Mirvac Group (MGR) is an internally managed, diversified property group.

Since the company sold its hotel management business in December 2011, the company comprises of two core divisions, Investments (MPT/MRES), which is a trust structure and includes office and retail portfolios. The division also includes its Investment Management arm. Development, which develops a variety of property types including, residential, apartments, master planned communities and commercial.

MGR has been undertaking a restructure of its business with a focus on de-risking its earnings stream.

1H12 Results

Last week MGR reported its results for the six months to December 2012, which we think showed some promise of things to come. Statutory profit was $55.2 million for 1H13, impacted by $273 million of inventory impairments.

Revenue was $619.4 million, a 7.1% decline on the same period a year earlier. On an operating profit basis – after tax but before specific non-cash items and significant items – the company made $194.2 million, a 3.6% decline on the previous corresponding period.

Although a decline in profit, it is important to note that the company did increase its operating margin by 120 basis points. The increase in margin was on the back of a higher price received for it development projects.

Tangible Book and Yield

On the back of revaluations in the half, MGR’s NTA increased to $1.64 per share. At the group’s current price it is actually trading at a 1.2% discount to this level as opposed to the property sector which is currently trading at a 16% premium to NTA.

At the release of its first half results the group declared a healthy distribution of 4.2 cents per stapled security and confirmed its full year distribution of between 8.5-8.7 cents per security (cpss).

This equates to a yield of 5.3%, which is slightly higher than the property sector’s average 5.2% and higher than its comparable peers Lend Lease and Goodman Group which are both expected to be around 4.3%.

Looking ahead

Despite a slight decrease in MGR’s 1H earnings the company is looking in much better shape, especially on a balance sheet level. The group’s gearing dropped from 27.4% in 1H12 to 23.8% in the 1H13 and impressively dropped its average borrowing cost from 7.6% to 6.4%.

We believe this will see ratings agencies upgrade the group’s BBB credit rating, with the flow on effect being a further reduction in borrowing costs. In the 1H13 results MGR reaffirmed is guidance of an operating EPS of 10.7-10.8cpss   and DPS of between 8.5-8.7 cpss, which would be a solid result.

We think that tight costs controls as shown by increased operating margins, a solid distribution yield and the chance of the ratings upgrade will see the current divergence in price to NTA between MGR and the rest of the property sector decline over the next few months.

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The Reject Shop (TRS) is a discount variety retail company, targeting Australian consumers through low price points, bargain-purchasing and convenient shopping locations. As of 30 June 2012, TRS had 239 stores in Australia, with plans to open another 40 in FY13.

At these stores the company offers a wide variety of general consumer merchandise, with a focus on everyday needs, such as toiletries, cosmetics, homewares, personal care products, hardware, basic furniture, household cleaning products, kitchenware, confectionery and snack food.

The company has two key advantages that many of its mid-to-upper market rivals don’t – a strong AUD benefits earnings due to lower import costs, whilst the substitute nature of its products can appeal to cost-conscious consumers.

Consumer environment

The environment in which TRS and all retailers have been operating has been challenging to say the least, but there are signs that some of these challengers area abating.

The latest reading of the Westpac Consumer Sentiment survey showed the index rising 0.6%, to 100.6 – its third consecutive month above the 100 level.

A reading above 100 indicates that more consumers are optimistic about the economy than pessimistic. Unfortunately the increase in consumer confidence has not translated into an increase in retail sales, which declined 0.2% in the month of December.

Oddly enough the release of the poor retail sales saw the sector move higher, as the market took the view the numbers add to the likelihood of further cash rate cuts.

FY12 results

TRS’s FY12 results were a big improvement on what was a disappointing FY11. The company grew its net profit by 35.6% on-year, to $21.9 million.

The addition of 18 new stores over the year helped sales climb 9.9%, to $555.3 million. An increase in stores was not the only reason for the jump in sales; comparable store sales grew 0.5% over the year, with a 3.2% jump in the second half.

We believe that the 2H12 momentum will continue into TRS’s 1H13 results, which are scheduled to be released on 20 February 2013.

Outlook

TRS’s FY12 results were impressive on several fronts. Besides from the strong store sales growth the group was able to reduce its debt by $16.9 million in FY12, while increasing free cash flow from $1 million in FY11 to $25.2 million in FY12.

Another notable item in TRS’s results was that gross margins rose from 38.9% in FY11, to 44.1% in FY12, likely a combination of a strong Aussie dollar and a reduction in shipping costs.

