afg review by broker

Macquarie Private Wealth
Thursday 24 January 2008
AFG AU Neutral
Relative to top 100
Volatility index medium
Stock price as of 23 Jan 08 A$ 2.21
12-month target A$ 2.00
12-month TSR % +11.3
Valuation A$ 2.00-3.00
– NTA
GICS sector diversified financials
Market cap A$m 813
30-day avg turnover A$m 17.3
Number shares on issue m 367.7
Investment fundamentals
Year end 30 Jun 2007A 2008E 2009E 2010E
Sales revenue m 1,232.4 1,393.5 1,606.4 1,808.8
EBIT m 717.7 847.6 993.2 1,133.1
Reported profit m 211.7 262.8 347.7 443.5
Adjusted profit m 201.3 262.8 347.7 443.5
Gross cashflow m 389.5 458.0 563.8 675.7
CFPS ¢ 117.3 127.8 150.7 178.4
CFPS growth % 142.8 8.9 18.0 18.4
PGCFPS x 1.9 1.7 1.5 1.2
PGCFPS rel x 0.17 0.17 0.18 0.16
EPS adj ¢ 60.4 73.1 92.9 117.1
EPS adj growth % 25.0 21.1 27.1 26.0
PE adj x 3.7 3.0 2.4 1.9
PE rel x 0.25 0.22 0.21 0.18
Total DPS ¢ 44.0 44.0 48.5 61.5
Total div yield % 19.9 19.9 21.9 27.8
Franking % 71 75 75 75
ROA % 14.5 9.4 10.4 11.5
ROE % 14.5 11.8 14.7 17.3
EV/EBITDA x 7.2 6.3 5.4 4.8
Net debt/equity % 257.5 269.8 251.9 230.8
Price/book x 0.4 0.4 0.3 0.3
AFG AU vs top 100, & rec history
Source: ASX, Macquarie Research, January 2008 (all
figures in AUD unless noted)
Allco Finance Group
Now in speculative territory
Event
! We take another look at our Allco investment thesis and downgrade the
recommendation from Outperform to Neutral.
Impact
! Allco brand damage difficult to repair now. The 75%+ fall in the Allco
share price has now triggered an Allco margin call over the Allco Principals
Trust, a vehicle wholly owned by the key Allco executives. An investment
bank’s number one asset is its reputation and Allco has failed to adequately
protect this asset in the last six months. The Rubicon transaction highlighted
that Allco management didn’t adequately listen to the market’s concerns or
price the transaction appropriately and has accelerated the selling of the
stock. The issue of scrip in the transaction highlighted that Allco wasn’t
confident in its own share price or alternatively was trying to preserve capital.
! Refinancing of $250m in May is a risk. Allco has notified the market that it
has a $250m facility expiring in May and we are uncertain whether Allco will
be extended, refinanced or refused further credit. Global credit markets
remain in a dire predicament and Allco has an extensive order book of
aircraft, ships and railcars as highlighted by the November AGM. While this
appears to be strong deal flow, the possibility remains that Allco can’t secure
funding on delivery. Allco had around $300m of funding in existing facilities
left prior to any asset sales as at November 2007.
! Clients could be getting nervous. In these types of situations, the Allco
credit risk may be checked thoroughly by Allco’s trading partners and it is
possible that some firms may refuse to deal. We are yet to see any signs of
this at this point.
! Potential corporate appeal. Allco does have quality people and good
relationships with clients and may be attractive to another investment bank at
current prices. The leasing business is where the value is with Allco listed
funds now a thing of the past and wholesale funds taking too long.
Earnings revision
! No change. Our current earnings forecasts for Allco are now uncertain and
depend upon Allco retaining funding relationships.
Price catalyst
! 12-month price target: A$2.00 based on an NTA methodology.
! Catalyst: 1H08 result (15 February), $250m of refinancing in May and the
creation of new Allco wholesale funds.
Action and recommendation
! Downgrade to Neutral. Allco is now in speculative territory. Multiple-based
valuation techniques are largely irrelevant if the financial risk of the business
moves out of the comfort zone. The net tangible assets of the stock are over
$3.00, but the values of Allco’s equity-accounted investments ($500m+, $1
per share) are difficult to defend. The stock may rally on a potentially strong
1H08 result on 15 February and positive commentary, but the risk from here is
difficult to justify the reward. We have cut our price target to $2.00 which is
slightly below NTA.
