ensure a gain for the week, but on Friday the Dow rose 67 points or 0.5% while the S&P gained 0.7% to 1335 and the Nasdaq added 1.2%.

There were no data of note out in the US on Friday, but in Germany it was revealed the IFO survey of business confidence fell to a two-year low this month. More evidence of a deteriorating European economy amidst a wider slowing of the global economy. What to do?

Hold a summit, of course. The EU will hold yet another grand summit beginning this Thursday, which no doubt will come up with a definitive and final solution for Europe, just like every summit has this past three years. Over the weekend nevertheless, the leaders of Germany, France, Italy and Spain agreed to measures to boost growth in the eurozone, for which they would mobilise 1% of zone GDP or E120-130bn. This agreement marks Merkel's first clear concession to the pro-growth faction led by Hollande and supported by just about everyone else. Germany remains pro-austerity given it is the inevitable paymaster, but weight of numbers have ensured Merkel can now only insist on fiscal discipline in a less harsh framework.

The arrangement will be discussed at the summit. Meanwhile the new Greek government will push for a two-year extension of its bail-out program in order to meet the strict deficit reduction targets, so it can freeze public sector layoffs and pension cuts, reduce taxes (what taxes?) and help Greece's growing poor. Greece can point to the eurozone leaders' fresh shift towards growth as grounds for such a concession, but as to what will be granted is yet unknown. EU leaders will further discuss greater fiscal union, a proposed banking union and other such alignments, all within the bounds of maintaining sovereignty.

What is they saying? The improbable takes time, the impossible a little longer?

The ECB is also ready to do its bit for kings and countries. The eurozone central bank has announced a widening of access to its funds through increasing the collateral it will accept from banks in the form of non-standard assets, such as mortgages, car loans and lower rated securities. The last time the ECB relaxed its requirements a cut to the cash rate followed, and it is expected the ECB will cut to 0.5% from 1.0% next week. There is also talk such moves would be laying some groundwork for a third Long Term Refinancing Operation (LTRO), which is the QE the ECB has when it can't have a QE given there is no eurozone bond.

The US dollar index fell back slightly to 82.21 on Friday as the euro managed to recover some ground. The Aussie crept up 0.3% to US$1.0064 and gold scraped back US$7.10 to US$1572.30/oz. The US ten-year bond did not rise much in price on the Thursday, but on Friday the news of further ECB easing saw the ten-year yield rise 5bps to 1.67%.

News of a tropical storm building in the Gulf had oil recovering, with West Texas up US$1.56 to US$79.76/bbl and Brent up US$1.75 to US$90.98/bbl, although the storm has since appeared to have subsided. Base metals were little moved.

The SPI Overnight rose 13 points or 0.3%.

Speculation and proposals as the stakeholders jostle for position will probably be the story of this week as we head into the two-day EU summit beginning Thursday. The week will also be dominated by US economic data, which will no doubt bring more QE3 speculation.

The US sees the Chicago Fed national activity index tonight along with new home sales, and the Case-Shiller house price index on Tuesday along with the Richmond Fed manufacturing index and the Conference Board leading economic index. Wednesday it's pending home sales and durable goods, and on Thursday the final revision of March quarter GDP will be made before we start looking at June quarter numbers. Expectations are for the March result to be unchanged at 1.9% growth. Friday's data include the Chicago PMI and the fortnightly consumer sentiment index along with personal income and spending.

The UK will also make a last revision to March quarter GDP on Thursday as a eurozone measure of business and consumer confidence is released, all in time for the summit.

It's a bit of an economic non-event in Australia this week, with Friday's building permits and private sector credit the only highlights.

Metcash ((MTS)) will release its full-year result on Thursday.

Rudi will be returning to the screens on Thursday at noon on Sky Business.

Note also that this is the last week of trade ahead of books close for the financial year, which can often inspire a bit of tax-selling on the one hand and fund manager window-dressing on the other. 

For further global economic release dates and local company events please refer to the FNArena Calendar.

article 3 months old

Weekly Broker Wrap: Earnings Confessions Season Is Near

 - Risk-off for markets
 - Value sectors in the Australian market
 - Confession season for corporate earnings
 - Small Cap preferences updated
 - Citi reviews its metals and mining expectations

By Chris Shaw

BA Merrill Lynch has developed a Global Financial Stress Index (GFSI), which represents a measure of stress in financial markets. By using the index BA-ML has developed a Critical Stress Signal to detect when markets move into risk-off mode.

In the broker's view the GFSI CSS signalled markets had entered risk-off mode on April 11. In terms of what this means for the Australian market, BA-ML's research shows the domestic market traditionally outperforms the US when the GFSI CSS is triggered. In part this reflects the shock-absorbing nature of the Australian dollar, which tends to depreciate during periods of stress.

Under such periods of risk-off BA-ML notes banks underperform resource stocks, while defensives outperform and small miners underperform. The latter is due somewhat to small miners being takeover targets in better times but losing this premium when times turn tougher, as well as the fact the ability of such stocks to raise capital becomes tougher as financial markets come under pressure.

