Tag Archives: Utilities

article 3 months old

Implications For Electricity Providers As NSW Deregulates

-NSW margin reduction for FY15
-Longer term profitability enhanced

 

By Eva Brocklehurst

NSW will phase in a de-regulated electricity market from July 1, 2014. The changes involve a transitional tariff, which delivers a modest decline of 1.5% to prices in FY15, followed by a CPI-related increase in FY16. In FY17 the NSW Independent Pricing And Regulatory Tribunal (IPART) is expected to move to an oversight role, much like the Victorian Essential Services Commission.

Origin Energy ((ORG)), the major electricity retailer with the greater number of regulated customers, has agreed to this reduction in revenue from NSW regulated customers in FY15. This is much the same as was the case in South Australia in 2012, when AGL Energy ((AGK)) agreed to tariff reductions at the start of that state's move towards de-regulation.

Broker views are essentially unchanged. Both companies will benefit in time from higher margins and lower regulatory costs, and more effective wholesale portfolio management should, over time, lead to improved profitability. In fact, UBS considers the timing is good news for the retailers, as margin changes may be partly covered by the removal of the carbon price during the transition year. In the longer term, higher prices are likely. Assuming the Victorian prices are "fair", UBS estimates NSW margins may actually need to rise as much as $100 per megawatt hour (MWh). Admittedly, retailers may face lower volatility in NSW and take a lower margin as recompense but prices are still expected to rise. UBS estimates every $1/MWh lift in mass market margins in NSW implies a $9m lift in earnings for Origin and $6m lift for AGL.

Macquarie believes the lower price associated with the introduction of deregulation will be lost in the $144 per user decline associated with the removal of carbon from the wholesale electricity price and retailing margin. Moreover, the price war in NSW has already cost Origin close to $100m and the broker considers the slightly negative earnings impact of deregulation is trivial compared with the longer term opportunities.

It may appear to be more of a structural change than is really the case. Deutsche Bank observes over 60% of NSW customers are already on market-based contracts that are priced below the regulated tariff, given current competitive pricing activities. Origin carries a higher number of regulated customers because of the weighting of Essential Energy customers. JP Morgan estimates that Origin and EnergyAustralia, the third major NSW player, have around 40-50% of customers on regulated tariffs in NSW. The broker thinks the deregulation is broadly positive for both AGL and Origin valuations because of improved retail margins. Origin has a deeper footprint in NSW but its retail position makes up a smaller proportion of its portfolio. The impact on valuation is slightly greater for AGL, in JP Morgan's view, as there's a challenge to achieve the same level of gross margin improvement in NSW without the customer base that Origin has.

Victoria is further down the track than NSW, having de-regulated from 2009. Here brokers see competition thriving and, where margins become uneconomic, churn falling. Deutsche Bank notes electricity retailers in the longer term have realised higher margins in Victoria while market-based pricing is less prone to unexpected shocks related to regulatory risks, as witnessed by recent tariff cuts in Queensland. Still, the broker is not rushing to conclude that Origin's and AGL's margins will expand as a result of the NSW de-regulation decision. Recent irrational discounting has led to significant margin erosion in retail electricity markets across the country and contributed to a greater impact on profitability than regulated tariffs, in Deutsche Bank's opinion.

BA-Merrill Lynch observes Victorian electricity retailers have moved their standing tariffs in the same direction each year since deregulation, which explains why this state continues to be the most profitable, despite the high 25% customer churn. The broker notes the average retail tariff has increased 59% since 2009 while costs have increased 41%, resulting in an extra $30-40/MWh in margins. Consumers have now oodles of choice, with more than 15 active retailers in Victoria. The broker's analysis suggests that AGL and Origin are capturing gross margins around $50-100/MWh in Victoria which compares to the $40/MWh allowed by the current NSW regulatory regime. This also explains why second tier players have been apprehensive about the NSW market.

Further analysis shows that, while Victoria may have higher churn and retail operating expenditure, better margins and profitability exist because the cost of electricity is the lowest in the national electricity market. That benefit goes straight to margins. Merrills considers it possible that churn in NSW and Queensland will actually increase after the removal of retail tariff regulation and new second tier retailers ramp up their marketing, but the increased gross margin should offset extra churn-related operating expenditure. Attention turns to Queensland now, particularly the south east, where the government has announced plans to remove regulation of electricity prices from July 2015. These reforms are yet to be ratified by parliament.

In sum, for the two major listed electricity retailers in NSW brokers consider Origin will endure some near-term declines in earnings that will be offset in part by an increase in gas margins. For AGL the near-term pain is less apparent as NSW comprises only one third of its electricity customer base. Hence, the retail gas tariff uplift is expected to more than compensate for any earnings decline brought about by electricity tariff adjustments.

Origin retains four Buy ratings and three Hold on the FNArena database with a consensus target of $15.49, suggesting 7.7% upside to the last share price. AGL has three Buy ratings, three Hold and one Sell with a consensus target of $16.30, suggesting 7.1% upside to the last share price.
 

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article 3 months old

Weekly Broker Wrap: RBA Easing Not Over; US Economy And Oz Utilities

-Still expecting RBA rate cuts
-RBNZ likely to hike
-US growth accelerates
-Electricity churn eases
-Merrills upgrades APA

 

By Eva Brocklehurst

The Reserve Bank of Australia may have left the cash rate unchanged, as expected, after last Tuesday's meeting but several brokers warn it's not a case for yawning. Goldman Sachs observes the central bank is a little more upbeat in assessing recent economic trends and the statement accompanying the decision shows the central bank is shifting focus. The statement incorporated a sense that the RBA has taken the first small step towards a more neutral setting, from a highly accommodative one.

