My thoughts on BHP, AMP and Emeco

Chief Investment Officer and founder of Aitken Investment Management
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After meeting with AMP’s chief executive Craig Dunn this morning I am even more of a believer in our strategist’s bullish view on AMP.

Firstly, I’d like to say I think Craig Dunn is very impressive – very calm, very presentable, very on top of the topic. I also believe the market doesn’t know him well, yet.

AMP is the major top-20 buy if you believe, like I do, that the five-year Australian equity bear market has ended and a change of federal government is pending.

This stock so reminds me of Telstra (TLS) at the lows. This stock is a major high conviction buy. It remains cum the 12.5 cent interim dividend, meaning you can buy the stock and receive the dividend until it goes ex-dividend on 3 September.

For the 2013 calendar year, we forecasts AMP to grow its earnings per share (EPS) by 10%, with the return on equity (ROE) rising to 15.2%. The price to earnings ratio (P/E) is 11.4-times bottom of the cycle earnings, while the yield is 6.9%.

The five-year chart is at a major inflection point and I believe this stock will be in a positive earnings and dividend revision cycle for the medium-term.

Markets have bottomed, legislative risk has peaked, capital position is rock solid and the brand is on the improve.

I am super high conviction on AMP at these levels. 

The main points from my meeting with Dunn are:

  • AXA synergies, both revenue and cost, are surprising on the upside.
  • There’s a lower exit of AXA planners than expected.
  • Capital position is strong. AMP wants a “fortress balance sheet”.
  • Dunn believes they have now ended uncertainty about the cost of regulatory change.
  • Looking for small bolt on SMSF administrator acquisitions. No major acquisitions.
  • AMP Bank going well, using cheap funding from CMTs.
  • Seeing fund inflows picking up, and he’s cautiously optimistic on this development and markets overall.
  • AMP’s looking forward to selling tonnes of high-yield manufactured asset management products to the yield hungry Japanese.
  • Dunn commented on a potential change of Federal Government and the potential opening up of the Industry Super Fund segment.
  • 20% of all Australian super flows into the closed shop that is industry funds.
  • Payout ratio to be 70% to 80%.
  • -2.5% discount dividend reinvestment plan (DRP) will be most likely abolished through time, potentially replaced with the on-market buying version of a DRP.

BHP Billiton

BHP Billiton’s results are always widely commented on by the financial press and broker analysts. Fair enough, BHP is the biggest mining company in the world and the biggest ASX200 index weight.

In my view, whatever BHP reported and said yesterday was going to be interpreted as bearish by the China/commodities bears and bullish by the China/commodities bulls. There is no middle ground in the views on China/commodities nowadays and BHP provides so much information, it is ammunition for both camps.

In my view, the BHP result of $17.1 billion, the delaying of major medium-term capex spend (they will still spend $22 billion in fiscal 2013), the second half operational consensus forecast of $12 billion, and the second half-year dividend payout ratio lift to 35%, were all good.

However, if I have one constructive criticism of BHP, it is that cost control through the 2012 financial year simply wasn’t strong enough. A negative $3 billion contribution from cost increases is simply too big.

It is time for BHP to harden up on costs, particularly in Australia. The Aussie dollar is out of their control, but the good news is it is peaking.

Encouragingly, I think BHP gets this message. This is going to be bad news for parts of the over-geared front-end mining services sector and good news for BHP shareholders.

BHP remains a member of my high conviction buy portfolio. I think this year will be brighter for them as variable costs are attacked hard and commodity prices rally in Australian dollars.

BHP should be able to earn around $3.30 earnings per share (EPS) in 2013. I think investors will be prepared to pay 11-times for that $3.30 EPS as they get more comfortable with that being achieved. That equates to a $36.30 price target. However, I believe BHP will trade on 12-times fiscal 2013 estimates, which equates to a price target of $39.60.

Cum the 57 US cent final dividend, I think BHP is a buy from a trading and investing perspective.

Emeco Holdings (EHL) – Buy

Emeco is an equipment hire company, supplying earth-moving equipment to the mining industry. Emeco reported an annual net profit after tax (NPAT) of $71.1 million, well ahead of our $67.3 million forecast and ahead of previous guidance of $67-70 million. Operationally the result was broadly in line with expectations, with stronger margins (particularly in Australia) offsetting weaker-than-expected revenue growth. In the second half of fiscal 2012, NPAT growth of 61% was a highlight and benefited from the deployment of recently acquired capital, something that should remain a feature throughout 2013-14. Operating cash realisation was exceptionally strong at 111.4%, and this enabled net debt to finish the year at about $40 million more than expected.

  • Recommendation: Buy (unchanged)
  • Price: $0.90
  • Target (12 months): $1.25 (unchanged)
  • Expected Capital growth: 38.9%
  • Dividend yield: 7.2%
  • Total expected return: 46.1%
  • Market capitalisation: $568.1 million

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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