Tag Archives: Telecom/Technology

article 3 months old

Oz CFD Traders Play The Banks, BHP and Apple

By Andrew Nelson

CFD (contracts for difference) trading house CMC Markets has taken a look at trading activity in April, noting Australian traders have shown an increased amount of interest in international CFDs, with Australian markets and the AUS:USD exchange situation remaining subdued.

CMC chief market analyst Ric Spooner also said that traders expended a significant amount of effort adjusting their exposure to Australian banks, although BHP Billiton ((BHP)) and Apple were the most busily traded CFDs in Australia last month.

Spooner notes the interest in Apple over recent months has followed a run in the share price, which has increased about 77% from last November to early April. Net client positions in Apple CFDs have remained consistently long, he points out.

There has also been strong interest in the German 30 Index, which follows the DAX, and is comprised of a mixture of the 30 largest companies in Germany. Spooner reports German 30 Index April turnover was up 30% compared to the average, with turnover increasing since the index peaked in March.

Data from CMC show that exposure in the German 30 flip-flopped between long and short during March and April, ending last month with long and short positions nearly balanced.

Overall, CMC reports that April turnover was up 30% on the year to date average, with Spooner explaining that traders are usually keen to take part in strongly trending markets.

There was a renewed level of focus in USD:GBP activity over March and April. The GBP had been trending higher for most of the year and after a minor correction in early March, the pound was on its way up again, drawing a significant amount of trading interest from late in March though April.

On the local front, CMC notes there was an increased amount of activity in the Australian banking sector post NAB's preliminary numbers and ahead of ANZ and Westpac’s result announcements due in early May.

CMC reports that its net client exposure on National Australia Bank ((NAB)) changed from a small long exposure to a significant short position by the end of April, while there was significant net short exposure to Common wealth Bank ((CBA)). Meanwhile, exposure to both Australia and New Zealand Bank ((ANZ)) and Westpac ((WBC)) was long, although CMC points out these positions declined a little during the last week of April.

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article 3 months old

SAI Global: Risk Or Opportunity?

- SAI shares hammered after profit warning
- Three brokers downgrade ratings
- Just a flesh wound, say others
- double-digit growth on offer in FY13


By Greg Peel

“Where there is one there is usually three,” suggests Citi, rather ominously, in a report this morning. The truth of the matter is Citi is drawing on plenty of past examples.

The Citi analysts were prompted to provide the warning after yesterday's profit downgrade from SAI Global ((SAI)) – the second in three months. What is most disappointing for many brokers is that the second downgrade has come so soon after the company's interim result release in February. Citi has downgraded its rating on SAI to Hold (Neutral), joining two other FNArena database brokers in doing the same. The market took SAI shares down yesterday by 5% after the announcement and another 6% has been lost so far today in the wake of the broker downgrades.

The question is now as to whether SAI might be a good buying opportunity. Although on Citi's warning, there's another profit downgrade to come.

SAI Global engages in providing information services and solutions for managing risk, achieving compliance, and driving business enhancement worldwide through a wide and diverse range of services. The company's earnings have to date been considered to be of a defensive quality, and with new contracts due to impact on the bottom line next year, SAI had been boasting a clean sweep, eight out of eight Buy ratings in the FNArena database. Until today.

SAI yesterday issued new guidance which amounts to an FY12 profit downgrade of up to 9%. The reasons behind the downgrade are both macro-related and company-specific, JP Morgan notes, with Information Services and Compliance Services divisions the key culprits due to weaker trading conditions, infrastructure set-up costs, rationalisation of legacy contracts and product development issues. JPM points out that while SAI has “attracted followers” due to its defensive characteristics, the downgrade shows the company is not immune to macro issues, or its own problems.

At the release of the first half result, management had declared expectations that the Standards business would improve in the second half but this hasn't happened given weakness in Europe and in Australia, Citi notes. Compliance sales continue to lag thanks to a slow uptake of UK bribery legislation solutions. Given the heavy infrastructure build undertaken to market this product, the slow take-up is disappointing and quite damaging to margins. The products may take longer to gain traction than first thought, RBS suggests. While higher costs form part of the downgrade, RBS believes the drop in guidance reflects “new negatives related to revenues” and not just costs.

Deutsche Bank nevertheless believes the market has missed an important announcement buried within the guidance announcement yesterday in its rush to exit the stock. Part of the downgrade came from increased costs in starting up new mortgage processing work but SAI has also now signed a second mortgage processing contract. And SAI has also made a small acquisition in the form of a seafood standards and supply chain management system.

“We see the trading disappointment as a temporary setback,” says UBS. Mind you, the earlier downgrade at the February result was dismissed by the brokers in the same vein, including Citi, which is why those analysts now have the heebie-geebies. Citi nevertheless still expects SAI's earnings to grow by 20% in FY13 with the significant new contribution from the ANZ property services contract. And therein lies the crux of SAI broker recommendations.

RBS is expecting 18% earnings growth in FY13, Macquarie 19%, Deutsche Bank 24%, and JP Morgan sees a 30% increase in profit. UBS suggests costs incurred in Property Settlement and Compliance in FY12 should be recouped from sales in FY13, and notes the increased enforcement of the Foreign Corrupt Practises and UK Bribery Act provides a tailwind despite the sluggish start for that new product. Credit Suisse notes the large Property and Assurance businesses are continuing to deliver upon expectations through a difficult economic environment and thus “the rationale for investing in SAI remains largely unchanged”.

