The east coast Australian economy has claimed some more top-100 casualties, with Leighton Holdings (LEI) issuing a profit warning this morning and property major Stockland Group (SGP) issuing one on Tuesday. We have had five top-100 companies issue profit warnings in the past week, with the clear trend being stocks exposed heavily to Queensland having negative earnings issues.
Leighton and Stockland joined QR National (QRN), David Jones (DJS) and Bank of Queensland (BOQ) in lowering profit guidance materially.
Stockland said, “A deterioration in the residential market has impacted its residential sales and in addition, prolonged wet weather has resulted in the deferral of a number of settlements into next financial year. Unfortunately the residential market has deteriorated since banks lifted interest rates independent of the RBA and March sales have been lower than expected. The revised guidance assumes sales will continue to be slow for the balance of the financial year.”
You’d think Stockland were selling home and land packages in California, but no, this is Australia in a so-called ‘mining boom’.
Stockland’s profit warning came on the same day another two RBA operatives spoke and Fitch said Australian mortgage arrears were “unexpectedly” rising. Dow Chemical CEO Andrew Liveris also gave a downbeat assessment of Australia’s economic prospects.
RBA softening the tone
But before I fire another shot at the RBA, in my understanding of how they attempt to communicate with markets, I think they are actually softening us up for a bad first quarter gross domestic product (GDP) print and a series of cash rate cuts. They tend to jawbone their changing intentions and I sense a genuine softening in their recent communications. There is at least now an acknowledgement that all is not good in Australia.
Bad news is now good news
We have this weird situation now, where in terms of the Australian equity market, domestic bad news, both macro and micro, is actually good news as it gets us one step closer to lower cash rates and a lower Australian dollar.
The other point worth noting is it seems no broker has downgraded Queensland coking coal export forecasts for the first quarter of 2012 despite the QR National profit warning citing coal volumes. These high-value coking coal exports are a big swing factor in Australian GDP and one of the key reasons I believe the first quarter Australian GDP print could be negative.
Top stocks
My top-five high conviction large-cap Australian recommendations are all immune to east coast pressures and remain in earnings and dividend upgrade cycles. They are:
- AMP (AMP)
- Crown (CWN)
- Fortescue (FMG)
- Santos (STO)
- Telstra (TLS)
Our Australian equity strategy remains only selectively bullish (ie. picking stocks), but I hope to upgrade that next Tuesday to ‘bullish’ (ie. recommending the asset class) when the RBA lowers cash rates. If I am wrong and they don’t cut rates, we will remain only selectively bullish, focused on the ‘haves’, the vast bulk of whom face Asia or are in structural growth sectors.
The Australian equity market is at a big decision zone again, yet large cap earnings and GDP growth forecasts are being downgraded. The only way to truly crack through technical resistance is via monetary policy change and a lower Australian dollar.
Go Australia, Charlie
Other recommendations:
Bank of Queensland (BOQ) – Sell
Bank of Queensland is raising $450 million as a result of massive write-downs in its commercial property portfolio. The offer price for the new 74 million new shares to be issued is $6.05 – a 17.1% discount to the prior closing price. Looking at the gloomy prospects painted by management, it is difficult to see things improving in the short to medium term. While there is always the possibility of an approach by a larger player, we discount this as long as the bank’s business model remains shaky. We have lowered earnings by 87% for 2012 and by 3-4% subsequently having assumed the bank is now adequately provisioned for future commercial property stresses.
- Target price: $5.50 (formerly $7.20)
- Last closing price: $7.65
Commonwealth Bank (CBA) – Hold
Commonwealth Bank remains a lower risk bank with: (1) value upside from further productivity gains to sustain current return on equity (ROE) levels; and (2) strong capital generation to support a higher payout ratio. The bank continues to exhibit the qualities of a utility in the current environment and remains a Hold with a share price trading at close to our price target. While ANZ (price target $24, Buy) and National Australia Bank (price target $26.30, Buy) remain our preferred major banks, we see an opportunity for those seeking exposure to domestic retail/business banking to switch into Commonwealth Bank from Westpac given the latter’s higher profit and loss volatility from mark-to-market and reliance on internal Residential mortgage-backed securities for liquidity purposes.
- Target price: $50.80
- Previous close: $50.38
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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Watch Charlie’s appearance on SWITZER on the Sky Business Channel on SuperTV. He sat down with Peter Switzer to talk about his outlook for the market and the stocks he likes and doesn’t like.
Also in the Switzer Super Report
- Peter Switzer: Do recent warnings signal a time to buy?
- Andrew Bloore: Three ways the mining tax impacts your super
- Ron Bewley: A safe strategy for building a stock portfolio – Part 2
- Jo Heighway: Why asset valuations are worth every cent
