Tag Archives: Transport

article 3 months old

Flight Centre Earnings Buck The Trend

- Flight Centre has lifted earnings guidance
- Increase reflects confidence in earnings growth outlook
- Brokers lift estimates, targets and ratings
- Recent share price weakness has improved the value on offer


By Chris Shaw

Despite a tough macroeconomic environment in Australia, Flight Centre ((FLT)) has managed to buck the trend and last week lifted earnings guidance for FY11. At the same time, management indicated double-digit earnings growth for FY12 was likely.

Management has guided to FY11 net profit before tax of $243-$247 million, which compares to previous guidance of a result between $220-$240 million. The new guidance implies earnings growth of 22.5-24.5% relative to FY10.

As Citi points out, Flight Centre is one of the few Australian companies to enjoy benefits from a stronger Australian dollar, while earnings have also been supported by ongoing resilience in travel and leisure spending in general.

Citi also notes for the first time in 12 years Flight Centre's US operations will report positive earnings, a sign management's investment in corporate travel capabilities and changes to the leisure business are generating positive results. BA Merrill Lynch also sees scope for additional improvement in US earnings, especially from FY13.

JP Morgan expects both the leisure and corporate travel operations will continue to deliver growth, something that offers further upside to earnings estimates in coming years. Helping is the fact international airfares have remained below historic trend levels, which in combination with the strong Aussie dollar is boosting demand for outbound holidays.

To reflect the revised guidance by Flight Centre earnings estimates across the market have been lifted. Citi has lifted its profit forecasts by 6% this year and by 3-4% in both FY12 and FY13. JP Morgan has increased its numbers by 5%, 3% and 4% respectively, while Credit Suisse made only minor changes.

Consensus earnings per share (EPS) forecasts according to the FNArena database now stand at 168c this year and 183.9c in FY12. The changes to estimates have seen a change in consensus price target, which now stands at $25.24 compared to $25.47 previously. The decline reflects the significant change in target made by Macquarie.

While operations at Flight Centre have clearly been going better than expected the share price has gone the other way, weakening from $23.50 in May to below $22.00 now. This has improved the value on offer, enough for both JP Morgan and RBS Australia to upgrade to Buy ratings from Neutral previously.

Overall, the FNArena database shows Flight Centre is now rated as Buy seven times and Neutral once. Morgan Stanley is not in the database but rates Flight Centre as Overweight within an In-Line view on Australian emerging companies.

What makes Flight Centre a Buy according to Citi is a combination of value and greater earnings certainty than a large portion of domestic retail peers. On Citi's forecasts, the stock is trading on 11.5 times FY12 earnings, while the early guidance for double-digit growth in FY12 implies management is confident in the earnings outlook.

Credit Suisse also sees value, expecting Flight Centre will re-rate back to its recent premium to the Small Industrials index and an absolute earnings multiple of around 15.8 times, as this would be more appropriate given the earnings outlook. For Credit Suisse this implies a price target of $29.00, which offers significant share price upside potential.

While the proposed carbon tax may have some impact given it is likely to raise costs and ticket prices. DJ Carmichael expects this impact will be relatively minimal. On its numbers the tax is likely to represent only 2-3% of average domestic air fares, something unlikely to be enough to have a significant impact on demand.

The non-Buy recommendation comes courtesy of Macquarie, which maintains a Neutral on the stock. In the broker's view the current Flight Centre share price factor in a large portion of the potential upside for the domestic operations, particularly given the cyclical nature of the business. While there is scope for better returns from offshore, Macquarie sees these as higher risk as well, meaning the risk/reward is fairly balanced at current levels. 

Over the past year Flight Centre has traded in a range of $17.21 to $25.12, the current share price implying upside of around 15.6% 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

Despite falls in equity prices over the past week the number of Buy ratings for Australian equities by the eight brokers under daily coverage in the FNArena database has barely moved, coming in at 53.2% this week against 53.1% last week. In total there were 17 upgrades and 18 downgrades in the period. The question as to why the number of Buy ratings still increased a little is answered through new initiations and re-initiations of coverage.

Among those enjoying a ratings upgrade were Bradken ((BKN)), which saw two brokers move to Buy from Neutral previously after the company announced the acquisitions of Norcast and Australian and Overseas Alloys.

Westfield Group ((WDC)) also enjoyed some upgrades during the week, this reflecting improved valuation and the potential for value creation assuming some US assets are sold as expected. Improved valuation following recent share price weakness was also behind upgrades for Coal and Allied ((CNA)) and Cochlear ((COH)).

On the flip side, better relative valuation elsewhere following solid performance by Australian office REITs has seen Dexus ((DXS)) cop more downgrades than upgrades in the past week, while reduced earnings guidance and weaker outlook commentary has seen ratings for David Jones ((DJS)) lowered on balance. The department store operator issued a shock profit warning mid-week that had noticeable repercussions for about everyone with consumer exposure in the share market.

Automotive Holdings ((AHE)) saw one downgrade from what had been a full complement of Buy ratings, this reflecting the expectation earnings will be impacted by the effect on auto sales of the mixed Australian economy and the recent natural disasters in Japan.

Along with its rating upgrades, Bradken received one of the only increase to earnings forecasts of note during the week, as brokers factor the newly acquired businesses into earnings models. Earnings estimates for Energy Resources of Australia ((ERA)) were also increased as management unexpectedly lifted full year production guidance. It has been a tough year for what once upon a time was Australia's leading producer of yellow cake.

