Collected Wisdom

Buy ANZ and Santos, hold Lend Lease and Echo Entertainment, and sell NIB.

Summary: The newsletters rate ANZ Bank and oil and gas group Santos as buys, property developer Lend Lease and casino owner Echo Entertainment as holds, while health insurer NIB is seen as a sell.
Key take-out: ANZ remains in value territory and, with its strong growth potential, the experts rate it a buy. But the major bank has been named among 20 other banks in a Singaporean interest rate scandal.
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.

Australia and New Zealand Banking Group (ANZ)

Share prices in the major Australian banks have staged a bit of a recovery in recent days, but the newsletters think Australia and New Zealand Banking Group (ANZ) still represents good value, and rate it a buy.

Of all the banks, ANZ is best positioned for growth, the newsletters say, giving it a serious advantage over its competitors that investors should take into account when choosing between the big four.

The bank suffered a minor setback last week when Singaporean authorities implicated it in an interest-rate rigging scandal, but the bank immediately sought to reassure investors, saying there will be no material impact on its Singapore operations.

Leaving this minor stumble aside, the investment press is much more interested in the bank’s “Super Regional Strategy,” which was launched in 2007 and finally looks to be gaining momentum.

Some expect ANZ to post its first profit from the division this year, while cost efficiencies should see the bank deliver above peer growth over the coming years, the newsletters say.

Abating margin pressures and the improved outlook for bad debts are further reasons to buy into ANZ, the investment press says, while more than one source believes that of the financials, ANZ is best placed to benefit from a recovery in the US economy. So get in while the going’s good, the newsletters say.

  • Investors are advised to buy ANZ at current levels.

Santos (STO)

Santos recently found 7.5 metres of gas pay and gas condensate in Jurassic sandstones at its newest exploration well, Bassett West-1, in the Browse Basin off Western Australia. This one’s a buy, the newsletters say.

The investment press is quick to point out Santos’ exploration capabilities and say the potential for further gas reserves on the site should appeal to investors, although as Tim Treadgold said last week, Santos has a long track record of disappointing investors and “snatching defeat from the jaws of victory”, which investors should keep in mind (see: Santos fires up on LNG).

The find was made on a site known as WA-408-P, 475 km north of Broome, of which Santos holds 30% of the rights. The remaining 70% is held by Total E&P Australia and US-listed Murphy Oil.

Santos head of exploration, Bill Ovenden, said further work is required to determine the composition of the gas and potential reservoir segments in the area.

The newsletters are quick to point out that Santos has the most developed gas infrastructure in the country, giving it a distinct advantage that sees it well positioned to benefit from both LNG exports and developments in the shale gas industry.

The recent find demonstrates the oil and gas explorer’s potential and should see investors remain optimistic for long-term returns, the newsletters say. Meanwhile, the market is just crossing its fingers that Santos will follow Woodside’s lead and consider joining its rival as a yield play.

  • Investors are advised to buy Santos at current levels.

Echo Entertainment (EGP)

Entertainment and hospitality group, Genting Hong Kong Ltd, has increased its stake in casino operator Echo Entertainment, from 5.2% to 6.6%.

The timing of Genting’s move hasn’t escaped the investment press, since both Echo and rival Crown Entertainment have until the end of this week to submit proposals to the NSW government for new gaming facilities.

Echo’s share price has already seen a welcome boost on the Genting news, which should help to appease investors worried about Crown’s decision to sell down its 10% holding in the rival casino operator last month, despite gaining approval from state regulators to double its stake.

There has been a lot of talk of the impact a rival VIP venue in Barangaroo could have on Echo’s Star casino, but the investment press says the risk  has been priced in at this stage.

Further, mass market gaming currently accounts for 60% of total revenue at Echo’s Star. Crown’s proposal, if it gets the go ahead, is for a VIP-only venue. As such, one source says the Star should still benefit from a growing tourism market and an increased Asian appetite for gaming. The softer dollar should also help push tourism higher. Hold onto Echo pending further developments, the newsletters say.

  •  Investors are advised to hold Echo Entertainment at current levels.