Macquarie Private Wealth
Allco Finance Group
Interim results 1H/07A 2H/07A 1H/08E 2H/08E Profit & Loss 2007A 2008E 2009E 2010E
Revenue 533.3 699.1 627.1 766.5 Revenue $m 1232.4 1393.5 1606.4 1808.8
EBITDA $m 413.3 484.9 489.4 543.5 EBITDA $m 898.3 1032.9 1196.2 1348.7
Depreciation $m 91.5 89.1 102.1 83.2 Depreciation $m 180.6 185.3 203.0 215.6
Amortisation of goodwill $m 0.0 0.0 0.0 0.0 Amortisation of goodwill $m 0.0 0.0 0.0 0.0
EBIT $m 321.8 395.9 387.4 460.3 EBIT $m 717.7 847.6 993.2 1133.1
Net Interest expense $m 204.7 220.2 219.0 249.9 Net interest expense $m 424.8 468.9 492.1 494.0
Pre-Tax Profit $m 117.1 175.7 168.3 210.4 Pre-Tax Profit $m 292.8 378.7 501.1 639.0
Tax Expense $m 30.7 53.2 47.1 58.9 Tax Expense $m 83.9 106.0 140.3 178.9
Net Profit $m 86.4 122.5 121.2 151.5 Net Profit $m 208.9 272.7 360.8 460.1
Outside equity interests $m 3.6 3.9 6.6 3.3 Outside equity interests $m 7.5 9.8 13.0 16.6
Net Abn/Extra $m 10.4 0.0 0.0 0.0 Net Abnormals/Extra. $m 10.4 0.0 0.0 0.0
Reported Earnings $m 93.2 118.5 114.6 148.2 Reported Earnings $m 211.7 262.8 347.7 443.5
Adjusted Earnings $m 82.8 118.5 114.6 148.2 Adjusted Earnings $m 201.3 262.8 347.7 443.5
Gross Cashflow $m 178.0 211.5 223.2 234.7 Gross Cashflow $m 389.5 458.0 563.8 675.7
EPS (Adj/dil) c 26.2 34.2 32.9 40.2 EPS (adj/diluted) c 60.8 73.3 93.0 117.1
EPS growth % 9.0 33.7 25.7 17.5 EPS growth % 22.4 20.7 26.9 25.8
CFPS c 59.4 71.1 65.6 66.0 CFPS c 131.5 135.7 160.0 186.3
CFPS Growth % 186.4 210.3 10.5 -7.1 CFPS Growth % 196.8 3.2 17.9 16.4
EBITDA/Sales % 77.5 69.4 78.0 70.9 EBITDA/Sales % 72.9 74.1 74.5 74.6
EBIT/Sales % 60.3 56.6 61.8 60.1 EBIT/Sales % 58.2 60.8 61.8 62.6
Profit and Loss Ratios 2007A 2008E 2009E 2010E Cashflow Analysis 2007A 2008E 2009E 2010E
PE (adj) x 3.6 3.0 2.4 1.9
PGCFPS x 1.7 1.6 1.4 1.2 Pre-tax Profit $m 292.8 378.7 501.1 639.0
Effective tax rate % 28.7 28.0 28.0 28.0 Depreciation & Amortisation $m 180.6 185.3 203.0 215.6
DPS* ¢ 44.0 44.0 47.0 59.0 Tax Paid $m -39.2 -92.2 -114.0 -149.0
Yield* % 19.9 19.9 21.3 26.7 Gross cashflow (adj.) $m 434.2 471.9 590.1 705.6
Franking % 71 75 75 75 Changes in working capital $m 15.5 17.9 1.4 1.4
Payout ratio* % 72.4 60.0 50.5 50.4 Other $m -212.5 0.0 0.0 0.0
EV/EBIT x 8.9 8.3 7.2 6.3 Operating Cashflow $m 237.2 489.8 591.5 707.0
EV/EBITDA x 7.1 6.8 5.9 5.3 Net Acquisitions $m -201.3 -382.9 0.0 0.0
EV/Sales x 5.2 5.0 4.4 4.0 Capex $m -1154.6 -500.0 -366.0 -420.9
Balance sheet ratios Asset Sales $m 1534.1 0.0 0.0 0.0
ROE % 14.5 11.8 14.7 17.3 Other (loans made/repaid) $m -441.8 -100.0 -102.5 -105.1
ROA % 15.2 9.9 10.9 12.0 Investing cashflow $m -263.6 -982.9 -468.5 -526.0
ROFE % 15.8 10.4 11.5 12.8 Dividend (ordinary) $m -90.0 -76.6 -171.7 -202.6
Net Debt $m 5670 6240 6289 6310 Equity raised $m 464.6 0.0 0.0 0.0
Net Debt/Equity % 257.5 269.8 251.9 230.8 Other $m 0.0 0.0 0.0 0.0
Interest Cover x 1.7 1.8 2.0 2.3 Financing cashflow $m 374.7 -76.6 -171.7 -202.6
Price/NTA x 0.7 0.7 0.6 0.5
NTA per share $ 3.06 3.16 3.52 4.11 Net Change in cash/debt $m 348.3 -569.7 -48.7 -21.5
EFPOWA m 330.3 347.7 368.8 378.8
Historical performance 2004A 2005A 2006A 2007A Balance Sheet 2007A 2008E 2009E 2010E
Cash $m 444.8 444.8 444.8 444.8
Revenue $m 44.5 92.4 172.1 1232.4 Current Receivables $m 145.0 176.4 203.4 229.0
EBITDA $m 39.3 85.7 160.8 898.3 Inventories $m 0.0 0.0 0.0 0.0
Depreciation/Amortisation $m 0.0 0.0 0.0 180.6 Investments $m 4526.4 5009.3 5111.8 5216.9
EBIT $m 39.3 85.7 160.8 717.7 Property, plant & equipment $m 2090.3 2405.1 2568.0 2773.3
Net interest expense $m 2.4 9.4 27.9 424.8 Intangibles $m 1117.7 1117.7 1117.7 1117.7
Pre-Tax Profit $m 36.9 76.3 132.8 292.8 Other Assets $m 259.3 259.3 259.3 259.3
Tax Expense $m 11.1 22.8 35.9 83.9 Total Assets $m 8583.7 9412.7 9705.1 10041.1
Net Profit $m 25.9 53.4 96.9 208.9 Payables $m 136.5 185.8 214.2 241.2
