Australian Equities Roundup — Market Talk

0207 GMT — Bell Potter is likely to maintain a buy recommendation on Commonwealth Bank (CBA.AU) in the wake of what it says was a good outcome for the 2016 financial year. Cash earnings at A$9.45 billion were ahead of the A$9.372 billion penciled in by the brokerage, while the A$9.227 billion net profit was shy of the A$9.236 billion it expected. The net interest margin was stronger than anticipated, falling by only 2 basis points on year, while asset quality remained sound and the key capital ratio was very strong, Bell Potter says. “Overall, a respectable outcome given challenges from all fronts.” After initially rising, the shares now are down 1% at A$77.65. (robb.stewart[a]; Twitter: [a]RobbMStewart)

0159 GMT — Wealth manager IOOF’s (IFL.AU) strong balance sheet and solid yield prevent Citi from being more negative on the stock. Still, it sticks with a neutral call after IOOF’s full-year results came in at the lower end of guidance and a fraction shy of the brokerage’s estimates. It says revenue trends were far from encouraging, with margins falling in each of the company’s three main divisions. Fund flows were under pressure, too, although industrywide trends are at least partly to blame. On the plus side, a A$3.4 million reduction in second-half costs over the first half was impressive, especially as that was after some reinvestment, Citi says. It trims its target on the shares by A$0.30 to A$8.20. (robb.stewart[a]; Twitter: [a]RobbMStewart)

0138 GMT — Recent results from QBE Insurance Group Ltd.’s (QBE.AU) U.S. peers suggest conditions there are in line with expectations, Deutsche Bank reckons. It says top-line growth in the U.S. continues to slow, while customer loss ratios are starting to rise off the back of flat-to-negative commercial premium rate trends. Although that is challenging, it remains consistent with expectations and QBE’s 2016 outlook. And with QBE trading at 12.9 times forecast earnings, with a dividend yield outlook of 5.7%, the brokerage says the stock offers compelling value. It retains a buy recommendation. (robb.stewart[a]; Twitter: [a]RobbMStewart)

0118 GMT — Australia & New Zealand Banking Group Ltd. (ANZ.AU) looks better-placed than its peers to ride out the challenges presented by a more constrained revenue environment and rising bad-debt charges, Bell Potter argues. It lifts its target on the bank’s shares to A$28.10 (US$21.62) from A$26 in light of ANZ’s third-quarter trading update and shifts to a buy recommendation from a hold call. A stable net interest margin for the quarter was positive, while a three-month cash profit of about A$1.7 billion was in line with expectations, Bell Potter says. The shares currently are up 0.5% at A$26.58. (robb.stewart[a]; Twitter: [a]RobbMStewart)

0117 GMT — Macquarie lifts accounting software maker Reckon (RKN.AU) to neutral from underperform, after a pull back in its shares over the past six months and support offered by possible M&A activity in the sector. The broker notes that initial feedback on the company’s latest online product, Reckon One, is positive and says its attractive price should provide a compelling alternative to price conscious start-ups. “However, we believe it’s going to take time for revenues to reflect the full benefit of increased marketing, research and development investment and offshore expansion,” Macquarie says. On Tuesday, Reckon reported an 8% fall in 1H Ebitda to A$18.5 million although that was a touch above Macquarie’s A$8 million. The software company’s net profit fell 34% to A$6.2 million. RKN last traded at A$1.50, below Macquarie’s lowered A$1.57/share price target. (david.winning[a]

0117 GMT — Deutsche Bank expects packaging company Orora (ORA.AU) to report annual net profit of A$161.2 million, up 23% from a year ago, but warns the result could disappoint. “We expect Orora’s full-year result could surprise slightly to the downside given lower container board prices, higher gas, soda ash and electricity costs, and the termination of the Lindsay distribution agreement.” Transport and logistics company Lindsay Australia last year made Visy its principal supplier of packaging products, terminating its prior agreement with Orora. Deutsche Bank expects Orora to initiate fiscal 2017 guidance of higher underlying earnings, subject to global economic conditions. (rebecca.thurlow[a]

