A variety of stocks - McQ

  1. Yak
    13,672 Posts.
    Here's a brokers view of the coming time and a few stock views as well:

    Equities Strategy

    Australian Market Forecasts
    We expect the ASX200 to rise by 12% over the year to June
    2003 and a further 3% by December 2003 on the back of
    good valuations and a stronger than normal earnings outlook.
    Once the market begins to make strong gains we expect a
    shift away from defensive exposures such as property trusts
    and banks, and towards higher risk stocks. Amongst high P/E
    stocks, we see the best potential in Harvey Norman, CSL,
    Corporate Express, Suncorp Metway, Aristocrat, ResMed and
    Precisely when this occurs will depend on the return of US
    investor confidence. We expect that, given continuing good
    news on the US economy and the current attractiveness of
    US equities (from a valuation perspective anyway), this is not
    too far away.

    Stock analysis

    Suncorp-Metway Recommendation change

    Following the release of the first half result in late February, we downgraded its Suncorp-Metway
    recommendation. This was on the grounds that fear of a material increase in the cost
    of claims in the Queensland motor vehicle compulsory third party would dampen sentiment
    until the release of the full year result.
    Scepticism surrounding Suncorp actually achieving the integration benefits from GIO would
    also add to this negative sentiment.
    We are increasingly confident that the full year result (due in August) will alleviate the
    concerns. We have obtained commentary from various participants in the Queensland
    compulsory third party market that suggests claims costs are better than originally estimated.
    We believe further downside in the Queensland market is limited and the worst case will be an
    increase of $25m in Suncorp’s reserves for future claims.
    Given the proximity to the release of the full year result, the fact investment market
    downgrades are well and truly in the market and that the stock is trading well below our $14.50
    valuation, we have upgraded our short term recommendation to Buy.


    Qantas’ April traffic statistics have been released. The company continues to achieve excess
    market share in both the domestic and international segments. Since a profit upgrade to
    +$605m was issued by management two weeks ago, the statistics are likely to have minimal
    market impact except to confirm Qantas’ solid performance in the market.
    The statistics confirm the solid revenue and profit rebound in the domestic and regional
    business. We expect this area to post a record result, at least 30% above the previous record
    result in 2000.
    Internationally, improvement continues. At this stage the earnings impact is minimal. The
    second half improvements will offset losses in the first, but will still be well below comparative
    performances. However, the signs seem positive for the international business in 2003.
    Looking towards 2003, we are expecting 32% earnings per share (EPS) growth, with the
    international recovery offsetting any slow down in the growth of domestic/ regional.
    Domestic/regional profit growth is likely to consolidate in 2003 as Virgin is introducing new
    planes, increasing the competition for Qantas.
    We continue to maintain our short and long term Buy recommendation for Qantas. The stock
    is cheap at current prices, with all signs pointing to a positive outlook ahead. Our share price
    valuation range is $5.40–5.70.

    Westfield America Trust

    Westfield America trust (WFA) remains our key pick within the listed property trust (LPT)
    sector for three reasons:
    1. Short term upside from new portfolio
    The scale of the change in the trust since December of last year is enormous. A total of 22
    new centres have been acquired. We rate Westfield’s ability to extract short term value highly,
    and a number of indications point to potential income waiting to be unlocked.
    2. Development upside opportunity.
    Westfield is an aggressive manager, rather than a passive holder of assets. Its ability to
    execute developments within regional shopping malls and willingness to reinvest in existing
    assets creates a competitive edge. Westfield has the ability over time to increase its market
    penetration significantly. (cont.)
    3. Acquisition surprise potential.
    Even though the trust has been added to significantly we believe further regional mall
    acquisition opportunities are being investigated. Recent acquisitions have added significant
    value for investors.
    Despite the current weakness in US retail sales, our view of WFA has not been tempered. The
    portfolio continues to receive large lagged benefits of several years of strong retail growth in its

    We reiterate our short and long term Buy recommendation for WFA. The stock is almost 10%
    below our valuation of $2.25.


    OneSteel has announced that earnings for 2002 are expected to be in the range of $43m to
    $47m. The company indicated that the improved results are attributable to “…strong
    underlying demand from the housing and rural sectors with some pick up in non-residential
    and engineering construction.”
    We think the outlook appears robust for 2003 and 2004 at least and have taken a more
    aggressive stance on volumes and margins. We have lifted forecasts in those years by 16%
    and 19% respectively. We believe that 2003 and 2004 will see fuller period benefits from the
    Email asset integration coupled with stronger price and volume fundamentals.
    That major infrastructure projects are being let and are underway (recent examples being the
    Chatswood–Epping rail link and the Sydney cross city tunnel) increases confidence for a
    strong engineering construction outlook.
    The non-residential construction approvals pipeline indicates a healthy demand pull for
    materials from this area is already in place. This overlays already strong housing-related
    In relation to the steel stocks, our investment theme was to seek out those companies that are
    in a position to benefit from a strong demand outlook. OneSteel’s announcement is the first
    sign that the dem and impacts are now starting to filter through into profits. Our short term price
    target is $1.69. Other stocks with a strong exposure to this are Smorgon Steel, Adelaide
    Brighton and Boral.


