Collected Wisdom

This week we look at Aristocrat Leisure, AMP, Commonwealth Bank, Orica, Macquarie Group and Eclipx.

Summary: CBA's quarterly numbers saw an increase in bad debt, but analyst consensus remains a buy, while a decline in half year earnings at Orica saw the stock remain a hold. Macquarie's annuity-like products impressed with solid revenue growth in its first full year report. Eclipx Group's acquisition of Right2Drive has impressed all round, with buy calls across the board.

Key take out: AMP remains a consensus buy as analysts see an overreaction to decreased inflows, while strong earnings at Aristocrat Leisure (ALL) have also promoted a buy call.

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.

AMP Limited (AMP)

Last week (May 12) AMP issued quarterly numbers for its assets under management and just like other investment institutions, inflows were weak. Just like Macquarie Group, AMP management pulled out the terms “challenging” and “subdued”.

Total assets under management finished the quarter at $112.6 billion, two per cent down on the first quarter of 2015. This is predominantly due to negative share market movements. The impact of this was a weaker cashflow number, coming in at $209 million for the quarter compared to $342m for the same time last year.

Analysts did not find the decline in inflows for the quarter alarming; what caught their eye was further declines in AMP’s wealth protection business. This part of the business lost $18m for the quarter which management put down predominantly to retail income protection, which covers incidences and terminations.

Analysts believe the market has overreacted to the issues in the wealth protection business and see this as a key potential upside for AMP. It is because of this overreaction analysts have AMP as a resounding buy. Currently the average 12 month price target sits at $6.07 with the share price at $5.48 at the time of writing.

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

Aristocrat Leisure Limited (ALL)

Aristocrat Leisure has kept punters happy with a sneak peak at the expectation beating half yearly earnings released on May 12. Earnings are up 66 per cent on the prior corresponding period, beating already lofty expectations. Management also reaffirmed full year guidance.

The profit was driven by the growth and gaining of market share in the US through its Class III premium machines. On top of this Aristocrat’s online presence seems to be growing as well. Analysts see the social and app based online gaming picking up speed and driving future growth. More details will be known in late May when the half year results are released.

The consensus has Aristocrat as a buy even with the recent share price jump taken into consideration. The average 12 month price target sits at $13.10 with the share price at $12.60 at the time of writing. Analysts have also flagged a potential dividend increase as well.

Investors are generally advised to buy Aristocrat Leisure Limited at current levels.

Commonwealth Bank of Australia (CBA)

The Commonwealth Bank reported its quarterly numbers on May 9 and the majority of commentary from analysts was around the increase in bad debts. The banking group announced an increase to $427m in Loan Impairment Expenses. Additionally, Troublesome and Impaired Assets for the group increased to $6.3bn.

Commonwealth Bank have put the increase in Loan Impairment Expenses down to a small number of exposures in the group’s institutional lending business. This was largely expected, given the increases seen in Commonwealth’s peers.

Increased bad debts aside – which analysts put down to a handful of troublesome names; one speculated it was due to the decline of Arrium – analysts saw the numbers as a little weak. However, this did not dissuade any who had the bank as a buy. It did not sway those with a hold either.

The consensus call remains just on the buy side for CBA, as analysts expected some short term positivity with its final dividend still looking juicy. The current average 12 month price target sits at $77.70 with the share price trading at $77.57 at the time of writing.

Investors are generally advised to buy Commonwealth Bank of Australia at current levels.

Orica Limited (ORI)

It was a rough start to the week for explosives manufacturer, Orica. On Monday May 9 it released its half yearly report and was promptly sold down, dropping from the previous close of $15.43 to go as low as $13.23 and close at $13.53.

The reaction from shareholders was caused by a decline in earnings of four per cent on the prior corresponding period. This was marginally weaker than analysts expected, but it was the cut in the dividend that proved to be the surprise and fall well below expectations.

The Orica board decided to abandon the progressive dividend policy in favour of paying out between 40-70 per cent of underlying earnings to be determined at each half, with the expectation that the bulk of the dividend will be delivered in the final dividend. The dividend for this half will be 20.5 cents per share franked at 49 per cent.

Analysts saw things as a story of declining sales volumes and prices if you were bearish on the stock. Those with a more positive slant thought of it more as tightening the belt. Management are introducing a number of cost-cutting initiatives and have reduced capital expenditure by 35 per cent.

There are plenty of analysts hanging in there and sitting on the fence with Orica, not wanting to call the explosives company a buy or a sell. The hold call thoroughly wins out here. Currently the average 12 month price target is $14.71. At the time of writing Orica’s share price was $13.63. 

Investors are generally advised to hold Orica Limited at current levels.

Macquarie Group Limited (MQG)

The investment bank formerly known as the Millionaires Club, Macquarie Group, delivered its full year result on Friday May 2. The figures were solid with profit up 29 per cent on 2015’s result to $2.06bn. Analysts were in agreement that Macquarie’s resilience in volatile markets has come from its mix of annuity-like businesses that make up 70 per cent of the group's earnings.

When it came to the outlook for 2017 the words “subdued” and “challenging” were used by most. This reflects most analysts’ views that investment markets will prove to be difficult and this will make it difficult for any business that relies on increasing funds under management and performance fees to increase earnings growth. Management has agreed, stating early expectations for 2017 are broadly in line with 2016 numbers.

Despite the subdued forward-looking conditions for Macquarie, it is widely touted by analysts to be ahead of its peers given the strength of its annuity businesses. This means Macquarie remains a buy especially as it experienced some recent share price weakness.

The current average 12 month price target stands at $77.94 indicating an implied upside of 11.76 per cent to the share price at the time of writing.

Investors are generally advised to buy Macquarie Group Limited at current levels.

Eclipx Group Limited (ECX)

The fleet leasing and management group Eclipx released its half yearly results and a new acquisition on Friday May 6. Eclipx delivered a solid set of numbers with profit increasing by nine per cent on last year’s first half, up to $26m. The report was overshadowed by the announcement of the group's acquisition of Right2Drive Pty Ltd for $67m.

Right2Drive is a business that provides short to medium term loan cars to not at fault drivers who have been in accidents. Right2Drive has approximately 1,200 replacement vehicles in operation through 16 offices across Australia and New Zealand. Right2Drive is the largest operator in the industry but only has 7.5 per cent of a highly fragmented the market making this acquisition ripe for a potential consolidation story.

It was thumbs up all round from the small but growing group of analysts that have Eclipx on their coverage list. They were in agreement the acquisition, which management says will be earnings accretive in 2017, has natural synergies with the current business and will help to continue to drive growth.

Management were more specific on full year guidance, tightening the expected profit growth range from 7-10 per cent to 8.5-10 per cent. Analysts were not finding too many negatives, with all noting Eclipx as a buy currently. One of the only downsides they could see was the potential increase to funding costs.

The current average 12 month price target is $3.41 with the share price sitting at $3.32 after a 21 cent price rise on Tuesday.

Investors are generally advised to buy Eclipx Group Limited at current levels.