0111 GMT — Credit Suisse lifts its thermal-coal price forecasts after China reined in its own production of the fuel. The broker now expects a thermal coal price of US$55/ton in 4Q16, up from US$52/ton previously, and for prices to stay around that level right through 2019, a 10% lift on its prior estimate. As a result, it upgrades New Hope Corp. (NHC.AU) to neutral from underperform and lifts its target on the stock to A$1.65/share from A$1.40. It lifts its price target on Whitehaven Coal Ltd. (WHC.AU) to A$2.00 from A$1.20 and its target on South32 Ltd. (S32.AU) to A$2.00 from A$1.80. (rhiannon.hoyle[a]; Twitter: [a]RhiannonHoyle)

0107 GMT — AGL Energy (AGL.AU) made no mention of capital management or changes to its dividend policy in its full-year results, which will disappoint investors, analysts at Macquarie say. Still, they note the underlying numbers in the results met expectations. As usual, the energy company offered no definitive guidance for the year ahead but did caution it faced unseasonably warm weather in July and a A$100 million headwind for natural-gas pricing changes. Full-year profit before one-time items of A$701 million was slightly ahead of Macquarie’s A$695 million estimate by shy of the A$713 million consensus estimate. The shares now are down 3.5% at A$19.64, while the broader ASX 200 is down 0.4%. (robb.stewart[a]; Twitter: [a]RobbMStewart)

0059 GMT — Commonwealth Bank of Australia’s (CBA.AU) full-year performance was a bit softer than expected, assisted by a lower-than-expected bad-debt charge, says Omkar Joshi, investment analyst at Watermark Funds Management. Still, he adds the bank’s net interest margin held together better than anticipated. Cash earnings growth of 3% for fiscal 2016 were 1% below what the market had penciled in, as was revenue, Joshi says. The bad-debt charge rose to 19 basis points of gross loans from 16% in the last two years, although that was better than the 20 points that brokers were expecting. Net interest margin declined by 2 basis points over the year to a better-than-expected 2.07%. The shares currently are up 0.3% at A$78.61 (US$60.45). (robb.stewart[a]; Twitter: [a]RobbMStewart)

0056 GMT — Commonwealth Bank of Australia’s (CBA.AU) share price is likely to respond well given market concerns in the run up to its second-half results, despite relatively weak underlying trends, Macquarie says. In early trade, the stock is up 0.3% at A$78.66 (US$60.48). The brokerage notes the second-half cash profit of A$4.65 billion was slightly below its forecast for A$4.7 billion, while its final dividend of A$2.22/share was in line with the consensus expectation. The bank’s cost growth was controlled and capotal generation was positive, while the bad-debt expense, while higher on-year, was better than anticipated, Macquarie said. It maintains an underperform call on the stock and a preference for Westpac (WBC.AU) and National Australia Bank (NAB.AU). (robb.stewart[a]; Twitter: [a]RobbMStewart)

0045 GMT — Fairfax Media Ltd. (FXJ.AU) shares are down 5.3% after the company reported a A$894 million (US$685.3 millino) net loss driven by recently announced publishing asset writedowns. Fairfax said weak trends in publishing are continuing into early fiscal 2017 and also revealed real estate listings were unusually weak in July, raising red flags for Fairfax’s star performer, online property portal Domain. Fairfax said new listings volumes fell 25% in Sydney and 11% in Melbourne in July. While the company blamed the long Federal election campaign, the weakness is likely to stoke concerns about the impact of a potential slowdown in Australia’s property market on Domain. Fairfax said the Domain property site’s digital revenue grew by 10% in the first five weeks of fiscal 2017, a slowdown from 53% growth in July 2015. (rebecca.thurlow[a]