    CSR has negotiated to acquire Kiewit Materials for US$540m . Kiewit Materials is an integrated
    aggregate and materials supplier based in Phoenix, Arizona. The acquisition is expected to be
    finalised by 30 September 2002 and is subject to shareholder and regulatory approvals.
    This price paid by CSR is fair and cheaper than that paid by CSR in mid 2000 for American
    Limestone and Florida Crushed Stone. Acquired goodwill from the purchase is estimated to be
    in the region of US$350m.
    On balance, we like the strategic overlay of the acquisition. CSR’s US operations are
    underpinned by a very large and successful Florida presence. Going forward, there is a natural
    limit to the extent that this part of the business can grow and CSR has been actively seeking to
    build a robust presence elsewhere.
    This acquisition is part of this. An integral part to progressing the strategy is to make further,
    bolt-on acquisitions that, over time, build returns to the sorts of strong levels that shareholders
    CSR’s balance sheet was arguably under-geared at last balance date and doesn’t need new
    equity for this size acquisition. Hence, CSR's balance sheet remains relatively strong and we
    estimate that the company has A$500m in further balance sheet capacity for acquisitions.
    We continue to maintain our short tern Buy recommendation for CSR. Our valuation now
    sits at $7.75 per share.

    Hills Motorway

    Hills Motorway released its traffic numbers for the month of June. Average daily traffic was up
    1.9% when compared to the previous corresponding period and up 1.7% on May.
    Whilst somewhat disappointing, it should be noted that June’s Sydney traffic numbers were
    impacted by a number of seasonal factors. As traffic growth should improve in coming months,
    we retain our Hold recommendation.
    Looking ahead, the potential for higher traffic flows exists due to a number of improvements for
    Sydney tollroads:
    · The construction of the Western Sydney Orbital (2007). This would add an extra 12,000
    cars per day.
    · The construction of the Lane Cove Tunnel in Sydney (2004) , relieving a major bottle neck
    on the M2. This would add an extra 500- 600 cars per day.
    · The possible widening of the M2 to three lanes (adding 50% capacity to the road)


    Telstra announced a range of new price charges from August, in line with the new price cap
    regime which allows more rapid rebalancing.
    Initial political reaction was, not unexpectedly, negative. The government may well ask the
    ACCC to check the changes are in line with the new price cap, but if so, it seems a formality.
    Looking at the bigger picture, our equity view is for the All Ords to rise 12% over the year to
    June 2003. Most of the upside comes from attractive valuations but the earnings (and earnings
    revisions) outlook looks strong for many companies.
    Comparable performance would require Telstra to price around $5.35 by June 2003. In
    contrast to many other equities Telstra has limited earnings growth and little prospect of
    significant revision.
    Areas to watch for possible earnings revision include stronger mobile revenue growth, an
    improved datacoms environment, rationalisation of smaller players and more vigorous cost
    control. None of these appears particularly imminent.
    On top of this, earnings improvement is only part of the story. There needs to be a better
    signal that improved earnings performance will reward shareholders, either with better
    dividends or stronger evidence that re-investment plans add value.


    We regard AMP as fundamentally cheap with our valuation of $19.31 unchanged.
    Notwithstanding significant upside to the valuation, investors are likely to remain on the
    sideline in the short term for several reasons. This includes lingering fears of weaker margins
    in the UK (and further perceived regulatory risk) and continued volatility in equity markets.
    In this regard, it is difficult to see the first half result (due Mid-August) as the catalyst for a re-rating
    in the share price for the following reasons:
    · The interim result is already largely flagged to the market
    · Recently announced cost savings in its UK financial services arm are unlikely to
    materialise until the full year result; and
    · It will be difficult for management to fully dispel (admittedly exaggerated) fears arising
    from a recent UK retail savings industry review until hard financial evidence emerges.
    Accordingly, we maintain our short term Hold, long term Buy.


    Brambles waste management business, Cleanaway, has announced it is the successful
    tenderer for the Medway Council collection contract in the UK. The contract is for seven years
    from September 2002, and is worth £71m. We expect that this will add around 3% to
    Cleanaway revenues.
    This announcement is positive, but insignificant when measured against Brambles pallet
    business, Chep, which we expect will be the key driver of the share price going forward.
    Evidence of improvements in this business are that:
    · Chep US is successfully converting non participating distributors (NPD) and smaller
    manufacturers which should drive an improvement in operating margins;
    Chep Europe demonstrates the successful conversion of the Italian market, and maintains
    momentum in converting the German market. This should re-ignite revenue growth of the
    European system to 10-15% again, particularly France and Spain.
    As the new management teams have only started to implement strategic changes, we expect
    it will take another 3-6 months before there is clear evidence of improvements. Until this
    evidence is apparent, we believe Brambles will continue to trade between $9.50-10.00.
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