30/08/10 - 12:30
Ben Potter, Research Analyst
Market Update from the Trading Room – 12.30pm
Australia 200 CFD Index: 4451.7 (1.9%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Financials | 2.1% | Telecommunications | 0.9% | |
| Materials | 2.0% | Consumer Staples | 1.2% | |
| Energy | 2.0% | Property Trusts | 1.3% |
Market - Australian company profits rose 18.9% seasonally-adjusted in 2Q vs 1Q, almost tripling an expected gain of 6.7%. The data tells a story of strength among the country's corporates, which lends weight to the view that the economy grew relatively solidly through the three months to June 30; mining companies were the main driver of the result. However, inventories fell 0.5% seasonally-adjusted in 2Q vs 1Q, against an expected decline of 0.4%. The result could cause some estimates of 2Q GDP to be revised down. Inventories may be lower as distressed retailers ease back stock levels as consumers remain cautious.
Earnings Season – In a comment from Macquarie Group, it said despite consensus downgrades this reporting season, the Australian markets FY11 EPS growth forecast (ex-resources) of 12.4% is at risk of further downgrades in the absence of a pickup in the "non resource" economy. The broker believes that in a year when Australia's private sector GDP growth is likely to have exceeded 5% (nominal), EPS growth is coming in barely positive. The broker also noted that the June half-year 2010 did see EPS growth accelerate to a useful +10.5% vs the previous corresponding period (non resources), although very low top-line growth (of less than 2%) suggests there is significant risk to FY11 EPS growth forecasts. Macquarie flagged the resources sector as the standout in the June half-year reporting season, with 9.1% revenue growth and cost control delivering a strong uptick in EBITDA margins and EPS growth of about 50%.
Banks – In a comment from Deutsche Bank, it said while recent 3Q updates from Aussie banks showed some headwinds, they also highlighted some positive trends which in its view will lead to improved growth in underlying revenue in FY11 and FY12. The broker pointed to a number of trends, including stabilising margins, improved revenue in retail and business banking, improved credit quality and strong organic capital generation. Deutsche believes ANZ Bank's update showed the strongest improvement and believes that ANZ will outperform over the next 12 months.
Fortescue Metals Group – In a research note from Goldman Sachs, it upgraded Fortescue to buy from hold, with a price target of $6.17 and cited positive FY10 results and presentation. Goldman’s expects cash flow to enable Fortescue to repay accrued interest on Leucadia note and self fund its expansion to 55 mtpa. The broker also added that forecast iron ore prices and production rates should allow the expansion to 95 mtpa to be internally funded.
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