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Date Posted: 16:00:47 05/16/10 Sun
Author: May 14th 2010==nervous investors
Subject: European shares ended a tumultuous week sharply lower on Friday,
In reply to: biggest point percentage gain week ended March 5. 's message, "Monday 17 May 2010==large number of S&P 500 e-mini contracts on May 6" on 15:58:47 05/16/10 Sun

European shares ended a tumultuous week sharply lower on Friday, with nervous investors pulling out of banks and miners on renewed fears over sovereign debt and slowing growth.

The Stoxx Europe 600 index dropped 3.5% to end at 248.37, sharply cutting into gains earlier in the week following the announcement of a EUR750bn joint European Union-IMF aid package for vulnerable members of the euro zone.

Greece, Portugal, Ireland and Spain have committed to take steps to cut debt but the first negative Spanish core consumer price inflation data reading on record raised the prospect that those measures won't be enough, in turn sparking fresh worries about economic growth.

Spain's core inflation rate turned negative in April, falling 0.1% and sparking worries over potential deflation and stalling growth.

Banks exposed to the Spanish economy were weak, with Santander shares down 9.8% and BBVA shares down 8.4%, pulling the Spanish Ibex 35 index down 7% to 9,273.90.

French banks are some of the largest holders of peripheral European government debt and fell sharply on Friday, with Societe Generale down 8.6%.

In one more hit for lenders, the New York Attorney General is carrying out an investigation into the role of lenders and credit rating agencies in mortgage-bond deals.

European banks reportedly under investigation include Credit Agricole, down 6.4%, Deutsche Bank, down 4.1%; Credit Suisse, down 4%; and UBS, down 3.7%.

Of the main regional benchmarks, the French CAC-40 index fell 4.6% to 3,560.36. The UK FTSE 100 index dropped 3.1% to 5,262.85 and the German DAX index lost 3.1% to 6,056.71.

On the FTSE 100, Rio Tinto slid 188.00 pence (5.53%) to 3,220.93 pence and BHP Billiton slipped 91.00 pence (4.54%) to 1,914.50 pence.

Most Asian markets declined on Friday, with Japanese shares pulling back as Sony Corp.'s poor earnings outlook and the euro's weakness against the yen damped sentiment toward exporters.

Japan's Nikkei 225 fell 1.5%, China's Shanghai Composite gave up 0.5% and Hong Kong's Hang Seng Index lost 1.4%.

New Zealand shares ended slightly weaker in a dull session, with brokers saying the market had put in a reasonable performance given the selling pressure on the neighbouring Australian bourse and the decline on Wall Street overnight. The NZX-50 Index closed off 0.2%, or 4.80 points, at 3,191.01 gaining 1.4% over the week.

Base metals were dragged sharply lower on the London Metal Exchange by the euro's slide against the US dollar. Aluminium fell $85 (3.92%) to $2,085 while copper weakened $260 (3.64%) to $6,880 and nickel dropped $1,250 (5.48%) to $21,575. Zinc shed $120 (5.56%) to $2,040 and lead lost $145 (7.00%) to $1,925. Comex copper was last quoted at 313.40 US cents per pound.

Gold prices ended lower after reaching new highs as investors continued to pile into assets perceived to be safe amid broad market turmoil. Spot gold was last quoted at $1,233.90. Comex gold futures slipped $1.40 (0.11%) to $1,227.80. Spot silver was last quoted at $19.25.

Crude oil slid to a fresh three-month low near $71 a barrel, as volatility across markets magnified existing concerns about the buildup of supplies. West Texas Intermediate was last quoted at US$71.61 per barrel.

At 07:45 a.m. (AET) the US dollar was quoted at 0.8094 euros, 92.30 yen, 1.130 AUD and 68.84 pence.

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Australian Market Report -Shares Tipped Lower on Offshore Falls
Local shares are tipped to open lower after offshore markets took a battering on Friday.

Ahead of the local open the June SPI futures were 79 points (1.70%) lower at 4,531.

Market and Company News | Friday 14 May 2010 - close

Downer EDI (DOW) and Fortescue Metals (FMG)

Downer said it was awarded preferred tender status on a six-year contract with Fortescue for mining services at Fortescue's $3bn Christmas Creek iron ore operation in Western Australia. Contract negotiations are expected to be finalised in June, with project commencement scheduled for July, Downer said. DOW firmed 3 cents (0.45%) to $6.77. FMG fell 4 cents (0.92%) to $4.31.

