Morningstar Equities - FWD, PFL, CQR, RYM-NZ, BXB, TSE

Morningstar Equities - FWD, PFL, CQR, RYM-NZ, BXB, TSE

Fleetwood Corporation Limited FWD| No Sign of Meaningful Improvement for Fleetwood
Morningstar Recommendation: Accumulate
Fleetwood Corporation's annual general meeting indicated that trading conditions continue to be challenging. Given a slew of downbeat comments in the mining services sector in recent weeks, the comments from Fleetwood are unsurprising. Fleetwood noted it expects first-half fiscal 2014 earnings to be lower than the same period last year, although with an expectation that earnings in the second half will be higher. We had been too optimistic on the pace of the turnaround and have reduced our earnings forecasts. We now forecast fiscal 2014 net profit after tax, or NPAT, of AUD 18.3 million, down from our previous estimate of AUD 22.5 million.

We have reduced our fair value estimate from AUD 5.00 to AUD 4.70. Our long-term forecasts are largely intact, however, we have trimmed our near-term expectations for village occupancy and margins on recreational vehicles. There is no change to our investment thesis, very high uncertainty or no-moat ratings. We see no barriers to entry in the manufacture of modular buildings or the construction of accommodation villages. Our very high uncertainty rating reflects the highly cyclical nature of end markets. Despite our reduction in fair value estimate, Fleetwood remains significantly undervalued. However, the catalyst for a share price rerating is dependent on evidence of an earnings turnaround.

Patties Foods Limited PFL| Patties Foods Anticipates a Tale of Two Halves for Fiscal 2014
Morningstar Recommendation: Hold
Daniel Mueller, Morningstar Analyst - 02 9276 4419
At its annual general meeting, Patties Foods, or Patties guided to a soft first-half fiscal 2014. Underlying net profit after tax, or NPAT, is expected to decline by approximately 5% on the previous corresponding period. This is due to increased marketing spend to support brands, the relinquishment of a major private label frozen fruit contract and increased logistics expenses. However, for second-half fiscal 2014, management expects an improving trend with the launch of new products, price increases, cost controls and the full commissioning of the packaging automation project. While we view second-half fiscal 2014 improvement driven by cost-out as highly feasible, we remain cautious on forecasting a strong rebound in revenue growth given the strong bargaining position of Patties' powerful retail customers.

We have reduced our fiscal 2014 NPAT forecast by 0.2% to AUD 17.1 million, and our fiscal 2015 NPAT forecast is reduced by 0.3%, but we still forecast moderate growth of 6.9% on fiscal 2014. The reduction to forecast earnings and review of long-term model assumptions decreases our fair value estimate from AUD 1.60 to AUD 1.40, with the shares currently trading slightly below our assessment of fair value. The assessment of medium fair value uncertainty is unchanged. We do not believe Patties possesses an economic moat. Despite owning well-known brands such as Four'N Twenty, Herbert Adams and Nanna's, these have little "brand equity", giving Patties low bargaining power over powerful customers. It is exposed to external factors such as unseasonal weather and raw material costs, which can be highly volatile. Supermarket customers have implemented their own range of housebrands, limiting Patties' shelf space and squeezing margins. Out-of-home customers also exert considerable bargaining power, being large petrol and convenience store chains or large catering companies that have multiple contracts across many sports venues, and convention and exhibition centres.

Charter Hall Retail REIT CQR| Buying by Charter Hall Retail Continues the Reweighting of Portfolio to Medium-Sized Malls
Morningstar Recommendation: Hold
Tony Sherlock, Morningstar Analyst - 02 9276 4584
Charter Hall Retail is acquiring Rosebud Plaza, a sub-regional shopping centre in Melbourne's south. The AUD 100 million acquisition will be funded from issuance of new equity at AUD 3.80, with funds coming from an AUD 80 million private placement, a unit purchase plan, or UPP, to eligible Charter Hall investors, and an AUD 8 million placement to Charter Hall Group (which is subject to unitholder approval).

The transaction has a negligible impact on our earnings forecasts, with our fair value estimate stable at AUD 3.90. Our no-moat rating is also unchanged, with the smaller shopping centres making up the bulk of the portfolio of Charter Hall Retail considered to have few sustainable competitive advantages. With Charter Hall Retail trading around AUD 3.85, we see the stock as slightly undervalued. Key attractions remain the high proportion of rent derived from low-risk sources, being the major supermarket chains, and low exposure to discretionary retail categories. Low average specialty rents also bode well for ongoing rental growth in the foreseeable future.

This transaction is consistent with what appears to be the company's strategy to increase the portfolio weighting to sub-regional malls at the expense of smaller neighbourhood and standalone assets. We are supportive of this strategy as we believe larger sub-regional shopping centres, generally are more likely to dominate catchment areas. This also means they are more likely to benefit from sustainable competitive advantages, with the most likely source being efficient scale and network effects, which collectively create barriers for prospective competitors.

Ryman Healthcare Limited RYM-NZ| Another Solid Result from Ryman Healthcare but Its Shares Remain Overvalued
Morningstar Recommendation: Reduce
Nachiket Moghe, CFA, Morningstar Analyst - 64 9 915 6776
Ryman’s first-half fiscal 2014 result was ahead of our expectations. Underlying net profit after tax, or NPAT, increased 22% to NZD 58.5 million compared with our forecast of NZD 55.3 million. Despite the strong first-half performance, management maintained its medium-term NPAT growth guidance of 15% per annum. We have not made material changes to our forecasts, which assume a 16% and 14% growth in NPAT during fiscal 2014 and 2015 respectively. Ryman continues to execute to perfection, and this, coupled with the tremendous growth prospects in the aged-care sector, should deliver solid earnings growth for the foreseeable future.

We have lifted our fair value for the stock from NZD 5.00 per share to NZD 6.00 per share due to the additional cash generated since our last update and a modest reduction in the weighted average cost of capital. The stock continues to trade at a substantial premium to our fair value estimate and is also significantly above its historical price/earnings and enterprise value/EBITDA multiples. We think the market has been enamoured by the firm's growth prospects, particularly in Australia where the addressable market is much higher. However, we argue the stock is not priced for any disappointments, which could come from missteps in Australia and moderation in New Zealand house prices. We make no changes to our narrow Morningstar Economic Moat Rating, which reflects the firm's low-cost position and brand strength.

Transfield Services - Upgrade due to price change

Brambles - Downgrade due to price change

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