Morningstar Equities Research - 24 Jan 2013

AMP Limited AMP| Earnings expected to rebound on stronger markets
Morningstar Recommendation: Accumulate
David Ellis, Head of Australian Bank Research

AMP reports FY12 earnings on 21 February 2013 and we expect a strong result following the disappointing FY11 performance. AMP timed the AXA acquisition in early 2011 superbly, with investment markets now turning and investor confidence starting to recover. We expect earnings momentum to improve and we increase our full year FY12 earnings forecast marginally from $986m to $992m. The wealth management group’s leverage to equity markets will support strong growth in 2013 and 2014. We retain our positive view and expect further improvement as the AXA integration moves closer to completion. Reflecting the improved earnings outlook we raise our medium term earnings outlook and upgrade our valuation from $5.60 to $6.50.

BHP Billiton Limited BHP | BHP Second Quarter Production Sizzles
Morningstar Recommendation: Accumulate
Mark Taylor, Associate Head of Basic Materials
BHP reported impressive second quarter production with most commodities up strongly on both the September and previous corresponding quarters. In many cases, in percentage terms, output growth was double digit or better. Compared to the September quarter, sales volumes rose 10% for iron ore, 23% for copper, 20% for coking coal and 13% for aluminium - all above our expectations. Strong rises are notable for being in some of the highest margin businesses.

Boral Limited BLD | Weather gods finally give Boral a break - underpinning upbeat first half trading update
Morningstar Recommendation: Reduce
Nathan Zaia, Equities Analyst
Boral kept the good news rolling today as management upgraded guidance for first half net profit after tax to AUD 52 million, up from previous guidance of AUD 35 million. While a profit upgrade is always welcome, upgrading guidance by 48% within three months of previous guidance illustrates why we assign Boral a very-high uncertainty rating. Driving the upgrade is better than expected demand for Australian construction materials. More favorable weather conditions play a big role when it comes to construction. Management also noted benefits from recent restructuring and rationalisation, but we suspect little impact during the half as they have only just taken place. While the first half 2013 result is a massive improvement to initial guidance, and big turnaround from second half 2012, it is still well below the AUD 67 million reported in the first half 2012. But the earnings trajectory is heading in the right direction, and we take comfort in management’s cost cutting initiatives announced last week. Resetting the cost base for a lower demand environment, and we suspect trimming unnecessary fat which commonly builds in many corporations during prosperous times, particularly as management strive to build a bigger and bigger business.

Brambles Limited BXB | First half results likely to show modest growth but point to stronger fiscal 2014
Morningstar Recommendation: Reduce
Peter Rae, Head of Industrials Research
We review Brambles ahead of the release of its first half fiscal 2013 result and update our numbers to reflect the recent acquisition of the Pallecon intermediate bulk container (IBC) business. The acquisition does not materially change our forecasts and our valuation is unchanged at AUD 7.00. We view Brambles favourably and expect it will continue to achieve strong growth from its entry into new regions and expansion of the reusable plastic crate business which helps to offset weak conditions in its core developed markets. But with the shares trading above our fair value estimate this growth is reflected in the current price.

Crown Limited CWN | Approval received in Perth, Macau recovers in 4Q
Morningstar Recommendation: Hold
Michael Wu, Equities Analyst
The Gaming and Wagering Commission of Western Australia approved additional gaming facilities at Crown Perth late last year. This is conditional on Crown’s AUD 568 million development of a new luxury hotel at the complex, which includes AUD 60 million to the State Government for land. The extra gaming facilities include a total of 500 gaming machines and 100 gaming tables, rolled out over five years and four years period respectively. This takes total gaming machines and tables at the casino complex to 2,500 and 320 respectively. We expect the gaming machines to be rolled out from fiscal 2014 but tables will likely be added as the expansion project nears completion. An additional 30 gaming tables are yet to be approved by the regulator and we have not factored this into our forecast.

