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Morningstar Equities Research

Morningstar Equities Research - BKN, TPW-NZ, DLX, GFF, PCT-NZ and TAH, QBE, SEK, CSR, BLD, ABC on price change

Bradken Limited BKN| Bradken Marginally Downgrades Earnings and Restructures Manufacturing
Morningstar Recommendation: Accumulate
Ross MacMillan, Morningstar Analyst -
02 9276 4450

Bradken announced a marginal downgrade to fiscal 2014 earnings and a major manufacturing facility re-organisation. Fiscal 2014 earnings before interest, tax, depreciation and amortisation, or EBITDA will be AUD 173 million, or 4% lower than previous guidance. Managing director Brian Hodges stated during the second half Bradken achieved a slight increase in overall monthly orders but there has been no evidence of any escalation in demand for capital mining products. Demand looks set to languish with Bradken believing there will be "no short to medium improvement." To counter the continuing subdued conditions Bradken will undertake a major reorganisation of its manufacturing facilities, which will result in a one-off charge of AUD 51.4 million. Bradken intends to progressively close its highest cost manufacturing facilities and fully utilise lower cost capacity available at its other domestic and overseas facilities. We have decreased our revenue growth expectations and adjusted our operating cost assumptions, which have resulted in a 3% to 4% fall in our future net profit after tax forecasts. Our fair value estimate falls to AUD 4.70 from AUD 5.00. Bradken's shares are undervalued, but we do not anticipate a strong rebound in earnings or in the share price in the short term unless commodity prices significantly improve.

We maintain our no-moat rating and high uncertainty rating. Despite strong market shares in mining products and significant scale, Bradken operates in a highly fragmented and cyclical markets with low entry barriers.

TrustPower Limited TPW-NZ| Tough Year for TrustPower in 2014 but Snowtown 2 Should Lift Earnings in 2015
Morningstar Recommendation: Hold
Nachiket Moghe, CFA, Morningstar Analyst -
64 9 915 6776
TrustPower's fiscal 2014 results were slightly ahead of our expectations. Underlying earnings before interest tax depreciation and amortisation, or EBITDA, of NZD 277 million beat our estimate of NZD 271 million. EBITDA was 6% below last year mainly because of lower hydro production and continued pressure on retail margins. We have reviewed our EBITDA numbers for fiscal 2015 and 2016 and have cut them by 2% to 3% each to reflect lower retail earnings in light of the competitive environment and increased marketing cost associated with the metro market strategy. Our forecasts don't assume any further wind or irrigation projects

Our fair value estimate remains unchanged at NZD 7.50 per share as we have left our longer-term forecasts broadly intact. We believe the shares are slightly undervalued given the stock is trading below our fair value estimate. In the near term a National party victory in the forthcoming elections should be positive for the stock. In the medium to long term, an improvement in retail margins in New Zealand and value-accretive wind-farm projects in Australia could be the main share price catalysts. Our no-moat rating on the stock remains unchanged. We also have a high uncertainty rating for the sector given the possibility of regulation (which seems to be abating), transmission pricing risk and the shutdown of the all-important Tiwai Point smelter after 2017. Also the advent of new technologies such as solar and fuel cells (which are at their infancy globally) remain potential threats.

DuluxGroup Limited DLX| Dulux Paints a Rosy Picture on Outlook After Impressive First Half
Morningstar Recommendation: Reduce
Ross MacMillan, Morningstar Analyst -
02 9276 4450
Dulux reported adjusted first-half fiscal 2014 net profit after tax, or NPAT, of AUD 56.1 million, up 33.6% on first-half fiscal 2013. The result benefited from a full six-month contribution from the acquired Alesco business versus a four-month contribution in 2013. Aside from this, the result reflected solid sales growth, cost management and margin improvement initiatives. Pleasingly, the interim dividend was increased by AUD 0.02 per share to AUD 0.10 cents. Commentary by the company was positive on its outlook, however, full-year fiscal 2014 guidance is unchanged and undemanding with the full-year adjusted NPAT expected to be higher than the prior year.

This was an impressive result, particularly at the earnings line. The Australian paints business, the main driver of Dulux's earnings, performed well delivering EBIT growth of 9.8%. Company revenues are highly leveraged to the home maintenance and renovations sectors with about 64% of revenue exposed to this market. Dulux has seen this market remain quite resilient and expects this to continue. Dulux also has exposure to the new housing market which represents about 16% of revenue. It is seeing new housing approvals starting to flow through to commencements.

There are no changes to our medium uncertainty and narrow moat ratings. We increase our fiscal 2014 NPAT forecasts by about 10%. Fair value increases by AUD 0.50 to AUD 5.00. The share price is trading at an 18% premium to fair value and, at current levels, we consider the stock overvalued. Narrow-moat Dulux is a high-quality business with a superior portfolio of brands exposed to a cyclical upturn in the domestic housing market.

Goodman Fielder Limited GFF| Goodman Fielder Board Capitulates
Morningstar Recommendation: Reduce
Peter Rae, Morningstar Analyst -
Goodman Fielder has agreed to a revised takeover offer, via a scheme of arrangement, from Wilmar International, or Wilmar, and First Pacific Company. The agreement is subject to a number of conditions including an independent expert concluding the offer is in the best interests of Goodman Fielder shareholders. The offer values Goodman Fielder at AUD 0.70 per share, up from the previous offer of AUD 0.65 per share and will allow shareholders to receive a AUD 0.01 per share final dividend for fiscal 2014. The board will unanimously recommend shareholders vote in favour of the scheme of arrangement in the absence of a superior offer.

While we reserve our recommendation on the takeover until after the independent expert's report is released, we consider Goodman Fielder overvalued and believe this offer looks attractive. It represents a 40% premium to our unchanged base case fair value estimate of AUD 0.50 per share and is in line with our bull case scenario valuation. It also represents an enterprise value/EBITDA multiple of 8.0 times based on our fiscal 2015 forecasts. This compares with our estimate of 8.6 times for the recent Archer Daniels Midland offer for GrainCorp. The higher multiple for GrainCorp represents the strategic value of its dominant east-coast grain handling infrastructure. In our view, Goodman Fielder has limited strategic value as a producer of largely commoditised baking and grocery products. It can be argued that Goodman Fielder's brands have some value but it needs to continuously incur a heavy marketing spend to support these brands. A significant portion of the savings from Project Renaissance is being directed at protecting its core brands. Goodman Fielder operates in a difficult industry with strong competition across its core categories and its major supermarket customers hold significant bargaining power. For these reasons we do not consider it has an economic moat.


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