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Date Posted: 16:02:53 05/16/10 Sun
Author: Gammex AMT protecthealthcare workers from contamination.
Subject: Re: Monday 17 May 2010
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

Utilising its portfolio of brands and managing latex volatility are ongoing objectives.

Gammex AMT is designed to better protect healthcare workers from contamination. The glove is coated with antibiotics that can kill 99.7% to 99.99% of eight common infectious bacteria in the event of a breach during surgery. The growth of the medical gloves market is driven by improving healthcare systems around the world and an increasing awareness of healthcare workers. Offering a higher level of protection the product should be well received, benefiting healthcare workers by offering greater safety and hospitals by reducing potential compensation costs.

Incoming CEO Magnus Nicolin also reaffirmed the objective of further utilising ANN's brands, by introducing existing brands into new regions and offering its whole portfolio of products to markets where only one segment is currently served.

Dealing with latex volatility is an ongoing challenge. Spot latex prices are currently 65% higher than last year. ANN is focused on reducing its dependence on latex and better managing volatility. Strategies include extending the storage life of latex from six to 12 months, exploring alternative materials and increasing the synthetic content in its product portfolio.

We suspect ANN was able to offset higher material costs in 2H10 through price increases and manufacturing initiatives. Guidance given at the interim result should be met. No change to earnings forecasts or valuation.

Austal Limited (ASB)
Update: Rationalisation of Australian operations
Recommendation: Hold Change: Unchanged
ASB has announced the closure of its Tasmanian operations at Margate from September 2010 due to changed demand for smaller sized vessels. Based on its forecasts of demand for smaller passenger ferries and small patrol boats, ASB believes it can service demand from its Henderson facilities in WA.

With 120 people employed by the Tasmanian shipyard there are likely to be restructuring costs, including redundancies, although ASB did not release any details of such costs.

The announcement also indicates the conditions within the boat building industry remain challenging.

Our forecasts already allow for the difficult environment. No changes to our earnings forecasts or valuation.

Carsales.com Limited (CRZ)
Update: Advertising opportunities for SME's
Recommendation: Hold Change: Unchanged
CEO Greg Roebruck presented at the Macquarie conference. CRZ remains comfortable it will achieve its FY10 EBITDA guidance of $61m.

Many of the big-brand companies are strongly endorsing the benefits of online. Hyundai's marketing boss Oliver Mann is quoted as saying: 'there is no debate, print is dead - at least retail classifieds are dead. Online marketing in all its permutations delivers bigger buyer numbers. So, Hyundai is delivering more budget to online.'

CRZ says it is interested in the accessories business. The next revenue dimension depends on CRZ's ability to move downstream into more specific markets. For example, a customer is not only interested in buying a boat but also wants accessories such as water skis. Segmenting accessories into groups such as boat electronics, safety and water sports enables the customer to drill down into a more specific level of interest. This opens the value proposition of the site for smaller companies, which will find it hard to justify the expense of advertising on the main site.

More specific content attracts lower customer volumes compared to the main site, which means its relative cost to advertise dramatically falls. Cheaper ad rates for niche content will draw in the small-sized business. Seek has successfully broadened its appeal by targeting the SME market and offering specific services to attract these customers. After capturing the big brands, CRZ can now afford to filter down the advertising curve and broaden the potential pool of funds from a wider market.

Singapore Telecommunications Limited (SGT)
Update: FY10 result
Recommendation: Hold Change: Unchanged
Group result was inline with our expectations. Group NPAT was up 13% to S$3.91bn, which was inline with our S$3.989bn forecast. Optus NPAT was up 15.9% to A$676m while underlying NPAT for SingTel was up 3.8% to S$1.35bn. Income from associates was higher than our estimates but this was offset by higher than anticipated tax expense.

Revenue increased 13% to S$16.87bn, slightly higher than our forecast of S$16.2bn. Both SingTel and Optus experienced strong top line growth. SingTel revenue increased 8.1% to S$5.99bn while Optus revenue lifted 7.5% to A$8.95bn.

