Collected Wisdom

This week we look at Wesfarmers, CSL, Primary Health Care, Patties Foods, and Bendigo and Adelaide Bank.

Summary: The newsletters believe it’s time to sell Wesfarmers, while CSL is viewed as a buy, and Primary Health Care, Patties Foods, and Bendigo and Adelaide Bank are regarded as holds.
Key take-out: The investment press view Wesfarmers’ share price as high at current levels, and some have concluded the company would have been better off paying down debt than declaring higher capital returns to shareholders.
Key beneficiaries: General investors. Category: Shares.

This is an edited summary of the Australian investment press: It includes investment newsletters, major daily newspapers and broker reports. 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.

Wesfarmers (WES)

Wesfarmers reported a 6% lift in net profit to $2.26 billion for the full year, with a 3% rise in revenue to $59.8 billion. The numbers look OK, and reflect decent earnings growth across the retail division (Target excepted), but the newsletters are concerned about future growth prospects and the majority rate it a sell.

One clear positive for Wesfarmers has been the competitive advantage it enjoys by operating a wide range of businesses, including supermarkets, hardware store, coal mining, chemicals, fertilisers and insurance to name just a few.

Despite the diverse mix of businesses, Coles is the clear breadwinner in the family, accounting for the majority of sales and more than 40% of group earnings before interest and tax (EBIT). For that reason, Coles understandably gets a lot of attention from the press. Coles FY13 sales rose 5% to $35.8 billion in the year, while EBIT gained 13% to $1.533 billion.

With Coles now at the mature growth stage, the newsletters are increasingly concerned about weakness from the resources division and Target. For that reason, the forward P/E ratio of 19 looks high, some say.

And while WES may have hoped to impress shareholders with its plan to return capital of about 50 cents per share, the investment press seems to think this may be more a diversionary tactic and question whether paying down debt would have been a better route to take.

There’s no doubt that Wesfarmers is a staple in many an investor’s portfolio but at current prices, it may be time to take some profits, the newsletters say.

  • Investors are generally advised to sell Wesfarmers.


Blood products and vaccine supplier CSL Ltd posted a 19% rise in profit to $US1.216 billion for the full year to June 30, but it wasn’t enough to keep some shareholders happy. The share price fell more than 3% following the result as investors digested comments from chief executive Paul Perreault.

The investment press is more optimistic and generally rates CSL a buy. Consensus price target among the brokers is about $69, and a couple even have a price target of close to $75. Product innovation and cost competitiveness are two factors working in CSL’s favour.

The outlook for the year ahead is what may have spooked some shareholders. Perrault voiced his concerns for FY14, saying it would likely be tempered by continued economic pressures. But one source says investors should be more focused on CSL’s plans to deliver profit growth and earnings per share growth despite these pressures.

EPS growth is expected to exceed NPAT – which is forecast at 10% above FY13 net profit – due to management initiatives like share buybacks. Speaking of which, another source lists the proposed new share buyback as testament to Perrault’s confidence in the group’s outlook.

Moving on to research and development (R&D), and the group’s forecast that R&D spending will surpass profit growth in the year ahead, was seen as another reason some sold off. Again, the newsletters seem to have taken a decidedly more positive view. One source rates it a buy on the news that R&D spending will rise, seeing it as an indicator that the group has a growing number of potentially significant products moving toward the final stages of development

On the negative side, some say a forward P/E ratio of 20.8 is pretty lofty given the slowing profit growth and increasing spending on R&D. Nonetheless, the majority seem to like what they see in Perrault and CSL, rating it a buy.

  • Investors are generally advised to buy CSL.

Primary Health Care (PRY)

Primary Health Care increased net profit by 29% to $150.1 million for the full year to June 30. The strong result was driven by improved margins: 0.8% in the Medical Centres division, 0.8% in the Pathology division and 4% in the Imaging division. While the share price dropped immediately after the result, it has since recovered and remains at fair value, the newsletters say.

PRY is generally rate a hold by the investment press given the strong result and management’s track record of delivering decent returns over the long term.

Valuation-wise, Primary Health Care doesn’t look expensive compared with its peers. It’s currently trading on a forward P/E ratio of 15.8x, while Sonic Healthcare is trading on a forward P/E of 16.2x, and Ramsay Healthcare is on 25.6x.

Earnings per share grew 28% in the year and PRY has forecast earnings per share growth of between 7% and 13% in FY14. One source notes that funding pressures in the year ahead could cap earnings growth in the single figures.

The 11 cents per share dividend surprised on the upside, bringing the full-year dividend to 17.5 cents per share, a payout ratio of around 57%. The newsletters took note that PRY says this ratio is sustainable but some commented that over the longer term, higher dividends means less debt will be paid down.

Medical centres are one area of concern for a number of sources, as top line growth in this division continues to fall.

  • Investors are generally advised to hold Primary Health Care.

