Morningstar Equities Research - 18 Feb 2013

Morningstar Equities Research - MIN, RIO, ANZ, CQR, DUE, MHI-NZ

Mineral Resources Limited MIN | Iron ore weighs on solid crushing growth
Morningstar Recommendation: Reduce
Gareth James, Equities Analyst -
Mineral Resources reported an underlying AUD 63 million net profit for the first half of fiscal 2013, 30% below the underlying net profit in the prior half. The fall was attributed to iron ore price weakness despite mining services and iron ore production growth. As usual, operational and financial details were scant. Iron ore production increased 13% to 2.5 million tonnes but no cash cost, grade, realised pricing, resource or reserve information was provided. There is insufficient disclosure to understand the financial performance of the iron ore and contracting segments.

Rio Tinto Limited RIO| Walsh's Fighting Words Light on Detail
Morningstar Recommendation: Accumulate
Mark Taylor, Associate Head of Basic Materials -
Underlying 2012 profit fell 40% to USD 9.3 billion in line with our recently downgraded forecast and consensus. Earnings per share fell 38% to USD 5.02. Iron ore's dominance again featured with USD 14.3 billion EBIT, higher than the overall group’s USD 13.4 billion, despite falling 29% due to lower prices. That bizarre outcome reflects losses in aluminium even though a considerable portion is excised in the Pacific Aluminium departure lounge. Pacific Aluminium houses Rio's Australian aluminium assets ready for divestment. The portion being retained managed break-even at best. The copper division recorded a 43% decline in EBIT to USD 2.0 billion in line with expectations, softer copper prices detracting.

Australia & New Zealand Banking Group Ltd ANZ | 1Q13 profits in line: on track for an impressive FY13
Morningstar Recommendation: Accumulate
David Ellis, Head of Australian Bank Research -
No major surprises in the three months to 31 December 2012 (1Q13) with the unaudited cash NPAT increasing an impressive 6.3% to $1.53 billion from $1.44 billion in 1Q12. First quarter earnings improved 3.4% on our $1.48 billion estimate for 4Q12. The Asian growth strategy is gaining momentum with good volume growth and the Australian franchise continues to efficiently manage costs and margins. Our positive view is intact but constrained revenue growth and flat margins demonstrate challenges of soft economic conditions in Australia and New Zealand in calendar 2012. Net interest margin (NIM) is not quantified, but management noted a flat outcome relative to September 2012. We estimate 1Q13 NIM around 2.28% and inline with our full year expectations.

Charter Hall Retail REIT CQR| 1H13 result: Larger sub-regional outperforms neighbourhood centres
Morningstar Recommendation: Hold
Tony Sherlock, Senior Equities Analyst -
CQR’s first half 2013 operating profit of $45.9m, with earnings per security up 6% on the prior corresponding period (pcp). Key drivers were rent increases and incremental income from recent developments and acquisitions. A 13.3 cent distribution was declared, up on the 13.0 cents in the pcp.

DUET Group DUE | 1H13: Another soft result
Morningstar Recommendation: Reduce
Adrian Atkins, Senior Equities Analyst -
DUET reported another soft underlying result in first half fiscal 2013. While revenue and EBITDA increased modestly, the higher share count and other factors saw proportionate ‘cash EPS’ fall 9% to 9.3 cents per security (cps). Cash EPS ignores depreciation and amortisation. Proportionate revenue increased 4.5% to $437.3m and EBITDA increased 4% to $317.5m, both excluding customer contributions. But revenue and EBITDA growth was more than offset by the 8% increase in securities on issue. Proportionate cash earnings slipped 2% to $106.1m.

Michael Hill International Limited MHI-NZ | First half results in line, second quarter soft
Morningstar Recommendation: Hold
Nachi Moghe, Senior Equities Analyst – NZ -
MHI reported first half results that were in line with our forecasts. Underlying NPAT increased 5.9% to NZD 27.9 million on revenue growth of 8.7%. EBITDA increased 4% but underlying margins dropped 60 basis points to 13.6%. We attribute this to significantly higher unallocated expenses which increased from NZD 11.2 million to NZD 14.4 million. The company’s margins were higher across all geographies with New Zealand delivering record high margins of 20.5%. In terms of growth, the Australian division was the standout achieving 12% growth in operating earnings reflecting reasonably strong same store sales (SSS) growth and new store rollouts. Australia is the firm’s largest market accounting for 73% of operating earnings and has good long term prospects. We expect growth momentum to continue with 10-15 new store rollouts per annum. In the US, MHI is taking a measured approach, so the cautiousness is understandable. In a low but stable economic growth, we expect losses in the US to decrease overtime as sales leverage translates into higher margins.

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