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What the top-20 Australian companies are up to

Friday 4th February 2000

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Most New Zealand investors would own shares in several of the top-20 Australian stocks, whether directly through personal portfolios or indirectly as participants in managed funds.

Most of the funds are index-linked and, therefore, weight their portfolios in accordance with the relevant relationship of particular capitalisations to the total index.

The stocks are listed in order of capitalisation.


Telstra

A recent company presentation to a conference in California outlined the group's market shares and outlook, although the presentation was naturally hyped-up.

Telstra said it offered a complete range of telecommunications and information services, from traditional areas such as local and long-distance access, through to directories, mobiles, Australia's largest internet service provider and 50% of the country's largest pay TV provider.

It had 53% of the Australian mobile telephone market at June last year which, it said, put the company in the world's top-10 market penetrators.

Mobiles were one of Telstra's fastest growing businesses, with a net increase of 12% in 1998/99 for handsets, 18% in minutes of use and an 18% lift in revenues.

The company said it is "actively immersing" itself in the "new internet world."

Net profit in the year ended June 1999 was 18% up on the previous year and forecasts from Australia suggest 2000 earnings should be about 7.5-10% ahead of last year.

The company is one of those at the forefront of new technology uses and is expected to continue its expansion, both within Australia and through overseas acquisition.


BHP

At the time of announcing the 1999 result, BHP's then recently appointed managing director, Paul Anderson, said the company had delivered on its undertaking "to aggressively clean up" the company's asset base. That was confirmed in the interim report for the six months ended November, when the resource group announced an operating profit of $A809 million, an increase of $A373 million, or 86% compared with the corresponding period in the previous year.

Mr Anderson said lower costs were the standout factor driving the improved half-year profit performance. They contributed about $A275 million after tax, including reduced interest charges from the group's significantly lower average debt levels, reflecting the company's determined efforts to lower its debt.

BHP has been involved in what Mr Anderson has called "rebuilding the company." He said the half-year result signalled it had largely finished phase one of rebuilding: closing down loss-making operations and "putting the past behind us."

Phase two involved continuing to reduce costs, optimising the performance of each of the businesses and adding value through improved financial management practices.

BHP's main operations are in steel, petroleum and minerals.

Merrill Lynch's quarterly stockmarket review said the company offered exposure to a corporate recovery story as well as the prospect of better commodity prices. It said changing the corporate culture was probably the biggest challenge. It could take two years but could increase the improvement in operating performance.


National Australia Bank

Commonwealth Bank

Westpac

ANZ Banking Group

There are two standout elements in the recent, and probably likely future, development of the four big Australian banking groups. Their latest results confirmed the emphasis on cost reduction and operational efficiency while emphasising the continuing move to electronic banking, e-commerce and other operations involving the internet. These matters seem to have led to renewed interest in banking stocks among Australian investors.

The current position was summed in ANZ chief executive John McFarlane's address to his company's annual meeting in January. Mr McFarlane said margins were under pressure so the company needed to cut costs.

Technology lay at the heart of meeting those demands, meaning the company must "embrace change and join the technological revolution. Banks had a new phenomenon - the internet - which had become the fastest growing method of purchasing goods and services and was a source of "enormous potential shareholder value."

The new technology it brought provided a new way of managing organisations and of communicating with each other. E-mail was now by far the most important communication method within business.

CSFB's The New Millennium Project said banks must run twice as fast to keep ahead of the challenges they are facing.

"The good news is that banks have more tools, allowing for better risk management, more precise pricing, disaggregated offerings and international expansion. The bad news is that bank competitors have these same tools. Banks gain competitive advantages merely by gaining new technology but by applying it more effectively than others."

New technology had made it possible for the banking industry to quantify risks that previously could only have been conceptualised.

The immediate local outlook for Australian banks depends on economic growth in that country and movements in interest rates, which could assist their returns - provided costs are controlled - with a possible improvement in margins which have been under pressure and their overall cost-to-income ratios, the last having shown steady improvement over recent reporting periods.


News Corporation

The recent announcement of the proposed merger of US media group Time Warner and internet company America Online renewed interest in media stocks, with the market speculating that News Corporation might join the urge to merge, although News chief Rupert Murdoch downplayed any likelihood of that happening.

Irrespective of the speculation the AOL-Time Warner merger created, News Corporation has merit in its own right, with a growing global reach in all branches of the media and strong interests developing in internet-related activities.

News Corporation's operating divisions are filmed entertainment, television, magazines and inserts, newspapers and book publishing. It is probably a misnomer these days to refer to the group as an "Australian" company because it has substantial operations in the UK, US, Asia and South America, all of which are in the process of further expansion.

Although there was a profit downturn in the year ended June 1999, the group continued its strategic development.

Commenting on the result, Mr Murdoch said News Corporation had been "extremely aggressive" in seizing opportunities in the new media world, not only in the US but in other markets, such as the UK, Australia and Asia.

The News America Digital Publishing division continued to develop and expand the company's Fox-branded internet sites and, separately, the group committed $A480 million in forming e-partners, a new media venture capital fund that gave the flexibility to move quickly in that rapidly developing sector.


Cable & Wireless Optus

The company is a subsidiary of UK-based C&W plc, which owns 52.5% of the Australian group.

Cable & Wireless Optus operates in the Australian telecommunications sector, which may be getting a little crowded, with most of its business in the long distance and mobile telephone networks.

A summary of activities from Merrill Lynch said the company connected more than 140,000 local customers to its hybrid fibre-coaxial network (HFC) and added more than 300,000 local resold customers.

