Billabong

Australian Equity Strategy Update provided by Australian stockmarket analyst Macquarie Research Equities.

Model Portfolio Update

Reducing Energy - Preference For Diversifieds:

We remain overweight diversified resources (where valuations appear reasonable), and have moved energy down from benchmark to underweight, as we believe valuations in the sector are looking stretched, as is the oil price in our view.

Accumulating Banks:

Billabong (BBG) outlook remains solid according to stock analyst Citi Investment Research. The two largest US surf retailers, Pacific Sunwear and Zumiez, reported strong May 2007 sales. The outcome reflects a normalisation of sales growth from the Easter calendar impacts in April 2007 and strong promotional activity in May 2007. Zumiez May 2007 sales were US$22.7 million, up 52%, with same store sales rising 11.2%. PSUN reported May 2007 sales of US$97.7 million, up 11% and PacSun same store sales were up 7.4%. The mix of US surf sales is positive for Billabong (BBG) given both PacSun and Zumiez highlighted strength in clothing. Menswear is the strongest category for Zumiez and womens wear for PSUN. The slowest categories are footwear and accessories where BBG has limited exposure. Zumiez has grown stores by 22% to 258 stores in the past year. PacSun on the other hand has stalled with store growth of only 3%. The analysts expects Billabong (BBG) to undertake selective store openings in the US to supplement its sales growth. The outlook for Billabong (BBG) remains solid: The monthly sales figures are too volatile to provide a useful insight. However, the 3-month and six-month trends are positive. The concern weighing on Billabong's (BBG) share price is currency movements. Every 1c rise in the AUD/USD lowers NPAT by 0.4%. CIR currently assume 0.83 for the remainder of FY07 and 0.80 for FY08e.

Billabong (BBG) have an upgraded broker call of Buy, High risk with a share price target of $20.80 from Australian Stock Exchange analyst Citi Investment Research. They forecast stores to grow from 144 to 400 by FY12e. The strongest growth will be in the UK, mainland Europe and Japan. Given the strong rollout, CIR forecast EBITDA to grow 17% per annum over the next five years. Every one of Billabong's European markets generates less than $100 million in sales. On the other hand, the US has over $500 million sales. A lack of distribution channels remains the key barrier for Billabong’s expansion in Europe. Company-owned store growth is key; they expect Billabong to open 20-30 stores in Europe and afurther 10-20 in Asia each year over the next five years. The store growth will focus on Billabong branded stores and Beachworks multi-branded stores. Billabong's decision to open retail stores in new markets overcomes the lack of available distribution channels. In addition, Billabong will benefit from increased awareness for its brands, visibility of demand for its products and increased store openings by third party retailers. Retail store rollout is central to Billabong's growth over the next five years. The margins and return on capital justify the rollout. Like most companies with strong store rollout opportunities, a PE premium is justified for Billabong (BBG). They view the fair value PE at 19.3x FY08e EPS.

UBS has upgraded their recommendation for the Billabong (BBG) stock as Buy 2 as a consequence of recent share price falls with a share price target of $16.95.