Macquarie notes SAI is in advanced discussions with a number of the major banks regarding further contract opportunities and the broker retains SAI among its “preferred picks” in the emerging leaders group.

All brokers have today cut back earnings forecasts, with a couple of the downgraders also taking a knife to FY13. SAI's consensus target in the database has fallen to $5.34 from $5.56 which at today's trading levels suggests around 13% upside. From eight out of eight, SAI now has five Buys and three Holds.

SAI's business amounts to complex IT solutions. Cost overruns and delays are part of the game. Macquarie is attracted to SAI's growth prospects as the company grows its global footprint while UBS notes SAI boasts a leading global position in a highly scalable business with low working capital requirements and high barriers to entry.

Is this just a stumble along the way to much greater things, or will Citi's warning prove accurate? SAI Global does not pay a big yield but if the Buy-raters are right there may be room to improve on solid earnings growth. And the share price has been hammered for two days.
 

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article 3 months old

The Short Report

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By Chris Shaw

Increases in short positions outweighed decreases for the week from April 16, with shorts in both Spark Infrastructure ((SKI)) and Whitehaven ((WHC)) rising by more than 4.0 percentage points.

For Spark Infrastructure shorts now stand at 5.28% from 0.5% the week prior, this as the company announced the intention to bid for the Sydney desalination plant in a move to expand away from electricity assets.

While Whitehaven is now a go-to coal play given the lack of independent coal producers listed on the ASX, Citi is cautious on the group's ramp-up ambitions as these plans appear very optimistic. Shorts in Whitehaven have increased to 7.08% from 2.86% previously.

Despite a lack of news in recent weeks shorts in Mesoblast ((MSB)) rose in the week from April 16 to 5.43% from 2.72% previously, enough to push Mesoblast into the top 20 short positions list. At the same time shorts in Carsales.com ((CRZ)) increased to 11.68% from 9.12% the week before in a continuation of the recent trend of rising shorts in the stock.

The increase cements Carsales.com in the top 20 largest short positions on the Australian market, a list that continues to be dominated by companies exposed to the consumer discretionary sector. Others in the sector making the list include JB Hi-Fi ((JBH)), where those holding short positions would be happy given recently revised down earnings guidance, Myer ((MYR)), David Jones ((DJS)), Billabong ((BBG)) and Harvey Norman ((HVN)).

Other stocks in the top 20 list cover a range of sectors, with the likes of Cochlear ((COH)) in the healthcare sector, Ten Network ((TEN)) and Fairfax ((FXJ)) among media plays, Echo Entertainment ((EGP)) in the gaming sector and Iluka ((ILU)) and Lynas Corporation ((LYC)) among commodity plays.

The largest decline in short positions for the week from April 16 was in SingTel ((SGT)), where positions declined to 4.05% from 5.72% despite no major announcements from the company.

With respect to monthly changes the biggest increases have come in Whitehaven, Spark Infrastructure, Bathurst Resources ((BTU)), Carsales.com and Independence Group ((IGO)). The increase in shorts for Bathurst came ahead of a quarterly production report indicating a slower ramp-up in production, while for Independence Group the major upcoming catalyst is the first gold pour at Tropicana continues to get closer.

Among the falls in short positions over the month from March 23, Billabong has seen total positions decline to 9.37% from 11.3% the month prior, while shorts also declined by more than 1.5 basis points in (FMS)), Wesfarmers Partly Protected shares ((WESN)) and Western Areas ((WSA)). Of those only Western Areas has a significant level of short positions at 3.58%, which may not be impacted by this week's quarterly production report that was broadly in line with expectations.

Elsewhere, RBS Australia notes short positions in Westpac ((WBC)) have risen by 35 basis points over the past month to a level of around 2.0%. Leading into bank reporting season this month the increase makes sense in the broker's view, as Westpac has delivered below peer loan book growth over the past year and has the greatest reliance on wholesale funding markets of the major banks. This leaves Westpac most exposed to any increase in eurozone tensions, something RBS expects will occur in coming months.

 

Top 20 Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 22928391 98850643 23.20
2 MYR 75404121 583384551 12.90
3 ISO 723617 5703165 12.69
4 CRZ 27277138 233684223 11.68
5 FXJ 273373404 2351955725 11.64
6 COH 6311333 56929432 11.10
7 FLT 10065499 100024697 10.06
8 DJS 52157507 524940325 9.96
9 LYC 161692161 1714496913 9.45
10 BBG 24223691 257888239 9.37
11 EGP 57361567 688019737 8.34
12 HVN 77576325 1062316784 7.26
13 GNS 61598376 848401559 7.25
14 WHC 35728428 502668417 7.08
15 WTF 13857249 211736244 6.53
16 ILU 26940403 418700517 6.42
17 TEN 62009646 1045236720 5.91
18 TRS 1528794 26071170 5.89
19 CSR 29662405 506000315 5.85
20 MSB 15445890 284478361 5.43

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

IMPORTANT INFORMATION ABOUT THIS REPORT

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

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

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

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

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

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

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

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

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article 3 months old

Weekly Broker Wrap: 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

Peter Switzer: Three Stocks I Like For A ‘Dirty Harry’ Market

By Peter Switzer, Switzer Super Report

With Wall Street up big time one day and then nervous the next, it is apparent that wealth builders are in a Dirty Harry predicament.