Patties Foods (PFL)

Pie maker Patties Foods posted a 12.8% drop in underlying net profit after tax (NPAT) to $17 million for the year, despite a 3.8% rise in sales to $244.8 million. The results were far from impressive, but the newsletters rate it a hold for now.

The big letdown for the investment press was the frozen fruit category, which took a non-cash impairment charge of $11.8 million. The group said the division was hit by competition from cheap private label fruit and margins remain under pressure. It also lost a major supermarket frozen fruit private label contract during the period. A review of the frozen fruit division is ongoing.

Outside of this category, Patties saw market share gains across much of its product range, including its well-known Four’n Twenty brand of pies. The pie maker now says it’s focused on a “disciplined control of costs” and plans on increasing its prices across its range of products.

One source says consumers are likely to stick with Patties due to strong trust in the brand, but investors will be aware that the major supermarkets are driving a big push to private-label goods, a move that will keep margins under pressure for manufacturers, including Patties.

On a more positive note, the investment press says there are organic opportunities for growth, especially in the out-of-home market, which saw an increase in sales over the period. Acquisitions are another avenue of growth that some of the newsletters say the pie maker could consider.

  • Investors are generally advised to hold Patties Foods.

Bendigo and Adelaide Bank (BEN)

Bendigo and Adelaide Bank (BEN) posted an 81% rise in net profit to $352.3 million for the full year in what managing director Mike Hirst described as a “solid” result in difficult trading conditions. The newsletters say earnings pressures will continue in the year ahead and rate it a hold.

An 81% rise in profit looks impressive at first glance, but investors should keep in mind that the previous year’s profit was hit by a $95m write-down on margin lending and wealth management operations.

On bad and doubtful debts, Bendigo said credit costs remained relatively low during the year, despite deteriorating 17.8% from $32.1 million to $37.8 million in the six months to June.

Looking ahead, the newsletters expect further pressure on the net interest margin, although it widened 10 basis points to 2.21% in 2012-13. A $12 million occupancy cost at the new Adelaide head office is another expense expected in the coming year.

The group is aiming to minimise cost increases so that revenue growth exceeds cost growth but the newsletters say rising costs will strip margins and put pressure on underlying earnings in both the year ahead and FY15.

Asset quality is another issue for one, while others say the rise in dividend doesn’t necessarily translate to confidence in management in this yield-centric environment. The newsletters see a tough year ahead for Bendigo, but say it’s worth holding onto for now.

  • Investors are generally advised to hold Bendigo and Adelaide Bank.

Watching the Directors

  • Newcrest Mining director, Peter Hay, showed his support for the embattled miner last week, snapping up 5,000 Newcrest shares for $59,850.
  • Elsewhere, BKI chairman Robert Millner spent $105,878 buying 66,174 of the company’s shares in an on-market purchase. He then invested a further $197,447 to buy up 10,000 Milton Corp shares.
  • On the selling side, Energy Resources of Australia (ERA) chairman, Peter McMahon, sold 5,000 Rio Tinto shares from the McMahon Family Trust on market at $59.80 a share.

Takeover Action August 14-21, 2013

02/07/2013Argosy MineralsAGYBaru Resources0.00
16/08/2013Australian Power & Gas CompanyAPKAGL Energy32.90
20/08/2013Breakaway ResourcesBRWMinotaur Exploration35.48
20/08/2013Central Australian PhosphateCENRum Jungle Resources74.53
20/05/2013CIC AustraliaCNBPeet84.17
01/07/2013Elemental MineralsELMDingyi Group Investment13.69
18/03/2013Energia MineralsEMXCauldron Energy0.00
31/07/2013Firestone EnergyFSEWaterberg Coal Co45.07
19/08/2013GraincorpGNCArcher Daniels Midland25.74
08/08/2013Lemur ResourcesLMRBushveld Minerals16.77
13/08/2013Red River ResourcesRVRIron Mountain Mining69.11Closed
07/05/2013Trust CompanyTRUEquity Trustees2.54
11/06/2013World Oil ResourcesWLRHoldrey10.91
Schemes of Arrangement
17/07/2013Bravura SolutionsBVAIronbridge Capital0.00Vote September
02/08/2013Emerald Oil & GasEMROchre Group Holdings16.00Vote November 1
30/07/2013Platinum AustraliaPLAJubilee Platinum0.00Vote adjourned for amendments
15/07/2013RHGRHGResimac-Australian Mortgage Acquisition Company0.00Accepts counter proposal
07/05/2013Trust CompanyTRUPerpetual0.00
Foreshadowed Offers
31/07/2013CloughCLOMurray & Roberts Holdings61.60Scheme proposal
12/08/2013Continuation InvestmentsCOTDMX Corporation0.00Bid for two thirds of shares
16/07/2013EnvestraENVAPA Group33.00Indicative proposal
10/07/2013RHGRHGPepper Australia0.00Competing proposal
Source: NewsBites

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