Citi suggests many of the most sold down stocks of last year have recovered somewhat this year as equities improved. With valuations now closer to normal ranges this increases the risk some of these stocks are increasingly at risk of fading and potentially rolling over again. This is because further gains are likely to require signs of respectable earnings growth, predict the analysts.

Looking at where the market currently offers greater earnings growth potential, Citi suggests looking beyond the banks and resource sector so those sectors where growth is picking up and where share price are not yet overvalued.

For Citi this means the general insurance, engineering and construction and healthcare sectors. This leaves Citi's sector preferences in order as financials ex banks/REITs, industrials, resources, banks, REITs, consumer sectors and defensive sectors.

Citi's review means some changes to its recommended portfolio, with Suncorp ((SUN)), Insurance Australia ((IAG)), Boart Longyear ((BLY)) and CSL ((CSL)) being added, while Dexus ((DXS)), Myer ((MYR)), Seven West Media ((SWM)) and Lend Lease ((LLC)) have been removed from the portfolio.

Goldman Sachs has in turn focused on the so-called confession season for earnings, noting around 25% of annual profit warnings since 2000 have come during the months of May and June. From current forecasts of 6% earnings per share growth for industrials in FY12 the expectation is this number continues to trend lower, this reflecting still tight domestic financial conditions.

A review sees Goldman Sachs list its stocks in the ASX100 with both the largest downside earnings risk and the greatest upside risk heading into May and June. The former includes Atlas Iron ((AGO)), Asciano ((AIO)), ASX ((ASX)), Alumina Ltd ((AWC)), BHP Billiton ((BHP)), Boral ((BLD)), CSR ((CSR)), Caltex ((CTX)), Fortescue ((FMG)), Fairfax ((FXJ)), Harvey Norman ((HVN)), Incitec Pivot ((IPL)), JB Hi-Fi ((JBH)), Lend Lease, Myer, National Australia Bank ((NAB)), Qantas ((QAN)), QR National ((QRN)), Sims ((SGM)), Seven West, Sydney Airport ((SYD)) and Transurban ((TCL)).

Stocks with the greatest upside earnings risk in the view of Goldman Sachs include CFS Retail ((CFX)), Campbell Brothers ((CPB)), CSL, Crown ((CWN)), Downer EDI ((DOW)), Dexus, Graincorp ((GNC)), Iluka ((ILU)), Monadelphous ((MND)), Macquarie Group ((MQG)), Orica ((ORI)), Oil Search ((OSH)), PanAust ((PNA)), Spark Infrastructure ((SKI)), Santos ((STO)) and Woodside ((WPL)).

Following a review of its quantitative analysis model, Credit Suisse suggests investors at present should be long quality stocks, long value plays and neutral on momentum plays. Quality plays should do well given there are material hard landing risks, while value should do well given de-leveraging pressures are not yet out of hand.

On the other hand, momentum factors have so far failed to pick up the recent inflection point in the global growth cycle and will probably miss the next major inflection point as well.

With respect to sector allocation Credit Suisse prefers high yielding defensives to cyclicals given expectations of slower growth ahead, while rate-sensitive cyclicals are preferred to mining stocks given better relative value.

Under such a screening process Credit Suisse notes high yielding defensives such as Telstra ((TLS)), Stockland ((SGP)), Challenger ((CGF)), Tabcorp ((TAH)) and Metcash ((MTS)), banks such as Bendigo and Adelaide ((BEN)), National Australia Bank, Westpac ((WBC)), ANZ Banking Group ((ANZ)) and Commonwealth Bank ((CBA)), and consumer discretionary stocks such as JB Hi-Fi, Myer, Seven West Media and Fairfax dominate the long-end.

In the short basket are metals mining and energy stocks such as Alumina Ltd, BlueScope ((BSL)), Oil Search, Santos, Atlas Iron, Newcrest ((NCM)), OZ Minerals ((OZL)) and Sims as well as selected US dollar exposures such as James Hardie ((JHX)), News Corporation ((NWS)) and ResMed ((RMD)).

According to Citi, the equity market rally in March means value is now harder to identify in the small industrials end of the market, as current earnings multiples appear to paint a true picture of value. In relative terms the current multiple for the sector is below average levels of the past 10 years, which suggests further relative outperformance is possible.

Factoring in recent price movements, Citi has removed Forge ((FGE)), Henderson Group ((HGG)), Super Retail ((SUL)) and Sandfire Resources ((SFR)) from its top picks list, while Mirabella ((MBN)) has also been removed given less conviction on the part of the broker. Ratings for Forge, Henderson Group and Sandfire have all been lowered in recent weeks to Neutral from Buy previously, while GWA Group ((GWA)) has also been downgraded by Citi; to Sell from Neutral. 

To replace these stocks Citi has added Flight Centre ((FLT)) and Adelaide Brighton ((ABC)) to the list of key small cap calls, the rest of the list being Miclyn Express Offshore ((MIO)), McMillan Shakespeare ((MMS)), NIB Holdings ((NHF)), NRW Holdings ((NWH)) and Southern Cross Media ((SXL)) among the industrials and Medusa Mining ((MML)), Resource Generation ((RES)) and Regis Resources ((RRL)) among resource plays.

