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.

BHP Billiton (BHP)

Falling commodity prices and an uncertain outlook for China equals declining share prices for the miners, BHP included. But the newsletters are more positive and say now could be the time to buy in at a discount. As Eureka Report’s John Abernethy said recently, “BHP will be growing throughout the next decade.” (see: Budgeting for better times ahead).

Chief executive Andrew Mackenzie has been doing the rounds of late, making it known that the company is committed to generating free cash flow. BHP plans to reduce capital expenditure (capex) to $US15 billion in the next two to three years and will look to simplify the portfolio and focus on iron ore, copper, coal and petroleum. Following this desire to cut back on capex, one source thinks the $10 billion Jansen potash project in Canada could soon be shelved.

The group is also more focused on shareholder returns, the newsletters say, though dividend policy is not expected to change for the foreseeable future.

The headwinds facing the mining sector will continue to affect BHP in the near term, but not as much as its peers, which are likely to face a tougher struggle, the newsletters say. This could in turn create opportunities for the big boys like BHP and Rio Tinto, as long as a measure of capital discipline can be employed for the longer term. If BHP goes along this path, investors could potentially hope for a bigger slice of the profits over time.

• Investors are advised to buy BHP Billiton at current levels.

David Jones (DJS)

David Jones lost the battle for sales against rival Myer in the Match quarter, with the top-end retailer recording a 3.4% drop in third quarter like-for like sales against Myer’s 0.4% decline. Chief executive Paul Zahra tried again to brush aside comparisons with Myer, instead saying: “We are comparing ourselves to international department stores, and what’s pleasing is the things we are known for are doing well”. That may be true, but its international competitors are walloping DJs in online sales. 

The newsletters have been saying for some time that online competition is a major threat for Australian retailers, and they’re still singing the same tune. Internet sales account for just 1% of DJ’s revenue, compared with 10-20% of revenue in international stores.

Zahra and his team are focusing on the areas of the business that they can control, namely gross profit margin, inventory and costs. To that end, DJs has made the decision not to go down the road of heavy discounting like its competitors, but says its “key June Clearance will need to be competitive”. So essentially, there will be discounting.

A positive development is that from May 29, DJs will accept the national Chinese credit and debit card, UnionPay, giving it the opportunity to entice the more than 700,000 Chinese nationals that visit Australia every year.

But in the long term, the newsletters don’t think this will be enough to halt the march of online competition and other structural challenges facing the industry.

• Investors are advised to sell David Jones at current levels.

Cardno (CDD)

Engineering company Cardno has continued the trend of earnings downgrades, forecasting weaker-than-expected earnings for the second half. Cardno says it is not immune to the current challenging conditions that “continue to affect demand for our services worldwide”. But the group sought to calm any jitters, saying its exposure to the mining sector is modest compared to others in the mining services sector.

Forecast net profit is now expected to be between $73 million and $77 million  for the year, compared with $74.1 million net profit in FY12, and is roughly 5-10% below market expectations. Investors took the news on the chin, with Cardno shares dipping just 3c to $5.47.

The investment press doesn’t seem surprised at the news of another downgrade, but advises caution for investors. One source says Cardno is too optimistic in expecting a turnaround in 2014 and warns the outlook for the company could fall again in the next year on the back of declining margins and increased competition. On the positive side, with the housing market in the US building steam, infrastructure is likely to pick up, which could provide some support.

The lack of transparency from the company on the disclosure of material acquisitions is a big issue for one, while others are just happy the numbers weren’t a whole lot worse.

• Investors are advised to hold Cardno at current levels.

Australian Agricultural Company Limited (AAC)

Australian Agricultural Company Limited (AACo) reported a net loss of $46.5 million for the March quarter, which was pretty dismal but within the range expected. After assessing the situation investors reacted positively, and the share price is up a little under 3%. But the newsletters are concerned that the outlook for the cattle producer will remain difficult and say it’s not for the risk averse.

AACo said the poor result was driven by a non-cash $43.2 million write-down of the value of the herd due to depressed cattle prices, which came about from the mid-2011 suspension of live cattle exports to Indonesia and below-average rainfall in northern Australia. The newsletters think the stock is trading at a discount, but for a reason. As with other agricultural stocks, adverse weather and market conditions can have a significant impact on earnings.

But it’s not all bad. One source notes that AACo is likely to benefit from the rising middle class in Asia. Its competitive advantages, including its genetically superior cattle stock due to better breeding technology, will also work in its favour.

The lack of dividends is likely to turn some off, but the newsletters are saying hold for now.

• Investors are advised to hold AACo at current levels.

Westfield Group

Westfield Group looks closer to attaining its downsizing goal, with speculation rife that the shopping centre owner is in talks with Starwood Capital Group to sell seven of its US mall holdings.

The deal is believed to be worth about $US1 billion and is part of a broader plan to focus on its prime flagship malls to get better returns. The news that it is to begin a major redevelopment of Westfield Miranda, a super-regional shopping centre 30 kilometres outside Sydney’s CBD, underpins this strategy. The $435 million development will increase the centre by approximately 19,000 square metres, and will include a new Woolworths and upgraded Big W, and a refurbished Myer among others.

Expectations that the Australian dollar will remain weak for some time has the newsletters thinking positively, and combined with sales growth in the US should give Westfield’s earnings a nice boost. This will help to offset ongoing sluggishness in the domestic market as Australian households continue to rein in spending.

The newsletters are broadly positive on the latest developments, but think the share price has already had a pretty strong run. It’s risen 14.5% since the start of the year, and the investment press says hold for now.

• Investors are advised to hold Westfield at current levels.

Watching the Directors

• The sellers easily trumped the buyers this week. Rodney Jones, chief executive at Navitas, was the clear winner, taking home an impressive $48,486,139 after disposing of $8,565,000 shares at $5.66 apiece through his family trust. Jones reportedly has no intention of selling any more Navitas shares in the short to medium term.
• Sandfire Resources’ executive technical director, John Evans, was also a seller last week, offloading 600,000 shares for $3,831,987.
• On the buying side, WorleyParsons director, Wang Xiao Bin, followed chief executive Andrew Wood’s lead last week, snapping up 7,000 shares for $142,330.31 in on-market trades.
• Elsewhere, Boart Longyear director, David McLemore, splashed out $US320,000 for 500,000 shares in the company through his family trust.