dec half results will be solid: strong buy

Following a 2.2% decline in the big US investment banks overnight, AFG is being sold off today by traders (down 3.5% at the moment). Following a pattern that has taken hold over the last couple of months, AFG is being sold off heavily, even though other Aust investment banks are being sold off only modestly (some selling is possibly also related to geo-political concerns). The market, in a bizarre fashion, is treating AFG as if it was a US investment bank like Citi, incurring massive sub-prime write downs and losses, and needing to raise emergency cash.

This alignment of AFG with the worst of the US investment banks is irrational for two reasons. First, AFG, as we should all know by now, has no direct sub-prime exposure, and so will incur no sub-prime related write downs. Furthermore, AFG has sufficient cash and credit already in place to fund all its intended business activities over CY08. AFG thus has no need to go to the US debt markets (for financing or refinancing) in the short or medium term and will not be materially impacted by the credit crisis over CY08.

Second, we are now only 2 days away from Dec 30, so AFG's CFO would now have a pretty clear idea of the Dec half profit figures. AFG has a duty to inform the market of any material decline in earnings (relative to the pcp). The fact that AFG has not put out any profit downgrade means that there will be no profit downgrade. I.e., the worst case scenario we are now looking at is that AFG's results might be flat relative to the pcp. However, there is also every possibility that AFG will in fact post solid EPS gains this FY. Management have stated publicly that they are aiming for EPS gains of 20% this FY. IMO, if management get anywhere near 20% EPS gains this year, it will be a truly massive result (I'm personally expecting more modest gains in the region of 8-10%).

AFG is now down over 50% from its highs earlier in the year, despite AFG being largely untouched by the credit crisis for the foreseeable future, despite most of its business segments performing well, and despite management hinting at solid EPS gains this year.

Sooner or later, the market will divorce AFG from the outlook of the worst performing (heavy-loss-incurring) US investment banks. When this happens, AFG's share price will begin a strong upwards trajectory that should see the stock trading north of $12 by the end of 08.

I've taken a large position in AFG at roughly current levels. I'm expecting the stock to remain volatile until the half year results are released in mid Feb. Once the half year results are released, I'm expecting AFG to begin a strong recovery towards $12. I'm also expecting a the US credit crisis to begin to ease in March 08.

For those with a bit of patience and tolerance for risk, there are huge gains to made on AFG over the next 6 months or so.