EBITDA excluding associates was up 9.4% to S$4.85bn. SingTel EBITDA margin declined 8bps to 38.2% on higher content costs, higher customer subsidies and lower margin business in IT and Engineering. Optus EBITDA margin fell 7bps to 24.1%, attributable to higher acquisition cost per subscriber for mobile. Margins for Consumer and Business fixed lines were steady.

Our forecast, recommendation and valuation are under review.

SP AusNet (SPN)
Update: Solid FY10 result
Recommendation: Accumulate Change: Downgrade
NPAT of $209m was ahead of our $191m forecast, due to higher customer initiated projects and lower management fees.

Revenue increased 14% to $1.33bn with EBITDA up 9.7% to $778.3m. Strong revenue growth was attributable to higher regulatory pricing and gains from unregulated business Select Solutions.

Final distribution of 4cps was declared, taking full year distribution to 8cps. This was inline with guidance and forecast. The distribution consists of 1.591cps fully franked dividend; 0.148cps of capital return; and 2.261cps from interest income. Guidance is for FY11 distribution to at least match FY10.

The result does not change our long term view on SPN. Our forecasts adjust accordingly and valuation remains unchanged.

Capital position is prudent. Net debt is $3.9bn with net debt to net debt and equity at 59%. EBITDA interest coverage is 2.6x.

Total capital expenditure of $581m was spent. This is expected to grow by 5% in FY11 with maintenance/growth split of 40/60. We are assuming 10% growth with 40/60 split.

Commonwealth Property Office Fund (CPA)
Update: Ups DPU and NTA
Recommendation: Accumulate Change: Upgrade
CPA's property values are improving with an average increase of 2.6% across the 10 properties independently revalued during the March quarter.

NTA rose 2.7% over the quarter to $1.14 and should rise further in June as CPA's remaining 15 properties are revalued.

FY10 distribution guidance was lifted 4.8% to 5.55cps, reflecting slightly higher earnings expectations, the release of one-offs and a higher distribution payout ratio.

Office markets should improve in coming years as economies recover. CPA is well placed with over 60% of its portfolio in Sydney, which has a particularly positive outlook

Our forecasts and valuation upgrade marginally. CPA is reasonably attractive with a 6.3% unfranked distribution yield based on an 80% payout ratio.

It offers exposure to recovering domestic office markets and should generate low-mid single digit growth over the long-term.

The current 20% discount to NTA adequately compensates for external management fee leakage.

Commonwealth Bank of Australia (CBA)
Update: More comment on March quarter trading update
Recommendation: Hold Change: Unchanged
CBA reported unaudited cash NPAT of $1.5bn for the March quarter, up 30% on pcp and in line with the December quarter.

Annualised ROE was steady at 19%. The main 1H trends of higher funding costs, declining impairment expense, cautious management commentary and conservative business settings continued.

The result was consistent with our FY $5.9bn forecast, which now requires only a steady $1.5bn for the 4Q. The main risks to our forecast are impairment expense, which can be difficult to forecast quarterly, and investment experience given the ongoing volatility in investment markets.

Total impairment expense (IE) is past its peak and was $500m, down 21% on pcp and 27% sequentially due mainly to better commercial credit quality. This was consistent with previous management guidance for IE to fall gradually rather than dramatically. IE in the Bankwest commercial book was worse than expected, balanced by better than expected IE in the CBA institutional and SME segments.

Average funding costs remain historically high as cheaper pre-GFC wholesale funding rolls off and price competition in deposits continues. The CFO admitted net interest margins had probably peaked and would soften in coming quarters.

Higher wage and funding costs, the drag from elevated holdings of liquids, cuts to exception fees and equity market volatility (lower funds under advice/management, and lower investment experience) will pressure the 4Q. Revenue earned from treasury operations is steady.

