Morningstar Equities

Morningstar Equities - CHC, WHS-NZ, SCP, FPH-NZ, FPH, ALQ, SEK, AIA, ASL, MGF, TSE

Following the investor day briefing, we are leaving our AUD 3.90 fair value and narrow moat rating for Charter Hall unchanged. We believe the intangible benefits of its strong reputation among both institutional and retail investors supports ongoing growth in its funds management operations.

The investor day didn't provide any major new information, but it did provide additional details on the levers available to the group to achieve its longer-term growth target of 6% to 10% for funds under management, or FUM. This implies net annual inflows of roughly AUD 600 million to AUD 1.0 billion. Year-to-date progress is good, with around AUD 400 million of gross equity secured for funds in the first five months of fiscal 2014. The recent track record also points to this being an achievable target, with the group recording a 12% average FUM growth rate during the past three years.

Charter Hall also shed additional light on the fee structures, competitive landscape and dynamics of its four key sources of equity FUM. The four sources totaling AUD 10.4 billion are: wholesale pooled (AUD 2.7 billion); wholesale partnership and mandates (AUD 3.7 billion); listed (AUD 2.3 billion); and retail (AUD 1.7 billion), which is comprised of retail funds and syndicates.

Against a backdrop of elevated uncertainty in the global economy, higher-quality Australian property is particularly attractive, with long-lease property presenting investors a good defensive yield. A further, although unquantifiable, attraction is the inflation protection afforded to owners of commercial property. The relatively stable Australian economy with low political risk is particularly attractive for foreign investors, as are the yields, which are well above bonds and materially higher than those on similar properties in the U.S. and Europe. The wholesale business has been the primary driver of FUM growth during the past three years and we see no major impediments to this persisting for the foreseeable future.

Warehouse Group Limited (The) WHS-NZ| The Warehouse Group is Seeing Some Short-Term Pain for Long-Term Gain
Morningstar Recommendation: Hold
Nachiket Moghe, Morningstar Analyst - 64 9 915 6776
he Warehouse Group, or The Warehouse, signaled that the first-half fiscal 2014 results will be lower than last year due to a one-off impact on gross margins and continued investments in growth initiatives as it transitions itself to become a multi-channel retailer. Warehouse also indicated that group results for fiscal 2014 will be higher than 2013, but less than originally anticipated and below consensus estimates. Consequently, we are cutting our net profit after tax forecast from NZD 80 million (which is in line with consensus) to NZD 76 million. However, we are not changing our longer-term projections and, as such, leave our fair value estimate of NZD 3.60 intact. The stock is fairly priced at current levels and we don't see any catalysts to drive the share price higher in the medium term. Overall, we retain our view that The Warehouse possesses a competitive advantage and a narrow economic moat due to the firm's iconic brand, low-cost position and unparalleled scale.

Shopping Centres Australasia Property Group SCP| Higher Operating Costs Swamp Short-Term Savings in Shopping Centres Australasia's Borrowing Costs
Morningstar Recommendation: Hold
Tony Sherlock, Morningstar Analyst - 02 9276 4584
Shopping Centres Australasia Property Group has refinanced and extended its AUD 600 million of debt, pushing out the weighted average maturity from 3.6 to 4.1 years. This has resulted in a material reduction in funding costs, with the weighted average cost of debt declining from 5.3% to approximately 4.8%.

Unfortunately, the uplift from lower borrowing costs in fiscal 2014 will not flow through to shareholders due to higher property statutory charges (land valuations above internal estimates) and higher-than-anticipated costs in maintaining a share registry of around 120,000 investors.

Separately, we have slightly increased the amount by which Shopping Centres Australasia draws on the Woolworths rental guarantee, incorporating delays in the store opening schedule and the reimbursement of rent-free periods provided by Woolworths to existing tenants. Following the aforementioned adjustments, our fair value estimate is unchanged at AUD 1.50, with the stock looking slightly overvalued.

