Collected Wisdom: Mixed doubles edition

This week we look at contrasting couples: Woolworths and Wesfarmers, Perpetual and BT Investment Management & Regis Resources and Northern Star.

Summary: Woolworth’s decision to exit home improvement venture Masters is seen as a short term boost for earnings, but analysts still see an overall downward trend, while Wesfarmer’s acquisition of UK Homebase not is expected to be smooth sailing. Analysts have been downgrading price targets on Perpetual as the share market dips, while BT Investment’s slowing FUM has been met with caution.

Key take out: Analysts move Regis Resources from a hold to a sell as the share price outstrips forward-looking targets, while Northern Star’s all-in sustaining costs from its December update were well received. 

Key beneficiaries: General investors. Category: Shares.

This is an edited summary of the Australian investment press: It includes investment newsletters, major daily newspapers and broker reports. The recommendations offered represent the views published in the other publications and may not represent those of Eureka Report. This article is general advice only which has been prepared without taking into account your objectives, financial situation or needs. Before acting on it you should consider its appropriateness, having regard to your objectives, financial situation and needs.

WOOLWORTHS V. WESFARMERS 

Woolworths Limited (WOW)

On Monday (January 18) Woolworths management bit the bullet and said enough is enough with the bleeding home improvement venture Masters. Management announced its intent to exit the big box hardware stores by either a sale or winding it up. 

All analysts see this is a short-term boost for cash flow and earnings, however many still remain bearish due to their low growth outlook for the food and liquor business. A large structural shift in the industry with more and more competitors on the landscape has analysts looking out for a potential downgrade. It would appear outgoing chief executive, Mr O’Brien, chairman Mr Cairns and shareholders are not out of the woods yet.

The downward trend with sell recommendations continues for Woolworths. At the time of writing the forward-looking price target was $24.51 with the current share price sitting at $23.42. The most bearish analyst has a price target of $21.

Investors are generally advised to sell Woolworths Limited at current levels.

Wesfarmers Limited (WES)

 “As Alexander Graham Bell used to say: As one door closes another opens”... so it goes for our two arch-rival supermarket groups. 

While Woolworths faced more troubles, this week Wesfarmers announced its acquisition of UK based home improvement and garden retailer Homebase for $705 million. Homebase is the second largest home improvement retailer in the UK behind B&Q. The acquisition is the first step in eventually converting the Homebase stores into Bunnings branded stores over the next three to five years.  

Analysts do not expect the move into the UK to be 100 per cent smooth sailing, with B&Q unlikely to sit back and let it happen. On top of that, analysts estimate WES needs to spend $1 billion of cap-ex over the next three to five years. 

Analysts also observed the closure of Masters may create some opportunity for Bunnings expansion here as well. They do not anticipate the Homebase business will have a short-term effect on earnings. 

WES remains favoured against WOW among the analysts with a hold call remaining in place. The forward-looking price target of $42.67 with the share price at the time of writing sitting at $39.74.

Investors are generally advised to hold Wesfarmers Limited at current levels.

PERPETUAL V. BT INVESTMENT MANAGEMENT 

Perpetual Limited (PPT)

Tuesday saw Perpetual give an update on their funds under management (FUM) for the quarter ending December 31. FUM increased by $2.5 billion, up to a total of $30.9bn. Net inflows increased marginally by $0.8bn. The increase in the All Ordinaries Index in the quarter contributed the remaining $1.7bn.

Perpetual included a breakdown of FUM by asset class. $22.2bn of the total $30.9bn is held in Australian equities with cash and fixed income the second highest category with $6.1bn. Perpetual’s outlook weighs heavily on the outlook of the Australian equity market. 

Short-term growth expectations have been tempered given the downward trend of the Australian market since December. Analysts have lowered expectations accordingly. The outlook for Perpetual to continue to grow FUM and earn performance fees on top of that rests on the market.

The 12 month price target has been steadily declining over the past 12 months and it now sits at $40.70. The consensus price target has moved down and tracked the share price for some time now. At the time of writing Perpetual’s share price is $40.24.

Investors are generally advised to hold Perpetual Limited at current levels.

BT Investment Management (BTT)

Last Wednesday (January 13), BT Investment Management released its FUM numbers for the quarter ending December 31. FUM totals closed $1.3bn up for the quarter (adjusted down from $3.9bn due to currency impact).

While this was in line with analyst expectations what disappointed was the declining trend in net flows. The bulk of the increase in FUM came from market movement, which given the direction of global markets in the first 20 days of 2016 could easily be given back.

Analysts agree BTT is fairly priced at current levels but remain cautious with their outlook given the slowing in FUM growth. The average price target for BTT has steadily increased over the years with the share price typically in line with it. Just recently, the share price has slipped below the price target of $12.03. What investors need to assess is whether the share price is already pricing in further declines in the market and therefore FUM, meaning analysts will eventually downgrade, or if it is a momentary disconnect with the short term focused participants putting downward pressure on the price.

Analysts are torn between a buy and a hold call with the "holds" just winning out.

Investors are generally advised to hold BT Investment Management at current levels.

REGIS RESOURCES V NORTHERN STAR 

Regis Resources Limited (RRL)

Regis Resources continues to perform well and surpass analyst expectations. This time it came from their quarterly production numbers and the declaration of a 4 cent fully franked dividend.

Regis met expectations on the volume front with strong numbers but it was the cash cost that was a pleasant surprise to analysts coming in at the lower end of the gold miner's guidance. 

It appears Regis is a victim of its own success. It has continued to perform well and analysts are pleased to see further exploration, which in turn will extend mine life scope. However it is because of the cracking performance analysts have a sell call on RRL. 

The share price has rallied well since a sharp fall in March 2015 and has outpaced forward-looking price targets. This has seen analysts move from a hold to a sell as profits are taken. Right now the average price target is $1.96. At the time of writing the share price was $2.56. This is ahead of the most bullish analyst case, with a price target of $2.30.

Investors are generally advised to sell Regis Resources Limited at current levels.

Northern Star Resources Limited (NST)

Northern Star Resources released its December quarterly numbers on the January 14 and much like fellow gold miner Regis it too hit expectations on production numbers. Production numbers came in at the top end of guidance and NST remain on track to achieve their overall guidance. 

What was pleasantly surprising to analysts was the all-in sustaining costs (AISC) per ounce coming in below original guidance. NST gave guidance for AISC between $1,050 - $1,100/oz. For the December quarter AISC came in at $1,040/oz.

Over the last two years analysts have had the price target steadily moving upwards for NST. The average currently sits at $2.51 but there are a few bullish cases out there with one analyst with a price target of $3.53. 

It seems despite the price targets set analysts are still of the view Northern Star will continue this positive run and continue to deliver strong numbers both on production and costs.

Investors are currently advised to buy Northern Star Resources Limited at current levels.