Thursday 13 May 2010


Incitec Pivot Limited (IPL)
Update: 1H10 Result: Strong margin expansion
Recommendation: Hold Change: Unchanged
IPL reported group revenue in 1H10 of $1.24B, which was down 27% on 1H09 with Fertilisers falling 21% and Explosives declining 32%. The stronger A$ adversely affected both divisions.

Group EBITDA and EBIT margins improved strongly in 1H10.

Adjusted NPAT (excluding non-recurring items) of $146M in 1H10 was down 14% on pcp.

IPL declared an interim 1H10 dividend of 1.8 cps, unfranked, down 14% on pcp.

IPL has delivered a reasonable 1H10 result considering the currency headwinds faced with the ~30% higher A$/US$ exchange rate than in the pcp and the significantly lower commodity prices.

The highlight of the result was the substantial margin expansion, partly due to the Velocity efficiency program. IPL expects difficult trading conditions to continue through CY10. However, farmers are expected to start re-investing in soil nutrients and the steady recovery in the US economy should drive increased explosives demand for mining as well as in construction and quarry.

We have amended our forecasts, reducing medium term DAP price forecasts but increasing our margins in recognition of the success of the Velocity program at reducing costs.

JB Hi-Fi Limited (JBH)
Update: Should score goals
Recommendation: Accumulate Change: Unchanged
JBH says 3Q10 comparative sales were positive, unlike many other retailers. The statement doesn't mean much, with market consensus relying on positive comparable sales growth continuing throughout 2H10.

Sales in March and April are behind internal expectations, which highlight just how tough retail conditions have become.

JBH says higher economic growth and lower unemployment should offset any short-term headwinds. Gross margins as a percentage of sales are ahead of last year given economies of scale and better buying, lower shrinkage and ongoing focus by management.

We also suspect consumer electronics suppliers are passing on rebates to the large stores like JBH, which they see as crucial distribution partners. Currency benefits are difficult to estimate since JBH doesn't directly import product itself. Suppliers will no doubt pass on some short-term benefits as part of an overall incentive package.

4Q10 sales should improve from the release of Avatar on DVD and the launch of 3D TV. Consumers who rushed out and purchased plasma and LCD panels over the past few years will be wary of 3D initially, but as the technology improves we suspect so too will penetration rates. An improving economic outlook helps disposable income on new technology.

FY10 guidance for sales near $2.8bn and NPAT of $117-$120m came at the 1H10 result presentation despite an increase in the new store roll out this year. Our earnings estimates and valuation are unchanged.

Programmed Maintenance Services Ltd (PRG)
Update: Leaving the UK & refocusing SWG
Recommendation: Buy Change: Unchanged
Following a strategic review, PRG will cease UK painting operations and sell the offshore contracting activities of SWG, an engineering, construction and maintenance provider to the resources industry.

With UK market conditions remaining difficult and a recovery not expected in FY11, PRG will wind down operations over the next two years. Given the operations contribute less than 2% of group revenues and made a small EBIT loss in FY10, we like the strategy of reallocating capital to Australia.

Since the ill-timed acquisition of SWG in 2008, earnings have disappointed. The offshore contracting activities of SWG are being sold to DOF Subsea, an offshore engineering contractor, for $3m-$7m. The sale depends on certain conditions over the next 12 months. The remaining construction and maintenance activities of SWG are to be combined with PRG's Marine business and branded under a new division named Programmed Resources.

Neither action leads to material changes to earnings forecasts or our positive view on the stock.

In January, FY10 EBITA guidance of $63m eased to $57m-$60m, with NPAT between $26-$29m. With the FY10 result now in the bag, PRG expects to report EBITA of $58m and NPAT of $26m.

The result is slightly softer than our pre-amortisation forecast of $29.1m, but is by no means alarming. We trim our FY10 pre-amortisation NPAT forecast to $28m and FY11 to $40m.

