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Peter WarnesHead of Equities Research

30 August 2012 | Issue 33

Huntleys’ Your Money Weekly

The carbon tax was introduced on 1 July. Other than highly publicised increases in energy – electricity and gas – bills which households receive on a quarterly basis, the impact is muted. Carbon tax headlines disappeared so it can’t be that bad. But it does and will affect almost everything we consume – goods or services. And the compensation is paid with borrowed money pales. The recent Boral presentation touched on the tax in reference to the cement division. This simple example reveals the magnitude of the problem. The FY12 EBIT was $69m down $18m or 21% on FY11. The loss of lime and limestone sales due to the closure of BlueScope’s Port Kembla facility cost $6m. Increases in electricity and fuel costs hurt and that before the carbon tax.

The high A$ atracted import competition affecting production volumes. Cement kilns are high fixed cost facilities requiring high utilisation to maximise efficiency and lower the position on the cost curve. Raw materials are not a problem. Facilities at Berrima and Waurn Ponds are adjacent to long term limestone reserves. Boral management identified the annual cost of the carbon tax on the cement operations to be $21m. In FY13 the business faces continued pressure from flat prices due to the strong A$ and competition from non-carbon constrained imports while manufacturing costs in Australia rise.

Import competition comes from companies including Thailand’s Siam Cement which has annual cement capacity of 24m tonnes and no carbon impost. Compare this with the annual capacity of Berrima and Waurn Ponds of 1.4m and 0.8m tonnes respectively, Sunstate Cement – 50% owned by Boral – 1.5m tonnes and Adelaide Brighton 2.4 million tonnes. The $21m increase in FY13 cost base, drives it up the cost curve and makes it less competitive before even considering the massive

scale advantage of Siam. Boral and others compete with imports in the bulk and bagged market and provide product to in-house or third party pre-mixed concrete operations. So market share is lost due to imports and pre-mixed concrete prices increase to reflect cost recovery in cement. Construction costs increase – housing, commercial, industrial, roads, bridges, public and private infrastructure.

So what to do? Close down and import all cement requirements? We are already heading down that path in steel and petroleum refining. Jobs lost and unions blame the companies involved. This is what happens when the playing field is not level! Inability to recover $21m in carbon tax directly hits pre-tax profit and in FY12 Boral only made $111m pre-tax!! A relatively small impost can have a very large impact on profits. While the government will scrap the $15 floor price from 2015, Australia in the meantime has a $23 carbon tax rendering many industries uncompetitive and downsizing is almost certain.

Bonds versus defensive or income stocksLast week I provided a table of returns from a collection of defensive or income stocks. Individual total returns – capital plus dividends – on a cash basis and grossed up for franking credits. The returns were impressive – from a low 12.8% and 16% grossed up for National Australia Bank to 43.1% and 44.4% for Ramsay Health Care. Telstra, which everyone should have had in their portfolio, was not far behind at 37.5% and 43.5%. I have heard about the bull market in bonds over that past few years and wondered how the performance of a diversified bond portfolio would compare with these defensive or income stocks over the past year – August 2011 through August 2012. Investing in bonds, like term deposits is a flight to safety – capital preservation. With income secondary, it has been about falling yields and resultant capital gains in recent years. But just what is the magnitude of the capital gains? Don’t forget when yields rise there are potential losses, whether realised or unrealised. But if held to maturity capital is preserved.

I looked at the UBS Australian Composite Bond Index ™. It is a composite index and includes government and non-government bonds. It is

Carbon Tax, Bond bull market and a letter from Broome

Continued on page 2

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Hybrid Corner Crown Subordinated Notes 3

Company Reports APA Group 10

ARB Corp 19

ASX 4

AWE 20

Beach Energy 11

Billabong Intl 21

Cabcharge 22

Coca-Cola Amatil 5

Envestra 12

IRESS 13

Mermaid Marine Aust. 23

NRW Holdings 24

Origin Energy 6

QR National 7

Ramsay Health Care 14

SEEK 15

Seven Group 16

Southern Cross Media 17

Toll Holdings 18

Woolworths 9

WorleyParsons 8

Australia’s Leading Independent Investment Newsletter Since 1973

2 Huntleys’ Your Money Weekly 30 August 2012 3Overview continued from Page 1

widely used as the benchmark for Australian bond funds. The Australian 10-year bond yield fell from 4.89% on 2 August 2011 to 3.30% on 22 August 2012 – the same period used for the measurement of equities last week. Similar falls were recorded at the short end of the bond curve. Below are the total returns – interest and capital gains – from the bond bull market of the past 30 months.

Year EndingTotal

Return % Year EndingTotal

Return % Year EndingTotal

Return %

Jan 2010 1.7 Nov 2010 5.6 Sept 2011 9.0

Feb 2010 3.4 Dec 2010 6.0 Oct 2011 8.4

Mar 2010 2.7 Jan 2011 5.6 Nov 2011 10.5

Apr 2010 3.3 Feb 2011 5.5 Dec 2011 11.4

May 2010 5.8 Mar 2011 6.9 Jan 2012 10.5

June 2010 7.9 Apr 2011 6.8 Feb 2012 9.8

July 2010 7.8 May 2011 6.4 Mar 2012 10.0

Aug 2010 9.1 June 2011 5.5 Apr 2012 11.2

Sept 2010 7.3 July 2011 7.0 May 2012 13.2

Oct 2010 7.4 Aug 2011 7.1 June 2012 12.4

July 2012 11.0

When bond yields fall it signals low economic growth and low inflation – a great environment for high sustainable yielding defensive or income stocks. The best annual return on the bond benchmark of 13.2% for the year ending May 2012 pales against Ramsay Health Care or Telstra at 43.1% and 37.5% respectively, before franking benefits. KPeter Warnes

Woodside: A Broome view from Ian HuntleyOn a personal basis, I guess I am what Woodside chairman, Michael Chaney, describes as an “anarchist”. Not a particularly apt description given my love of business and investment, let alone our system of government. But yes, as a long time winter resident of Broome, I am totally against the near Broome James Price Point (JPP) gas development. And yes, I have spent time walking

the Lurujarri aboriginal songline trail which runs through the proposed precinct, a wonderful experience. Currently in Broome I have many friends in the “No Gas” movement. It is a small well knit community in many ways and a lot of information flows through various walls.

The current view is that Shell, having taken Chevron out of the Browse Joint Venture, lifting its stake to 26.6% behind Woodside’s 31.3%, does not want to go ahead with the JPP development, rather a floating platform a la its nearby Prelude development or a pipeline south to the NW Shelf. They argue Shell presumably agrees with some major broking firm’s analysis that a pipeline south to Karratha, which houses NW Shelf and Pluto LNG, would cost $12 to 16bn less than a JPP development. As that other unlikely anarchist, Telstra director and former advertising man, Geoff Cousins points out, the Browse agreements appear to tie any development to JPP. But the published material suggests preference for whatever development would take place most quickly. Should those broking sums prove accurate, as is likely, JPP is no longer front runner. Rather development economics rule leading to a commercial deal involving back up for the NW Shelf and possibly additional trains for Pluto, which would be an interesting Shell/Woodside negotiation. Pluto is an excellent phase one LNG development already in place, and needs at least four more modules! My anarchistic mind suggests this would be a very positive resolution for Woodside, and makes a Browse development far more likely given the raging escalation in costs surrounding these huge developments, and the ongoing Save the Kimberley push against the JPP development on environmental and well documented aboriginal heritage grounds. KIan Huntley

Please note:We've made some changes to the format of our Company reports.

Date-based pricingThe prices quoted for each company are the intraday prices at the time the research was published online. This price is also used to calculate the forecast Dividend Yields and P/E Ratios in the earnings table.

New data: Grossed-Up Yield %Grossing up the yield allows the investor to compare yields across companies that have different franking rates. For example, a company with a dividend yield of 5% and 100% franking grossing up to a 7.14% yield compares to a company with a dividend yield of 5% and 35% franking grossing up to a 5.75% yield.

Grossing up the dividend or yield helps the investor to work out the net dividend or after-tax dividend. Once you have the grossed-up number, the investor can apply their marginal tax rate for the entity they have invested via. For example, a DIY super fund trustee in the accumulation phase may pay 15% tax on their income or 0% in pension phase. An individual investor has marginal tax rates that vary from 0% to 45% and a company pays tax at a rate of 30%.

The calculation is as follows:

Grossed-up Dividend Yield % = Dividend Yield % x (1+ (Franking % x (Corporate tax rate/(100 - corporate tax rate*))))

* the corporate tax rate is 30%.

Other research published onlineView more result reviews at www.morningstar.com.au/Stocks/ResearchArchive, including:Code Company Rec

ABP Abacus Hold

AGO Atlas Iron Accumulate

AHD Amalgamated Holdings Hold

ALL Aristocrat Leisure Hold

ALS Alesco Corp. Hold

ASL Ausdrill Hold

CHC Charter Hall Hold

CMW Cromwell Property Reduce

CTX Caltex Reduce

FLT Flight Centre Hold

FXJ Fairfax Hold

GFF Goodman Fielder Avoid

IOF Investa Office Fund Hold

NCM Newcrest Mining Accumulate

NFK Norfolk Group Hold

PAN Panoramic Resources Buy

PFL Patties Foods Hold

TSE Transfield Services Hold

VAH Virgin Australia Holdings Hold

DeclarationDeclaration of all equities analysts' personal shareholdings, disclosure list for YMW 33. These positions can change at any time and are not additional recommendations. AAO, ABC, ACG, ACL, ACR, AFI, AGK, AGS, AGX, AKF, ALL, ALS, AMP, ANO, ANP, ANZ, APA, APN, ARD, ARG, ASB, ASZ, ATI, AVX, BEN, BFG, BHP, BKI, BKN, BLY, BND, BNO, BOL, BOQ, BSL, BTU, BWP, BXB, CAB, CBA, CCL, CDD, CGS, CIF, CND, COF, COH, CPA, CRK, CRZ, CSL, CSS, CTN, DOW, DTE, DUE, EGP, EPX, EQT, ERA, ESV, EVZ, FMG, FXJ, GBG, GFF, GMG, GPT, GWA, HIL, HSN, IAG, IFL, IGR, IIN, ILU, IPD, JMB, KAR, KCN, KEY, KMD, LEG, LEI, LLC, MBN, MCR, MFF, MIO, MPO, MQG, MSB, MTS, MUN, MYR, NAB, NEU, NHC, NMS, NUF, NUP, NVT, NWS, OSH, PBG, PBT, PGM, PMV, PNR, PPT, PRG, PRY, PTS, QBE, QFX, QUB, RCR, REX, RFE, RHC, RHG, RIO, RKN, RQL, SAKHA, SEK, SFW, SGP, SGT, SHV, SMX, SOL, SRH, SRX, STS, SUN, SVW, SWM, TAH, TCL, TEN, TLS, TOL,

TPM, TRF, TRS, TSE, UGL, UXC, WAL, WAM, WBB, WBC, WCB, WDC, WES, WHC, WHG, WOW, WPL, ZGL.

Investors please note:To the extent that any of the content constitutes advice, it is general advice that has been prepared by Morningstar Australasia Pty Limited ABN:95 090 665 544, AFSL:240892 without reference to your objectives, financial situation or needs. Before acting on any advice, you should consider the appropriateness of the advice and we recommend you obtain financial, legal and taxation advice before making a decision. Please refer to our Financial Services Guide for more information at www.morningstar.com.au/fsg

Contact DetailsTel: 1800 03 44 55Email: [email protected] Web: www.morningstar.com.au

2 Huntleys’ Your Money Weekly 30 August 2012 3

Recommendation We recommend investors with a high risk appetite Subscribe

A high stake bet!Crown (CWN) will raise at least $525m via an ASX-listed security issue, Crown Subordinated Notes (CWNHA). CWNHA are long-dated, unsecured, subordinated debt securities, which rank above CWN ordinary shares and below other CWN debt. The notes mature in 60 years unless the issuer exercises an option to redeem at the first call date in September 2018, on any subsequent interest payment date or following a trigger event (see key terms). The notes pay quarterly interest based on the 90-day BBSW rate plus a 5.00% p.a margin. If the notes are not redeemed on the September 2038 step-up date the margin steps up once by 1.00% p.a. Interest payments are cumulative and deferrable at CWN’s option and subject to mandatory deferral conditions. Being interest payments they are not franked.

Summary and recommendationWe recommend investors subscribe, but only if they have a high risk appetite, and we suggest a small portfolio allocation. Morningstar assesses CWNHA as being high risk so potential investors need to weigh up an investment in CWNHA versus CWN equity. We also remind investors to seek independent professional advice before making an investment decision.

CWNHA is a pure debt security with no conversion into equity, offering an attractive margin of 5.00% that is also above our fair margin estimate of 4.85%. The note is similar to some of the long dated subordinated debt issues of recent times such as AQHHA and ORGHA issued by APA Group and Origin Energy. CWNHA has a higher risk profile than these two notes given its conditions and the underlying business so pays a higher margin. AQHHA and ORGHA pay margins of 4.00% and 4.50% respectively. Higher return equates to higher risk!

CWN is using proceeds to repay some bank debt, extend its debt maturity profile and qualify for treatment as 50% equity by some rating agencies. From a risk perspective we would

prefer the issue of a higher ranking security such as the Tatts Bond (TTSHA) with mandatory interest payments, a shorter term and a step-up in the margin at the first call date, but this would mean a lower margin being offered. Given the treatment of 50% of this issue as equity by some rating agencies, some of our preferred terms may not have been able to be adopted.

Morningstar has assigned CWN a high uncertainty rating. While the business holds the licences to operate casinos in Perth and Melbourne, the business is capital intensive, has expansion risk, carries a sizable amount of debt, is subject to regulatory risk and earnings are exposed to consumer discretionary spend.

We do not think CWN’s revenues are as stable as Tatts Group which has a high mix of relatively stable lotteries revenues. For CWN, main gaming floor revenues, including various table and electronic games such as poker machines, represent around half of total revenue and are the most stable of its revenue streams. VIP includes table and electronic games played by high-end clients in exclusive gaming areas, and contributes around a quarter of revenues. Non-gaming operations such as retail and hotel contribute almost a quarter of revenues.

