Collected Wisdom

This week we look at BHP Billiton, Commonwealth Bank, Australand and Macquarie Group.

Summary: The newsletters believe BHP Billiton’s share price remains attractive at current levels, and are hopeful of a solid full-year result from Commonwealth Bank when it reports mid next month.
Key take-out: BHP Billiton is expected to outperform, while the newsletters have Commonwealth Bank, Australand and Macquarie Group in neutral territory.
Key beneficiaries: General investors. Category: Shares.

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.

BHP Billiton (BHP)

BHP Billiton’s fourth quarter production numbers came in well above expectations, with sales volume for iron ore rising 21% in the quarter. Meanwhile, Western Australia Iron Ore (WAIO) production guidance was increased from 200 million tonnes to 217 tonnes for fiscal 2013.

The investment press says the share price is still attractive and generally rate it a buy.

Copper production exceeded guidance, rising 12% in the quarter, while petroleum actually fell short of expectations due to continued production issues in the Gulf of Mexico, including maintenance and drilling delays.

Despite failing to live up to expectations in the quarter, the newsletters have high hopes for the miner’s petroleum operations going forward. It now makes up a solid 21% of group earnings.

The outlook for iron ore prices and demand from China are obvious concerns for the newsletters, but BHP’s diversified operations and healthy balance sheet will help offset the risk, they say.

Moving onto copper, and the miner has just committed $US1.972 billion ($2.136 billion) to a new desalination facility for its Escondida project in Chile.

BHP copper president Peter Beaven said that securing a sustainable water supply in the Atacama Desert was a major priority and the approval of the project was significant for the business. Construction will start this month, the miner said.

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

Commonwealth Bank (CBA)

Commonwealth Bank is tipped to report strong full-year earnings on August 14. The newsletters say its solid earning power and position as one of the most well-capitalised banks in the world make it a hold for now.

Investors will be pleased to hear that the newsletters say there’s potential for dividends to get a bit of a boost next month, with one hinting at a dividend payout ratio of up to 80%.

Fears of a downturn in the housing market are still in the air but the newsletters are taking it in their stride and don’t seem as concerned. But economic conditions are expected to become less favourable and there is increasing talk of Australian banks coming under pressure in the near term.

CBA’s diversified revenue stream and solid balance sheet will help it weather the oncoming headwinds, which is why it’s rated a hold by the press.

And while credit growth is still weak, costs are under control, which gives earnings some support.

The bank continues to trade at a premium to its peers, with the current share price at about $70, but its capital strength and return on equity justify the price-tag, the press says.

Investors will also be keen to see what happens with the three listed real estate trusts it owns, now that they’ve seemingly been put into play. Last week, CBA said it is looking at internalising the management of the REITs as part of a review of its property investments.

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

Australand (ALZ)

There were few surprises in Australand’s first-half result last week, but there were some green shoots that investors should be keeping an eye on.

The group reported operating net profit of $62.4 million for the six months to June 30, a 9% drop on the previous corresponding period. This was driven by a “lower contribution from the residential division given the expected completion of a number of built form projects in the second half,” managing director Bob Johnston said.

What really piqued the interest of the investment press was the update on residential sales activity.

“Despite business and consumer confidence continuing to be fragile, residential sales activity strengthened during the first half, with contracts on hand up 36%,” Johnston said.

The newsletters say this indicates a slow but firm recovery in residential markets is underway.

The outlook for the second-half counters the less-than-impressive first-half numbers. Management is now indicating 3-4% growth in earnings for the full year, which the newsletters in general feel confident is achievable.

A central issue for the newsletters is the uncertainty surrounding the intentions of major shareholder CapitaLand. This week Australand closed its books to prospective buyers, saying it had failed to attract high enough bids. CapitaLand, which owns 59.3% of Australand, says it will remain a ‘key’ shareholder, but the newsletters are concerned regardless.

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

Macquarie Group Ltd (MQG)

Macquarie’s first-quarter update came in as expected, with the group pretty much on track to achieve guidance for the full year.

The newsletters are satisfied with the group’s performance and its strong balance sheet, but note that operating conditions remain difficult.

Nonetheless, some think the outlook for market conditions is improving and say Macquarie is in good shape to benefit from an upturn.  Its market-facing division, Macquarie Securities, has already seen improved earnings, which the investment press takes as a good sign for the rest of the business.

The risk is that market conditions could actually worsen, and given the global recovery is still incredibly fragile, there’s no telling where it could go from here.

Return on equity is also below par and will likely remain under pressure in the near term, the press says.

On the positive side, the group’s expertise and financial strength are reasons it will remain competitive, while divisions such as funds management and corporate finance are faring better than the investment banking operations.

Macquarie will no doubt be cheering the lower dollar, since about 63% of its total income is from overseas.

  • Investors are generally advised to hold Macquarie Group at current levels.

Takeover Action July 24-31, 2013

DateTargetASXBidder(%)Notes
02/07/2013Argosy MineralsAGYBaru Resources0.00
15/07/2013Australian Power & Gas CompanyAPKAGL Energy19.90
16/07/2013Breakaway ResourcesBRWMinotaur Exploration19.90
29/07/2013Central Australian PhosphateCENRum Jungle Resources65.33
20/05/2013CIC AustraliaCNBPeet84.17
01/07/2013Elemental MineralsELMDingyi Group Investment13.69
18/03/2013Energia MineralsEMXCauldron Energy0.00
04/07/2013Firestone EnergyFSEWaterberg Coal Co43.86Takeovers Panel application
22/07/2013GraincorpGNCArcher Daniels Midland23.63
25/07/2013Kalgoorlie Mining CompanyKMCNorton Gold Fields84.85
18/07/2013Lemur ResourcesLMRBushveld Minerals14.30
29/07/2013Red River ResourcesRVRIron Mountain Mining45.60
07/05/2013Trust CompanyTRUEquity Trustees2.54
11/06/2013World Oil ResourcesWLRHoldrey10.91
Schemes of Arrangement
17/07/2013Bravura SolutionsBVAIronbridge Capital0.00Vote September
30/07/2013Platinum AustraliaPLAJubilee Platinum0.00Vote adjourned for amendments
08/04/2013Polymetals MiningPLYSouthern Cross Goldfields0.00Vote July 31
15/07/2013RHGRHGResimac-Australian Mortgage Acquisition Company0.00Accepts counter proposal
07/05/2013Trust CompanyTRUPerpetual0.00Vote July
Foreshadowed Offers
31/07/2013CloughCLOMurray & Roberts Holdings61.60Scheme proposal
16/07/2013EnvestraENVAPA Group33.00Indicative proposal
10/07/2013RHGRHGPepper Australia0.00Competing proposal
Source: NewsBites