The three major US equities benchmarks were marginally lower by the end of their Wednesday sessions. Investors were erring on the side of caution in the wake of less than exciting economic indicators emanating from China and Europe over the preceding 24-hour period. The January existing home sales stats were marginally below market expectations and yet again hinted that high foreclosures remain an unwanted feature of the US housing scene.

The S&P 500 went 0.3% lower in Wednesday trading, hurt by declines in eight of its 10 industrial sectors. The Financials (1.0%), Technology (-0.6%) and Consumer Services (-0.5%) sectors booked the largest interday falls. The highlights on a down day were gains in both Energy (+0.2%, helped by continued ructions in the Middle East) and Utilities (+0.2%). The rally in Energy-related stocks was helped along by buying in Nabors Industries Ltd and Range Resources Corp after both announced better than expected earnings. Key stocks taking the Dow into the red were Wal-Mart Stores Inc and Chevron Corp. Listed homebuilders like KB Home and Toll Brothers Inc retreated in the wake of January existing home sales stats. After markets closed Hewlett-Packard Co announced a mixed fiscal first quarter result (while EPS bettered expectations, the sales number was shy of analysts' consensus forecasts).

US TREASURIES

US Treasuries rallied by 3-7 basis points across the 3-years and longer portion of the curve. The US$35B 5-year note auction held on the day went at 0.9%, near market expectations, with the bid-to-cover ratio a respectable 2.89.

COMMODITIES

Base metal prices were mixed in Wednesday LME trading despite some so-so Chinese PMI data released in Wednesday Asian markets - the HSBC Holdings Plc/Markit Economics-compiled Chinese manufacturing index was 49.7 in February, up on January's final reading of 48.8, but under the crucial 50.0 mark that delineates between expansion and contraction. Copper prices edged lower.

However, gold prices continued to rise in Wednesday New York trading, helped by press reports that the Fed was closer to unveiling another round of quantitative easing. Goldman Sachs Group Inc has maintained its forecast for gold to hit US$1,940 an ounce over the coming 12 months (remembering it was above US$1,900 in early September).

Dated Brent oil prices climbed in overnight markets on reports that officials from the International Atomic Energy Agency had been denied access to an Iranian military base. Adding fuel to existing cinders, an Iranian general said his nation would consider pre-emptive action if threatened.

EUROPEAN BOURSES

European stock markets were again lower in Wednesday trading, led by 1%+ interday declines in the IBEX 35 and AEX indexes. Investor sentiment, already a touch nervous in the wake of so-so Chinese PMI data in earlier Asian trading, was further rattled by some disappointing Markit Economics-compiled February euro-zone services and manufacturing index numbers. The headline number for the latter index fell to 49.7 this month, from 50.4 in January, and south of the consensus forecast of 50.5. On an up-note though, PSA Peugeot Citroen rallied strongly after news broke that it was looking into a possible alliance with General Motors Co. Minutes for the February Bank of England board meeting indicated that seven of the nine members of the BOE's Monetary Policy Committee, including Governor Mervyn King, voted to increase the bank's bond-purchase target by 50B pounds to 325B pounds. The Stoxx Europe 600 slipped by 0.8% in Wednesday trading, with the worst performing sectors being Financials (-1.7%), Technology (-1.0%), Telecoms (-0.7%) and Consumer Services (-0.7%).

European Sovereign Debt Crisis Latest: German Chancellor Merkel hinted that she will maintain pressure on Greece to meet debt-cutting pledges required for its second financial rescue. She opined that fiscal discipline was needed if the euro-zone was to be held together. Cynically she also had to espouse such deeply held views ahead of a German parliamentary vote on that country's contribution to the latest batch of Greek bailout monies. She also stated that Germany was too small "to stand alone" in Europe – one thinks she is a wee bit too humble on that one! She longed for a Europe the component parts of which pulled in the same direction – best of luck on that one! Fitch Ratings cut Greece's credit rating by two levels to 'C' from 'CCC' after the country's planned bond exchange was progressed.

