News

Mechel OAO’s (NYSE:MTL) ADR price increased significantly on 28 November 2008, following the announcement of the Russian government’s US$200 bn plus rescue package for refinancing loans and helping struggling companies working in key sectors of the economy. However, as we remain concerned regarding volatility in commodity prices, as well as political and economic conditions in Russia, we maintain our HOLD rating for the ADR although our target price supports a BUY at current levels. As the Russian stock trades in US dollars, we do not anticipate any currency impact on the Russian stock over our investment horizon. Therefore, based on our fundamental outlook, we maintain our HOLD rating.

Celestica Inc.’s (NYSE:CLS) NYSE common stock price has appreciated significantly since our last update report, reflecting volatility in global stock markets. However, we expect global IT spending to remain weak as a result of the global economic downturn, hampering top-line over the medium term. Therefore, in light of the significant increase in the NYSE common stock price and anticipated weak financial performance, we downgrade our current NYSE common stock rating from a HOLD to a SELL until we revalue the stock in our next update report. Although we expect a positive currency impact on the Canadian stock over our investment horizon, given our fundamental outlook and current price levels, we downgrade the Canadian stock rating from a BUY to a HOLD.

Grubb & Ellis Company (NYSE:GBE) common stock price has appreciated significantly since our rating change on 07 November 2008. Management is currently waging a battle over the direction of the company with the former Chairman, Anthony Thompson, and whether the current decline in stock price is due to the real estate downturn or poor management decisions. The current Management maintains that it has an effective plan to ensure growth; it has also received support from leading independent proxy advisory firms in the US. We believe that the current price rally reflects not only volatility in the stock market, but also speculation over whether the current Management can retain control of the company. Going forward, we maintain our cautious outlook given the current downturn in the US real estate sector and, therefore, maintain our HOLD rating for the NYSE common stock.

Acergy S.A. (NASDAQ:ACGY) released its pre-close trading update for FY 2008 as well as its outlook for FY 2009 on 28 November 2008. The company remains optimistic regarding levels of tendering activity for its short-term projects as well as the materialization of discussions on various long-term projects. However, as the company’s outlook for FY 2009 remains below our expectations, we are likely to marginally lower our FY 2009 estimates and target price for Acergy’s ADR in our next update report. However, given current price levels, we maintain our BUY rating for the ADR. As we continue to anticipate a positive currency impact on the Norwegian stock over our investment horizon and given our fundamental outlook, we maintain our BUY rating.

Qimonda AG’s (NYSE:QI) ADR price appreciated significantly on 28 November 2008, following a few trading days of marked improvement, supported by a moderate recovery in broader indices, after the stock price collapse of the past few months. The ADR has reported extreme volatility amidst speculation over the company’s survival in very distressed economic conditions. On 01 December 2008, Qimonda announced that as a result of discussions with potential strategic and financial investors it has delayed its 4Q 08 and FY 2008 results until mid December 2008. In view of stock price instability and the company’s weak financial position, we maintain our HOLD rating for the Qimonda ADR, although the current target price supports a BUY rating. We maintain our current HOLD rating for the European stock based on our fundamental outlook for the company despite an anticipated positive currency impact in the medium term.

New Valuations

Although Desarrolladora Homex S.A.B. de C.V.’s (NYSE:HXM) 3Q 08 total revenues were in line with our estimate, overall margins fell short of expectations. Homex continued to experience robust volume growth in both its Affordable Entry Level (AEL) and Middle Income Housing level (MIHL) segments. Going forward, the current economic environment provides a cautionary outlook for the real estate industry over the near term and we expect volume growth to level-off in 4Q 08. Moreover, a shift in product mix and falling consumer demand is also expected to reduce Average Selling Price (ASP) in FY 2009. Despite Management’s efforts to use efficient construction methods, such as aluminum molds, cost pressures and changes in accounting practices are expected to erode operating margin over the year. Nevertheless, we continue to believe the company’s long term growth will be supported by the government’s efforts to reduce the housing deficit in Mexico. Therefore, we believe volatility in global stock markets has left the company significantly undervalued.

In 3Q 08, while Grupo Aeroportuario del Sureste S.A.B de C.V. (NYSE:ASR) total revenues were in line with our estimate, profitability fell below our estimate given higher than expected cost of services and technical assistance fees. Going forward, we expect ASUR’s revenues will be impacted by slowing levels of air passenger traffic given ongoing economic slowdown. Furthermore, we expect ASUR’s margins to decline with a sustained increase in cost of services and maintenance costs.

Although Bunge(NYSE:BG) recorded healthy y-o-y revenue growth in 3Q 08, it fell below our estimate given lower-than-expected sales volumes across all of its segments. Going forward, the company is expected to suffer from falling sales volumes across all of its segments given current economic conditions. However, its Cost of Sales (COS) is expected to decline with commodity prices, which will support margin growth.