So, is the easing cycle done for? The broker thinks not. Ultimately, inflation is low, demand is tepid and employment is contracting. For the broker, a lack of demand is the key risk, not inflation. The latest increase in inflation does complicate the issue regarding whether further official rate cuts are on the cards, so Goldman's forecast changes have been pushed out to July. A cut to the cash rate is still forecast. The commencement of the tightening cycle, in the broker's forecasts, has been also pushed out to the second quarter of 2015.

Goldman thinks there's headwinds to GDP growth this year, with delays and cost blow-outs at key LNG projects, completion of construction at several iron ore mines and a likely surge in public infrastructure spending. Exports are still expected to be robust but the contribution could be more modest. This will keep the focus on the pace of recovery in the non-mining economy and there is a risk that a return to above-trend GDP growth will be delayed well into 2016. This adds up to downward pressure on the cash rate, in the broker's opinion.

A shift in the RBA's assumed bias is apparent to BA-Merrill Lynch as well. The broker considers, despite the more positive stance, that downside risks to the economy remain in place. The unemployment rate is expected to rise on a sustained basis and mining investment is forecast to be detracting consistently from growth in the second half of 2014. The broker anticipates the non-mining sectors will not recover to the extent needed to offset the mining decline. The broker suspects the rise in inflation is temporary and expects a rate cut in the second half of the year, settling for August as the key date.

Across the Tasman the story is about the Reserve Bank of New Zealand's nervy trigger finger. Alliance Bernstein suspects, while there was no action this week, the RBNZ will counter a combination of strong growth and rising inflation with an official rate hike in March. The RBNZ governor signalled rates would not be staying at current levels for much longer, which effectively signals the central bank is about to move. The broker notes there's 100 basis points of rate hikes by September factored into the market and a further 50 basis points by mid 2015. The justification is clear. NZ GDP is running at 3.5%, above trend, and inflation has surprised on the upside.

What about the US economic trajectory? Growth has shown improvement in the latter half of 2013, with real GDP growth estimated to be 3.2% annualised in the fourth quarter. Alliance Bernstein finds many signs the US economy is turning a corner, with a large boost to growth from consumer spending in the December quarter. Big ticket items have been impressive, with durable goods spending up 5.9% in the quarter. The broker believe the spending on equipment and software, which rose 6.9% in the quarter, also signals an economy that's looking stronger. Construction activity indicators are pointing to double digit gains for commercial construction in 2014. The drag from the federal sector is also waning as Congress recently passed legislation that postpones sequestration cuts for the next two years. Alliance Bernstein suspects there's a real chance GDP growth could expect current expectations this year.

Churn rates in Australia's electricity market slipped in January and this represents the third consecutive month of decline, according to JP Morgan. This has been largely underpinned by the cessation of door knocking by the big three retailers. South Australia bucked the trend and recorded an 0.8% increase in transfer activity. In contrast, churn rates for gas increased in January, with the exception of Victoria. Churn rates rose to 14.9% from 12.5% in South Australia, the largest increase. The broker envisages a number of factors coming to bear on the electricity market which should bring some relief to retailers. Besides the cessation of door knocking there's de-regulation in SA and Queensland and the potential for a similar move in NSW. The broker thinks there is sufficient evidence that the competitive intensity is cooling, particularly in Victoria and Queensland which is supportive for AGL Energy ((AGK)) and Origin Energy ((ORG)).

Merrills has reviewed the Australian regulated utilities sector and is more comfortable with the growth profile of APA ((APA)), upgrading the stock to Neutral from Underperform. Cash returns from assets have increased and the company's track record is solid in the broker's view. The key headwinds are higher gas prices and a risk that Queensland/Cooper gas from the Moomba Sydney pipeline will be diverted to Gladstone for LNG. While lower southbound throughput is a risk, the broker believes concerns from this quarter are somewhat overplayed.

On the downgrade front, the broker has lowered the rating on SP AusNet ((SPN)) to Underperform from Neutral, noting lower total returns compared with peers. The broker acknowledges that the company has capacity to be more aggressive with distribution policy but, with no signal that's about to change, Merrills' top preference is with the likes of DUET ((DUE)), a stock that stands out in terms of the yield premium that's on offer.
 

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article 3 months old

More Power For ERM

-Increased focus on generation
-Plan to bid for MacGen assets
-Company transformation potential

 

By Eva Brocklehurst

ERM Power ((EPW)) has mopped up the minority interest in the Oakey power station and will repay the operation's debt. Full ownership makes life simpler for the power retailer and, despite the expensive price, enables faster utilisation of tax losses and the absorption of Oakey's franking credit balance. Brokers envisage the acquisition, and the announcement that ERM will take part in the bidding for Macquarie Generation assets, puts the company on a path to becoming the fourth largest vertically integrated power provider in the Australian market.

ERM has both power generation and retail electricity assets and is the fourth largest retailer of industrial electricity in Australia. Besides Oakey, it also has a majority stake in Neerabup power station, on the outskirts of Perth, Western Australia. It also has a small gas exploration business. The full acquisition of Oakey, located in the Darling Downs, Queensland, was logical, in Macquarie's opinion. The station is close to the Roma-Brisbane gas pipeline and a number of coal seam gas fields.The price including debt is $72.4m. This may look expensive, being at a 50% premium to previous prices, but Macquarie believes it's justified by the cash flow enhancement. Up until now the income at Oakey was passive, with the majority of the revenue coming from a contract with AGL Energy ((AGK)), which expires December 2014. Now, Oakey is expected to re-contract at least 50% of capacity to ERM's retail arm.

