Weekly commentary

Weekly commentary

Economy: Even though the US employment report released last Friday showed US unemployment rate at record lows of 3.9%, we maintain that the US economy is slowing down. The number of US companies flagging a deteriorating earnings outlook due to weakening consumer demand, weak export markets due to the rise in the US$ and high oil prices, show the economy is losing momentum. The US bond market is expected to rally strongly once oil prices retreat and the market factors in a possible interest rate cut by the US Federal Reserve by mid 2001. World growth forecasts are being cut as higher interest rates and high oil prices begin to bite.

Equities: Australian equities traded softer over the past week in line with a sharp correction in US equities. Deteriorating earnings outlook along with a softening US economy, have made some analysts re-adjust their valuations on various companies. The biggest losers for the week were Media & Telecommunication stocks. Defensive stocks like Banks, Utilities & Retailers have been a good shelter for those investors placing money into the equity market.


On Tuesday, WA’s largest utility Alinta Gas made its public debut closing at $2.86. This gave retail investors a 27% profit on their initial $2.20 investment. Those investors who pre-registered received 450 shares, while those in the public allocations received 360 shares. Institutions were required to pay $2.45

Coles Myer (CML)

Further capital management announcements likely

CML reported a profit for FY00 of 483.7m (eps of 41.7 cents). The result was in line with expectations. A final fully franked dividend of 13.5 cents was declared. For FY01 we are forecasting $520.9m (eps of 44.8 cents). We are forecasting a dividend of 30 cents for FY01. We value CML at $7.20 per share and a further 30 cents per share upside to this valuation if loss-making assets including Katie’s are sold.

CML earnings are defensive relative to other retailers. EBIT contribution from food & liquor represent around 56% of forecast company EBIT. If we also add EBIT contribution from property and discount stores shows that CML’s earnings stream is relatively defensive.

Management announced in conjunction with the profit result a share buy-back up to $220m equivalent to 30m shares. The buy-back is expected to be funded in part from its store of excess franking credits and the issue of preference shares. The timetable for the on market buy-back has not been set. Further capital management initiatives are likely to be introduced to utilise excess franking credits above those flagged in the $220m buy-back.

CML’s inventory management practices compared to WOW have been poor but have improved over FY00 which has seen a large reduction in growth of inventory compared to sales.

Telstra (TLS)

Revised PCCW alliance terms

TLS will acquire a controlling 60% interest in Hong Kong Telecom (HKT) mobile for US$1.68m (US$2,886 per subscriber) compared to the previous announced deal terms of 40% for US$1.5m (US$3,886 per subscriber). This is clearly a marked improvement in the terms, but not sufficient to make this a good deal. In our view a ratio of between US$2,000 and US$2,500 would be more reasonable for HKT which is still a significant premium to subscriber ratios for other competitors.

The IP backbone company (IPBC) will continue to be a 50/50 joint venture. IPBC will purchase PCCW’s and TLS’s existing global wholesale businesses for a combination of cash and equity. The purchase price payable to PCCW will comprise an initial cash payment of US$750m with any further cas consideration being paid in equal amounts to PCCW and TLS. IPBC is expected to raise debt of US$2b. The transaction is expected to complete in early 2001 following PCCW shareholder approval.

TLS also secured a reduction in the price paid for the convertible note issue by PCCW from US$1.5b to US$0.75m. The conversion price for the convertible note will be a 15% premium to the volume-weighted average price of PCCW shares during the 45 trading day period following the execution of the definitive agreement.

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