CURRENCIES

The yen retreated to a seven-month low against the US$ in Wednesday New York trading, as US Treasuries yields remained attractive relative to equivalent Japanese offerings and the January US existing home sales were broadly to plan. The Norwegian krone was in demand as better than expected December quarter jobs data dented hopes that the Norges Bank would soon cut its benchmark interest rate. The A$/US$ rate was on the back foot for the greater part of overnight markets, at one stage threatening to go under US$1.06 in early Wednesday New York trading. At this point some buying was apparent, with the Aussie working its way back towards in later business. News that Australian Foreign Minister Kevin Rudd had resigned opening the way for a leadership spill, failed to have any material impact on forex markets.

ECONOMIC RELEASES

January Existing Home Sales. US existing home sales increased by 4.3% to a slightly lower than expected 4.57M annualised in January (economists were forecasting a circa 4.66M figure). The previously released December number for this National Association of Realtors-compiled stat was downgraded to 4.38M (initially 4.61M annualised). Sales of existing single-family homes rose by 3.8% in January, to 4.05M annualised. The smaller multi-family component (which includes condos and townhouses) advanced by 8.3% to 0.52M annualised. All four on the broad US regions contributed to the January increase: Northeast +3.4%; West +8.8%; Midwest +1.0%; and South +3.5%. Distressed sales, which comprise foreclosures and short sales where the lender agrees to a price under the balance of the mortgage, accounted for a huge 35% of total established home sales in January, a high last seen in April, up on the 32% level seen in December. Some 31% of the January sales total were cash transactions, while investors accounted for 23% of all existing home sales in the first month of 2012. The stock of established homes on the market slipped back to 2.31M, its lowest reading since back in March 2005. This delivered a stock-to-sales ratio of just 6.4 months in January. The median price for existing home sales in January was a paltry US$154,700 down 2% on that for the same month last year.

AUSTRALIAN EQUITY MARKET WRAP

Local shares recovered early loses to end a touch above flat, just clinching four straight days of gains as banks and materials turned higher. The All Ordinaries rose 3.9 points on Wednesday.

The S&P/ASX 200 firmed 1.90 points - finishing the day higher. Positive movers for the day were OST (+$0.13) and SEK (+$0.61). Big losers were TEN (-$0.08) and SIP (-$0.03).

In company news, Woodside Petroleum (WPL +$0.91) hopes of expanding its $14.9bn Pluto gas-export project in Western Australia have been boosted by a large offshore natural gas discovery; CSL (CSL +$0.77) reported that first-half net profit fell 3.4%; Suncorp (SUN -$0.18) reported a sharp rise in first-half profit; Leighton Holdings (LEI -$0.04) may sell its waste management unit after receiving a number of approaches from potential buyers; Asciano (AIO +$0.15) posted a 21% jump in half-year profit; Transfield Services (TSE -$0.02) reported that first-half net profit rose 13% on; Coca-Cola Amatil (CCL -$0.05) said its full year net profit rose 19%; Seven West Media (SWM +$0.26) reported better-than-expected first-half profit; Seek (SEK +$0.61) said first-half net profit rose 27% on year; and Ten Network (TEN -$0.08) expects first-half EBITDA to fall about 40% on year.

AUSTRALIAN DUAL LISTED STOCKS

In New York, News Corp fell by US$0.17 to US$20.04, equivalent to A$18.84, A$0.25 below its last close on the ASX.

ResMed rose by US$0.02 to US$28.96, equivalent to A$2.72, A$0.27 above its last close on the ASX.

In London, Rio Tinto fell 37.0 pence to £36.63, A$0.54 lower in Australian currency terms.

BHP-Billiton fell 2.0 pence to £19.49, A$0.03 lower in Australian currency terms.