Net Abn/Extra $m 0.0 0.0 0.0 10.4 Short Term Debt $m 0.0 0.0 0.0 0.0
Long Term Debt $m 6115.3 6685.0 6733.7 6755.2
EPS (adj/dil) c 20.2 31.9 49.6 60.8 Other Liabilities $m 129.5 228.7 260.8 311.1
EPS growth % 37.8 57.9 55.7 22.4 Total Liabilities $m 6381.4 7099.5 7208.7 7307.4
Ordinary DPS c 18.3 30.6 41.0 44.0 Shareholders Funds $m 2179.3 2280.4 2450.6 2671.2
EBITDA/Sales % 88.3 92.7 93.4 72.9 Minority Interests $m 22.9 32.8 45.8 62.4
EBIT/Sales % 88.3 92.7 93.4 58.2 Total Shareholders Equity $m 2202.3 2313.2 2496.4 2733.6
ROE % 9.4 13.5 18.4 14.5
ROFE % 13.5 14.4 16.0 15.8 Total Funds employed $m 8,583.7 9,412.7 9,705.1 10,041.1
Allco share price $2.21
Notes to financial summary
1. From FY06 onwards we have used AIFRS whereas in FY05 and before we use AGAAP.
2. The merger of Allco with Record has required consolidation of the equity accounted entities that have now become controlled entities of the merged entity. This has
increased assets at 1 July 2006 by around $4bn and liabilities by around $3.9bn on a pr.
3. Merged company reverts to a 40% to 60% payout ratio in FY08 and indicates it will match FY06 dps in FY07.
Source: Macquarie Research, January 2008
© Macquarie Group Notes: This research has been issued and distributed in Australia by Macquarie Equities Limited ABN 41 002 574 923 ("MEL"). MEL holds Australian Financial Services Licence No. 237504 and is a Participant of the
Australian Securities Exchange Group. MEL is not an authorised deposit-taking institution for the purposes of the Banking Act (Cth) 1959 and MEL's obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008
583 542. Macquarie Bank Limited does not guarantee or otherwise provide assurance in respect of the obligations of MEL. This research has been prepared for the use of the clients of Macquarie Group Limited and its related entities (the
"Macquarie Group") and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose the information in this research in any way. Nothing in this research shall
be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is general advice and does not take account of your objectives, financial situation or needs. Before
acting on this general advice you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. There
are risks involved in securities trading. The price of securities can and does fluctuate and an individual security may even become valueless. International investors are reminded of the additional risks inherent in international investments, such
as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the investment. This research is based on information obtained from sources believed to be reliable but we do not make
any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. No member of the Macquarie
Group accepts any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group or its associates (including MEL),
officers or employees may have interests in the financial products referred to in this report by acting in various roles including as investment banker, underwriter or dealer, holder of principal positions, broker, lender, director or adviser. Further,
they may act as market maker or buy or sell those securities as principal or agent and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group or its associates
(including MEL) may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The analyst(s) principally responsible for the preparation of this research receives compensation
based on overall revenues, including investment banking revenues of Macquarie Group Limited and its related entities. Disclosures with respect to issuers, if any, mentioned in this research are available at
www.macquarie.com.au/research/disclosures, or can be obtained from your Macquarie representative. © Macquarie Group