0033 GMT — Don’t expect too many positive highlights when miner BHP Billiton Ltd. (BHP.AU) reports its annual earnings next week, says Credit Suisse. “Underlying profit of US$1.5 billion and Ebitda of US$12.3 billion will be the lowest level since 2001,” according to Credit Suisse estimates. It worries BHP may also have to increase its capital expenditure budget for FY17 from US$5 billion, as that “may not match the recent volume and project aspirations outlined to the market,” says the broker. BHP trades down 0.8% at A$20.42 (US$15.65) a share. (rhiannon.hoyle[a]; Twitter: [a]RhiannonHoyle)

0022 GMT — Software issues with Rio Tinto Ltd.’s (RIO.AU) much-anticipated autonomous rail system could take up to two years to resolve, says Macquarie after a roundtable with CFO Chris Lynch in Sydney. Rio once anticipated having its driverless trains in Australia’s Pilbara region operational by 2015. “Lynch indicated that problems with the software were the key driver behind the delay, although he was unwilling to rule out the potential for fatal flaws in the system,” the broker says. (rhiannon.hoyle[a]; Twitter: [a]RhiannonHoyle)

0019 GMT — Rio Tinto Ltd. (RIO.AU) is making lots of cash because of relatively strong iron-ore prices–cash that could result in a higher-than-anticipated dividend this year, Macquarie says after a roundtable with CFO Chris Lynch in Sydney. “Gearing at the end of June of 23% is towards the bottom end of Rio’s 20-30% forecast range, and with forecast 2016 free cashflow generation of US$4.2 billion on our forecasts and US$5.5 billion at spot prices, we believe there is upside risk to the minimum US$1.10/share total full-year dividend payment should spot prices persist,” it says. Rio trades down 1.4% at A$50.20 (US$38.48) a share. (rhiannon.hoyle[a]; Twitter: [a]RhiannonHoyle)

0014 GMT — Morningstar lifts its fair value estimate on Cochlear (COH.AU) to A$110/share from A$96. Analyst Chris Kallos says services revenue, which rose 30% in fiscal 2016 and includes upgrades and accessories, will remain strong given the substantial pool of implant recipients – about 80% – yet to upgrade to the Nucleus 6 sound processor. Kallos expects Cochlear to maintain momentum this fiscal year given strong July sales, the rollout of the new slimmer modiolar electrode and the next-generation True Wireless Mini Microphone 2+, as well as the launch of the Kanso sound processor in the U.S. over the next six months. Kanso is similar to the Nucleus 6 however it is worn off the ear and is more discreet. Still, with the stock above A$125, Kallos has a reduce rating. (rebecca.thurlow[a]

2307 GMT — UBS keeps a sell rating on Cochlear Ltd. (COH.AU) after the hearing-implant maker flagged profit growth will slow to 10-20% this year from 30% in fiscal 2016. UBS says that while implant units grew 12% in fiscal 2016, they were up a slower 7.8% when excluding the China tender contract, and growth slowed further to 4.3% in the second half. UBS says growth is under pressure as Cochlear enters the mid-point in its 4-5 year innovation/product cycle, which the broker says is the weakest phase. “Slowing in ex-China growth is consistent with UBS thesis map that competitor products and cycle are emerging headwinds for growth,” the broker says, adding that despite the headwinds, the stock is at its highest against 10-year average forward PE. (rebecca.thurlow[a]

2226 GMT — Australia & New Zealand Banking Group (ANZ.AU) posts a reasonable quarter as it continues to transform its organization, UBS says. Volumes in its core markets appear to be holding up and cost performance remains a key focus for the bank, although earnings volatility is likely to remain a feature for the next 6-9 months as ANZ shifts away from low-yielding institutional assets in Asia and works to improve its capital position, the brokerage says. UBS estimates ANZ’s 3Q cash profit was a little shy of expectations, while it managed a good income with a flat net interest margin. The brokerage’s forecasts are broadly unchanged. (robb.stewart[a]; [a]RobbMStewart)

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