UBS sees more upside than downside for FY15 earnings from the acquisition, but the key to upside is how Oakey is employed after the end of the AGL contract. One aspect, noted by CIMB, is that Oakey, being a peaking power station, has a low annual usage factor. It only operates in times of peak electricity demand. No major maintenance is planned this decade and the useful life at completion of the AGL offtake agreement is likely to be significant. Furthermore, it operates on either gas or diesel, providing flexibility. Yet, given the uncertainty over the demand outlook, CIMB has factored in no upside from re-contracting. Peaking stations earn a return by providing an insurance to power retailers. Macquarie expects that, based on forecast demand for gas in 2015-2018, Oakey is unlikely to be cranked up at power prices below $160/MWhr. The falling electricity demand across the market means the outlook is somewhat challenging, in the broker's view.

The earnings-per-share outcome from the acquisition is likely to be mixed but CIMB expects strong growth in free cash flow, with Oakey no longer amortising outstanding debt and cash tax leakage reduced by the inclusion of the power station in the ERM group. The broker expect this cash to be redeployed in retail sales. Upside is expected to come from share gains in the small-medium enterprise market, the possible de-merger of the gas business and the involvement in the privatisation process of the NSW generation assets.

ERM has confirmed it will engage in the NSW privatisation process and bid for the MacGen assets, alongside AGL and Shenhua. The potential cost is $1.3-1.9 billion. Even via a joint venture that amount is intimidating and likely to hamper the company's near-term share price performance, according to Macquarie. The timetable for final bids looks to be late January. UBS considers such an acquisition, if achieved, would transform ERM. Hence, the broker has revamped valuation models for the company, splitting the power generation from the rest of the business.

Macquarie observes that ERM's interest in these MacGen coal fired power stations comes because of the power surplus it would provide to the group, particularly in NSW. To date, ERM has base and peaking power solely acquired through financial products. Macquarie notes, being short on power has been an advantage when base load power prices are falling. ERM has been able to rapidly grow market share by offering power to customers with limited financial risk. Nevertheless, Macquarie also considers there's a real risk that the company's retail business valuation is overwhelmed by the focus on power production. All up, the size of the investment in MacGen is too large and Macquarie thinks a JV is the most likely way it will pan out, if successful. UBS suggests investors should wait and see how serious a contender ERM is and how it intends to finance such an acquisition.

On the FNArena database ERM Power has one Buy rating and two Hold. The consensus price target is $2.82, suggesting 9.9% upside to the last share price. The dividend yield on FY14 forecasts is 4.5% and for FY15 it is 5.1%.
 

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article 3 months old

The Heat Is On Origin And AGL

-FY14 forecasts subdued
-Gas demand falls
-Churn and discounting ease
-Benefits in FY15 expected


By Eva Brocklehurst

The two major retailers of gas and electricity in Australia remain despondent. They've had trouble growing business in a market that's been the subject of aggressive price discounting over the past year or so. A warm winter has now affected them by reducing demand for heating, particularly gas. With a hot summer being predicted some clawing back of earnings may be possible as the populace rushes to turn on air conditioning but that's not expected to compensate much.

AGL Energy ((AGK)) and Origin Energy ((ORG)) have both pointed to the dampening effects of the warm winter on FY14 earnings forecasts. Origin declined to make a specific forecast at the AGM but noted that the lagged effects of discounting in FY13 would also delay earnings recovery. AGL's guidance suggests a flat year, with underlying profit forecast in the range of $560-610m. At the lower end of the forecast that's a decline year-on-year around 4.3% while at the upper end it's growth of around 4.2%.

Even with a recovery in electricity demand in summer UBS thinks it won't offset the low consumption of gas during the winter. The broker believes the step down in guidance was driven by lower gas demand, not so much electricity. Both companies have highlighted a surplus gas position which they hope to realise value from by selling into the LNG market. Macquarie expects the earnings impact of AGL's surplus gas in Queensland will more than offset the drag from the loss of the carbon tax benefit - in FY15. For Origin APLNG was the positive story. Origin, which has a 37.5% interest in the venture, reported the project on budget and on schedule. Macquarie notes the risks around the project are starting to diminish with upstream facilities now 50% complete and downstream at 54%. Again, it's not a short-term positive.

Aside from the vagaries of the weather there are other concerns about FY14. Competition for market share remains strong and the margin deterioration that was a feature of FY13 is unlikely to diminish, in JP Morgan's opinion. Benefits of reduced discounting are now expected to take until FY15 to be realised through earnings. BA-Merrill Lynch has made the positive observation that industry churn has slowed, with NSW down to 15% from 18% in FY13. Also, discounts are 10-12% off the regulated tariff against being up to 25% off the tariff a year ago, but they're still there.

Macquarie observes that the variance in AGL's guidance from consensus expectations hinged on the pace of recovery in the electricity markets. The consensus factored in a more optimistic timing. Additionally, in Queensland, the company will benefit from better regulated recovery on costs. Credit Suisse notes, consistent with its surveys, discounting may be easing, but more so in NSW. In Victoria it remains elevated. The broker is also guarded regarding competitive behaviour. Door knocking campaigns may have ceased but other online forms of aggressive and lower-margin customer acquisition are gaining popularity. UBS suspects the acquisition of Australian Power & Gas is likely to end the discounting wars in NSW as AGL has now hit customer number targets. 

The AGMs confirmed Deutsche Bank's suspicions that FY14 will be subdued, but broker believes the drivers of growth for the two companies are materially different. Origin's earnings should improve because of the absence of transmission constraints in Queensland, which affected the FY13 result, as well as a full-year contribution from the Mortlake power station and lower churn in Victoria. AGL's earnings will be driven by a full year contribution from the Macarthur wind farm, improved retail tariffs in Queensland and lower churn in Victoria.