While retail sales numbers are an important indicator for the retail space, the substitute nature of TRS’s products can appeal to cost-conscious consumers, thus giving the company the ability to grow its sales in a weak environment.

Overall we believe that the aforementioned healthy balance sheet, strong comparable sales growth and expansion of gross margin will continue to drive TRSs earnings and in turn push its share price higher in the near-term.

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ANZ Banking Group (ANZ) is the nation’s third-largest bank by market capitalisation, and is among the top 50 banks in the world.

The group provides a variety of banking and financial products and services to around 8 million customers, and employs 48,000 people worldwide.

ANZ operates in Australia, New Zealand, Asia, the Pacific, the Middle East, Europe and America. In recent years the group’s strategy has shifted to become a super-regional bank. To this end, the bank is aiming for between 25-30% of its earnings to come from its Asia, Pacific, Europe and America Division (APEA) by 2017, with the major focus being the high growth Asian region.

China manufacturing in expansion mode

For much of the early part of 2012 the discussion surrounding China was whether it was heading for a hard landing or a soft landing. The fears of a hard landing abated by the end of 2012’s second half, helped by China’s central bank adopting an easing bias towards monetary policy.

Measures including lower interest rates and targeted fiscal stimulus appear to be flowing through to China’s manufacturing sector, which is beginning to expand after an extended period of contraction. Last month, the HSBC Flash PMI showed factory activity accelerated to a two year high in January.

A pickup in manufacturing activity is important for ANZ as it implies Chinese companies are taking advantage of easier credit conditions and borrowing money in order to expand.

What to look for in trading update

ANZ’s FY12 results revealed a 2.6% increase in FY12 cash profit to $5.75 billion.  The APEA strategy also continues to be a key driver for ANZ’s overall business.

In FY12 this region’s income comprised 21% of overall profit, putting the group on track to achieve its aim for APEA to contribute 25% – 30% of overall profit by 2017.

Today CBA reported a 6% on-year rise in 1H13 cash profit to $3.78 billion.  Impressively, the result came on the back of a 6% increase in revenue.

The group’s net interest margin rose 4 basis points from the previous half, in a sign wholesale funding pressures are easing for the four majors. CBA’s first half results are a healthy indicator for the industry, and we expect ANZ to announce a similarly positive result when it provides a trading update for the first quarter later this week.

Outlook

ANZ’s FY12 results provide it with a good base to tackle FY13, and we expect some good news in its first quarter trading update. We will look for an improvement in interest margin and asset quality, as well as a cash profit driven by good cost control and evidence of top line growth.

The group’s exposure to Asia will continue to be an important earnings driver, and the benefits of this leverage will translate to further share price appreciation in our view.

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Credit Corp Group (CCP) is a receivables management company, specialising in debt purchase and debt collection. CCP’s primary business is the acquisition of purchased debt ledgers (PDLs) comprised of distressed debt from Australian and New Zealand credit issuers.

Over the past several years’ the company has made significant investments in technology and resources, which has led to solid infrastructure that is geared to produce sustainable long term performance.

With the infrastructure in place the group has begun to expand into the large US market, where it now employs 30 full-time staff.

1H13 results

CCP enjoyed a solid 1H13, in which underlying net profit rose 12% to $14.6 million.  The higher profit came on the back of a 6% increase in underlying revenue.

Over the half, the company grew its PDL collections and fee income to a record $72 million, a 54% increase on the same period in FY12. CCP also reported that the contracted pipeline for purchasing grew to $105 million in the 1H. This is a great result considering that the upper end of the guided range for FY13 was only $70 million.

The group also declared a half year dividend of 20 cents per share, fully franked – a 54% increase on 1H12’s interim dividend. Collections as % of total PDL continues to improve, rising from 71% at the end of FY12 to 72% at the end of December.

The rise in the collection rate highlights the company’s disciplined approach to purchasing, especially in the face of the strong competition from sector peers.

CCP’s US operations, which are only in the second year of operations, grew debt purchasing from $2.2 million as of June 30, 2012 to $4.0 million at the December 31, 2012.

The Australian loan book branded ‘MoneyStart’ also had solid growth over the half, doubling to $12 million in six months to December.

Outlook

The two most impressive points we took out from CCP’s 1H13 results were the massive increase in PDLs and the company’s disciplined investment approach, which has allowed it to increase its collection rate.