Valuation is reduced by 10c to $4.65.

A full report will follow the release of PRG's full-year results on 26 May 2010.

Transurban Group (TCL)
Update: TCL rejects $5.57 bid
Recommendation: Hold Change: Unchanged
The two Canadian pension funds, CPPIB and OTPP, together with CP2 have increased their proposed takeover offer to $5.57 per security, up 6% from the $5.25 offer in November 2009. The proposal represents a 13% premium to TCL's last closing price.

This primary offer is conditional on TCL dropping the equity raising and acquisition of the Lane Cove Tunnel (LCT).

A second deal was proposed in the event the equity raising goes ahead which sees the offer price drop to $5.42 to account for dilution.

TCL directors rejected both offers as too low and continue to believe the equity raising and LCT acquisition represent the best option for security holders.

According to TCL, the proposal is considered final by the bidders.

CPPIB, OTPP and CP2 currently own around 44% of TCL.

TCL remains under review but valuation is unlikely to change materially. The bid price is towards the top of our Hold range.

Securities are expected to resume trading on 13 May.

Given the bid is final and has been rejected by TCL, the share price is likely to lag the offer price and could remain under pressure for some time if CPPIB, OTPP or CP2 look to exit the stock.

If TCL temporarily trades around the offer price it would be prudent to take some money - perhaps up to one third - off the table.

Telecom Corporation of New Zealand Limited (TEL)
Update: Good underlying results
Recommendation: Hold Change: Unchanged
TEL reported better-than-expected third-quarter results. Normalised NPAT declined 39% to NZ$97m due to significantly higher dividends from subsidiary Southern Cross in the prior period and a steep rise in depreciation expense this year.

Sales fell 10.1%, reflecting declines across all businesses barring mobile. Revenue from the traditional fixed-line business continued to fall at a double-digit rate. Mobile was flat but XT uptake was pleasing.

EBITDA (excluding Southern Cross dividends) grew 2.7% to NZ$450m. Quarterly dividend remained at NZ6cps, not imputed.

We are not changing our FY10 and FY11 estimates. Management maintained its NPAT guidance of NZ$400-440m for FY10, although it is comfortable with the lower end of this range due to the recent XT troubles. This assumes EBITDA growth of -1% to +2%. Group capital expenditure guidance of NZ$1.1-1.2bn remains intact.

EBITDA for FY11 is expected to be between NZ$1.72-1.78bn with capital expenditure of NZ$1-1.1bn. In FY12 and FY13, management is looking at an increase in EBITDA of between NZ$20-80m.

In our view, a lot of this will depend on the extent of cost cuts TEL is able to implement. These forecasts don't take into consideration the impact of the government's proposed ultra fast broadband (UFB) program.

Commonwealth Bank of Australia (CBA)
Update: Steady performance in the March quarter
Recommendation: Hold Change: Unchanged
CBA reported unaudited cash NPAT of $1.5bn for the March quarter, up 30% on pcp and in line with the December quarter.

Impairment expense (IE) in the Bankwest commercial book remains elevated due to pre-acquisition expansion in east coast property development, although this was 'balanced' by improvements in CBA institutional and SME segments. IE was $500m, down 21% on pcp and 27% sequentially.

The result was consistent with our FY $5.9bn forecast, which now requires only a steady $1.5bn for the 4Q.

1H trends continued in the quarter. Average funding costs remain historically high as cheaper pre-GFC wholesale funding rolls off and price competition in deposits continues.

But profitable growth in deposit share was possible and home loan growth was slightly above system. Retail net interest margins were steady. Credit growth has resumed, though remains sluggish, at the top end of the institutional market.

Wage and funding costs, cuts to exception fees and lower investment experience. will pressure the 4Q.

Management remains cautious on the outlook, pointing to subdued credit growth, margin pressure from higher funding costs and strong price competition, and gradual rather than dramatic improvement in credit quality. The rate of decline in impairment expense is consistent with this. While the economy is improving recovery from the GFC will take time.

