Collected Wisdom

Buy Boral, sell Super Retail Group and hold NAB, Orica and Flight Centre.

Summary: Analysts rate Boral a buy and Super Retail Group a sell, while NAB, Orica and Flight Centre are holds, the newsletters say.
Key take-out: Building materials group Boral has had a tough year, but the newsletters see some potential.
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.

Boral (BLD)

Buildings materials group Boral last week issued an earnings downgrade for its full-year profit, citing weaker-than-expected third quarter earnings on the back of a soft housing market. The news took much of the investment press by surprise, since only months ago the company delivered better-than-expected earnings in the first half.

Net profit before one-off items is now expected to be in the range of $90 million to $105 million. Boral said its construction materials and cement division has been impacted by declining residential construction activity in Victoria, project delays in both Victoria and South Australia, and poor weather in south east Queensland in the quarter. The combination of these factors meant divisional earnings came in $19 million below forecast.

But it’s not all bad news. The newsletters are convinced Boral remains well-positioned for a turnaround in building and construction activity. The Reserve Bank’s decision to cut the cash rate, and the major banks passing on the cut, could see the housing market stage a turnaround before too long.

Exposure to Asia and the US provides geographic diversification, although the US market has been tough since the global financial crisis (GFC) and Boral has operated at a loss there since 2008. But, signs of a sustained pick up in recent months have the newsletters optimistic for a return to profitability there. Boral’s cost-cutting drive is also seen in a favourable light. The company shed 700 staff earlier this year, and plans to follow that up with another 1,000 later this year. The newsletters say this is a smart move in the current challenging environment.

  • Investors are advised to buy Boral at current levels

National Australia Bank (NAB)

National Australia Bank’s first-half numbers came in just above expectations and were deemed an all-round solid result by the investment press. The bank reported a 3% rise in cash profit on the previous corresponding period, to $2.92 billion. The newsletters are confident of NAB’s outlook in the medium term and rate it a hold.

Moderate earnings and dividend growth are expected to continue despite near-term headwinds, the investment press say. The strategic review of its UK operation is progressing, and one source says it could deliver positive earnings in the next 12-18 months.

Revenue increased just 1.6%, which the newsletters were less than impressed with. The rise was driven by growth in personal banking, NZ Banking and wholesale banking, the bank said. For the newsletters, the soft credit growth highlighted continuing caution from both businesses and consumers.

Falling interest rates are putting pressure on all the bank’s margins from mortgages, and NAB’s pledge to keep its variable rate the lowest of the big four will keep this downward pressure in place. Nonetheless, the newsletters are confident that NAB will be able to maintain the attractive fully-franked dividend.

  • Investors are advised to hold NAB at current levels

Super Retail Group (SUL)

Super Retail operates in the auto, leisure and sports areas, and owns a number of well-known retail brands including Supercheap Auto, Goldcross, Ray’s Outdoors, Rebel Sport, BCF and AMART.

The company has just posted a positive trading update that showed top-line growth and margin expansion for its vehicle and sports segments, which grew 5.1% and 7.8% respectively in like-for-like sales in the 43 weeks to the end of April. Leisure came in lower than expected, with growth of 3%, which Super Retail blamed on weather conditions. The company’s performance has been strong, but the investment press just can’t get over the high share price and rate it a sell.

The newsletters say the group’s strategy of selling more home-brand goods and sourcing more products directly has been a smart move that has contributed to reducing costs. It has seen decent growth from its BCF chain, and its sports chain, The Rebel Group, is another avenue of potential growth.

The newsletters think the business is in good shape overall, but after an extremely strong run that has seen the share price jump from $7 to $13 within a year, the newsletters say it’s time to get out and take some profit. The investment press is also concerned for the group’s growth prospects in the long term, which would appear to be quite limited.

  • Investors are advised to sell Super Retail Group at current levels

Orica (ORI)

Explosives maker Orica reported a 5% rise in profit in the first six months of the year, bringing it to a healthy $266.8 million. The result beat market expectations, but the newsletters still see a challenging road ahead. The share price has surged 6% since the results, and is now looking like pretty much fair value. Hold for now, the newsletters say.

Like so many others, Orica is in the midst of a restructuring, with 400 jobs tipped to go in the next six months that will cost the company about $20 million. Its mining services division, Minova, which accounts for about 30% of total assets, has dragged on the rest of the business, and one source is doubtful it will ever deliver the goods when it comes to decent returns. Minova’s current return on net assets is just 7% on an annualised basis, while the company aims to grow this to 18%.

On the positive side, Orica has a number of competitive advantages, including established explosives distribution around the globe, and a duopoly in the Australian explosives market alongside competitor Incitec Pivot. Growth is expected in the coming months and next year through increased production at its Bontang ammonium nitrate plant in Indonesia and improved earnings as demand for explosives from the coal industry is tipped to rise.

  • Investors are advised to hold Orica at current levels

Flight Centre (FLT)

Flight Centre continues to defy the critics. The company last week upgraded its profit guidance for the full year to an underlying profit before tax of between $325 million and $340 million. Previous guidance was in the range of $305 million to $315 million. The improved guidance implies growth of between 12-17% on the previous year.

The trouble with Flight Centre has always been the threat of online competition. But the newsletters have reassessed the situation this time around, and seem to have changed their opinion of the company and its future in the market. Flight Centre’s multi-channel strategy of building both its online and bricks-and-mortar presence has given the newsletters some confidence of its strength in the sector, and they now see online competition as less of an immediate threat.

The newsletters are impressed with the rebound in the leisure market in both Australia and the UK, which has helped offset the impact of continued weakness in the corporate market. The healthy balance sheet is another positive, with Flight Centre continuing to grow cash reserves while maintaining low debt levels, while the benefits of scale allow it to negotiate better deals with travel providers than its online competitors can.

  • Investors are advised to hold Flight Centre at current levels

Watching the Directors

  • director Richard Collins was the big seller of the week, pocketing $2,622,360 from the sale of 269,163 shares from one of his family trusts, Jarvis Buff N Shine Centre Pty Ltd.
  • On the buying side, Prime Financial managing director, Simon Madder, snapped up 8,028,789 shares in Prime at 10 cents apiece, setting him back $802,879.

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