The Australian and US commercial loan books look solid and we expect further growth in the coming six-month period. The group has made specific mention of its plans to grow its US operations through optimisation and technology upgrades, which we believe will show exponential growth given the size of the market.

The group has plenty of room to grow its consumer loan books given its almost unleveraged balance sheet. Overall we were pleased with CCP’s 1H12 result and we expect the company’s current earnings momentum will translate into further share price appreciation.

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Perseus Mining (PRU) is a gold explorer and producer, focused on under-explored gold belts in West Africa. The group’s main assets are located in Ghana and the Ivory Coast, consisting of the Edikan Gold Mine (EGM), the Tengrela Gold project (TGP) and the Grumesa Gold Project (GGP).

The Edikan Gold Mine in Ghana has 5.6Moz of Measured and Indicated gold resources, including reserves of 3.4 million ounces of gold, and 1.7Moz Inferred gold resources. Production began at the mine in the 3rd Quarter of 2011.

The Sissingue Gold Project which is part of the Tengrela Gold Project. It is the group’s most advance non-producing project.

Quarterly Production

As mentioned, EGM has been producing gold since the third quarter of 2011.  Since the initial ramp of production PRU has reported four quarters worth of production numbers.

The first two quarters were within guidance, however the last two set of figures released have missed. The December 2012 quarterly production result was the more disappointing of the two misses.

Gold production over the quarter was 51,090 ounces, 13% below the lowered guidance provided in November and also below the previous quarter’s production of 52,610 ounces.

Cash costs for the December quarter was $588 per ounce, 2.3% higher than the revised guidance and much higher than the $475 per ounce in the September quarter. The group blamed the production short-fall principally on lower crusher output since its initial downgrade on 23 November 2012.

The Sissingue Gold Project

The Sissingue Gold Project located in the Ivory Coast is the project PRU is planning on getting to production. The group is targeting a mid-2014 commissioning date, but given its 12-month build time from the start of construction we see this timeframe as unrealistic.  PRU still needs to:

 
Finally PRU will need to approve development of the project, which it has put on hold pending clarity of the some of the aforementioned tasks.

Outlook

PRU has missed two quarterly production results in a row. The production issue of late is relating to a mechanical issue to do with the drive shaft for the crusher, which has results in poor mill utilisation.

The drive shaft is scheduled to be replaced in February, but given the downtime that will be required for the replacing and testing of the new shaft we can’t see the group meeting its previous guidance range of between 127,000 to 143,000 ounces.

PRU offers long-term value at these levels, but until the company can stick to its guidance we have too many short-term concerns.

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ANZ Banking Group (ANZ) is the nation’s third-largest bank by market capitalisation, and is among the top 50 banks in the world.

The group provides a variety of banking and financial products and services to around 8 million customers, and employs 48,000 people worldwide. ANZ operates in Australia, New Zealand, Asia, the Pacific, the Middle East, Europe and America.

In recent years the group’s strategy has shifted to become a super-regional bank. To this end, the bank is aiming for between 25-30% of its earnings to come from its Asia, Pacific, Europe and America Division (APEA) by 2017, with the major focus being the high growth Asian region.

FY12 results

ANZ’s FY12 results were good without being great. The banking major recorded FY12 statutory profit of $5.7 billion, up 6% from the FY11 result.

An increased capital base saw EPS only rise by 2% year on year, to 213.4 cents a share. Dividend growth over the financial year managed to outpace inflation, with a 4% increase to 145 cents a share.

We were most impressed with direction of the group’s super-regional strategy.

 
As the above shows the group managed to grow the income from APEA by 5% over FY12 to 21%. Notably the group also managed to slow down operating expense growth in the region from 11% to 4%.

The group’s APEA strategy continues to be a key driver for ANZ’s overall business results and we think this will continue as the group strives for a contribution of 25% – 30% of overall profit by 2017.

China expanding again!

For much of the early part of 2012 the discussion surrounding China was whether the slowdown in growth would be a hard landing or a soft landing. The fears of a hard landing abated by the end of the second half, helped by China’s central bank adopting an easing bias towards monetary policy.

The central bank actually began its stimulus measures in December 2011 when it implemented the first of a series of reserve requirement ratio (RRR) cuts. After cutting the RRR by 1.5% the PBOC then cut the country’s official interest rate by a little over 0.5% in the months of June and July.

