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Morningstar Equities Research

Morningstar Equities Research - APA, ALL, NHF, AIA, AIA-NZ, PTM ALZ, SGP, AIZ,

APA Group APA| APA Could Crystalise Envestra Windfall
Morningstar Recommendation: Reduce

APA Group's takeover of Envestra hit a snag when Cheung Kong Group's two nominated directors on Envestra's board recommended voting against the takeover. We thought APA Group and Cheung Kong could work something out, such as Cheung Kong staying on as a minority investor, but instead it proposed a takeover of its own. Cheung Kong's indicative proposal is AUD 1.32 in cash. This is close to the value of APA Group's, mostly scrip, bid which is valued at AUD 1.33 based on APA Group's current share price.

To acquire Envestra, APA Group needs agreement from Cheung Kong as its stake is large enough to block APA Group's scheme of arrangement, which requires approval from 75% of non-APA Group investors. In contrast, Cheung Kong's bid only requires it to gain more than 50% of Envestra as it is not looking to move to compulsory acquisition. If Cheung Kong acquires more than 50% of Envestra, APA Group would end up a minority investor in a business controlled by Cheung Kong. This would not appeal to APA Group. Considering these points, Cheung Kong is in a powerful position to win this battle. However, that's not bad news for APA Group, which could sell its stake and crystalise a big win.

APA picked up almost half its shares in Envestra at the rock bottom price of AUD 0.30 in the depth of the global financial crisis as it took up its entitlement in and underwrote Envestra's desperate rights issue. Excluding shares issued via the dividend reinvestment plan, or DRP, we estimate APA Group invested AUD 237 million in Envestra. Its stake, including shares from the DRP, is now worth a staggering AUD 800 million. We believe Envestra is overvalued and selling it at current levels would be moderately accretive to APA Group. The sale of the stake would reduce APA Group's net debt position by about 20% to AUD 3.4 billion, reducing financial risk. It would also be mildly accretive to net profit as Envestra's dividend yield is less than APA Group's average interest rate.

Aristocrat Leisure Limited ALL| Aristocrat's First-Half 2014 Result Shows Positive Momentum in North America and Online
Morningstar Recommendation: Reduce

Aristocrat Leisure reported net profit after tax, or NPAT, for first-half fiscal 2014 of AUD 57.4 million. NPAT was 9% above the prior corresponding period, or pcp, supported by pricing growth in North America and improved monetisation in the rapidly growing online business. Aristocrat is on track to meet our full-year forecasts with earnings likely to be weighted towards the second half. We are forecasting full-year NPAT of AUD 124 million, implying a 46:54 split across the first and second halves. This mix reflects typical seasonality in the business; the first half is impacted by the Christmas holiday period, and the timing of new game releases which can result in lumpy earnings. Management retained guidance for strong full-year NPAT growth and our forecasts imply a 15% rise from the pcp.

Our fair value estimate is unchanged at AUD 3.80. Despite evidence of improved operating performance, we continue to view Aristocrat as overvalued and believe growth opportunities are already priced in. Aristocrat's strong domestic market share, extensive game library and regulatory licences support our narrow moat rating. We reaffirm our view that execution of online opportunities, product improvements and liberation of the gaming sector in emerging markets will drive medium-term revenue growth for Aristocrat. The most immediate market opportunities for electronic gaming machines include Macau and the Philippines.

Gaming content is now accessible to customers on Aristocrat's Facebook application, with spend continuing to trend higher. Online revenue rose fivefold in the first half relative to the pcp, with further upside likely as monetisation improves and new mobile applications are launched in the second half of fiscal 2014. Management estimates that existing mid-30% operating margins in online business are sustainable longer term. We expect this to drive group margin expansion with this division the fastest growing segment in percentage terms.

NIB Holdings Limited NHF| Narrow-Moat NIB Boosts Long-Term Growth Outlook
Morningstar Recommendation: Hold


NIB Holdings' recently announced alliance with Apia Insurance further strengthens the distribution reach and capability for the fast growing Newcastle-based Australian and New Zealand health insurer. NIB is to underwrite health insurance sold by Apia, a specialist in the over 50's age group via a "white-label" distribution agreement. The agreement further strengthens NIB's competitive advantages and supports our positive long-term investment view. Apia offers home and motor vehicle insurance and is wholly owned by major general insurer, Suncorp Group. NIB will leverage Apia's strong and trusted brand, gaining access to its large over-50s client base, without risking NIB's success in the under-40s age group bracket. More than four million Australians aged over 50 hold private health insurance with the number growing 3% annually. This represents more than 37% of total private health insurance coverage.

In mid-April we upgraded NIB's fair value estimate by 15% to AUD 3.10 per share based on a more positive outlook for the fast growing insurer. The arrangement with Apia, combined with raised expectations for insurance penetration rates and an improved outlook for NIB's New Zealand business, are behind an even more positive view on future earnings. We also note that the May 2014 National Commission of Audit Report includes a number of recommendations that, if implemented, would boost growth opportunities for private health insurers. Proposed changes in the federal budget announced in mid-May are supportive of long-term growth for the private health insurance industry. Our fair value estimate increases 13% to AUD 3.50 per share following revisions to our forecasts to incorporate the more positive assumptions. At current prices the stock is undervalued, trading 11% below valuation.

Auckland International Airport Limited AIA, AIA-NZ | No Material Change to Our Auckland Airport Estimates, Long-Term Outlook Remains Strong
Morningstar Recommendation: Reduce


Auckland International Airport's passenger numbers so far are tracking in line with our expectations. International and domestic passenger movements (excluding transits) have increased 5% and 2.5% respectively year-to-date. International passenger growth has mainly been underpinned by the company's route development strategy that has delivered a material increase in capacity to and from Auckland, especially on Asian routes. We believe passenger growth, along with added aircraft capacity and phased introduction of new pricing for passengers, will boost aeronautical revenue growth by nearly 8.9% this year. Non-aeronautical businesses are projected to grow by about 5.6%, driven by property and car park revenues. As such, we leave our estimates for 2014 and 2015 broadly intact. We forecast profits to remain flat in fiscal 2015, reflecting the full impact of interest cost associated with the debt required to return NZD 454 million of cash to shareholders.

Our fair value for Auckland Airport remains unchanged at NZD 3.50 per share. The stock appears overpriced at current levels as the market seems to be overestimating the company's growth prospects. Our thesis on the company is unchanged. We continue to believe the firm is well placed to capitalise on the expected strong growth in tourist arrivals from Asia, particularly China in the long term. We project international passenger movements (the main driver of Auckland Airport's valuation) to witness a compound average growth rate, or CAGR, of 4.5% during the next 10 years. We are also bullish on the property business as the company's massive land bank (314 hectares for commercial development) provides at least 20 years of development opportunity. We maintain our wide moat rating on the company, reflecting Auckland Airport's monopoly status and a favourable regulatory environment that will enable it to generate reasonably strong returns on capital.

Platinum Asset Management Limited PTM| Our Upbeat View of Narrow Moat-Rated Platinum Unswayed by Short-term Investment Underperformance
Morningstar Recommendation: Accumulate
Nathan Zaia, Morningstar Analyst -

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