Brokers went the other way on Rio Tinto ((RIO)) and lowered earnings forecasts post a mixed 2Q production report, while it was a similar story for Coal and Allied following a quarterly production report that highlighted some short-term headwinds.

With earnings estimates increased price targets for Bradken rose by the most during the week, increasing by around 7%. Minor increases to price targets were also enjoyed by Cardno ((CDD) and Transurban ((TCL)), reflecting an acquisition for the former and a quarterly traffic report for the latter.

With targets still being adjusted lower for Murchison Metals ((MMX)) following its update on the OPR and Jack Hills projects, the company saw the largest decrease in consensus price target, while David Jones and Automotive Holdings also experienced consensus target declines from changes to earnings estimates. Investors should note that while earnings forecasts for David Jones fell by more than 8% for FY11, following the shock announcement, the impact on further out earnings has materialised in double digits.

As with Murchison Metals this week, the impact on David Jones of its revised guidance should continue to flow through next week as more broker models are updated.

 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 BKN 0.670 1.000 0.33% 6
2 WDC 0.710 1.000 0.29% 7
3 CNA 0.200 0.400 0.20% 5
4 BTT 0.500 0.670 0.17% 3
5 COH - 0.290 - 0.140 0.15% 7
6 TCL 0.570 0.710 0.14% 7
7 FMG 0.750 0.880 0.13% 8
8 TEL 0.250 0.380 0.13% 8
9 STO 0.750 0.880 0.13% 8
10 TTS 0.250 0.380 0.13% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 DXS 0.500 0.140 - 0.36% 7
2 MMX - 0.330 - 0.670 - 0.34% 3
3 DJS 0.380 0.130 - 0.25% 8
4 AHE 1.000 0.750 - 0.25% 4
5 CDD 0.500 0.330 - 0.17% 3
6 NWS 0.500 0.330 - 0.17% 6
7 MGX 0.860 0.750 - 0.11% 8
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 BKN 9.240 9.893 7.07% 6
2 NWS 19.650 20.400 3.82% 6
3 CDD 6.198 6.363 2.66% 3
4 TCL 5.707 5.793 1.51% 7
5 FMG 7.975 8.075 1.25% 8
6 STO 17.198 17.404 1.20% 8
7 AIO 1.979 1.985 0.30% 8
8 APA 4.345 4.358 0.30% 8
9 TSE 3.814 3.822 0.21% 6
10 WDC 10.079 10.090 0.11% 7

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 MMX 1.327 0.560 - 57.80% 3
2 DJS 4.813 4.413 - 8.31% 8
3 AHE 2.895 2.745 - 5.18% 4
4 MGX 2.391 2.318 - 3.05% 8
5 BTT 2.960 2.900 - 2.03% 3
6 DOW 4.519 4.433 - 1.90% 7
7 CNA 128.600 127.000 - 1.24% 5
8 ABC 3.560 3.535 - 0.70% 8
9 COH 76.290 75.959 - 0.43% 7
10 DXS 0.932 0.929 - 0.32% 7
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 ERA - 14.950 - 3.463 11.50% 8
2 BKN 64.133 71.167 7.00% 6
3 SVW 77.080 78.920 1.80% 5
4 AZT - 3.825 - 3.150 0.70% 4
5 ASX 217.300 217.971 0.70% 7
6 FMG 80.049 80.562 0.50% 8
7 SHL 85.688 86.138 0.50% 8
8 BXB 45.535 45.945 0.40% 8
9 SGM 133.529 133.843 0.30% 7
10 ANN 99.687 99.916 0.20% 7

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 RIO 1020.623 996.326 - 24.30% 8
2 CNA 820.380 798.540 - 21.80% 5
3 BHP 491.483 483.449 - 8.00% 8
4 MQG 337.786 331.786 - 6.00% 7
5 MCC 104.663 100.300 - 4.40% 8
6 GCL 79.400 75.300 - 4.10% 5
7 WPL 185.926 182.495 - 3.40% 8
8 LLC 84.386 82.271 - 2.10% 7
9 MND 120.533 118.467 - 2.10% 6
10 CSL 197.675 195.775 - 1.90% 8
 

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article 3 months old

Top Ten Weekly Recommendation, Target Price, Earning Forecast Changes

 By Chris Shaw

Total Buy recommendations on Australian equities have moved even higher this week, the FNArena database now showing nearly 52.5% of all ratings by the eight stockbrokers under daily coverage are Buys. The increase comes despite little sign of any improvement in the outlook for corporate earnings or the broader economy.

During the week there were 16 upgrades compared to just seven downgrades, which is a continuation of the recent trend and suggests the valuation argument remains favourable for many companies.

Orica ((ORI)) received an upgrade to a Buy rating given an improved balance sheet has the company in good financial shape and earnings growth suggests value. Westfield Retail ((WRT)) also saw an upgrade to Overweight from Underweight, the argument being the stock offers defensive earnings and there is scope for June 2011 NTA to surprise to the upside.

Seven Group Holdings ((SVW)) was also upgraded and saw increases in price target, this being the result of changes in analysts covering the stock. Valuation arguments support the upgrades to Kathmandu ((KMD)), Paladin ((PDN)), AGL Energy ((AGK)), CSL ((CSL)) and Sonic Health ((SHL)), while an improved outlook given a competitors strong quarterly result was behind the upgrade for Sims Group ((SGM)).