Santos (STO)

Santos said Fluor Australia Pty Ltd has been picked as the preferred contractor to perform engineering, procurement and construction of the upstream facilities part of its Gladstone liquefied natural gas joint venture with Petronas. Santos said it expects to award the contract subject to a final investment decision on the project, expected later this year. In the interim, Santos said it will extend the contract to include early works activities worth about $50m. STO fell 3 cents (0.23%) to $13.12.

Coca-Cola Amatil (CCL)

CCL reaffirmed its earnings guidance for the first half of 2010, but said it was too early to provide a full year forecast due to uncertainty over what impact recent interest rate rises and an uncertain global economic outlook would have on consumer spending. The company said it still expects "high-single-digit growth in both EBIT and tax and net profit" for the six months to June 30. CCL added 26 cents (2.37%) to $11.21.

Healthscope (HSP)

Private equity outfits TPG Inc and Carlyle Group LP are said to be behind a $1.74bn takeover bid for Healthscope, a newspaper has reported. Healthscope said it received a $5.50-a-share takeover offer from a private equity consortium. HSP rose 78 cents (17.33%) to $5.28.

Gunns (GNS)

Gunns is going to idle each of its three mills for two or three weeks to reduce inventory levels, the company reported. One mill has already ceased operation, which has also allowed the company to replace its main chipper, while the other two mills will be idled from the end of the month. GNS rose 2 cents (3.19%) to $0.49.

Consolidated Media Holdings (CMJ)

CMJ said that its biggest shareholder, Consolidated Press Holdings, doesn't currently plan to sell any of its shares into the group's planned on-market share buyback. CMJ said that its second-biggest shareholder, Seven Network, hasn't decided whether it will participate in the buyback, but "may decide to do so". CMJ strengthened 1 cent (0.32%) to $3.13.

Companies commencing Ex-Dividend Trading Today (ASX 300):

BT Investment Management Limited

Telecom Corporation of New Zealand Limited

Westpac Banking Corporation

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COMPANY UPDATES FOR Monday 17 May 2010

Recommendations provided by Morningstar. Please read subject to our disclaimer.


Coca-Cola Amatil Limited (CCL) Closing Share Price: 11.210
Update: Solid start to the year
Recommendation: Hold Change: Unchanged
CCL provided a trading update on current business performance and outlook guidance for 1H10. Overall conditions appear solid across the business with Australian operations showing their resilience despite cycling off a strong prior corresponding period.

Australia - Expected to deliver high single digit earnings growth for 1H10. Guidance is for positive volume growth which is strong given the 8% growth experienced in 1Q09. Demand for premium beverages in restaurants and cafes remains subdued but this is offset by better sales in quick-service restaurants & take-home products in the grocery channel.

Two Australian PET bottle in-line blow-fill lines were commissioned at the Northmead manufacturing facility in April with cost savings evident. Food Services are expected to deliver high single digit earnings growth for 1H10.

New Zealand & Fiji - Division expects to deliver low to mid single digit local currency earnings growth for 1H10 despite challenging economic conditions

Indonesia & PNG - Solid start to the year with volume growth up around 10% in 1Q10. This year will mark a significant step up in capital spending in Indonesia in production capacity. The region expects to deliver double digit local currency earnings growth for 1H10.

FY10 Cost of Goods Sold (COGS) is expected to rise by 4-5% on a constant currency basis, excluding Indonesia. This is below previous guidance of 5-6%, mainly due to a mix shift in Australia and efficiency gains. COGS rises will be weighted to 2H10 with a lower increase in 1H10 numbers. FY10 effective tax rate will be 28-29%.

FY10 capex is expected to be within 8-9% of net sales revenue. Net debt will be around $1.8bn at 1H10, down by around $100m since the beginning of the year. CCL confirms no refinancing requirements for the next year.

1H10 guidance is reaffirmed for high single digit growth in both EBIT and NPAT. Our current forecasts assume FY10 NPAT growth just below 11%. 2H10 trading remains uncertain but we think conditions should continue to improve in line with the global economy. Our forecasts and valuation are unchanged for now with a trading outlook for 2H10 due in mid August.


CSR Limited (CSR) Closing Share Price: 1.705
Update: Beats consensus - Outlook cautious but positive
Recommendation: Accumulate Change: Unchanged
The 29% lift in FY10 underlying NPAT to $173.4m is well above consensus, our forecast and an estimated $25m - $30m ahead of guidance. At the1H10 and new issue presentation in late October 2009 guidance was for group EBIT before significant items to be "slightly higher than last year." This guidance was despite a 22% lift in 1H10 EBIT to $215.7m and FY09 EBIT of $320.1m - "slightly higher" became a 14% increase. Clearly management expected a decline in 2H EBIT instead of a 4% improvement. EPS increased from 12.2 to 12.7¢. The better result saw final dividend increased from 1.5¢ to 6.0¢ fully franked. Payment date is 97 days after balance date - lazy payers!