A Buy for Credit Suisse among small cap plays is Webjet ((WEB)), which has recently guided to FY12 earnings growth of at least 18%, up from at least 10% previously. On the back of this guidance Credit Suisse lifted its earnings forecasts and reiterated an Outperform rating on the stock, expecting further gains as growth continues to come through over the next 12 months.

Despite its positive view, Credit Suisse doesn't list Webjet among its top five small caps, which are made up of Alliance Aviation Services ((AQZ)), Mermaid Marine ((MRM)), Carsales.com ((CRZ)), SAI Global ((SAI)) and Flexigroup ((FXL)).

Deutsche's review of emerging companies has focused on stocks where there may be a 2H12 earnings skew and or a cyclical recovery is factored in FY13 forecasts. This gives a list of stocks offering earnings risk in coming periods and a list of companies offering potential earnings upside.

Among companies in the former category, Deutsche suggests Salmat ((SLM)) has the most risk to consensus forecasts and guidance given still tough operating conditions. Emeco Holdings ((EHL)) also offers some risk from the potential wet weather impact on operations in Queensland and northern New South Wales, while Bradken's ((BKN)) risks relate to the timing and execution of any increases in output.. The latter was confirmed by a profit warning from company management last week.

If retail conditions don't improve there are risks around earnings expectations for Pacific Brands ((PBG)) given around 80% of Deutsche's forecast earnings growth in FY13 is tied to a cyclical recovery, while it is a similar story for Spotless ((SPT)) in that a large portion of expected earnings improvement is related to an improvement in market conditions. For Navitas ((NVT)) the risk is any delay to a recovery in any of the group's divisions.

Deutsche has Hold ratings on all of these companies with the exception of Bradken, which is rated as a Buy.

With respect to companies offering upside earnings potential Deutsche includes Flight Centre given continued strong international travel numbers and easier comparable numbers in the second half of FY12.

Also included is Skilled Group ((SKE)) given scope for further improvement in key labour markets, while digital media is seen as a driver of stronger earnings for STW Communications ((SGN)). All three stocks are rated as Buy by Deutsche Bank.

Post its review of the emerging companies Deutsche has revised its top picks. Among the emerging company cyclicals the broker now prefers Ardent Leisure ((AAD)), Flight Centre, Programmed Maintenance ((PRG)), Prime Media ((PRT)), Skilled and Transpacific Industries ((TPI)). Both Adelaide Brighton ((ABC)) and GWA ((GWA)) have been removed from the broker's top picks among the cyclicals.

In the mining services sector Deutsche likes Ausenco ((AAX)), Ausdrill ((ASL)) and NRW Holdings, while also among the broker's top picks are SAI Global and IOOF Holdings ((IFL)).

In the view of Goldman Sachs the likelihood of a depreciating Australian dollar relative to the US dollar has risen. Given this, the broker has reviewed stocks to ascertain those companies with the most significant earnings sensitivity to a movement in the currency.

Among industrial stocks, Goldman Sachs suggests those with the highest positive earnings per share (EPS) impact in a depreciating AUD/USD scenario as measured by largest to smallest impact are OneSteel ((OST)), Select Harvests ((SHV)), Incitec Pivot, CSR, Aristocrat Leisure ((ALL)), Sims, Matrix Composites ((MCE)), Bradken, Macquarie Group, Campbell Brothers, Treasury Wine Estates ((TWE)), Orica and BlueScope. 

Among resource stocks the largest EPS impacts on the same basis according to Goldman Sachs would be felt by Independence Group ((IGO)), Kagara ((KZL)), Whitehaven Coal ((WHC)), OZ Minerals, AWE Ltd ((AWE)), Western Areas ((WSA)), Energy Resources of Australia ((ERA)), Aditya Birla ((ABY)), Mount Gibson Iron ((MGX)), Sandfire and Evolution Mining ((EVN)). 

Of those companies reporting in US dollars, Goldman Sachs sees the largest impacts of a depreciating AUD/USD as being felt by Brambles ((BXB)), News Corporation, Ansell ((ANN)), James Hardie, ResMed, Computershare ((CPU)), QBE Insurance ((QBE)) and Boart Longyear. 

Goldman Sachs has also assessed those stocks with the highest negative correlation of total excess returns to AUD/USD changes, this list comprising Woolworths ((WOW)), CSL, ResMed, CFS Retail ((CFX)), Westfield Group ((WDC)), SP Ausnet ((SPN)), Coca-Cola Amatil ((CCL)), SingTel ((SGT)), Telstra, Spark, Tatt's Group ((TTS)), Amcor ((AMC)) and BWP Trust ((BWP)).

Citi has also reviewed expectations for the metals and mining sectors, its analysis showing low cost producers and those that deploy capital efficiently remain the preferred exposures. Citi expects industrial commodity prices in general will be somewhat range bound over the medium-term, while precious and base metals are preferred to the bulk commodities.

Within the commodities spectrum, Citi's key picks are in palladium, nickel and gold on the bullish side, while the broker remains bearish on both copper and silver.

Changes to Citi's commodity price assumptions mean adjustments to earnings estimates for resource stocks under coverage, though there have been no changes in ratings. Key picks listed in Australia remain BHP and Rio Tinto.