CWN’s operating cashflows from its Australian operation are robust but are more susceptible to changes in consumer discretionary spend, in particular the VIP and non-gaming parts of the business, than Tatts Group. While having casino licences provides some protection as CWN has a monopoly in table gaming in Melbourne and Perth, it does not make it immune from competition from alternative forms of gambling and entertainment.

CWN’s financial leverage measures are not an immediate concern, but have worsened due to funding needs for its large capital expenditure programs. While the operating cashflows are robust, the demands on them by the business are high. We expect CWN to be able to meet its current capex demands from operating cashflow. However, these do not incorporate any additional expansion plans such as a potential development of a hotel and VIP gaming establishment at Barangaroo, Sydney. KAnalyst: Ravi Reddy The full version of this article is available at www.morningstar.com.au

Crown Subordinated Notes CWNHA Hybrid | Gambling

Hybrid Corner

Key dates

Offer opens 21/08/12Closing date for CWN 05/09/12 shareholder and general offer

Closing date for 13/09/12 broker firm offer

Issue date 14/09/12Commencement of 17/09/12 trading

First interest payment 14/12/12 date

First Call Date 14/09/18Step-up Date 14/09/38Maturity date 14/09/72

Key terms

3 ASX code is expected to be CWNHA.

3 Face value: $100 per security.3 Minimum subscription amount:

$5000 (50 units).3 Ranking in wind-up: Ahead

of CWN ordinary shares and any ranking obligations (if any); Equally with other equal ranking obligations (if any); and Behind all unsubordinated creditors (including all debt currently on issue) and all other creditors preferred by law.

3 Holder call rights: Holders cannot request the notes be redeemed unless there is an Event of Default.


$38.00

$36.00

$34.00

$32.00

$30.00

$28.00

ASX S&P/ASX 200Business RiskPrice RiskMoat RatingFair Value ($)

Morningstar Style BoxMkt Cap ($ Mil)Last ReviewAnn. Share Turnover (%)ROE-FY12 (%)Net Interest Cover (x)52 Week Hi/Low ($)Ex-DividendPayable

Compound Growth 5Yr 10Yr EPS %DPS %

ASX ASX | $31.30Large Cap | Financial Exchanges | 16 Aug 2012

Recommendation

A tale of two halves: Sluggish volumes take its toll on earningsAbove/Below Expectations Fair Value Up/Down

Sluggish volumes in equities and options took their toll on earnings. In May, ASX announced an earnings update for the nine months to 31 March 2012 – stating underlying earnings were $261.6m, down 2.7%. The FY12 underlying NPAT was $346.2m, marginally below expectations and showing further deterioration in 2H as investors reduced risk appetite. With significant variation between business lines, derivatives performed well, albeit slower in 2H. A final dividend of 85.1cps fully franked brings full year dividends to 177.9 cps, lower than FY11, but in line with a steady 90% payout ratio.

Fair value estimate is unchanged at $30 per share. Our valuation assumes a return to low single digit EPS growth in FY13, before rising slightly in FY14. FY13 and FY14 NPAT trim 5% to $349.4m and $371.5m, respectively. At $30, ASX trades at an FY13 PE of 14.8x and a 6.1% fully franked dividend yield. While we appreciate future cash traded market volumes may soften further, we are confident in the developing derivatives business as an alternate revenue stream. ASX remains in a strong financial position, with an FY12 free cash flow of $198.2m. The key risks remain movement towards private ‘dark’ trading pools, and encouraging competition in clearing and settlement – we keenly watch this space.

As market conditions weakened, 2H revenue was 5.1% lower than 2H11. Unsurprising, listings and issuer services were softer on subdued ECM, with $6.3m initial listing revenue, down 51.9%, and $34.4m secondary listing revenue, down 22.9%. Cash market traded value was 11.5% softer at $1.185bn, even with the 14.9% windfall in total trades from surging High Frequency Trading (HFT). Derivative revenue grew 9.6% to $188.7m. ASX 24’s (formally Sydney Futures Exchange) derivative volume, which makes up 85% of the segment, was 5.6% higher in 1H12, before deteriorating 1.9% in 2H. Although ASX 24 is still heavily reliant on interest rate derivatives, index options are on the rise, up 75.9% on FY11. Information services disappointed, with revenue falling 5.6% to $66.9m as retail data usage slipped. Technical services improved, up 12.1% on FY11 – with only 59 clients hosted in the new data centre, we expect this will be an area of future growth.

New business initiatives include creating flexible capital raising rules, encouraging small and mid-cap companies raise capital, as well as a movement into managed funds service – with over 50 partners signed. In the cash market clearing and settlement space, settlement and clearing fees are expected to be unbundled. This should not make a material difference in FY13, but following a seven year period of stagnant fees, the change is encouraging.

Cost control was respectable, with cash operating costs rising 4% and capex of $39.1m – the top end of previous guidance. Expenses were impacted by occupancy and equipment, following migration to the new data centre and expanded data centre operations. The data centre cost $11.3m, while upgrades and initiatives added $20.2m to capex. We expect relatively high capex and rising operating expenses to continue in FY13, with management guiding $35–$40m and 4%, respectively.

Given the high degree of uncertainty there was no outlook statement. Post balance date activity wanes – daily average cash market value traded 24.6% below FY12 average, and ASX 24 daily average contracts traded 14% below the FY12 average. A strong balance sheet will provide resilience, but if ASX does not successfully diversify into technology, new products and services – earnings most definitely will suffer. We appreciate confidence in capital markets won’t return until the European debt and political crisis calms, so we maintain our Hold recommendation and await more attractive prices or an improvement in global economic conditions. KAnalyst: Michael Higgins

Investment RatingASX operates Australia's national exchange for securities trading, clearing and settlement and is a simple franchise: a monopoly - in all categories except equities trading - clipping the stock exchange activity ticket. The stock offers leverage to an improving Australian equity market with cyclical earnings around a long-term uptrend. The derivatives business is now the largest revenue stream and a source of secular growth. ASX is conservatively managed and financed. The desire of listed companies for maximum liquidity in their shares creates a natural monopoly in listings.

NPAT ($m)EPS (c)EPS % ChgDPS (c)Franking%Div Yield%Grsd up%P/E

8.6 14.88.8 18.2

45,501

10/05/12 (YMW17)90.911.6

-12.233.49/27.52

27 Aug 201219 Sep 2012

MediumMediumNarrow

30.00

Hold

332.6

06/10(a)

193.07.2

173.1100.0

5.17.3

356.6

06/11(a)

204.15.7

183.2100.0

5.47.8

346.2

06/12(a)

197.7-3.1

177.9100.0

5.98.4

349.4

06/13(e)

199.50.9

180.0100.0

5.88.2

371.5

06/14(e)

212.16.3

191.0100.0

6.18.7

17.7 16.5 15.3 15.7 14.8

The full version of this article is available

at www.morningstar.com.au


$14.00

$12.00

$10.00

$ 8.00

CCL S&P/ASX 200Business RiskPrice RiskMoat RatingFair Value ($)



Coca-Cola Amatil CCL | $13.85Large Cap | Beverages - Soft Drinks | 24 Aug 2012

Recommendation

1H12 result: Inexorable growth, better than expected dividendAbove/Below Expectations Fair Value Up/Down

1H12 adjusted NPAT rose 5.6%, just above the guidance range of 4–5%. This was achieved on trading revenue growth of 8.9% and EBIT growth of 4.1%. EPS rose 5.2% to 32.5c. 1H dividend increased by 9.1% to 24cps fully franked with the payout ratio increased to 73.9% and expected to be 75% for the full year.

Our thesis, valuation and earnings forecasts are unchanged. Dividend forecasts increase by one cps in both FY12 and FY13. We consider CCL a little expensive at current levels. But investors taking full advantage of 100% franking, will still earn, at a share price of $14.00, a reasonably attractive grossed up dividend yield of 6% growing by more than 5% per annum.

The balance sheet is robust. High returns on capital mean despite relatively high net debt to equity of 75%, EBIT interest cover is strong at 7.3x, up from 6.1x in 1H11. Return on invested capital weakened marginally to 17.4%. The Project Zero capital investment programmes continue to deliver efficiency gains and enhance customer service. The investment in self-manufacture of PET bottles continues to deliver returns ahead of target. There remains a deep pipeline of initiatives for implementation over the next three years, largely focused on further manufacturing insourcing and efficiencies and

upgrading cold drink cooler technology. In H1 $70m was invested in cold drink equipment. Cooler investment is a critical driver of market share gains. There was a material uplift in cooler investment in Indonesia and PNG in the period. Capex will rise by around $100m to $470m over the full FY12 year, with $140m earmarked for Indonesia and PNG.

Beer joint venture with CasellaCCL has taken an initial step toward re-entry into the beer market in December 2013 with a $46m loan to the newly created Australian Beer Company (ABC). ABC will become jointly owned by CCL and the Casella group when the loan converts to equity in December 2013, the date when CCL’s restraint of trade agreement with SABMiller ends. Casella is the manufacturer of the Arvo beer brand, but better known for the highly successful, low-priced Yellowtail export wine brand.

The JV will manufacture premium beer and developing brands while CCL will be solely responsible for the sales, distribution and development and management of customer relationships. ABC may look to distribute and/or brew global premium beer brands under licence as well as develop its own brands. The relatively low cost of entry mitigates risk.

Divisional performanceAustralian EBIT rose 4.9% to $295m on volume growth of 3.1% – a good result given wet weather and weak consumer sentiment. A strong 2Q followed a weak 1Q but volume growth slowed since June and CCL is relying on pricing, market share gains and efficiencies to drive 2H12 earnings growth.

Indonesia and PNG continues to impress with the expansion in this region delivering 19.3% EBIT growth to $27m on volume growth of 12.9%. We expect continued investment in the region to drive further strong growth with CCL targeting 10–15% volume growth and EBIT growth of more than 15%. New Zealand and Fiji disappointed with a 14.2% decline in EBIT to $31m. The outlook is unlikely to improve significantly in 2H12.

The Alcohol, Food & Services division increased EBIT 3.7% to $50m, reflecting a solid result from Services and a full six-month inclusion of revenue and earnings from the new manufacturing, sales and distribution agreement with Beam. Food snacks business SPC Ardmona continues to perform weakly, reporting another earnings decline. KAnalyst: James Cooper

Investment RatingCCL is a well-managed bottler of Coke and other mainly non-alcoholic beverages, with a strong track record. A narrow moat stems from scale advantages flowing from the extensive distribution network. Revenues grow as new products, including alcoholic beverages, are added to the chain relatively cheaply. Brand power supports price increases over time. Indonesia adds an additional growth stream. Healthy margins allow cash flows to comfortably exceed substantial capital requirements. Solid and growing fully franked dividends should continue. CCL is suitable for investors with medium risk tolerance. Corporate appeal continues.


11.0 10.110.1 12.3

710,658

14/06/12 (YMW22)60.626.2

6.814.10/11.30

27 Aug 201202 Oct 2012

Low-MediumMediumNarrow

13.00

Reduce

462.2

12/09(a)

62.213.543.5

100.04.66.6

495.8

12/10(a)

66.06.1

48.5100.0

4.26.0

531.1

12/11(a)

70.16.2

52.5100.0

4.56.4

568.2

12/12(e)

74.86.7

57.0100.0

4.15.9

626.4

12/13(e)

82.410.263.0

100.04.66.5

15.1 17.4 16.6 18.5 16.8


$17.00 $16.00 $15.00 $14.00 $13.00 $12.00 $11.00

ORG S&P/ASX 200Business RiskPrice RiskMoat RatingFair Value ($)



Origin Energy ORG | $12.00Large Cap | Oil & Gas Integrated | 25 Aug 2012

Recommendation

Result in line but earnings growth slowingAbove/Below Expectations Fair Value Up/Down

Our Accumulate recommendation is maintained. A more conservative approach to long term electricity and gas volume growth sees a 7% reduction in fair value to A$16.40 a share, rounded down to A$16.00 a share. Origin suffered a 160,000 or 4% drop in customers in FY12 in stark contrast to AGL Energy which won 180,000 customers. Management guided FY13 EBITDA growth of ‘…around 10%...’ with net profit ‘..in line..’ with FY12, below consensus estimates of 4% growth. ORG’s intention to reduce its shareholding in APLNG from 38% to 30% is not captured so some potential upside may exist.

Underlying FY12 NPAT rose 33% to A$893m, 3% above company guidance, 4% below consensus estimates and 2% above our forecast. Underlying EPS was up 16% to A$82.6 cents per share, muted by equity issuance. Growth was driven by the energy generation and retail businesses including full year contributions from Integral Energy and Country Energy, acquired in 2011. An improved performance from the Exploration and Production, and Contact Energy businesses had little impact. Earnings contribution from the APLNG joint venture is negligible. A final fully franked dividend of A$0.25 per share brings FY12 to A$0.50 per share as guided.

Earnings remain dominated by the generation and retailing businesses accounting for 76% of group EBITDA. Underlying FY12 EBITDA from this segment

increased 33% or A$388m to A$1,562m. Increased energy sales were partially offset by reduced customer numbers and lower intensity of use. Customer losses should ease in FY13 following implementation of new I.T. systems and integration of acquired businesses.

Energy generation and retailing are tough places to operate. Retail competition is fierce and largely price based with increased discounting. Weak energy demand and margin compression are a concern and could weigh on earnings growth. Both AGL Energy and Origin highlight increasing regulatory risk. A recent pricing decision by Queensland makes the state less attractive to energy retailers. The potential for a change in Federal government creates further uncertainty, particularly around the carbon tax and renewable energy targets.

The Australia Pacific LNG (APLNG) joint venture remains ORG's primary growth project. Construction remains on time and budget with sales from the first train due in mid 2015 and from the second by early 2016. Pleasingly the US$20bn development cost is unchanged – cost blow-outs are a key concern for investors. At capacity the trains will deliver 9.0m tonnes a year (mtpa) of LNG.