The board is pursuing the creation of two independent businesses focused on Building Products and Sugar (Sucrogen). Discussions with Bright Foods in relation to the non-binding offer for Sucrogen continue.

Better performances by Building Products and Aluminium were responsible for the improved 2H result while Sucrogen was the driving force behind the full year improvement.

Despite the increased capital base the return on equity (ROE) improved from 9.4% to 10.3%. A focus on improving working capital management resulted in a 140% jump in operating cash flow before derivative margin calls. Together with the $375m equity raising, net debt fell $422m to $767m while the gearing ratio - net debt/equity - improved from 75% to 42.2%.

No FY11 guidance was provided but clearly an improvement is expected as Building Products recover. While we anticipate a reasonable recovery we do not see a return to buoyant conditions. Sucrogen's contribution should improve given the favourable forward hedge position and a return to average crop size. A moderate increase from Aluminium is also expected. Property will remain subdued until FY12.

Fair value is unchanged at $1.95.


Healthscope Limited (HSP) Closing Share Price: 5.280
Update: Private equity bids $5.50
Recommendation: Hold Change: Unchanged
HSP has received an indicative, non-binding and confidential proposal to acquire all of the issued capital of Healthscope by scheme of arrangement from a private equity consortium at a price of $5.50 per share.

Private equity must be able to calculate a significant increase in value from managing the assets.

Its options in splitting up the business are constrained by the ACCC which would likely block any further consolidation in private hospitals or pathology.

This reaffirms our confidence in the investment returns available from the private hospital industry and explains the associated uplift in RHC's stock value.

The crown jewels of HSP are its portfolio of private hospitals. We believe these should be valued at a premium earnings multiple to reflect their monopolistic characteristics and building revenues from the ageing population.

We would expect this offer will be rejected by the board of HSP. The risk is private equity fails to make a higher offer and the share price falls back to pre-bid levels.


InvoCare Limited (IVC) Closing Share Price: 6.230
Update: Death rate slows, but business in excellent shape
Recommendation: Hold Change: Unchanged
For the four months to 30 April 2010 Australian funeral volumes fell 1.8%.

In the less significant Cemeteries and Crematoria segment revenue for the four months rose 15.7% against a weak, GFC-impacted pcp.

Following refinancing later this year, the cost of borrowing will rise to 8% plus in FY11, some way above the current c.6.4%.

IVC believes the fall in funeral volumes was due to a retreat in the death rate not market share loss. We expected a slowdown after several periods above the 1.7% average growth rate - the mean reversion we discussed in our last review.

IVC's appropriately high debt means interest rate moves have a quite meaningful impact; a 1% change implying a near 7% impact on NPAT.

We expect earnings to flatten in FY10 and FY11 before resuming steady growth.


Kathmandu Holdings Limited (KMD) Closing Share Price: 1.690
Update: Confirms guidance despite uncertainties
Recommendation: Accumulate Change: Unchanged
KMD confirmed guidance for FY10 EBITDA of NZ$57m - despite acknowledging uncertainty due to the withdrawal of government economic stimulus, rising interest rates, an increasing cost base, a volatile and unpredictable economic environment and the late onset of cool weather.

Following a strong debut with H1 EBITDA and NPAT 20% above prospectus, we expect the full-year result to also beat the Prospectus forecast for EBITDA of NZ$57m and NPAT of NZ$30m. But due to rising levels of uncertainty, both political and economic, and in addition to other headwinds mentioned above, consumers may be a little more cautious than our initial forecasts assumed.

Our FY10 NPAT forecast falls to A$26.4 from A$27.9, still roughly $2m above Prospectus. Fair value falls from $2.15 to $2.08, a little over 13 times FY11 EPS.

The immaturity of many of the stores, which increases the sensitivity of profit to revenue, and the significant sales skew to H2 - around 60% - make full-year profit relatively less predictable. These may fall when the stock has a longer track record.


Sigma Pharmaceuticals Limited (SIP) Closing Share Price: 0.350
Update: Outlook bleak with further cuts to drug funding
Recommendation: Sell/Avoid Change: Downgrade
The government's new agreement with industry group Medicines Australia targets $1.9bn in drug price cuts over the next five years. The further price reductions will impact both patented and generic drugs. We understand there will also be cuts to Community Service Obligation payments made to wholesalers. These payments subsidise sub-economic pharmaceutical supply activities to remote regions.