 

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article 3 months old

Aussies Staying Home For Christmas

- Oz consumers signal they are more likely to stay at home this Christmas
- Those that want to travel are more likely to go overseas
- It probably has never been this cheap to travel overseas for Australians

By Andrew Nelson

A new survey from Westpac isn’t likely to be celebrated by the Australian tourism industry. The December Westpac-Melbourne Institute Consumer Sentiment indicates fewer Australians are planning to travel this Christmas and the ones that do are more likely than ever to choose an overseas destination.

According to the data, the stay at home option, or “staycation” has become the most popular choice for Australian holiday destinations, with only 31% of consumers surveyed saying they intend to hit the road this Christmas. Last year, the number was at 33% and in 2009 it was 36% and 2008 was at 38%.

A clearly GFC inspired downtrend, it seems.

The next kicker for Australian destination marketers is overseas destinations are becoming increasingly popular. In fact, 17% of those looking to travel at Christmas are heading overseas. This compares to 13% last year and 11% in 2009.

Westpac Senior Economist Matthew Hassan thinks the final number will probably end of being higher, given a significant number of travellers head off at the last minute.

Of course, he notes the strong AUD is a major factor. Hassan notes Westpac's ‘outbound tourism-weighted’ exchange rate index is 1.8% higher than last year and 37% above its 2008 level. This shows that overseas travel has never been cheaper for Australians.

It’s thus not surprising that the proportion of travellers heading overseas is about as high as Westpac has ever seen.

Many of the new “staycationers” are from New South Wales, Victoria and Queensland. While there was an increase in intended travellers from South and Western Australia, Westpac notes those states are still the least inclined to travel.

 

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article 3 months old

Qantas Shares At Cross Roads

The TechWizard has observed shares in Qantas ((QAN)) have bounced to circa $1.63 after falling from $3 to $1.18 earlier.

Technically, reports the Wizard, the shares are now sitting at resistance at the 20 moving average (M/A). This provides investors with two possibilities for the path ahead:

1. the shares resume their downtrend and revisit $1.20 soon

2. the shares run up to the top Bollinger band resistance at $2.00

The TechWizard believes we will see an end-of-the-year rally in equities and as such he favours scenario number two

The TechWizard is the pseudonym of Scott Morrison, whose experience in financial markets exceeds twenty years. Morrison operates his own website nowadays at www.techwizard.com.au. All views expressed are the TechWizard's, not FNArena's (see our disclaimer).

Technical limitations

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article 3 months old

Still Value In Flight Centre

- Solid earnings growth outlook for Flight Centre
- Early FY12 trading in line with guidance
- Stock offers value according to Moelis
- Buy ratings dominate broker views

By Chris Shaw

In FY11 Flight Centre ((FLT)) delivered earnings per share (EPS) growth of 22%, a result that followed on from better than 100% EPS growth recorded in FY10. As stockbroker Moelis notes, FY11 was the first time Flight Centre delivered profits in all 10 of the countries where wholly owned businesses are operated.

Record earnings were achieved in Australia, Canada, India and Dubai, Moelis taking the view this was helped by a supportive operating environment. For Flight Centre this meant stimulatory global airline ticket prices and sustained strength in the Australian dollar helping the domestic outbound travel market.

Not only were results for FY11 a record, but Moelis notes the lift in EBIT (earnings before interest and tax) margins implies some operational improvements were achieved and Flight Centre was able to leverage its scale.

Also boosting earnings was an improvement in the US market, Moelis noting EBIT from that market for FY11 of $1.5 million was a solid turnaround from a loss of $2.3 million the previous year. The improvement followed a restructuring of the US business.

Further earnings growth is expected in FY12, Moelis noting management has guided to profit before tax for the current year of $265-$275 million. This would be an increase of 8-12% over the FY11 result.

While achieving this target may be a challenge given current tough operating conditions, Moelis notes trading in both July and August has been consistent with this guidance being achieved. As a result no changes to earnings forecasts have been made.

In EPS terms, Moelis expects Flight Centre to earn 187.3c in FY12 and 209.2c in FY13. These forecasts compare to consensus EPS estimates according to the FNArena database of 187c and 201.3c respectively.

On the stockbroker's numbers, Flight Centre would be trading on a FY12 earnings multiple of around 10 times, a level seen as attractive given expectations of further growth longer-term from an increase of around 10% in global store numbers from a current 2,243. The earnings multiple for Flight Centre would fall to just over eight times in FY13 according to present estimates, notes Moelis.

Moelis is not the only broker to identify value in Flight Centre, as the FNArena database shows a total of seven Buy ratings and just one Hold recommendation. The sole Hold comes from Macquarie and reflects a somewhat cautious view given a softening demand environment.

But the valuation argument dominates and underpins Buy ratings from the likes of RBS Australia, Citi and BA Merrill Lynch. Also supportive of positive broker views is an attractive dividend yield, Moelis forecasting a yield of 5.0% in FY12 and 5.6% in FY13 based on expected distributions of 94c and 105c respectively. Dividends for Flight Centre are currently fully franked.

The consensus price target according to the database stands at $23.79, which is comfortably above Moelis's target of $22.50.