This explains the conservative business settings: total provisions to risk-weighted assets were 2.17% on 31 March, the highest of the big four banks, Tier 1 strengthened to 9.2%, liquid asset balances were maintained at $89bn, the funding task for FY10 is complete and the average tenor of new term funding is five years.

Wednesday 12 May 2010


Maxitrans Industries Limited (MXI)
Update: Trading update
Recommendation: Ceasing coverage Change: Downgrade
Ceasing coverage on MXI

For the 9 months to 31 March, MXI reports a 29% increase in order intakes with orders up 51% for 3Q10. Management expects FY10 NPAT to be around 25% higher than FY09 NPAT of $5.2m.

While positive, MXI says the rate of orders has now slowed across some product categories. Construction and infrastructure demand for vans and tippers remains depressed, stimulatory impacts of government's investment allowance has ended and interest rates continue to rise. The proposed resource rent tax poses further doubt over expected orders from the mining/resource sectors.

The lack of resiliency in earnings and high operating leverage exposed during the downturn leads us to recommend investors currently holding the stock to Sell and shift holdings into higher quality businesses. Better opportunities exist elsewhere. We maintain a watching brief should conditions drastically improve.

Sims Metal Management Limited (SGM)
Update: Further earnings recovery depends on global economic stability
Recommendation: Accumulate Change: Unchanged
Earnings troughed in the December quarter as we expected, with an improvement in March quarter earnings from better margins as global trading conditions for ferrous and nonferrous commodities improved.

Excluding the impairment charges of the 1H, 3Q EBIT shot to $43.1m from $8.5m in the 2Q while NPAT bounced to $30.4m from $6.6m. EBIT margins recovered to 2.7% from 0.5% on flat sales revenue of $1.6bn.

Sales revenue was flat partly because scrap intake grew just 3% on the 2Q, to 9.7mt, and shipments fell short at 9.2mt. The carry-over tonnes will ship in the 4Q.

Divisional quarterly performance was not disclosed but for the nine months to 31 March North American sales revenue was down 29% as scrap intake fell 4%, Australasian sales rose 1% as intake improved 13% and European sales declined 2% as intake increased 3%. The performance in Europe was subdued but pleasing given the region's severe macroeconomic challenges. The European e-waste and nonferrous trading businesses supported earnings.

The commentary was upbeat but realistic. Economic data and manufacturing activity in North America were particularly encouraging and scrap flows had increased significantly. The improvement in intake is however subject to economic stability and recovery, especially in North America. Sequential earnings growth is expected for the 4Q but this assumes no significant declines in commodity prices or adverse global economic developments.

Tuesday 11 May 2010


Spark Infrastructure Group (SKI)
Update: ETSA final decision
Recommendation: Accumulate Change: Unchanged
The Australian Energy Regulator (AER) handed down its final decision for South Australia's electricity distributor, ETSA Utilities. The decision will come into effect from 1 July 2010 to 30 June 2015.

Total net capital expenditure of $1.77bn was approved with operating expenditure at $1.1bn. Approved capex was lower than ETSA's original proposal at $2.3bn and revised proposal of $1.99bn. AER acknowledged the significant of capex is needed for network improvement and to meet future peak demand, but considers ETSA's proposed amount was greater than needed. This is a similar case for operating expenditure.

Regulated Asset Base (RAB) of $2.77bn is applied from 2010 onwards to calculate the return on capital. Weighted Average Cost of Capital (WACC), which determines the rate of return, was reduced from 10.02% to 9.76%. Increase in interest rate assumption offset decline in debt margin. Debt margin of 2.98% was assumed instead of 4.3%, inline with improved credit market conditions at the time of draft decision. The regulator assumes margin of BBB+ rated debt as a benchmark in its calculation. ETSA has an A- credit rating with debt margin lower than the benchmark, meaning it can fully pass on its cost of debt.

