Collected Wisdom

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.

WorleyParsons (WOR)

A surprise earnings downgrade spooked the market last week, with the share price losing more than 12% following the announcement. The newsletters, like investors, were disappointed with the downgrade, but at the same time they are optimistic that WorleyParsons will deliver in the longer term than and think now could be a good time to get in at a decent price.

WorleyParsons said the earnings downgrade was driven by a slowdown in resources activity in Western Australia, as well as weaker-than-expected growth at its Canadian-based construction contracting business due to soft construction activity in the Canadian oil sands market. Net profit is now expected to be in the range of $320-$340 million, below last year’s $345.6 million profit.

With the major resources companies cutting costs, the outlook for the mining services division isn’t looking great, in the near term at least. In response, WorleyParsons has taken steps to downsize operations, which the newsletters think is a good move.

One source believes not enough credit has been given to the company’s international presence and says it has been unfairly caught up in the recent mining services sell-off, given its global positioning, with operations performing well in the US and China. The newsletters see real potential in its Canadian operations and say WorleyParsons is well positioned to benefit from expected strong growth in the oil and gas sector in the medium to long term.

WorleyParsons closed today at $19.81.

• Investors are advised to buy WorleyParsons at current levels

Incitec Pivot (IPL)

Incitec Pivot’s first half earnings were weak, but that was no surprise given the expectations from the market. In the six months to March 31, net profit after tax (NPAT) fell 23% on the previous corresponding period, to $110 million. The strong Australian dollar and lower fertiliser prices were blamed for the dampened earnings. Though expectations for the dollar to remain weak could see this turnaround in the second half.

The newsletters are disappointed that the Moranbah ammonium nitrate plant hasn’t ramped up production at the rate expected. The reasons given for the delays relate to issues with the gas compressors used and an estimated one month Ammonia plant shut-down from May 12 to repair damage to the plant following recent gas outages.

On the positive side, one source says as the group reduces its reliance on fertilisers, its competitive advantage increases. Stronger growth from explosives should be seen in the second half as production at Moranbah is expected to increase. Alongside recent weakness in the Australian dollar, continued economic recovery in the US should also help, says another source. If the weakness in the dollar continues, Incitec Pivot could see a decent boost to full-year earnings.

One source believes the stock is trading at a discount and sees value in Incitec Pivot in the long term, thus rating it a buy, but for the most part the newsletters rate it a hold for now.

Incitec Pivot closed today at $2.83.

• Investors are advised to hold Incitec Pivot at current levels

Mirvac Group (MGR)

Mirvac Group’s plan to focus on the core office sector was kicked into high gear last week when the company successfully raised $400 million from institutional investors to help fund the acquisition of seven properties from GE Real Estate Investments Australia. The acquisition includes two top-tier properties, Allendale Square in Perth and 90 Collins Street in Melbourne. The remaining five properties, in Sydney’s CBD, are to be redeveloped into premium assets.

The investment press is relatively optimistic and rates Mirvac a hold, but there are concerns, especially since the sector remains under pressure. One source points to leasing challenges facing the office market as a near-term risk, while soft regional residential markets are also highlighted as a cause for concern.

On a more positive note, the newsletters say that lower interest rates should deliver benefits in the longer term, while the group’s balance sheet is viewed as relatively healthy.

As a market leader in premium residential developments, Mirvac has competitive advantage has over its peers due to scale and its ability to source cheap funding, one source says. The group’s exposure to international markets is seen as a threat, but the steps Mirvac has taken to limit this through asset sales in the US and UK reduces its vulnerability.

Mirvac closed today at $1.75.

• Investors are advised to hold Mirvac at current levels

Virgin Australia (VAH)

Virgin Australia’s share price suffered some major turbulence last week, plunging 17% on Thursday after a pretty dismal trading update, before recovering about 10% the following day as Etihad increased its holding in the airline to just below 10%. Prior guidance from the airline for a lift in second half profit was obviously a bit premature, as Virgin announced last week that underlying pre-tax profit is now expected to be below last year's $82.5 million. While a minority of the newsletters optimistically rate Virgin a hold, most are of the view that it’s time to fly far, far away.

Virgin put the blame for the reduced profit on the introduction of its new Sabre booking system in the third quarter and weaker-than-anticipated trading and economic conditions. The new booking system is believed to have cost the airline about $50 million in lost revenue, as it reduced its service by 15% for a time so staff could sufficiently learn the new system and thus avoid any customer disruption.

The newsletters think domestic competition is the bigger issue that Virgin should be focusing on. In the nine months to March, Jetstar increased domestic passenger numbers by 9.4%, compared to Virgin’s 2% rise for the ten months to April. Virgin’s apparent inability to increase its market share in the domestic market is a real problem, the investment press says.

Despite the recent fall in share price, one source believes the market is still underestimating the severity of increased competition, high fuel prices, and a continued soft economy.

Virgin Australia closed today at 42.5 cents.

• Investors are advised to sell Virgin Australia at current levels

Leighton Holdings (LEI)

Leighton Holdings’ chairman, Bob Humphries, sought to reassure investors at the company’s annual general meeting last week, reaffirming full-year guidance of underlying net profit of between $520-$600 million. After a number of profit downgrades from its competitors in the mining services sector, Leighton says it will not fall victim to the same fate. The construction giant believes its diverse business interests and the cyclical nature of the industry mean it will continue to find opportunities even if the mining sector remains sluggish.

The newsletters say that Leighton’s diversification, across 20 countries and a number of sectors, including infrastructure, resources and property markets, is its saving grace. The company’s efforts to cut costs have also received praise from the investment press, which are keen to see a healthier balance sheet.

The fact that Leighton has plans for growth outside of Australia illustrates the benefit of its diversification. Chief executive officer Hamish Tyrwhitt says Leighton is focused on expanding in Asia to achieve future sustainable growth. “It is clear that we need to move our focus from an Australian-centric approach to one where we export our skills to markets where our services are valued and where we can add value,” he said.

But the newsletters are still concerned of the impact of commodity price volatility and lower demand. One source is worried that Leighton could see delays to mining contracts and infrastructure projects in the coming year.

Leighton Holdings closed today at $18.88.

• Investors are advised to hold Leighton Holdings at current levels

Watching the Directors

• Primary Health Care chief executive, Edmund Bateman, was obviously feeling very generous last week. He gifted 12,002,588 of the company’s shares to family members and charities, worth a whopping $61,923,074.
• Elsewhere, News Corp deputy chief operating officer, James Murdoch, sold 752,000 of non-voting shares in the company, worth $US25.1 million.
• Coca-Cola Amatil managing director, Terry Davis, was also a seller last week, offloading 150,000 shares in the company for $1,955,700.
• On the buying side, Coffey International chief executive, John Douglas, splashed out $594,008 for 5,100,000 shares in the company at the bargain price of 11.6 cents per share.
• Also in the buying mood was WorleyParsons chief executive, Andrew Wood, who took advantage of the company’s lower share price by snapping up 7,500 shares for $149,250.
• Elsewhere, Virgin Australia chairman, Neil Chatfield, bought 200,000 of the embattled airline’s shares for $80,360.