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Morningstar Equities Research - 20 Dec 2012

Morningstar Equities Research - BBG, CHC, SKC-NZ, FKP, PMV, AIO, CDD, TRS

Billabong International Limited BBG | Earnings on the slide while a proposal enters the mix
Morningstar Recommendation: Avoid
Tim Montague-Jones, Senior Equities Analyst - 02 9276 4469
BBG has received a non-binding and conditional proposal from a consortium comprising Paul Naude, Sycamore Partners Management and Bank of America Merrill Lynch as ‘lead debt financier’, at an offer of $1.10 per share.
BBG provides a trading update indicating EBITDA guidance provided at the AGM on 30th September is downgraded from a range of $100m to $110m to a new underlying constant currency range of $85m to $92m.

We welcome the bid proposal; the continued contraction in earnings reflects the need to aggressively re-organise the business from the ground up to ensure it has the correct cost structure to drive future earnings growth.
Paul Naude knows the business and understands the underling value of the brands. There is significant uncertainty surrounding the future of premium lifestyle branded products as consumers enter a new normal of frugality. We sense consumers are now unwilling to pay $50 for a branded Tee Shirt. Taking the business private offers Mr Naude a significant incentive to successfully transform the business to match consumer demands within the market. This process is best done in private hands outside the constant attention of the investment and media community.

The Americas comparable sales have deteriorated while in Europe cancellations of orders have increased. The underlying demand for BBG products continues to wane, leading to price discounting and an erosion of gross margin. We expect the transformation process will take a number of years to ensure adequate returns on capital can be achieved.

Recommendation Impact
We retain our Avoid recommendation, we do not consider BBG as investment grade, and there remains significant uncertainty surrounding the future viability of the business model in extracting premium prices from general apparel in an environment of extended consumer frugality.

Charter Hall Group CHC | Continuing to bulk up funds management platform
Morningstar Recommendation: Hold
Tony Sherlock, Senior Equities Analyst - 02 9276 4584
CHC has undertaken a series of transactions on its funds platform. The most notable is the $207m acquisition of Bunnings stores in conjunction with Telstra Super. The assets will be held in a new BP Fund, in which CHC will have a 10% or $10.8m equity stake. The Bunnings transaction will be marginally accretive to FY13 earnings.

CHC reinstated the distribution reinvestment plan for the 1H13 distribution, with a discount of 1%. Notification to participate must be lodged prior to the 31 December record date.

CHC achieved approval for a $250m office and luxury retail property at 333 George St. Sydney through its Core Plus Office Fund. The fund’s investment committee has yet to decide to proceed immediately with the building. We expect the Sydney CBD to be oversupplied from 2015 given the major office developments that have started or are seeking tenant pre-commitments by Lend Lease (Barangaroo), AMP (Circular Quay Precinct), Mirvac (190-200 George St) and Commonwealth Property Office Fund (5 Martin Place). Nonetheless, with only 11,000 sqm of office to fill we expect the project is likely to get the green light in mid- to late-2013, which should be mildly accretive to FY14 and FY15 earnings.

Our forecasts adjust to reflect growth in funds under management from the creation of the BP Fund, the 333 George St. development and marginally higher project management fees. As part of a review to harmonise weighted average costs of capital (WACC) across the property sector we cut CHC’s WACC from 10.8% to 9.3%, reflecting a lower debt cost outlook and a reduced risk assessment for the underlying business operations. Following these changes, our fair value estimate increases 22% from $2.65 to $3.25.

Recommendation Impact
We upgrade our recommendation from Reduce to Hold

SkyCity Entertainment Group Limited SKC-NZ | Adelaide expansion offers good prospects
Morningstar Recommendation: Hold
Nachi Moghe, Senior Equities Analyst – NZ - 64 9 915 6776
In a landmark deal SKC today announced that it would spend AUD 300 million (NZD 375 million) to expand the Adelaide casino after reaching an agreement with the South Australian government. The redevelopment would transform the Adelaide casino from a staid gaming entity to an integrated entertainment complex with a new and much improved gaming offering. This should significantly boost visitor numbers and spend rates overtime as the casino takes market share away from local pubs and clubs. Importantly we expect a dramatic rise in VIP gaming revenues as the company dedicates about 300-400 machines to this segment and lures high end players from competing cities like Melbourne and Sydney. As a result we are reasonably confident that the range of initiatives announced today will underpin Adelaide’s revenue and EBIDTA and deliver low to mid teens after tax returns in the long run. However given Adelaide’s relatively modest contribution (of nearly 15%) to group EBITDA we don’t expect the overall impact to be material. We are not making any changes to our forecasts as the revised regulator framework is subject to legislation and approval from the Independent Gaming Authority.

FKP - Upgrade due to price change.

Asciano - Downgrade due to price change

Cardno - Downgrade due to price change.

Premier Investments - Downgrade due to price change.

Reject Shop - Downgrade due to price change.

Click here to read: Morningstar_Equities_Research_2012 [pdf]


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