Shares in Flight Centre have moved within a trading range over the past year of $17.44 to $25.12. At current levels the Flight Centre share price implies upside of of around 28% to the consensus price target in the FNArena database.

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article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

Total Buy ratings among brokers in the FNArena database continue to increase as the market works its way through profit reporting season, the database showing 51 upgrades this week against 25 downgrades. Total Buy ratings now stand at 57.9%, up from 56.2% last week.

Among those enjoying upgrades to ratings were Charter Hall Office ((CQO)) as models were adjusted to reflect both better than expected full year earnings and the sale of the group's US portfolio. Charter Hall Retail ((CQR)) similarly enjoyed an upgrade following a solid operational result for the full year.

A similarly good result from Super Retail ((SUL)) has seen ratings upgraded for what is regarded as one of the top picks in the retail sector, while a solid profit result and good earnings momentum in coming years saw upgrades for Challenger Financial Services ((CGF)).

Whitehaven Coal ((WHC)) has been upgraded given its attractiveness among a limited number of options for Australian coal plays, while recent share price weakness has seen an upgrade in rating for Ridley Corp ((RIC)). Others to enjoy upgrades over the past week include Blackmores ((BKL)) and Virgin Blue ((VBA)). 

On the downgrade side Mortgage Choice ((MOC)) has seen ratings lowered by two brokers despite what was regarded a solid profit result, while ANZ Banking Group ((ANZ)) suffered a similar fate post a below consensus trading update.

While the outlook for Beadel Resources ((BDR)) remains positive, the stock has been downgraded following the announcement of a capital raising, while the view risk remains to the downside was enough for Ardent Leisure ((AAD)) to equally receive a downgrade in rating.

Tough macro conditions explain the downgrade for Southern Cross ((SXL)), while new guidance from management is enough to generate a downgrade for Downer EDI ((DOW)). Board infighting is enough to see Mount Gibson ((MGX)) downgraded, while others seeing drops in ratings include Telecom New Zealand ((TEL)) and Telstra ((TLS)).

In terms of price targets, Increases to forecasts for ARB Corporation ((ARP)), Challenger, Mortgage Choice and Whitehaven have driven increases to broker target prices, while changes to models have also seen targets rise for the likes of Kingsgate Consolidated ((KCN)), Perseus Mining ((PRU)) and NRW Holdings ((NWH)).

Targets have fallen for Consolidated Media Holdings ((CMJ)), Seven West Media ((SWM)) and Southern Cross as slower growth expectations are factored into the media sector, while QBE Insurance ((QBE)) also saw cuts to targets as operating conditions remain difficult for the company.

Adjustments to earnings estimates in coming years have meant cuts to targets for Ausenco ((AAX)) and Ardent Leisure, while the board issues at Mount Gibson and a lack of catalysts for Boart Longyear ((BLY)) also impact on price target assessments.

Changes to earnings forecasts are largely profit result related, with increases to forecasts for Santos ((STO)), Woodside ((WPL)), Mortgage Choice, NIB Holdings ((NHF)) and Sedgeman ((SDM)) and cuts for BlueScope Steel ((BSL)), Beadel, QBE Insurance, DUET ((DUE)), Ardent Leisure, Australian Pipeline Trust ((APA)) and Goodman Fielder ((GFF)).

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 CQO - 14.0% 57.0% 71.0% 7
2 CQR - 14.0% 43.0% 57.0% 7
3 SUL 50.0% 100.0% 50.0% 6
4 CGF 57.0% 100.0% 43.0% 7
5 WHC 33.0% 67.0% 34.0% 6
6 BKL 33.0% 67.0% 34.0% 3
7 RIC 33.0% 67.0% 34.0% 3
8 NWH 67.0% 100.0% 33.0% 3
9 AAX 50.0% 80.0% 30.0% 5
10 VBA 43.0% 71.0% 28.0% 7

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 MOC 67.0% 33.0% - 34.0% 3
2 ANZ 63.0% 38.0% - 25.0% 8
3 BDR 50.0% 33.0% - 17.0% 3
4 AAD 83.0% 67.0% - 16.0% 6
5 SXL 86.0% 71.0% - 15.0% 7
6 DOW 57.0% 43.0% - 14.0% 7
7 MGX 88.0% 75.0% - 13.0% 8
8 TEL 38.0% 25.0% - 13.0% 8
9 TLS 63.0% 50.0% - 13.0% 8
10 PBG 38.0% 25.0% - 13.0% 8
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 ARP 8.063 8.675 7.59% 4
2 WHC 6.842 7.108 3.89% 6
3 CGF 5.471 5.603 2.41% 7
4 MOC 1.427 1.460 2.31% 3
5 PRU 3.430 3.508 2.27% 6
6 KCN 9.270 9.456 2.01% 5
7 NWH 3.260 3.310 1.53% 3
8 NCM 44.126 44.626 1.13% 8
9 DXS 0.929 0.936 0.75% 7
10 CQR 3.287 3.310 0.70% 7

