No Capital Raising Good News For AXA

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This story features AMP LIMITED.
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The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

To say conditions are tough for fund managers at present is an understatement, especially in light of the annual strategy briefing delivered by Axa Asia Pacific ((AXA)) last Friday. As Merrill Lynch notes, the latest data suggests there is a chance the company could actually report a loss for 2008, as earnings appear to be materially worse than its model suggests they should be.

To reflect this the broker has cut its cash earnings forecasts by 102% for 2008 and by 4-6% in both 2009 and 2010, though even with the changes it continues to see long-term value and so retains its Buy rating on the stock. As well, there is always the chance parent company AXA-SA may move to take full control, which the broker sees as another potential positive longer-term given it has already tried to do so once before.

In the broker’s view, the reason the share price jumped on Friday despite the news earnings will be well down was because the company didn’t come to the market for additional capital. Rather, it is effectively raising capital in part by having its dividend reinvestment plan underwritten, with the parent company to stump up for its share. The fact it is willing to do so is a major positive in the broker’s view, as it provides the company with a funding advantage compared to rivals such as AMP ((AMP)).

Citi also takes the view an equity raising won’t be on the company’s cards in the future, as assets in excess of regulatory requirements were around $724 million compared to the company’s target surplus of $570 million. This should go some way to allaying market concerns over the need to raise capital.

This is about where the good news stops, in the broker’s view, as for starters it notes earnings on a normalised basis were tracking below its expectations for the four months from the start of July. However, the broker concedes after the latest revisions there is some scope for a more positive trend to emerge in the December quarter. Gearing has also risen above the group’s target range of 45-50% and is now at 53.8%, meaning the company is likely to have less ability to access debt to meet further requirements.

Credit Suisse also suggests there are issues facing the company, as it takes the view the annual update showed a relatively tight capital position that should in turn act as something of a drag on the share price going forward. Despite this, it sees the stock as relatively defensive in the sector and so worth buying. Deutsche Bank is less concerned with the capital issues, as it sees gradual progress in this regard even allowing for the earnings impact over the past couple of months.

In a similar move to Merrill Lynch, Macquarie has also revised down its earnings forecasts by 117% this year and by 13% in 2009, but in the broker’s view this simply reflects weaker equity markets since it last ran its numbers. In other words, the broker suggests the company continues to deliver about as well as it can given the tough market conditions.

As well, Macquarie expects the news that no capital raising will be required could act as a positive catalyst for the stock in the shorter-term. It sees this as prompting something of a bounce in the stock from what it regards as an oversold position in recent weeks.

With any bounce to be limited by the fact conditions are not likely to suddenly take a turn for the better, the broker remains at Neutral with its rating. The FNArena database shows a total of six Buys, three Neutrals and only Citi at Sell.

In terms of earnings per share, the database shows consensus forecasts are at 15.3c this year and 38.1c in 2009. Citi forecasting a loss of 3.1c and Credit Suisse is forecasting EPS of 35.7c this year, so there remains a significant variation in broker forecasts, which reflects the volatility in financial markets at present.

It is a similar story in terms of price targets, as Citi remains far and away the low marker with its $4.40 target. This compares to Merrill Lynch and Deutsche Bank at $6.00 and an average target according to the FNArena database of $5.52, down only slightly from $5.60 prior to the update.

With the market having had the weekend to factor in the details of the strategy briefing, it appears more weight is being given to the Citi view, as the stock is sharply weaker today. As at 12.50pm the stock was down more than 21%, or $1.10 at $4.01. Over the past year the shares have traded between $3.44 and $8.19. 

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