Flight Centre (FLT) – Buy
Flight Centre offers good value, unless you expect both domestic and global growth to deteriorate rapidly.
The Australian business contributes 82% of group earnings predominantly through the leisure segment (retail stores) with around 70% of leisure revenue derived from flight bookings.
The market appears to have discounted the stock excessively based on an assumed material slowdown in growth impacting its corporate and leisure businesses. But the market has underestimated the strength of the local Flight Centre brand and positioning, together with the potential for the Australian economy to continue to outperform.
Flight Centre has a limited presence in the Australian online flights segment, which although relatively small (10% of flights bookings), has superior growth prospects to bricks and mortar. The company has recently flagged plans to materially expand its capabilities in this segment and we think it has the potential to be a serious online player, provided it can first deal with the delicate issue of how retail consultants will be rewarded for online-only clients and those requiring service within the retail network.
- Wednesday’s close: $18.36
- Target stock price: $22.10
BHP Billiton Ltd (BHP) – Buy
BHP Billiton remains cheap and we continue to rate it as a Buy. It has a strong platform of capital expenditure expected to total some US$80 billion over the next five years and this will underpin organic growth for the next decade. The US$10 billion share buyback program was completed six months ahead of schedule and we expect its strong cash flow could enable further buybacks to be announced. BHP stands out as one of the best-managed companies in the Australian market, which is matched globally with a market capitalisation ranking in the top 10 in the world.
There are, of course, risks to our valuation, which are:
- Weaker than expected iron ore, copper, coal and aluminium prices.
- Fluctuations in exchange rates.
- Lower than expected production levels for iron ore, petroleum, coking coal, and energy.
- Coal, given that the group’s earnings are biased towards these commodities.
- Achieving target margins.
- The proposed mining tax. Our initial estimate is that this should have a minimal impact on our valuation, and earnings should not be impacted in the forecast period.
- The proposed carbon tax. Our initial estimate is that the carbon tax should have a minimal impact on our valuation, and earnings should not be impacted in the forecast period.
- Wednesday’s close: $37.00
- Target stock price: $52.83
ANZ Banking Group (ANZ) – Buy
We’ve upgraded ANZ from Hold to Buy. We had concerns about ANZ’s accelerating expenses in the short-term that were not matched by revenue growth. However, the bank’s recent cost initiative to potentially reduce its workforce by up to 1,000 should address this issue and ensure a sustainable return on equity.
ANZ aims to be a super-regional bank with 25-30% of its underlying earnings coming from the Asia-Pacific by 2017 – that’s up from 13% currently – making it a valuable growth option in the region. This target will likely only be met by a few large acquisitions.
The regional focus would enable the bank to achieve growth rates far superior to those in Australia and New Zealand. But on the flip-side, the bank also represents a higher risk/higher reward proposition.
- Overweight New Zealand.
- Continuing conduit asset exposure, largely involved in back-to-back credit intermediation trades (ANZ acts as both protection buyer and protection seller in generating a spread, with a US$2.2 billion contingent liability under the sold protection at present that is only partially offset by purchased protection) – although the risk appears to be lessening.
- Wealth returns still sub-optimal.
- Needs clearer strategy in Asia with some perceived friction between ANZ and its joint venture partners.
- Wednesday’s close: $20.79
- Target stock price: $22.75
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