Alpha POWER Shares (Lonsec) Portfolio - August 2007

Lonsec comments on major out-performers:

WOW (+11.1%) reported a strong FY07 result with sales up 12.6% to $42.3bn while NPAT was up 27.5% to $1.3bn. Earnings per share rose nearly 20% to 108.8 cps while the final dividend of 39 cps brought total dividends to 74cps – up 25.4%. A telling statistic was the increase in EBIT margins to 4.97% from 3.59% five years ago. With the business turning over $42.3bn in sales, a small increase in margin has a major impact on the bottom-line. Woolworths has flagged further strong growth ahead with FY08 guidance of 7-10% Sales growth and 19-23% growth in NPAT.

Lonsec comments on major under-performers:

AIO (-10.2%) was sold-down during August’s correction but did not recover as well as the market, most probably due to the company building a 4.1% stake in Brambles at a cost of approximately $700m. The market is concerned about Asciano launching a possible takeover for Brambles given Brambles market capitalisation is $20bn v $6bn for AIO. Asciano has stated that it “looks forward to having discussions with Brambles on ways to create value for all Brambles shareholders.” At the same time, Toll has appeared on the Brambles register with a much smaller 0.5% stake. Toll have stated that they would like to “work with Brambles on a friendly deal”. Investors should note that Asciano and Toll cannot work together under ACCC conditions imposed as part of the recent de-merger.

Setting aside any possible corporate action, at these levels Asciano offers a yield of 5.0% (unfranked) with excellent prospects for capital growth given the company’s industry positioning as a duopoly operator of Australia’s port and rail assets where freight volumes are expected to grow by 6% pa over the next 5 years (scheme book). Lonsec recommends investors BUY the stock at these levels.

Tabcorp (-3.0%) was negatively affected by the short-term impact of the Equine Horse Influenza on horse racing and wagering which will lead to a loss of $5m in NPAT. This could increase further if extended for longer into the Spring racing carnival but so far this seems unlikely. To put the loss into context, Tabcorp just reported a NPAT of $515.6m – so the impact is about 1% of NPAT to date. Tabcorp has three divisions – Casinos, Gaming and Wagering.

The EBIT split as at June 30 was:

Casinos	$386.2m
Gaming	$262.1m
Wagering	$253.7m

So the business is well diversified across three key divisions.

Clearly the Equine influenza will have a negative impact on wagering revenue but its effects are likely to be short-term and should not be capitalized into the share price to any great degree. However, the timing of this event could not have been worse with Tabcorp recently reporting a soft result resulting in the new CEO embarking on an operational improvement drive particularly focused on Star City and NSW wagering.

Lonsec reminds investors that TAH is in our Income Model Portfolio for its defensive cash flows and reliable dividend. The current yield is 6.3% fully franked. The share price has already retreated from the $17.60 level to its current level of $14.90 and at these levels Lonsec recommends that investors continue to HOLD.

For those investors looking to BUY we would advise waiting for the outcomes of the Star City exclusivity period ending in Sept 2007 along with re-negotiation of its State Govt. tax agreements (should be known by early October) and the outcome of the Victorian Government Gaming and Wagering industry structure review for beyond 2012 (should be known by Christmas).

Lonsec is not expecting any adverse outcomes and will continue to monitor developments.

 

Lonsec Limited ABN 56 061 751 102 Published by Participant of ASX Group Level 22, 500 Collins Street, Melbourne, 3000 - P.O. Box 46 Collins Street West, Victoria, 8007 General Inquiries: (03) 9623 6345 Dealing Room: 1800 649 518 Fax: (03) 9629 6990

 

© Alpha Structured Investments
Dr Tony Rumble
July 2007