APLNG is well funded with an US$8.5bn joint venture debt facility secured in May and partners comfortably able to meet the required balance. The remaining capital commitment of A$3.6bn is covered by undrawn debt facilities and A$4.6bn in cash as well as strong cash flows from domestic energy retailing. It also intends to cut its APLNG stake to 30% reducing capital commitments by up to A$700m and potentially raising over A$1bn. We expect sell down by late 2012 / early 2013.

Contact Energy enjoyed dry weather which reduces hydro generation by competitors. Electricity sales volumes rose 4% as thermal output increased to take advantage of higher spot prices. The Retail division suffers intense competition and high customer churn with margins at all time lows. We expect solid free cash flows from FY14 as capital expenditure programs end.

Underlying Exploration and Production EBITDA rose 23% or A$61m to A$329m. Higher revenue reflects a 12% increase in commodity prices, mainly crude and condensate. Production volumes from most fields were steady. The exception was BassGas where an extended shutdown for the Yolla life extension project crimped output. KAnalyst: Gareth James

Investment RatingOrigin Energy is Australia’s largest integrated energy company. Its energy retailing business is the largest in Australia with four million customers and a 33% market share. Its portfolio of base load, intermediate and peaking electricity plants is the largest in the National Electricity Market (NEM) with a capacity of 6,000MW and a 13% market share. Origin owns 53% of Contact Energy (NZE:CEN), New Zealand’s second largest integrated energy company, and 38% of the Australia Pacific LNG project.


15.3 15.821.0 21.1

413,076

05/07/12 (YMW25)71.0

6.85.8

15.08/11.0828 Aug 201227 Sep 2012

MediumMedium

None16.00

Accumulate

585.0

06/10(a)

64.810.350.0

100.03.54.9

673.0

06/11(a)

71.09.6

50.0100.0

3.34.7

893.0

06/12(a)

82.416.050.0

100.03.75.2

898.9

06/13(e)

82.50.2

50.0100.0

4.25.9

929.2

06/14(e)

85.33.4

50.0100.0

4.25.9

22.4 21.2 16.6 14.6 14.1




$4.00

$3.50

$3.00

$2.50

$2.00

QRN S&P/ASX 200Business RiskPrice RiskMoat RatingFair Value ($)



QR National QRN | $3.60Large Cap | Railroads | 29 Aug 2012

Recommendation

FY12 Result – full reportAbove/Below Expectations Fair Value Up/Down

FY12 revenue rose 10% to $3.6bn driving underlying EBITDA 25% higher to $1.06bn. Underlying EBIT rose 52% to $584m. Changes to the accounting treatment of certain non-cash expenses including depreciation contributed 9% of the EBIT gain. Productivity and efficiency gains offset volume softness, and will continue to do so.

Coal volumes hauled increased 2%, but were 47 million tonnes (mt) or 20% below Prospectus forecast. EPS rose 18% to 18.1c, against FY11 proforma EPS. Full-year dividends were 8.3cps unfranked. Our valuation rises marginally to $3.50. Our FY13 EPS forecast rises from 17.3cps to 18.6cps, but our dividend forecast reduces slightly from 9.0cps to 8.5cps unfranked.

Underlying EBIT was slightly above Prospectus forecast, despite QRN hauling 47mt or 20% less coal than anticipated. The shortfall in tonnages was due to floods and industrial action at the BHP Mitsubishi Alliance Queensland mines. Cost reductions and efficiency gains offset the lower volumes. The rollover of expiring pre-privatisation contracts into new contracts with market-driven terms added $59m of revenue boosting EBIT by the same amount. Such contracts now cover 38% of railed tonnages and will rise to 65% in FY15 and 95% in FY17.

Group EBIT margin rose from 12% to 16% with management targeting 25% in 2016. We consider this achievable given the new contract pricing impact and significant efficiency and cost reduction opportunities after 150 years of government ownership. We expect these factors to underpin solid EBIT growth of around 15% in FY13 and FY14 despite weaker demand for coal haulage services. We reduce volume expectations around 5% for the next two years, but forecast greater cost and efficiency gains reflecting our rising confidence in management’s capacity to execute.

QRN made another voluntary redundancy offer to certain employees. It expects 750 to accept and leave by December 2012 at a $75m cost, which will be recouped in around one year. The new program will bring total redundancies for the 2012 calendar year to 900.

An on market buyback of up to 10% (244 million) of issued shares, partly reflects lower than anticipated capital expenditure forecasts due to project expansion deferrals by coal mining customers. The balance sheet has little gearing with net debt to equity only 15%. Cash flow should be sufficient to fund 65% of capital expenditure in FY13 and FY14 which we forecast to be a little over $1bn. We expect the buyback to be marginally EPS accretive.

QRN expects to haul around 8% more coal in FY13 despite expecting softer coking coal demand to persist in the near-term. In the medium to longer term it expects Asian demand for Australian resources to remain robust. This reflects in a "strong pipeline of new and expansion projects committed in the resource sector, especially for coal and iron ore, which will underpin QR National’s growth." We share this view. Near-term global economic issues are likely to constrain growth but we do not expect coal and iron-ore export volumes to enter a negative trend for a prolonged period. Commodity price volatility belies the stability of underlying volume demand. KAnalyst: James Cooper The full version of this article is available at www.morningstar.com.au

Investment RatingQRN is a strongly positioned, vertically integrated rail haulage and network business with ownership of 2,300km of track and associated assets, and at the time of listing a fleet of 700 locomotives and 16,000 wagons. It has leverage to what looks to be a sustained commodities' supercycle and only one meaningful competitor in Asciano´s Pacific National. A crucial difference is QRN´s monopoly ownership of the (regulated) Queensland coal network track. QR also transports non-coal freight in regional Queensland and iron ore in WA, and operates intermodal services between the East and West Coasts. Very significant capex over 2008-2013 should support strong earnings growth, the latter magnified by likely efficiency gains in private sector hands. It also means debt will rise quickly. Risks include single commodity dependency, powerful customers and execution risk. The majority of earnings will be re-invested in the business constraining dividends.


-- ---- --

08,784

29/03/12 (YMW12)76.4

5.815.0

4.03/2.8503 Sep 201228 Sep 2012

MediumMediumNarrow

3.50

Hold

-15.4

06/10(a)

-0.7--

0.00.0

----

58.7

06/11(a)

2.5--

3.70.01.21.2

440.7

06/12(a)

18.1619.5

8.30.02.42.4

444.6

06/13(e)

18.63.08.50.02.42.4

500.7

06/14(e)

21.917.610.0

0.02.82.8

-- 123.7 19.2 19.4 16.5


$32.50

$30.00

$27.50

$25.00

$22.50

$20.00

WOR S&P/ASX 200Business RiskPrice RiskMoat RatingFair Value ($)



WorleyParsons WOR | $26.32Large Cap | Oil & Gas Equipment & Services | 29 Aug 2012

Recommendation

FY12 a little below expectations but strong growth set to continueAbove/Below Expectations Fair Value Up/Down

Adjusted FY12 NPAT grew 16% to $345.6m but was 4% below our forecast. Revenue lifted an impressive 32% but the hydrocarbons division continued to be plagued by underperforming projects in Western Australia, causing a reduction in EBIT margin. Our underlying view remains unchanged: We expect continued strong growth given a positive outlook for the global oil and gas sector, ongoing expansion into new regions and strengthening global relationships with key clients. With FY12 a little below our expectations we lower our FY13 NPAT forecast 2% but still forecast growth of 22%. Our valuation is unchanged at $28.00 and we retain our Hold recommendation.

This was a good result given currency headwinds, the problem Western Australian contracts and a less certain outlook in the resources sector in 2H12. Earnings benefited from strong conditions across the key oil, gas and mining markets. Mining, metals and chemicals was the standout performer benefiting from significant mine expansion projects and associated infrastructure, particularly in Australia. Hydrocarbons disappointed given the margin squeeze as did the power division which was the only business to report a fall in earnings. 2H12 delivered a stronger result with EBIT up 14% on 1H12 due to a recovery in hydrocarbons and power margins. This sets the base for higher

earnings in FY13. The strong result saw the full year dividend increased to 91cps, 69% franked, up from 86cps in FY11 with a final dividend of 51cps.

The outlook remains positive with strong conditions in the oil and gas sector and expectations of further margin improvement with reduced margin projects complete or fully provisioned. But softness in the resources sector, particularly in Australia is likely to lead to slower growth for the minerals, metals and chemicals division. We expect conditions to remain strong across the key hydrocarbons business as capital spending continues to grow, particularly in the unconventional oil and gas segments. Staff numbers grew strongly, up 5,700 over the year to 40,800, a good indicator of the increasing work load. The key risk is a slowdown in the global oil and gas industry but we don’t think there will be any major reduction in global spending in this sector. There is also the risk of further margin pressure from project delays and cost over runs. But with WOR’s contracts primarily cost plus and the Western Australian problem contracts completed, we think this unlikely. WOR’s guidance is typically vague with expectations for ‘good growth’ in FY13. We are comfortable with our forecast for 22% NPAT growth given the strong oil and gas sector and recovering margins.

Operating cash flow improved significantly after a disappointing first half and was a highlight of the result. Full year cash conversion was 127% with a strong focus on debtor control and cash collection. The strong cash flow saw net debt decline from $640m at 31 December 2011 to $490m. The balance sheet remains healthy with net debt to equity of 25%. EBIT interest cover is very strong at 11.4 times. WOR is in a strong position to fund future growth opportunities. KAnalyst: Peter Rae

Table 1: Segment results$m FY11 FY12 % change

Hydrocarbons 554.3 586.5 6%

Minerals & Metals 102.7 131.4 28%

Power 65.3 59.9 -8%

Infrastructure & Environment 101.0 115.3 14%

Corporate costs/other adjustments -349.1 -362.8 4%

Total EBIT (incl. associates) 474.2 530.3 12%

EBIT Margin 8.0% 7.2% -80bps

Source: WOR

Investment RatingWOR is well managed with a strong professional reputation and has strong international growth options. The group is strongly cash generative with limited capex requirements and modest gearing, allowing a growing dividend stream over time. Risks include the potential for project delays or complications exacerbated by instability in some areas worked, the difficulty in assessing the order book, and exposure to any further strengthening of the A$. This stock is suitable for longer-term growth investors willing to accept above average risk.


6.8 26.38.5 38.2

76,374

12/07/12 (YMW26)85.917.712.0

30.00/23.8403 Sep 201228 Sep 2012

HighHigh

Narrow28.00

Hold

291.1

06/10(a)

117.5-26.375.571.9

2.93.8

298.5

06/11(a)

120.62.7

86.057.0

3.24.1

345.6

06/12(a)

139.415.691.069.2

3.44.1

421.1

06/13(e)

169.921.9

105.050.0

4.04.8

493.9

06/14(e)

199.317.3

120.050.0

4.65.5

22.2 21.9 19.4 15.5 13.2




$32.00

$30.00

$28.00

$26.00

$24.00

$22.00

WOW S&P/ASX 200Business RiskPrice RiskMoat RatingFair Value ($)



Woolworths WOW | $28.89Large Cap | Grocery Stores | 24 Aug 2012

Recommendation

FY12 below expectations – Outlook guardedAbove/Below Expectations Fair Value Up/Down

FY12 NPAT from continuing operations and the final dividend were both slightly below our expectations. A weaker 2H margin in Australian Food & Liquor (AF&L) and guarded, but not unexpected FY13 guidance of 3–6% NPAT growth disappointed. Despite the slight disappointment our thesis and our wide moat remain intact.

FY12 NPAT increased 2.8% to $2.183bn and nearer the bottom end of 2–6% growth guidance. Total group sales increased 4.7% to $56.7bn and excluding Petrol up 3.9% to $50.0bn. EBIT increased 2.3% to $3.352bn. Final dividend of 67 cents fully franked was one cent below expectation with a payout ratio of 70%. Operating cash flow was robust at $2.9bn. Return on Equity fell from 27.1% to 25.8% reflecting the above average investment in AF&L and launch of Masters. The balance sheet remains in good shape. There was no share buy-back activity in FY12 and none is expected in FY13. The provision for Dick Smith consumer electronics increased from $300m to $420m – effectively written down to zero.

Given guarded guidance we reduce our FY13 NPAT estimate from $2.42bn to $2.275bn. EPS is reduced from196.0 to 184.2 cents with dividend from 135 to 130 cents. FY13 estimate is predicted on a 5% lift in group sales, excluding Dick Smith operations, and group margin maintained at 6.0%. In FY14 we anticipate an improvement in economic activity and a return to more

normal retail conditions. Group sales are expected to lift 5.5–6.0% with a modest improvement in overall group margin. FY14 NPAT forecast is $2.41bn with EPS of 194.0 cents and dividend of 136.0 cents. Fair value is unchanged at $29.00.

Brief divisional comments:Australian Food & Liquor – Prior benchmarks make progress increasingly difficult particularly in a deflationary environment and a resurgent competitor with positive momentum. Sales rose 3.8% to $37.5bn with EBIT up 5.2% to $2.82bn. Margin widened nine basis points (bps) from 7.41% to 7.50% but 2H margin eased from 7.63% in 1H to 7.36%. This is still a very good and world leading performance in a very competitive space. Market share, items sold and customer transactions all increased. Expansion and refurbishment activity was heightened with 38 new supermarkets opened, well above average and 20 Dan Murphy’s also opened. Trading area increased by 5.3% and with another 35 supermarkets planned for FY13 will lift by 4.2%. Liquor, with Cellarmasters contributing for a full year, performed strongly with market share gains. Sales increased 11.9% to $6.6bn with Dan Murphy’s the ‘engine room”. EBIT growth exceeded sales growth and clearly assisted overall AF&L margin. Liquor represented 17.5% of AF&L sales up from 16.3% in FY11. New Zealand Supermarkets –A very solid performance with the completed transformation to Countdown driving all key metrics higher. Sales increased 3% to NZ$5.52bn with trading EBIT jumping 16% to NZ$292.25. Margin widened 59 bps from 4.71% to 5.30%. Market share increased and supply chain capability and efficiency improved significantly. BIG W – Sales edged 0.5% higher to $4.18bn with comparable sales down 1.5%. There was a bounce in 2H with comparable sales up 0.3%. EBIT was up 0.8% to $178.4m with margin up from 4.26% to 4.27%. Customer numbers and items sold increased. Competitor Kmart’s performance left BIG W in the shade with a 30% lift in EBIT and margin of 6.56%. Conditions remain challenging and modest growth is expected in FY13.Hotels – A good performance in a challenging consumer constrained environment. Sales increased 4.4% to $1.2bn with EBIT up 6.5% to %195.7m. Margin widened 32 bps to 16.25%.Home Improvement – The roll out of the Masters Home Improvement is on track with 15 stores opened at year end. Sales increased almost 25% to $828m. There are 112 sites in the pipeline and 12 stores are under constructions and five completing fitout. At least 30 stores in total will be opened by June 2013. KAnalyst: Peter Warnes

Investment RatingWOW has an enviable track record with well above average EPS and DPS growth driving exceptional total returns over the past decade. This reflects well on operational and shareholder focus. Project Refresh was a great success capturing over $9bn in cumulative savings with another $1.5bn to come through further logistics and development initiatives. Quantum will extend these benefits and savings. WOW is a defensive growth stock with a solid balance sheet and an imposing moat surrounding its economic castle.


