Collected Wisdom

This week: Wesfarmers, Clydesdale, Flight Centre and BlueScope.

Summary: Wesfarmers update on impairment charges for Curragh and Target did not alter analyst expectations of the stock overall. Clydesdale is beating market expectations with belt tightening. A dip in earnings guidance at Flight Centre saw the share price hit last week, with a majority of analysts maintaining a hold call.

Key take out: Cost reductions at BlueScope steel have impressed the market – analysts have a buy call.

Key beneficiaries: General investors.  Category: Economy.

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.

Wesfarmers Limited (WES)

Wesfarmers issued an update to the market last week (May 25) and the market decided to take two dollars off the share price as a result. The announcement was about Target and Wesfarmers’ coal interests, Curragh. Wesfarmers indicated there will be $1.7 billion - $2.15bn in impairment charges between the two.

On top of this Target has incurred $145 million in restructuring costs, which will sit alongside a loss of approximately $50m which management attributed to lower gross margins and high seasonal clearance activity.

Although the above does not materially alter analyst expectations due to the consistent performers Coles and Bunnings, a cut to the dividend is now expected by most market commentators and analysts.

On the whole analysts marginally trimmed their price targets. Currently the average 12 month price target sits at $41.74. The above impairments were no surprise but now thoughts turn to how Wesfarmers will find earnings growth in a slowing market. The consensus call on Wesfarmers is currently a hold, which is also in line with the view of our friends at Intelligent Investor.

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

CYBG PLC (CYB)

NAB spin off Clydesdale announced its first half results last week (May 24) and it was a story of cost outs from management. Management are seriously tightening the belt at the British bank and the results so far speak for themselves, with CYBG beating market expectations.

So far management has been able to extract £32m of savings, with costs now expected to come in at £730m. Analysts anticipate further reductions to come as new management continue to shake up the recent demerged business. James Carlisle, head of research at Intelligent Investor mused last week that you better be hitting your KPIs if you are in middle management at the regional British bank.

Eventually the cost out story will stop, there is a finite amount of costs you can extract from a business after all and when that happens the market will be looking for a sign of top line growth. For now analysts expect further gains to come in the short to medium term and despite the share price currently exceeding the average 12 month price target of $5.27 ($5.43 at the time of writing), the consensus has CYBG a buy.

Our friends at Intelligent Investor are looking further ahead than the short to medium term outlook most have for CYBG – and when the cost out story has finished they see challenges for bank – therefore have gone against the grain and have placed a sell on the group.

Investors are generally advised to buy CYBG PLC at current levels.

Flight Centre Travel Group (FLT)

In similar fashion to Wesfarmers, Flight Centre Travel Group issued guidance to the market and the market reacted savagely. Even more savagely than it did to Wesfarmers, taking $6 off the share price on Monday (May 23).

Flight Centre reduced guidance indicating profit before tax will be 2 – 5 per cent down on last years $366.3m. Management pointed to a number of reasons including but not limited to the upcoming election, the Brexit, the Zika virus and heightened price wars.

Eureka’s own Robert Gottliebsen went further to suggest it is the inevitable cost of Flight Centres bricks and mortar stores that will weigh heavily on the company click here to read more: Problems at Flight Centre signal wider issues, May 25, 2016. The inevitable transition to an online strategy is taking place but analysts foresee Flight Centre giving up the higher margins they have historically enjoyed.

It appears analysts do not have a key answer for what is going to drive top line earnings growth but plenty are will to give management a chance as the bulk of analysts have a hold call. This view is in line with the team at Intelligent Investor who have the travel retailer as a hold as well. Currently the average 12 month price target sits at $36.34 with the share price sitting at $32.99 at the time of writing.

Investors are generally advised to hold Flight Centre Travel Group at current levels.

BlueScope Steel Limited (BSL)

BlueScope Steel issued the market with a short and sweet update last Monday (May 23). The steel maker upgraded earnings guidance from $209m to approximately $270m for the second half. That’s an increase of 29 per cent.

This upgrade is due to earlier than expected cost reductions, increased volumes and higher than expected steel and ore prices. Analysts remain positive on the steel maker with a number anticipating further cost outs to come providing a further catalyst.

A handful of commentators have downgraded from a buy call to a hold as they believe the stock is fully priced however they are outweighed by those still positive. The consensus still has BlueScope as a buy and an average 12 month price target of $7.18 compared to the current share price of $6.15 at the time of writing.

Investors are generally advised to buy BlueScope Steel Limited at current levels.

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