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 CMJ 3.197 2.672 - 16.42% 7
2 SWM 4.845 4.103 - 15.31% 8
3 QBE 18.776 16.208 - 13.68% 8
4 AAX 3.375 3.016 - 10.64% 5
5 AAD 1.590 1.445 - 9.12% 6
6 MGX 2.163 1.988 - 8.09% 8
7 SXL 1.864 1.716 - 7.94% 7
8 BLY 4.879 4.544 - 6.87% 8
9 ANZ 24.824 23.399 - 5.74% 8
10 CTX 12.742 12.103 - 5.01% 6
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 STO 49.825 56.313 13.02% 8
2 WPL 183.740 205.667 11.93% 8
3 TOL 44.075 48.513 10.07% 8
4 MOC 14.000 15.267 9.05% 3
5 MRE 5.575 6.067 8.83% 4
6 NHF 12.933 14.067 8.77% 3
7 SDM 17.033 18.500 8.61% 3
8 TEL 17.297 18.353 6.11% 8
9 NWH 23.700 25.133 6.05% 3
10 PRU 19.000 20.100 5.79% 6

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 BSL 3.843 - 0.543 - 114.13% 7
2 BDR 9.300 7.633 - 17.92% 3
3 QBE 158.295 135.288 - 14.53% 8
4 DUE 12.763 10.969 - 14.06% 8
5 AAD 15.167 13.050 - 13.96% 6
6 KCN 119.640 106.880 - 10.67% 5
7 APA 21.563 19.413 - 9.97% 8
8 OGC 16.274 14.917 - 8.34% 3
9 GFF 10.663 9.813 - 7.97% 8
10 SWM 44.513 41.575 - 6.60% 8
 

Technical limitations

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article 3 months old

More To Airlines Than Valuation Alone

- Valuation only one variable for airline stocks
- Moelis suggests a number of other factors are also important
- Stockbroker initiates coverage on both Qantas and Virgin Blue with Hold ratings


By Chris Shaw

For some time both Qantas ((QAN)) and Virgin Blue ((VBA)) have received favourable ratings from either a majority (QAN) or some (VBA) of the equity brokers in the FNArena database, in both cases because of evidence of valuation support relative to existing share price levels.

The database currently shows Qantas is rated Buy seven times and Hold once, while Virgin Blue scores three Buys, three Holds and one Underperform recommendation.

But as stockbroker Moelis points out, a number of recent market shocks such as ash clouds, floods, earthquakes and the potential for industrial action means earnings in the sector remain volatile. This suggests an airline stock being cheap on earnings based multiples should be only one factor driving any investment decision.

Other factors needing consideration according to Moelis include structural issues, the cost structure of the airline, macroeconomic drivers, earnings sensitivity and financial leverage. Moelis suggests structural issues include capacity increases coming at the expense of yields, an inability to pass on increased fuel costs and different regulations for airlines in different countries.

Fuel costs in particular have been an issue in recent years, as having been equal to about 10% of group revenues in 2000, fuel costs for Qantas have risen to about 25% of revenues in 2010. Moelis also notes in 1965 the lowest airfare from Sydney to London and return was equal to about 21 weeks wages, now it equates to around 1.7 weeks average wages. 

Over the same period, petrol prices have increased by 1,386%, while the same airfare has risen by just 44%. This is pressuring margins, as Moelis notes gross margins for Qantas for 2009 and 2010 were around 2%. This compares to an average gross margin of 7% over the past decade.

Moelis also points out airlines don't have the same economies of scale that other capital intensive businesses enjoy, as variable costs represent around 65% of total operating costs. This helps keeping earnings volatility high, the commodity based variables making forecasting earnings in the sector very difficult.

In terms of financial leverage, Moelis notes both Qantas and Virgin Blue utilise operating leases as a way to finance their fleets. If these leases are regarded as another form of financing, Moelis suggests investors need to incorporate these figures into coverage and gearing ratios. 

Looking at the Australian macroeconomic picture, the stockbroker suggests the outlook for the domestic airlines is mixed at best. Consumer sentiment and business confidence are both subdued, which implies some risk to spending on air travel.

With these factors being considered, Moelis has initiated coverage on both Qantas and Virgin Blue with Hold ratings. Respective price targets stand at $2.00 for Qantas and $0.31 for Virgin Blue, which compare to respective consensus targets according to the FNArena database of $2.60 and $0.39.

For Qantas, Moelis suggests the stock is attractive on virtually every valuation metric, the exception being free cash flow multiples. This reflects a current capital expenditure program, which will keep free cash flow in negative territory for the near-term.

Given this and a volatile earnings stream, Moelis doesn't see the stock being cheap on valuation metrics as justification for investment. This is especially the case in the light of limited earnings visibility given current forward rates and Qantas's hedging position.

This means shareholders are not getting the required return on capital to justify the investment risk. This is especially the case as while earnings for Qantas are expected to recover, Moelis suggests any recovery is likely to be fragile. In such an environment a Hold rating is seen as appropriate.

Looking at Virgin Blue, Moelis notes when the company first entered the Australian market its no frills business model delivered a genuine cost advantage. The subsequent advancement of the business model to a New World Carrier has increased complexity and costs, which has impacted on returns.

As well, while the current strategy utilising a virtual network has some merit, Moelis notes it remains untested at the customer level. This, and the leverage in place from operating leases, leads Moelis to suggest it is currently difficult to justify a Buy rating on Virgin Blue, especially without a well defined path to profits in FY12.