14.5 15.315.6 15.6

436330

26/07/12 (YMW28)56.828.512.0

29.61/23.2110 Sep 201212 Oct 2012

LowMedium

Wide29.00

Hold

2020.8

06/10(a)

163.28.3

115.0100.0

4.25.9

2124.0

06/11(a)

173.66.4

122.0100.0

4.56.4

2182.9

06/12(a)

177.82.4

126.0100.0

4.97.0

2275.1

06/13(e)

184.23.6

130.0100.0

4.56.4

2409.9

06/14(e)

194.05.3

136.0100.0

4.76.7

16.9 15.7 14.4 15.7 14.9


$6.00

$5.00

$4.00

$3.00

$2.00

APA S&P/ASX 200Business RiskPrice RiskMoat RatingFair Value ($)



APA Group APA | $4.78Medium Cap | Oil & Gas Midstream | 22 Aug 2012

Recommendation

Solid FY12, laying foundations for long-term growthAbove/Below Expectations Fair Value Up/Down

The FY12 result was in line with guidance with adjusted EBITDA rising 9% to $535m. Operating cash flow increased 8% to $335.6m but operating cash flow per security – the key metric – was flat at 52.5 cents, held back by an expanded capital base necessary to fund expansion projects not yet contributing to revenues, as expected. Adjusted NPAT increased 29% to $140.3m, slightly ahead of expectations due to a lower interest cost. EPS increased 11% to 22 cents per security. Distributions increased 1.7% to 35cps on a higher payout ratio of 67% of operating cashflow. FY13 guidance is for at least 35cps, regardless of the outcome of the Hastings Diversified Utilities Fund (HDF) takeover. High organic capital expenditure and the near-term earnings decretive HDF merger will dampen near term distribution growth. But these are sound investments providing good growth over the longer term.

FY13 guidance is for EBITDA of $540–550m and net interest costs of $240–245m. Near-term forecasts downgrade marginally. Fair value is broadly unchanged. APA remains our preferred Australian infrastructure stock due to the positive long-term outlook for gas, limited regulation, a solid financial position and good management.

The core Energy Infrastructure business increased EBITDA 14% to $441.7m, excluding Allgas which was

sold into an APA managed fund during the year. The solid performance was due to asset expansions, tariff increases on most assets and acquisitions. Asset management EBITDA fell 18% to $31.9m due to fewer customer contributions. Energy Investments EBITDA increased 54% to $41.8m mainly on increased returns from Envestra and HDF. Capital expenditure runs at a high level, suppressing near term returns due to the lag between raising capital and receiving revenues from completed projects. But expansion provides strong long-term returns, one of APA’s key positives. Excluding acquisitions, capital expenditure was $249.1m, up from $173.3m last year. We expect capital expenditure to track at $300m pa over the medium-term before falling back toward $200m.

It looks like APA will acquire HDF, owner of gas transmission company Epic Energy. Rival bidder Pipeline Partners Australia (PPA) bowed out after APA improved its offer. We believe the offer is fair to both parties. Our forecasts will incorporate the merger when complete. We expect the merger to be decretive to operating cash flow per security until at least 2015 when lucrative contracts on HDF’s South West Queensland Pipeline start. APA should strip out material costs including management fees, other corporate costs and refinance debt on an interest rate about 1% lower. There is upside to revenue as the combined network can offer greater flexibility in services to suit customer needs.

There is also significant strategic benefit given the SWQP is one of the links connecting coal seam gas fields and new LNG export facilities in Gladstone, with most of APA’s assets in southern states and traditional gas fields. APA must divest the Moomba-Adelaide Pipeline to appease the ACCC. We expect good demand for this asset, likely fetching $400–500m for APA to reduce debt. APA already has an excellent gas transmission network. The addition of the SWQP will make it even better.

The recent subordinated notes issue was highly successful. Strong support allowed APA to upsize from $350m to $475m from brokers and institutional investors with more to come from retail. Proceeds will help fund the HDF takeover and other growth initiatives. The notes pay a margin of 4.5% above the bank bill rate, currently around 3.6%. The notes mature in 2072 but APA can redeem in 2018 if it wishes. The notes strengthen APA’s financial position given their very long maturity, no covenants and ability to defer interest payments in extreme conditions, after cutting distributions to security holders. KAnalyst: Adrian Atkins

Investment RatingAPA is the industry leader in gas infrastructure, with interests in transmission and distributions assets across Australia responsible for delivering over half of the nation´s domestic gas usage. Gas, whether natural or coal seam, continues to be the fastest growing energy source in Australia. Coal still dominates as the energy source for base load power generation but increasingly the growth of cogeneration and gas-fired plants sees gas consumption increase at a faster rate than coal in power generation. The portfolio is well positioned to share in this growth. Internal management is astute and conservative. APA is our preferred exposure to the infrastructure sector. It is a suitable core holding for income investors.


-1.1 3.48.4 5.8

53,106

26/07/12 (YMW28)131.6

6.51.6

5.34/3.8325 Jun 201214 Sep 2012

MediumMediumNarrow

4.80

Hold

100.3

06/10(a)

19.4-5.632.8

0.010.110.1

108.8

06/11(a)

19.71.6

34.40.08.68.6

140.3

06/12(a)

21.911.135.0

0.07.77.7

145.7

06/13(e)

22.31.9

35.30.07.47.4

170.8

06/14(e)

25.614.635.7

0.07.57.5

16.7 20.4 20.8 21.4 18.7




$1.75

$1.50

$1.25

$1.00

$0.75

$0.50

BPT S&P/ASX 200Business RiskPrice RiskMoat RatingFair Value ($)



Beach Energy BPT | $1.22Medium Cap | Oil & Gas E&P | 28 Aug 2012

Recommendation

Fiscal 2013 in line, bring on the shale testingAbove/Below Expectations Fair Value Up/Down

Underlying FY12 earnings rose three-fold to a record $123 million, in line with expectations. The result is robust and stands BPT in good stead to deliver on oil and gas commercialisation opportunities including unconventional shale gas. We retain our Accumulate recommendation reiterating the Speculative rating. Around half BPT's worth is shale gas (unconventional) upside. Preliminary production results from shale gas wells are phenomenal but much remains to be done to convert the potential into reliably profitable producing assets. The upside though is very alluring.

No change to our 8 cent FY13 EPS forecast. BPT forecasts production at 8.5–9.0mmboe. Our FY13 forecast resides at the lower end of that range. The increase reflects higher oil production from the Western Flank fields in the Cooper Basin. Our forecast FY14 EPS is 9 cents, higher on marginally lower cost assumptions. BPT paid a better than anticipated 1.5 cent final dividend which brings the full year to 2.25 cents, a 21% payout on underlying earnings.

Headline profit improved from negative $93 million to positive $165 million adding net $42 million in after-tax gains including profits on asset sales and unrealised hedge gains, less asset impairments. BPT divested its 55.4% interest in Somerton Energy

generating $8 million post-tax profit. The previous corresponding period included a large write-down on the diminished Basker Manter Gummy asset.

The result was struck on a 24% increase in sales to $620 million reflecting 16% increase in production to 7.2 million barrels of oil equivalent (boe) and a 23% increase in average price to US$74 per boe. Receding flood waters in the Cooper Basin allowed appraisal and development drilling which boosted production. The average oil price improved 25% from US$95 barrel to US$119 per barrel. A lower proportion of gas and ethane sales volumes also increased average pricing relative to FY11.

Earnings before interest, tax, depreciation, amortisation and exploration (EBITDAX) increased 61% to $289 million and EBIT by 141% to $167 million while net operating cash flow was steady at $115 million. All were in line with expectations. Cash flows in FY11 were boosted by draw down of crude inventory from the Jackson-Moonie oil pipeline.

Net cash levels increased 47% to $265 million at end December, aided by strong cash flows, $190 million in new equity net of costs and an $150 million convertible note issue. Outgoings included $11 million in dividends, $163 million in capital expenditure and net $72 million on acquisitions including the strategic purchase of Adelaide Energy. Proven and probable reserves increased 20% to 93mmboe including 3mmbls in oil reserve additions and 21mmboe in gas and gas liquids additions. BPT anticipates a material increase in resources in the near future following fracture stimulation and flow testing on the Moonta-1 and Streaky-1 wells. In FY13 BPT will drill seven new vertical exploration wells and three horizontal pilot production wells to better define potential from shale gas. KAnalyst: Mark Taylor

Investment RatingBeach Energy produces around 7.0 million barrels of oil equivalent (mmboe) per year of oil, gas and gas liquids predominantly from joint ventures within the onshore Cooper and Eromanga Basins of South Australia and Queensland. A 30% stake in the Basker Manter Gummy (BMG) oil and gas fields in Bass Strait is a some-time contributor. Overseas forays into Egypt and the United States are minor. Beach has a strong balance sheet and resiliently cash flow positive operations. More value has been achieved in trading assets rather than growing production and underlying earnings. The well timed purchase and sell-down of coal seam gas assets generated a one-off cash bonanza. Perennial capital raisings blunted shareholder benefits. Speculative and not for conservative investors. Appeal is potential for conversion of large contingent conventional and unconventional resources into reserves and economic production. Shale gas potential in particular has generated strong interest.


12.5 14.83.0 15.9

51,588

02/08/12 (YMW29)244.6

5.2-15.2

1.76/0.8803 Sep 201228 Sep 2012

SpeculativeHigh

Nonena

Accumulate

-27.6

06/10(a)

-2.4--

1.7100.0

2.23.2

32.6

06/11(a)

2.9--

1.8100.0

2.33.2

122.9

06/12(a)

10.6263.1

2.2100.0

1.82.5

102.7

06/13(e)

8.1-23.6

1.8100.0

1.42.0

114.8

06/14(e)

9.011.9

1.7100.0

1.42.0

-- 27.2 11.7 15.1 13.5

No recommendation trigger guide available.


$0.90

$0.80

$0.70

$0.60

$0.50

$0.40

ENV S&P/ASX 200Business RiskPrice RiskMoat RatingFair Value ($)



Envestra ENV | $0.84Medium Cap | Utilities - Regulated Gas | 28 Aug 2012

Recommendation

Performing strongly, wary of Vic resetAbove/Below Expectations Fair Value Up/Down

A good FY12 performance with underlying NPAT jumping 57% to $74.6m, 6% ahead of our expectations due to better cost control. Revenue increased 10% to $468.6m and EBIT increased 15% to $276.6m as higher tariffs and strong customer connections easily offset weak volumes due to warm winter weather. Net finance costs reduced 2% as lower interest rates offset higher debt levels.

FY13 NPAT guidance is comfortably ahead of prior expectations at around $100m, representing 35% growth. Strong profit growth is driven by high operating leverage which magnifies movements in revenue. This is beneficial when revenues rise and negative when revenues fall. Our near-term forecasts upgrade and our fair value estimate increases marginally.

Profit before tax (PBT) fell 6% in Victoria to $99.1m due to the mild winter. Benefiting from big tariff increases under the new regulatory period, South Australia increased PBT 29% to $119.4m and Queensland 21% to $44.7m. Capital expenditure is increasing materially as ageing mains are replaced.

Financial health is reasonably good and improving as stronger earnings help credit metrics. Interest cover was 2.0x and the ratio of funds from operations to debt was 7.5%, both improving

towards FY13 targets. Gearing measured as debt to regulated asset base (RAB) was 79% and will trend lower as the majority of capex is funded from retained earnings and the distribution reinvestment plan. Debt maturity profile is excellent. Around 60% of debt is cheap, long-term debt secured before the GFC. Average maturity is 11 years and all maturities before FY14 are covered by existing undrawn debt. The first major refinancing year is FY16, by which time ENV should be in good financial shape.

Two years ago we said ‘Annual distributions are frozen at 5.5cps in the near-term to help fund capex without pushing gearing higher. This has led the market to believe ENV offers no growth, pricing it on one of the highest distribution yields in the sector. But we think it could surprise on the upside following regulatory resets in 2011.’

While the market was focussed on the lack of distribution growth and limited expansion of the physical network, we identified earnings growth would be driven by more favourable returns under the new regulatory period. ENV’s share price increased substantially as the stock re-rated for improved earnings. We are now concerned future regulatory periods will provide substantially lower returns. This is mainly due to the lower long-term government bond yield, a key determinant of regulatory returns. Additionally, there is much media and political focus on returns given rapidly rising household energy bills and there is a review underway considering changing rules to give the regulator more power.

Given infrastructure companies are again trading at substantial premiums to RAB (what the regulator considers the assets to be worth), the regulator could justifiably argue returns are too high. ENV is trading at a 31% premium to RAB. While half of its assets have returns locked in for the next four years, the Victorian assets reset in January 2013. The draft decision is due 24 September 2012 and we expect it to be tough.