Among the downgrades are Cochlear ((COH)), this given the combination of a high multiple and a slowing in earnings growth expectations. Generally weak trading conditions or valuation issues are behind the downgrades for Macquarie Airports ((MAP)), Macquarie Group ((MQG)) and ResMed ((RMD)).

While MAp saw a ratings downgrade there was also an increase in price target, this reflecting the potential for a proposed asset swap involving the company to deliver a positive valuation result for shareholders.

Positive initiations of coverage on Austbrokers ((AUB)) and Lynas ((LYC)) saw increases in consensus price targets for the two stocks in the database, while Orica and Westfield Retail also enjoyed price target increases associated with the upgrades in ratings.

The consensus target for Boart Longyear ((BLY)) fell after an initiation of coverage added a target below the previous consensus, while Ten Network ((TEN)) similarly saw a cut in target given ongoing evidence of weakness in advertising markets.

With fresh eyes looking at Seven Group the company enjoyed the largest increase in earnings estimates during the week, while the likes of CSR ((CSR)), Spark Infrastructure ((SKI)) and SP Ausnet ((SPN)) also saw changes to estimates as did Lynas, MAp and McMillan Shakespeare ((MMS)).

Resource stock Energy Resources of Australia ((ERA)) and refiner Caltex ((CTX)) were hit with the largest cuts to earnings forecasts during the week, while others to see numbers lowered by around 4.0% or more were Macquarie Group, Rio Tinto ((RIO)) and Aquila Resources ((AQA)). More modest cuts were made to estimates for Tabcorp ((TAH)), Qantas ((QAN)), BHP Billiton ((BHP)), Atlas Iron ((AGO)) and Blackmores ((BKL)).

 

 

 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 ORI 0.130 0.500 0.37% 8
2 WRT 0.710 1.000 0.29% 7
3 SVW 0.600 0.800 0.20% 5
4 KMD 0.800 1.000 0.20% 5
5 LYC 0.330 0.500 0.17% 4
6 SGM 0.430 0.570 0.14% 7
7 PDN 0.290 0.430 0.14% 7
8 AGK 0.750 0.880 0.13% 8
9 CSL 0.250 0.380 0.13% 8
10 SHL 0.500 0.630 0.13% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 MAP 0.830 0.670 - 0.16% 6
2 MQG 0.290 0.140 - 0.15% 7
3 RMD 0.630 0.500 - 0.13% 8
4 BLY 0.860 0.750 - 0.11% 8
5 COH - 0.250 - 0.290 - 0.04% 7
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 AAX 3.336 3.545 6.26% 4
2 TAH 3.110 3.275 5.31% 8
3 SVW 9.710 9.940 2.37% 5
4 MAP 3.487 3.555 1.95% 6
5 ORI 28.104 28.441 1.20% 8
6 AUB 6.570 6.638 1.04% 4
7 KMD 2.133 2.153 0.94% 5
8 SHL 13.253 13.371 0.89% 8
9 LYC 2.383 2.400 0.71% 4
10 WRT 2.917 2.934 0.58% 7

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 PDN 4.337 4.130 - 4.77% 7
2 MQG 39.666 38.094 - 3.96% 7
3 BLY 5.197 5.106 - 1.75% 8
4 TEN 1.319 1.306 - 0.99% 8
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 SVW 70.380 75.220 4.80% 5
2 CSR 24.125 25.950 1.80% 8
3 SKI 7.950 8.588 0.60% 7
4 SPN 8.250 8.488 0.20% 8
5 MMS 61.420 61.647 0.20% 3
6 LYC - 2.200 - 1.975 0.20% 4
7 MAP 8.459 8.659 0.20% 6
8 CSL 177.263 177.388 0.10% 8
9 SEK 29.725 29.825 0.10% 8
10 NHF 12.175 12.275 0.10% 3

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 ERA - 7.175 - 14.950 - 7.80% 8
2 CTX 114.550 108.050 - 6.50% 6
3 MQG 349.500 344.071 - 5.40% 7
4 RIO 1030.422 1026.386 - 4.00% 8
5 AQA - 4.050 - 7.750 - 3.70% 4
6 TAH 66.900 64.850 - 2.10% 8
7 QAN 18.950 17.150 - 1.80% 8
8 BHP 411.961 410.211 - 1.80% 8
9 AGO 23.886 22.771 - 1.10% 7
10 BKL 160.533 159.667 - 0.90% 3
 

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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. 

 

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article 3 months old

Qantas Can Stay Cheap For Much Longer

- April traffic stats improve for Qantas
- Union issues remain a threat to brand
- Strike action appears priced in
- Brokers in general remain positive


By Chris Shaw

Yesterday Qantas ((QAN)) released traffic statistics for April, the feature being a strong increase in domestic yields that combined with a flat load factor for the domestic operations in total.

The data also showed some improvement in international yields and traffic, which Credit Suisse suggests offers support for an expected improvement in revenues in FY12. Hedging has also increased, Qantas now being 50% hedged for FY12 at US$113.30 per barrel, up from 44% hedged at US$111.20 per barrel in March.

Post the update on traffic stats there have been some different reactions with respect to earnings estimates for Qantas. Credit Suisse has left estimates unchanged through FY12, while Macquarie has trimmed forecasts by 5-9% over the same period.

