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Weekly Broker Wrap: Queensland Coal, Equity Strategies, Focus Lists And Real Estate

Weekly Reports | Mar 04 2016

This story features RIO TINTO LIMITED, and other companies. For more info SHARE ANALYSIS: RIO

-Who will buy Anglo American's assets?
-Large caps drag on headline growth
-Appeal still found in domestic cyclicals
-New real estate listings growth on positive trend

 

By Eva Brocklehurst

Queensland Coal

The Australian assets of Anglo American which have been put up for sale include Moranbah and Grosvenor, the most valuable parts of the disposal program. Yet, Deutsche Bank notes the commodity, coal, is one that few are excited about. Achieving an acceptable valuation for shareholders may prove challenging.

The two logical buyers are Rio Tinto ((RIO)) and BHP Billiton ((BHP)) as both can extract operating synergies. The broker also suspects Japanese trading houses may take a look. From BHP's standpoint the acquisition of Anglo coal assets would provide operational synergies around Goonyella and Caval Ridge.

Furthermore, with only around 10% of production from underground the company may be tempted to add more capacity. On the other hand, regulators may investigate any acquisition as it would increase the company's controlled production to 80mtpa in the 225mtpa seaborne hard coking coal market. BHP has also stated its preferred area of investment is copper and oil.

Rio Tinto expressed interest some time ago in increasing its metallurgical coal exposure and the two Anglo American assets would raise its production to 18mtpa from 7-8mtpa, making Rio Tinto a significant producer. The question Deutsche Bank asks is: Does Rio Tinto want to assist in Anglo American's balance sheet repair or does it envisage other assets may be up for grabs if the environment deteriorates further?

Equity Strategies

Equities continued to be weak in February, falling a further 2.5% on top of the 5.5% decline in January, Macquarie observes. Volatility remains elevated in the equity market and, while the reporting season was slightly better than the broker expected, expectations had been lowered substantially in the lead-up to the results. Approximately 70% of companies reported in line or results above expectations.

The broker notes domestic cyclicals were solid and materials in line while health care was mixed. Large caps underperformed versus small caps. Improving commodity prices helped underpin energy stocks as oil rallied strongly over the month while banks were hit hard by fears of tightening credit markets.

In the materials space Newcrest Mining ((NCM)), Alumina ((AWC)), South32 ((S32)) and Iluka Resources ((ILU)) stood out for Macquarie.

UBS suspects the Australian equity market is on track for its second successive year of negative earnings growth. Growth ex resources is better but still an anaemic 3-4%. The broker notes earnings trends for a “typical” company remain reasonable but headline growth is being dragged down by the large-cap end of the market.

The broker remains overweight on banks and underweight mining while neutral on energy. While the broker is concerned about the high price of growth in a range of stocks there are still some appealing defensive ones. Sandfire Resources ((SFR)) and Iluka Resources are removed from the model portfolio while Heathscope ((HSO)) is added.

The broker continues to hold some selected domestically exposed stocks on a mix of relative valuation appeal. Defensive growth stocks held include Aristocrat Leisure ((ALL )), CSL ((CSL)), Healthscope and Transurban ((TCL)) as well as Estia Health ((EHE)), Virtus Health ((VRT)0 and G8 Education ((GEM)) in small caps.

Some growth is also envisaged for those exposed to US dollar earnings such as Aristocrat Leisure, CSL, Incitec Pivot ((IPL)) and Macquarie Group ((MQG)) and are held on this basis.

Small & Mid Caps

Goldman Sachs removes 3P Learning ((3PL)) and Sirtex Medical ((SRX)) from its Small & Mid Cap Focus List. In February the list was down 12.3% while the ASX Small Ordinaries Accumulation index was up 0.9%, implying 13.2% underperformance.

Over the year to February the list was up 10.5% while the ASX comparable was down 3.6%, implying 14% outperformance.

Best performers in February were Austbrokers ((AUB)), Sky City Entertainment ((SKC)) and Fisher & Paykel Healthcare ((FPH)), outperforming 2.5%, 2.6% and 2.7% respectively. The key detractors on the list were amaysim ((AYS)), Blackmores ((BKL)) and 3P Learning, underperforming 37.9%, 17.6% and 17.0% respectively.

Real Estate Classifieds

New listings in the Australian property market grew 6.0% year on year in February, indicating solid trading conditions in the second half to date. Deutsche Bank considers the February data, showing lower growth than January, as a more reliable indicator of market trends.

New listings growth in the capitals showed a similar trend to the national numbers. Sydney volumes turned around and Melbourne also produced solid growth in the month. The broker views these two markets as most important for online classifieds and for premium listings, likely contributing well over 50% of revenues.

The broker expects volumes to grow for the remainder of the second half and this will benefit the earnings of REA Group ((REA)) and the Fairfax Media ((FXJ)) Domain business.
 

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CHARTS

3PL AUB AWC AYS BHP BKL CSL EHE FPH GEM ILU IPL MQG NCM REA RIO S32 SFR SKC TCL

For more info SHARE ANALYSIS: 3PL - 3P LEARNING LIMITED

For more info SHARE ANALYSIS: AUB - AUB GROUP LIMITED

For more info SHARE ANALYSIS: AWC - ALUMINA LIMITED

For more info SHARE ANALYSIS: AYS - AMAYSIM AUSTRALIA LIMITED

For more info SHARE ANALYSIS: BHP - BHP GROUP LIMITED

For more info SHARE ANALYSIS: BKL - BLACKMORES LIMITED

For more info SHARE ANALYSIS: CSL - CSL LIMITED

For more info SHARE ANALYSIS: EHE - ESTIA HEALTH LIMITED

For more info SHARE ANALYSIS: GEM - G8 EDUCATION LIMITED

For more info SHARE ANALYSIS: ILU - ILUKA RESOURCES LIMITED

For more info SHARE ANALYSIS: IPL - INCITEC PIVOT LIMITED

For more info SHARE ANALYSIS: MQG - MACQUARIE GROUP LIMITED

For more info SHARE ANALYSIS: NCM - NEWCREST MINING LIMITED

For more info SHARE ANALYSIS: REA - REA GROUP LIMITED

For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED

For more info SHARE ANALYSIS: S32 - SOUTH32 LIMITED

For more info SHARE ANALYSIS: SFR - SANDFIRE RESOURCES LIMITED

For more info SHARE ANALYSIS: SKC - SKYCITY ENTERTAINMENT GROUP LIMITED

For more info SHARE ANALYSIS: TCL - TRANSURBAN GROUP LIMITED