amp & srp - macca's view

  1. Yak
    13,672 Posts.
    Stock analysis
    AMP has disappointed the market again, lowering profit expectations for its UK Financial
    Services arm. This time by £36m, down 32% relative to the £112m guidance provided at the
    December 4 briefing.
    The downgrade reflects continued weakness in equity markets and a (hopefully) non-recurring
    £13m increase in provisions relating to historical pensions mis-selling and other liabilities.
    Although primarily investment market related, the downgrade will nevertheless (and justifiably)
    disappoint. It will not only rekindle fears about the likely extent of profit declines in the UK
    Financial Services but also (more generally) undermining newfound confidence in the recently
    appointed senior management team.
    The downgrade reduces our valuation of AMP by 35 cents per share, with our lower and upper
    limits now $12.00 to $13.60. While AMP is trading 13% below our lower case valuation, this
    latest announcement is a reminder that better performance in the near term will be found in the
    property and casualty insurers, namely IAG, QBE and Suncorp.
    Additionally, pending analysis of the full year result (due 26 February) where more detail will
    be released, we are considering lowering our longer term recommendation to Hold (with the
    prospect of a recovery in the UK financial services appearing increasingly distant).

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    Recommendation change ê
    We have reduced our long term recommendation for Southcorp to Hold after yesterday it
    revised down its 2003 financial year forecasts for operating profit by 15% from $335m to
    $287m. It also said that operating profit for the first half would be $115m, 10% below the same
    period in the previous year.
    The deterioration in earnings is primarily due to an unfavourable shift to increased demand for
    lower end product. Volumes remain strong, however, revenue and profits are weaker.
    The shift in mix is a result of weakening consumer spending, consolidation among liquor
    retailers and increasing competition impacting profit margins and revenue.
    The region most adversely affected has been the UK market. We have identified promotional
    activity from BRL Hardy and a resultant loss of key promotional slots for Southcorp in this
    market. Approximately 80% of wines sales in the UK are made on promotion.
    Our valuation for Southcorp is now $5.80 per share but given the uncertainty that will continue
    to surround future earnings and management’s guidance, we do not envisage it trading to this
    level in the near term. We note that recent corporate activity in the sector will likely underpin
    the share price but uncertainty regarding the earnings outlook will prohibit short term

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