Effectively, we are looking at numerous great opportunities based on current share prices, but we have to ask ourselves: ‘Do we feel lucky, punk? Well, do we?’
 

Lucky stocks

The penny dropped for me on Wednesday night on my SWITZER program on the Sky Business channel when I was interviewing Tom Goode from JB Were in Melbourne. As he covered the BHP Billiton ((BHP)) production story, my crew flashed up the chart of the company’s share price and it screamed out to me that this has to be a great dollar-cost average opportunity. And I reckon Rio Tinto ((RIO)) fits into the same category for the long-term investor – both companies are great value now.

But you might be saying, but what if European nightmares this year send their share prices down even further?

Well, I’d say to you, buy more if you believe in the long-run China story, and that’s exactly what long-term investors have to think about: the long-term. To worry about Europe between May and October – the scariest months for investors – is to be a short-termer.

Sad news

It is significant to me that the sad news that Warren Buffett has prostate cancer came on the day I had my BHP epiphany as he always advises investors to be greedy when others are fearful.

As a long-term investor, I do feel lucky and I like the company, the management, their customers and their long-term story. The same applies to Rio and I would throw in Telstra ((TLS))  too – I especially love their dividend.

Out there will be an eventual big spike in stocks and BHP and Rio will make a lot of long-term investors who kept the faith very happy and today’s share prices pretty well ensure I am on the money.


Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

article 3 months old

The Short Report

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By Chris Shaw

With the Easter break impacting on trading the week from April 3 was relatively quiet in terms of changes in short positions on the Australian market. Few stocks saw changes of more than one percentage point, with an increase to total shorts of 5.75% from 3.75% for SingTel ((SGT)) the largest change for the period and the only increase of more than one percentage point. The increase came despite little recent news from the company, other than a structural streamlining of the international divisions.

On the side of decreases in short positions for the week from April 3, David Jones ((DJS)) topped the list with total shorts declining to 9.63% from 10.82% previously. This change has come as the market has had time to digest the group's interim earnings result from late March.

David Jones was not the only stock exposed to the consumer discretionary sector where short positions fell, as shorts in Myer ((MYR)) for the week declined to 11.57% from 12.39% and for Specialty Fashion Group ((SFH)) to 0.56% from 1.09% previously.

Consumer discretionary stocks continue to dominate the top 20 list of short positions, led by JB Hi-Fi ((JBH)) at 22.3%, followed by Myer, Carsales.com ((CRZ)) at 11.48%, Flight Centre ((FLT)) at 9.9%, David Jones, and Billabong ((BBG)) at 9.4%.

Aside from consumer discretionary stocks, short positions remain elevated across a number of sectors as the top 20 includes the likes of Fairfax ((FXJ)), Gunns ((GNS)), Iluka ((ILU)) Beach Energy ((BPT) and CSR ((CSR)). Note that CSR is one of the worst performers in the Australian share market this calendar year.

Bank of Queensland ((BOQ)) also saw shorts decline to 3.4% from 4.56% the previous week as the market has now factored in the capital raising announced by the bank in late March. The raising has improved the bank's balance sheet, which supports some Buy ratings among brokers in the FNArena database.

Monthly changes in short positions from March 9 have highlighted some more significant changes, the largest on the increase side being an jump in shorts for Carsales.com to 11.48% from 6.31% previously. Deutsche Bank recently noted total inventory growth for Carsales.com remains subdued, while brokers continue to reassess the outlook for the company post a move away from its traditional classifieds business via an investment in Torpedo7.

Shorts also increased by more than three percentage points for both Bathurst Resources ((BTU) and Cochlear ((COH)), the former as a market update indicated delays to the Escarpement appeals process and the latter as the recall process has meant the market no longer sees Cochlear as more reliable than its peers.

With respect to monthly declines in short positions the largest was a fall to 0.49% from 3.55% for Rialto Energy ((RIA)), which comes as the company is in the early stages of a three well drilling program.

Shorts in Alkane Resources ((ALK)) fell to 2.09% from 4.24% for the month from March 9, this as the market factored in both an increase in resource at the Tomingly gold project and a entitlement offer to shareholders to raise additional funds.

Elsewhere, shorts in Nufarm ((NUF)) have risen over the past month and now stand at a little above 2.2%. In the view of RBS this increase reflects the fact while earnings upgrades are needed to generate a share price re-rating this is unlikely given current market conditions. With pricing pressures still in place, RBS recommends investors reduce their exposure to Nufarm, rating the stock as a Hold.

