Collected Wisdom

Analysts from the newsletters this week cover Metcash, Wotif, AMP, Trust Company and Goodman Fielder.

Summary: Analysts from the newsletters this week cover Metcash, Wotif, AMP, Trust Company and Goodman Fielder.

Key take-out: A positive growth outlook combined with an attractive 7.5% dividend yield have the newsletters rating grocery, liquor and hardware wholesale distribution group Metcash as a buy.
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.

Metcash (MTS)

For the most part, the newsletters were pretty satisfied with the latest set of numbers from grocery, liquor and hardware wholesale distribution group Metcash, as were investors, who pushed the share price 5% higher in the hours after the full-year results.

In the 12 months to June 30, Metcash delivered a net profit of $206 million.

The obvious disappointment for the newsletters was the grocery business, which lost market share on the back of a major restructuring. The group saw a 2.3% decline in sales in its core grocery business, to $9.1 billion. More promising was the liquor business, which delivered 35% earnings growth, to $47 million. Earnings per share fell 4.4% over the period.

The newsletters are broadly optimistic for the grocery division given the greater focus on investment, and acquisitions are tipped to give a boost to FY14 earnings.

Further underpinning the positive outlook, new chief executive Ian Morrice is expected to put more attention on improving the company’s competitiveness against the big two retailers, Coles and Woolworths. A stronger emphasis on volume growth should also deliver benefits to the company.

The dividend yield is obviously a major factor for some investors and, at current levels, the dividend yield is about 7.5%. But keep an eye on the rising share price. It could move into neutral territory very quickly if the impressive yield continues to attract investors.

Wotif (WTF)

Another downgrade hit the headlines yesterday, this time from online accommodation provider Wotif. It seems strong growth in the group’s Australian division was offset by continued weakness in Asia and the rest-of-the-world divisions, resulting in an expected full-year underlying profit of between $53-$54 million. Prior to the downgrade, expectations were for profit of about $57 million.

Expenses also increased during the year as the company invested in marketing and IT.

The investment press took the news on the chin and chose to focus on the positives, namely the potential for growth. The strategic review identified opportunities including monetisation of traffic from group websites, increasing overseas hotel content, refreshing the marketing strategy, improving Asian sales and enhancing functionality for mobile devices.

The newsletters are of the view that Wotif has the right elements for success, and expect the group to benefit from more and more consumers going online to research and snap up travel deals.

In spite of the bad news, and the threat of competition from offshore rivals, the newsletters think there is decent potential for growth and say following yesterday’s sell-off, now could be a good time to buy.


AMP Ltd has joined the long line of companies issuing earnings downgrades lately, and investors vented their frustration by sending the share price a whopping 13% lower in the hours after the news.

As announced earlier this week, management now expects underlying first-half earnings to come in between $415-$435 million, compared with the $491 million previously projected. The full-year dividend has also been trimmed.

Having taken a breather after the sharp share price fall, the newsletters rate AMP a hold, with a number noting that while it is currently trading at a discount, it’s for a good reason.

The lack of a clear roadmap for the future is a worry, and some are waiting for the first-half results to see just how widespread the issues are. The newsletters are also concerned that the downgrade comes just weeks after the AGM, at which AMP failed to flag any issues, and that there are broader issues at hand.

For the optimists out there, a few sources note AMP’s strong market position and long-term growth prospects, and one says that AMP is well positioned to reap the benefits of the growing pool of superannuation assets.

But in the short term, the newsletters see continued tough trading conditions ahead.

Trust Company

The battle for the Trust Company continues, with Equity Trustees formally tabling its upwardly revised takeover offer. The newsletters don’t seem to think there was much to the latest announcement, and rate Trust a hold.

Equity Trustees now expects annual synergies of $11 million from the merger, with potential upside. But this is still well below that of rival suitor, Perpetual, which is looking for $15 million in annual merger synergies.

The newsletters are disappointed that Equity Trustees didn’t increase its offer price, which remains at 0.37 Equity Trustees shares for each Trust share, and a possible special dividend of 22 cents per share. There was also no mention of a cash-only bid to rival Perpetual’s, which is likely a reason for the sell-off, with investors sending the share price 6% lower.

Equity Trustees said its improved offer was aimed at long-term shareholders in the trustee industry and that the offer provided “the prospect of materially better future returns with a lower-risk profile than the Perpetual offer, which is more exposed to equity market movements through its large funds management”.

The investment press seems to think that Perpetual is still offering the better deal, with a higher value and cash alternative. But the good news for Trust Company shareholders is that there is still plenty of upside potential if the two suitors continue to duke it out.

Goodman Fielder (GFF)

Food manufacturer Goodman Fielder continued the trend of profit downgrades this week, forecasting earnings before interest and tax (EBIT) of between $195-$200 million, a 14%-16% decline on last year’s earnings, although 2012’s earnings included the oils and fats division, which has since been divested.

Despite this news, investors jumped on the stock, pushing the share price 4.2% higher, to 74 cents, after Goodman announced it had negotiated a private-label bread contract with Coles.

The deal came as a surprise to many, since chief executive Chris Delaney had previously indicated the company would not be renewing its contract because it was making a loss on the deal. It seems under the new deal Coles will pay 10 cents more for each loaf. But while investors cheered the news, the investment press was not of the same mind and consider Goodman a sell.

The main issue for the investment press is the long-term impact of the supermarket price war and the increasing number of consumers switching from branded to private label goods, putting serious pressure on the margins of food suppliers like Goodman.

The big players on the scene, Coles and Woolworths, will almost certainly continue to exert their overwhelming power, driving price deflation and further margin pressure.

One source notes a couple of positives are that Goodman is on its way to becoming the lowest-cost producer in a number of its sectors, and should see decent growth from its Asia-Pacific business, but for the most part the investment press has taken a broadly negative view of Goodman over the long term.

Takeover Action June 19-26, 2013
24/06/13ActivEXAIVASF Group 40.76
24/06/13Azimuth ResourcesAZHTroy Resources72.13
20/06/2013Central Australian PhosphateCENRum Jungle Resources2.08
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
21/06/2013Kalgoorlie Mining CompanyKMCNorton Gold Fields73.53
15/05/2013Lemur ResourcesLMRBushveld Minerals2.70
21/06/2013Merlin DiamondsMEDInnopac Holdings67.25
7/05/2013Trust CompanyTRUEquity Trustees2.54
21/06/2013UCL ResourcesUCLMawarid Mining90.95
11/06/2013World Oil ResourcesWLRHoldrey10.91
Schemes of Arrangement
15/04/2013Norfolk GroupNFKRCR Tomlinson0.00Vote July 17
3/05/2013Platinum AustraliaPLAJubilee Platinum0.00Vote June
8/04/2013Polymetals MiningPLYSouthern Cross Goldfields0.00Vote July 31
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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