Market Update

Thursday, May 19 2011

The market began to show signs of life yesterday before reports of a downgrade by Moody’s for the banks caused a retreat.  We note there might be some press on the banks but it is of little concern, with the downgraded already well flagged:

  1. It was in line with S+P,
  2. Was already on review for downgrade at Moody’s, and
  3. Aussie bank reliance on wholesale funding has been well flagged.

All the Rating Agencies are now mid AA with stable outlooks for the banks.

In other market views the short term remains hostage to a few issues:

  1. Concerns regarding Chinese inflation impacting resources, and
  2. The strong A$ causing a two speed economy.

The good news is these two issues do not seem compatible.  I still think it is more likely that the A$ will take a breather.   While sentiment has turned negative we are beginning to think the market looks oversold (but I am tentative on this as there is little news flow to drive a bounce at the moment).  We are also keen to avoid value traps among domestic cyclicals whose competitive position is being eroded by the A$ (Bluescope Steel, retailers etc).

On the portfolio we have been working through stock by stock to become comfortable with the outlook for 2012 earnings.  Valuations remain attractive if you are comfortable with the earnings forecasts in the market.

Brambles will have a briefing tomorrow.  We think they are a stock which could have some good news.   The Australian speculated regarding the troubles of their main competitor in the US iGPS.   iGPS have been losing pallets and their customers have had to supplement with white wood pallets.  Their CEO and founder has been moved aside and Walmart and a number of States have banned the carcinogenic that iGPS use to retard fire in their pallets.  It is quite possible that iGPS is losing share now (or will shortly).  The market has revenue growth rates for Brambles of around 5% in 2012.  This is essentially GDP growth rate plus some wins from white wood pallets.  If you add some market share from iGPS and a possible price rise then the growth rate starts to look very attractive (they could be back to double digit growth by the second half of 2012).

Lend Lease will hold a briefing in one week.

The stock has been a little weak on two concerns:

  1. Negative press on their Barangaroo development.  There is unlikely to be much change of any material consequence to the development and so is a non issue.
  2. The Leightons profit downgrade has raised concerns regarding their acquisition of a key competitor.  We note indemnities were put in place to cover six major contracts.  Furthermore the focus by Leightons on profitable growth means Lend Lease is seeing less competitive tendering.

The briefing should be positive:

  •  They have a very good story to tell,
  • There is little risk to profits this year,
  • 2012 will benefit from the Valemus acquisition, further asset sales, and the beginning of the Barangaroo development.
  • 2013 looks better, the next few months could also see further major contract announcements (they are bidding on some major hospital developments in particular).

 

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