With Origin, Macquarie believes the company avoided giving specific guidance because it lacks confidence in FY14 outlook. The steep discounting has crippled earnings and a rebound is not expected until FY15. One uncertainty for FY15 is the deregulation process in NSW. Origin will be asked to provide a discount to the regulated price. Macquarie estimates a 5% discount could cost $21-28m after tax. CIMB was also unsettled by the lack of detail in Origin's outlook. The company may have noted some improving trends but the decision not to provide guidance leaves the broker concerned abut the sustainability of improvements in the short term. Further afield, with potential retail price deregulation form 2015, upside from more rational competition and improved earnings in the gas business the outlook is considerably brighter for Origin.

UBS is of the mindset that retail earnings disappointment is now priced in. Falling churn rates, scaled-back discounts and increasing retail prices are all positive signs for the industry. This should allow retailers to recover margins lost in the churn battle earlier this year. Discounted contracts are lengthy and the broker does not expect meaningful favourable financial impact ... until FY15. 

The FNArena database shows three Buy and three Hold or equivalent ratings for AGL. A consensus target price of $16.33 suggests 6% upside form Friday's closing price. Origin shows three Buy and five Hold. A consensus target of $14.64 suggests fair value.
 

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article 3 months old

Chasing Infrastructure And Utilities For Yield

- Brokers favour Infrastructure and Utilities for yield
- Transurban well liked, Aurizon and Qube also feature
- Goldman Sachs has four rules of thumb for picking yield plays
- UBS likes Origin best


By Andrew Nelson

The "chasing yield" theme carried on in a healthy fashion through April. For the most part, investors chased Infrastructure and Utilities plays, seeing a number of stocks from both spaces outperform the broader market over last month.

This has continued to play out despite declining yields (yields fall as prices rise). A basket of stocks comprised of Transurban ((TCL)), Sydney Airport ((SYD)), DUET ((DUE)), Spark Infrastructure ((SKI)), SP Ausnet ((SPN) and APA ((APA)) have seen yields pull back to 6.2% from 7.5% over the past year, reports BA-Merrill Lynch.

The broker also points out that the best piece of evidence for this sustained level of yield appetite is Envestra ((ENV)) and its share placement last month. The company was hoping to pick up $100m and ended up walking away oversubscribed, pocketing some $130m.

Transurban disappointed at last month’s AGM, revealing the total cost of the M2 project was going to come in $90m, or 16% higher because of scope increases. Despite this seemingly unfavourable news, especially given the current capex-paranoid world, the share price nonetheless pushed higher.

Now what could convince investors in such a capital heavy company to buy more shares when a major project is not running to plan? Simple. All that was needed was the reiteration of the dividend growth story. The broker estimates TCL’s div will post an average of around 9% per year growth for the next five years.

There was some good earnings news to support the dividend story, so yield didn’t carry the load alone. The company also still expects the M2 widening to generate 16% traffic uplift, while March quarter traffic was good enough. CityLink traffic was up 2.6% and a little ahead of Merrills' forecast, while M2 traffic was up 2.5%, although still short of Merrills' 3.5%. All up, the broker expects to see good growth, driven by steady increases in traffic and tolls.

The broker reports most stocks in the sector actually still boast decent growth prospects over the next 3-years. Asciano ((AIO)) is expected to benefit from new grain and coal contracts. There’s a bit less certainty with Aurizon ((AZJ)), as growth needs to be supported by contract re-pricing and capex on regulated networks.

The broker likes Spark Infrastructure and SP Ausnet ((SPN)) amongst the regulated utilities given some fairly attractive multiples, while APA Group is simply too expensive. All up, however, BA-Merrill Lynch expects Transurban, Aurizon and Qube Logistics ((QUB)) to enjoy the strongest 5-year average earnings growth and if you add in Asciano, you’ve got the stocks the broker thinks are offering the best value in the market as well.

Goldman Sachs also had a look at the yield theme playing out in the infrastructure and utilities sector to try to get a handle on the factors that have historically been the best indicators of future risk-adjusted returns. The broker had three key pieces of advice to impart after looking at the numbers from FY00-12.

The first piece of advice is that valuation-based stock selection tends to work. The broker had fourteen data points that it compared and eleven indicated a positive alpha curve over the period. What’s more, many of those metrics that did generate a positive return actually booked compound returns of better than 10% per year.

The next thing the broker noticed was that picking stocks based on distribution yield combined with growth historically generated ever stronger risk-adjusted performance. The broker notes this method yielded compounded average returns of better than 23% a year for the top 25% of stocks and a negative 4% for the bottom quartile of stocks.

The last lesson the broker wanted to impart was that stock selection based on price to discounted cash flow, free cash flow yield and cash return on capital invested tended to generate strong risk adjusted returns.

Across the infrastructure and utilities sector, Goldman Sachs notes Spark Infrastructure and Sydney Airport offer the highest dividend yields. Spark, Australian Infrastructure ((AIX)) and Transurban offer the best forecast dividend per share (DPS) growth on current estimates.

UBS also thinks the utilities make for good choices for yield focused investors, with network utilities offering some of highest yields in the market. The broker notes Origin Energy ((ORG)) and Envestra offer some of the highest total returns.

The broker has broken down the utilities into two groups. The first it calls the high DPS growth average yield basket. These stocks include Origin, Transurban, Envestra and Sydney Airport. The second group has offered what UBS calls a “turbo yield”, while still regularly offering normal DPS growth. These stocks include Spark Infrastructure, SP Ausnet, DUET, Stockland ((SGP)) and CFS Retail ((CFX)).

