Morningstar Equities

Morningstar Equities

Chorus Limited CNU-NZ, CNU| Chorus's Fibre Roll-out Slightly Ahead of Schedule
Morningstar Recommendation: Accumulate

Chorus reported a fiscal 2013 result in line with our expectations. The result does not change our view on Chorus and our fair value is reaffirmed at NZD 3.60. We continue to believe regulatory risk on wholesale broadband pricing is factored into the current valuation and Chorus remains an attractive investment. The New Zealand government's discussion paper released earlier this month acts as a backstop if Chorus receives an unfavourable final decision on wholesale broadband pricing from the Commerce Commission. Our narrow economic moat rating is unchanged. Chorus has a moat due to efficient scale and cost advantage, as its assets are monopolies and difficult to replicate.

Spark Infrastructure Group SKI| Tariff Increases for Spark Offset Soft Volumes in First-Half 2013
Morningstar Recommendation: Hold

Spark Infrastructure reported a solid first-half 2013, with earnings before interest, tax, depreciation and amortisation, or EBITDA, increasing 11% to AUD 340 million on a proportional basis. Growth was driven by substantial tariff increases to recover increased investment, partly offset by lower volumes. Regulated asset base (RAB) grew 9% in the past year and will continue growing robustly in coming years as investment continues.

Boart Longyear Limited BLY| Terrible First-Half Result and Tough Times Ahead for Boart
Morningstar Recommendation: Hold

Boart Longyear announced a terrible first-half 2013 result, incurring an operating net loss after tax, or NPAT of USD 60 million, after reporting a profit of USD 98 million in first-half 2012. In addition, Boart incurred USD 269 million of post-tax, mainly non-cash restructuring charges and asset impairments. The result reflected a weak operating environment with significantly reduced demand for drill rigs and related consumable drilling products. The result reinforces our investment thesis of no moat, low barriers to entry and very high uncertainty. The large earnings volatility is due to the majority of work coming from mining companies focused on the exploration and production of base metals, where activities are leveraged to commodity price movements. Demand and supply factors in the global drilling services and drilling equipment markets will always be very volatile and cyclical, with rapid changes having a considerable impact on Boart's earnings.

Atlas Iron Limited AGO| Atlas's Viability in Question Following Weak Result
Morningstar Recommendation: Accumulate
Gareth James, Morningstar Analyst - 02 9276 4583
Atlas Iron's AUD 15 million underlying net profit disappointingly missed our AUD 70 million forecast. What was once a lean, profitable and transparent business has become increasingly costly, indebted and opaque. We maintain our view that Atlas has no sustainable competitive advantage, or economic moat, due to poorer than industry-average margins and relatively short reserve life. The update causes us to change our thesis that Atlas will produce iron ore profitably during the next decade. We now expect cost of sales to increase by 8% in fiscal 2014 and the gross profit margin to fall from 27% to 23%. The changes cause our fiscal 2104 net profit forecast to slump from AUD 158 million to a AUD 32 million loss.

AWE Limited AWE| AWE Crystalizes AAL Profit, but the Quantum Detracts from Fair Value
Morningstar Recommendation: Accumulate
Mark Taylor, Morningstar Analyst - 02 9276 4478
Santos is the buyer of the previously flagged 50% sell-down of AWE's Ande Ande Lumit (AAL) field in Indonesia for a less-than-expected AUD 209 million. Consideration includes USD 100 million in cash and USD 88 million in capital expenditure carry. Santos becomes operator. The sale reduces AAL project risk, boosts AWE's coffers and lessons its funding commitment. AWE expects to report an estimated post-tax profit of AUD 60 million. However, the quantum is proportionally less than we'd anticipated and we downgrade our AWE fair value estimate by 12% to AUD 2.30 per share from AUD 2.60 per share.

Caltex Australia Limited CTX| Caltex's Result In Line, Fair Value Unlikely to Change
Morningstar Recommendation: Hold
Mark Taylor, Morningstar Analyst - 02 9276 4478
Caltex reported a 13% decline in first-half 2013 replacement cost net profit to AUD 171 million, in line with expectations. Revenue fell 2.5% to AUD 23.6 billion due to lower sales volumes and lower average prices. Marketing and distribution earnings before interest and tax, or EBIT, was in line with the record first-half 2012 result of AUD 367 million, as lower sales were favourably offset by lower production costs. However, refining and supply was negatively impacted by the weaker Australian dollar (AUD 39 million), unplanned outages (AUD 29 million) and higher depreciation (AUD 27 million). Group net operating cash flow improved from AUD 67 million to AUD 244 million, comfortably ahead of levels anticipated. Positive free cash flow of AUD 70 million allowed a modest decline in net debt to AUD 730 million, net debt to equity falling to 32% from 34% at end December.

Goodman Property Trust GMT-NZ| Initial Development Commitments Bode Well for a Rebound in Goodman's Development Earnings
Morningstar Recommendation: Hold
Tony Sherlock, Morningstar Analyst - 02 9276 4584
Goodman Property Trust (Goodman) has sold Gateside Industry Park in Penrose for NZD 37.2 million. The multi-tenanted estate also includes roughly 2.3 hectares of associated development land. Settlement is due in February 2014. The sale is consistent with the strategy to dispose of more than NZD 50 million of assets during fiscal 2014. The sale appears to have been struck on attractive terms, executed at a healthy NZD 2.9 million (7.8%) premium to the March valuations for the commercial property and development land of NZD 28 million and NZD 6.3 million respectively.

Sims Metal Management Limited SGM| Despite Operational Cost Savings, Material Earnings Growth Still Unlikely in Near Term for Sims
Morningstar Recommendation: Accumulate

In closing out the fourth quarter of its 2013 fiscal year, Sims Metal Management offered mixed results. Although Sims missed relative to our expectations on both the top and bottom line, investors were encouraged by the degree to which Sims was able to generate operational cost savings. With regard to the North American market, while sales volume decreased 15% year over year and revenue decreased 25% owing to a challenging pricing environment, earnings before interest, tax, depreciation and amortisation, or EBITDA, actually improved relative to last year as a function of AUD 48 million of cost savings. While Sims generated these savings by reducing its headcount by 279 employees, management seemed confident that the company would successfully drive further cost savings in the 2014 fiscal year, although the vehicle by which this would take place was not specified. If, indeed, Sims is able to continue its cost-cutting measures without sacrificing productivity, it will be well positioned to drive stronger earnings growth once demand conditions improve.

CSL - Downgrade due to price change
Amalgamated Holdings - Downgrade due to price change
Aurora Oil - Downgrade due to price change
Newcrest Mining - Downgrade due to price change

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