The final decision was inline with the draft decision announced by the regulator and ETSA's revised proposal. Our assumptions were based on the draft decision hence no change in our earning estimates and valuation. The final decision provides some certainty to SKI's earning stream and lowers regulatory risk. ETSA makes up half of group's total revenue. Victorian assets Powercor and Citipower submitted their business proposal to the regulator and a draft decision is expected on 30 May.

Transurban Group (TCL)
Update: Equity raising to fund LCT bid
Recommendation: Hold Change: Unchanged
TCL agreed to buy the failed Lane Cove Tunnel (LCT) in Sydney for $630.5m, well below the $1.6bn it cost to build. LCT is fully electronic and has a remaining concession of 27 years. It includes the Military Road E-Ramp.

At the same time, TCL announced a fully underwritten 1 for 11 renounceable entitlement offer at $4.60 per security, raising $542.3m. The offer price represents a 6% discount to the theoretical ex-rights price.

TCL will fund the acquisition with $372m of equity from the raising and $258m of non-recourse project debt. The remainder of the equity raising, around $152m after transaction costs and capitalised borrowings, will reduce gearing in the near-term and help fund the M2 and M5 upgrades later.

Gearing reduces from 44.2% to 42.9%.

Distribution guidance is unchanged. New securities will be entitled to the second half distribution of 12cps.

The record date for entitlement is 13 May 2010. The offer opens 17 May and closes 4 June. Renounced securities will be sold in an auction on 9 June with proceeds above the issue price given to renouncing security holders.

The offer price is a little higher than expected but appears reasonable.

DPS guidance is unchanged despite mildly lower EPS. Pro-forma FY09 underlying cash flow per security falls 7% to 20.6cps. Organic growth and significant cost savings from integration with the M2 will help future earnings.

Forecasts and valuation are under review.

Santos Limited (STO)
Update: Resource Super Profits Tax
Recommendation: Accumulate Change: Downgrade
The Rudd government proposes a 40% Resource Super Profits Tax (RSPT) on top of corporate tax and a reduction in corporate tax rate ultimately to 28%. This response to the Henry Review needs careful consideration.

Not all aspects of the design of the new tax have been defined - in fact far from it - and full implications for the industry will remain uncertain until clarification emerges. Be that as it may we attempt a first blush interpretation on the consequences for miners. Full details can be found in our Special Report "The Six Wives of Henry".

The outlook for mining company profits and valuation is plainly negative. A significant new tax will have the effect of making investment in Australia much less attractive. The government's actions clearly lift the sovereign risk bar - changing the goal posts is not a good look. It certainly isn't a simpler tax system as the government promised.

But if it is implemented, and it is still a big "if", the new tax won't kick in until July 2012. Will the Senate pass the Government's reform measures in their entirety? Will resource companies successfully lobby to have the tax watered-down? Will the Rudd government even be re-elected?

We think the safest course of action is to assume the worst, with all recommendations implemented. If you can still buy companies at fair value, even including downgrades for RSPT you effectively have a free option on the legislation being softened, or better still, not getting through at all.

It's worth considering the offshore petroleum industry has lived with a 40% resources rent tax (PRRT) since 1987, though admittedly with more favourable offsets than proposed under RSPT.

We lower our STO valuation 10% for RSPT risk. No change to near term earnings.

Monday 10 May 2010


Asciano Group (AIO)
Update: Coal strong but Ports patchy
Recommendation: Accumulate Change: Unchanged
The highlight of AIO's report on 3Q10 business volumes was the continued strength in the coal haulage business (around 29% of EBITDA). Volumes were 33% higher than in 3Q09 and 5% higher than in the December 2009 quarter.

The Patrick Container Ports business only increased container lifts by 1% against pcp.

Intermodal volumes increased 10% above pcp and were 10% below the December quarter.