The broking firm said those matters plus development of internet and data networks should enable Cable & Wireless Network to sustain "double digit" revenue growth and, over time, lessen dependence on the long-distance market.

Current share prices put the company's shares on extraordinary high historic and projected price/earnings multiples, even by Australian standards, but that seems to be a reflection of market expectations of earnings growth, rather than a blue-sky approach to investment.


AMP

Well-known in New Zealand, both before and after demutualisation, but suffered a share price reversal when listing euphoria faded and the company struck some problems, particularly with its GIO Insurance subsidiary.


Rio Tinto

The company is involved in mining, with interests in copper, iron ore, coal, alumina, aluminium and other minerals. Rio Tinto's overall profitability is linked to global commodity prices, which have been depressed recently, but are generally expected to improve this year, although it should be noted that they probably could only go up, given that depression.


Lend Lease

Lend Lease is a financial services and global real estate group (its definition). Financial services comprises insurance and funds management in Australia - particularly the MLC group - and the US, while real estate covers construction (through "Property Services") and real estate funds management and property development in Australia, UK and, recently, Continental Europe.

The net profit was $A420.4 million in the year ended June 1999, an increase of 15.5% over 1998. That equated to earnings per share of 88.2Ac, which explained the strong share price.

The preliminary report said directors were budgeting for another profit increase in 2000.


WMC

WMC is a nickel, gold, copper, alumina and fertiliser-producing company, the last two through a 40% stake in Alcoa US's alumina and chemical assets.

The company had a poor first half in 1999 (year ends in December) but a rise in the nickel price should see a better second six months. Commodity price fluctuations affect WMC's profitability, in common with all miners and processors.


Brambles

Brambles' comparatively high dollar share prices is related to the low number of shares on issue and a correspondingly high earnings rate per share. The company operates basically in the transport sector.


Coles Myer

Coles Myer is Australia's largest retailer, with activities covering supermarkets, department stores and discount stores. The business is divided into various divisions but, in broad terms, Coles Myer is involved in virtually all aspects of food and general retail merchandising.

Coles Myer is, like all broadly-based retailers, dependent on economic health, as reflected in disposable incomes, economic growth, employment levels and inflation. The economic outlook in Australia appears good this year and the company should do well.

There was strong sales growth for Coles Myer in the third quarter of calendar 1999 and fourth quarter sales - unavailable when NBR Personal Investor went to press - were expected to be good.


Woodside Petroleum

The company is the major oil and gas producer and explorer operation of the North-west Shelf Project, which produces oil, natural gas, liquefied natural gas and liquefied petroleum gas.

Merrill Lynch has reported that the company has had exploration problems recently and deferred development of the North-west Shelf expansion and the Northern Australia LNG project.

The broking firm noted Woodside's strong share price performance highlighted that the price performed more in line with oil price expectations than with operational events.

That comment and the actual share price movement are in line with the recent, and continuing, increase in oil prices, which has flowed through in New Zealand to ongoing rises in retail pump prices for petrol.


Publishing & Broadcasting

Publishing & Broadcasting is an amalgam of the TV Nine Network and Australian Consolidated Press. The Australian Consolidated Press publications include several New Zealand titles. The company has control of ecorp and offered 20% of it to the public last year.

Ecorp is another of the computer-associated businesses that sprung up in Australia in recent years. Its business divisions cover online auctions, the Ticketek computerised ticketing operations - also well known in this country - and a sharebroking service, as well as other computerised activities, including e-commerce.

Given the rapid growth of such businesses, the operation should do well. The market thought so, pushing ecorp shares to a healthy premium after listing.


Fosters

A brewer, with wine as an additional business. Although the company is large, beer markets are extremely competitive in Australia, as in New Zealand, and the other markets where the big Australasian brewers sell their wares.


Colonial

Colonial is another demutualised life insurance company well known in New Zealand. The company's interim profit for the six months ended June 30, 1999 was $A212 million, an increase of 54% on the corresponding period of the previous year. The company said it benefited from strong sales growth in all regions, together with the impact of considerable efficiencies flowing from the successful integration of the Prudential and Legal & General businesses acquired in 1998.

Colonial achieved total annualised cost savings of more than $A150 million as a result of the integration.

Group managing director Peer Smedley said the company had maintained a consistent focus on delivering its core strategy, which was the building of a balanced life insurance, banking and funds management business in selected geographic regions.

New business growth was up 50% on the same period of 1998 and each of the three operating divisions achieved overall growth in market share.

The three divisions are Australian Financial Services, International Financial Services (Colonial UK, Colonial New Zealand, CMG Asia) and Colonial First State Investments, the group's international funds management business.

Colonial First State doubled its interim to $A34 million, and funds under management were $A43.5 billion at June 30. The funds management company is among the best-performed in the industry.

Although there has been talk that Colonial's share price has risen strongly because of a possible takeover, recent operational results suggest the market has also rerated the group in relation to other insurance/financial services companies.


Woolworths

Woolworths seems to be regarded in Australia as more susceptible to market forces than Coles Myer, due partly to a much higher proportion of its sales coming from supermarkets where there is strong competition and a likely increase in competition from the activities of other market participants.


St George Bank

A smaller Australian bank with its base mainly in New South Wales, it has interested Australian investors as a possible takeover target in the continuing rationalisation of the financial services sector.

NAB currently holds 9.4% of St George and ANZ has 4.9%, the latter having said the holding was a "good fit" because St George had a higher proportion of consumer business than ANZ and a strong position in New South Wales. St George has a 10% restriction on individual holdings until 2002.

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


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