Friday, April 28, 2006

Stock takes: Time is on their side

As the generation of 1960s ragers such as Mick Jaggerheads into their actual 60s, time does indeed appear to be on the side of the aged-care industry.

No doubt with that in mind, First NZ Capital has initiated coverage of Ryman Healthcare, giving it an Outperform rating and a relatively conservative valuation of $7.79 plus a a 12-month price target of $8.41.

The demographic argument for Ryman is pretty obvious. The number of people 65 and over has doubled since 1970. By 2031 that age group will make up about one-quarter of the population.

But a good "big picture" story doesn't mean much if a company can't survive long enough to cash in.

Ryman is looking healthy in the short to medium term, concludes First NZ analyst Jason Familton.

On top of the rapidly increasing demand for its products, he says, Ryman is a well-established brand with high-calibre management. Its business model - which allows it to benefit from any appreciation in the value of its serviced and unserviced apartments - has also built up considerable reserves thanks to the property boom of the past few years.

In the short term, First NZ is picking Ryman to deliver a net profit of $36.6 million for the 2006 year - up 55 per cent on last year.

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Ryman is one of several stocks that has been steadily climbing the league tables for best performance on the NZSX-50 this year. Unsurprisingly, Waste Management has soared to the top of the heap thanks to the solid premium that goes with the TransPacific "merger" plan.

More impressive is Nuplex (featured here last week), which has grabbed second spot with an impressive year-to-date return of nearly 40 per cent.

Back in February, the insurers AMP, Promina and Tower were hogging the top three spots. Other strong performers of late include F&P Appliances, Mainfreight and Fletcher Building, all of which make the top 10 with returns in excess of 25 per cent.

Top fiveYr-to-date return

Waste Management 45 pc
Nuplex 39.7 pc
Promina 35.7 pc
AMP 33.6 pc
Ryman Healthcare 33.6 pc

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Last week's piece about Citigroup contained a couple of unfortunate errors.

It has appointed Andy Bowley as a senior member of its research team - covering leisure and retail - but he is not head of research. That title stays with Kar Yue Yeo in the Wellington office. Also, while Bowley does come from the consumer and beverage team at CSFB in London, he isn't a returning Kiwi. Sorry about that, Stock Takes hates making mistakes.

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Looks like GPG shares are starting to recover from the Government tax changes furore and the battle between Tony Gibbs and Peter Dunne (although one suspects that was just round one). All the publicity about the changes wasn't good for the share price, which shed 20c or nearly $200 million in market cap within days of the tax announcement. But the stock has regained nearly three-quarters of that.

It looks like those who see the change as a big negative have sold, and the strong run which GPG has had this year is back on track.

"It's back to business as usual," says Pete Sigley of Goldman Sachs JBWere. "I thought initially it was way overdone in that the underlying asset base hasn't changed."

He says what will happen is that there will be a change in the composition of the share register over time.

If something isn't done to mitigate the changes - either through the Government allowing an exemption or management finding a way around it - then it's likely the register will migrate from New Zealand to Australia and further afield.

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Pumpkin Patch shares are still looking good despite the fact that they aren't exactly cheap, Goldman Sachs JBWere says in its latest report on the kids' clothing retailer.

Pumpkin Patch shares have long since eclipsed the Goldman base valuation of $3.30. They closed at $4.05 yesterday, but the report says they remain a long-term buy because the company still looks likely to continue on its strong growth path for the foreseeable future.

In fact, if a range of more aggressive growth possibilities are considered, it could have a future value of up to $5.61. Those scenarios combined with a bit of subjective reasoning about the probability of various outcomes leads to a conclusion that Pumpkin Patch has an expected value of $4.12.

So while they aren't a cheap stock in the absolute sense, investors are still paying a fair price for the amount of "blue sky" on offer, writes analyst Terry Tolich.

The probability game is an interesting one.

The report calculates that to hit the $5.61 valuation, Pumpkin Patch would have to successfully roll out 400 US stores and 200 UK stores. That's a pretty big ask, but the fact that the scenario even features in calculations shows how much confidence there is about this great Kiwi brand.

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Judging by the market reaction to the Air New Zealand fare price hike (almost no share price movement), it looks as though the airline has done the right thing in the eyes of investors.

OK, it's not the most liquid stock, given the Government holds 82 per cent, but it is walking a fine line between covering costs and maintaining demand. You could bet on negative market reaction if investors had thought the airline had got it wrong.

But it got it about right, said Forsyth Barr research head Rob Mercer.

Basically, the airline needed about a 3 per cent increase in yield to cover another $100 million in fuel costs. A 10 per cent increase shakes down to about that.

"It's still a balancing act. It will be trial and error. But the most important thing is filling those planes at the higher prices," Mercer says.

Domestically, it has a strong market, so it is unlikely to have much of a negative impact there, he says.

US routes were also likely to withstand the hikes. More problematic are the more competitive Asian routes.

Wednesday's smaller fuel surcharges hike by Qantas has highlighted how much more Air NZ is struggling with fuel cost.

The Australian airline has more breathing space because the Aussie dollar has fallen less dramatically against the greenback than the kiwi has. Air New Zealand shares closed steady at $1.27 yesterday ... up 3c since last week's announcement.

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What's worse than a banana republic? New Zealand apparently. At least that's the way a headline in the Sydney Morning Herald put it on Monday: "Banana republic? No, worse: like NZ".

The article notes the upcoming 20th anniversary of former Prime Minister Paul Keating's infamous banana republic warning. More interestingly, it references a new report by Access Economics. The report makes the point that Keating's comments are as relevant as ever to the lucky country.

It's all about current account deficits and the risk they pose to general economic well being. Access Economics director Chris Richardson goes so far as to describe Australia as a "New Zealand waiting to happen".

If that sounds a little harsh, consider this remark from the report: "Every lesson of history is that markets ignore current account deficits for a long time and then exact a sudden and messy vengeance in a belated over-reaction."

The March surplus announced yesterday was a positive blip, but New Zealand still faces a shocker of a $7 billion-plus deficit on an annualised basis.

Of course, if you take a look at the world current account rankings, you'll notice that it's mostly rich countries such as the US and UK with big deficits while plenty of extremely poor countries run a surplus.

It seems countries such as Chad, Equatorial Guinea and Haiti seem to have shaken off their deficit concerns by becoming so poor that they can't afford to import anything.

New Zealanders seem keen on following that model. But until then, we'll continue to wear our deficit like a First World membership badge.


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