Stockwatch
Information current as at 31 August 2010
This month's stocks
- Brambles Ltd (BXB) – Maintain HOLD – We expect a positive story to emerge from the investor tour in September 2010 but it is likely to take at least another six months for positive signs to emerge. In the meantime: 1) many of the themes from the investor tour are likely to be similar to those articulated in the past; 2) it is difficult to see how long the key competitor will keep the pressure on BXB; and 3) a rapid economic recovery in the US appears unlikely. We expect a lack of positive catalysts and uncertainty around long-term margins to drag on the stock. Risks to our hold recommendation include the loss of key customers in major European and American markets, continued strength in the Australian Dollar against the US Dollar and a slowdown in global economic growth resulting in weaker pallet volumes and employment data, the latter a demand driver for document and paper management.
- BHP Ltd (BHP) – Maintain BUY - BHP reported a very strong result for 2010. The US$12.5bn profit met the market expectation and significantly higher on last year. The US45c final dividend was slightly more than anticipated, bringing the full year to US87c with a 39% payout ratio. Oil and the bulk commodities performed better than forecast while Aluminium, copper and nickel dragged the chain. Overall the recovery in demand and prices was only partially offset by cost pressure associated with the weaker US dollar. Currency aside, costs were managed exceptionally well. Production records were set in petroleum and iron ore. BHP is cautious on the short term outlook for the global economy with uncertainty continuing to surround the developed world. But the company remains positive on the longer term prospects, driven by continuing urbanisation and industrialisation in emerging economies. On the M&A front, BHP’s US$40bn bid for a Canada based Potash Corporation has been rejected by the Board of the target company. BHP needs to cross a number of hurdles before this deal is successful.
- Suncorp-Metway Ltd (CWN) – Suncorp reported a strong result for the 12 months to June 2010. A significant improvement was seen to the previously assumed bad debt provision in the non-core bank book. This was due to improvement in the property prices. The non-core bank book is in a run-off mode and we note some acceleration to this process over the past 12 months. In general insurance, we thought the insurance margin was slightly weaker than our expectation but management has forecast to get the insurance margin up to 12% by 2012. This is premised on the current cost out initiatives being implemented. The weakness in the insurance margin in 2010 came from higher implementation costs of new strategies. As for the core banking operation the key issue going forward will be whether growth (e.g. chase more residential mortgages) can be restored without hurting margins. We are yet to see evidence of this. Overall, the company is in the middle of a turn around which will take some time.
Western Australia News (WAN)
WAN holds a unique market position in dominating newspaper readership in Western Australia through The West Australian. This newspaper accounts for over 80% of its revenues, generating high operating margins from advertising and classifieds. WAN´s fortunes are heavily dependent on the West Australian economy, which is reliant on resources and tourism markets. Local regional content for a niche market represents a powerful competitive barrier against national mainstream media content.
West Australian Newspaper’s 2010 result was broadly in line with the market expectation. We recently upgraded WAN to a ‘Buy’ recommendation due to its strong cost control measures and expected future operating costs to not exceed inflation. WAN has sound financials with strong cashflows and a conservative level of financial gearing. We remain positive on the advertising market recovery and see it enjoy operating leverage as advertising sales recover. Additionally, current 7% fully franked dividend yield is attractive. The downside risks to our view include: 1) competition from online news platforms; 2) the entry of a new competitor in WA and a change in the industry structure.
