Stock specifics MBL & BNB – Time to Buy back in … Our analysis...

Stock specifics

MBL & BNB – Time to Buy back in …

Our analysis shows that the downside risks to valuations for MBL and BNB are limited. Given strong business models, we believe that in the near term both stocks will continue to be bolstered by upgrades. We move both stocks from Add to Buy.
Sensitivity testing for key risks shows limited downside...

The key risks to our valuations and target prices for Macquarie Bank (MBL) and Babcock & Brown (BNB) are a downturn in equity markets, a rise in interest rates and an increase in competition. Our sensitivity testing of all three events shows a surprising resilience by both banks to negative shocks over the next 12-18 months, with the maximum valuation impact resulting from a rise in interest rates, decreasing valuations for MBL by 12% and for BNB by 22%.
...and both banks now well positioned for the medium term



In our view, there are important counter-arguments to concerns about the risks mentioned above. Firstly, both banks have raised enough equity over the past 12 months to continue with rapid asset growth even in a market downturn. Secondly, international diversification provides the opportunity to search for assets and capital on a global scale. Thirdly, the increasing brand recognition of both firms provides them with a distinct competitive advantage compared with any newcomers.
Biggest issue is keeping the fee pipeline full

Given the level of spare capacity at both MBL and BNB, we believe the main impediment to their growth in the near to medium term will be finding suitable assets in which to invest while maintaining a disciplined approach to acquisitions. Longer term, MBL and BNB will need to raise further capital to support the continued rollout of their specialised funds and, as such, are vulnerable to future market conditions.
Upgrades to earnings forecasts, price targets and recommendations

In the near term, we believe MBL and BNB's share prices will continue to be bolstered by earnings upgrades. Accordingly, we lift our forecasts for the next couple of years by about 5% for both stocks. Further out, reduced visibility leads us to a more cautious approach. Nevertheless, with the rise in our price target for MBL from A$80.85 to A$84.72 and the retention of our A$20.00 price target for BNB, there is now more than 20% upside potential to our targets for both stocks. Hence, we raise our recommendations on both from Add to Buy.

MBLIWP
Description: WESTPAC 5000 MBL ROLLING INSTALMENT WARR 06-DEC-05
Type: Call warrant
Issuer: WESTPAC BANKING CORP
Commenced Trading: 20 Jun 2005
Expiry: 06 Dec 2005
Exercise level: 50.000 (expressed in $ or index points)
Warrants per underlying instrument: 1.0000
Exercise style: European
Warrants issued: 10,000,000

Cheers!!!!