Auto, Bulk and General was mixed. Vehicle movements were 25% above the pcp, while vehicle storage days fell 56%. Bulk tonnes moved at ports fell 49% due to a major grain customer's decision to insource stevedoring. Bulk rail volumes were 18% lower than pcp.

We emphasise the inherent leverage in earnings - due to relatively high gross margins, high fixed costs and debt - means sharply changing perceptions about the economic outlook could see further violent movements in the share price.

Given the degree of operating leverage, a worst-case slowdown in the Chinese economy and in the economies of other major trading partners could materially reduce earnings. But we see little risk of another equity raising to reduce debt with EBIT interest cover now around three times.

Air New Zealand Limited (AIZ)
Update: Alliance with VBA makes good sense
Recommendation: Accumulate Change: Unchanged
AIR and VBA announced their intention to seek regulatory approval to create an alliance on the trans-Tasman route.

Management believes the alliance would deliver cheaper airfares, increased frequency and loyalty program reciprocity.

This alliance is subject to regulatory approvals from the ACCC in Australia and NZCC in NZ. The regulators are expected to take around six months to review the applications prior to authorization.

Clearly, the alliance would benefit both AIR and VBA. In the case of AIR it would enable the firm to rationalise capacity on the trans-Tasman route, thereby helping it to lift returns and yields.

The tie-up will not have any meaningful effect on AIR's stock price in the near term, but could potentially benefit its valuations in the longer term should the concerned authorities give their approval.

We have reduced our FY10 and FY11 forecasts to NZ$90m and NZ$140m due to the impact of high jet fuel prices. There will be some impact from the Icelandic volcano of approximately NZ$500,000 per day, which will be reflected in the second-half results.

Spark Infrastructure Group (SKI)
Update: Strategic review continues
Recommendation: Accumulate Change: Upgrade
SKI's share price continues to track sideways with the uncertainty surrounding a strategic review.

We published a number of funding options at announcement of the strategic review. Our view has not changed.

We continue to assume a distribution cut from 13.56cps to 10.17cps coupled with an equity raising. But do not expect a large equity raising at significant discount. We did not factor this into our forecast given the lack of clarity on the size and timing of the raising.

Takeover by majority asset owner Cheung Kong Infrastructure (CKI) appears unlikely.

No change to our forecasts and valuation.

Sirtex Medical Limited (SRX)
Update: Market weakness provides opportunity
Recommendation: Buy Change: Unchanged
With the recent market correction SRX's share price is at attractive levels under $5.50 as nervous investors engage in indiscriminate selling.

Despite high business and investment risk because of single product dependency and the risk of technology obsolescence, SRX has a defensive aspect. Demand for its liver cancer therapy is not dependent on the state of the economy; people develop liver cancer regardless of the business cycle.

And still at a low point on what should prove a long growth curve means revenue expansion could be well above market averages during good and bad economic times.

Telecom Corporation of New Zealand Limited (TEL)
Update: Third quarter results
Recommendation: Hold Change: Unchanged
TEL 3Q results handily beat our forecast. NPAT at NZ$97m was NZ$7m above our expectations. Revenue was slightly below our forecast but cost reduction was well ahead of our estimate.

Group EBITDA was NZ$464m a reduction of 2.9% over the prior period. Southern Cross dividend was NZ$14m versus NZ$40m in the pcp. Wholesale and International suffered a double digit fall in earnings. This was to some extent offset by AAPT and Chorus.

Mobile subscribers declined attributable to a drop in lower value prepaid customers. However TEL managed to add 128,000 XT customers despite network troubles.

Quarterly dividend of 6cps was maintained. The dividends don't carry any imputation credits. Management is targeting a payout ratio of 90% going forward.

TEL maintained its NPAT guidance of NZ$400-440m for FY10 although it is comfortable with the lower end of this range due to the recent XT troubles. The guidance assumes EBITDA growth of -1% to +2%. Group capital expenditure guidance of NZ$1.1-1.2b remains intact.