GUD Holdings Limited GUD | Christmas sales disappoint as competition intensifies
Morningstar Recommendation: Hold
Michael Higgins, Associate Analyst
Trading conditions across GUD’s primary consumer business remain challenging. 1H13 adjusted NPAT fell 9% on sales growth of 0.2%. The slow-down in the consumer segment was more severe than forecast, but consistent with our underlying thesis of increased competition from lower priced house brand products coupled with weak demand. The $1.8m loss in Breville dividends also dragged on the result. Dexion experienced stronger than expected growth - sales were up 20% on a recovery in large distribution centres and demand for warehouse racking and automated solutions in Asia. The interim dividend of 26cps (compared to 30cps last year ) will be paid on the 6th March together with the previously announced special cash dividend of 10cps. With business conditions forecast to remain sluggish, we struggle to see significant outperformance from current levels. The stock trades at a high 14.4x FY13 PER, a reflection of investor appetite for dividend paying companies. We lower our FY13 NPAT assumption to $41.0m, down 10% from $45.6m. Full year dividends also fall in line. Fair value is cut 6% to $8.

IOOF Holdings Limited IFL| Well positioned for a sustained recovery in investment markets
Morningstar Recommendation: Hold
Ravi Reddy, Equities Analyst
We upgrade our forecasts given the strong performance of Australian equity markets over the six months to 31 December 2012. The S&P/ASX 200 accumulation index returned 16.39% over this period. We have also upgraded our longer term forecasts. Our fair value estimate increases from $6.50 to $7.50 and the stock looks fairly valued around at current levels.

Nufarm Limited NUF| Guidance maintained despite weaker trading conditions in Australia
Morningstar Recommendation: Hold
Peter Rae, Head of Industrials Research
Despite challenging trading conditions in Australia, Nufarm maintained guidance for first half fiscal 2013 EBIT – on an underlying basis – to be at least 15% higher than first half fiscal 2012. The weak Australian conditions have been more than offset by stronger conditions in other regions. Nufarm also announced that BASF will terminate its distribution arrangements in Australia from 1 March 2014. While this will lead to a loss of revenue for Nufarm of around AUD 60 million per annum, this represents just 3% of group revenue. With first half guidance maintained we make no changes to our fiscal 2013 forecasts. At this stage we make no changes to allow for the termination of the BASF agreement. Given it is a relatively small component of the overall business this can be accommodated within our existing forecasts. Our valuation is unchanged. Nufarm has a strong global crop protection business with strong distribution capabilities and key market positions in its core products, but remains exposed to cyclical demand from agricultural markets and has limited pricing power in some of its products.

SkyCity Entertainment Group Limited SKC , SKC-NZ | A transformative deal that will underpin casino earnings
Morningstar Recommendation: Accumulate
Nachi Moghe, Senior Equities Analyst – NZ
SKC will invest AUD 350 million in expanding its casino operations in Adelaide after reaching an agreement with the South Australian government. The regulatory relief obtained from the government, involving increased gaming product and lower VIP taxes, is likely to significantly enhance the competitive position of the Adelaide casino and dramatically lift earnings over time. We forecast Adelaide’s EBITDA to increase by AUD 62 million on an incremental basis by FY18, implying a post tax return on investment of 10.5% which will rise to 18.3% by 2022. Our FY14 and FY15 projections increase by 1% and 2% respectively reflecting the addition of VIP electronic gaming machines. The real kicker from the expansion comes in FY18.

Sydney Airport SYD | Strong Finish to the Year
Morningstar Recommendation: Hold
Michael Wu, Equities Analyst
After a slow start to 2012, Sydney Airport had a good second half with international growth remaining solid and domestic growth improving. Overall passenger numbers increased 3.6% to 36.9 million during the year. Increased low-cost carrier capacity was the main driver, in particular Scoot, Jetstar and AirAsia X internationally, and Jetstar and Tiger domestically.

Western Areas Limited WSA | Solid quarters production
Morningstar Recommendation: Hold
Mathew Hodge, Senior Equities Analyst
December quarter mine output of 6,950 tonnes of nickel, though 7% below the previous quarter, was in line with expectations. Nickel in concentrate output was in line with the September quarter at 6,830 tonnes but 6% ahead of expectations with mine feed augmented by stockpiled ore. Cash costs increased from AUD 2.49 to AUD 2.89 per pound of nickel in concentrate. This is not a surprise. We forecast cash costs to rise primarily with a gradual decline in mined grades. Though costs have risen, they are still low by industry standards and we expect Western Areas to remain a relatively low cost producer underpinned by the very high grade Flying Fox, Spotted Quoll and Lounge Lizard deposits.

Downer EDI - Downgrade due to price change.

DWS - Upgrade due to price change


Click here to read: Morningstar_Equities_Research_240113.pdf

ENDS

© Scoop Media