UBS’ top pick, however, is Origin, which, although the broker points out DUET’S 6.8% yield is also quite attractive and DPS coverage near term is solid compared to peers.
 

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article 3 months old

AGL Powers On

-Solid interim result
-Competitor beat in retail
-Limited discounting a plus
-Loy Yang A robust contribution


By Eva Brocklehurst

Brokers gave AGL Energy ((AGK)) the thumbs up after the interim results. The electricity and gas utility impressed with stable earnings and margin improvement as well as customer wins.

Retail provided the best outcome for several brokers with AGL clearly in front of competitors, gaining customers and maintaining margins. AGL has stated it will cease the door knocking customer acquisition strategy in NSW and Victoria, believing a better margin outcome is obtained through re-investing in winning back customers. Credit Suisse is not so sure and will be looking to confirm the margin outcome has been maintained in the second half.

Macquarie highlighted the gross profit increase of 18% in electricity against an average price increase of 22% per megawatt hour and revenue increase of 26%. The broker notes only a limited amount of the increase was given away through discounting, despite the intense competition in the market place. The headline result for retail appeared weak but this reflected timing of carbon price billing and changes to transfer pricing. Credit Suisse expects this will be recovered with a weighting to the second half.

On the merchant side, brokers welcomed the robust contribution from AGL's recently acquired Loy Yang A power station. Credit Suisse estimates Loy Yang A contributed around $182m to the result and this was a respectable outcome given the hedge book pressures experienced by other retailers. On the matter of the hedge book, Deutsche Bank finds the company has learned from past mistakes. Recent high electricity prices in Queensland from weather events and transmission constraints have affected profitability across the sector but AGL's exposure is muted. The company anticipates an adverse impact of around $10m (pre-tax) which highlights the sound positioning of the electricity hedge book. Deutsche Bank noted AGL suffered a profit downgrade in FY11 from similar issues with Cyclone Yasi and has adjusted its hedge book accordingly.

AGL's gas contracting position is a source of concern for Deutsche Bank. The contract position (from the Cooper Basin and offshore Victorian contracts) falls from around 250PJ to 80PJ across 2017-18. Increased upstream activity can mitigate this but, with increased regulation of the CSG industry, the potential exposure to higher third party gas prices is a source of risk, the broker maintains. For Credit Suisse too this is a concern, noting management is relying on this gas shortfall to come from contracts with Victorian producers given the constraints in NSW.

For Macquarie, uncertainty will come later in FY16 when soft carbon and non-carbon prices weaken earnings. Here, gas will be the key to to profit growth as the underlying price increases. In the meantime, gas is a frustrating business. The NSW CSG decision process remains fraught. Macquarie notes the Gloucester project will now take one more year than was factored in and, while only minor additional approvals are needed, this is a sensitive issue and there is risk with further delays.

The NSW zoning plans, if implemented, mean AGL's Hunter and Camden North projects would not proceed. Gloucester has some wells within 2km of residences but will go ahead as approvals have been granted at both state and federal levels. The company has flagged a writedown of around $250 million if the NSW government's proposal to restrict CSG activity goes ahead. Macquarie notes AGL expects to keep the licences and, if CSG is demonstrated to be safe, the projects could resume. Most brokers attach limited value to the gas portfolio so this uncertainty has not impacted the share price severely to date.

The interim dividend of 30c came through as most expected. Management highlighted a progressive policy which should produce steady growth but Macquarie notes, whilst in the investment phase in merchant and upstream gas, there was no consideration of a step change in the dividend. Credit Suisse found the dividend below its expected 31c but the cash flow profile should support upside in the second half and the broker forecasts a final dividend of 32c.

On the FNArena database the consensus dividend yield on FY14 forecasts it is 4.2%. The price targets range from $15.70 to $18.00. Deutsche Bank has the top target price and a Buy rating, finding the stock a strong performer in a challenging environment. The consensus target price is $16.66, giving 4.8% upside to yesterday's closing share price. There are no Sell ratings for AGL on the database just three Hold and four Buy, underpinning the stock's solid characteristics.
 

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article 3 months old

Australian Stocks: What Happened Today?

By Max Ludowici, Equities & Derivatives Advisor, 708 Capital

The scoreboard:

-          The ASX200 closed down 10 points or 0.23% to 4623

-          The AUD fell sharply lower at midday.. Currently reading 1.0451 vs the USD

-          Total volume for the day was $8.3B. Less the influence of premarket options exercise ($3.3) gives a real volume figure of $5B.

It was a rollercoaster ride on the final major trading day for the year as the ASX reversed early gains at midday after an 11th hour vote was pulled by House of Representatives speaker John Boehner who was unable to muster majority support  to avert a possible fiscal cliff disaster.  The vote was supposed to extend Bush era tax cuts on incomes below $1m and allow higher tax rates for incomes above $1m. Boehner and Obama remain at loggerheads over the threshold at which the tax hikes will come into effect. Obama wants higher taxes on income above $400,000 where Boehner remained fixed on only agreeing to increases above $1m.

The market is all too aware that time is running out to resolve the crisis as most politicians will take holiday from today. Our market jagged 40 points lower on the news before financials and defensives regained traction and slowed the fall in the final two hours of trade. The news sent DOW futures plunging 220 points on the failed vote and remained down around 200 for most of our session.

