Australian Stocks Are `Cheap' on Earnings, Says UBS

By Shani Raja

Aug. 22 (Bloomberg) -- Australian companies have posted ``respectable'' earnings so far this reporting season and are now good value, according to UBS AG strategists.

After more than half the companies in the nation's benchmark S&P/ASX 200 Index reported earnings to June 30, UBS expects earnings per share growth of just under 3 percent this financial year, rising to 24 percent in fiscal 2009. The nation's equities are trading at 11 times 2009 estimated earnings, ``cheap'' given the prospect of interest rate cuts and a weaker Australian dollar, the Sydney-based strategists said in a note released today.

``The likelihood of lower official cash rates and the recent sharp pullback in the Australian dollar has improved the outlook,'' said the strategists, led by David Cassidy. ``The valuation picture appears attractive.''

Australian companies this month have reported earnings that struggled to match recent growth, hampered by 12-year high interest rates, record oil prices, and the Australian dollar's climb to a 25-year high. The Australian dollar has declined 11 percent from its July peak after the central bank signaled it may cut borrowing costs as slowing economic growth cools inflation.

Downer EDI Ltd., an engineering company, yesterday said it's aiming for ``double-digit'' growth after reporting full-year profit surged 63 percent on increased orders from mining and resource companies. David Jones Ltd., Australia's second-largest department store chain, last week said net income rose as much as 25 percent, and that it is looking for annual profit growth of 5 percent and 10 percent over the next few years.

Downer, David Jones

Downer shares have climbed 8.1 percent since it posted its results, taking the company's market value to A$2.35 billion. David Jones shares have surged 15 percent since reporting on Aug. 14, paring this year's loss to 24 percent.

UBS analysts have upgraded the earnings-per-share estimates of OneSteel Ltd., WorleyParsons Ltd. and Coca-Cola Amatil Ltd., among others, the strategists said in the note.

Shares in OneSteel, Australia's second-largest steelmaker, have risen 13 percent since Tuesday reporting a 57 percent gain in second-half profit, driven by increased sales of iron ore and higher steel prices.

WorleyParsons, the nation's biggest engineering company, has advanced 4 percent since it posted a 46 percent increase in second-half profit last week. Coca-Cola Amatil, a soft-drinks maker that gets a quarter of its sales from overseas, has gained 5 percent since reporting first-half earnings that beat analysts' estimates on Aug. 20.

The Australian dollar has dropped to 87.72 U.S. cents at 1:50 p.m. Sydney time from its peak of 98.27 U.S. cents on July 15, boosting the value of exporters' overseas sales.

UBS's biggest downgrades include James Hardie Industries NV and Telstra Corp.

James Hardie, Telstra

James Hardie, the biggest seller of home siding in the U.S., said Aug. 20 that first-quarter profit tumbled 96 percent amid the worst U.S. housing recession since the Great Depression. Telstra, Australia's largest phone company, forecast earnings growth on Aug. 13 that missed analyst estimates.

Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors, which manages about $108 billion, said more companies are coming in below expectations than above this reporting season. Like the UBS strategists, he expects better times for investors as conditions improve in the coming year.

Members of the Australian Reserve Bank's board said in minutes of their Aug. 5 meeting, released in Sydney this week, that they may soon cut interest rates for the first time in seven years to avoid a more lasting economic slowdown.

``The oil price is well off its highs and, along with weakening economic activity, this should help clear the way for lower interest rates,'' Oliver said. ``Some of the preconditions for a sustained recovery in shares are falling into place.''

To contact the reporter on this story: Shani Raja in Sydney at sraja4@bloomberg.net.