ANZ: AGM Information - Upgrade to Earnings and Top Pick of the Sector

Following ANZ’s AGM on Friday, Macquarie Research Equities (MRE) have upgraded their FY06 EPS numbers by 0.5%, to reflect the improvement in New Zealand margins and the improvement in the outlook for the bank’s wealth management division. ANZ is MRE’s preferred stock in the sector as (1) NZ pressures easing, (2) the bank’s Australian and institutional businesses are targeting double digit growth (3) the stock is trading at a 7–8% discount to its peers, and (4) its share price offers 7% upside against MRE’s 12-month target price. MRE retain their Outperform recommendation on the stock, with a $25 price target.

Key highlights from the AGM include:

ANZ enhances outlook guidance. Whilst still avoiding outright guidance, at its AGM, ANZ outlined that trading in the first two months of FY06 was satisfactory. Earnings growth in the first two months of 2006 should be similar to 2005, and continue for the balance of the year.

NZ outlook improving. ANZ reiterated its expectation that ‘New Zealand earnings should improve in 2006’, given a less adverse margin environment and integration benefits. MRE believe there is potential for upside to margin expectations in 1H06, as September quarter margins were flat, and most of 2H05’s margin compression occurred in the March and June quarters.

Sustainable financial advantage from engaged staff extended. ANZ extending its staff engagement to ‘best of any major Australian company’ is a significant comparative and financial advantage versus its peers (such as NAB). For example, Hewitt Associates estimates that each additional engaged employee is worth c$5,000 of additional profit per year, and high employee engagement correlates strongly with higher revenues, profits and total shareholder returns.

With NZ pressures easing and the bank’s Australian and institutional businesses targeting double digit growth, ANZ remains MRE’s top medium term pick in the sector. ANZ is also attractive on valuation fundamentals, with the bank trading at a 7–8% discount to peers, and its share price offers 7% upside against our 12-month target price. Outperform recommendation is retained.