Morgan Stanley has reacted more severely, cutting underlying profit before tax forecasts for FY11 by 2% and for FY12 by 26%. The changes reflect higher Australian dollar and oil price expectations, demand destruction from higher fuel surcharges and ongoing union negotiations.

Consensus earnings per share (EPS) forecasts for Qantas according to the FNArena database stand at 19.3c for FY11 and 27.3c for FY12.

The union negotiations identified as an issue by Morgan Stanley may lead to strike action, something the broker suggests could result in some brand damage and so deter some passengers from using the airline.

In the view of Credit Suisse, the potential for a prolonged strike is already factored into the Qantas share price at current levels. This implies something of a mis-valuation as Credit Suisse doesn't see a prolonged strike as likely.

Adding to the value on offer, Credit Suisse points out underlying business conditions are improving. This trend should continue as the market recovers from the natural disasters of March and given a reduced competitive threat from Tiger Airways.

This implies significant value in Qantas at current levels, as Credit Suisse estimates the stock at current levels is trading on an earnings multiple of 6.6 times for FY12. RBS Australia estimates a FY12 multiple of 7.5 times but agrees the stock is offering value, particularly as confidence increases on the back of improving monthly reports such as Qantas delivered in April.

Both Credit Suisse and RBS Australia rate Qantas as a Buy, while Morgan Stanley has an Overweight rating within an In-Line view on the Australian Airlines sector.

Macquarie is not as positive, downgrading Qantas to Neutral from Outperform. This reflects the view Qantas lacks positive earnings momentum at present that would reverse the recent decline in the share price.

This suggests little scope for share price outperformance near-term, especially given some downside risk to consensus forecasts and the potential uncertainty of labour action.

Overall the FNArena database shows Qantas is rated as Buy seven times and Hold once. The consensus price target according to the database is $2.90. Targets range from $2.30 to $3.40.

Shares in Qantas today are down slightly and as at 11.30am the stock was 5c lower at $2.04. Over the past year Qantas has traded in a range of $2.03 to $2.97. The current share price implies upside of better than 40% to the consensus price target in the FNArena database.
 

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article 3 months old

The Budget And The Stock Market

- The Budget was underwhelming
- While very contractionary, new spending balanced cuts
- No real relief for the RBA
- Little impact on stocks


By Greg Peel

The Treasurer announced last night that the Budget would be in deficit of $22.6bn in FY12 and in a surplus of $3.5bn in FY13.

The amount of FY12 deficit is larger and the amount of FY13 surplus is smaller than the previous budget suggested, impacted by weather, the strong Aussie, and a two-speed economy providing fewer tax revenues. Even the booming mining industry is madly spending on projects, thus also reducing potential tax receipts. There are two points to note here.

The first is that there are a lot of elements the government has little control over from May to May, and that's even before we get to weather. From a political perspective the government has been hellbent on being able to “announce” a surplus, albeit one depending on an enormous number of variables, but the FY13 surplus is so small that there is a distinct danger it may not be achieved. Secondly, were the result to ultimately come in at, say, a $3.5bn deficit rather than a $3.5bn surplus, it would imply a very negligible variation but boy wouldn't the Opposition jump all over it, whoever might be in Opposition at the time?

Incremental changes in commodity prices or the currency from forecasts in the meantime, for example, would completely alter the result.

If the Australian economy is booming then a return to surplus is very important, notes Macquarie. It alleviates the inflationary pressure of borrowing-to-spend in the public sector when the private sector (ie resources) is already applying enough inflationary pressure. But if the economy is weak as it is now, notes Macquarie, then the goal of a surplus is still important. Borrowing can become a downward spiral.

Macquarie notes, “The impact of fiscal policy on the economy, however, does not depend on whether there is a surplus or a deficit, but on the change in the Budget balance. And when [this] Budget is viewed through this frame, it points to the most contractionary Budget in 40 years.”

The main story to come out of this Budget is the “huge” reduction in the deficit, from over $50bn now to $22bn and then surplus, and the negative impact it will have on economic growth in FY12, suggests Macquarie. Both households and businesses will see lower rather than higher incomes through tax and welfare changes, and household spending will thus suffer. As Goldman Sachs puts it, “Sharing the benefit of the boom will likely feel more like sharing the pain of adhering to a 2012-13 fiscal surplus target”.

Goldmans notes that should the government reach its FY12 Budget objective, it suggests a fiscal contraction of a “staggering” 2.1% of GDP. The biggest contraction previously was 1.4% in FY00.

Yet this was not by any means a Budget of “deep cuts”. It seems the tradition these days is to talk tough beforehand and then elicit a more popular response on the night of “phew”. JP Morgan sums up economist views by noting, “new savings announced [last night] are balanced neatly by new spending initiatives”.

The result is the RBA will not be getting much help from the fiscal side while it struggles with tough monetary policy decisions. UBS suggests initiatives to improve productivity are “commendable”, and Goldman Sachs suspects the RBA will acknowledge it is a contractionary Budget and welcome the labour market initiatives within. However, JP Morgan again echoes consensus in noting the Budget contains little in the way of fiscal tightening and as Citi notes, the return to surplus won't stop the RBA tightening monetary policy.

