Price target decreases & downgrades

Bendigo & Adelaide Bank (BEN)

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


Share Price: $8.19

Price target: $8.01 (RBS)

Broker Calls: Sell – RBS

P/E: 9.12

Market Cap: $3,143 million

In December, Bendigo and Adelaide Bank announced its intent to spend $130 million to acquire Bank of Cyprus Australia, a 14-branch bank catering to Greek and Cypriot communities in NSW, Victoria and South Australia.

Bendigo would raise $120 million by issuing new shares to institutional investors at a price of $8.45 per share; at the time of the announcement Bendigo was trading at $9.00. Having since lost 9% of its value over the holiday period, it seems investors both new and old have already lost from the deal.

What’s more, the regional lender booked a $95 million writedown on its margin lending business caused by weak investor sentiment and market volatility. Bendigo’s MD Mike Hirst said its margin lending business was suffering from a reduced portfolio as investors shunned risk in the current climate.

‘We remain convinced that margin loans are appropriate products, with a legitimate place in the investment portfolios of many of our customers,’ he said. ‘However, the impairment testing required under current accounting standards is prescriptive about how this goodwill should be accounted for, and we have therefore made this decision.’

The stock is down some 15% in 2011, but John Rawicki from Ord Minnett reckons there’s more pain to come. ‘In December, the bank announced a $120 million placement and an upcoming $70 million share purchase plan to bolster its balance sheet and fund the Bank of Cyprus acquisition,’ he says. ‘We don’t believe the acquisition will be as value accretive as management indicates.’ Rawicki also points to the bank’s recent $95 million writedown in goodwill over its margin lending fallout as a factor that will place further pressure on earnings.

Brokers Australia-wide downgraded their earnings forecasts for Bendigo after the announcement of the Bank of Cyprus acquisition and margin lending writedown. Merrill Lynch dropped its target to $8.60 from $10.40 and downgraded the bank several notches to underperform from a buy. Merrills sees headwinds for the regional bank and continued earnings pressure.

Similarly JP Morgan and Credit Suisse downgraded Bendigo to underweight and cut price targets, ciiting concern over the margin lending writedown.  


Paperlinx (PPX)

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


Share Price: $0.065

Price target: $0.00

Broker Calls: Sell – Ord Minnett, Patersons

P/E: –

Market Cap: $40 million

We featured paper merchant PaperlinX as our Dog of the Week back in May 2011 when it was trading at 26 cents. It has since lost 75% of its value and reported a net loss of $108 million for the 2011 financial year. Down 98% over the past five years and with debt 300% of its market cap, this former arm of Amcor is plagued by difficulties. Even a recent takeover bid by a private equity firm looks set to stumble, and is doing little to prop up the share price.

Back in May 2011 Patersons analyst James Georges advised investors to avoid the stock, arguing that given its exposure to European markets it was unlikely to recover until conditions improved in Europe. Chris Stott of Wilson Asset Management specifically pointed to PaperlinX as a net loser to a strong Aussie dollar because it earns a significant chunk of its income offshore.

The European crisis shows little sign of improving anytime soon and the Aussie dollar is going from strength to strength. Against the Euro the Aussie is sitting at an all-time high of 81 Euro cents, up 60% in just three years. For a struggling exporter like PaperlinX this scenario is a disaster;  over the past five years, its share price has retreated from highs of $4 a share.


So where to from here for PaperlinX? As you can imagine, it’s hardly a favourite amongst brokers or investors. In late-October 2011 Credit Suisse placed an Underperform on the stock, voicing concern when management wouldn’t provide earnings guidance. Morningstar has an ‘Avoid’ on the paper merchant, with no value placed on the stock.

Just this week John Rawicki of Ord Minnett reiterated his sell on PaperlinX, citing a structural downshift in global paper consumption and rising competition. ‘The company’s debt balance is more than three times its current market capitalisation,’ says Rawicki. ‘Its ability to repay debt in the future concerns us.’

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