Henderson Group Plc was unchanged at £1.26

RESEARCH

Downer EDI Limited (DOW) - Hold

Risk Profile Improving

Downer released its interim result in line with expectation, delivering revenue growth of 14% to $3.9bn and NPAT growth of 195% to $85m, in line with expectation. No interim dividend was declared (as expected). Management maintained FY12 guidance for underlying EBIT of $340m and NPAT of $180m.

What surprised?

Strength in Mining – Mining was expected to deliver a strong result, but revenue came in higher than forecast as the major Christmas Creek, Goonyella and Norwich Park projects ramped-up. Even with slight margin contraction through the ramp-up phase, Mining still delivered EBIT growth of ~80%.

Key Issues

Waratah Rail project – Will continue to be the focus of the market until completion in FY14, but there is no doubt the risk profile is improving. On the negative side, a further $20m was released in contingency ($70m remaining – which doesn't look enough). On the positive side the Reliance Rail funding risk has been resolved and the contractually important 7th train set has been accepted for PC by RailCorp. It now comes down to an exercise in logistics of delivering future sets on time and budget. We remain sceptical but DOW may be given the benefit of the doubt in the short term.Australia (previously Engineering & Works divisions) – Relatively disappointing result plagued by the underperforming Curragh CHPP project. Curragh will be complete in the next 2 months so we expect improved performance at the margin in 2H12 and into FY13.

Our View

Relatively clean result for the first time in 2 years. The risk profile is definitely improving and balance sheet pressure will begin to ease by CY12 end. Management is building credibility through a turnaround and increased transparency. Underlying markets look solid. Still worried about the logistics of Waratah, but short performance should be fine. Although we acknowledge the potential for further short term share price upside we retain our Hold recommendation on a 12 month view.

Full Report

IINET Limited (IIN) - Buy

Delivery on Synergies paramount

IIN's 1H12 result beat our expectations on both EBITDA and NPAT metrics. EBITDA grew by 36% to $56.4m while NPAT grew by 18% to $14.4m. We forecast a step-change in earnings leading into FY13 largely due to acquisition contributions and synergies (FY13 EBITDA $160.1m vs FY11 EBITDA 98.3m). In a tough competitive environment, delivery on acquisition synergies and business efficiencies is paramount in our view. We recommend IIN as a BUY with a price target of $3.37 (from $3.39).
1H12 result key points Reported EBITDA up 36% to $56.4m (PSL $49.9m). Underlying EBITDA of $58.7m excluding $2.3m legal costsReported NPAT up 18% to $14.4m (PSL $13.9m). Underlying NPAT of $16.0mInterim dividend of 6.0 cps compared to 1H11 5.0 cpsFree cash flow of $3.2m down from $35.9m, impacted by TransACT working capital, legal costs, higher interest and taxNet debt of $173.6m following TransACT acquisition and debt funded share buyback. Net debt has yet to include Internode acquisition debt of c$73m
Step-change in earnings premised on synergies. Our FY12 and FY13 forecasts are c17% lower after considering higher depreciation, amortisation and net interest expense assumptions. Nonetheless, we continue to forecast a step-change in earnings growth in FY12 and FY13 largely premised on earnings margin improvement driven by acquisition synergies and business efficiencies (e.g. turning off hyperbaric billing system in FY13).
Business and mobiles focus in tough environment. Subscriber growth metrics remain constrained with continuing off-net and AAPT subscriber losses. However, the continuing process of migrating off-net subscriber's on-net is likely to drive incremental earnings growth. Away from this, management will focus on expanding capabilities in business services and increasing products per customer (for example cross-selling mobile and TV services).

Full Report

Logicamms Limited (LCM) - Buy

Rebuilding momentum

Engineering services company LogiCamms delivered a much improved result after a poor 6 month period to June 2011. The result was broadly in line with the 2011 interim result, but importantly contained none of the severe problems the company faced in the 6 months to June. Revenue of $56.1m was in line with our forecast and broadly in line with last year's December period, but up 32% from 2HFY11. NPAT of $4.7m was 20% ahead of our expectation; however the difference can be attributed to a tax credit in the period. No formal guidance for FY12 was given, other than another "increase in revenue and earnings in the second half of the financial year".