Distributions were planned to grow robustly over the medium-term on higher earnings and a higher payout ratio, afforded by the improving balance sheet. But potentially poor returns following the Victorian reset could de-rail distribution growth. ENV will review the outlook for distributions after the Victorian regulatory decision. KAnalyst: Adrian Atkins

Investment RatingENV is Australia’s largest distributor of natural gas with networks in South Australia, Victoria, Queensland, New South Wales and the Northern Territory delivering gas to almost one million customers. It listed on the ASX in 1997 after being spun-out of Origin/Boral. The monopoly distribution and transmission assets provide highly stable and predictable cash flow, with over 90% of revenue regulated. Financial strength will improve substantially in coming years as regulatory resets drive solid revenue growth. Management is internal but operation of the pipelines is outsourced to APA Group, ENV’s largest shareholder with 33%. Cheung Kong Infrastructure is also on the registrar with 19%. It is suitable for income investors at the right price.


-1.5 11.8-9.2 -5.2

81305

08/03/12 (YMW09)26.512.6

1.60.87/0.62

10 Sep 201231 Oct 2012

MediumMedium

None0.71

Reduce

39.8

06/10(a)

3.0-6.95.5

27.510.812.1

47.6

06/11(a)

3.312.8

5.50.09.99.9

74.6

06/12(a)

4.946.0

5.80.08.08.0

100.9

06/13(e)

6.329.7

6.00.07.17.1

111.0

06/14(e)

6.87.36.30.07.57.5

17.1 16.6 15.0 13.2 12.4


$10.00

$ 9.00

$ 8.00

$ 7.00

$ 6.00

IRE S&P/ASX 200Business RiskPrice RiskMoat RatingFair Value ($)



IRESS IRE | $7.11Medium Cap | Software - Infrastructure | 24 Aug 2012

Recommendation

1H12 Result: Inline with subdued outlookAbove/Below Expectations Fair Value Up/Down

1H12 underlying NPAT of $27.8m is in line with our expectation, and earnings are on track to achieve our full year FY12 underlying profit forecast of $54m. Revenue for 1H12 was relatively stable, up 2.7% on 1H11 and down 1% on 2H11. EBITDA is down about 5% due to additional investment of A$3.4m on the UK and Asian expansion. Reported NPAT for 1H12 fell 9% to $17.7m due to amortisation and non operating charges. The interim dividend of 13.5cps 90% franked is down 4% on 1H11. The dividend payout is a healthy 88% of reported profit, well above the minimum 80% dividend payout policy level. The balance sheet remains strong with $49m cash.

We have already allowed for the increased investment in the UK and Asia and we maintain our full year FY12 and FY13 earnings forecasts. Weak markets and higher costs are a worry, but the company is investing for medium term growth and we expect earnings to recover, supported by a stronger contribution from Wealth Management. Financial Markets in Australia, New Zealand and Canada account for the bulk of the near term revenue weakness. Our fair value estimate declines from $7.20 to $7.00. Risks remain that medium-term earnings growth could disappoint if the current contraction in the sell-side broker market develops into a more structural change rather than a cyclical downturn.

Wealth Management stood out in 1H12, with revenue up 9% on pcp to $29m and EBITDA up 7%, despite $2m in losses from Asia and the UK. Financial Markets revenue of $74m is flat on pcp (prior corresponding period) with Canada in particular suffering from weaker conditions. Group operating margins declined from 44% in 1H11 to 41% as flatter revenues, the impact of client losses and increased expenditure on medium term growth initiatives took their toll. Financial Markets EBITDA of $32m declined in all segments with Australia/NZ down 5% on 1H11, Canada down 11% and South Africa 6% weaker. Wealth Management EBITDA increased 7% to $10m, with Australia/NZ up 19%, South Africa up 33% (off a low base), partially offset by EBITDA losses from Asia and the UK.

Performance in 1H12 is consistent with previous guidance for an approximate 10% decline in full year FY12 earnings. Financial Markets revenue growth is expected to remain flat in 2H12, despite a modest price increase in July 2012. A slight change in the guidance wording to a “decline in group segment profit of less than 10% in 2012 compared to 2011” suggests a minor improvement in the outlook. Nevertheless, the poor trading conditions will continue in 2H12 as trading difficulties faced by the client base weigh on activity. Despite a soft 1H12 result, the underlying business remains resilient, with management launching a range of technology initiatives and enjoying strong demand in specific segments and products. The high level of recurring subscription revenue and sticky client base provide some confidence in the medium to long term outlook for earnings growth. The Financial Markets business is leveraged to a recovery in equity markets, but questions remain whether markets are undertaking a shorter term cyclical change or a longer term structural adjustment.

The UK expansion is an important medium term earnings catalyst, as the UK wealth management industry is going through a major regulatory transformation with new rules shaking up the industry. The FOFA regulatory changes in Australia pale in comparison to the tough rule changes implemented in the UK. In conjunction with recently hired UK industry experts, IRE is well placed to leverage its Australian wealth management regulatory experience, introducing a modified XPLAN software product to the UK market. However, in the near term the system development is expensive and is hurting group performance. The operational funding requirement for the UK will be fully expensed and limited to A$5m per year in the establishment phase. KAnalyst: David Ellis

Investment RatingIRESS provides market data and trading systems for equity market participants based on order input, management and routing network and services. IRE is also a leading provider of financial planning software. Incremental upgrades enable price increases, leveraging a fixed-cost base without damaging key customer relationships. Competition in Australia remains negligible, but given the favourable metrics should not be dismissed in the medium term. Capital structure is ideal - it currently has zero debt, employs negative working capital, and requires a low level of capex and tangible fixed assets. Entry into Canada and acquisition of XPLAN and PlanTech provide strong upside potential to mature Australian operations, as is the case with South African operations through Spotlight and Peresys. IRE is an attractive long-term investment for low to medium-risk investors.


6.9 8.712.6 15.7

5925

10/05/12 (YMW17)65.232.3

-37.18.35/5.93

10 Sep 201228 Sep 2012

LowMediumNarrow

7.00

Hold

43.0

12/09(a)

35.016.534.090.0

5.06.9

58.1

12/10(a)

46.131.838.072.0

4.55.9

59.8

12/11(a)

47.22.5

38.086.0

4.56.2

54.3

12/12(e)

42.5-9.936.080.0

5.16.8

56.3

12/13(e)

43.62.6

37.080.0

5.27.0

19.6 18.4 17.8 16.7 16.3




$25.00

$20.00

$15.00

$10.00

$ 5.00

RHC S&P/ASX 200Business RiskPrice RiskMoat RatingFair Value ($)



Ramsay Health Care RHC | $23.74Medium Cap | Medical Care | 23 Aug 2012

Recommendation

FY12 inline with expectations and expects 10% to 12% EPS growth for FY13Above/Below Expectations Fair Value Up/Down

FY12 reported NPAT was $244m. Removing CARES dividend and adjusting for $8.5m of net abnormal items normalised NPAT is $234.9m – in line with our forecast of $234.2m and up 15% on FY11. Previously forecast declining growth in EPS changes with management indicating new expansion projects are set to further enhance earnings growth for FY13 by 10%–12%. This is above our expectation of 8.6% and we upgrade to be consistent with guidance. Fair value lifts from $21.00 to $22.00 and our recommendation moves from Reduce to Hold.

The ageing population is the underlying driver of recent and future organic growth. This is driving increased demand for health related goods and services. Increased utilisation of facilities sees a greater share of revenue falling to profits lifting operating margins. RHC continues to deliver strong margin growth with Australian EBITDA margins up from 14.3% to 15.2%.

Another key contributor is the investment in new capacity as RHC moves from a building phase over the last four years to accelerate the release of a number of large and incrementally meaningful projects. This adds revenue without capital costs which are in prior year capital expenditure. Construction activity remains a key driver to profit

growth. Expanding an already established hospital within a community represents a low risk strategy to extract returns on invested capital. RHC is constantly reassessing its operations and will spend at least $100m annually in capex adding extra capacity. Demand surpasses capacity with new facilities quickly utilised once operational. We view the strategy of adding a range of health related services and complexity as differentiating and growing the competitive advantage of a particular centre. These growing centres of excellence attract the best medical specialist skills from the surrounding area. There is a positive feedback loop as the best specialists are drawn to these centres further establishing the centres and so attracting more specialists.

The increasing needs of an ageing population are becoming an issue for governments which are also battling constraints on their fiscal budgets. Australia is set to follow the UK with the launch of activity based funding. This will set a cost per medical procedure and will aim to drive efficiency among the public health care providers. The experience in the UK demonstrates the cost advantage of transferring patients into the private system. RHC’s UK private hospital now treats 65% of admissions from the public system. This increase in volume enables EBITDAR margins to reach 25%. There remains significant upside earnings potential if the federal or state governments implement a similar initiative. We expect Australia to increasingly move towards a number of one off public private partnerships. These are likely to represent definable contracts which can be used to reduce a specific waiting list for a common procedure and enable state governments to take some pressure off their public hospitals to alleviate waiting lists.

Offshore expansion sees management assessing options. Further acquisitions in France are on hold. The economic collapse across Europe and the associated fall in private insurance participation and government spending ensures the returns from hospital assets are now less attractive. Asset values have materially declined and RHC will only invest if the discount allows for future uncertainty on the duration of the economic downturn. RHC turns it attention to emerging markets and we suspect Indonesia is high on the target list. With three hospitals in the region it has already proved it has the people and operating model which ensures it can achieve a required rate of return. KAnalyst: Tim Montague-Jones

Investment RatingRHC is a premier private hospital operator generating industry-leading margins. Strong cashflow from the portfolio of quality hospitals is invested to enhance facilities. RHC has over 117 hospitals and day care facilities, 30,000 staff, manages over 10,000 beds and has annual revenue of over $3bn. RHC operates a decentralised control structure to empower operators. Many of the hospitals present natural monopolies for their region because of location, scale and reputation. Offshore expansion provides another leg of growth as RHC exports its business practices. The stock suits investors looking for long-term earnings growth derived from increasing capacity to meet the service requirements of an ageing population.


17.0 17.316.7 18.8

84,957

26/07/12 (YMW28)56.416.1

5.425.14/17.0603 Sep 201226 Sep 2012

MediumMediumNarrow

22.00

Hold

167.8

06/10(a)

85.114.834.0

100.02.84.1

204.7

06/11(a)

101.118.838.1

100.02.33.3

234.9

06/12(a)

116.114.842.4

100.02.23.2

262.5

06/13(e)

129.711.752.0

100.02.23.1

286.1

06/14(e)

141.39.0

60.0100.0

2.53.6

14.1 16.3 16.4 18.3 16.8


$9.00

$8.00

$7.00

$6.00

$5.00

$4.00

SEK S&P/ASX 200Business RiskPrice RiskMoat RatingFair Value ($)



SEEK SEK | $7.25Medium Cap | Advertising Agencies | 27 Aug 2012

Recommendation

Education and international divisions add significant profit growthAbove/Below Expectations Fair Value Up/Down

FY12 reported NPAT of $131.7m was up 35% on pcp. We adjust the result to account for a one off fair value gain of $25.1m and an impairment loss on Think of $23.6m. This translates to normalised NPAT of $130.2m which is 6% above our forecast of $123.1m. The earnings surprise comes from the Education division which turned around strongly in 2H to lift group earnings. After updating forecasts fair value eases from $7.60 to $7.50, while recent share price strength sees a Hold recommendation.

Our thesis remains intact. SEK retains its dominant position in the domestic jobs ad market and is building strong positions in selected international markets. We expect employment conditions around the world to remain under pressure from deterioration in economic growth. With the total size of the market declining, SEK is extracting a higher share as the structural shift from print to online gathers pace. This ensures we remain comfortable in forecasting low double digit earnings growth for the next five years despite the unsettled outlook for employment conditions.

Increased ownership stakes in international assets sees consolidation distorting comparability. SEK provides a look through EBITDA which adds colour to the key drivers of profit growth. Education was the standout and increased EBITDA 80% to $33m. This is

a turnaround after a poor performance in FY11. A fairer comparative is the FY10 year which delivered an EBITDA of $39.7m and implies further headroom for growth. The International division increased EBITDA 40% to $49.8m. This reflects the move from a period of earnings dilution to profit contribution as the early stage offshore investments begin to pay sizable dividends. The core domestic job seeker website increased EBITDA 14% to $152.1m reflecting strong growth in price offsetting soft volume as employment conditions remain subdued.

The Education division generates upfront revenues as students enrol. This creates a step up in revenue for a new course every consecutive year until the duration of the course is fully enrolled. Upfront revenue drives near term returns but the larger student numbers require a higher cost to operate through employing more teachers. This delay between cash in and cost out led to the sudden contraction in FY11 returns. After a full review of the division SEK is now confident it has the required systems and resources within the educational platform to cater for expected growth in course enrolments.

SEK is in discussions with a global education company that wants to acquire a 20% stake in its educational provider Think. Adding additional expertise and experience will energise and focus the operations to accelerate growth and increase returns for all shareholders.

The domestic jobseeker business accounts for 65% of group EBITDA at $152.1m, with revenue up 11% to $247.8m. The structural shift of revenues from print to online remains the core driver to profit growth. This helps offset cyclical weakness with the volume of advertising up only 1% while price increased 10%. Recruitment consultants are charged on a price per volume so as the market contracts they are charged a higher fee.

International accounts for 21% of group EBITDA at $49.8m. Zhaopin, the Chinese job seeker site delivered strong market share growth with June internet data indicating it has now overtaken competitor 51Job for monthly page views, job ads and unique browsers. Some would like SEK to extract higher returns from emerging assets but we commend management for the long term approach of reallocating capital back into growing domestic market positions and so driving a wedge between itself and competitors with an aim of replicating market dominance established in Australia. KAnalyst: Tim Montague-Jones

Investment RatingSEK operates three main divisions: employment, education and international investments. The seek.com.au website captures 83% of total time spent online looking for jobs. The jobseeker database markets educational courses to enhance a job applicant's prospects. SEK is working on a JV with Swinburne University to offer vocational education courses online. Offshore expansion through associate holdings enables SEK to hold the number one online market position in Brazil, Mexico, Indonesia, Hong Kong, Singapore, Thailand, Malaysia and the Philippines. It holds the number two position in China. Strong domestic operating cash flow is funnelled offshore to further develop associates. Investment is expanding domestic education businesses. Market success to date demonstrates the brand strength, which we view as a powerful barrier to entry.