Lend Lease (LLC)

Lend Lease kicked the week off on a sour note, with boss Steve McCann looking to reassure the market that the latest update was most definitely not an earnings downgrade. Try as he might, investors weren’t convinced, and sent the share price tumbling 8.5% on Monday. The investment press sees some potential and rates Lend Lease a hold.

In Monday’s market update, Lend Lease warned construction earnings would be lower due to softer market conditions.

“The underlying construction markets in Australia and EMEA have softened in the second half of FY13, contributing to reduced earnings from the construction businesses in those regions,” the company said.

But fiscal 2013 net profit after tax (NPAT) is expected to be in line with consensus estimates of between $540 and $547 million. What got investors in a flap was that guidance for the 2013 tax rate was cut from the low- to mid-teens to between 4% and 8%, which basically adds between $40 and $60 million to earnings.

Some of the newsletters say Lend Lease is well positioned to weather any construction weakness due to its mixed-use pipeline and geographical diversification, while others are concerned that the domestic engineering and construction business will see more difficulties through fiscal 2014 due to the slowdown in resource and public sector infrastructure capex.

  • Investors are advised to hold Lend Lease at current levels.

NIB Holdings

Private health insurer NIB Holdings has lowered its full-year profit guidance on the back of higher-than-expected claims. The newsletters are wary of the insurer’s ability to navigate the challenging market, and rate it a sell.

In a strategy briefing, NIB said it expects full-year pre-tax net underwriting profit excluding non-cash amortisation of intangible assets on acquisitions (TMIL and IMAN) to be at the low end of the $75 million to $78 million guidance range. Since the news, the share price has taken a tumble, falling more than 6%.

NIB also mentioned recent regulatory changes in the update, but said they would “only have moderate impact on sales, lapse and downgrading activity”.

The newsletters aren’t convinced, and the direction of regulation of the private health insurance industry is of concern. Policy changes to subsidisation and taxation are already hitting higher earners, and in the short term the investment press says NIB could come under more pressure from falling demand if further changes come into effect.

Rivals Medibank Private and BUPA have the advantage of brand recognition and a stickier customer base, while online comparison site, iSelect, will likely benefit as customers increasingly look for the best deal in private health.

Over the long term, as the ageing population grows, private health insurance will likely play a bigger role, and NIB could be one of the key players. So the newsletters do see potential over the long term, but the short-term hurdles will be difficult to contend with.

  • Investors are advised to sell NIB Holdings at current levels.

Takeover Action June 12-19, 2013

14/06/13ActivEXAIVASF Group 36.63
17/06/13Azimuth ResourcesAZHTroy Resources34.17
12/06/2013Central Australian PhosphateCENRum Jungle Resources1.00
20/05/2013CIC AustraliaCNBPeet84.17
18/03/2013Energia MineralsEMXCauldron Energy0.00
29/04/2013Firestone EnergyFSEWaterberg Coal Co27.42Takeovers Panel application
26/04/2013GraincorpGNCArcher Daniels Midland19.90Bid implementation deed
17/06/2013Kalgoorlie Mining CompanyKMCNorton Gold Fields9.56
15/05/2013Lemur ResourcesLMRBushveld Minerals2.70
17/06/2013Merlin DiamondsMEDInnopac Holdings65.93
7/05/2013Trust CompanyTRUEquity Trustees2.54
17/06/2013UCL ResourcesUCLMawarid Mining90.69
11/06/2013World Oil ResourcesWLRHoldrey10.91
Schemes of Arrangement
15/04/2013Norfolk GroupNFKRCR Tomlinson0.00Vote July 17
3/05/2013Platinum AustraliaPLAJubilee Platinum0.00Vote June
7/05/2013Trust CompanyTRUPerpetual0.00Vote July
Foreshadowed Offers
21/03/2013Billabong InternationalBBGAltamount/VF Consortium0.00Indicative proposal
24/04/2013Billabong InternationalBBGExec Paul Naude-Sycamore Consortium0.00Exclusivity ext to May 8
22/05/2013RHG RHGAustralian Mortgage Acquisition Company0.00Scheme proposal
Source: NewsBites

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