Morningstar Equities

Morningstar Equities

Air New Zealand Limited AIR-NZ, AIR | Passenger growth and improved profitability propel earnings

Morningstar Recommendation: Hold
Nathan Zaia, Morningstar Analyst - 02 9276 4491
Air New Zealand provided much better than expected fiscal 2013 pre-tax profit guidance of NZD 235 million to NZD 260 million. Previous guidance was for second half earnings to exceed last year's NZD 58 million, which implies second half earnings of NZD 96 million to NZD 121 million - exceeding is an understatement. Our fiscal 2013 pre-tax forecast is increased from NZD 205 million to NZD 256 million. Passenger growth is key to the earnings improvement, up 5.2% in March, and now 2.4% for the year-to-date. A culmination of lower overheads, cutting unprofitable routes, utilising alliance and code-sharing agreements and replacing the fleet with more fuel efficient planes is also certainly paying off. Although an earnings recovery has occurred quicker than expected, it has no impact on our valuation given our focus on the long term.

Flight Centre Limited FLT| Our confidence in the business model increases, fair value estimate rises to AUD 33

Morningstar Recommendation: Reduce
James Cooper, Morningstar Analyst - 02 9276 4428
Flight Centre continues to confound the doubters. Based on 10 months trading Flight raised its underlying profit before tax guidance for fiscal year 2013 from AUD 305-315 million to AUD 325-340 million, implying 12-17% growth on fiscal 2012. We upgrade fiscal 2013 EPS forecast 3% and fiscal 2014 forecast by around 10%. Our fair value estimate rises from AUD 27 to AUD 33.

National Australia Bank Limited NAB| Solid 1H13 result but revenue momentum is slow

Morningstar Recommendation: Accumulate
David Ellis, Morningstar Analyst - 02 9276 4582
National Australia Bank (NAB) delivered a solid all-round performance with first half 2013 cash profit of AUD 2.92 billion, up 3% from first half last year. The result was just ahead of consensus and slightly below our AUD 3.0 billion forecast. Cash earnings growth was more impressive compared to second half 2012, up 12% due to a sharp fall in bad debts. The 3% increase in interim dividend to 93cps fully franked is in line with earnings growth and 1cps below consensus. Based on our higher earnings forecasts, we were expecting an interim dividend around 95cps. There was no special dividend surprise. Increasing surplus capital provides confidence the attractive fully franked dividend is sustainable.

News Corporation NWS| Cable Networks Overshadow News Corp.’s Blemishes

Morningstar Recommendation: Reduce
Michael Corty, Morningstar Analyst – +1 312 696 6228
Event

• Excluding several one-time items, adjusted segment operating income improved 4% in the quarter. The impressive cable network top-line growth exceeded our expectations and was boosted by both domestic and international channels. Affiliate fee growth in the U.S. was 11% with double-digit growth for all its main channels as News Corp. has pricing power with its distribution partners. Organic international fees improved 25% as the Fox International Channels (FIC) continued to take market share as pay-TV penetration continues in most markets. We believe News Corp. has an impressive collection of sports channels outside the U.S. and the company is clearly looking to invest more in this area, a wise move given the company’s strong competitive position in these markets.

Impact

• News Corp's fiscal third-quarter results came in ahead of our expectations and were driven by the cable networks (70% of total operating profit). A few of the smaller parts of the News Corp. (Sky Italia, publishing) are struggling but their contribution to overall profit is minimal.

• The cable network growth continues to surprise us on the upside and we plan to lift our fair value estimate to AUD 30 from AUD 26 based on incorporating higher long-term growth and margin assumptions for this segment. Still, we think the shares are slightly overvalued at the current price as the stock has been on a strong run, up almost 30% since the beginning of 2013.

Recommendation Impact
The proposed increase in fair value may lead to an upgrade from Reduce to Hold. Our forecasts are under review and a note incorporating our changes will be published in the next day.

Seven West Media Limited SWM| Aggressive Downsizing to Counter Structural and Cyclical Headwinds.

Morningstar Recommendation: Hold
Tim Montague-Jones, Morningstar Analyst - 02 9276 4469
Seven West Media’s investor day provided some colour on how the organisation continues to integrate its media assets from the silos of old to an integrated digital platform. CEO Don Voelte, who approaches his first year anniversary in the role, has completed phase one of an on-going cost out program with AUD 74 million removed for fiscal 2013. In 2014 a second phase of cost initiatives continues with the company confirming it is on target for a further AUD 120 million of reductions. We expect these initiatives will help support earnings and counter falls in revenues which continue to be hurt by a combination of cyclical weakness and structural fragmentation as the internet scatters audiences and advertisers over a wider base of content. We adjust our fair value estimate up 17% from AUD 2.30 to 2.70 per share. This reflects a further reduction in our assumptions surrounding the cost base as the company continues to see opportunities to downsize overheads over the next five years. Uncertainty for this business remains high reflecting the cyclicality of earnings and uncertainty surrounding structural challenges within the media industry. The internet has removed any moat like qualities this company once held.

AGL Energy - Upgrade due to price change.

Aquila Resources - Downgrade due to price change.

Cochlear - Downgrade due to price change.

Orica - Downgrade due to price change.

SAI Global - Downgrade due to price change.

SMS Management and Tech - Downgrade due to price change.

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