9.6 --4.8 --

82404

09/08/12 (YMW30)101.2

25.97.6

7.55/4.8706 Sep 201216 Oct 2012

MediumMedium

None7.50

Hold

89.5

06/10(a)

26.541.812.0

100.01.92.7

103.6

06/11(a)

30.715.814.0

100.02.02.9

130.2

06/12(a)

38.525.417.0

100.02.84.0

143.8

06/13(e)

42.510.419.0

100.02.63.7

158.9

06/14(e)

47.010.621.0

100.02.94.1

24.2 22.6 15.9 17.0 15.4


$11.00 $10.00 $ 9.00 $ 8.00 $ 7.00 $ 6.00 $ 5.00

SVW S&P/ASX 200Business RiskPrice RiskMoat RatingFair Value ($)



Seven Group SVW | $8.05Medium Cap | Engineering & Construction | 28 Aug 2012

Recommendation

FY12 Result: Solid improvement but cautious outlookAbove/Below Expectations Fair Value Up/Down

A solid FY12 profit result but inclusive of numerous non-cash significant items including the carrying value of the listed media investments being marked to market value. The carrying value of Seven West Media (SWM) was reduced by $483.5m offset by Consolidated Media Holdings (CMJ) written-up by $66.6m. Significant items were further offset by the $129.8m gain on the sale of vividwireless and $8.9m gain on the sale of property and equipment. SVW’s diverse structure and varied investment portfolio ensures the company will regularly report large non-cash gains and losses, from marking investments to market.

WesTrac Australia and WesTrac China provided 94% of FY12 trading revenue and 68% of EBIT, inclusive of equity accounted profits from associates. WesTrac Australia achieved an extremely robust result, with product sales up 82% to $2.2bn, product support income up 26% to $1.3bn and EBIT up 88% to $387.1m. WesTrac Australia continues to experience buoyant demand for Caterpillar equipment and maintenance services from the coal and iron ore mining sector. In late 2H12, the distribution and support business of Bucyrus in Western Australia, ACT and NSW was acquired for US$400m. It was successfully integrated into the WesTrac Australia and early FY13 results are inline with expectations. The

Bucyrus acquisition will ensure strong growth for WesTrac Australia in FY13.

Our concerns regarding WesTrac China proved correct, with product sales down 13% to US$555.1m, due to a softening construction market in north-eastern China. Product support and maintenance income was up 17% to US$120.1m. EBIT fell 70% to US$8.7m, on aggressive competition, inventory write-downs and weak demand. Management very cautious regarding trading conditions in China.

The media investments, with a combined market value of $1.1bn, contributed EBIT of $116.1m, down 8% on FY11, due to lower dividends, distributions and other investment income resulting from the uneven domestic economic conditions and a difficult advertising market. Consolidated Media is currently under a takeover offer from News Ltd.

Apart from dividend income paid by media investments, SVW’s operating cash flow is highly dependent on the continued strong performance of the three industrial businesses. During FY12, SVW incurred net operating cash outflows of $115.1m, an increase of $86.2m on FY11, due to higher working capital needs, higher inventory levels and increased interest costs. Net debt at the end of FY12 was $1.7bn, up $881.6m on FY11, due to major investment activity including the US$400m Bucyrus acquisition, $192m National Hire minority interest acquisition and $94m maintaining media investments. Despite net debt to equity being at a very high 66.6%, SVW has $819m in undrawn borrowing facilities. In FY13, SVW could sell the $490m CMJ investment, $433m portfolio of ASX 200 listed shares and limit acquisitions, significantly reducing debt.

Transparency improved marginally but SVW remains complex, opaque and highly leveraged to mining, infrastructure construction and the media sectors of the economy. Future acquisitions, divestments and strategy remain largely at the discretion of Kerry Stokes. Forecasting future earnings is extremely difficult with a constantly changing structure resulting in a high uncertainty rating. We increased our FY13 NPAT forecast by 14% to $336.3m on the Bucyrus acquisition and strong domestic demand for Caterpillar equipment but reduce forecasts beyond FY15 on slower economic conditions in China and a weak domestic advertising market. Fair value remains at $9.00. KAnalyst: Ross MacMillanThe full version of this article is available at www.morningstar.com.au

Investment RatingSVW is a large industrial equipment and investment company. The main operating business is Westrac, the sole authorised Caterpillar dealer for New South Wales, Australian Capital Territory, Western Australia and North Eastern China. WesTrac owns a 100% interest in ASX-National Hire Group (NHR), which in turn has a 46% interest in Coates Hire. Westrac is the dominant heavy equipment supplier in its authorised regions and offers strong exposure to the local government, construction and mining sectors. SVW holds significant interests in ASX-listed Seven West Media (SWM), Consolidated Media Holdings (CMJ) and Prime Media Group (PRT). The media shareholdings while offering few synergies with the industrial businesses provide passive exposure to the highly cyclical domestic television, newspaper and magazine sectors. Kerry Stokes holds a 68% shareholding in SVW, providing a dominant position on company strategy, structure and management.


16.7 13.95.5 6.5

02,336

26/07/12 (YMW28)33.4

9.46.4

10.76/6.3524 Sep 201212 Oct 2012

HighHigh

None9.00

Hold

06/10(a)

204.0

06/11(a)

77.5--

36.0100.0

4.56.5

411.2

06/12(a)

134.072.838.0

100.04.56.4

336.3

06/13(e)

109.6-18.240.0

100.05.07.1

359.9

06/14(e)

117.37.0

42.0100.0

5.27.4

10.2 6.3 7.3 6.9


$2.00

$1.75

$1.50

$1.25

$1.00

$0.75

SXL S&P/ASX 200Business RiskPrice RiskMoat RatingFair Value ($)



Southern Cross Media SXL | $1.25Medium Cap | Media - Diversified | 29 Aug 2012

Recommendation

Falls in Television expected following an Olympic hangoverAbove/Below Expectations Fair Value Up/Down

Southern Cross Media recorded a $100.1m net profit for FY12, a 43.3% improvement on last year and in line with our forecast of $99.5m. EPS fell 6.2% due to dilution from the $471m entitlement offer in April 2011. Consistent with peers in radio and television, advertising conditions have continued to sour, with further deterioration likely in FY13. Dividends were strong as expected. A fully franked final dividend of 5cps takes total dividend for the year to 10cps, flat on FY11 and at the high-end of the previously stated 60%–70% payout ratio.

We reduce FY13 NPAT expectations by 6% to $104.1m, representing EPS of 14.8cps. Our valuation softens to $1.80, which reflects an FY13 PER of 12.1x. At current prices around $1.25, SXL trades on an FY13 PER of 8.4x. We retain our Accumulation recommendation.

Our long term view, consistent with our thesis, is both metro and regional radio are strongly positioned. Our concern is chiefly around the free-to-air (FTA) television division, contributing 36% of FY12 revenue. SXL’s exposure to regional FTA will buffer the more dramatic headwinds felt in metro FTA stations. But the affiliation with Network Ten and a well-publicised ratings collapse will likely restrict top line growth.

The TV business needs to overcome both a slump in ratings as well as a depressed advertising market. In forming our valuation, we argue the turnaround story for television is likely to take longer than initially expected, with meaningful earnings growth to return in FY15. As we now pass the months of July and August – winding down from the Olympic Games that aired on rival Channel Nine – comparable periods is likely to be weaker. We forecast a mid-single digit fall in television revenue in FY13–14, following this year’s 7.7% slide. Encouragingly, TV production costs improved in FY12 and will continue to reduce following the conclusion of the 2011 AFL season and the 2010 Commonwealth Games.

Radio performance was mixed, with regional radio advertising revenue up 3.4% due to stronger national sales and metro suffering a 4.7% revenue slump following Today’s network share loss. Promisingly, all stations are now engaging audiences through multiple digital platforms including online, apps and video – offering new potential revenue opportunities. Capex continued at $21m, primarily investing in digital radio technology, and we expect this to rise to $25m in the medium term. We assume SXL will maintain its very strong focus on costs and this will continue to help offset subdued revenue growth. Austereo synergy expectations are $15m to $20m by FY14 and we would not be surprised to see it exceed this target. The benefits of these synergies will continue to emerge in FY13.

While net interest coverage remains low at 2.9x, we believe it is manageable and expect gradual improvement as debt is retired from strong cash flows. In saying this, low coverage does not leave much room to manoeuvre and is a risk for investors. FY12 gearing reduces with net debt to equity falling from 45% to 39.7%.

Although competition looms as technology within vehicles and telephones becomes more advanced, we expect radio to remain resilient. In saying this, we do not expect the stock to outperform until there is a significant improvement in advertising markets. Weakness in television will continue into FY13, restricting top-line revenue. KAnalyst: Michael Higgins

Investment RatingSXL is an Australian broadcaster with regional TV and radio and metropolitan radio assets. National broadcasting reach is around 95%. Regional television and radio markets historically are relatively stable, moderate growth markets under normal macroeconomic conditions, but not totally immune to a slowing economy. Metropolitan radio is also relatively resilient in weak advertising markets. Primary TV affiliation is with the TEN Network, which aims to differentiate from competitors Seven and Nine by focusing on the younger demographic. The stock suits investors willing to accept an earnings stream exposed to cyclical advertising markets.


58.5 ---13.0 --

0867

19/07/12 (YMW27)58.6

4.73.0

1.44/0.9019 Oct 201219 Apr 2012

HighHigh

None1.80

Accumulate

33.0

06/10(a)

9.5-59.7

9.063.9

6.07.6

69.9

06/11(a)

15.158.510.0

100.06.18.7

100.1

06/12(a)

14.2-6.310.0

100.08.2

11.8

104.4

06/13(e)

14.84.4

10.0100.0

8.011.4

105.3

06/14(e)

14.90.9

11.0100.0

8.812.6

15.7 10.9 8.6 8.4 8.4


$9.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00

TOL S&P/ASX 200Business RiskPrice RiskMoat RatingFair Value ($)



Toll Holdings TOL | $4.51Medium Cap | Integrated Shipping & Logistics | 27 Aug 2012

Recommendation

FY12 Results: Waiting for economic conditions to improveAbove/Below Expectations Fair Value Up/Down

FY12 operating revenue increased 5.9% to $8.7bn and underlying NPAT fell 3.6% to $267.6m. A final fully franked dividend of 13.5 cps was in line with FY11. Underlying EBIT of $411m was in line with May guidance of $400–$420m. FY13 underlying NPAT forecast increases 4% to $280.1m on recent contract wins. Our longer term growth assumptions reduce due to continuing uneven global economic conditions. Fair value is maintained at $5.00.

FY12 was a difficult and challenging year. We believe economic conditions will remain challenging during FY13 with the domestic retail and industrial sectors set to struggle. TOL is leveraged to the domestic retail, manufacturing, automotive and industrial sectors, which are more exposed to economic fluctuations. Recent solid contract wins and renewals will contribute to FY13 revenue growth. Opportunities will spring from the mining and energy sector.

Global Resources lifted operating revenue by 41% to $1.1bn and EBIT by 19% to $102.3m. It reflected a full year contribution from Mitchell Corporation and strong demand from the domestic mining and energy sector. During FY12, TOL successfully leveraged the acquisition to increase exposure to the high growth domestic mining and energy logistics sector. The Toll Offshore Petroleum Services (TOPS)

port, industrial, office and warehouse development in Singapore remains on target for completion in late FY13. TOPS revenue and EBITDA was marginally ahead of FY11, with capital expenditure of $55.5m in FY12. TOL’s marine logistic operations in Asia were hurt by weak economic conditions and vessel oversupply. A strategic review is being conducted, with divestment the most probable outcome.

After a difficult FY11, Global Express increased operating revenue by 4.4% to $2.2bn but EBIT fell 22.7% to $128.7m. The domestic businesses (Toll IPEC, Toll Priority, Toll Air Express, Toll Fast and Toll Secure) performed strongly but margins were impacted by the Japanese operations, start-up costs of new businesses, increased depreciation costs and higher line-haul supplier costs.

Global Logistics increased operating revenue by 4.6% to $1.4bn and EBIT by 2.7% to $88.1m. The solid organic growth was due to new contract wins and renewals. But the outlook remains difficult, with the domestic discretionary retail and manufacturing sector struggling.

Global Forwarding operating revenue fell 11.3% to $1.5bn and EBIT slumped 42.7% to $16.5m. Conditions remain challenging with air and ocean freight carriers incurring losses due to excess capacity and weak demand. TOL will continue to seek acquisition opportunities in key markets during FY13.

Domestic Forwarding increased operating revenue by 4.9% to $1.2bn but EBIT fell by 7.5% to $56.7m. Revenue growth reflected acquisitions but margins fell on aggressive competition and a poor performance by the refrigerated business, which was sold at year end. A significant investment in upgrading and developing key property assets should deliver operational improvements in FY13.

Specialised and Domestic Freight increased operating revenue by 10.1% to $1.3bn and EBIT increased by a 21.6% to $87.7m. New customer wins, operating cost reductions and yield management initiatives combined to produce a strong FY12 result and further growth is expected in FY13.

Net operating cash flow was up 3% to $555.8m despite higher tax payments with a stronger focus on working capital management. FY12 capex was $479m and we anticipate $400–$420m in FY13. Net debt was up 12% to $1.1bn with gearing a moderately high 41.5%. KAnalyst: Ross MacMillan

Investment RatingTOL is among the dominant suppliers of transport, logistics and freight forwarding in Australia. Scale and market share in the domestic market provides a major competitive advantage, barrier to entry and solid base for regional expansion. The Asian strategy is well considered and should generate significant growth in the medium term, by leveraging existing expertise, resources and balance sheet strength. But TOL’s operations are highly leveraged to global; economic conditions. Significant exposure to domestic retail, fast moving consumer goods, industrial and automotive sectors cause earnings volatility, and weak current conditions are weighing on earnings. Balance sheet strength supports growth options including boosting regional scale.


