Collected Wisdom

This is an edited summary of Australia’s best-known investment newsletters, broker reports and major daily newspapers. The recommendations offered represent the views published in the other publications and may not represent those of Eureka Report. This article is general advice only which has been prepared without taking into account your objectives, financial situation or needs. Before acting on it you should consider its appropriateness, having regard to your objectives, financial situation and needs.”

Insurance Australia Group (IAG)

Earnings season is almost upon us and the newsletters have high hopes for Insurance Australia Group. The general insurer is tipped to report solid numbers for fiscal 2013 on the back of minimal weather-related claims and productivity improvements. Premium repricing over the period should also help firm up the result. This one’s a hold, the newsletters say.

One source is looking for net profit after tax of $1 billion, a big jump from last year’s $583 million profit. The full-year dividend is also expected to strengthen from 26 to 27 cents per share.

Consensus seems to be that IAG is looking a touch overvalued at current prices, but with margins at record levels and expectations of strong earnings, one source thinks the share price could push even higher in the near term.

Looking forward, investors interested in the long-term potential would do well to keep an eye on the group’s expansion into Asia. This region is tipped to drive growth in the future, since insurance markets in Australia are at such mature levels.

So far, IAG has spent $750 million on Asian investments and currently holds minority stakes in a number of insurers in the region. Some say the group’s minority holdings in foreign businesses give little control and heighten operational risk, but over the longer term, there is definite potential for decent returns from this region, the newsletters say.

• Investors are generally advised to hold IAG at current levels.

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Treasury Wine Estates (TWE)

Treasury Wine Estates is firmly out of favour at the moment after the group announced a $160 million write-down that will have a significant effect on full-year results.

Investors were none too impressed, and sent the share price more than 12% lower in the hours following the news. Even with the sharp share price fall, the newsletters say TWE is overpriced and rate it a sell.

Aged and excess wine stock in the US market was blamed for the write-down, alongside the restructuring of its distribution system into the country, which is also TWE’s biggest export market.

Earnings before interest and tax (EBIT) for the year will be in line with market estimates of $216 million, the company said, but the newsletters are quick to point out that the write-down will cancel out most of that.

TWE plans to destroy $35 million worth of US wine and sling another $40 million in discounts and rebates to distributors in a bid to shift old stock. TWE’s chief executive David Dearie said the move is a one-off and critical for the long-term success of the US division.

One source expects volume and margin pressure to continue, indicating the problem is a lack of demand for product in the US at the current prices.

Before the share price fall, TWE was trading at almost 40 times earnings. It has a fair bit further to fall before it moves into buy territory, the investment press says.

• Investors are generally advised to sell TWE at current levels.

AGL Energy (AGK)

Taking a 19.9% stake in Australian Power & Gas and launching a full off-market takeover bid shows AGL is playing the long game, the newsletters say. Some think it’s a move that just may pay off, and rate it a long-term buy. If successful, the “bolt-on” acquisition will see AGL nab 354,000 new electricity and gas customer accounts and providing a healthy 10% boost to its NSW customer base.

The takeover offer price of 52 cents per share represents a 33% premium to Friday’s close of 39 cents and values the company at $103 million. AGL estimates the "all up" cost for the “bolt-on” acquisition will come in at $562 per-customer. This includes the cost of migrating the new customers over to its own platform.

The acquisition is expected to add an extra $20 million in earnings in FY14 and could deliver up to 3% earnings per share (EPS) increase from FY15, says one source.

But it may not be all smooth sailing. Some of the investment press are concerned about APG’s high churn rate and say the challenge for AGL will be to get the churn rate down to a more appealing level amid fierce competition, while at the same time dealing with its own churn issues in New South Wales. AGL will also need to deliver on cost targets. Provided it can overcome these hurdles and integration goes to plan the deal should be beneficial in the long run, the newsletters say.

• Investors are generally advised to buy AGK at current levels.

Orica (ORI)

Explosives and fertiliser heavyweight Orica Ltd has struck a gas off-take deal with Strike Energy that will see it part fund the development of the market junior’s coal seam gas project in the Southern Cooper basin. In return, Orica gets access to a cheap source of gas…eventually.

Orica’s share price dropped a little over 2% on the news but the investment press has taken a more positive view and say it could be a long-term buy at current levels.

The deal will see Orica make pre-payments of up $52.5 million that will go toward developing the gas deposit in the Cooper basin, allowing Orica access to 150 petajoules of gas over the next 20 years. Stike is not expected to produce any gas until at least 2016.

For Orica, the deal is a means of protecting itself against rising gas prices that are expected to double to about $9 a gigajoule on the east coast after 2015.

Orica managing director Ian Smith said the deal “has the potential to provide a future new source of gas supply to our Australian east coast manufacturing plants at an affordable price".

Locking in a cheap gas source is a shrewd and necessary move in a constricting domestic market and could lead to other similar deals with market juniors, the newsletters say. The stock is currently trading below fair value and offers potential for those with a long-term view, says the investment press.

• Investors are generally advised to buy ORI at current levels.

Goodman Group (GMG)

After successfully raising €550 million ($775 million) in new equity through its European operations, industrial real estate investment trust Goodman Group is looking in pretty good shape, the newsletters say.

Interest in the raising was well above capital needs, at €900 million. Chief executive Greg Goodman said the excess demand spoke to the strength of the fund’s portfolio. “The overwhelming demand for the equity raising reflects the fund's high quality portfolio and the attractiveness of the European logistics property market to large institutional investors,'' he said.

The newsletters generally agree, with one saying it validates both the business and its strategy for the future. The raising also adds to the pile of money that Goodman now has at its disposal, which could be spent on acquisitions in the near term, the investment press says.

Aside from the raising, the investment press sees the growing yield spread between industrial property and government bonds as a very positive development and a strong reason for institutional support. There is every reason to believe this will continue as interest rates remain at or near historical lows.

Goodman has decent growth prospects, but there are clouds on the horizon, including the long-term outlook when interest rates eventually move higher. The group’s move into Asian markets, including China, also heightens risk since developments in the region are often undertaken without formal commitments. That being said, the investment press is content to rate Goodman a hold for now.

• Investors are generally advised to hold GMG at current levels.

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