These stimulus measures have began to show signs of flowing through to China’s manufacturing sector, which was the cornerstones of the country’s explosive growth of the last 10 years.

The month of November saw the HSBC Flash Manufacturing Index return a reading of over 50 for the first time in 12-months, indicating the sector had returned to expansion. Every month since that return to expansion was followed by an increase in the index, with yesterday’s reading of 51.9 marking a 24-month high.

Outlook

ANZ’s FY12 results provide it with a good base to tackle FY13. The year was not an easy one for the global banks in general, with the eurozone crisis leading to higher funding costs, which increased pressure on bank interest margins.

ANZ’s net interest margin contracted 11 basis points over the year. That being said, it was the group’s exposure to Asia that allowed it to grow earnings.

We believe that ANZ’s leverage to the growing Asian region will continue to benefit the company and this is expected to result in further share price appreciation.

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Telstra Corporation Limited (TLS) is a full service domestic and international telecommunications provider and is without question the dominant telco in Australia.

The company provides telephone exchange lines to homes and businesses, supplying local, long distance and international telephone calls and supplying mobile telecommunications services. TLS also provides data, internet, on-line services and directory services.

TLS has five key business segments:

 
FY12 Results

The groups’ FY12 results revealed low, but stable growth. EBITDA was $10.2 billion, a 2.1% increase on the prior year’s result on a guidance basis. Revenue over the year climbed 1.3%, to $25.4 billion.

TLS’s mobile division, which accounted for over 30% of entire group’s EBITDA, continues to be one of the company’s strongest contributors. The Mobile division reported an EBITDA of $3.12 billion, an 18.4% increase on the prior year’s result.

The group’s margins in this division also grew over the year from 33%, to an impressive 36% in FY12.

Investor day – strategy

The group’s investor day focused on the medium/long-term strategy and positioning of TLS. A few of the key points we gleamed from the presentation in regards to th core/mature business’s fixed lines, mobiles and internet:

 
The group plans to extract growth out of the less mature segments such as the Network Applications and Storage, Mobile Broadband or Foxtel.

Investor day – Decrease in Capex

A real positive announcement to come out of the investor day was the targeting of a lower capex/sales ratio.

TLS set it will target a capex/sales ratio of 14% in the medium-term, down from the 15% it has forecasts for FY13. This is most likely a result of the group’s involvement in the NBN, which is likely to be less capital intensive than its current network.

Looking ahead

TLS’s FY12 results showed the type of consistent growth we have come to expect. The investor update was a realistic approach to the business, with TLS understanding that it needs to protect its mature business rather than strive for unrealistic growth.

TLS is currently trading on a forecast yield (28c for FY13) of over 6.1%, fully franked, or 8.7% on a pre-tax basis. This yield, while not as attractive as before, is still likely to be enticing to investors given the low interest rate environment.

The aim of a lower capex/sales ratio is also good news as the high capital intensive nature of the business has always been a concern to market pundits. Overall we expect a solid result from TLS for the 1H13 and this should translate to further share price growth.

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STW Communications (SGN) is Australasia’s largest marketing communications group, comprising over 75 specialist companies.

Through its subsidiaries, SGN works with Australasia’s biggest brands and some of the world’s biggest companies, including IBM, Ford, Panadol, Bendigo Bank, PepsiCo, Hyundai, Castrol and Dick Smith, to name just a few.s.

The acquisitions

In late October 2012, the company announced plans to acquire three companies, paid for via a $40 million capital raising. Markitforce (75% SGN ownership) is a leader in promotional campaign execution and point of sale fulfilment for local and global clients, with clients such as has Unilever, L’Oreal and Boehringer Ingelheim.

The acquisition will strengthen SGN’s execution capabilities and offer it exposure to the attractive retail and shopper marketing segment, which only adds to its already well diversified portfolio.

Maverick Marketing and Communications(Maverick) (80% SGN ownership) is a leader in experiential marketing from strategic and creative development through to execution. It has clients such as, Telstra BigPond, Coca Cola, Westpac, Bonds, Target and Vodafone to name a few.

The acquisition will provide SGN with experiential marketing capabilities, but we think it will provide a great opportunity for SGN’s current companies to leverage Maverick’s client base.

Switched on Media (SOM) (75% SGN Ownership) is a digital agency specialising in search engine marketing and social media. SOM’s client base includes Canon, Fairfax digital, Cochlear and Westfield. The acquisition of SOM will not only boost but also compliment SGN’s current digital capabilities.