4.0 12.69.5 19.3

23,263

17/05/12 (YMW18)122.0

10.012.5

5.98/3.7218 Sep 201222 Oct 2012

MediumMedium

None5.00

Hold

292.9

06/10(a)

41.81.6

25.0100.0

3.34.7

277.7

06/11(a)

39.3-6.025.0

100.04.26.0

267.6

06/12(a)

37.4-5.025.0

100.05.27.4

280.1

06/13(e)

39.14.7

25.0100.0

5.57.9

300.6

06/14(e)

42.07.3

25.0100.0

5.57.9

18.1 15.1 12.9 11.5 10.8




$10.00

$ 8.00

$ 6.00

$ 4.00

$ 2.00

ARP S&P/ASX 200Business RiskPrice RiskMoat RatingFair Value ($)



ARB Corp ARP | $9.21Small Cap | Auto Parts | 15 Aug 2012

Recommendation

Weather tempers FY12 result, strong FY13 expectedAbove/Below Expectations Fair Value Up/Down

Although catastrophic weather events moderated ARB’s FY12 result, the resilient 4WD parts manufacturer and distributor eked out a 1.7% increase in underlying NPAT to $38.5m, in line with our $38.3m forecast. The result was respectable in a challenging year, as 4WD vehicle supply was disrupted by floods in Thailand, as well as the delayed impact of disaster-struck Japan. While ARP’s plant in Thailand was not directly affected, many component suppliers to vehicle plants were flooded, reducing deliveries of new 4WD vehicles to Australia (Thailand supplies 80% of all new 4WD vehicles sold in Australia). Top line revenue improved 5.7% to $268.7m, the 10th year of consecutive growth. A final dividend of 14cps fully franked brings full year dividends to 25cps, 8% higher than FY11.

Valuation increases 3% to $9.00 and assumes a return to double digit sales growth in FY13, before tapering to high single digits in FY14. FY13 and FY14 NPAT remain unchanged at $45.3m and $50.1m, respectively. We expect a solid performance in FY13/14 following increased output from manufacturing plants and further strengthening of the store network throughout Australia, especially in strong mining regions. ARB remains in a strong financial position, with an enviable net cash position of $33.2m, compared to $30.7m in FY11. We estimate ARB can fund higher

dividends in the future, or perhaps another special dividend like in FY10. If a special isn’t announced for FY13, we expect the payout ratio to lift from around 47% in FY12 to around 55% going forward. We forecast dividends to increase to 34cps in FY13.

FY12 sales growth of 5.7% was achieved despite supply issues stemming from natural catastrophes. The full extent of the impact can be appreciated by examining 4x4 utility sales for the period. For the 9 months from July 2011 to March 2012, utility sales grew 3.1%. But, for the 3 months from April 2012 to June 2012, like-for-like sales were 29.3% stronger, exceeding ARB’s capacity to satisfy. Of total group sales, the Australian market accounted for 66%, exports represented 22% and sales to vehicle manufactures 12%. Exports to ARB’s US subsidiary Air Locker Inc were hampered by the strong A$ and we expect poor economic conditions offshore to result in further anaemic growth in FY13. The Australian market will benefit from store expansion, with new stores in Orange NSW, Burleigh Heads and Bundaberg QLD and Welshpool WA. A key risk in the Australian market is a slowdown to oil, gas and mining sectors – a significant consumer of 4WD supplies.

Pleasingly, expenditure on new product innovation increased to $1.1m. Product development is essential to maintaining a competitive brand in retail, with complacency a common cause of fallen brands. Sales outlets and customers trust there will always be an ARB range of quality accessories for each new 4WD model, which makes independent stores more likely to stock ARB products and customers more likely to buy them. Given the credibility of management’s record at R&D, increased expenditure is a leading indicator of sales. A strong balance sheet also allows ARB the opportunity to undertake suitable acquisitions or future accretive capital projects in the future.

Expected completion of the new warehouse and factory in Thailand in late 2012 is encouraging. Facility improvements in Australia during FY13 have also been factored in forecasts. KAnalyst: Michael Higgins

Investment RatingARP designs, manufactures and distributes 4WD accessories in Australia and internationally. Expertise in product innovation, marketing, exporting, distribution network expansion and capture of production efficiencies made ARP one of the best long-term small-cap investments. The management is as accomplished and credible as any in the small-cap sector. ARP found niche export markets around the world and the local distribution footprint is widening. The main downside risks are lower consumer and industry demand for 4WDs, A$ appreciation, rising steel input costs, higher fuel prices and skills shortages. ARP is at the forefront of accessories design for each new 4WD mode but innovations can be copied. ARP’s competitive advantages are brand equity, continuity and consistency, market understanding, an ability to innovate, speed to market and a distribution network in growth markets.


21.0 16.614.9 15.1

9689

15/09/11 (YMW35)25.829.3

-56.110.23/7.66

28 Sep 201219 Oct 2012

MediumMedium

None9.00

Hold

32.6

06/10(a)

46.339.219.5

100.03.85.4

37.8

06/11(a)

52.212.923.0

100.03.24.5

38.5

06/12(a)

53.11.7

25.0100.0

3.04.3

45.3

06/13(e)

62.517.634.0

100.03.75.3

50.1

06/14(e)

69.110.738.0

100.04.15.9

11.0 14.0 15.7 14.7 13.3


$3.00

$2.50

$2.00

$1.50

$1.00

AWE S&P/ASX 200Business RiskPrice RiskMoat RatingFair Value ($)



AWE AWE | $1.58Small Cap | Oil & Gas E&P | 27 Aug 2012

Recommendation

FY12 cost blow-outs biteAbove/Below Expectations Fair Value Up/Down

Worse than anticipated FY12 free cash flow sees our fair value estimate decline 15% to A$2.60 per share. This is still well above the A$1.60 share price. Our forecast for a small loss in FY13 is little changed, reflective of expected weaker oil prices. Earnings before interest, tax, depreciation, amortisation and exploration (EBITDAX) though should remain in excess of A$100 million with positive net operating cash flow and neutral free cash flow. Our FY14 forecast improves to modest net A$10 million profit, EBITDAX A$114 million, on slightly higher production.

AWE guides for flat production in FY13 at 4.5 to 5.0 mmboe. We sit at the lower end of expectations. Capital expenditure is forecast at A$190–220 million, mainly on the BassGas Mid Life Extension (MLE) cost blow-out. Cash and undrawn debt facilities stand at A$327 million. Ignoring potential for Ande Ande Lumut (AAL) oil field development expenditure in Indonesia, we expect AWE to be at worst only very marginally geared in FY13 before the balance sheet returns to net cash.

Lower output is now more steady-state on longer-lived gas fields and Tui's stabilised production tail. Reserve life around 12 years based on forecast production is favourable compared to ASX listed peers thanks largely to longer lived gas projects. Despite this AWE remains an energy

exposure suitable only for investors comfortable with higher risk. Shale gas potential of 13–20 trillion cubic feet in the Perth Basin creates intriguing appeal. The first three fracture stimulated wells have encouraging gas flows from all zones tested.

Underlying FY12 earnings climbed back into positive territory at A$15 million from negative A$16 million in FY11. This was below our A$40 million expectation due largely to higher tax and exploration expenses. Stripping out significant items, tax on underlying earnings was A$29 million or 80% of pre-tax profit. AWE expensed A$37 million in exploration costs, more than was actually spent in the year. EBITDAX was in line with expectations – up 4% to A$165 million – as was EBIT at A$48 million. Operating cash flow increased 30% to A$119 million, healthy though below expectations.

This was a mixed result, with higher revenue despite a 23% decline in production to 4.7 million barrels of oil equivalent. The former reflects stronger oil and gas pricing in addition to a higher proportion of more valuable liquids. Cliff Head oil output improved following successful well work-overs while accelerated development drilling of shales boosted US condensate production. The better liquids ratio also captures lower gas production with BassGas shut in for ill-fated mid life extension works. Reduction in the rate of oil decline at Tui in New Zealand is also an expected feature. This will see steadier group production albeit at radically reduced heights from Tui's peak in 2H08.

The headline FY12 loss of A$67 million improves on the prior period loss of A$118 million and includes among other things an A$97 million impairment to BassGas due to delays and heavy cost blow-outs at the MLE. The total A$156 million capital outlay in FY12 chiefly reflects MLE expenditure. Net cash levels declined 82% from A$167 million at end December 2011 to just A$30 million six months later. This captures the A$135 million acquisition of the Northwest Natuna and Anambas PSCs in Indonesia including the 76mmbl undeveloped AAL oil field, partially offset by an A$80 million inflow from sell-down of 11.25% equity in BassGas. KAnalyst: Mark Taylor

Investment RatingAWE joined the ranks of serious mid tier oil and gas companies in 2006 with production at Casino, Cliff Head and BassGas. Production from Tui in NZ began in July 2007. A key strategy is to develop discoveries near installed infrastructure – like Henry and Trefoil near Casino and BassGas. Production declined from heady 9.9 million barrel of oil equivalent (mmboe) fiscal 2008 levels with Tui's fade. Lower output is now more steady-state on longer-lived gas fields. Reserve life based on forecast production is favourable compared to ASX listed peers. A suitable energy exposure for investors comfortable with higher risk. Strong management, low sovereign risk, a healthy balance sheet with A$30 million net cash and exploration upside appeals too. AWE successfully bid for ARC Energy in 2008 and Adelphi in 2010. The jury is probably still out on the success or otherwise.


-17.3 37.7-- --

9825

02/08/12 (YMW29)106.4

1.714.4

2.00/0.9014 Dec 201120 Jan 2012

HighHigh

None2.60

Accumulate

-21.1

06/10(a)

-3.9-116.0

0.0100.0

0.00.0

-16.1

06/11(a)

-3.0--

0.0100.0

0.00.0

14.8

06/12(a)

2.8--

5.0100.0

3.55.0

-1.1

06/13(e)

-0.2-107.3

0.0100.0

0.00.0

10.1

06/14(e)

1.9--

0.0100.0

0.00.0

-- -- 52.2 -- 84.0




$10.00

$ 8.00

$ 6.00

$ 4.00

$ 2.00

$ 0.00

BBG S&P/ASX 200Business RiskPrice RiskMoat RatingFair Value ($)



Billabong Intl BBG | $1.36Small Cap | Apparel Manufacturing | 27 Aug 2012

Recommendation

FY12 result reflects restructure in progress while TPG enters due diligenceAbove/Below Expectations Fair Value Up/Down

FY12 reported a net loss after tax was $275.6m. A very messy report with restructuring costs and asset write-downs combined with the net proceeds on the partial sale of Nixon. The normalised NPAT is $33.5m, down 74% on FY11. Pro-forma EBITDA of $84m looks through to the continuing operations and provides a new base and a reference point to judge ongoing performance. But more important is the transformation presented by new CEO Launa Inman which targets $155m in annualised EBITDA by FY16 at a cost of $80m in new capex. Fair value adjusts downwards from $1.60 to $1.50

BBG expects to deliver $30m in cost savings for FY13 from the first stage of its transformation program. Another $6m is expected from increasing the store closure program from 52 to 82. Added to the FY12 result this implies FY13 EBITDA of $120m, but BBG provided guidance in a range from $100m to $110m which allows some leeway. We use the midpoint forecast of $105m.

The complexity of the result leads us to use a sum of the parts valuation to determine a fair value estimate. We view a suitable multiple of eight times FY13 EBITDA on what is the start of a process to drive annualised EBITDA to hit $239m by FY16. The 8x multiple translates to an enterprise value of $840m and deducting $93m of debt equates to $1.50ps.

BBG remains heavily burdened with excess inventory which not only constrains cash flow but prevents the business from redefining its brand until the shelves are cleared. But if BBG delivers on its target of $239m EBITDA by FY16 then potentially the stock could be worth up to $2.20. This reflects the potential upside appeal and explains the interest by TPG private equity group which starts due diligence after making an indicative non-binding bid of $1.45ps.

This result and the accompanying transformational presentation are somewhat irrelevant. Share price disappointment centred on the board’s decision to move into the retail channel, the sale of Nixon to address debt and a heavily diluted equity raising leaves investors looking for an exit to realise some near term value. We expect a private equity offer will materialise after due diligence. There remains a possibility other groups may also seek to review the assets now a greater level of detail is presented to investors

Inman and her team have identified some inherent problems within the organisation. BBG evolved from a wholesaler into a retailer but these two different industries require very different skill sets. Inman aims to simplify the business from regional silos to a consolidated structure to leverage and integrate international skills across the group. With 85% of purchases generated from 19% of suppliers there are some easy gains from consolidating the supplier base of 500. With 80% of sales generated from only 22% of the designed styles there is scope to trim. The immediate impact will be to reduce 15% of styles, reassess and then cut a further 15% to refocus attention and resources towards products which generate sales. Consolidating suppliers should enable more favourable sourcing arrangements and possible relocation of manufacturing to a cheaper location.

BBG has evolved its brand portfolio to now support eight unique niche brands. Inman has indentified the core Billabong brand has high awareness but a low sales conversion. She aims to refocus the marketing budget and improve the value proposition to drive sales. Other niche brands are identified as having low awareness but high levels of sales conversion. Inman is set to refocus the group towards three of these core brands which have the highest sales conversion rates, Element, Dakine and RVCA. KAnalyst: Tim Montague-Jones

Investment RatingBillabong has a heritage name in the action sports market, with a strong youth following. Premium-branded lifestyle brands are under pressure as consumers become increasingly cost-conscious. A change in strategy moved the business from being a branded wholesaler to an acquirer of a network of retail outlets. Retail outlets and their associated operating costs increase the inherent operating leverage. Weakness in retail conditions, combined with constraints from increased working capital cost commitments, suddenly contracts cash flow. Investment risk is high as a period of reorganisation aims at reducing costs and freeing up capital to reduce debt. This stock is not suitable for conservative investors.


