Morningstar Equities

Morningstar Equities

Fonterra Shareholders' Fund FSF-NZ, FSF| Fonterra Contamination Issue Contained for Now

Morningstar Recommendation: Hold

Nachiket Moghe, CFA, Morningstar Analyst - 64 9 915 6776
Following our recent note on the whey contamination issue, we assess the impact on the Fonterra's financial performance and fair value. We believe that while the whole episode has somewhat tarnished the image of Fonterra and New Zealand, we don't think it will affect the firm's earnings, as the product in question accounts for a relatively small proportion of the company's overall volumes. The cost of product recalls, which was one of our main concerns, will likely be covered by insurance. Consequently, our fiscal 2013 and 2014 estimates of NZ 46.3 cents per share and NZD 47.6 cents per share remain unchanged. We are also sticking with our fair value of NZD 6.50 per share which translates to a price of 13.7 times our 2014 earnings forecast. The stock saw a significant sell-off following the incident, but has recovered sharply since then, nearly recouping all its losses. This suggests the market is relatively unperturbed by the incident. Still, the stock appears expensive, trading at a premium to our fair value estimate and leaves no scope for any disappointments. We continue to believe that Fonterra does not possess an economic moat given its business is predominantly driven by commodity products like milk and powders, which have lower margins and returns compared with value-added products.

JB Hi-Fi Limited JBH| JB Hi Fi's Gross Margins Expand as Industry Discounting Subsides
Morningstar Recommendation: Sell
Tim Montague-Jones, Morningstar Analyst - 02 9276 4469
JB Hi-Fi increased fiscal 2013 revenue by 5.8% which is in line with our expectations. Gross margins improved to 21.5% compared with 21.1% in fiscal 2012. This improvement reflects less industry promotional activity. In fiscal 2012, the clearance of inventory by retailer Dick Smith, as it was prepared for sale, led to significant industry discounting and margin dilution. The bounce-back in margin ensures a healthy increase in net profit after tax, up 11.2% to AUD 116.4 million. This is slightly above our forecast of AUD 112.6 million. The opening of 12 new stores in fiscal 2014, combined with a more settled industry, less discounting and signs of some moderation in price deflation, leads us to upgrade our earnings outlook. We raise our fair value estimate 16% from AUD 9.50 to AUD 11.00. We continue to view the stock as overvalued. Our fair value estimate differs from that of the market because we expect sales growth to slow as the store roll-out program slows over the next three years and lower-cost online retailers increasingly compete for sales of commoditised electrical products.

IRESS Limited IRE| IRESS - Acquisition Drives Fair Value Upgrade - Take Up Entitlements
Morningstar Recommendation: Reduce
Ravi Reddy, Morningstar Analyst - 02 9276 4581
IRESS shares resumed trading on 9 August 2013 following completion of the institutional component of the 2 for 9 renounceable entitlement offer. The institutional offer raised around AUD 152 million. There was a 97% take?up by eligible institutional investors. The shortfall shares were placed at AUD 8.35, a AUD 1.20 premium to the entitlement offer price for each entitlement.

The fully-underwritten retail offer opened on 12 August 2013 and closes at 5.00 p.m. (Melbourne time) on 29 August 2013. Eligible retail investors that take no action will have their entitlements sold through the retail shortfall bookbuild process on 3 September 2013. Any proceeds from the sale of the entitlements in excess of the offer price will be paid to eligible retail investors.

James Hardie Industries Plc JHX| James Hardie Posts Solid First-Quarter Sales and Better-Than-Expected Margin Recovery
Morningstar Recommendation: Hold
Nathan Zaia, Morningstar Analyst - 02 9276 4491
James Hardie's first-quarter earnings reinforced our view it is one of the highest-quality building material names on the planet. The 10% sales growth to USD 372.1 million was slightly higher than we expected, but the real show-stopper was an impressive rebound in the operating margin driving earnings before interest and tax up 18%. We continue to attribute this narrow moat company's unique technological advantage and sole focus on fibre cement, which gives it a portfolio of superior products and cost advantages, as the reason it has been able to sustainably achieve attractive margins. Our fair value estimate is increased to AUD 9.00 from AUD 8.00. This is primarily due to reducing the exchange rate used to translate U.S. dollar earnings into Australian dollars from 1.00 to 0.90, as well as a small impact from increasing our fiscal 2014 net profit after tax (NPAT) forecast from USD 170 million to USD 175 million. This is in line with management's broad guidance of NPAT within analyst forecasts of AUD 164 to AUD 191 million. While strong earnings growth is expected in the long term, from both a recovery in activity and increased share of the total siding market, we believe James Hardie appears fairly valued.

Twenty-First Century Fox, Inc. FOX| Fox Investor Day Highlights Near-Term Growth of Cable Networks; Shares Slightly Overvalued
Morningstar Recommendation: Hold
Michael Corty, Morningstar Analyst – +1 312 696 6228
We attended the 21st?Century Fox investor day in Los Angeles on Thursday. Overall, we thought the leaders of the key units did a good job presenting the strategic view for the various businesses and provided some additional financial details (especially on the international cable business) that provide us with more insight into the company. We came away even more impressed by the company's television studio, FX cable network, and portfolio of international channels. COO and President Chase Carey began the event by outlining the company's overall and segment financial targets, which he described as real targets that management will be judged on, for fiscal 2014-16.

GPT Group GPT| Solid First Half Positions GPT to Deliver on 2013 Guidance of At Least 5%
Morningstar Recommendation: Hold
Tony Sherlock, Morningstar Analyst - 02 9276 4584
GPT Group's preferred financial metric of realised operating income (ROI) for first-half 2013 was AUD 236.5 million, up 4.1% on the prior corresponding period. Full-year guidance for growth of at least 5% in ROI was reiterated, which implies full-year 2013 ROI per security of at least AUD 25.4 cents. We expect it can do a little better given first-half 2013 ROI per security was AUD 12.7 cents, most tenant leases contain fixed escalations and average borrowing costs have been revised down from 5.5% to 5.4

Perilya - Downgrade due to price change
Aquila Resources - Downgrade due to price change
BHP Billiton - Downgrade due to price change
REA Group - Downgrade due to price change
DWS - Downgrade due to price change
Navitas - Upgrade due to price change

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