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Price target increased

QBE Insurance (QBE)

 

Chart: Share price over the year to versus ASX200 (XJO)

 

Share Price: $13.58

Price target: $15.67 (Macquarie)

Broker Calls: Macquarie – Outperform

P/E: 10.43

Market Cap: $15,149 million

Large catastrophe claims from storms, cyclones, earthquakes and tornados has forced QBE to put its hand in its pocket more than usual over the past year. However the year needs to be put into perspective – natural and man-made catastrophes cost the world economy a staggering $US350 billion ($A354.23 billion) and 30,000 lives this year, reinsurer Swiss Re said just yesterday. ‘2011 will be the year with the highest catastrophe-related economic losses in history, at $US350 billion,’ the company said, which is up 55% from $US226 billion last year.

When it comes to total insured losses the figures get even worse – total insured losses for the global insurance industry from disasters reached $US108 billion in 2011. This is more than double the 2010 figure of $US48 billion and the second highest on record (the only reason it isn’t the highest is because Japan wasn’t fully insured). On top of the quakes in Japan and New Zealand, severe flooding in Thailand and Australia this year triggered more than $US10 billion in insurance claims.

So it comes as little surpise that QBE’s share price has suffered, with the stock down 24% over the past year compared to a 13% drop for the ASX200. What is surprising is that it has held up so well, considering it was the second worst year on record for insurance claims.

QBE management, however, don’t seem too worried and are taking advantage of share price weakness to pick up stock. Over August, two directors were acquiring shares.

Cameron Bell from Intersuisse is upbeat, with a buy rating attached. Bell argues: “QBE offers strong management and an excellent business model based on conservatism. Volatile and weak global markets have restricted the share price recently, but it’s trading on a very cheap multiple and is paying a dividend yield above 9 per cent. The company has a sound balance sheet and generates very strong cash flow.”

Meanwhile, Peter Day from Wilson HTM sees this as a long-term hold. ‘We have further analysed QBE’s weather allowance for claims…it’s our view that the aggregation of smaller claims is the typical contributor…highlighted by weak third-quarter results from US peers due to higher weather claims.’

The question for investors is whether QBE’s fortunes are short-term, or not. Sure, on face value it would seem that the second worst year on record for insurance claims is just a bad luck year for insurers and those affected by the events. However climate change and population growth may mean that global catastrophic events will become more commonplace. Aside from the terrible human cost, should this be the case it would severely cut into insurers’ margins. Hardly the kind of investment that investors are looking for.

 

Upgrades

Iluka (ILU)

 

Chart: Share price over the year versus ASX200 (XJO)

 

Share Price: $16.08

Price target: $25.00 (Citi), $21.00 (Credit Suisse)

Broker Calls: Citi – Buy, Credit Suisse – Buy

P/E: 35.58

Market Cap: 6,732 million

We highlight Iluka again this week as it’s definitely worthy of consideration. Last week the company announced an 80-85% increase in the first half 2012 weighted average price for rutile – of which it is the biggest producer in the world. Analysts have cheered, represented by a string of buys and price upgrades on Friday.

The company also announced a 85 to 90 per cent increase in the average price of synthetic rutile, compared to the forecast average price for the current half of about $US1,075 per tonne.

Rutile is used in the production of titanium, a key metal used in aircraft due to the fact that it’s strong, light and corrosion resistant. Iluka said the price increases reflected the company’s preferred product pricing approach, current market dynamics and competitive conditions.

Austock Securities senior client adviser Michael Heffernan said Iluka has been 2011’s ‘star of the resources sector,’ with its share price rising more than 90 per cent in the calendar year to date.

James Samson from Lincoln Indicators also places a buy on ILU. ‘This mineral sands explorer, project developer and producer is financially healthy, having negotiated higher than expected prices to supply rutile,’ he says, ‘However, with the company’s core focus on zircon, we believe that ILU is poised to generate further earnings growth, leading to a higher share price.’

Even prior to the announcement, Iluka’s recent numbers were what investor dreams are made of.  Expenses, debt, and gearing declined. Profit, cash flow, and shareholder return rose.

RBS’s Clive Briggs is confident that zircon prices will increase between $US200 and $US250 a tonne in the December quarter. ‘The company will receive higher royalty payments from iron ore produced at specific parts of BHP Billiton’s mining area C in Western Australia,’ he notes, adding that Iluka remains one of his top picks in the resources sector.

There are a host of other brokers who are also positive about ILU’s outlook including Deutsche, Citi and JP Morgan – Credit Suisse has a $21.00 price target, while Citi is even more bullish with a $25.00 target. Macquarie and RBS also have buys with price targets over $20.00. 

 

Buys

Seek Ltd (SEK)

 

Chart: Share price over the year versus ASX200 (XJO)

 

Share Price: $6.23

Broker Calls: Patersons – Buy

P/E: 21.48

Market Cap: $2,100 million

Seek Limited (SEK) is becoming a favourite with brokers as it expands its operations throughout South America and Asia. Notably it is no.2 in China, and has the no.1 & no.2 sites in both Brazil and Indonesia – giving it the no.1 and/or no.2 spot in three of the five biggest countries on the planet. And let’s not forget that it is also no.1 in Mexico, which holds the 11th largest population. Consider this – the population of Australia is around 22 million.  There are about 210 million people in Brazil; 243 million in Indonesia, and 1.3 billion in China.  While Internet usage in developed countries like Australia and New Zealand is high, some experts say internet penetration in countries like China, Brazil, and Indonesia is well below 50%. That is impressive growth potential.

SEK’s operating divisions include online job classifieds, and training and learning. Seek Commercial enables browsers to search for businesses and franchises for sale, while Seek Learning assists jobseekers with career development.

Andrew Inglis, Shadforth Financial Group has a buy on SEK, saying that strong market positions in China, Brazil and Indonesia provide an excellent platform for future growth as many of these countries still have relatively low internet usage rates. ‘It will also benefit from employers continuing to switch to online advertising,’ he says. ‘Discounted valuations on the overseas subsidiaries and its education and training business, together with a solid balance sheet and strong growth outlook, present a buying opportunity.’

Scott Marshall, Shaw Stockbroking analyst points out that the Internet is now the first port of call for those wanting a job, car, house, flight, product or service. Marshall says SEK is wasting no time taking advantage of a shift in search from printed materials to the digital space. He says it is an aggressive company that’s established dominant positions in the online Australian job ads sector, with almost 70 per cent. And Seek is now expanding into Asian and South American economies, with more on the drawing board. “The group has also established an effective strategy in the Australian classroom and online education sectors,” he says. “It’s also specialising in career enhancement for Australian and foreign students. We expect Seek to benefit from growth in online job ads numbers amid the related shift away from printed ads.” 

Across the non-mining sectors, internet job search provider Seek is a stock that’s watched closely. Deutsche has affirmed its buy rating on the back of the company’s exposure to the South-East Asian employment market. While exposure to Asia sounds exciting, however, the company’s primary exposure is to employment conditions in Australia. According to BA-Merrill Lynch the employment trend in Australia is likely to be down. The risk for Seek is falling employment in Australia and falling ad volumes, notes the broker. Unlike Deutsche, Merrill’s has downgraded the stock to neutral. Meanwhile RBS, UBS, Citi and Macquarie all have buys on SEK.

Hamza Habib from Patersons also has a buy. ‘The company is Australia’s premier online job classifieds provider, with almost 70 per cent of the Australian and New Zealand markets,’ he says. ‘Given its recent international expansion and substantially low operating costs, the company offers a good entry level.’

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