We continue to believe Shopping Centres Australasia has no economic moat, with the bulk of the portfolio's properties being too small to benefit from entry barriers. Notwithstanding, earnings are strongly supported by very long leases to Woolworths subsidiaries, collectively making up around 60% of gross rental income.

Fisher & Paykel Healthcare Corporation Limited FPH-NZ, FPH| New Products and Cost Savings Deliver Strong Earnings Growth for Fisher & Paykel Healthcare
Morningstar Recommendation: Reduce
Nachiket Moghe, CFA, Morningstar Analyst - 64 9 915 6776
Fisher & Paykel Healthcare reported very strong results for first-half fiscal 2014. Normalised net profit after tax, or NPAT, of NZD 44.5 million was ahead of our forecast of NZD 43 million, and 34% above last year's NPAT. Strong constant-currency revenue growth, coupled with margin improvement through improved product mix and cost efficiencies, were the key profit growth drivers. We haven't changed our fiscal 2014 and 2015 forecasts of NZD 90 million each. Our fair value estimate holds at NZD 3.30 per share. The stock is modestly overpriced at current levels as the market seems to be overestimating the firm's growth during the next few years. Our narrow economic moat rating also stands, reflecting intangible assets (namely, patents) and switching costs in respiratory and acute care products.

The overarching theme for the firm remains unchanged. The company continues to produce market-leading products for both respiratory & acute care, or RAC, and obstructive sleep apnea, or OSA. New products, especially consumables, are boosting constant-currency growth and aiding margins, since the overall product mix continues to improve. Growth continues unabated in new applications such as noninvasive ventilation, oxygen therapy, and humidity therapy. These applications now constitute nearly 40% of RAC's consumables revenue, up from 33% in fiscal 2012. These products are helping Fisher & Paykel Healthcare deliver improved patient outcomes by reducing the intensity and length of hospital stay. This has resulted in valuable cost savings for care providers, which is a key demand driver.

ALS Limited ALQ| Uneven Growth but ALS Achieves First-Half Guidance as Minerals Market Deteriorates
Morningstar Recommendation: Reduce
Ross MacMillan, Morningstar Analyst - 02 9276 4450
After lowering earnings expectations in July, ALS reported first-half fiscal 2014 operating revenue of AUD 744.7 million, down 3% and net profit after tax, or NPAT, of AUD 97.7 million down a large 28%. The interim dividend of AUD 0.19, 50% franked, was down 10% on the prior year. ALS's chairman Nerolie Withnall stated the disappointing results were caused by uneven economic conditions, falling commodity prices, limited exploration activity and restricted expenditure by the mining companies. ALS is forecasting December-quarter NPAT of AUD 47 million, after achieving June quarter NPAT of AUD 45.2 million and September-quarter NPAT of AUD 52.5 million. ALS believes the December quarter is too difficult to forecast due to the lack of visibility surrounding conditions in the domestic mining sector and North American oil and gas sector. We have our trimmed fiscal 2014 NPAT by 2% to AUD 195 million but marginally increased longer-term growth on recent acquisitions, including the Reservoir Group, EarthData, Reliance Technical Services, OilCheck and Advanced Inspection Technologies. Our fair value is increased to AUD 7.50 from AUD 7.00. We believe ALS's shares are overvalued based on the continuing deterioration in demand for geochemical and coal services, with a further downturn in commodity prices possible in the next year.

No change to our investment thesis and high uncertainty rating. ALS is a narrow moat company, which has formed strong barriers by establishing a global network of operations and laboratories, gaining accreditation approvals from various regulatory institutions and developing significant technical expertise. ALS dominates the fragmented Australian market for analytical testing and inspection services but still struggles for market share globally. We believe ALS will be successful in its growth strategy aimed at challenging the leading global competitors, in the longer term.

Magellan Financial Group - Downgrade due to price change

Auckland Airport - Downgrade due to price change

Ausdrill - Downgrade due to price change

SEEK - Downgrade due to price change

Transfield Services - Downgrade due to price change

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