Morningstar Equities Research

Morningstar Equities Research - TRS, AUT, PBG, NPX, NPX-NZ and AIO, CSL, MFG, QAN on price change

The Reject Shop Limited TRS| Warm Weather Leads to a Cold Update for The Reject Shop; Fair Value Estimate Reduced
Morningstar Recommendation: Hold
Daniel Mueller, Morningstar Analyst -
The Reject Shop provided a disappointing trading update, announcing that it is unlikely to meet its net profit after tax, or NPAT, guidance for fiscal 2014 of between AUD 17 million and AUD 18 million. The company now expects to report fiscal 2014 NPAT of between AUD 14.5 million and AUD 15.5 million. Despite a tough retail environment since Christmas 2013, and flat sales performance to the end of April, the company remained cautiously optimistic previous guidance would be met. However, trading conditions deteriorated during May, which was attributable to a drop-off in consumer confidence post the federal budget and unseasonably warm weather leading to weaker sales of winter-related ranges. The revised guidance includes the impact of costs associated with opening 13 new stores in the second half, and asset write-downs of three underperforming stores and three stores that are being closed. The Reject Shop confirmed the new Perth distribution centre, which is scheduled to open in late July, is on time and on budget. The company also stated it expects to make an announcement on the appointment of a new CEO in the near future.

We have reduced our estimate of fiscal 2014 NPAT by 13% to AUD 15.2 million and we now forecast a decline in adjusted earnings per share of 22% for the year. We expect the difficult trading conditions to continue into the first half of fiscal 2015. Given the seasonal skew of earnings to the first half, we reduce our fiscal 2015 NPAT forecast by 28%. The reduction to forecast earnings decreases our fair value estimate to AUD 9.00 from AUD 11.00, with the shares currently trading slightly below fair value. The trading update affirms our view that The Reject Shop does not possess an economic moat. While it has rapidly expanded its store footprint in recent years, accompanied by strong product sourcing, these aspects of the business can be easily replicated and we view the company as having no long-term, sustainable competitive advantages.

Aurora Oil & Gas Limited AUT| Ceasing Coverage of Aurora Following Successful Baytex Bid
Morningstar Recommendation: Ceased Coverage
Mark Taylor, Morningstar Analyst -
We cease coverage of Aurora. Federal Court approval for a scheme allowing Canada's Baytex Energy Corp to acquire Aurora for AUD 4.10 per share was given on 26 May, 2014. Aurora shares ceased trading on 27 May, 2014. Our most recent recommendation had been to vote in favour of the scheme or sell on-market prior to the scheme vote. Prior to Baytex's bid, Aurora shares had slipped to AUD 2.60 levels. If the scheme had fallen through, Aurora shareholders risked a share price relapse. We ascribed Aurora no moat, by and large a minority partner in its Eagle Ford holdings, and fair value uncertainty was high. Aurora's board recommended the Baytex pitch, coming in well above our pre-bid stand-alone fair value estimate, an opportunity too good to pass up.

Pacific Brands Limited PBG| Warm Weather Melts Pacific Brands' Earnings
Morningstar Recommendation: Hold
Daniel Mueller, Morningstar Analyst -
Pacific Brands provided a soft trading update, announcing its fiscal 2014 earnings before interest and tax, or EBIT, before significant items is expected to be between AUD 90 million and AUD 93 million. At its interim result in February, the company expected second-half fiscal 2014 EBIT to be down by a similar percentage to the 14% decrease in the first half. This implied EBIT of AUD 105 million. However, sales to the end of May indicate weak trading conditions, driven by challenging markets, a drop-off in consumer sentiment and a warm autumn. The company's lower sales growth has also led to increased margin pressure and a higher-than-expected net debt position for 30 June 2014 of between AUD 250 and AUD 260 million, as working capital builds up relative to the prior year. Another strategic review has been initiated, with Macquarie Capital being appointed advisors, while management intends to accelerate performance improvement and cost reduction initiatives. However, this will lead to a one-off cash cost of approximately AUD 25 million to AUD 30 million in the second half of fiscal 2014.

Our forecasts were well below EBIT guidance of AUD 105 million as we believed trading conditions would deteriorate in second-half fiscal 2014, however, the new guidance is below this level. We reduce our fiscal 2014 net profit after tax, or NPAT, forecast by 20% to AUD 46.6 million, and now forecast a decrease of 37% on fiscal 2013. Our fiscal 2015 NPAT forecast is reduced by 15% as we expect the difficult trading conditions to continue into first-half fiscal 2015. Our fair value estimate decreases to AUD 0.56 from AUD 0.60 with the shares currently trading slightly below our assessment of fair value. The trading update affirms our view that Pacific Brands does not possess an economic moat. The company has low bargaining power over its customers, limiting its ability to push through price increases in response to cost inflation.

Nuplex Industries Limited NPX-NZ, NPX | Cutting Nuplex's Fair Value Amid Sluggish Conditions
Morningstar Recommendation: Hold
Tim Mann, Morningstar Analyst -
Nuplex announced a downgrade to fiscal 2014 earnings guidance, with earnings before interest, tax, depreciation and amortisation forecast to be between NZD 121 and NZD 125 million, compared with previous guidance of NZD 130 to NZD 145 million. Weakness is primarily being driven by margin pressure in the Australian business (coatings, resins and the agency distribution business). This continues to be a theme from the first-half 2014 result, where Nuplex's Australian operations were struggling. We have reduced our earnings estimates by 9% and 7% in 2014 and 2015, respectively. Our fair value estimate falls to NZD 3.20 from NZD 3.50. We maintain our no-moat and high fair value uncertainty ratings.

Australia and New Zealand, or ANZ, volumes are improving, with construction activity continuing to gradually improve, yet pricing appears to be soft going into the upturn. Australian earnings are expected to be significantly down; we anticipate 35% to 40% lower than the prior year. Europe, Middle East and Africa markets are trading ahead of management expectations, with earnings up 15% to 20%. Asia is also trading well, with earnings up between 10% and 15%. Earnings from the Americas are expected to be flat, undermined by a recent contract loss.

The ANZ business is currently being restructured with streamlining of manufacturing to be completed in June. Competitive pressures have impacted the business and costs are being reduced. Management has flagged NZD 11 million of savings. As the housing and infrastructure cycles continue to improve, we expect excess industry capacity to fall and pricing power to return in line with improving demand.

We expect the dividend to be maintained with Nuplex in sound financial health. Gearing, measured by net debt to equity, is satisfactory at 38% as is interest coverage above 5 times. Nuplex has a year of significant capital investment ahead, but we expect the business to generate healthy levels of free cash flow in the medium term.

Magellan Financial Group - Upgrade due to price change
NRW Holdings - Downgrade due to price change
Asciano - Upgrade due to price change
Qantas Airways - Downgrade due to price change
CSL - Upgrade due to price change

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