For the stock market, there was neither anything to be generally excited about nor generally concerned about. If labour market pressure can be eased through new Budget measures then Australia's capex boom becomes less inflationary, but the policy is not going to have a huge or immediate impact, JPM suggests. At least there were no more “lightening raids on corporate returns” this time. Citi believes the Budget is unlikely to greatly alter the backdrop for the stock market and Macquarie points out no change to the negative pressures on the consumer and no change to Aussie dollar pressure. There thus remains downside risk to earnings forecasts both outside and inside the resource sector in FY12.

Deutsche Bank points out the obvious, nevertheless. There was nothing in this Budget which provided any new information on big-impact measures such as the carbon tax, mining tax or the NBN. As these are ratified over time, interim Budget changes could look a lot different to last night's offering. And one can take it another step further in suggesting that whichever party gets to deliver the next Budget will be determined by whether this government can push through far-reaching policy without a double dissolution being forced.

Investors in the listed healthcare sector are those most likely to be holding their breath on Budget night given the potential impact of government policy on earnings, but last night's result was not particularly influential. A quick summary would be that funding increases in radiology will benefit Primary Health Care ((PRY)) and Sonic Healthcare ((SHL)) but then more mental healthcare funding for GPs will undermine Primary. Only a small step was made towards means testing private health insurance rebates, which means a small negative for Ramsay Health Care ((RHC)) that could have been worse. Means testing nevertheless remains on the government's agenda.

The Budget forecasts suggest further falls in unemployment, further wage growth and a stabilisation of the savings rate. If accurate, this is good for the retail sector over time and thus Citi maintains its Buy ratings on David Jones ((DJS)), Myer ((MYR)) and Woolworths ((WOW)). But there was no immediate relief offered to the currently weak retail sector last night, and nor was there sufficient fiscal tightening to imply lower inflationary pressures and thus a let-up from the RBA and the Aussie.

In transport, RBS suggests spending initiatives for roads may present Transurban ((TCL)) with opportunities, and the Pacific Highway duplication should add to an already solid pipeline of work for contractors and material suppliers. But RBS also notes that as the big mining and energy projects ramp up, government infrastructure spending is becoming a lesser and lesser portion of overall engineering and construction spend. To make much of a difference there would have had to have been an “extraordinary” change in Budget policy, RBS suggests, which there wasn't.

So mild benefits may accrue to Leighton Holdings ((LEI)), Lend Lease ((LLC)) and Downer EDI ((DOW)), but don't sell the farm. Similarly RBS really sees little benefit, if any, for materials producers.

For the rest of us, life goes on as normal.
 

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article 3 months old

The Overnight Report: Middle East Tensions Escalate

By Greg Peel

The Dow fell 168 points or 1.4% while the S&P lost 1.6% to 1306 and the Nasdaq lost 1.6%.

The Madman of Tripoli will not go easily as hoped, and reports suggest Gaddafi's forces have regained control of oil terminals east of the capital. The UN is now applying sanctions and the US has frozen US$30bn in Libyan assets, but resolution, it appears, will not be as swift as that in Egypt.

Meanwhile, violent clashes between protesters and government forces have been reported in Iran, as if in a warning to the world the game is still on in this major oil producer. In Oman, a silent protest was held in the capital Muscat but in the industrial centre of Sohar, troops were deployed to break up protests by firing into the air.

But for all financial market onlookers, the real concern is the world's biggest oil producer Saudi Arabia. Despite the monarchy attempting to head off similar unrest with a preemptive US$36bn social reform package, commentators suggest the people are not assuaged. Last night the Sunni authorities detained a Shi'ite cleric. It is one issue to deal with youth-inspired democracy protests – it is another when opponents are divided across sectarian lines.

The result of the above escalation of tensions across the region last night was a return to panic oil buying. Brent crude has shot up US$3.65 or over 3% to US$115.42/bbl. Psychologically, West Texas crude was the focus on Wall Street as it jumped similarly to near US$100/bbl (and over in the after-market).

That US$100 mark is critical is it appears to be the point over which Wall Street is assuming demand destruction. In other words, listed oil stocks are sought initially on the rising oil price but if that price rises too high, consumers back off and oil companies sell less product. Attention also swings swiftly toward alternative energy sources. As WTI approached US$100/bbl last night oil stocks were heavily sold along with other sectors.

While the Dow Industrial Average was down over 1% last night, the Dow Transport Average was down over 2%, marking a lower low than last week and breaking down through its 50-day moving average. Such breaches set off ongoing technical selling.

In Washington, Fed chairman Ben “Scoop” Bernanke told a Senate committee that a high oil price could impact on the tenuous US economic recovery. He also again denied that QE2 and its implicit increase in the supply of US dollars had anything to do with price rises in oil and other vital commodities. Traders were listening out for any mention of a QE3 but got none. Or did they?

One might assume that rising commodity prices and subsequent inflation would keep QE3 in the can. Around the world central banks are tightening or look set to tighten monetary policy as a result. But Bernanke doesn't give a tinker's cuss about the rest of the world, and the US is still marking very low levels of core (ex food & energy) inflation. So if a rising oil price is scuppering the US recovery come June, there is little to suggest QE3 will not be unleashed.

Geopolitical tensions had gold running again last night, rising US$23.00 to US$1434.50/oz. Silver jumped US81c to US$34.69/oz.

There was not a lot of movement in currencies nevertheless. The euro, for example, is torn between the economic impact of higher oil prices and the inflationary pressure on rates it creates. The US dollar index ticked up slightly to 77.06 while the Aussie risk indicator remained surprisingly resilient ahead of today's GDP release. It was down only 0.2% to US$1.0161.