In FY11 management expects a whopping 48-55% jump in EBITDA to between NZ$1.72-1.78b. Its capital expenditure assumptions for FY11 are between NZ$1b and NZ$1.1b

Our earnings for FY10 and FY11 are under review. We will update them along with our full earnings report which will be released shortly.

Alumina Limited (AWC)
Update: Resource Super Profits Tax not so Super
Recommendation: Buy Change: Unchanged
The Rudd government proposes a 40% Resource Super Profits Tax (RSPT) on top of corporate tax and a reduction in corporate tax rate ultimately to 28%. This response to the Henry Review needs careful consideration.

Not all aspects of the design of the new tax have been defined - in fact far from it - and full implications for the industry will remain uncertain until clarification emerges. Be that as it may we attempt a first blush interpretation on the consequences for miners. Full details can be found in our Special Report "The Six Wives of Henry".

The outlook for mining company profits and valuation is plainly negative. A significant new tax will have the effect of making investment in Australia much less attractive. The government's actions clearly lift the sovereign risk bar - changing the goal posts is not a good look. It certainly isn't a simpler tax system as the government promised.

But if it is implemented, and it is still a big "if", the new tax won't kick in until July 2012. Will the Senate pass the Government's reform measures in their entirety? Will resource companies successfully lobby to have the tax watered-down? Will the Rudd government even be re-elected?

We think the safest course of action is to assume the worst, with all recommendations implemented. If you can still buy companies at fair value, even including downgrades for RSPT you effectively have a free option on the legislation being softened, or better still, not getting through at all.

It's worth considering the offshore petroleum industry has lived with a 40% resources rent tax (PRRT) since 1987, though admittedly with more favourable offsets than proposed under RSPT.

Under the RSPT our AWC valuation declines 5%.

AWE Limited (AWE)
Update: Resource Super Profits Tax
Recommendation: Buy Change: Unchanged
The Rudd government proposes a 40% Resource Super Profits Tax (RSPT) on top of corporate tax and a reduction in corporate tax rate ultimately to 28%. This response to the Henry Review needs careful consideration.

Not all aspects of the design of the new tax have been defined - in fact far from it - and full implications for the industry will remain uncertain until clarification emerges. Be that as it may we attempt a first blush interpretation on the consequences for miners. Full details can be found in our Special Report "The Six Wives of Henry".

The outlook for mining company profits and valuation is plainly negative. A significant new tax will have the effect of making investment in Australia much less attractive. The government's actions clearly lift the sovereign risk bar - changing the goal posts is not a good look. It certainly isn't a simpler tax system as the government promised.

But if it is implemented, and it is still a big "if", the new tax won't kick in until July 2012. Will the Senate pass the Government's reform measures in their entirety? Will resource companies successfully lobby to have the tax watered-down? Will the Rudd government even be re-elected?

We think the safest course of action is to assume the worst, with all recommendations implemented. If you can still buy companies at fair value, even including downgrades for RSPT you effectively have a free option on the legislation being softened, or better still, not getting through at all.

It's worth considering the offshore petroleum industry has lived with a 40% resources rent tax (PRRT) since 1987, though admittedly with more favourable offsets than proposed under RSPT.

We lower our AWE valuation 10% for RSPT risk. No change to near term earnings.

BHP Billiton Limited (BHP)
Update: Resource Super Profits Tax not so Super
Recommendation: Buy Change: Upgrade
The Rudd government proposes a 40% Resource Super Profits Tax (RSPT) on top of corporate tax and a reduction in corporate tax rate ultimately to 28%. This response to the Henry Review needs careful consideration.

Not all aspects of the design of the new tax have been defined - in fact far from it - and full implications for the industry will remain uncertain until clarification emerges. Be that as it may we attempt a first blush interpretation on the consequences for miners. Full details can be found in our Special Report "The Six Wives of Henry".

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