 

Top 20 Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 22050937 98850643 22.30
2 ISO 708915 5703165 12.43
3 MYR 67569627 583384551 11.57
4 CRZ 26850070 233684223 11.48
5 COH 6460956 56929432 11.33
6 FXJ 255882163 2351955725 10.90
7 FLT 9903258 100024697 9.90
8 LYC 169429683 1714496913 9.90
9 DJS 50636631 524940325 9.63
10 BBG 23994166 255102103 9.39
11 EGP 54003153 688019737 7.83
12 GNS 61543147 848401559 7.24
13 HVN 76887590 1062316784 7.22
14 WTF 14314910 211736244 6.75
15 ILU 27218206 418700517 6.50
16 BPT 72923928 1199253779 6.11
17 CSR 30579008 506000315 6.04
18 TRS 1563710 26071170 6.01
19 TEN 61329693 1045236720 5.86
20 SGT 9486159 165074137 5.75

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

IMPORTANT INFORMATION ABOUT THIS REPORT

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

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

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

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

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

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

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

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

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article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

Over the last week ratings downgrades by brokers in the FNArena database have again dominated upgrades to the tune of 11 to six, leaving total Buy ratings at 50.38%.

Among the upgrades was Amcor ((AMC)), where Citi moved to Buy from Hold to account for the expectation of increased M&A activity from the company going forward. Changes to its model to reflect this also saw Citi lift its price target for the stock.

Austar ((AUN)) was also upgraded to Neutral from Underweight by JP Morgan to reflect the ACCC has approved the proposed merger with Foxtel. The lift in rating reflects the removal of previous concerns with respect to the deal being allowed to proceed. At the same time UBS downgraded its rating on Austar to Hold from Buy, this on valuation grounds as the ACCC approval drove the share price to the broker's target price.

While David Jones ((DJS)) was hit with a couple of downgrades post its interim result last month, BA Merrill Lynch now sees enough value to upgrade to a Neutral rating from Sell. The call is strictly a value play, the broker noting the David Jones share price has underperformed the market by almost 40% over the past year.

Another valuation based upgrade has seen UBS lift its rating on Fleetwood ((FWD)) to Buy from Hold, this given a weak share price since the group's interim result earlier this year. A shortage of resource sector accommodation should keep the company in focus in UBS's view, while the attractive dividend is also expected to support the share price.

Strong leverage to iron ore prices and the fact the Karara project is on track to meet expectations has seen JP Morgan move to an Overweight rating on Gindalbie ((GBG)) from Neutral previously, the upgrade supported by the current 20% discount to net present value.

Another upgrade in the mining sector involved PanAust ((PNA)), where Credit Suisse has moved to Outperform from Neutral post a solid quarterly report. Both the Phu Kham expansion and the development of Ban Houayxai project are on track, while higher grades meant lower costs in the March quarter. Valuation has also improved given recent share price weakness.

ASX ((ASX)) was among the downgrades this week as Credit Suisse moved to an Underperform rating from Neutral previously. The downgrade reflects current weak trading conditions, a trend the broker suggests has little chance of any significant turnaround shorter-term.

Credit Suisse also downgraded Coca-Cola Amatil ((CCL)) to Underperform from Neutral, this a simple valuation call given recent solid share price performance. The broker has made no changes to earnings forecasts or price target.

RBS Australia has moved to a Sell rating on Echo Entertainment ((EGP)) from Hold previously, this given the potential for some negative consequences from the Star redevelopment to emerge in coming years. The broker is also uncertain as to the benefit of Crown's ((CWN)) interest in the company.

A review of its model has prompted Macquarie to downgrade Gloucester Coal ((GCL)) to Sell from Neutral previously, while Deutsche Bank has downgraded Investa Office ((IOF)) to Hold from Buy as FY13 earnings are now considered priced in.

BA-ML has downgraded Lend Lease ((LLC)) to Sell from Hold, the broker arguing the market has become too carried away with the stock of late to the extent of overlooking a poor acquisition track record and little news on potential buyers of the Barangaroo project. Cuts to forecasts leave the broker well below consensus with its estimates.

PMI Gold ((PVM)) was downgraded by JP Morgan to Neutral from Outperform. While resource estimates have been increased, grades have been lowered. This is seen as having a potential ongoing impact on production levels. 

JP Morgan also lowered its rating on Seven Group Holdings ((SVW)) on valuation grounds, as while the Bucyrus deal is expected to be earnings accretive, the stock appears fully priced at current levels. Others in the market have adjusted earnings forecasts and price targets to account for the acquisition.

Sandfire Resources ((SFR)) delivered a solid quarterly report but given subdued expectations for copper prices UBS has downgraded to a Hold rating, while Citi downgraded Super Retail ((SUL)) to Hold from Buy following share price gains of around 40% so far this year.

