Collected Wisdom

This week we look at Rio Tinto, JB Hi-Fi, Suncorp, CSL and Austal.

Summary: Analysts are positive on Rio Tinto’s cost cutting, while they see some opportunity in shipbuilder Austal despite this week’s sell off. JB Hi-Fi does not appear to be significantly impacted by Dick Smith’s price slashing, and could benefit from DSH store closures. CSL is looking towards 2016 as a breakout year for their haemophilia treatment, while analysts lower their earnings forecasts for Suncorp Group as their new chief executve announces a profit downgrade.

Key take out: Analysts see value in Rio Tinto as the miner cuts capital expenditure to $5 billion in 2016, from a proposed figure just under $6bn.

Key beneficiaries: General investors. Category: Shares.

This is an edited summary of the Australian investment press: It includes investment newsletters, major daily newspapers and broker reports. The recommendations offered represent the views published in the other publications and may not represent those of Eureka Report. This article is general advice only which has been prepared without taking into account your objectives, financial situation or needs. Before acting on it you should consider its appropriateness, having regard to your objectives, financial situation and needs.

Rio Tinto Limited (RIO)

Last week RIO got together with analysts for an update on its aluminium division and to talk about its overall capital expenditure outlook. It was the latter that analysts were more interested in.

RIO management announced they planned to cut capital expenditure to $5 billion in 2016, down from a proposed figure just under $6bn, and 2015 capex will be held to $5bn instead of the reported $5.5bn. These reductions have come as a result of “continued disciplined balance sheet management, prudent capital allocation and currency benefits”.

Analysts are genuinely impressed by the cost cutting done throughout the group, with all smelters in positive cash flow territory in 2016. With the price of iron ore continuing to decline, and subsequently the RIO share price, analysts are seeing value in the resilient miner.

From current levels all analysts see upside in the share price when compared to the price targets. The average price target is $58.56 with the most bullish sitting at $66. The implied upside is significant from the current share price which was $42.54 at the time of writing.

Investors and generally advised to buy Rio Tinto Limited at current levels.

Austal Limited (ASB)

After an impressive three year run from $0.51 shares, shipbuilder Austal Limited came to a screeching halt on Thursday after a progress update. The update was not well received by the market and the sell off was rapid.

Management announced they were experiencing scheduling issues and margin pressure on Littoral Combat Ship (LCS) 6. ASB are building numerous LCSs and this scheduling issue will flow on to the others. Management anticipate this to have an impact on FY16’s earnings and they have guided these to be lower than FY15. Margins are expected to be between 4.5 per cent and 6.5 per cent.

Despite the disappointment of this announcement, analysts see opportunity in the aggressive sell off that took place. The stock went from $2.30 to $1.36, to then settle at $1.57 at the time of writing. Analysts do not see these issues impacting the shipbuilder past FY16 and anticipate further contract wins and/or acquisitions to provide a catalyst for a rerating.

The average 12 month price target for ASB is $2.14, with the most bullish case at $2.40. The key risks for this business remain the same as they have always been. ASB has a constant need to win new contracts to replace ones that have been completed. They must also have the ability to deliver those contacts on time and with sufficient margins.

Investors are generally advised to buy Austal Limited at current levels. 

JB Hi-Fi Limited (JBH)

In light of the troubles of fellow retailer Dick Smith Holdings (DSH), a number of investors might be wondering how the heavy discounting will impact rivals such as JB Hi-Fi (and rightfully so).

The heavy discounting by DSH has the attention of analysts, with all keeping one eye on the troubled retailer. Analysts covering JBH were pleased to see that discounted items at DSH were lesser quality private label items and not products with attraction, like Apple products. This will have less of an impact on JBH.

Analysts pointed out that on a positive note, JBH would be a beneficiary of any potential DSH store closures. Analysts have also commented that the recent pullback in the JBH share price has priced in any anticipated weakness in sales growth for FY16.

The average 12 month target price for JBH is $19. At the time of writing the share price was trading at $17.91.

Investors are generally advised to hold JB Hi-Fi Limited at current levels.

CSL Limited (CSL)

The global biopharmaceutical company held a research and development update last week (Thursday December 10) for investors, and it was the company's work in haemophilia that got analysts the most excited. CSL believes rFIX Idelvion, a product set to launch in 2016, will be the benchmark for treatment in the haemophilia B market. 

CSL showed off a whole range of products with a number of launches anticipated over the next 18 months. Analysts are anticipating a breakout year in 2016 for the haemophilia products and for this to continue to drive growth for the group.

Despite the share price being borderline, on the 12 month price average analysts agreed CSL was still a buy given the ongoing commitment to R&D which will continue to drive future growth. They are happy to pay up for the future growth.

The average 12 month price target for CSL is $101.10. At the time of writing the share price was $99.86.

Investors are generally advised to buy CSL Limited at current levels.

Suncorp Group (SUN)

On Monday December 14 Suncorp chief executive Michael Cameron made his first big splash with the announcement of a downgrade. New chief executives clearing the decks shortly after getting behind the desk is, unfortunately, not uncommon for investors. Reset the bar, blame the previous person and hit your growth targets the following year.

The downgrade is due to claims in the general insurance department, with Cameron stating margins will be down to 10 per cent in first half FY16. This is a significant decline from the 14.6 per cent margins in the second half of FY15.

The downgrade has moved all analysts to lower their forecasted earnings estimates with one even suggesting the FY16 dividend may even see a trim if the issues are not resolved. Another analyst pondered if there was more spring-cleaning to come from the new chief executive. This analyst decided to err on the side of caution and not take advantage of the share price drop like some others, preferring to maintain a hold call and see what happens when the dust settles and Cameron has been in the chair a little longer.

Out of the 12 analysts surveyed there were five buys, five holds and two sells. The 12 month average price target was $12.83 with the most bullish at $14 and the bearish case at $11. At the time of writing the share price was $11.33.

Investors are generally advised to hold Suncorp Group at current levels.  

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