Equity and derivative investors may be concerned about the market outlook given a couple of sizable sell-offs in recent sessions but it is all good for the Australian Stock Exchange (ASX), as increased volatility means trading volumes remain high.
The group's update for October shows a fourth successive month of strong equity volumes, with the increase more than 100% from the previous corresponding period. While this is positive, Merrill Lynch notes the smaller transaction size means equity trading values rose a more subdued 47%.
The increase has been enough to offset modestly weaker futures volumes, resulting in the broker edging up its earnings forecasts in coming years. It has not been alone as others such as UBS and Credit Suisse have followed suit, though revisions have been modest.
The end result is EPS (earnings per share) estimates are now clustered around 215c for FY08 and 240c for FY09, which compares to 187.7c in FY07. While this suggests strong earnings growth there remains a valuation issue, particularly given recent strong gains in the share price.
As Credit Suisse points out, the stock is now trading at around 27x FY08 earnings, this despite the expectation relatively conservative hurdles for equity market rebates will significantly dilute the contribution to earnings from the stronger volumes the group is enjoying.
As a result the broker sees the stock as fully valued at current levels, a view shared by Merrill Lynch on the basis there is evidence total capital raisings will moderate from this month, suggesting a flatter FY08 for the proceeds from such equity raisings.
Deutsche Bank adopts a similar view, pointing out while the year to date has been better than expected comparable growth rates become tougher through the rest of the year, making it more difficult for the company to continue delivering growth above expectations.
The lack of apparent value can be seen in comparing the current share price to the average target price in the FNArena database, which currently stands at $56.41, up from $54.26 prior to the update. The shares remain at a premium, having traded at more than $58 recently and at close to $57.00 today, which is significantly above the median price target according to Thomson One Analytics of $50.61.
Investors appear to agree upside is limited as despite a stronger overall market this morning shares in ASX are weaker and at 11.00am were down 37c at $56.93.