Collected Wisdom

Buy SAI Global, sell The Reject Shop, hold Westpac, Ausdrill and Brambles, the newsletters say.

Summary: Analysts rate SAI Global a buy, but recommend selling The Reject Shop, while Westpac, Ausdrill and Brambles are holds, the newsletters say.
Key take-out: Ahead of Westpac’s half-year results, the newsletters are confident the lender remains on a sure footing.

Key beneficiaries: General investors. Category: Portfolio management.

This is an edited summary of Australia’s best-known investment newsletters and major daily newspapers. The recommendations offered represent the views published in other publications and may not represent those of Eureka Report.

SAI Global (SAI)

SAI Global’s share price suffered a 30% drop in February following a downgrade in full-year profit guidance. The share price has rebounded about 10% since its lows, but one newsletter still sees the current price as well below fair value. The group’s dominant position in the domestic market delivers solid cash flow, while expansion overseas should help ensure long-term growth.

SAI Global is primarily involved in the publishing and distribution of industry standards and provides businesses with risk, compliance and business improvement solutions. The company holds an exclusive license to publish and distribute Australian standards over a 15-year period that began in 2003. At the end of this term, SAI will also have the option of renewing the exclusive license for a further five years.

The group has embarked on extensive overseas expansion, with 45% of revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) now generated offshore. One newsletter is concerned that the aggressive expansion could bring with it new issues, including that management may find itself spread too thin. Still, the exclusivity licence, combined with the company’s effective strategy of building up its complementary businesses, such as compliance and training, and the lower share price, has the newsletters convinced for now.

  • Investors are advised to buy SAI Global at current levels

Westpac (WBC)

Though a curve ball surprise in Westpac’s half-year results due out this week could, theoretically, change the attractive investment picture for this bank – it is highly unlikely. Instead the newsletters are confident the lender remains a premium pick on the Australian market, and may even stand out amongst its ‘big four’ peers on some measures.

Like all the banks at the moment, Westpac is battling low credit growth by improving productivity and trimming down its risk profile. Forecast cash earnings just shy of $7 billion are safely expected this year, and the newsletters see the outlook further ahead as reasonably positive. One of the leading banks in terms of capital position, at 8.8%, the company has also reduced stressed exposure as a percentage of total committed exposure to below 2%. This, along with its large portion of deposit funding, puts Westpac on a surer safe footing – though it reinforces its more domestic positioning compared to ANZ and NAB.

The investment press highlights the leadership of Brian Hartzer at the helm of the financial services division, which includes the retail and business banks as well as BT Financial, as a further strength for the business. Westpac’s focus on older customers and key industry sectors also helps to give the bank a direction and define a kind of niche – as all banks look to poach market share off each other for growth.

The newsletters remain strongly supportive of the bank, though recommend waiting for a dip in the highly-priced stock before buying. The consensus forward PE estimate for FY13 of 14.6 is above Westpac’s own long-term average of about 12, and the share price has put on more than 7% in the past month alone.

  • Investors are advised to hold Westpac at current levels.

Ausdrill (ASL)

The slowdown in the domestic resources sector has led mining services company Ausdrill to downgrade its earnings forecast for fiscal 2013, with the company now expecting a net profit of between $90-$96 million for the full year, compared with a previous forecast of $112 million.

The newsletters weren’t surprised at the downgrade, given the mining services company’s exposure to highly volatile commodities, including gold and copper, although one expressed its disappointment at the extent of the downgrade. Negative sentiment in the mining services sector means the newsletters are pessimistic as to a recovery this year. The company’s net debt to equity, at 62%, is also viewed by the press as too high, given its exposure to cyclical markets.

Despite the earnings downgrade, and the slowdown in mining activity, the newsletters are optimistic on the gold price in the longer term, and see a continued demand for drilling and blast work. Increased diversification into iron ore is also seen as a positive by the investment press, as it reduces the company’s dependence on gold and copper. Meanwhile, its geographical diversification sets it apart from its peers (over 30% of the group’s total revenue comes from mining services in Africa), although one source is concerned that political instability is a significant risk that shouldn’t be ignored.

  • Investors are advised to hold Ausdrill at current levels

Brambles (BXB)

When Collected Wisdom looked at Brambles about this time last year, the newsletters suggested selling, as complicated multi-regional exposure was seen as too risky, and the numbers were expected to turn. However, since then the stock has put on 20% and last week came out with an impressive sales report despite tough trading conditions.

Brambles’ performance is driven by its CHEP pallet and crate pool business, with massive global scale, which in turn is driven by economic activity. Sitting at the centre of global supply chains, the business generates plenty of cash on decent margins, but pays high capital costs to get there.

Sales in the nine months to the end of March were up 4%, which came despite ongoing weak conditions in Europe and thin growth in the US. The Europe, Middle East and Africa pallets division grew sales by 5%, as did pallet sales in the Asia-Pacific division. The newsletters also expect growth in Canada following an acquisition and a push into South America.

One of the benefits of Brambles, aside from its safely dominant market position, is that the stock can act as a kind of listed proxy to general global economic performance. While, at the moment, this is not such a rosy picture – and some of the newsletters do recommend reducing exposure accordingly – the consistently positive sales figures reported through this year show the business can still perform well in an average economy. On the back of some good numbers, and stronger forecast result for FY14, it may be worth holding onto the stock for the time being.

  • Investors are advised to hold Brambles at current levels.

The Reject Shop (TRS)

The fast-growing discount retailer has been a sharemarket darling of the past 12 months, but the newsletters are taking a cautious view and it may be time to take some profits.

From a low of just over $9 in July last year, the stock has ridden the wave of value-conscious consumers to close at more than double that low. It finished today at $18.07. A large part of that rise came last week, following a $30 million institutional placement as part of a $40 million capital raising announced on Tuesday. The other $10 million is set to come from a non-underwritten share purchase plan.

The money is being raised to fuel a fast-tracked store opening and expansion plan, which the newsletters note has likely been triggered by troubles at rival Retail Adventures. Picking up some of its competitor’s turf, The Reject Shop now expects to open 40 stores in FY14 compared with its previous estimate of 20.

However, with expansion comes cost and risk. The business has a low debt profile and a strong management team, but few unique competitive advantages. The newsletters argue aggressive growth is favourable with the market at the moment, but could lead to increased debt or dilution problems down the line.

The Reject Shop’s forward dividend yield for FY13 is roughly 2%, on a pricey-looking PE estimate of more than 21. Given the strong performance of the stock over the past year, and the fact that after this recent pop it is nearing its all-time high from 2010, the newsletters think its trading a little above where it should be with its risk profile.

  • Investors are advised to sell The Reject Shop at current levels.

Watching the Directors

Walter Pisciotta, chairman of, was the big seller of the week, collecting $11.69 million in recent days after disposing of 1,213,540 shares at $9.63 apiece.

Elsewhere, Gale Pacific’s David Allman was obviously in a buying mood as he splashed out $300,000 for 1,000,000 shares at 30 cents each.

Finally, Ben Elias, chairman of Kupang Resources, was also a buyer last week, forking out $139,965 for 1,333,000 shares at 10.5 cents apiece.

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