5.3 12.1-39.9 -18.0

3649

26/07/12 (YMW28)263.0

23.50.9

3.59/0.9213 Mar 201219 Apr 2012

Very-HighHigh

None1.50

Hold

149.2

06/10(a)

59.1-17.736.0

100.04.36.2

130.1

06/11(a)

51.4-13.129.050.0

4.65.6

33.8

06/12(a)

13.4-74.0

3.025.0

1.21.3

54.1

06/13(e)

11.3-15.5

0.025.0

0.00.0

67.7

06/14(e)

14.125.2

0.025.0

0.00.0

14.1 12.2 19.3 12.1 9.6


$6.50

$6.00

$5.50

$5.00

$4.50

$4.00

CAB S&P/ASX 200Business RiskPrice RiskMoat RatingFair Value ($)



Cabcharge CAB | $5.98Small Cap | Business Services | 23 Aug 2012

Recommendation

Good FY12 result but retaining market share could get expensiveAbove/Below Expectations Fair Value Up/Down

Adjusted FY12 NPAT of $66.1m was up 8% but marginally below our forecast. This is a good result given the weakness in consumer sentiment and demonstrates the resilience of the traditional taxi business. While there was modest growth in service fee income, taxi related services and the bus joint venture continue to grow strongly. Robust cash flow allows a high payout ratio. Final dividend of 18cps takes FY12 dividend to 35cps fully franked, up from 30cps in FY11. Our FY13 and FY14 earnings forecasts are largely unchanged. We assume no growth over the next few years on the assumption the driver bonus scheme designed to help retain market share will start to impact earnings. Our fair value increases from $5.00 to $5.50 due to the time value of money since our last update. We retain our Hold recommendation.

Our overall view remains unchanged. CAB has a strong business model, with a high share of the taxi fare processing market. Its position has been helped by continued technology innovation, a solid base of corporate accounts and various state government subsidy schemes requiring taxis to have Cabcharge terminals. But there are a number of potential threats and uncertainties therefore we continue to take a cautious approach and do not see CAB as suitable for conservative investors.

The Victorian taxi industry review and the Reserve Bank of Australia review of card surcharging are still in progress and it is difficult to know what the final outcomes will mean for CAB. The threat to market share from new entrants saw CAB introduce the driver bonus scheme to help stem the flow of business to rivals. (Refer to our note of 14 June 2012 for more details). It is still early days and difficult to assess whether this scheme will be successful. But with the scheme now rolled out to 3,000 taxis, we continue to take a conservative approach to our forecasts and assume flat earnings for the next few years due to the cost of this scheme. The final uncertainty is the re-tender of NSW bus contracts. But we think the ComfortDelGro Cabcharge (CDC) joint venture is in a very strong position to retain these contracts and possibly capture additional routes. Taxi service fee income rose 2%, a good result given competitive pressure and weak economic conditions. Cabcharge accounts cards turnover was up 4% reflecting the strong positioning with corporate account holders and government departments with bank issued card turnover up 4%. Third party card turnover was down a disappointing 10%. We expect a further decline in FY13 but note this represents 12% of total turnover. The EMV (Europay, Mastercard and Visa) contactless technology was rolled out Australia wide with the number of contactless transactions rapidly growing. Members taxi related services continues to be a highlight with revenue up a solid 8%. Growth reflects an increase in the fleet size, strong take-up by taxi operators and expansion of the product range. Further fleet growth in NSW and Victoria and the Yellow Cabs Adelaide acquisition should drive strong growth in FY13.

The CDC joint venture continues to be a strong contributor to growth and increased its contribution by 34% to $17.8m. We expect the joint venture will continue to achieve strong earnings growth. We see opportunities for CDC to gain additional routes in NSW and Victoria. The acquisition of Deane’s Transit Group – assuming it receives regulatory approval – provides a strong growth opportunity in the Queanbeyan/Canberra region.

Net cash flow from operating activities was a highlight of the result increasing from $32.2m to $69.9m. Net debt to equity is comfortable at 36% and interest cover 13.4x.KAnalyst: Peter Rae

Investment RatingCAB has a quasi-monopoly position in the taxi fare processing industry thanks to first-mover advantage, 30 years of experience and scale efficiencies that are difficult for potential competitors to replicate. Earnings growth will come from increased usage of Cabcharge and bank-issued cards, conversion from paper to electronic transactions, eTags, lower transaction and equipment rental costs, acquisitions and taxi fare increases. The bus JV is increasingly promising. Despite its strong position, structural changes within the industry have increased competition and seen new entrants take market share from CAB. Given the increased competitive threats and greater regulatory scrutiny we do not see CAB as being suitable for conservative investors.


8.4 14.95.5 13.0

6723

14/06/12 (YMW22)82.519.913.4

6.57/3.9524 Sep 201231 Oct 2012

HighHigh

None5.50

Hold

57.6

06/10(a)

47.8-6.034.0

100.05.98.5

61.1

06/11(a)

50.76.1

30.0100.0

5.67.9

66.1

06/12(a)

54.77.9

35.0100.0

6.99.9

66.8

06/13(e)

55.51.3

37.0100.0

6.28.8

66.1

06/14(e)

54.8-1.137.0

100.06.28.8

12.0 10.6 9.2 10.8 10.9




$3.50

$3.25

$3.00

$2.75

$2.50

$2.25

MRM S&P/ASX 200Business RiskPrice RiskMoat RatingFair Value ($)



Mermaid Marine Aust. MRM | $3.16Small Cap | Shipping & Ports | 23 Aug 2012

Recommendation

FY12 Result: Swimming in oil and gas – outlook remains brightAbove/Below Expectations Fair Value Up/Down

Service providers to mining and energy sectors are in a sweet spot at the moment, MRM is no exception. Construction of mammoth LNG projects on the west coast is driving strong demand for vessels and supply base facilities. Revenue increased 33% to $380m, but margins were squeezed across the business, mostly due rising labour costs and changes in work mix. EBIT rose a healthy 18.6% to $79.8m and NPAT increased 18.3% to $51m, just below our $51.8m forecast. The fully franked final dividend was 6cps.

No guidance was provided but growth is expected in FY13. Continued construction of the Gorgon project and recent commencement of BHP's Macedon project underpins growth in vessel demand, with other major LNG projects requiring significant offshore vessel support. Our long term thesis is intact. MRM is attractively positioned to benefit from the $180bn of projects marked for development in the North West Shelf, Browse Basin and Timor Sea over the next six years. While the construction phase is a short to medium term profit driver, we expect production and ongoing maintenance requirements from these large facilities to support longer-term demand for vessels and supply bases. No change to our forecasts and $3.80 valuation.

While vessel operations revenue and EBIT increased 30.1% and 23% respectively, 2H12 was considerably weaker. Completion of two large one-off projects in 1H12, as well as lower utilisation rates and fewer short-term contracts resulted in 2H12 earnings 37% below 1H12. Utilisation is expected to improve from last year's average of 77% in FY13, with demand expected to ramp up in FY14 as major projects progress. International operations, contributing 5% of revenue in FY12, remain challenging. The Dampier supply base increased revenue by 51% to $92.6m and EBIT by 21% to $36.7m. 1H12 was hurt by protracted industrial action by the Maritime Union of Australia and low drilling activity. In December, MRM purchased additional land to increase its Dampier supply base land area by 60%. With its existing facility at capacity the acquisition was crucial to take advantage of future growth opportunities in the offshore oil and gas sector. Increased drilling and construction activity should support strong long term demand from the major international oil and gas companies. MRM benefits from its ability to provide a suite of integrated marine services encompassing vessels, wharf facilities, supply base facilities, slipway facilities and engineering support services. The Dampier slipway remains a key strategic asset but incurred lower revenue and earnings.

The Broome Supply base JV, Toll Mermaid Logistics Broome, contributed a meagre $362,000, but the outlook remains bright. The start of drilling campaigns and the construction of major projects in the region, with more proposed, is encouraging. These include the $32bn INPEX Ichthys LNG Project and proposed $30bn Browse and $88bn Bonaparte LNG Projects. Shell has already awarded Toll Mermaid a five year supply base services contract for the $12bn Prelude FLNG Project.

To satisfy strong demand MRM continues to expand its fleet of vessels. One new vessel delivered in April 2012 and two more under construction are expected to be delivered in January and October 2013. MRM also designs and delivers custom marine solutions to meet specific needs of clients. This differentiation helps win contracts, but costs money. The key will be the foresight to reduce capital expenditure ahead of any structural shift in demand. Capital expenditure of $66.5m and the $24m acquisition of Bis Industries' Dampier supply base increased net debt by $23.5m to $102.8m. But the balance sheet is not stretched with net debt to equity of 32% and EBIT interest cover at 9.7x. KAnalyst: Nathan Zaia

Investment RatingMRM is Australia’s largest provider of marine services to the offshore oil & gas industry in Western Australia. The company provides three integrated businesses – offshore vessels, supply bases and slipway services. MRM’s Dampier supply base is strategically located at a crucial access point to the oil and gas fields off Western Australia’s coast. Oil and gas exploration and production activity in the North West Shelf, Browse Basin and Timor Sea ensures buoyant demand for the company’s vessels and supply base services. Fleet capability and supply base location are the main barriers to entry but the marine vessel market is highly competitive. Earnings are highly exposed to project activity in the offshore oil & gas industry in Western Australia and ultimately the global demand for energy. Suited to investors prepared to accept risks associated with exposure to the offshore oil and gas industry in north-west Australia.


25.7 80.9-- --

6680

15/03/12 (YMW10)63.115.9

9.73.44/2.54

03 Sep 201228 Sep 2012

HighHigh

None3.80

Accumulate

38.2

06/10(a)

20.140.9

8.0100.0

3.04.3

43.2

06/11(a)

20.72.99.0

100.03.04.4

51.0

06/12(a)

22.910.711.0

100.03.65.1

59.9

06/13(e)

26.917.413.5

100.04.36.1

67.2

06/14(e)

30.212.215.0

100.04.86.8

13.2 14.2 13.4 11.7 10.5


$5.00

$4.00

$3.00

$2.00

$1.00

$0.00

NWH S&P/ASX 200Business RiskPrice RiskMoat RatingFair Value ($)



NRW Holdings NWH | $2.89Small Cap | Engineering & Construction | 24 Aug 2012

Recommendation

FY12 Result: Excellent, FY13 locked inAbove/Below Expectations Fair Value Up/Down

FY12 NPAT jumped 136% to $97.1m on an 81% increase in revenue to $1.4bn A final dividend, fully franked, of 10 cps, was up from 5 cps in FY11. NPAT was 5% above our expectations and 7% above guidance.

Our view is largely unchanged. There is good earnings visibility over the next 12 to 18 months but beyond this we adopt conservative forecasts to reflect the high uncertainty. NWH should continue to benefit from iron ore and coal volume growth during FY13 and early FY14, but it is very difficult to forecast growth beyond FY14. Our FY16 NPAT forecast reduces by 8% and FY17 forecast 5%. Fair value reduces from $3.40 to $3.20.

For FY13 we forecast 19% revenue growth to $1.6bn and 19.7% NPAT growth to $116.2m driven by new contracts in the iron ore, coal and coal seam gas sector. NWH expects the civil contracting business to increase the scale and capability of the concrete operations and grow earnings during the year. Further mining service contract extensions are also anticipated as FY13 progresses.

In FY12, civil contracting operating revenue was up 91% to $731.7m and EBIT was up 106% to $81.6m. The buoyant growth was underpinned by large-scale contract work for major mining and energy companies. In FY12, the civil contracting business

diversified geographically. The civil contracting business finished FY12 with a $0.7bn order book including $640m secured revenue for FY13 and $60m for FY14. Based on the order book and $0.9bn in active civil contracting tenders, we forecast FY13 revenue growth of 11% and EBIT growth of 9.4%. Approximately 60% of civil contract work is awarded after negotiation with long term existing clients without a tender process.

Mining services revenue increased 69% to $542.2m and EBIT doubled to $64.0m. The strong EBIT result was despite unseasonably heavy rains in Queensland impacting performance on the $780m Middlemount Coal Mine Project contract for the Macarthur Coal and Gloucester Coal Joint Venture. Mining services ended FY12 with a $1.1bn order book including $500m secured revenue for FY13 and $600m for FY14. Based on the order book and $2.8bn in active mining service tenders, we forecast FY13 revenue growth of 17% and EBIT growth of 18.9%.

Despite being established only two years ago, Action Drill and Blast achieved operating revenue growth of 307% to $113.1m and EBIT growth from $2.9m in FY11 to $18.7m in FY12. At the end of FY12 the drill and blast business had 350 employees, 36 drills and a $200m order book. Action Drill and Blast has $160m of secured revenue for FY13 and $40m for FY14, with primary contracts in the iron ore and coal sectors. We are forecasting FY13 operating revenue growth of 51% and EBIT growth of 50.8%.

NWH’s smallest business Action Mining Services experienced operating revenue growth of 67% to $46.6m and EBIT growth of 109% to $4.6m, due to strong sales of mining support vehicles. We anticipate steady sales and EBIT margins in FY13 for the business.

Net operating cash flow was strong and increased 123% to $173.2m due to growth in EBITDA and efficient management of working capital. Understanding the lessons from the GFC, NWH maintains low levels of debt with net debt to equity at 18.5%. Capital expenditure was $144.4m in FY12, down 4% on the prior year. KAnalyst: Ross MacMillan

Investment RatingNWH provides contract civil and mining services particularly leveraged to WA's iron ore market, but is expanding into Queensland coal and WA oil and gas. Significant revenue stems from a few key blue-chip clients such as BHP, RIO and Fortescue Metals Group. This is a good position to renew contracts and win new ones, but key client risk is high. With a high fixed cost base, NWH is leveraged to the resources cycle and subject to swings in profitability. It is performing very well at present given the strength of the resources sector but a downturn in commodity prices and volumes would see earnings drop. Margins also suffer in competitive tendering and a rising cost environment.


-- ---- --

6837

14/06/12 (YMW22)159.1

15.511.4

4.36/2.0808 Oct 201230 Oct 2012

HighHigh

None3.20

Hold

37.7

06/10(a)

15.133.8

6.0100.0

4.05.7

41.2

06/11(a)

16.16.89.0

100.04.36.2

97.1

06/12(a)

34.7115.8

18.0100.0

6.08.6

116.2

06/13(e)

41.519.720.0

100.06.99.9

119.8

06/14(e)

42.83.1

20.0100.0

6.99.9

10.0 12.9 8.7 7.0 6.8



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