Impact of acquisition

The total cost of the acquisitions (including Amblique) is $30.6 million; this includes an estimate of the likely earnout payments to the previous owners.

SGN forecast a full year contribution from the acquisitions for CY13 as follows: revenue of $29.8 million and EBITDA of $6.1 million. For CY13 the acquisitions are likely to be EPS neutral on a pre-synergy basis.

We expect synergy benefits, especially the cross selling opportunities to some very large blue-chip companies, to provide SGN with some major growth potential.

Outlook

When SGN reported its 1H12 results, it acknowledged the challenging macro economy and stuck to its FY12 forecast for mid-single digit net profit growth. Longer term, however, it remains in a strong position to benefit from the ongoing shift to digital publishing.

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REA Group (REA) is Australia’s leading online property advertising business. It operates a number of different websites including realestate.com.au and realcommercial.com.au, as well as international property sites such as Italian-based casa.it and Hong Kong-focused squarefoot.com.hk.

Realestate.com.au is the group’s flagship website, which generates revenue primarily through subscription fees levied to real estate agents.

Growth path

REA has been on a strong growth path since FY08.  In the four years since then, revenue has risen at an average rate of 20% whilst underlying earnings have grown at an average rate of 38%. Impressively, the group has expanded its underlying profit margin each year since FY08 and stood at 31% in FY12.

Margin expansion has come as operating cost growth has been kept in check, and revenues have increased due to the group’s property websites strengthening their competitive positions, especially in Australia.

Becoming more profitable has allowed the company to accelerate the rate of growth in free cash flow, giving it greater flexibility to boost dividends in coming years.

Highlight

Realstate.com.au retains a commanding position in the online Aussie property ad market. Its share of the overall market (revenue) was 60% in FY12 and its average monthly unique audience was almost twice that of its nearest competitor.

The group took steps in FY12 to protect its market position, launching a new mid-range residential listing product, Highlight. For a $700 monthly fee, Highlight allows vendors to make their ads more prominent among search results on realestate.com.au.

In what is arguably a buyer’s market in Australia, we expect property advertising upgrades like Highlight to attract increased interest from vendors looking to sell.

In a sluggish domestic property market, product differentiation will play a bigger role in generating revenue for firms like REA.  Highlight is an example of this differentiation.

Outlook

The Aussie property market’s struggles saw the number of REA’s subscription paying agents fall 6.4% in FY12. However the RBA’s spate of interest rate cuts will provide a degree of support to the property market in 2013. This should help stabilise the trend in the number of paying agents.

In what remains a challenging operating environment, REA is generating impressive revenue and profit growth.  The group said that 1Q13 revenue increased 17%, whilst EBITDA jumped 28%.

This bodes well for the remaining nine months of FY13, and reinforces our view that the quality of REA’s product offering (Highlight) and its dominant market position are key factors presently underpinning the share price.

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Woolworths Limited (WOW) operates supermarkets, specialty and discount department stores, a liquor business and electronics stores throughout Australia.

The company manufactures processed foods, exports and wholesales food and offers petrol retailing. WOW’s hotel operations include pubs, food, accommodation, and gaming.

1Q13 Sales

WOW’s 1Q13 sales continued to show an improving sales trend. Sales from continuing operations were $14.8 billion for the quarter, up 4.7% on the prior corresponding period.

The supermarket division (including liquor), which accounts for ~88% of sales, reported a 3.4% rise in sales to $12.99 billion.

Areas growth

While a majority of WOW’s 1Q13 sales were good without being great, there were a few standout divisions. Big W reported like-for-like (LFL) sales growth of 3.4%, showing the success of the group’s recent marketing campaigns.

The group’s newly entered Masters Home Improvement segment showed spectacular growth, with 62.2% increase in sales. Most of this was driven from seven new store openings in one quarter and greater brand recognition.

The company plans to open 150 stores over the next five years, with at least 30 stores to be opened by the end of FY13. We believe that exposure to this sector can only be beneficial to WOW’s earnings in the long run.

Looking forward

A real solid sales trend has begun to emerge for WOW and 1Q13 sales may continue this positive trend. Another fact we like about the group is that such a large proportion of its sales come from the more reliable supermarket division, as this provides more consistent earnings.

WOW’s ability to generate cash will become increasingly important to fund the Masters Home Improvement expansion and we believe this will be beneficial to WOW going forward.

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