The finale of this soap opera is anyone’s guess really. The market has a nasty habit on ‘selling the fact’ so perhaps a fall in the US market is likely even if a resolution is reached before the year end. We do know that there won’t be another House of Reps vote before Christmas so any immediate resolution remains up to Senate leader Harry Reid and President Obama. It looks as though the market is in for a good old country and western standoff. Perhaps the pollies have set the market up for one of the greatest bull traps in history. The way the US futures were looking most of the day, Iam not sure why Aussie market thinks they’re only bluffing?

If we put this noise to the side, the GDP news out of the US overnight and the reason for our market’s rise early on was due to a shock upward revision in 3Q GDP in the US from 2.7% to 3.1%.  Existing home sales also rose 5.9% in November from October, the biggest jump since 2009 and in contrast with analyst expectations of a rise of 2.3%. Both data sets are genuinely encouraging and illustrate a US economy genuinely in uptrend.

Bring on 2013, as a US economy hitting its straps and a centralised communist government willing to throw seemingly unlimited dollars on the world’s second biggest economy hopefully make the lingering GFC of ‘07 and Euro Crisis of ‘12 a distant memory.

Cliff uncertainty drove our market lower but saw cyclicals take the brunt of the fall with defensives showing good resilience. Westpac Bank ((WBC)) Commonwealth Bank ((CBA)) and ANZ Bank ((ANZ)) all showed gains of between 0.5-1%.

The big miners were the largest drag on the market. Rio Tinto ((RIO)) falling 0.90% and BHP Billiton ((BHP)) down 0.92%.

Gold struggled again today as it took another substantial hit overnight and continued slide throughout our session to $1641oz. (current pricing). Newcrest Mining ((NCM)) fell 2 cents to $22.47 and closing in on 3 year lows.

Those who remember the little animal chocolate, Yowie ((YOW)) will be pleased to hear it’s about to hit shelves again with a new and improved (child friendly) design and new listing on the ASX. YOW hit the boards today up 19,400% (reconstructed) as it unveiled a new US based production facility and a new confectionary range due out in Q1 2013. Hooray!

DOW futures are pointing to a disastrously weaker opening, currently down 195 points
 

(For a more comprehensive summary of last night’s market action see FNArena’s Overnight Report.)

This article produced at the request of and is published by FNArena with the expressed permission of 708 Capital.

708 Capital is a full service stockbroking and investment advisory firm. 708 offers investment and market advice to high-net-worth Private and Institutional clients in Australia and across the globe. 708's extensive network of contacts gives its clients exclusive access to ground-level fundraising opportunities and new company listings in a variety of small and large cap ASX listed companies. 708 has a longstanding track record of generating exceptional returns for its clients. Click here 708capital.com.au/contact-us/ for a no costconsultation and portfolioreview or to learn more visit www.708capital.com.au. Note: 708 Capital offers wealth management services for Sophisticated and Wholesale Investors only. We can only assist investors who are classified as Sophisticated Investors or have verified assets over AUD$2.5m.

708capital is a holder of AFSL. No. 386279

IMPORTANT DISCLAIMER - THIS MAY AFFECT YOUR LEGAL RIGHTS:

This document is intended to provide general securities advice only, and has been prepared without taking account of your objectives, financial situation or needs and therefore before acting on advice contained in this document you should consider its appropriateness having regard to your objectives, financial situation and needs. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.

Disclosure of Interests: 708capital receives commission from dealing in securities and its authorised representatives, or introducers of business, may directly share in this commission. 708capital and its associates may hold shares in the companies recommended.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Australian Stocks: What Happened Today?

By Max Ludowici, Equities & Derivatives Advisor, 708 Capital

 The scoreboard:

-          The ASX200 closed up 16 points or 0.35% to 4634

-          The AUD broke below 1.05 overnight. Currently reading 1.0479 vs the USD

-          Index and Equity option expiry resulted in $6.4B worth of stock changing hands

Trading on the ASX was surprisingly resilient ahead of the Christmas and New Year break following on from a nervous session offshore as concerns surrounding the Fiscal Cliff weighed on sentiment. Other Asian markets were weaker across the board in today’s session following on from the US session which ended in the red as investors became increasingly pessimistic that a budgetary deal would be reached in time. Republican House speaker John Boehner spooked markets by declaring he would only approve legislation that protected the current income tax rates for Americans earning less than $1m per year.

Strong gains in the defensives offset mild profit taking in the miners as investors appeared unperturbed by the slower trading environment next week.  

Qantas Airways ((QAN)) and Emirates won approval from Australian competition regulators today for their proposed partnership overcoming the biggest hurdle the two companies faces in sealing their alliance. Though the determination as only in draft form, the ACCC announced it had concern that traffic between Australia and New Zealand would be neglected and that the airlines must agree to maintaining minimum flight capacity on the Trans-Tasman route. In other ACCC news, Carsales.com’s ((CRZ)) proposed takeover of the Trading post website was blocked by regulators as it was determined to reduce competition in the online car classifieds market. QAN closed flat at $1.46, CRZ closed down 1.2% to $7.49.

It was hardly earth shattering news but our economic hero Wayne Swan said the federal budget was unlikely to be in surplus by end of this fiscal year breaking the market’s nice uptrend and pushing the market beneath its highs.

Miners BHP Billiton ((BHP)) and Rio Tinto ((RIO)) closed lower down 0.05% and 0.62% respectively. Fortescue Metals ((FMG)) lost 3.43% to close at $4.50.

Dexus Property ((DXS)) closed up 4.5% to $1.055 following an announcement that It had sold the majority of its industrial assets in the US for $560m above their current value.

ANZ Bank ((ANZ)) gained 0.65% to $24.80 and Westpac Bank ((WBC)) put on 0.66% to $25.97.