 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Broker Rating

Order Company Old Rating New Rating Broker
Upgrade
1 AMCOR LIMITED Neutral Buy Citi
2 AUSTAR UNITED COMMUNICATIONS LIMITED Sell Neutral JP Morgan
3 DAVID JONES LIMITED Sell Neutral BA-Merrill Lynch
4 FLEETWOOD CORPORATION LIMITED Neutral Buy UBS
5 GINDALBIE METALS LTD Neutral Buy JP Morgan
6 PANAUST LIMITED Buy Buy Credit Suisse
Downgrade
7 ASX LIMITED Neutral Sell Credit Suisse
8 AUSTAR UNITED COMMUNICATIONS LIMITED Buy Neutral UBS
9 COCA-COLA AMATIL LIMITED Neutral Sell Credit Suisse
10 ECHO ENTERTAINMENT GROUP LIMITED Neutral Sell RBS Australia
11 GLOUCESTER COAL LTD Neutral Sell Macquarie
12 INVESTA OFFICE FUND Buy Neutral Deutsche Bank
13 LEND LEASE CORPORATION LIMITED Neutral Sell BA-Merrill Lynch
14 PMI GOLD CORPORATION Buy Neutral JP Morgan
15 SANDFIRE RESOURCES NL Buy Neutral UBS
16 SEVEN GROUP HOLDINGS LIMITED Buy Neutral JP Morgan
17 SUPER RETAIL GROUP LIMITED Buy Neutral Citi
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 GBG 83.0% 100.0% 17.0% 6
2 DJS - 63.0% - 50.0% 13.0% 8
3 AMC 50.0% 63.0% 13.0% 8
4 VAH 40.0% 50.0% 10.0% 6

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 SVW 75.0% 50.0% - 25.0% 4
2 LLC 86.0% 71.0% - 15.0% 7
3 SUL 71.0% 57.0% - 14.0% 7
4 ASX 43.0% 29.0% - 14.0% 7
5 IOF 71.0% 57.0% - 14.0% 7
6 EGP 63.0% 50.0% - 13.0% 8
7 CCL 50.0% 38.0% - 12.0% 8
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 AMC 7.734 7.949 2.78% 8
2 GBG 0.957 0.977 2.09% 6
3 EGP 4.498 4.523 0.56% 8
4 SVW 10.925 10.943 0.16% 4
5 IOF 0.690 0.691 0.14% 7

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 LLC 9.404 9.227 - 1.88% 7
2 VAH 0.478 0.473 - 1.05% 6
3 ASX 33.014 32.943 - 0.22% 7
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 VAH 2.940 3.033 3.16% 6
2 OSH 11.840 12.191 2.96% 8
3 QBE 137.164 139.356 1.60% 8
4 EGP 20.675 20.875 0.97% 8
5 WPL 223.185 225.328 0.96% 8
6 AWE 3.371 3.400 0.86% 7
7 CWN 55.513 55.850 0.61% 8
8 PNA 34.762 34.942 0.52% 8
9 ROC 4.577 4.598 0.46% 5
10 PRG 30.386 30.514 0.42% 7

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 GBG 1.343 0.800 - 40.43% 6
2 SVW 87.780 80.040 - 8.82% 4
3 HZN 1.193 1.119 - 6.20% 4
4 ILU 241.900 227.063 - 6.13% 8
5 TAP 3.300 3.100 - 6.06% 4
6 CTX 128.333 121.000 - 5.71% 6
7 GWA 16.083 15.200 - 5.49% 6
8 AIO 26.175 25.663 - 1.96% 8
9 BCI 49.567 48.767 - 1.61% 3
10 BLD 21.813 21.488 - 1.49% 8
 

Technical limitations

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article 3 months old

Earnings Risks Remain For Oakton

 - Goldman Sachs downgrades Oakton to Neutral
 - Change reflects recent share price strength
 - Downgrade supported by ongoing earnings concerns

By Chris Shaw

Shares in IT play Oakton ((OKN)) have risen 16.5% since the middle of January, which is significant outperformance relative to a 3.6% increase in the S&P/ASX200 Index over the same period.

The gains in the Oakton share price have prompted Goldman Sachs to downgrade to a Neutral rating citing valuation grounds. Supporting the move is the broker's view earnings risk remains to the downside.

This reflects both a continued shift towards project work for IT providers as corporate spending remains tight in the current environment and a soft environment for new IT projects in general. On the plus side, Goldman Sachs expects this shift will build greater earnings visibility for Oakton in the longer-term.

Given the recent share price appreciation, Oakton is now trading on a FY13 earnings multiple on Goldman Sachs's forecasts of 9.5 times. This is in line with IT services peers and further supports the broker's downgrade to a Neutral rating.

The change in rating brings Goldman Sachs into line with brokers in the FNArena database covering Oakton, as the database shows a perfect five-for-five Hold ratings. Ratings had been somewhat more positive but both Credit Suisse and UBS downgraded from Buy recommendations post Oakton's interim profit result in February, which came in weaker than the market had forecast.

Where Goldman Sachs remains more positive is with respect to price target, as despite the downgrade in rating the broker's target is unchanged at $1.55. This is well above the consensus price target according to the FNArena database of $1.20, with targets in the database ranging from Macquarie at $1.11 to UBS at $1.40.

Despite similar ratings brokers covering Oakton offer somewhat different commentary on the stock. Macquarie suggests the weak interim result and a number of earnings disappointments in recent years mean investors are likely to remain sceptical on the outlook for Oakton until management can prove otherwise.

RBS Australia is a little more positive, viewing a strong balance sheet as a positive and regarding Oakton as well placed to benefit from any recovery in both macro and IT market conditions. At the same time, RBS concedes earnings risk for Oakton remains to the downside at present.

Goldman Sachs also sees scope for upside longer-term for Oakton, this stemming largely from potential benefits from new technology in the IT services sector. Examples of this new technology include virtualisation, cloud computing, mobility and Software as a Service (SaaS). 

Following the downgrade in rating Goldman Sachs has now removed Oakton from its Australia/New Zealand Buy list.

