Morningstar Equities Research

Morningstar Equities Research

Dexus Property Group DXS| A Good First Half for Dexus Despite Weak Market Fundamentals
Morningstar Recommendation: Hold
Adrian Atkins, Morningstar Analyst - 02 9276 4508
Dexus's first-half funds from operations increased 6% to AUD 4.04 cents per security on the back of relatively strong income growth from the office portfolio, distributions from the Commonwealth Property Office Fund, or CPA, and the security buyback. Despite the good result, which was in line with our expectations and recent guidance, we remain cautious because of weak fundamentals in office and industrial markets. We change the accounting treatment of the CPA stake in our forecasts to match Dexus's accounts, but underlying forecasts are broadly unchanged. There is no change to our AUD 1.00 fair value estimate. We believe Dexus is fairly valued at present. We continue to believe Dexus has a narrow economic moat with its high-quality portfolio of central business district, or CBD, office properties benefiting from long-term tailwinds including ongoing tenant demand and some barriers to entry.

Net tangible asset, or NTA, backing increased AUD 3 cents to AUD 1.08 per security on rising property values, but dilution from the CPA acquisition will see NTA fall back to AUD 1.06. Further increases in property values are likely because of strong demand from large global investors. Strong investor demand contrasts against weak operating conditions. Generally, office and industrial markets are suffering with soft tenant demand, high vacancies, rising supply and high tenant incentives.

The office portfolio performed well in difficult conditions with like-for-like income rising 3.8% on contracted rental increases and leasing success. Occupancy by income was flat at 94.6% and rental increases averaged 2.5% at market reviews, but tenant incentives increased 470 basis points, or bps, to 16.9%. Looking forward, we remain concerned about underlying market fundamentals. Tenant demand is weak and new supply is increasing in most markets.

SkyCity Entertainment Group Limited SKC, SKC-NZ | Sky City Results in Line, No Change to Favourable Outlook
Morningstar Recommendation: Accumulate
Nachiket Moghe, CFA, Morningstar Analyst - 64 9 915 6776
Skycity Entertainment's first-half fiscal 2014 results came out in line with guidance provided in December. Underlying net profit after tax, or NPAT, was NZD 66.4 million, within the guidance of NZD 65 to NZD 68 million and compares with NZD 72 million posted in the previous corresponding period. The negative impact of the significant rise in the New Zealand dollar versus the Australian dollar was NZD 2.4 million. The rest of the decline was due to lower earnings from Hamilton and the Australian casinos. We increase our fiscal 2014 forecast slightly to NZD 132 million, reflecting lower depreciation costs but keep our fiscal 2015 estimate intact at NZD 148 million. Our fair value estimate remains unchanged at NZD 4.60 per share as we have not changed our long-term projections.

We continue to believe Skycity’s shares are undervalued, with favourable risk/reward characteristics and feel that the market is not pricing in the upside from the expansion of Adelaide and Auckland casinos. Based on our forecasts, the Adelaide and Auckland projects will deliver after tax returns of 11% and 15% respectively by fiscal 2023 and represent NZD 0.70 of our fair value estimate. We reaffirm our narrow moat rating, resulting from the firm's long-dated monopoly licenses in all the jurisdictions in which it operates.

OZ Minerals Limited OZL| Results as Expected, but Rising Australian Dollar Commodity Prices Help OZ Minerals
Morningstar Recommendation: Hold
Mathew Hodge, Morningstar Analyst - 02 9276 4459
OZ Minerals 2013 net loss of AUD 294 million was as expected, and included a AUD 232 million asset write-down. The adjusted net loss of AUD 63 million compared to a AUD 152 million profit in 2012 due to lower production and commodity prices and a higher cash costs. Guidance for 2014 stands, with an approximate 6% improvement in copper output at a one-third lower cash cost of USD 1.15 to 1.25 per pound. A further one-third volume increase to greater than 105,000 tonnes is expected in 2015.

Our fair value estimate increases to AUD 4.30 per share from AUD 3.70 after lowering our long-term AUD / USD exchange rate forecast to 0.90 from 1.00. This benefits OZ Minerals through the translation of U.S. dollar revenue, with higher U.S. dollar-denominated costs like fuel and steel a partial offset. Other long-term assumptions remain USD 2.50 per pound copper and USD 1,100 per ounce gold. (2013 dollars, inflated at 2.5% per annum).

We consider OZ Minerals shares somewhat undervalued. The prime attraction is the relatively large Carrapateena deposit and potential regional exploration upside. A pre-feasibility study should finish in mid-2014 and other mining companies are interested in investing. Two nearby exploration discoveries in 2013 contribute to the appeal given Carrapateena is near the massive Olympic Dam mine.

The in-ground value of Carrapateena's resource is AUD 50 billion based on our long-term prices. Our fair value estimate assumes just AUD 3 cents per pound of copper equivalent, equal to 1% of the resource value, given the development uncertainty and capital required. Carrapateena's size and exploration uncertainty, coupled with legacy cash flows from the relatively low-margin Prominent Hill mine, means OZ Minerals is highly leveraged to copper and to a lesser extent gold prices. This dictates our very high fair value uncertainty rating. No change to our no moat rating. Prominent Hill, the sole operating mine, has short life, and lacks a cost advantage.

Computershare Limited CPU| Computershare Has Good First Half and Announces New CEO
Morningstar Recommendation: Accumulate
Nathan Zaia, Morningstar Analyst - 02 9276 4491
Flexing its competitive advantages and diversity, Computershare increased first-half fiscal 2014 net profit after tax by 9.6% in a far from ideal environment. Realisation of cost synergies post the acquisition of Shareowner Services and a general cost focus helped increase earnings before interest, tax and depreciation, or EBITDA, by 10.6% to USD 267 million, offsetting a 1.1% decline in revenue. Transactional income from corporate activity and initial public offerings, or IPOs, remains subdued; reported revenues from outside the United States were hurt by a stronger U.S. dollar and lower client funds battered interest income. While much of Computershare's revenues will ebb and flow with market activity, crucial to our long-term thesis is client retention which appears sturdy. We believe Computershare continues to benefit from a superior and scalable technology platform, reputation for efficiency, and ability to provide cross-border share registry products and services. These competitive strengths have underpinned market share gains in key global markets which, in turn, build on economies of scale and switching cost benefits.

Management appears to be gaining confidence that the operating environment may be improving, with guidance increased to earnings per share growth of 5% to 10%, up from previous guidance of 5%. There is no material change to our earnings forecasts, which imply fiscal 2014 earnings growth of 7%. Our AUD 13.00 fair value estimate is also unchanged. Our forecasts are underpinned by Computershare achieving targeted synergies, higher long-term interest rates and, more broadly, the benefits of a sustained recovery in global economies, particularly the U.S. Stronger economic conditions lead to increased merger and acquisition activity, capital returns, IPOs, as well as higher interest rates. Despite likely pricing pressure from share registry competitors, an increased contribution from interest income is expected to support group operating margins.

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