DOW futures are pointing to a sharply negative opening currently reading down 40 points
 

(For a more comprehensive summary of last night’s market action see FNArena’s Overnight Report.)


This article produced at the request of and is published by FNArena with the expressed permission of 708 Capital.

708 Capital is a full service stockbroking and investment advisory firm. 708 offers investment and market advice to high-net-worth Private and Institutional clients in Australia and across the globe. 708's extensive network of contacts gives its clients exclusive access to ground-level fundraising opportunities and new company listings in a variety of small and large cap ASX listed companies. 708 has a longstanding track record of generating exceptional returns for its clients. Click here 708capital.com.au/contact-us/ for a no costconsultation and portfolioreview or to learn more visit www.708capital.com.au. Note: 708 Capital offers wealth management services for Sophisticated and Wholesale Investors only. We can only assist investors who are classified as Sophisticated Investors or have verified assets over AUD$2.5m.

708capital is a holder of AFSL. No. 386279

IMPORTANT DISCLAIMER - THIS MAY AFFECT YOUR LEGAL RIGHTS:

This document is intended to provide general securities advice only, and has been prepared without taking account of your objectives, financial situation or needs and therefore before acting on advice contained in this document you should consider its appropriateness having regard to your objectives, financial situation and needs. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.

Disclosure of Interests: 708capital receives commission from dealing in securities and its authorised representatives, or introducers of business, may directly share in this commission. 708capital and its associates may hold shares in the companies recommended.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Australian Stocks: What Happened Today?

By Max Ludowici, Equities & Derivatives Advisor, 708 Capital

 

The scoreboard:

-          The ASX200 hit a 17-month high intraday to close up 21 points or 0.5% to 4595

-          The AUD is still holding above 1.05. Currently reading 1.054 vs the USD

-          Total volumes were strong at $4.8B despite many brokers and dealers already taking holidays.

Aussies stocks rose strongly on Tuesday closely tracking Wall Street’s session as positive signs from the US toward a fiscal cliff resolution inspired confidence in investors. A 45 minute meeting between Republican House Speaker, John Boehner and president Obama, the contents of which isn’t even known, was enough to get punters believing progress was being made. Boehner on Friday said he may support increasing income tax on those earning more than US$1m per year and this was likely the main topic of conversation as Republican’s are become increasingly conciliatory as they push for a resolution before the new year.

Iron Ore’s stellar run didn’t slow overnight and this was the big supporting factor for our market over the day. 62% Fe on the Spot market was up another 2.2% overnight to $132.20 a metric ton, a 50% jump from its low 6 months ago. The rise augers well for our resources industry and economy at large given our leverage to commodities and is pointing to a stronger 2013 for our market. Mining services companies are starting to move strongly with the likes of Bradken ((BKN)) up 10% in a week – closing today’s session at $5.28. Other notable rises included NRW holdings ((NWH)) up 7.7% in today’s trade.

The obvious beneficiaries of the continued strength in iron ore had strong moves over the day with Rio Tinto ((RIO)), BHP Billiton ((BHP)) and Atlas Iron ((AGO)) up 0.8%, 1.9%, 5.2% respectively. Fortescue was another standout, rising another 2.9% to $4.60.

The election of the pro-growth Liberal Democratic party in Japan over the weekend has pushed uranium stocks globally through the roof as the new party affirmed their support for the Nuclear power industry in Japan. Paladin Energy ((PDN)) rose 12.4%, Energy Resources Australia ((ERA)) also moved strongly, jumping 7.2%

DOW futures are pointing to another positive opening, currently up 36 points 
 

(For a more comprehensive summary of last night’s market action see FNArena’s Overnight Report.)

 

This article produced at the request of and is published by FNArena with the expressed permission of 708 Capital.

708 Capital is a full service stockbroking and investment advisory firm. 708 offers investment and market advice to high-net-worth Private and Institutional clients in Australia and across the globe. 708's extensive network of contacts gives its clients exclusive access to ground-level fundraising opportunities and new company listings in a variety of small and large cap ASX listed companies. 708 has a longstanding track record of generating exceptional returns for its clients. Click here 708capital.com.au/contact-us/ for a no costconsultation and portfolioreview or to learn more visit www.708capital.com.au. Note: 708 Capital offers wealth management services for Sophisticated and Wholesale Investors only. We can only assist investors who are classified as Sophisticated Investors or have verified assets over AUD$2.5m.

708capital is a holder of AFSL. No. 386279

IMPORTANT DISCLAIMER - THIS MAY AFFECT YOUR LEGAL RIGHTS:

This document is intended to provide general securities advice only, and has been prepared without taking account of your objectives, financial situation or needs and therefore before acting on advice contained in this document you should consider its appropriateness having regard to your objectives, financial situation and needs. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.

Disclosure of Interests: 708capital receives commission from dealing in securities and its authorised representatives, or introducers of business, may directly share in this commission. 708capital and its associates may hold shares in the companies recommended.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Weekly Broker Wrap: Slithering Towards The Year Of The Snake

-2013 heralding low growth, low rates
-Risks for domestic cyclical sectors
-Favouring of yield stocks continues
-Improvement seen for US building sector
-Infrastructure unprepared for climate change


By Eva Brocklehurst

For JP Morgan we are slithering towards 2013 - the Year of the Snake. The themes are now very familiar - a world of low growth and ultra-low interest rates. The broker contends that investors are already downbeat on any upside, while falling economic volatility reduces the downside risk. Hence, there's a narrowing in the outlook to one that's quite ordinary.

