Another nail in coffin for once mighty company

Co-founder of the Switzer Report
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Changes were made to Australia’s key share market indices after the close of trade on Friday, with a once leading company falling out of the top 100.

Every calendar quarter, S&P reviews the constituents of each index and, based on changes in free-float market capitalisation, adds or removes companies. The interesting point about this set of changes is that it puts yet another nail in the coffin for ‘CSR’ – once a top 10 company that is now out of the ASX100!

CSR’s demise follows a continuing decline in its share price and its recent announcement to suspend the franking of dividends. Now a shell of its past glory, it is largely a manufacturer of building products – gone is the sugar, the timber and other products in what was probably Australia’s first true conglomerate. How the mighty have fallen!

How this impacts you

Index changes matter to investors because, over time, index fund managers adjust their portfolios by buying into companies joining an index like the ASX100, or selling out of companies that leave an index. Some of the larger so-called ‘active’ institutional managers also take note because they are often forced to hug the index due to the risk of underperforming the benchmark. Further, analysts initiate or cease coverage based on companies that are in certain indexes. All these factors can lead to changes in the natural ‘demand’ for a stock.

Index changes in June

Companies to watch

The most important changes are to the S&P/ASX200 Index because this is the benchmark index used by most index funds, including exchange-traded funds (ETFs). Focusing on the additions, a brief review of the new companies is detailed below (consensus forecasts courtesy of FNArena).

Cardno Limited (CDD)

Cardno is a professional services firm, which provides engineering and environmental services to infrastructure projects and operations encompassing building and property, coastal and marine, transport, mining, urban development and water services. Headquartered in Brisbane, Cardno has more than 6,500 employees and operates in 85 countries.

This company has been one of the better performers in the market, rising from around $5.00 in Dec/Jan to close at $7.50 on Friday. Consequently, the market price is above the consensus target price of $7.06. Two brokers still rate it a ‘buy’, one an ‘outperform’, and one a ‘neutral’.

Other key data for Cardno:

M2 Telecommunications (MTU)

Like Cardno, the M2 Telecommunications Group has had a fairly impressive run up in share price, notwithstanding a recent entitlement issue to fund the acquisition of Primus Telecom. M2 is Australia’s largest network independent telecommunications provider, offering fixed line, mobile and data communication services specifically tailored towards small to medium businesses. Brands include ‘Commander’ and ‘iPrimus’.

While only a handful of brokers currently research M2 (this will no doubt change), the consensus seems to be that Primus is pretty close to the valuation/target price. Acquisition risk, and the prospect of increased competition under the National Broadband Network (NBN) have led the market to hose down their ratings to ‘hold’ territory.

Key data for M2:

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.

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