abn-amro recommendation 30 march

This recommendation by ABN-Amro on 30 March 2005 is not looking too good hot at the moment. They had a price taget for MBL of $54.68

"ABN-AMRO: We Upgrade MBL Price Target on Back of Compelling Long-Term Growth Prospects!
30/03/05

Instalment Buy

This note is designed for investors seeking enhanced capital returns using Instalments as a lower risk leveraged vehicle. It seeks to demonstrate the capital returns achievable through ABN AMRO Instalment Warrants if projected share price increases come to fruition. It focuses on cash flows, scenario analysis, and breakeven points using the following Instalment:

ASX Code MBLIZQ
Instalment Payment $22.00
Next Reset Date 2-Dec-05
Gearing Level 1.73
Forecast Cash Income $1.990
Forecast Franking $0.768
Gross Yield 14.894%

Introduction - Reasons we like MBL

ABN AMRO has upgraded its price target for MBL to $54.68 (Currently $47.60) on the back of compelling long-term growth prospects. Our upgrade is influenced by the following factors:
Macquarie continues to expand across a diverse range of businesses simultaneously, and we are encouraged by their strength in diversity.
Significant potential for expansion in the US following their strategic breakthrough on the successful Chicago Skyway deal and listing of MIC.
Successful acquisition of ING Asia in July 04, which has provided an Asian foothold. Macquarie Securities Asia is already operating profitably, and should provide a substantial input to group profitability in from FY06 as the higher margin M&A and ECM arms of the business grow.
MBL has raised over A$12.5bn in new equity in the last 9 months. These deals provide the bank with income from Brokerage, Advice and underwriting in their early stages followed by performance based management fees as the investment matures.
Strategy - How do we make 47.14% pre-tax?

The strategy presented below is geared towards the medium to longer term investor and presents analysis using a 50/50 geared (or “vanilla”) Instalment - in this case MBLIZQ.

The strategy presented will show that, if MBL shares increase 14.87% over the initial investment period (In line with our target share price), YOU will make 47.14% per annum.

In order to illustrate, let’s start with the basic details using today’s prices:

Stock Code MBL
Instalment Code MBLIZQ
Share Price $47.60
Instalment Price $26.71
Instalment Payment $22.00
Reset Date 2-Dec-05

Given the above information, let’s assume we buy MBLIZQ today @ $26.71 and then hold it to expiry. On the expiry date, 2-Dec-05, we may elect to pay the $22.00 Final Instalment and take possession of the MBL share.

So, effectively, in 9 months time we’ll be paying $48.71 ($26.71 + $22.00) for a stock worth $47.60 today. So, to breakeven, we need to find $1.11 along the way (which represents the funding costs associated with buying MBLIZQ).

The question is: how are we going to find that $1.11 to offset the cost of holding MBLIZQ?

Dividends and Funding Costs

With any Instalment trade the first thing we look at (after working out how much carrying the position is going to cost us) is dividends. ABN AMRO forecasts the following:

Dividend dates Cash Dividends Gross Dividends (includes franking)
24-May-05 $1.14 $1.580
25-Nov-05 $0.850 $1.178
Total Income $1.990 $2.758


Hence, the gross income I can expect to receive from MBLIZQ up to Dec 2005 comes to $2.758 (which implies a gross yield of 14.894% per annum). Remembering that my funding costs for the same time period are $1.11, this means that my net income will be ($1.648) for the period.

This is a positively geared share investment. If the stock price increases 14.87% to $54.68 over the term of the investment (2 Dec 2005) the return will be:

Standstill: = 32.68%
Annualised: = 32.68%/(0.693 years) = 47.14%

Scenario Analysis (including Tax)

As noted above, MBLIZQ is a positively geared share investment - if the stock goes nowhere we will still finish ahead by $1.648. As a result, this implies that the share must decrease by $1.648 before we hit our breakeven point of $45.952 for MBL.

However, remember that when we purchase an Instalment we are effectively borrowing a portion of the share price. As a result, we pay funding costs in the form of prepaid interest, which we can deduct from our assessable income since we derive income in the form of dividends and franking credits.

Of the $1.11 in funding costs we will pay over the life of MBLIZQ, $1.038 is deductible prepaid interest. The remaining $0.072 is attributable to capital protection and we can add this to cost base if we sell MBLIZQ.

