Alpha POWERS Lonsec Portfolio Report - Dec 07
Lonsec comments on major out-performers:
ORG (+1.7%) shares recovered a little during the month after being de-rated by the market over the past quarter. ORG has been de-rated from a premium P/E to a market P/E after a profit downgrade from AGL Energy spooked the market. Lonsec is not aware of any material issues with ORG, operationally or strategically. Lonsec expects 10-15% pa earnings growth over the next few years and is happy to maintain the holding.
Lonsec comments on major under-performers:
SGB (-12.6%) was harshly dealt with during December. While the Banking sector has been sliding since November, SGB has underperformed further. Lonsec believes the main reason for the slide is the recent capital raising which raised about $1.1bn from the issue of $750m in ordinary shares and $400m in hybrid capital. The capital raising represented about 5% of capital and firms up SGB’s balance sheet during tough times in credit markets. SGB also announced that it had given 20 or 30 loans to trusts managed by Centro totalling about $400 million. The bank has first mortgages over all its loans, which were for regional and city-based shopping centres in Australia that are 99% tenanted.
The Chairman of SGB, Mr Thame, said "it was wrong to aggregate the bank's total exposure to Centro as the loans were made to a series of separate legal entities, of which Centro was the responsible managing entity." It seems the Centro exposure is fully secured against the property assets but the market is obviously concerned about any exposure to Centro at the moment. Lonsec notes that SGB is keeping to its forecast 10% earnings per share growth for FY08. SGB is now trading on a forecast yield of 6.0% fully franked and a forward P/E of 12.7 and as such looks to offer good value at current levels.
BHP (-6.6%) shares have weakened since the company announced a proposal to launch a 3:1 scrip takeover of RIO. BHP has until February 6 to formally announce a takeover offer for RIO under UK law. At the same time, the outlook for the US economy has deteriorated adding to uncertainty over the future of commodity prices. While Asia’s economic growth (outside of Japan) is expected to remain relatively robust, it is unclear how much impact a slowing US economy will have on the region. At this stage, the outlook for coal, oil and iron-ore prices continues to remain strong. Base metals prices have retreated since June 2007 but are generally holding up better than many analysts expected. Lonsec expects growth in the developing economies of the world to remain robust, underpinning strong demand for natural resources. The resource sector is expected to outperform over 2008 with Lonsec recommending BHP as the best diversified exposure to the sector.
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© Alpha Structured Investments
Dr Tony Rumble
July 2007