Oakton shares today are weaker in an overall weaker share market. As at 12.15pm the stock was down 10c at $1.38. This compares to a trading range over the past year of $1.065 to $2.57, the current share price implying downside relative to the consensus price target in the FNArena database of around 14%.


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article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

Downgrades to stock broker ratings for individual stocks continue far outweighing upgrades and the past week proved once again no exception. The eight brokers in the FNArena database lifted recommendations on just four companies while downgrading 24 stocks. Total Buy ratings now stand at just 50.56%, the lowest level for some time despite the share market effectively moving sideways.

Among the upgrades was Aurora Oil and Gas ((AUT)), where JP Morgan lifted its rating to Neutral from Sell. While full year earnings saw both UBS and Credit Suisse downgrade to Neutral ratings from Buy previously, JP Morgan factored in its findings from a recent site visit and lifted its valuation and price target. This was enough for the broker to lift its rating to the same level as UBS and CS.

OM Holdings ((OMH)) was also upgraded to Neutral from Sell by RBS Australia, a valuation call as downside risks to earnings from lower manganese prices now appears priced into the stock following a share price fall of around 70% over the past year.

Deutsche Bank has upgraded Oz Minerals ((OZL)) to Buy from Hold following changes to commodity price and foreign exchange assumptions. While the changes meant a trimming in price target, the broker sees improved value at current levels and upgrades accordingly.

The final upgrade of the week was Telstra ((TLS)), where BA Merrill Lynch has lifted its rating to Neutral from Underperform. There is increased scope for capital management and a more stable earnings outlook in general in the broker's view, which justifies the upgrade.

So to recap: only four upgrades were issued and only one out of these four led to a Buy rating.

Among the 24 downgrades Aurora was not the only stock where ratings were lowered by more than one broker, as Leighton Holdings ((LEI)), QBE Insurance ((QBE)) and Transfield Services ((TSE)) also received multiple downgrades.

Both Deutsche Bank and Macquarie Moved to Sell ratings on Leighton from Hold previously, this given further credibility issues arising from further write-downs to problem contracts. The other issues according to Deutsche is the potential for balance sheet issues and a weak medium-term growth outlook.

Valuation is the issue for QBE, as both Citi and JP Morgan have moved to Neutral ratings on the back of recent share price strength. The insurer's AGM this week showed earnings drivers for the company have turned more positive in recent months.

With respect to Transfield, the downgrades from JP Morgan, RBS Australia and Macquarie reflect concerns over problem contracts that go beyond April's profit warning.

Post management's revised guidance, earnings estimates and price targets for Transfield have been adjusted across the market.

Elsewhere, Macquarie downgraded Boral ((BLD)) to Neutral from Buy as earnings revisions meant a cut in price target, while UBS moved to neutral from Buy on CSL ((CSL)) on valuation grounds after factoring in some changes to forex assumptions.

The changes to forecasts that saw Deutsche upgrade Oz Minerals have also seen the broker downgrade Fortescue ((FMG)), Iluka ((ILU)), Paladin ((PDN)) and Sandfire ((SFR)), as revised earnings estimates have impacted on total return expectations.

While OrotonGroup ((ORL)) remains a retail favourite of Credit Suisse, the broker has downgraded to Neutral from Buy on valuation grounds. Primary Health Care ((PRY)) has similarly been downgraded by the broker on the same basis.

Valuation has also been behind RBS Australia downgrading Pharmaxis ((PXS)) to Hold from Buy, while JP Morgan has downgraded Qantas ((QAN)) to Neutral from Overweight given the in-house view consensus earnings estimates for the airline remain too high.

A stretched valuation and some concerns over domestic ad volumes have seen BA-ML downgrade Seek to Sell from Hold, while recent share price gains have been enough for Citi to downgrade Sonic Health ((SHL)) to Neutral from Buy.

The risk of earnings and sentiment downside from current levels has prompted UBS to move to a Neutral rating on Virgin Australia ((VAH)), while Macquarie has moved to a Sell rating on Westfield Group ((WDC)) from Neutral previously as the group's shopping mall property assets business re-positioning is expected to take some time.

Price target adjustments during the week have not resulted in any changes of more than 10%, while earnings adjustments during the period were most significant in terms of increases for Macquarie Bank ((MQG)) and James Hardie ((JHX)) and cuts for Alumina Ltd ((AWC)), Leighton and Bank of Queensland ((BOQ)). 