Shares in Qantas and Virgin Blue are mixed today, with Qantas trading up 0.5c at $1.82 and Virgin Blue down 0.5c at $0.275 as at 11.30am. Over the past year Qantas has traded in a range of $1.785 to 2.97, while Virgin Blue has traded between $0.265 and $0.48.

The current share prices imply upside to the consensus price targets according to the FNArena database of around 42% for Qantas and about 43% for Virgin Blue. 

 

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

Ardent Makes A Big Splash

- Ardent's result provides a big positive surprise
- Share price jumps but yield still attractive
- Analysts see more upside


By Greg Peel

It was back in November when Ardent Leisure ((AAD)), operator of theme parks, bowling alleys, marinas, health clubs and family entertainment centres here and in the US, posted its first quarter FY11 update. Stock analysts saw some very positive signs emerging at the time. (See Ardent Supporters Cheer)

The point was that when one looks at the business of frivolous entertainment, there is never going to be a worse impact than a GFC. When you don't know where your next dollar's coming from, you don't blow the one you've got on the rollercoaster. Leveraged trusts were beaten down enough as it was on debt concerns, but as consumer purses zipped post-stimulus, Ardent really hit its nadir in FY10.

Ardent's first quarter result was, nevertheless, very encouraging. It wasn't fantastic, but it did suggest the worst had been seen and that FY11 would bring a gradual recovery. The real attraction, however, was that Ardent had reduced its debt to manageable levels and deftly controlled its costs, yet the yield on offer was a lofty 10% on FY11 forecasts. Ardent was not junk, it just needed the punters to return.

It had already been a bit of a wet winter, but no one was quite prepared for the weather in South East Queensland as spring gave way to summer. We are reminded that meteorologists attribute the January floods to the saturation of the landscape given prior relentless rain. Where do you go for entertainment when it's bucketing down? Whitewater World? One would think not. The market certainly thought not, and as such the Ardent units continued to lose valuation ground over Christmas which only served to push up that available yield.

But they came. The punters weren't exactly busting the doors of Dreamworld down, but compared to a year ago theme park sales were up 7% when JP Morgan, for one, was expecting a 2% decline. Indeed, all brokers were caught out by the resilience in attendance and the pull of market share away from theme park rival Village Roadshow ((VRL)). To counter desperate discounting from Village, Ardent had introduced its $69 “World Pass”. And it worked, quite spectacularly.

Ardent is not just theme parks of course, but all five business units performed well in the half. Little more evidence is now needed that FY10 represented the bottom of the earnings cycle. And before you say “what about January in Queensland?”, management confirmed that January also saw stronger revenues across all businesses, including the parks, albeit no full year guidance was offered.

And Ardent hasn't been sitting still either, with the Skypoint Observation Deck now open, new rides planned, further health club, Main Event and bowling alley acquisitions targeted, and further growth opportunities sought. Ardent does not intend gearing to exceed 45% and as Macquarie puts it, “the group's ability to manage costs has never been in doubt”.

Which serves to underpin that high yield. There is, however, one problem. On the release of Ardent's shockingly good result yesterday, the unit price jumped 17%. A $1.17 stock quickly became a $1.37 stock and as a result, the FY11 forecast yield has fallen to 9.0% (consensus of the six brokers in the FNArena database covering Ardent) and the FY12 yield to 10.1%.

But such yields are hardly to be sniffed at, and despite yesterday's price surge analysts see further capital appreciation ahead. The consensus target price from those six brokers has jumped to $1.46 from $1.17 on a spread from $1.30 (BA-Merrill Lynch) to $1.65 (Deutsche Bank). I am omitting UBS ($1.20) which did not update its view this morning.

Deutsche's big target increase to $1.65 from $1.00 unsurprisingly sparked a rating upgrade from Hold to Buy. Four of the other six brokers already had a Buy rating which just leaves Merrills on Hold.

While acknowledging a “stellar” result, Merrills remains a little wary of the typical seasonal downturn in the cooler months and without full year guidance does not want to get carried away. Merrills' target already was at a high-end $1.30 and there it remains. The big surge in price yesterday means the market has caught up and so the broker is sticking to Neutral for now on valuation.

Obviously the retail environment in Australia is currently weak, and a flood levy is not going to help. Entertainment spending however appears to be on the bounce and the RBA's commitment to steady rates for a while, along with low unemployment, should provide support. But again we look at that yield.

Tuesday would have been a better day to buy, but most brokers believe Ardent's re-rating is still an ongoing story.

article 3 months old

Ardent Supporters Cheer

By Greg Peel

If ever there were an investment which was likely to suffer the effects of a GFC, even in Australia where technically a recession never actually occurred, it was units in the Ardent Leisure Group ((AAD)), formerly the Macquarie Leisure Trust Group until 2009. Ardent assets are all about fun, fun, fun, and GFC's simply aren't.

One might be tempted to suggest it's been a rollercoaster ride for Ardent since it shook off the stigma of its “Macquarie Model” tag, but then one would have to be shot for the use of a painfully obvious pun. Ardent's assets include the big Dreamworld and WhiteWater World theme parks in Brisvegas, AMF and Kingpin bowling clubs and Goodlife health clubs across the country, d'Albora Marine, and Main Event family entertainment centres in the US.