Base metals were similarly torn. While high oil prices might slow recovery and reduce demand for metals, the LME was last night also dealing with the global round of purchasing managers' index data. The manufacturing PMI in Australia rose to 51.1 last month from 46.7 in January. China's fell to 52.2 (52.9), the UK remained steady on 61.5, the eurozone jumped to 59.0 (57.3) and the US rose to 61.4 (60.8) to mark a seven-year high.

Australia's sudden return to expansion was a surprise, but elsewhere in the developed world manufacturing sectors are quite simply screaming along. This helps to offset China's forced slowdown, which by both official and HSBC independent accounts was not ominous. The world is now more watchful of Chinese inflation anyway, rather than economic growth, in worrying about further tightening.

To summarise last night's sell-off one can draw on three distinct factors – oil, oil and oil. Selling in stocks did not, for example spark counter-buying in bonds. The US ten-year yield was barely changed at 3.41%. There is a lot of reference back to the Middle East-driven oil shocks of the seventies and eighties and the stagflation that resulted, albeit many an economist has risked ignominy by suggesting “things are different now”. Commentators are still holding on to the consideration, nevertheless, that whoever takes over power in various oil producing nations would never cut off those nations' only economic lifeblood.

The SPI Overnight was down 58 points or 1.2%.

Stay tuned today for the release of Australia's fourth quarter GDP result. 

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

article 3 months old

(Most) Small Miners No Longer Attractive, Citi Concludes

- small cap analysts at Citi have concluded most small miners are now fully valued

- Citi analysts still see value, but in selected small mining stocks only

- they suggest investors should shift attention towards small industrials

- Citi still likes gold miners, projecting strong gains in the year ahead

- plus market strategists elsewhere have made various changes

 

By Rudi Filapek-Vandyck

Fully valued, with some pockets of value left. Such was the conclusion when small cap specialists at Citi updated their sector views on Monday. No wonder thus, the analysts recommend investors should switch their focus to small cap industrial stocks instead.

To add some support to their thesis, the analysts stated bottom up valuations imply a total return for the Small Ordinaries of 9.8% in the year ahead. Note "total return" is the sum of prospective dividends plus anticipated share price appreciation. Citi analysts believe market beating returns should come from Consumer Discretionary (with a projected total return of 23.5%) and Consumer Staples (19.4%). Those investors who want to stay loyal to the Resources theme should be best off (on Citi's projections) with smaller gold stocks which carry a projected total investment return of 29%.

The analysts have lined up four preferred candidates to play the small industrials theme, these are Pacific Brands ((PBG)), Southern Cross Media ((SXL)), Alesco ((ALS)) and GWA International ((GWA)). We couldn't help but noticing there are quite a few small cap specialists in the market that has shifted preference to GWA recently. Some have been advocating switching out of GUD Holdings ((GUD)) in order to become a shareholder in GWA.

FNArena's website reveals Pacific Brands shares are trading some 9.5% below consensus price targets, with implied Price-Earnings rations (on consensus forecasts) placing the shares on multiples of 8.7x for FY11 and 7.9x for FY12. Add implied dividend yields of 5.7% and 7.2% respectively and it is easy to see why Citi likes the potential upside for this stock.

Shares in Southern Cross Media are trading more than 25% below consensus price targets with implied dividend yields of 6.8% and 7.4%. This is in line with what the R-Factor has been indicating since last year: the market is neglecting traditional media stocks in Australia. Neglect always leads to underpricing. Note: investors should always keep in mind that "valuation" is a lousy gauge for "timing".

Alesco shares are trading more than 10% below consensus target, with consensus forecasts anticipating its dividend yield will jump from 2.8% this year to 5.2% next.

GWA shares are the only ones trading on mid-teens multiples, with this year's prospective (consensus) PE ratio above 15x and next year's below 14x. No wonder, consensus target suggests there's only 3-4% upside left. While the implied dividend yield is still a healthy 5%+, it would nevertheless seem Citi's expectations are not widely shared. Or maybe they are, but they've already been priced in?

Mind you, consensus forecasts assume a jump in earnings per share in the order of 35% for GWA this year, to be followed up by 13.8% growth in FY12. This might imply that as market confidence increases in these numbers, the share price could potentially still rise further.

Buying the shares here would nevertheless be in breach of the strict valuation rules put forward by Warren Buffett and his side-kick Charlie Munger who long time ago decided any stock on a PE multiple above 15 is not worth their time or attention.

Citi's small cap analysts also put forward their favourites among small cap resources stocks: Medusa Mining ((MML)), OceanaGold ((OGC)), Resource Generation ((RES)), Gindalbie Metals ((GBG)) and Grange Resources ((GRR)). In simplistic terms, this becomes gold, gold, coal and uranium, iron ore and iron ore.

Citi also has picked three stocks it suggests should be sold/avoided/shorted at present share price levels. Among industrials the least liked candidate is Nufarm ((NUF)) while on the resources side the stockbroker picked Lynas ((LYC)) and Eastern Star Gas ((ESG)).

Most strategists and sector analysts have been rather quiet these past weeks. No wonder as we are currently in the midst of corporate reporting season. No doubt we will see more updates once the dust has settled in March.

