Morningstar Equities Research - CCL, CMW, GWA, KMD-NZ

Morningstar Equities Research - CCL, CMW, GWA, KMD-NZ

Coca-Cola Amatil Limited CCL | Slightly disappointing guidance overshadows Indonesian investment
Morningstar Recommendation: Hold

The acquisition of Indonesian food and beverage assets and momentum in building an alcoholic beverage portfolio were overshadowed by lower than expected earnings guidance of 4-5% NPAT growth in fiscal 2012. In light of today's guidance and with only weeks of trading left in fiscal 2012, our expectation for 7% growth is out of reach. We reduce our fiscal 2012 NPAT forecast from AUD 568 million to AUD 557 million. There is no change to our AUD 13.00 fair value and our thesis remains intact. Coca-Cola Amatil has a strong portfolio of brands which are supported by scale advantages. Expansion in Indonesia offers a strong growth opportunity.

Cromwell Property Group CMW | Well-timed equity raising reduces gearing concerns
Morningstar Recommendation: Reduce

CMW is raising up to $163m in new equity at 78.5 cents per security. Institutional placements have raised $143m and a security purchase plan will raise up to $20m from retail investors early next year. Net tangible asset (NTA) backing increases from $0.67 to $0.68. There is no change to FY13 guidance of EPS of at least 7.5cps and DPS of 7.25cps.
The equity raising partly alleviates our concerns over high gearing and slim covenant headroom. The group is now in reasonable shape to withstand a moderate downturn though a severe economic crisis would hurt, in our opinion. We previously used a high weighted average cost of capital (WACC) in our discounted cash flow analysis to penalise CMW for carrying too much debt. Following the equity raising, we reduce its WACC from 10.4% to 9.6% to reflect reduced risk and an outlook for lower interest rates to persist for longer. These positives are partly offset by softening tenant demand and increasing supply in some markets. Combined, these changes see our fair value estimate increase 14% to $0.74 per security. While improved, CMW remains higher risk than most AREITs due to higher gearing and assets in secondary locations. It is only suitable for risk tolerant investors. We recommend not subscribing to the security purchase plan.

GWA Group Limited GWA | Restructure and trading update - cost cutting in the absence of sales
Morningstar Recommendation: Hold

GWA announced changes to its divisional structure in an effort to deliver cost savings and improve customer service. The restructure will see Dux hot water combined with bathrooms and kitchen division and Gliderol garage doors with the Gainsborough door furniture business. While there are synergies in having a sales force that can offer their residential or commercial clients a wider range of products, we think the restructure is another move to bolster the bottom line as sales decline. The restructuring means 230 jobs will be lost, with restructure costs expected to be offset by cost savings in fiscal 2013.

Kathmandu Holdings Limited KMD-NZ | Ceasing Coverage
Morningstar Recommendation: Ceased coverage

Event
KMD announced sales of $66.9 million for the first 15 weeks, a rise of 19.5% compared to last year. Like for like sales grew by 14.3% during the period.
Consistent with normal trading patterns, sales to date are less than 20% of expected total sales for the year. Growth in first half profit is highly dependent on Christmas and January Trading.
Impact
KMD continues to generate strong revenue growth as the company expands its store portfolio. New stores can take over a year to reach optimal sales performance enabling the maturity of the portfolio to buoy comparable sales growth. Fifteen new stores will open in fiscal 2013 taking the total to 129, with a target set of 170.
The business remains relatively high risk and dependent on the popularity of its in-season product range. We have decided to redirect our research efforts towards larger and more proven retail models that offer lower investment risk.
Recommendation Impact
As initially flagged on 4th of October, we cease coverage of KMD to reallocate our resource to more predictable and proven retail businesses which offer lower uncertainty surrounding future value.

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