Grupo Aeroportuario del Pacifico, S.A.B. de C.V.’s (NYSE:PAC) revenues and operating profitability fell below our expectations during 3Q 08, given lower than expected aeronautical revenues and higher than expected operating expenses. Going forward, we expect a decline in the company’s top-line during FY 2009 as weak economic conditions will likely hamper air travel demand. This is likely to be exacerbated at the operating level by rising salaries and maintenance expenses. However, revenue growth from FY 2010 onwards is expected to be margin accretive.

Crucell N.V. (NASDAQ:CRXL) reported significant y-o-y growth in revenues in 3Q 08, primarily attributable to robust performance across all 3 product lines in 3Q 08. Total revenue were in line with our estimate in 3Q 08. Going forward, we expect Crucell to continue to report strong Quinvaxem sales (a vaccine against 5 childhood diseases; diphtheria, tetanus, pertussis, hepatitis B and Haemophilus influenza type b). Moreover, PER.C6 is unique cell culture platform, is expected to provide a competitive edge to the company, resulting in strong revenue growth, going forward. Considering strong product offering and strategic alliance with various partners we believe Crucell has strong growth prospects. We expect 2 Clinical development projects to finish in FY 2010 resulting significant saving. Consequently, we expect significant improvement in margin from FY 2010.

Herbalife Ltd. (NYSE:HLF) reported a 13.7% y-o-y increase in its 3Q 08 revenues. Revenue growth and EPS in 3Q 08 exceeded company guidance. This strong performance was attributable to double-digit growth in several of the company’s top operating regions, including North America, China and South America. Going forward, sales growth in Herbalife’s largest market; the US, is expected to be fueled by the continued expansion of the Nutrition Club concept and Weight Loss challenge. However, the Mexican government has recently levied VAT on certain products of Herbalife, which is expected to result in decline in volume growth, as Mexico is a price-sensitive territory. Nevertheless, Herbalife continues to expand in China. With 5 additional direct selling licenses in China, we expect the company to register robust business growth in the Asia Pacific region in FY 2008 and FY 2009.

Satyam Computer Services Ltd’s (NYSE:SAY) 2Q 09 top-line exceeded our and Management’s expectations mainly due to a weaker-than-expected Indian rupee. Adjusted net income also exceeded our estimate due to better-than-expected operating profitability and non-operating other income. Due to the substantial appreciation of the US dollar against the Indian rupee, Management has revised its FY 2009 US dollar revenue guidance downwards, while guidance in Indian rupee terms has been revised upwards. Despite the downward revision in top-line expectations, the US dollar earnings outlook has been revised upwards, to be driven by margin expansion and a weak Indian rupee, leading to moderate bottom-line growth over our investment horizon.

Barclays PLC (NYSE:BCS) reported a decline in its top-line in 1H 08, reflecting a decline in non-interest income. Growth in fee and commission income was moderate for the period. However, there was a drastic decline in trading and investment income as a result of volatile financial markets. In its October trading update, the bank reported that its Profit Before Tax (PBT) for 9M 08 was ahead of 9M 07, reflecting strong growth in income. However, we remain particularly concerned about the bank’s exposure to the US subprime mortgage market and the ongoing financial crisis and its adverse impact on profitability. Going forward, given the recession in the UK and US economies coupled with slowdown in Asia and decline in aggregate demand, we expect the loan portfolio to grow at a muted pace. Therefore our fundamental outlook for the common stock remains cautious for the medium term.

Semiconductor Manufacturing International Corporation (NYSE:SMI) The continued shift away from Dynamic Random Access Memory (DRAM) business led to a yo- y sales decline in 3Q 08, broadly in line with our expectation. However, adjusted operating and net loss2 were better than we had forecast. Sales and margins are expected to worsen over the next few quarters as the company faces an unfavorable market environment marked by a severe demand slowdown. While the situation is expected to improve in FY 2010, we do not see SMIC generating positive shareholder returns over the next three years.

RenaissanceRe Holdings Ltd.’s (NYSE:RNR) adjusted total revenues were significantly higher than our expectations as a result of stronger-than-expected y-o-y premium growth partially offset by lower-than-expected net investment income. Adjusted net loss was higherthan- expected as loss expenses escalated. We expect the impact of improvement in premium rates following recent large catastrophe and investment losses to be limited by economic slowdown. We do not expect much improvement in net investment income in the near to medium term due to significant reduction in investment portfolio during 3Q 08, although we expect improvement in FY 2010. However, despite the downturn, RenaissanceRe’s fundamental strengths, with strong financial strength ratings for both segments (A+ for Reinsurance segment and A- for Individual Risk segment by A.M.Best) and maintenance of dividend payments, along with the company’s expectation of a strong renewal season, should enable it to perform relatively strongly in a hardening market.

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