Last update by market strategists at RBS, for example, was provided two weeks ago and contained quite a few shifts in preferences. At the time, RBS switched Myer ((MYR)) for Harvey Norman ((HVN)), Toll (TOL)) for Qantas ((QAN)) and Downer EDI ((DOW)) for Bradken ((BKN)). RBS strategists also believed it was time to add QBE ((QBE)) and Lend Lease ((LLC)) to their Model Portfolio. On the broker's short list at the time were Leighton Holdings ((LEI)), Aquila Resources ((AQA)) and Tatts Group ((TTS)).

RBS also reduced its ownership in WorleyParsons ((WOR)).

Macquarie strategists last updated their so-called Marquee Ideas for the year ahead on the same day as the RBS update, leading to four Outperform-with-Conviction nominations, offset by two Underperform-with-Conviction calls. On the negative side, Macquarie put the Australian Stock Exchange ((ASX)) and National Australia Bank ((NAB)). On the positive side, Macquarie nominated propery trust CFS Retail ((CFX)), Crown Media ((CWN)), Rio Tinto ((RIO)) and ResMed ((RMD)).

Note that on my observation, Macquarie's nomination of NAB on the sell-side is contrary to what happened elsewhere in February with most stockbrokers downgrading ANZ Bank ((ANZ)) on their list of sector preferences in favour of NAB and Westpac ((WBC)).
But that's not how market strategists at RBS see this year's scenario play out for the bank. On Wednesday, RBS strategists repeated their preference for ANZ Bank in the sector, alongside NAB. Also, RBS strategists believe this year might see a re-rating for the banking sector overall, which means higher multiples and this should translate into total returns of up to 20% (including dividends) by December. Such a view is definitely not widely accepted in the market and it is not reflected in consensus price targets either.

RBS strategists also added go long BlueScope ((BSL))/short Mineral Resources ((MIN)) to their sector calls with Conviction on Wednesday. Note Mineral Resources shares are currently trading well above consensus price target, while BlueScope is nowhere near.

Another sector idea put forward is going long Austar ((AUN))/short Ten Network ((TEN)). Would ongoing speculation about Foxtel ((CMJ)) having another go at Austar have something to do with this?

Finally, market strategists at Goldman Sachs did the inevitable on Wednesday morning, removing SEEK ((SEK)) from their Conviction Buy list after the company disappointed friend and foe with its interim report. The stockbroker still rates the stock as Buy, but there's no longer any conviction that whoever owns the stock will outperform the broader market on a six to twelve months outlook. Goldman Sachs still has no Sells-with-Conviction. The remaining names on its Buy-with-Conviction list are Aquarius Platinum ((AQP)), BHP Billiton ((BHP)), CFS Retail Property Trust ((CFX)), News Corp ((NWS)), PanAust ((PNA)), UGL ((UGL)) and Wesfarmers ((WES)).

article 3 months old

Shifting Between Commodities And The Rest

By Rudi Filapek-Vandyck

Commodities analysts at Credit Suisse likely captured the mood among many institutional investors and funds managers as February sees prices for risk assets climb ever so higher: resources stocks cannot outperform when commodity prices are falling. Thus far we've seen relentless rallies for commodity prices, but CS analysts are quick in their response: current prices will not prove eternally sustainable.

Hence it becomes a matter of timing?

CS analysts have left the timing issue aside and concentrated on mid-cycle value instead. What this means is they have tried to establish which companies inside the mining and metals sector in Australia still represent good value even if commodity prices will eventually move lower. The analysts have tried to put together a set of dynamics and input variables in order to create a through-the-cycle valuation assessment.

Without going too much into details, the broker's exercise has generated one absolute stand-out and that is copper producer Equinox ((EQN)). Others that still stand-out on valuation grounds are Rio Tinto ((RIO)), BHP Billiton ((BHO)), Iluka ((ILU)) and New Hope Coal ((NHC)).

Market strategists at Goldman Sachs published another update on their Conviction Buy list, with online jobs services provider Seek ((SEK)) being the latest newcomer to the list. In line with CS's comments, and with the three Weekly Insights stories I wrote this year so far, it has to be noted the balance in GS's conviction for the year ahead has gradually shifted away from metals and energy stocks, though it has to be acnowledged there's still a large connection with commodities and growth to be found.

Goldmans current Buys-with-Conviction consists of the following stocks:

- Aquarius Platinum ((AQP))
- BHP Billiton ((BHP))
- CFS Retail Property ((CFX))
- News Corp ((NWS))
- PanAust ((PNA))
- Seek
- UGL ((UGL))
- Wesfarmers ((WES))

Over at UBS, market strategists clearly have set their sights on potential outside the resources sector. UBS's list of Key Calls has been extended with Tabcorp ((TAH)) and Graincorp ((GNC)). Both names are complementing Asciano Group ((AIO)), CSL ((CSL)), JB Hi-Fi ((JBH)), Qantas Airways ((QAN)) and Rio Tinto ((RIO)).

Tabcorp seems to have been elevated because of increased M&A potential once the corporate split is in place. While Graincorp shares are labeled simply too cheap. Also, UBS analysts anticipate Graincorp's earnings per share will grow by 33.5% in 2010 and by 64.3% in 2011.

Two other names on the list might do even better with Rio projected to improve EPS by 101.7% in 2010 and by 32.9% in 2011. Qantas, on the other hand, is projected to grow EPS by 184.5% in 2010 and by 117.3% in 2011.