SIP's CFO has resigned. This follows the recent resignation of the CEO.

The company continues to seek ways of reducing debt to comply with loan covenants.

If implemented, the government's proposals will further reduce SIP's margins putting additional pressure on debt servicing.

It is not clear that SIP has saleable assets that will realize sufficient prices to significantly rehabiliate the balance sheet.

A highly discounted equity issue may be necessary.

Given their declining profitability, the ACCC may be more tolerant of a consolidation of wholesalers or at least of some of their cost centres.


AWE Limited (AWE) Closing Share Price: 2.300
Update: AWE to Emerge from 3Q10 Maintenance
Recommendation: Buy Change: Unchanged
Third quarter production fell 23% to 1.1mmboe due to continuing oil decline at Tui in NZ and planned maintenance at BassGas. Sales volumes fell a lesser 14% to 1.2mmboe following draw-down of Tui inventory.

Revenue was only 4% lower on a 12% improved average price of A$65/boe. Stronger pricing reflects the lower proportion of gas to oil, and a slight rise in the oil price to $83/bbl.

Net cash levels dropped 12% to a still healthy $261m. Key factors were lower production, higher maintenance spend and $52m of exploration and development expenditure. The latter includes completion of the Henry/Netherby project, now feeding additional gas into the existing Casino network 8.5km to the south.

During the quarter the Trefoil-2 appraisal well confirmed the size of this BassGas satellite field including reservoir continuity. The initial estimate of proven and probable (2P) recoverable volumes is a solid 195PJ (33mmboe) and 12mmmbls of liquids.

Even accounting for RSPT, the price is at a near 20% discount to fair value and we retain the Buy recommendation. Appeal remains the underpinning and long-lived BassGas and Casino gas project cash cows, quality management, enticing exploration potential and the healthy balance sheet. A sentiment-damaging production profile - in decline since 2H08's 5mmboe highs - might discourage some but is more than priced-in. AWE is no WPL, yet it offers the safety of sustainable cash flows while still being small enough for exploration to count. This makes it surprisingly rare and will ensure interest is maintained.


Oil Search Limited (OSH) Closing Share Price: 5.660
Update: Softer 1Q10 Output no Surprise
Recommendation: Hold Change: Unchanged
Group first quarter production fell a less than expected 10% to 2.0mmboe. Oil output was always forecast to gradually decline due to natural field run-off in the lead up to first LNG sales. In addition to this natural decline, 1Q10 was crimped by well testing, inspection and maintenance activities.

Oil sales plunged a steeper 34% to 1.6mmbls due to poor timing of shipments. The timing appears to have impacted price achievement as well, oil down 5% to US$73.80/bbl despite quarterly average spot at almost US$80/bbl. Revenue fell 34% to US$134m, improved gas price only a partial offset.

This is semi-interesting from a near term cash perspective. But OSH is really all about commercialising gas via LNG and other initiatives. Oil will help fund the LNG future but at $1.35ps, comprises only a one-fifth and shrinking share of our overall valuation.

Our OSH valuation is little changed at $4.70ps, nor our FY10 and FY11 earnings forecasts of 16cps and 15cps respectively. With overseas assets, OSH shares predictably weathered the Resource Super Profits Tax (RSPT) storm better than many ASX listed peers.

We retain our Hold recommendation though OSH remains one of our least favoured emerging LNG exposures. That despite the potential for RSPT to hold up project sanctions for peers in Australia.

We can't get as comfortable with PNG sovereign risk as the market at large appears able to do. We view the PNG highlands as hard with potential for cost blow-outs due to geography and topography. OSH's minority and non-operating status detracts. So too does single project risk. Shareholders must wear declining production and profit for four years prior to first LNG earnings.

Positives are a worthy JV partner and operator in ExxonMobil, valuable gas-associated liquids and the strong balance sheet.





PREVIOUS WEEK'S COMPANY UPDATES

Recommendations provided by Morningstar. Please read subject to our disclaimer.


Friday 14 May 2010


Ansell Limited (ANN)
Update: Raising the bar on protection
Recommendation: Hold Change: Unchanged
Sales and market share growth continue to be underpinned by innovative products, development of new distribution channels and leveraging off existing brands. ANN's release of the Gammex Powder Free Glove with anti-microbial technology (AMT), the world's first of its kind, is a significant advancement.

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  • Re: Monday 17 May 2010 -- Gammex AMT protecthealthcare workers from contamination., 16:02:53 05/16/10 Sun
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