ubs

UBS's decision to downgrade from buy to hold and massively downgrade its target price for AFG is unprecedented because it is not correlated with any expected reductions in earnings (or even EPS) or dividends.

In other words, the UBS analyst has simply got caught up in the negative sentiment stemming from Centro.

In this regard the analyst is not really doing what an equities analyst is supposed to do (which is to examine and assess the fundamentals of a company). A good analyst will cut through non-specific market sentiment and discover a company's true value based on expected earnings.

On any conceivable valuation metric, AFG is a strong buy. And as the share price decline, AFG becomes an even stronger buy. Buying at current prices is actually less risky than buying once the sp has recovered. But the UBS analyst sees things in reverse.

Continuous disclosure obligations necessitate that AFG management must inform the market if there is going to be any material decline in earnings or dividends, or if the company foresees any debt financing problems. The fact that AFG management have not released any such statement means that management are not expecting any cut in earnings or dividends or problems financing debt. Furthermore, at the recent AGM, management gave every indication that the company would experience healthy EPS growth this FY.

The credit crisis is only due to the fact that no-one is sure where the bad debt lies. But banks can hide bad-debt for only so long. Over the next 3-6 months, we will know who holds the sub-prime debt, and with this knowledge, inter-bank credit markets will return to normal. While the credit-crunch is ugly (and may get uglier still), it is not going to be a long term problem.

Having said all of this, it is pretty clear (as I've been saying for a couple of weeks), that AFG's share price will not reflect fair value (=$12+) until (1), the US credit crunch has eased and (2), AFG releases its dec half results with a positive outlook statement.