What surprised

Share buy-back – We were surprised to see a share buy-back announced (albeit small at $2m). Buy-backs come with the obvious positives of EPS accretion and a clear sign of management confidence and its view on value; however LCM is in a growth phase and raised capital less than 12 months ago at ~$1.20. We are still confident it does not represent lack of growth avenues as LCM is in a strong net cash position and non-capital intensive.

Key Issues

Contract delivery at the margin – EBITDA margin in the half was 7.6%, much improved on 2HFY11 but still below the pcp of 8.2%. Actual operating margins were higher because the interim result contained some restructuring costs at Senior Executive level (estimated at $1m), so the underlying run-rate is more like 9%. We look for LCM to expand margins in 2HFY12 and into FY13 towards the 10% target.
Converting the pipeline – LCM has built good new contract momentum with top tier clients including Chevron, RIO, ConocoPhillips, Woodside and BHP. The headcount in the business has increased 28% to ~440 people and is expected to approach 500 by December 2012 – usually a positive sign for people based services businesses.
Forecast changes – We have made minor changes to our forecasts to adjust for tax treatment and slightly altered EBITDA margin assumptions. Our EPS forecasts assume full tax paid.

Our View

We retain our Buy recommendation and 12 month share price target of $1.37. LCM still has a clear growth trajectory, an impressive management team and appears to have resolved a large portion of the risk management issues it faced last year. The business appears to be rebuilding momentum and we see upside potential to our relatively conservative forecasts.

Full Report

Macmahon Holdings Limited (MAH) - Buy

Time to revisit

MAH has reported interim 2012 earnings of $23.2m representing a solid turnaround in profitability over the 12 months to December 2011 following the disappointing write-downs of 1H11. Earnings guidance has been upgraded by over 22% since the November AGM and the company is fully funded to execute substantial capex in 2H12. Our price target is 17.0% higher at $1.03/sh and we retain the BUY recommendation.
Profitability building. MAH reported a 37.9% increase in revenue to $829.0m. EBIT before significant items improved 32.8% to $41.7m, interim EPS was 3.3cps and dividends were reinstated with a fully franked interim dividend of 1.5cps declared. A key feature of the result was the improved Construction division performance which assisted the group run-rate significantly.
Fully funded for growing capex. MAH reported strong operating cashflow which was assisted by better profitability but also approximately $30m in advance payments on construction contracts. Net cash at December 31 was $78.8m. Capex in the 2H is expected to total $150.0m to support equipment purchases for new projects. MAH recently signed A$475m in new debt facilities.
Record order book underpins earnings guidance. Work-in-hand currently sits at $3.4bn with good cover over 2H12 and FY13 revenue. Management report the current tender pipeline at in excess of $3.0bn. As a result FY12 earnings guidance has been reiterated at $55-$60m on revenue of approximately $1.8bn (we estimate $56.8m and approximately $1.8bn respectively).
Attractive pricing. Despite recent share price strength we believe MAH continues to look attractive on key metrics – MAH is potentially trading at sub-10x 2012F P/E and sub-6.0x 2012F EBIT. We estimate 2012 EPS growth of 46.5% and 2013 EPS growth of 18.8% giving rise to PEG ratios of 0.2 and 0.5 respectively. Our price target represents an average of 7.5x 2012 & 2013 EBIT

