Uptick In Residential to Offset Deteriorating Engineering

Lend Lease Group LLC| Uptick In Residential to Offset Deteriorating Engineering Outlook

Morningstar Recommendation: Hold

Tony Sherlock, Morningstar Analyst -   02 9276 4584        

We review the read-through implications for Lend Lease’s of recent competitor earnings downgrades in the engineering and construction sector and assess longer-term growth initiatives and prospects.

A series of Australian engineering and construction (E&C) firms have downgraded their outlook for earnings over the past month citing project deferrals and a slowdown in capital investment in the resource and infrastructure sectors. There will be flow-through implications for Lend Lease from this, but it will be less severe, as most of Lend Lease’s E&C operations are outside the resource sector. This does not mean Lend Lease will be immune, as companies previously focused on mining will redirect resources to civil projects, with the increased competition pushing down margins.

Nuplex Industries Limited NPX| Weak manufacturing prompts fiscal 2013 downgrade

Morningstar Recommendation: Hold

Nathan Zaia, Morningstar Analyst -  02 9276 4491    

Weaker Australian manufacturing and European industrial sectors see Nuplex downgrade 2013 EBITDA guidance from NZD 135 - 140 million to NZD 124 - 129 million. This is the second downgrade this year, and now well short of the initial top end of guidance at NZD 150 million. While disappointing, we attribute the decline to cyclical manufacturing and construction markets which Nuplex serves, not a loss of market share or irrational competitor discounting.

Stockland SGP| Revised strategy sees rebirth of industrial

Morningstar Recommendation: Hold

Tony Sherlock, Morningstar Analyst -   02 9276 4584        

At the third quarter update Stockland guided fiscal 2013 earnings per share (EPS) to be down 25% on fiscal 2012. The downgrade to prior guidance for EPS to fall by 20 to 25% is due to additional restructuring costs. The AUD 287 million impairment to residential projects taken in the half was increased by a further AUD 49 million, with the higher amount reflecting additional analysis of inventory and divestment negotiations.

Singapore Telecommunications Limited SGT| Digital strategy to deliver long term growth

Morningstar Recommendation: Hold

Michael Wu, Morningstar Analyst -  02 9276 4431    

Narrow moat Singapore Telecommunication's (SingTel) fiscal 2013 result was in line with expectations. In line with guidance and our forecasts, operating revenue declined 3% to SGD 18.18 billion while EBITDA was stable at SGD 5.2 billion. Free cash flow was solid at SGD 2.9 billion, with dividends from its associates up 8% to SGD 993 million. Positively, management has raised the dividend payout ratio to 60-75% from 55-70%. As such, second half dividend of SGD 10 cents per share brings the full year dividend to 16.8 cents per share, representing a payout ratio of 74%. We have argued SingTel has the ability to initiate capital management initiatives with the possibility of special dividends. Management reviews its capital position on a three year basis with the last special dividend paid in fiscal 2011. In our view, the increased payout ratio is a long term positive and illustrates the sustainability of SingTel’s capital structure.

TrustPower Limited TPW-NZ | Results in line, attractively valued

Morningstar Recommendation: Accumulate

Nachi Moghe, Morningstar Analyst -  - 64 9 915 6776    

TrustPower’s (TPW) fiscal 2013 results were in line with our expectations. Underlying EBITDA of NZD 295 million came in below our forecast of NZD 300 million but that included additional development costs in the second half. Underlying NPAT was NZD 127 million against our forecast of NZD 130 million. Currency options also impacted results although they were expensed in the first half. Generation volumes declined because of lower hydro production but wholesale spot prices were higher than last year. We are maintaining our fiscal 2014 NPAT estimate of NZD 130 million and introducing our fiscal 2015 NPAT forecast of NZD 135 million. We raise our fair to NZD 8.50 per share from NZD 8.00 per share to reflect time value of money and additional cash generated since our last update. We think revenue and earnings growth in the medium term will remain subdued and expect an uplift from fiscal 2016 reflecting the full contribution of Snowtown 2. The stock looks attractive at current levels and is yielding 5.3% (NZ 40 cps). However we think the stock is being weighed down by Tiwai Point smelter and regulatory concerns.

Wesfarmers Limited WES| Target Targeted for Restructuring and Inventory Clearance.

Morningstar Recommendation: Reduce

Tim Montague-Jones, Morningstar Analyst -   02 9276 4469    

We make no change to our fair value estimate of AUD 37 following a trading update for Target. Weak second half sales, exacerbated by a late start to the winter season will result in higher clearance activity. Combined with the on-going cost increases associated with restructure initiatives, earnings for the division will be lower. Target is forecast to deliver fiscal 2013 EBIT of between AUD 140 million to AUD 160 million. This compares to first half fiscal 2013 EBIT of AUD 149 million, so only breaking even in the second half and implies a 41% fall compared to fiscal 2012. Target, which accounted for 7% of group earnings in fiscal 2012 will be diluted to 4% on our forecasts for fiscal 2013. This near term profit weakness from Target leads us to downgrade our fiscal 2013 NPAT by 5% to AUD 2,465.6 million from AUD 2,580.9.million. We retain a Narrow moat rating reflecting the strong scale benefits achieved across the combined group.

WorleyParsons Limited WOR| Mining slowdown detracts from strong oil and gas outlook

Morningstar Recommendation: Accumulate

Peter Rae, Morningstar Analyst -   0414300107    

WorleyParsons surprised with a fiscal 2013 earnings downgrade driven by a slowdown in resources activity in Western Australia and slower than expected growth at its WorleyParsonsCord construction contracting business in Canada. Previous guidance was for earnings growth, but net profit after tax (NPAT) is now expected to be in the range of AUD 320-340 million, up to 7% below fiscal 2012 NPAT of AUD 345.6 million.

Independence Group - Upgrade due to price change.

Mineral Resources - Upgrade due to price change.

Orica - Upgrade due to price change.

Premier Investments - Upgrade due to price change.

ENDS

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