It's not cheap to pack the kiddies off to a theme park at the best of times, and Ardent's flagships saw a lot of tumbleweeds roll through in FY10. Bowling alleys may be quietly regaining in popularity since their heyday in the 60-70s when this correspondent spent half his primary school birthday parties at one, but leisure boating and anything connected to conspicuous entertainment in the unemployment-stricken US were always going to be among the first items struck off the family budget after 2008. Rampant ticket discounting among entertainment establishments and theme parks resulted, cutting into what little profit potential there was.

Let's just say FY10 was possibly about as bad as it's ever going to get for Ardent.

Yet the units are projected by analysts to provide a consensus yield of 10.0% in FY11 and 11.4% in FY12. Rates may be rising in Australia, but double digits are nothing to be sniffed at when investment in growth stocks remains fraught with lingering danger. One must always be very wary when distribution yields look just a bit too high, because it usually means something very risky lies underneath. For unit trusts that risk was once clearly overstretched debt, but Ardent's gearing ratio is currently a comfortable 32%. Ardent management intends to expand the business organically and has set a target zone of gearing at 30-35%.

So yes – it looks like a good yield. But Ardent's unit price has fallen from a peak (as Ardent) of above $1.80 as we entered 2010 to under $1.00 and despite the index now trading back towards its April peak, Ardent seems pretty stuck at around $1.10. Hence the good yield.

But the six brokers in the FNArena database covering the trust all agree that the first quarter of FY11 produced a very encouraging result for Ardent. It would seem the tide may have turned. Analysts are expecting a steady return to more normal earnings from here.

But one quarter does not a summer make, nor a whole year. We already know that the December quarter will be hampered because south east Queensland experienced Biblical weather in October in which one might simply have stood outside in the gutter for free rather than pay good money to visit WhiteWater World. And we know that given the ensuing strength in the Aussie dollar, it's now nearly as cheap to visit Disneyland in LA as it is to travel to the Gold Coast. Cartoon characters and superheroes must just sigh as fully laden planes groan out of Brisbane and overhead before returning empty.

Not to mention that a strong Aussie is all about rising interest rates, which also tighten the local purse strings.

But the positive signs are nevertheless there for the patient investor who likes a bit of yield behind a longer term growth prospect. The new Tower of Terror II has proven a big draw card, as one might naturally assume, albeit a couple of analysts fear early popularity in Q1 might have sucked a bit of potential patronage from Q2. Beyond that, Ardent is leveraged to eventual economic recovery (or simple economic growth in Australia's case) and most likely has seen its trough.

Ardent is showing a Buy/Hold/Sell ratio in the FNArena database of 3/3/0 with a twelve-month consensus target of $1.19, 9% above the current trading price.

article 3 months old

Wotif.com Is A Sell, Says CBA

By Chris Shaw

Yesterday FNArena noted the market remains divided on the outlook for Wotif.com ((WTF)), with uncertainty over earnings growth expectations from the second half of FY11 accounting for much of the disparity in views (see: Is Wotif Now Cheap Or Too Expensive Still?, 26/10/10).

Today Commonwealth Bank has added its view, continuing to rate Wotif.com as a Sell post the company's earnings update included in management's annual general meeting commentary.

For Commonwealth Bank domestic room night growth is a concern, as outlook commentary indicated this is likely to be negative in the first half of FY11. While medium-term there should be an improvement, the bank is below some expectations in the market given its view a significant portion of Wotif.com's potential market is already booking rooms online.

Wotif is attempting to grow its product offering by initiatives such as a further extension of the booking window, Wotflight and user reviews. Commonwealth Bank also notes acquisitions are likely to try and complement the current earnings growth profile.

Commonwealth Bank has lowered its earnings forecasts for Wotif by 2% this year and by 3% in FY12. This reflects a lowering of domestic room night growth assumptions in FY11 to 3% from 4% previously, as well as an increase in its expenditure assumptions to account for higher marketing and IT spending (a point highlighted by other stockbrokers as well).

In earnings per share (EPS) terms Commonwealth Bank is forecasting 24.9c in FY11 and 28.1c in FY12, which implies a minor fall in earnings this year given EPS in FY10 was 25.3c. As a comparison, consensus EPS forecasts for Wotif.com according to the FNArena database stand at 25.7c in FY11 and 29.7c in FY12, so Commonwealth Bank is below market with its updated estimates.

The reduction in its earnings forecasts sees Commonwealth Bank lower its price target on the stock to $4.40 from $4.60. This is enough to justify a Sell rating as while Wotif.com is seen as a fantastic business, the shares are simply expensive at current levels in the bank's view.

The consensus price target for Wotif.com according to the FNArena database is $4.87, with BA Merrill Lynch the low with a target of $3.65 and JP Morgan the high mark with a target of $6.13. The database shows Wotif.com is rated as Buy twice, Hold five times and Sell once.

Shares in Wotif.com today are weaker and as at 11.25am the stock was down 8c at $4.68. This implies upside to the consensus price target in the FNArena database of around 3.7% but is above the revised price target of Commonwealth Bank.