Full Report

SMS Management & Technology Limited (SMX) - Buy

Well positioned to grow through cycle

SMS reported 1H12 EBITDA of $22m, up 4% on pcp and in-line with our forecast
Revenue increased 16% to $170m (PSL $163m) which comprised organic growth of c13% and acquisitive growth of c3% ($4m from acquisitions made in FY11)
Sales were solid despite the uncertainty with $201m (18% ahead of revenue) of new contracts added to pipeline in 1H12 and the revenue contribution of the Asian operations increasing to 12%
The company indicated that its prime margin remained strong with only a slight degradation as a result of additional cost in servicing new Asian markets
However, as flagged at the AGM in October, there was a decline in 1H12 EBITDA margin to 12.9% (from 14.4% in 1H11) due to lower utilisation (87% v 88% in 1H11) caused by project delays and deferrals (largely NSW with 2Q12 impact in Victoria)
The company has curtailed recruitment activities and expects demand to vary across industries with continued growth in ICT, Resources and Utilities and softer demand in Financial Services
It also expects a gradual improvement in the underperforming NSW region
In addition, SMS has commenced a program to streamline operations following the establishment of its national practice structure with targeted cost reductions of $2m pa (from FY13)
The result was in-line with our forecasts (reduced by c10% following AGM guidance) and consequently our forecasts are largely unchanged
However, our 12-month price target has increased 10% to $5.94 per share (from $5.42) as a result of rolling forward our DCF and the increase in sector average pricing
SMS offers high-quality exposure to the IT services sector with a track record of growth through the cycle
The company has a high level of repeat business from existing clients as well as significant organic growth opportunities including an increasing contribution from its Asian operations
It is well positioned to benefit from continuing strength in the ICT and Resources demand and any improvement from the Government and Financial Services sectors
We are forecasting a total 12-month return of 18% and maintain our Buy recommendation

Full Report

Ausenco Limited (AAX) - Buy

FY2011 Final Result

For the full year ended 31 December 2012, AAX reported underlying NPAT of $22.4m. This compared to $0.8m last year.
Underlying EBITDA was $46.9m, compared to $10.6m in 2010.This equated to a full year EBITDA margin of 8.6%, with 2H margin of 10.4%.
The company declared a final dividend of 9.8 cents per share (35% franked), taking the full year dividend to 12.9 cents.
Net gearing of 0.6%.
Company Outlook: AAX expects 2H 2011 results will provide a platform for strong operational EBITDA growth into 2012, with NPAT growth modestly impacted by a higher income tax expense.

Full report

CSG Limited (CSV) - Hold

Result in-line with Jan downgrade

1H12 revenue up 7% to $199m (PSL $187m)
Underlying 1H12 EBITDA down 15% to $29m (PSL $29m)
1H12 dividend flat at 2.5cps (PSL 2.0cps)
Technology Solutions: strong performance with revenue up 20%, and CSG's adjusted EBITDA up 15%P
rint Services NZ: achieved a solid, but flat result due to a challenging operating environment
Print Services Australia: despite an increase in equipment sales, experienced a decline in overall revenue and EBITDA

Full report

Golden Rim Resources (GMR) - Speculative Buy

Burkina Faso site visit

We provide an update following our visit to Golden Rim Resources (GMR) Balogo and Yako projects in Burkina Faso. The Balogo project is located approximately 3hrs south of the capital Ouagadougou and is the most advanced with assays received from 100 holes returning some excellent intersections as high as 57m at 23.3g/t Au. A 30,000m drill program is underway with results from a further ~100 holes pending which will yield steady news flow for investors. The Yako project is located approximately a 4hr drive to the north of Ouagadougou and is very early stage proposition, however, significant artisanal mining suggests good potential for a more significant gold system. Probably the biggest bottleneck is the assay turnaround time which has increased significantly given heightened activity in Burkina by mining companies. With a significant amount of drill results pending we rate GMR a SPEC BUY

Disclosure: Patersons Securities acted as Joint Lead Manager to GMR's Share Placement in November 2009 at 13 cents. Patersons acted as Lead Manager and Underwriter for a Rights Issue in May 2009 at 3 cents and Lead Manager for a Share Placement in November 2007 at 8.5 cents. Patersons received fees for this service.

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