Locally, JP Morgan sees the economy moving to a riskier phase, as the public and corporate sectors hunker down and export earnings take a jolt. Those bewailing the fact that Australians are not greeting lower interest rates with spending are forgetting constraints of a soft labour market and low appetite for leverage and credit, according to this broker. If rates fall further, as JP Morgan expects, this spells risk for the domestic cyclical sectors, including banks, where the broker has a Sell signal. Mining stocks are given a modest Buy rating, however, more as a relative call rather than outright bullishness. Sentiment on near-term Chinese demand should continue to improve, but longer-term concerns will remain. JP Morgan believes the market has shown a willingness to buy earnings risk, but in cyclical industries with well-defined returns. There is a shortage of candidates and, since this is unlikely to change, the broker has a reasonable weighting to defensives but argues against giving special prominence to yield.

JP Morgan describes the current scenario as 'peace without victory', where world economies and market options have narrowed. A gradual improvement in the US private sector economy - where a large and avoidable fiscal policy error is the main risk of recession, China's soft landing, and a strong stance by the ECB - making it less likely fiscal solvency in the eurozone periphery will fall into critical territory - that's the peace bit. However, upside from the world economy is a long time coming and expectations remain modest. A narrowing distribution of outcomes robs equity markets of strong thematic patterns and, in this broker's summation, turnover. The stocks that do best in this landscape are ones which benefit from a lower cost of equity. That's all the 'victory' bit, folks.

CIMB has formed a grid concept to define stocks where its analyst views diverge from consensus, and the perceived risk is in the same direction. Stocks where the analysts' estimates are above consensus and where they perceive positive risk include Hills Industries ((HIL)), Monadelphous ((MND)), Aristocrat Leisure ((ALL)), Downer EDI ((DOW)), National Australia Bank ((NAB)) and Seven Group ((SVW)). Stocks where the analyst is below consensus and sees further negative risk to earnings are Leighton Holdings ((LEI)), Bendigo and Adelaide Bank ((BEN)), Toll Holdings ((TOL)) and Seek ((SEK)).

Citi notes, in the face of the continuing rally in the Australian equity market -- outperforming global developed markets since they began recovering around mid year -- there seems considerable doubt about the justification. At least for the extent of the market's rise. Some doubters point to earnings downgrades through the AGM season, others to the outperformance of defensive and high yield stocks as raising questions about the sustainability of the rally. Interest rates have mattered, Citi says. Much of the rise in the Australian market has been in tandem with global equities, after the earlier actions by the major central banks played a large part in reducing risks. However, the cuts in interest rates in Australia also look to have contributed to the re-pricing of equities, as they became more attractive for their yield, and Citi points to continued strong performance of the perceived reliable yield stocks as consistent with this view.

Earnings can still improve, Citi maintains. Bidding up equities for yield requires a degree of confidence about market earnings but the continued underperformance of cyclical stocks implies little expectation of any significant earnings upturn. Citi understands this may be some sign that earnings downgrades could be starting to moderate, because of lower interest rates. Indeed, the broker believes that is what commonly happens. The potential for improved earnings growth on the back of lower interest rates seems another justification for the rally, and one that could extend it further.

Burrowing into the market sectors, Credit Suisse conducted a small sample survey of consumer electronics shopping preferences and found some interesting statistics. JB Hi-Fi ((JBH)) was the preferred retailer by a significant margin. Across three of four product categories, more participants indicated they would visit JBH than any other retailer. Shopping preferences contrast with actual price comparisons which show JBH to be relatively expensive. Harvey Norman ((HVN)) and Dick Smith performed poorly on shopping preferences and appeared to require significant improvements to their brand perception. A disparity between shopping preference and price position highlights downside risk to JBH revenue over the medium term, according to the broker.

Another survey from Credit Suisse -- this time the building materials sector in the US was under the microscope. US home prices have climbed for the eighth consecutive month according to the broker's survey of US real estate agents. Pricing was strong across James Hardie's ((JHX)) and Boral's ((BLD)) end market. Widespread home price momentum exhibited over the past nine months points to higher sustained new home construction and renovation activity. A lack of inventory was recently cited as one of the key reasons for pricing pressure, however the shortening of time needed to sell a home also hints at positive pricing, Credit Suisse said. For the two Australian listed companies mentioned, it invokes a re-acceleration in activity in the fist half of 2013. For Hardie, about 65% of volume is exposed to renovation end-markets. The survey also points to continued declines in housing inventory, which can only lead to demand for new homes, a positive aspect for Hardie and Boral. For Hardie, the broker sees upside risk to US fibre cement volumes. However, profitability (margins) could be tempered by a more flexible pricing strategy to gain market share (near-term). Boral may be closer to break-even in the US, according to Credit Suisse, and, whilst not implicit in forecasts,  it could break even by FY14.


Meanwhile, Citi has looked at infrastructure's preparedness, or otherwise, for climate change. The Climate Institute, in conjunction with Westpac, Mirvac and Manidis Roberts, recently published the report "Coming Ready or Not: Managing climate risks to Australia’s infrastructure". Citi notes from the findings that some utilities are better prepared than others. Impacts on property; electricity; road & rail and finance were looked at. For many industries, the  findings show key impacts can be via services and infrastructure that they rely on (eg transport, electricity), rather than necessarily within their own operations. Citi said property was one of the more advanced sectors, with several ASX-listed real estate investment trusts having conducted climate risk assessments. However, the broad conclusion was that most were under-prepared and many, even in high risk industries or with high risk assets, have not conducted climate risk assessments. While businesses may recognise the risk, there is a low level of knowledge about how to respond, Citi said. Risk assessment seemed particularly important for coastal/estuarine assets, geographically dispersed businesses heavily reliant on transport infrastructure, assets at risk from electricity supply disruptions, and long term fixed assets.
 

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