Update on regional banks
The recent round of reporting by the major banks pointed to improving asset quality, partly due to a halt in credit quality deterioration of commercial property exposures. The major banks have generally made comments that commercial property values are now stabilising, even in south-east Queensland, due to improving liquidity. The regional banks have a greater reliance on term deposits as a source of funding compared to the major banks. Reductions in term deposit spreads will be more positive for the regional banks than the major banks given that the regionals have a greater reliance on term deposits. We upgrade our underperform recommendations on SUN and BOQ to BUY. We maintain our BUY recommendation on BEN.
Chinese govt inducing steel production cuts
With mills in China seemingly reluctant to cut production, the government is reportedly starting to use environmental regulations to deliver production cuts by turning the power off to mills that are in breach, particularly smaller ones. Iron ore prices rose 4.2% to $125.5/t, anecdotes reporting mills are further lowering stockpiles. Port stocks rose 0.8Mt to 69Mt. Excluding stainless, scrap prices fell with East Asia Heavy Melt off 0.7% to US$382.5/t and Chinese prices down about the same. European prices fell 2.5%, Turkish 3.9%, US and UK falling as much as 6.7% and 9.8% respectively. Hard coking coal prices generally fell this week, with Peak Downs finishing 2.1% lower at US$142.25/t and low vol PCI fell 1.3% to US$111/t. Semi-soft rose 0.5% to US$102/t. US crude steel production fell 0.2% to 1.88 million short tons in the week ending May 4, with mill capacity utilization of 78.5%. Chinese production for the first ten days of May had not been released. Of the 211 steel/steel-related prices monitored, 17 rose and 100 fell. LME billet futures spreads dominated prices increases, with actual steel prices typically falling across the board, driven by falling scrap and overcapacity.
AWE: Yolla Production Increase
We have been monitoring the BassGas asset in detail for some time now.....
GNC: 1H earnings, initial thoughts
Revenue up 40% to A$2.36B, above Bloomberg consensus A$2.08B. EBITDA down 3% to A$227M ($235M pcp), above BBY (A$186M), but below consensus A$240M. Underlying NPAT down 11% to A$109M, above BBY (A$73M), but below consensus A$112M. Reported NPAT down 34% to A$88M, due to A$20M charge for acquisition and integration of oils business, and responding to ADM t/o proposal. Total dividend 25¢ - Interim dividend 20¢ and 5¢ special dividend. The 25¢ dividend forms part of the total A$1.00/sh dividend payable as part of the ADM t/o bid. The share price will be driven by the ADM t/o bid of A$12.20/sh plus A$1.00ff special dividend, rather than underlying performance. With the stock trading at a modest 4% discount to the cash bid, and 7% discount to A$13.62 grossed up value, shareholders should consider selling on market.
Shine Corporation IPO
Shine (SHJ) has opened around $1.40 which places it on a similar multiple to Slater & Gordon. We believe Slaters is a much better business and would take the view that you should sell Shine at these levels and switch into slaters. Our DCF valuation is $1.20. It is hard to push up the DCF valuation unless we push up the EBITDA margin given the company is so reliant on working capital to fund growth.
QBE: Impact of a Strong US$
The share price has rallied sharply partially because of the strength of the USD (QBE has 40% of its earnings coming out of the US). At the current share price of $15.06, the share price is factoring in an 11% insurance margin along with upgrades in the currency. BBY believes there has been no significant change in the insurance margin at all and we still forecast a margin of 9%. We maintain our UNDERPERFORM with a 12 month share price target of A$10.00/sh. If there are no major catastrophe events forthcoming, our insurance margin may need to be adjusted.
New Float: Shine Corporation
Shine is expected to list on the ASX on 15 May 2013. The group operates on a ‘speculative fee basis’ which means fees are only collectable if it successfully wins the case. This payment arrangement means Shine needs to be rigorous when selecting cases to pursue to ensure a high success rate (historically 98%). Generally no repeat clients, brand reputation and successful business writers are required to drive the business. Revenue growth should outpace expenses in the longer term and EBITDA margins should be sustainable at current levels and may move higher in the coming years. The major sensitivities for the company are recoverability rates which are driven by winning cases, retaining and attracting fee-writing employees and their respective productivity and maintaining and or shortening the cash collection cycle.
Karoon Gas: Bilby-1 Update
This is a good result but too early to make definitive comments on size.
SIP: High dividand payout not sustainable long term
SIP’s 90% dividend payout ratio is not sustainable in the long term due to high working capital requirement.
Telstra: Spectrum auction and rate cut both positive
Two developments occurred today that are positive for Telstra Corporation and its shareholders.