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Stock take: Friendless banks and is Ardent Leisure a takeover target?

Just last month, Paul Rickard believed the banks were in the buy zone [1] with beaten-down share prices reflecting global economic concerns, the spectra of negative interest rates (which could squeeze bank margins) and the usual fears about the banks’ exposure to a possible housing price bubble. Paul noted that there was also unease about falling commodity prices with “market fears that there may be some horrible exposures, leading to large write-offs”.

At the time of writing, the banks’ prices were a bargain buy with ANZ’s closing price at $22.56, Commonwealth Bank at $70.72, NAB at $24.41 and Westpac at $28.56.

Share prices have since risen but remain under pressure, with the big four banks falling 2% on Tuesday, continuing last Thursday’s sell off.

Last Thursday, ANZ warned that it expects to take an extra $100 million in credit provisions for the first half of its financial year, while Westpac increased its debt provisions because of bad consumer loans in the resource-driven states of Western Australia and Queensland.

In today’s Switzer Daily, both Peter Switzer and Paul Rickard provide a detailed analysis behind the recent fall in bank prices and why they have been “unnecessarily beaten up”. Super Stock Selectors’ Michael McCarthy also joined the debate with a detailed piece on ANZ.

In a nutshell, Peter says the banks have the added pressure [2] from short-sellers and overseas reports that the Australian banks are vulnerable to a housing crisis.

He notes that ANZ’s $100 million write-down is material to its earnings, a view shared by Macquarie analysts. And while ANZ is not in the good books with UBS, the broker downgraded the bank because of its Asian exposure.

In his article, Banks on the nose [3], Paul noted the banks are a “little friendless’” and any “news no matter how material, adds oxygen to the fire”.

Michael looked at some of the specific pressures confronting ANZ [4], in particular, its disappointing results from its Asian operations. “Once perceived as ANZ’s strength, its engagement with the higher growth economies of Asia failed at the tactical level,” he writes.

Peter remains a bank believer and while he is concerned “about external events derailing my optimistic story for bank stocks” that “goes with the patch of investing in stocks”.

Michael sees value in ANZ, noting that at current prices (and even if ANZ halved its dividend) that would still put the dividend yield at 5.5%. As he is not forecasting a disaster in Australian debt markets, he reckons “investors should have ANZ on their radar right now”.

Paul still believes banks are in the buy zone and may stay cheap until the markets get clarification over what is happening with the credit exposures. “My take is that the overall credit environment remains broadly stable, and while employment remains strong, Australian banks will continue to enjoy relatively low levels of credit losses,” he says.

While profits and dividends are not growing, Paul says, “they won’t get smashed either”. With the official banking reporting season kicking off in over four weeks, the results will certainly be watched with interest and, hopefully, the results might provide the tonic the market needs to start liking the banks again.

Tony’s call on Ardent

This week, Ardent Leisure (AAD) made it on the brokers likes’ list. The business was a stock pick by Tony Featherstone back in August, when he analysed the tourism megatrend. At the time of Tony’s article, the stock had fallen to $2.36 compared to a 52-week high of $3.49. It’s since trading around $2.24 levels, which is just below a median target price of $2.49.

Ardent Leisure owns the Main Event family entertainment business in the US, health clubs, bowling alleys, Gold Coast theme parks, and marinas in Australia. Recently the business announced it would sell its d’Albora marina business in a bid to boost its balance sheet and focus on the Main Event family entertainment business.

The business booked a net profit of $22.7 million for the six months through to December, an increase of 20.4% on the prior interim period. Revenues rose 16.8 % to $333.8m over the same period.

Tony still believes that the business has a strong leverage to the boom in inbound Asian tourism through its Gold Coast theme parks but acknowledges it “should be performing better than it is”.

“Recent weakness in the Main Event business is an emerging concern, as it is the main valuation driver,” he says.

The relatively new chief executive Deborah Thomas still has some work to do, according to Featherstone. Thomas was a surprise pick, according to the analyst community when she was appointed in May 2015, following the unexpected retirement of longstanding CEO Greg Shaw. Thomas was formerly the editor of Women’s Weekly and many questioned her ability to run a public company.

Analysts’ views also support the marina sale, with Morgans, Citi, UBS and Deutsche Bank noting that the decision was strategically sound.

Tony wouldn’t be surprised to see a takeover offer if its operational momentum does not improve. “It looks a possible candidate for a private equity privatisation,” he says.

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