 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Broker Rating

Order Company Old Rating New Rating Broker
Upgrade
1 AURORA OIL AND GAS LIMITED Sell Neutral JP Morgan
2 OM HOLDINGS LIMITED Sell Neutral RBS Australia
3 OZ MINERALS LIMITED Neutral Buy Deutsche Bank
4 TELSTRA CORPORATION LIMITED Sell Neutral BA-Merrill Lynch
Downgrade
5 AURORA OIL AND GAS LIMITED Buy Neutral UBS
6 AURORA OIL AND GAS LIMITED Buy Neutral Credit Suisse
7 BORAL LIMITED Buy Neutral Macquarie
8 CSL LIMITED Buy Neutral UBS
9 FORTESCUE METALS GROUP LTD Buy Neutral Deutsche Bank
10 ILUKA RESOURCES LIMITED Buy Neutral Deutsche Bank
11 LEIGHTON HOLDINGS LIMITED Buy Sell Macquarie
12 LEIGHTON HOLDINGS LIMITED Neutral Sell Deutsche Bank
13 Metcash Limited Buy Neutral Credit Suisse
14 OROTONGROUP LIMITED Buy Neutral Credit Suisse
15 PALADIN ENERGY LTD Buy Neutral Deutsche Bank
16 Pharmaxis Ltd Buy Neutral RBS Australia
17 PRIMARY HEALTH CARE LIMITED Buy Neutral Credit Suisse
18 QANTAS AIRWAYS LIMITED Buy Neutral JP Morgan
19 QBE INSURANCE GROUP LIMITED Buy Neutral Citi
20 QBE INSURANCE GROUP LIMITED Buy Neutral JP Morgan
21 SANDFIRE RESOURCES NL Buy Neutral Deutsche Bank
22 SEEK LIMITED Neutral Sell BA-Merrill Lynch
23 SONIC HEALTHCARE LIMITED Buy Neutral Citi
24 TRANSFIELD SERVICES LIMITED Neutral Sell RBS Australia
25 TRANSFIELD SERVICES LIMITED Buy Neutral Macquarie
26 TRANSFIELD SERVICES LIMITED Buy Neutral JP Morgan
27 VIRGIN AUSTRALIA HOLDINGS LIMITED Buy Neutral UBS
28 WESTFIELD GROUP Neutral Sell Macquarie
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 CER 50.0% 67.0% 17.0% 3
2 RRL 33.0% 50.0% 17.0% 4
3 OZL 25.0% 38.0% 13.0% 8
4 PNA 50.0% 63.0% 13.0% 8
5 TLS 38.0% 50.0% 12.0% 8
6 SKI 50.0% 57.0% 7.0% 7
7 IFN 57.0% 60.0% 3.0% 5

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 LEI 25.0% - 13.0% - 38.0% 8
2 PXS 100.0% 67.0% - 33.0% 3
3 QBE 63.0% 38.0% - 25.0% 8
4 ORL 40.0% 20.0% - 20.0% 5
5 AUT - 20.0% - 40.0% - 20.0% 5
6 VAH 60.0% 40.0% - 20.0% 5
7 CGF 86.0% 71.0% - 15.0% 7
8 PDN 43.0% 29.0% - 14.0% 7
9 MQG 43.0% 29.0% - 14.0% 7
10 SEK 57.0% 43.0% - 14.0% 7
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 AUT 3.430 3.758 9.56% 5
2 QBE 13.351 14.443 8.18% 8
3 PXS 1.700 1.800 5.88% 3
4 SKI 1.405 1.449 3.13% 7
5 SEK 6.970 7.134 2.35% 7
6 SHL 13.098 13.281 1.40% 8
7 TLS 3.398 3.435 1.09% 8
8 RRL 4.413 4.460 1.07% 4
9 ORL 8.856 8.936 0.90% 5
10 CSL 35.998 36.273 0.76% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 LEI 23.633 21.998 - 6.92% 8
2 PNA 4.206 4.095 - 2.64% 8
3 CGF 5.039 4.953 - 1.71% 7
4 BLD 4.425 4.364 - 1.38% 8
5 OZL 12.406 12.236 - 1.37% 8
6 BOQ 8.150 8.069 - 0.99% 8
7 FMG 7.101 7.064 - 0.52% 8
8 VAH 0.480 0.478 - 0.42% 5
9 MQA 1.858 1.854 - 0.22% 5
10 PRY 3.289 3.283 - 0.18% 8
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 MQG 211.229 291.229 37.87% 7
2 JHX 30.803 39.009 26.64% 8
3 PRG 25.414 30.386 19.56% 7
4 SGT 18.750 21.297 13.58% 6
5 CSR 15.750 17.800 13.02% 8
6 PRU 14.350 15.940 11.08% 5
7 QBE 132.729 137.164 3.34% 8
8 TGA 19.867 20.400 2.68% 3
9 BPT 8.660 8.860 2.31% 5
10 IAG 23.700 24.013 1.32% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 AWC 0.143 - 0.096 - 167.13% 8
2 LEI 187.550 128.550 - 31.46% 8
3 BOQ 39.450 28.938 - 26.65% 8
4 WHC 17.217 14.383 - 16.46% 6
5 VAH 3.300 2.940 - 10.91% 5
6 QAN 13.775 12.363 - 10.25% 8
7 BCI 55.000 49.567 - 9.88% 3
8 IGO 4.080 3.740 - 8.33% 5
9 ROC 4.977 4.577 - 8.04% 5
10 SBM 38.300 35.800 - 6.53% 3
 

Technical limitations

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article 3 months old

Game Changer, Macquarie Reckons

- Reckon Will Terminate It's Agreement with Intuit in 2014
- Royalties saved but R&D required
- Most analysts circumspect but Macquarie calls a Sell


By Greg Peel

Reckon ((RKN)) is an accounting software developer who Australians would recognise through brands such as Quicken and Quickbooks for business and personal bookkeeping and accounting. Reckon's biggest competitor in the market has always been MYOB which controls a greater slice of this particular market.

