KALIN®

Kalkine Daily - 25/02/2014

Feb 25, 2014

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KALKINE DAILY

Date - 25/02/2014

S&P 500 was up 0.62 % to 1847.61 overnight, climbing to an all-time high as optimism over merger activity helped Wall Street erase this year's early weakness. Gains were broad, with nine of the 10 S&P 500 sectors up on the day and a number of bellwethers, including Caterpillar Inc and Merck & Co, hitting 52-week highs. Despite the day's gains, many investors were concerned that markets were becoming over-valued as recent economic data failed to meet expectations, though the weak data has largely been blamed on harsh winter weather rather than worsening fundamentals. Many traders are looking ahead to Thursday, when Federal Reserve Chair Janet Yellen will speak to the Senate Banking Committee in her semi-annual testimony about monetary policy.

S&P 500 Daily Chart (Source – Thomson Reuters)

S&P ASX 200 was up 1.5 points and closed at 5440.2 points. Sim Lian Group listed on the Singapore Exchange acquired 100 pct interest in a portfolio of investment grade neighbourhood shopping centres in Australia, the transaction value of the Portfolio is A$133 mln. The portfolio will be acquired through an off-market transaction from Fabcot Pty Limited, a subsidiary of Woolworths Limited. Super Retail Group (SUL) announced 5.01 pct of interest in the share capital of the company by AMP. The global dividend pool has exceeded $US 1 trillion ($1.11 trillion) for the first time as companies respond to shareholders’ demands for income, underscoring the seemingly insatiable thirst for dividends triggered by ultra-stimulatory monetary policy.

S&P ASX 200 Daily Chart (Source – Thomson Reuters)

The top gainers on ASX 200 were:-

Code	Company	Price	Change	%Change
TSE	TRANSFIELD SERVICES LIMITED	$0.99	$0.20	24.53%
BPT	BEACH ENERGY LIMITED	$1.66	$0.14	8.85%
BSL	BLUESCOPE STEEL LIMITED	$6.30	$0.43	7.33%
LYC	LYNAS CORPORATION LIMITED	$0.31	$0.02	6.90%
EVN	EVOLUTION MINING LIMITED	$0.95	$0.06	6.74%

Stock of the Day – Treasury Wine Estates (TWE)

Treasury Wine Estates is an international wine business with its headquarters and majority of its production in Australia. It became a stand alone listed company following the Foster’s demerger in 2011. Its major markets are Australia and New Zealand, the United Kingdom, the United States, Canada, the Nordics and Asia. The group’s portfolio includes prestigious brands such as Penfolds, Beringer, Lindeman’s, Wolf Blass and Rosemount.

For the 1H14 Treasury reported EBITS of $45.8m. There was an $80.5m tax benefit which we treat as a non-recurring item. The group has reiterated the FY14 guidance it provided in January for Earnings before interest, tax, SGARA and material items (EBITS) to be in the range of $190 - $210m (previously $230 -$250m).

Management seems to be relying on two factors to underpin 2H earnings and achieve its earnings guidance: 1 – Increased availability of Luxury and Masstige wine in the US and execution of successful 2014 Penfolds release. We are very cautious on the 2014 Penfolds release given it will be heavily reliant on the problematic 2011 vintage which was of poor quality. This has two implications firstly the group is able to produce less volume of the wine and secondly consumer demand is likely to be weak given the negative sentiment towards the vintage.

The company has appointed Michael Clarke as the new MD and CEO. Mr. Clarke appears to come with creditable experience across FMCG and beverage business. Most recently was the CEO of the UK publicly listed Premier Foods where he led a significant turnaround of the company.

TWE Daily Chart (Source - Thomson Reuters)

Operating cash flow turned positive in 1H14 to $4.8m from the $14.2m deficit it recorded in the previous corresponding period. The result was aided by better working capital, resulting from lower debtors in ANZ and Americas due to weaker trading, planned reduction in US shipments as well as the higher receivables recorded in the previous corresponding period due to delay in electronic invoicing.

With capital expenditure well above operating cash flow, free cash flow was negative leading to an to an increase in net debt and tightening credit metrics. There was weak ANZ performance due to soft commercial volume. As per the warnings in January the poor performance was driven by a change in the depth of promotional pricing in the commercial, Masstige sparkling and Masstige white wine segments. Results from Asia were significantly below expectations with the division reporting volume decline of 17.6%.

We believe there remains downside risk to FY14 EBITS guidance given the likelihood that challenging conditions persist and uncertainty regarding the strategic direction of the company following the departure of the CEO. We will review this stock at a future date to take stock of any changes.