Downgrades, Price target lowered
Macquarie Group (MQG)
Chart: Share price over the year to versus ASX200 (XJO)
After cutting 460 staff over the three months to the end of 2011, Macquarie Group is now in the process of cutting another 10 per cent of jobs in its securities business and fears its full year profit will plunge as difficult trading conditions take their toll. Australia’s largest investment bank on Tuesday warned its net profit for 2012 would fall by a quarter, far worse than investors had been expecting.
Chief executive Nicholas Moore said the global economic uncertainty had deepened and resulted in ‘substantially lower levels of client activity in many markets’. The planned staff layoffs follow similar announcements from Australian retail banks such as Westpac and ANZ, while the bleaker outlook mirrors sentiments expressed by other investment banks worldwide.
To add insult to injury, yesterday Fitch Ratings placed Macquarie Group on Rating Watch Negative (RWN). Fitch says that the review of MGL has been prompted in part by challenges facing financial institutions globally, in particular those that are more exposed to market-oriented income. Fitch notes that this action is not tied to any specific earnings or capital information as this broad review has been ongoing for some time.
In its note Fitch said that three of Macquarie’s six divisions are market-oriented, which adds volatility to its earnings not normally seen in more traditional commercial banks.
In a presentation to investors in Sydney on Tuesday, Mr Moore said net profit for fiscal 2012 was expected to be down a massive 25 per cent from the $956 million achieved in the prior year – and that’s based on current market conditions. Should things take a turn for the worse we’re going to see a much lower number.
Should the result print in line with expectations, net profit would come in at about $717 million, well below the $840 million the market had been expecting before Tuesday’s announcement. Part of the blame lies with its securities business, which will make a negative contribution to net profit in fiscal 2012.
‘These market-facing businesses are really feeling the brunt of what’s happening out there in the macro world,’ Mr Moore said. Macquarie Securities group head Stevan Vrcelj said the company was reviewing its current portfolio, exiting some businesses and reducing costs, which had involved job losses. ‘It will be more than 10 per cent head count reduction in terms of the front end of the business,’ Mr Vrcelj said of the job cuts. ‘And that also then feeds through into further head count reductions in terms of the support structure for Securities.’
‘We expected a weak result given market conditions but this is lower than our forecast,’ Morningstar analysts said in a research note.
Morningstar isn’t the only broker who was surprised, with a host of other cutting earnings estimates, including Deutsche, Credit Suisse, UBS Merrill Lynch. Citi went one step further, downgrading the investment bank to Neutral. UBS, JP Morgan and Deutsche are also unprepared to recommend that investors pile into Macquarie, placing a Neutral on it as well. Think Technically’s Mark Lennox says that Macquarie is doing it tough with M&A activity way down from last year. ‘Macquarie could face continuing headwinds if global negative sentiment surrounding investment banks is sustained for any lengthy period,’ he says.
Although Macquarie has bounced 12.5% over the past month, it has been a long time since shareholders had a smile on their faces. Macquarie is down 32% over the past year, 43% over the past two years and 67% over the past 5 years. But that’s because of the GFC, you might say. As a point of comparison CBA is down less than 2% over the past 5 years, as is Challenger Financial, while ANZ and Westpac are 25% lower over a five year period. NAB is off a whopping 43% but this is nothing compared to the hit Macquarie shareholders have taken. With deal flow drying up, the cash cows have gone out to pasture and investors are running for the door.
Gunns Limited (GNS)
Chart: Share price over the year versus ASX200 (XJO)
It seems the shorters know what they’re on about. As one of the top five most shorted stocks on the ASX for most of 2011, Gunns (GNS) has been sliding for many years now as investors have deserted the company. The horrible run continued when it hit an all-time low of 9.6 cents on 12th January 2012. By that point the forestry group was down 60% over the previous two months alone and was worth only 16% of what it was year earlier.
Since then, however, there has been a remarkable turnaround – the stock is no longer a shorter’s favourite and in just four weeks the stock has jumped 75% on the back of a deal with NZ billionaire Richard Chandler, who snared a 39% in Gunns as part of a $280m capital raising.
Gunns managing director Greg L’Estrange said he was confident the agreement would help the company find a joint venture partner for the planned $2 billion Tamar Valley pulp mill in northern Tasmania. Mr L’Estrange said Mr Chandler supported the pulp mill and was likely to boost public confidence in the project.
Gunns desperately needed a white knight after slashing its expected earnings by up to $20 million in December, saying it expected underlying earnings before interest and tax (EBIT) to be $30 million for the 2012 financial year. The company is in the process of settling the $120 million sale of its Green Triangle Forest Estate, which will go towards debt reduction.
With a dumping share price it’s tough to find a broker or analyst with a positive word to say about the forestry company. Chris Elliott from Shadforth Financial Group had a firm sell on Gunns in 2011 in the 18 Share Tips column, saying that the company had been restructuring its business as other forestry groups fell by the wayside. ‘However, with tough trading conditions remaining and continuing delays regarding financing and construction of the Bell Bay pulp mill, GNS carries more downside risk than upside,’ he said. As early as mid-last year Grant Dwyer from Patersons Securities was warning investors about the timber company in last May’s 18 Share Tips. ‘Gunns is struggling on all fronts, and is unlikely to see any significant recovery in earnings until there’s improving demand for pulp and paper products,’ said Dwyer. ‘Also, a short-term recovery in the managed investment scheme sector seems unlikely.’ Morningstar has joined in the chorus, placing an ‘Avoid’ on the stock. According to Thomson Reuters consensus broker data the stock is classed as ‘UNDERPERFORM’. With the stock down 67% in a year underperform is hardly strong enough a word.
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