The schedules below take into account the potential taxation impacts of the strategy thereby providing a holistic scenario analysis. We consider investors who pay the highest marginal tax rate of 48.5%, the company tax rate of 30%, and the DIY super fund tax rate of 15%.

This way, we can see what the results will be post-tax and gain an understanding of our true financial gains or losses given a range of asset prices (and yes - we show you the downside as well).

Schedule 1: DIY Super Fund - 15%

Stock Price Return (standstill) Return (pa)
Stock increases by 20% by maturity date $57.12 40.84% 58.93%
Stock increases by 15% by maturity date $54.74 31.93% 46.07%
Stock increases by 10% by maturity date $52.36 23.02% 33.22%
Stock increases by 5% by maturity date $50.02 14.25% 20.55%
Stock is unchanged by maturity date $47.60 5.20% 7.51%
Stock falls by 5% by maturity date $45.22 -3.71% -5.35%
Stock falls by 10% by maturity date $42.84 -12.62% -18.20%
Stock falls by 15% by maturity date $40.46 -21.53% -31.06%
Stock falls by 20% by maturity date $38.08 -30.44% -43.91%
Stock Breakeven Point $46.21 0% 0%


Schedule 2: Company Tax Rate - 30%

Stock Price Return (standstill) Return (pa)
Stock increases by 20% by maturity date $57.12 39.88% 57.53%
Stock increases by 15% by maturity date $54.74 30.97% 44.68%
Stock increases by 10% by maturity date $52.36 22.06% 31.82%
Stock increases by 5% by maturity date $50.02 13.28% 19.16%
Stock is unchanged by maturity date $47.60 4.24% 6.11%
Stock falls by 5% by maturity date $45.22 -4.67% -6.74%
Stock falls by 10% by maturity date $42.84 -13.58% -19.60%
Stock falls by 15% by maturity date $40.46 -22.49% -32.45%
Stock falls by 20% by maturity date $38.08 -31.41% -45.31%
Stock Breakeven Point $46.47 0% 0%


Schedule 3: Highest marginal tax rate - 48.5%

Stock Price Return (standstill) Return (pa)
Stock increases by 20% by maturity date $57.12 38.69% 55.81%
Stock increases by 15% by maturity date $54.74 29.78% 42.96%
Stock increases by 10% by maturity date $52.36 20.87% 30.10%
Stock increases by 5% by maturity date $50.02 12.09% 17.44%
Stock is unchanged by maturity date $47.60 3.05% 4.39%
Stock falls by 5% by maturity date $45.22 -5.86% -8.46%
Stock falls by 10% by maturity date $42.84 -14.78% -21.32%
Stock falls by 15% by maturity date $40.46 -23.69% -34.17%
Stock falls by 20% by maturity date $38.08 -32.60% -47.03%
Stock Breakeven Point $46.79 0% 0%


Profit & Loss Graph

Let’s take it a step further and see what the strategy looks like graphically with regard to the numbers we’ve derived above and compare it against the stock itself - MBL. The graph plots the two assets, MBLIZQ and MBL, against each other using the same scenario assumptions (income, stock prices etc).

It makes sense that the MBLIZQ profit/loss line (the pink line) is steeper than that of MBL (the blue line). This is the effect of leverage. We can also see the break evens, where the respective lines cross the horizontal ($) axis. This tells us that the breakeven points for investor at maturity are as follows:

MBLIZQ: $45.95
MBL shares: $44.84



That is to say, if we think MBL will finish lower than $44.84 we shouldn’t buy the shares or the Instalment.

The graph also tells us at what stock price should we consider buying MBLIZQ instead of the MBL shares. It is, of course, the stock price where the two lines cross and they cross when MBL is equal to $47.372 (which is BELOW the current price of $47.60).

What does this mean? If we think MBL will finish higher than $47.372 some time in the future we should buy MBLIZQ INSTEAD OF MBL.

Summary

The strong dividend yield associated with MBL at these levels represents an opportunity for investors to enhance their income stream over the medium to longer term. The strong positive gearing effects associated with MBLIZQ imply there does not need to be a strong capital appreciation in the share price to produce an excellent result for the investor.

Gearing should appear particularly attractive to the investor in an instance such as this where MBL shows strong growth and capital appreciation prospects over the next 6-12mths.

ABN AMRO re-iterates its BUY rating on MBL and price target of $54.68

For more information on this strategy please call your financial adviser or ABN AMRO on 1800 450 005. "