An interesting exercise was conducted by transport analysts at Citi. They opened coverage on the sector on Tuesday and part of the sector analysis was made up by a competitive analysis between Asciano ((AIO)) and QR National ((QRN)). To go immediately to the stockbroker's end conclusion: between now and 2020 Asciano will dwarf QRN in market share gains and consistent growth. Not difficult to see why the first one has received a maiden Buy rating while the second now carries a Sell rating from Citi.

And lastly but not least, analysts at RBS remain true to their earlier observations that paying attention to changes and shifts in local short positions data can provide investors with some timely insights. As such, RBS notes there's an increasing level of investor interest from the short side for companies including Leighton Holdings ((LEI)), Downer EDI ((DOW)), UGL, WorleyParsons ((WOR)), Transpacific Industries ((TPI)), Toll Holdings ((TOL)), Macquarie Group ((MQG)), Bank of Queensland ((BOQ)), Perpetual ((PPT)), David Jones ((DJS)), Myer ((MYR)), Harvey Norman ((HVN)), Billabong ((BBG)), WA Newspapers ((WAN)), BlueScope Steel ((BSL)), OneSteel ((OST)), Atlas Iron ((AGO)), Riversdale Mining ((RIV)), Amcor ((AMC)), Ansell (ANN)), Nufarm (NUF)) and ResMed ((RMD)).

On the flipside, shorts interest seems to be declining for stocks including Oil Search ((OSH)), Beach Energy ((BPT)), Australian Securities Exchange ((ASX)), Computershare ((CPU)), Transfield Services ((TSE)) and Equinox Minerals.

article 3 months old

Bleak Prospects For Global Shipping

Lloyd's List, source of information dedicated to the global shipping community, recently interviewed Norwegian shipping magnate John Fredriksen about the global prospects for the shipping industry. With permission from the publisher, we re-publish below the first part of this exclusive interview as published in the print magazine earlier this month.

Fredriksen warns of bleak prospects for next two years

By Richard Meade and Andrew Lansdale, LLoyd's List

OFFSHORE is hardwork but lucrative, liquefied natural gas is about to ripen and fish can provide a steady streamof income, but don’t expect to make any real money out of shipping over the next two years. At least not until the next wave of tanker consolidation kicks in, says the world’s largest tanker operator, John Fredriksen.

Speaking exclusively to Lloyd’s List in a rare interview, the billionaire maritime industrialist said he was staying away from shipping for the time being and concentrating his attention on more profitable offshore and seafood ventures. The tanker and dry bulk sectors will remain besieged by overcapacity for the next two to three years, he predicts, and only once some people have “faced the reality of what they have done over the past five years” would a process of consolidation allow some movement in the market.

“Something will break here and quite a lot of people will not be able to take delivery of ships,” said Mr Fredriksen. “It’s going to be another couple of years at least on the tanker side and a lot of ships will have changed hands by then.” However, once the market has rebalanced, the 66-year-old serial entrepreneur, who will celebrate 50 years in the business next month, has promised that he will be “back on the scene”, potentially in a big way,with significant profits from his other ventures to spend.

“If it gets cheap enough we will be there,” he said. “That’s how Frontline was started, out of a massive consolidation.  We started with eight bulk carriers and ended up as the biggest tanker owner in the world within four years after doing more or less a transaction every quarter. This time round? Sure, we will try to have a go at it.”

Mr Fredriksen controls a network of companies worth in excess of $24bn, but he currently has only 15% of his money invested in pure shipping ventures. Despite being best known as a tanker owner, he points out that the label is somewhat misleading and his investments in fish farming far outweigh his interests in Frontline, the world’s largest crude oil tanker company. Offshore is where he is currently investing most of his attention and money. Having transformed Seadrill from a $200m operation to a $14bn offshore giant in under five years, Mr Fredriksen suggests there are some exciting offshore opportunities yet to come.

In the wake of the Deepwater Horizon oil spill, Seadrill last month ordered up to four ultra-deepwater drillships at Samsung Heavy Industries in deals worth well over $2bn, suggesting that Mr Fredriksen is prepared to test his faith in the ability of modern tonnage to turn a profit in a period of tightening regulatory standards.

“We are now the second biggest in the world after Transocean, but we have unique assets in the sense that we have a very modern fleet of rigs in a market where the average age is between 25-30 years,” he said. “It takes a lot of time and hard work but we are putting a lot of effort into offshore at the moment.”

But if offshore is paying out now, it is his long-term punt on LNG that could turn out to be the big winner. After close to a decade of structural overcapacity in the market, Mr Fredriksen remains convinced that his Golar LNG ventures are about to pay off. “Nobody else is looking at LNG ordering, it has been dead for years, but there is only 3%-4% left of the orderbook and we have been waiting for close to 11 years, he said. “Now it is getting ripe, we are getting close on that one.”

Speaking about who has the most influence in today’s shipping industry, Mr Fredriksen conceded that his own power to influence the market has waned over recent years as he has consolidated his interests and Asian operators have gained a foothold. “Now the Chinese have entered the market I am not sure how much influence we have at the moment,” he said. “From a business point of view the Far East is the place to be today.”

Asked if he could see a Chinese John Fredriksen emerging in the next five years, he said: “It will probably happen, but I don’t know who it will be.”

Lloyd's List recently published its updated list of 100 most influential persona in the shipping industry, see http://www.lloydslist.com/ll/news/top100/article352203.ece