Brokers are almost always biased towards buy recommendations because it is the best way to get, well, brokerage. But with the market at such depressed levels, it is probably not an overly bad call. Goldman Sachs, which thinks there is some hope that Europe is being sorted, is looking for multiples to be higher and is calling a 14% return for the All Ords over the next year. Optimism is not dead after all!
That comprises a 10% capital gain pluses a 4% yield. Goldman is increasing its cyclcial exposure, including Macquarie Group (optimism really isn’t dead) and James Hardie. Transurban is dropping off the list.
It is probably not a bad time to look from the market bottom, provided the world financial system does not collapse. NAB, Wesfarmermers, News Corporation, Orica and ANZ have the largest positions in Goldman’s model portfolio (Goldman has long been a key broker for News). It is underweight in Westpac, Woolworths, Telstra, Newcrest Mining and QBE.
RBS is advising some switches that are worth looking at (out of “funding source” to “long”):
Table 1 : Banks
Long ANZ Bank (ANZ) Andrew Lyons
1. ANZ’s Asian franchise is a key differentiator in a sluggish domestic growth environment, in our view, and we believe the group is relatively well positioned on funding in uncertain money markets.
2. ANZ’s lower relative exposure to retail banking means it should be less affected by the volume, margin and fee headwinds we believe the sector faces in FY11-12, while the group has good exposure to the recovery in business credit growth that we have forecast.
3. ANZ’s balance sheet looks robust. Firstly, ANZ’s asset quality is showing good improvement and the group is strongly provisioned, in our view. Secondly, we think ANZ is not only best in class on capital, but one of the best prepared for additional Basel III standards.Funding source Westpac Bank (WBC)
1. We believe WBC’s domestic operations will be less exposed to the improvement in business credit growth that we forecast will come through in FY12.
2. In an increasingly difficult revenue environment, we believe WBC has less flexibility on costs and we are yet to see results from the multi-brand strategy.
3. While funding markets remain problematic, WBC has the largest reliance on short-term wholesale funding, has a larger term-funding requirement than peers and has the lowest liquid asset portfolio in the sector (compared to banking assets).Table 2 : Capital Goods
Long Downer EDI (DOW) Andrew Hodge
1. We believe DOW’s management continues to make steady progress towards where it believes the business should operate.
2. In our view, the short-term key to DOW’s share price performance is three upcoming potential catalysts: Reliance Rail funding, further delivery of Waratah trains and the successful ramp-up of the FMG Christmas Creek contract.
Funding source Leighton Holdings (LEI)
Although we don’t believe there are structural problems within the business, we continue to believe LEI is too expensive relative to its likely growth profile over the next three years.Table 3 : Transportation
Long Asciano (AIO) Mark Williams
1. Looks cheap relative to peers given that AIO is trading on a rail multiple despite the fact that one third of its earnings are exposed to ports.
2. We see momentum in the ports division following a contract win with Maersk.
3. Catalysts we see remain in the form of wage negotiations concluded and potential coal rail contract announcements.
Funding source Brambles (BXB)
1. Consumer spending in key markets such as the USA and Europe looks set to remain under pressure, with
economic conditions remaining volatile.
2. BXB is trading at an FY12F PER of over 15x, about a 40% premium to the ASX200. We do not consider this
premium justified at this point given the fragility of BXB’s key markets.Table 4 : Energy
Long Oil Search (OSH) Jason Mabee, CFA
1. On our current NAV forecast, an investor is only paying for 30% of PLNG’s third-train expansion. This includes very conservative capex forecasts on PLNG T 1& 2.
2. OSH is embarking upon a very active drilling programme in 4Q which we believe will be enough to underpin
PLNG T3 with the potential for further expansion (T4) in the future.
Funding source Santos (STO)
1. We see no near-term positive catalysts ahead.
2. Disproportionate market reaction to any bad news regarding CSG.
3. We have concerns about capital expenditure blowouts.Table 5 : Gaming
Long Crown (CWN) Michael Nolan
1. In essence, casinos are a property play, which means the key success factor is location, location, location. CWN’s Australian casinos tick that box in spades. And so does its 33% interest in Melco Crown in Macau, the world’s fastest growing gaming market. A portfolio of AAA-rated properties with a domestic and international flavour, a strong board and executive management team is a potent mix, and makes CWN a potent franchise, in our view.Funding source Tabcorp (TAH)
1. The demerged entity is predominantly a wagering business, and wagering is in secular decline. We believe such businesses warrant portfolio inclusion in exceptional circumstances only. TAH does not qualify on that basis, in our view.Table 6 : Food & Beverages
Long Coca-Cola Amatil (CCL) Michael Nolan
1. We believe CCL has a strong medium-term growth profile driven by high-return-generating capital projects over the next four years.
2. Strong brands and footprint position business relatively well in a difficult pricing environment, in our view.
3. Not cheap on PE multiples, in our view, but trading towards the bottom end of its historical range despite having a superior medium-term growth profile.
4. Indonesia should be a positive earnings driver as relative immaturity and rising incomes continue to drive strong growth.
Funding source Goodman Fielder (GFF)
1. With key food CPI segments flat, we believe any further material margin improvement would require brand
emphasis and new product development (NPD) programmes, which are medium-term propositions.
2. The medium-term outlook appears uncertain, in our view, with risks in a tough CPI environment, private label substitution and supermarkets’ bargaining power all likely to affect GFF’s earnings growth profile.
3. While GFF trades on a low P/E, we do not see it as cheap given its low growth potential.Table 7 : Health care
Long Sonic Healthcare (SHL) Dr Derek Jellinek
1. Lower cost base increases leverage as domestic volumes return and the new funding agreement takes effect.
2. Offers higher-margin services and products through specialist channels.
3. Growing offshore footprint diversifies revenue base, decreases reliance on domestic business and offers upside via increasing coverage and volume.
Funding source CSL Limited (CSL)
1. Constant currency NPAT growth has waned over the last three years (FY09-11: 45%; 22%; 14%), with 10%
guided in FY12.
2. The return of Octagam, slowing product mix shift and increasing competition has negative implications on last – litre economics.
3. The R&D pipeline appears underfunded (7.8% of revs) and lacks strong growth drivers over the near/medium term.
4. Growth looks muted in Human Health (18% of total sales) with soft Gardasil sales, concerns surrounding the seasonal influenza vaccine and ongoing FDA discussions with compliance issues for the Parkville facility.Table 8 : Infrastructure
Long MAp Airports (MAP) Will Allott
1. We see strong traffic growth and operating leverage driving short-term earnings growth, with upside potential from better-than-expected traffic growth and cost performance.
2. Completion of the proposed OTPP transaction should unlock material upside from the move to a single-asset vehicle, removal of dilution of the Australasian airport premium, streamlining the structure (reducing costs and potentially increasing foreign ownership limit) and the deployment of surplus cash.
3. MAP has indicated it will return about 80cps to shareholders by the end of CY11, underpinning the share price.
Funding source Macquarie Atlas Roads Group (MQA)
1. Weak economic conditions in the UK and the US affecting CY11 traffic.
2. Weak 1H revenue figures indicate Dulles Greenway is unlikely to pass the distribution test in December 2011.
3. Likely to tread water until we get closer to the €3.6bn Eiffarie debt refinancing in late CY11/early CY12, in our view.