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Analyst report
Reporting season stock carnage points to opportunities
March 17, 2008
Brendon Lau, ShareAnalysis
Despite the headwinds and challenges ahead for our share market, this reporting season has been generally positive as we had expected. This week, we look at some fallen angels to see if these investments are salvageable.
This past reporting season has shaped up to be the most challenging in five years as financial turmoil, rising costs and the threat of a global economic slowdown shakes investor confidence. In the face of the market upheaval, we believe that calm will eventually prevail and that decent returns can still be attained.
But as we have said before, these returns will not come easy. In the wake of this reporting season, our FY08 EPS forecasts for a number of sectors have been cut from the year before to account for the more challenging environment. The silver lining is that our forward P/Es for almost all sectors have fallen, indicating that many stocks now represent better value than a year ago.
That could be cold comfort for investors in companies that have fallen from grace this reporting season. The common driver for most of these underperformers is debt.
One recent example is ABC Learning Centre (ABS) when a combination of short selling and margin calls triggered a precipitous decline in its share price.
As a result, ABS will offload 60% of its US day-care centres to pay down debt (subject to the approval of its banks). But that was not enough though to save ABS' shares from another 18% plunge when it resumed trading last Thursday.
The issues facing Allco Finance (AFG) are worse (although not dissimilar). Margin loans held over its directors' personal shares in the company and complex financing structure proved to be its undoing. Because of this, we no longer regard AFG as a worthy investment in its current form and have subsequently removed the stock from our model portfolios.
Another stock that suffered an EPS downgrade is Boom Logistics (BOL). BOL breached its interest cover debt covenant, but was granted a waiver by its lenders. The 1H08 result was disappointing as the company struggled to benefit fully from booming mining and infrastructure development activities. Going forward, BOL has little room for error as any further deterioration in earnings could force BOL to hold a fire sale on some of its assets or freeze dividend payments.
Two other stocks that have gotten off on the wrong foot are ANZ Bank (ANZ) and Babcock and Brown Wind Partners (BBW). Although ANZ reports its interim result in April, it issued a trading update in mid February that was not well received by the market. ANZ revealed an exposure to a US monoline insurer and increased its bad debt provisioning. However, the update did show that the underlying business of ANZ appeared to be travelling well despite flailing sentiment towards the banking sector.
Meanwhile, investors have also abandoned BBW despite the good outlook for green energy. Again, the worry here is the rising cost of debt. However, compared to its European peers, BBW is looking cheap. But unlike other stocks mentioned in this article, we believe BBW and ANZ have strong turnaround potential.
However, considering the lack of near-term catalysts for equities, investors not only need to be patient but they also need to be prepared for more volatility ahead as the market is still struggling to find its feet.
Two stocks we'd like to highlight this week are:
Allco Finance (AFG) advised that all its holdings in the Rubicon Trusts have been sold and its margin lending facility has been repaid in full. With sale proceeds of $22M and a book value of $101.7M, AFG is likely to have realised a loss of $79.7M on these investments. In our view AFG's business model is challenged with maturing debt, loss of investor confidence and the prospects of further losses on investments and assets held for sale. We have a SELL on AFG with a 12-month price target of $0.55 (Technical Recommendation: HOLD).
ANZ Bank (ANZ) confirmed underlying profitability remains solid. However, its 1H08 NPAT is expected to be impacted by increasing bad-debt provisions. ANZ identified three specific corporate exposures requiring material provisions, including a US$200M provision on a derivative position with a US monoline insurer. We have updated our forecasts, increasing bad-debt provisions and decreasing interest margins, which have lowered our FY08 and FY09 EPS forecasts by 8.7% and 3.8%, respectively. At current levels we regard ANZ as a BUY with a 12-month price target of $30.66 (Technical Recommendation: HOLD).
Brendon Lau is the editor of ShareAnalysis, a premium retail investment service offered by Aegis Equities Research. Click here for your free trial.
More articles from this edition of CompareShares:
Stocks: How sub prime will impact your share portfolio
Trading: A story of a home-based trader Vimal Mehta
Stocks: Stock of the week: Coal of Africa
Sectors: Reporting season stock carnage, points to opportunities
Advisor Lounge: Family trusts and tax deductions
Markets: History shows traders that bear markets and crises bring on the biggest daily rallies
Markets: US stocks sink as Bear Stearns reignites credit fears
CFDs: Top ten CFD stocks for the week
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions. |
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