Alpha POWER Shares (Lonsec) Portfolio - October 2007
Lonsec comments on major out-performers:
WOW (+12.6%) rallied strongly over the month after releasing an increase in 1st quarter sales of 8.9%. All divisions except Petrol (flat) showed a strong increase in sales. The outlook for retail trade remains positive, given the strong Australian economy, with the main risks being rising interest rates and petrol prices. Woolworth's maintained its outlook for sales growth of 7-10% for the full year. Woolworth's has been a strong performer over the year and now trades on a relatively expensive earnings multiple of 25x FY08 earnings. Investors should look to BUY on any major weakness in the share price.
Telstra (+7.3%) shares rebounded after it provided a market update where EBIT guidance for FY08 was upgraded from +3-5% to +5-7%. In addition, long-term objectives for both revenue and EBITDA growth to 2010 would increase from +2-2.5% pa to +2.5-3.0% pa. Other news released included the Telstra IT system upgrade is ahead of schedule by two months. The upgrade to earnings guidance is certainly a positive and the positive news on the IT transformation is important as it is viewed as critical to Telstra's overall transformation program. The stock has plenty of upside if management can indeed deliver on their long-term management objectives. Getting the EBITDA margins back up to 46-48% from the 42% level will be the critical driver of the share price. There was no guidance on the dividend but broker consensus remains that the 28c annual dividend is safe. In Lonsec's view, Telstra is a BUY for yield with some capital growth.
Lonsec comments on major under-performers:
ORG (-11.2%) shares retreated during October after a profit downgrade by rival AGL Energy (for flat earnings) shocked the market and led to a reassessment of risk in the sector. Subsequently, Origin Energy reduced its profit guidance to 10-15% earnings growth, down from 15% earnings growth, due mainly to a delayed start for one of its new gas fields in the Otway basin (offshore Victoria). Origin's short to medium-term earnings outlook is far better than for AGL (which has operational issues) but nevertheless the market has reduced Origin's P/E to be more in line with the market with the stock now trading on a forward FY08 P/E of 18x rather than 20x. Effectively, the stock has moved back to a more reasonable valuation level. Origin has invested over $2bn in the past year for future growth with Lonsec expecting the company to maintain earnings growth of 10-15% pa over the short to medium-term. Lonsec recommends the stock as a BUY at these levels.
AIO (-7.0%) shares have been weak since the company built a 4-5% stake in Brambles in early August 07. Investors are presumably concerned about a possible takeover for Brambles which is some 3-4 times larger than Asciano in market capitalisation. The decline in Asciano's share price and the tightening in credit conditions have made a bid for Brambles increasingly unlikely and indeed, the company recently confirmed that it had “no current intention of making a bid”. Speculation over Asciano making a bid for Brambles has distracted the market from the underlying attraction of the company which is a dominate position in Australia's port and rail infrastructure where volumes are growing at 6-7% pa. At current levels, Asciano is on a forecast yield of 5.5% (unfranked) and offers strong earnings growth. Lonsec expects that the next company update will put the market in a better position to assess the revenue and cashflow prospects of the newly listed company.
 | Lonsec Limited ABN 56 061 751 102
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© Alpha Structured Investments
Dr Tony Rumble
July 2007