MYOB used to be listed but was last year bought out by private equity, leaving Reckon as the only locally listed company in the field. Reckon's share price has had its ups and downs of late but at around $2.20 currently, it has provided investors with 145% capital appreciation from its depths of 90c in late 2008.

Reckon nevertheless does not own the Quicken brands, rather they are owned by US contract partner Intuit. In 1998 Reckon signed a licensing agreement to become Intuit's Australasian distributor of desktop applications. However, with the subsequent development of cloud computing, online applications have since become popular and this prompted a new agreement to be signed in 2010.

The problem was that the two companies found that they had what you might call, were they a rock band, “musical differences”. Intuit retained multinational aspirations but Reckon was keen to concentrate only on the Australasian market. So while the desktop agreement stood, the new agreement allowed for each company to go down their own online product strategy paths. To maintain the analogy, two years later Reckon has found it is a lot more rock and Intuit a lot more pop and so inevitably the band has decided to break up. The 2010 agreement will terminate in 2014 and not be renewed.

Everything will remain the same up until 2014, and thereafter Reckon will retain Intuit's Quickbooks intellectual property and be allowed to develop that as it sees fit. This is good news, as is the fact Reckon will no longer have to pay royalties to Intuit after that time. The bad news, on the other hand, is that Reckon will no longer be able to use the Quicken brand names and will have to fund all its own research and development. Previously it rode on the back of Intuit's R&D. Moreover, in late 2015 Intuit will be permitted to return and compete with Reckon on its own turf.

BA-Merrill Lynch sees the end of the agreement as “a set-back, but not terminal” for Reckon. Deutsche Bank suggests “it's not all bad news”. RBS Australia believes there may be upside potential for Reckon after 2014, but not without risk. The announcement of the agreement termination came as a bit of a shock to analysts, and while there's plenty of time to mull the implications over there are a lot of “what ifs” to consider.

Looking at forecast 2014 numbers, the royalties Reckon will no longer have to pay represent $6m or 15% of 2014 earnings, by all calculations. But the question is as to just how much of that saving the company can hang on to given it now has to spend up big on its own R&D and on marketing its own new brands once the Quicken name is lost. There is a clear transitional risk, given customers may prefer to stick with the Quicken they know rather than trusting a shift to Reckon's home brands. On the positive side, Deutsche sees Reckon as gaining more flexibility in product development.

There are nevertheless further pros and cons to weigh up. Competition from Intuit itself after 2015 is an issue, but Reckon has the advantage of owning the local distribution channel. What will MYOB do to take advantage of the situation? And that's not to mention any upcoming players in the cloud. Reckon shares trade at quite a premium to the Small Ords, mostly because there has always been a perceived chance Intuit would make a full takeover bid, springboarding off its 11% stake, or that MYOB's buy-out would spark similar interest in the number two player.

Merrills is looking on the bright side of potential corporate action, using the MYOB private equity takeover and the removal of the Intuit connection as reason to see Reckon as a potentially attractive acquisition. Merrills retains its Buy rating. Both Deutsche and RBS are a little less bold, and given the risks noted above would rather play the waiting game on Hold, particularly given Reckon's premium.

Macquarie, on the other hand, sees risk with a capital R and wasted no time last week in downgrading Reckon to Underperform. The analysts then went away and thought about it for a while, and came back even more convinced. In contrast to the other three brokers in the FNArena database who cover the stock, Macquarie believes the pending termination of the Intuit agreement is a “game changer”, and not in a good way.

“Although RKN will save on the royalty fees and may be able to survive on existing product code,” suggest the Macquarie analysts, “if the company is going to remain competitive then substantial R&D investment longer term is unavoidable, in our view”.

Merrills notes Reckon spent 11% of sales on R&D in FY11 which it believes is “relatively high for a software vendor”. Yet Macquarie notes that another software vendor, Technology One ((TNE)), spends around 20% of sales on R&D every year. That equates to about $30m per annum, while Reckon's earnings are only $35m. Closer to home, MYOB's earnings are $85m and it spends $25-30m on R&D every year.

Macquarie does not believe Reckon could make an adequate return on matching this kind of money, and thinks it unlikely the company would try. Yet if it doesn't, its customer base might hang in there for a while (accountants are known to be “sticky”) but over time Reckon's offerings are at risk of becoming obsolete. There is a near opportunity to lift prices, which is what MYOB has been doing, but every way the analysts run the numbers they just can't arrive at a valuation that isn't well below the current share price.

As for a takeover of Reckon, Macquarie can't see it. The analysts can see Intuit divesting of its 11% stake, however and thus that holding may well become an overhang. Reckon could increase debt and buy back the stake for an accretive outcome, they note, at least in the short term.

Macquarie was quick to downgrade reckon to Underperform last week, but left its target unchanged at that point before it had a chance to run some numbers. With numbers now run, Macquarie has slashed its target to $1.65 from $2.39, or some 25% below the current trading price. The analysts see Reckon's price/earnings multiple being de-rated by the market over the short to medium term.

The other three brokers' target range from $2.50 to $2.65, which, with Macquarie, leaves an average of $2.35 but quite a gap.

Will 2014 see a day of reckoning?
 

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