Morningstar equities Research - 6 June 2013

Morningstar equities Research - AIA, AIA-NZ, EBO-NZ, GBG, SEK, SKI, SYD

Auckland International Airport Limited AIA, AIA-NZ | Commerce Commission’s ruling lessens regulatory risk, valuation raised
Morningstar Recommendation: Hold
Nachi Moghe, Morningstar Analyst -    
We are lifting our valuation for Auckland Airport from NZD 2.60 per share to NZD 3.00 per share mainly reflecting a reduction in our weighted average cost of capital (WACC) from 8.5% to 7.5%. We think a lower cost of capital is justified given Auckland Airport’s defensive earnings characteristics. Our revised fair value implies fiscal 2014 price/adjusted earnings of 24.5 times, enterprise value/adjusted EBITDA of 13.5 times and free cash flow yield of 3%. The stock now appears fairly priced compared to our revised intrinsic value. We continue to believe the firm is well-placed to capitalise on expected strong growth in tourist arrivals from Asia in the long term. We think the firm deserves a wide moat because it is a monopoly operating in a favourable regulatory environment with reasonably strong returns on capital.

Ebos Group Limited EBO-NZ| Symbion’s acquisition propels EBOS into the big league
Morningstar Recommendation: Hold
Nachi Moghe, Morningstar Analyst -    
EBOS Group (EBOS) is acquiring Australia’s leading pharmaceutical wholesaler and distributor for NZD 1.1 billion which includes Symbion’s debt of NZD 230 million. The acquisition is subject to certain conditions including EBOS shareholder approval which is slated for 14 June 2013. At this stage we are not making any changes to our forecasts as we are not incorporating Symbion’s financials pending the shareholder approval. However we lift our valuation to NZD 9.00 per share to reflect the additional cash generated since our last update. Our valuation implies a 2013 fiscal P/E of 14.4 times and EV/EBITDA of 8.8 times using the pro forma numbers for the combined entity. We are unlikely to make any further material changes to our valuation after incorporation of the Symbion business into our model. We believe EBOS’ shares are fully priced at current levels and provide little scope for price appreciation. We also raise our uncertainty rating for the stock from medium to high pending a detailed review of the transaction. Our no moat rating on the stock remains unchanged.

Gindalbie Metals Ltd GBG| Funding squeeze causes extreme uncertainty (corrected)
Morningstar Recommendation: Avoid
Gareth James, Morningstar Analyst -    
Gindalbie Metals’ share price slumped to its lowest level since 2005 this month, some 95% below the 2007 peak and implying a market capitalisation of just AUD 164 million. The market capitalisation is well below the book value of its 50% stake in the Karara iron ore mine, worth AUD 650 million as at 30 June 2012. More has been spent on the project since but capital expenditure simply isn’t being reflected in Gindalbie’s share price. Key concerns are that both Gindalbie and Karara are dangerously low on cash, raising the prospect of a dilutive equity issue. Our base case scenario assumes short term funding issues are resolved without equity being issued however the risk of dilution causes us to increase the fair value uncertainty from very high to extreme. In addition, problems with the mine ramp-up mean we reduce our fiscal 2013 net profit forecast from AUD 48 million profit to a AUD 25 million loss. Single commodity exposure, extreme operating leverage and extreme financial leverage mean small changes to financial model assumptions have large impacts on our fair value estimate. Our fair value estimate falls 25% to 0.20 per share but we stress that fair value uncertainty is extreme. As a high cost producer, Gindalbie has no sustainable competitive advantage, or economic moat. Returns on invested capital (ROIC) are likely to be very poor due to the high up front capital cost to build a magnetite iron ore mine.

SEEK Limited SEK| Fairfax to Make Online Job Listings Free
Morningstar Recommendation: Reduce
Tim Montague-Jones, Morningstar Analyst - 

Fairfax’s online employment website, MyCareer, is switching to a free online listing model. Display advertisements within Fairfax publications will remain on the paid model. Both MyCareer and the News Corporation website, CareerOne, have been losing online relevance as Seek grows its dominance as the largest aggregator of job seekers and advertisers. We don’t expect this strategic change by Fairfax will have a material impact on Seek because advertisers will continue to target their expenditure at the largest online audience. Our earnings are unchanged and fair value estimate remains at AUD 7.00. We continue to view the company as overpriced, trading at 1.3 times relative to our fair value estimate.

Spark Infrastructure Group SKI| Regulatory risk our main concern
Morningstar Recommendation: Hold
Adrian Atkins, Morningstar Analyst -      
Spark Infrastructure owns 49% of three major Australian regulated electricity distribution networks. We like its secure earnings, material unregulated operations and internal management. But we are concerned by the acquisition strategy and the unfavourable medium-term earnings outlook as the regulator cuts returns at future resets. Additionally, control over underlying assets is limited by minority interests.

Sydney Airport - Upgrade due to price change.

Research PDF:

http://img.scoop.co.nz/media/pdfs/1306/Morningstar_Equities_Research_060613.pdf

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