Collected Wisdom

This week we look at Sims Metal, AWE, Mirvac, Carsales, and Caltex.

Summary: The newsletters believe scrap metal recycler Sims Metal will improve, based on its exposure to the US economy, while AWE will benefit from its oil and gas projects. Mirvac and Carsales are regarded as holds, but the newsletters think it’s time to reduce in Caltex.
Key take-out: The investment press suggest that Sims Metal is poised for growth, but falling global scrap prices and lower volumes are a concern.
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.

Sims Metal Management (SGM)

Sims Metal Management reported a net loss of $466 million for fiscal 2013, an improvement from the $622.5 million loss seen in the previous year, but a disappointment nonetheless.

The result was dragged down by $304 million in goodwill and other charges. Europe and electronics retailing were identified by the investment press as the weakest links, but a majority are keeping the faith and rate it a buy.

The newsletters were quick to point to continued signs of improvement in the US market as a reason to buy – 63% of revenue was derived from there in 2013 compared with 22% from Europe. But it’s early days yet. Sims will be counting on further recovery in the US market over the next few years, the investment press says, which will be needed since there’s every chance Europe will continue to lag for some time.

Falling global scrap prices and lower volumes are a concern, so cutting costs will be key, the newsletters say. Sims has employed some cost-saving measures over the past year by reducing the headcount but the newsletters say it’s not enough. They want to see more cuts in the coming year without hurting productivity.

Sims did not declare a final dividend for 2013, with the company focused on capital management and debt reduction. For investors keen to get exposure to the recovery in the US and Europe, Sims is a long-term buy, the newsletters say. Also see Tim Treadgold's article, Recycling Sims.

  • Investors are generally advised to buy Sims Metal Management at current levels.

AWE Ltd (AWE)

AWE Ltd swung back into the black in fiscal 2013 with a $20 million statutory net profit after tax (NPAT) and $17.1 million underlying NPAT, but failed to meet market expectations. The result was affected by depreciation and high operating costs, the newsletters say.

Investors sold off the shares in response, sending the share price to $1.28 at today's close. Despite the disappointing result, the newsletters are more optimistic and rate it a buy.

Total oil and gas production was 5 million barrels of oil equivalent (boe), a 6% rise on the previous year due to the BassGas project coming back online in October 2012 and increased production at its Sugarloaf asset in the US.

Managing director Bruce Clement said the result was “further enhanced” by the company’s 2P (proven and probable) reserves, which had more than doubled to 110 million boe from 2012, “representing more than 20 years of current production”.

Further growth is expected from Sugarloaf and the Ande Ande Lumut oil field development project.

The company’s balance sheet is in decent shape following the sale of a 50% stake in the Northwest Natuna production sharing contract to Santos Ltd for $US188 million, the investment press says, although the sale is still subject to Indonesian regulatory approval.

Looking ahead, the newsletters are of the view that FY14 production guidance looks conservative. Last year, AWE guidance for FY13 was also conservative and then upgraded during the year. The newsletters think the same could happen again this year.

While the investment press has some concerns, including rising costs of oil and gas developments, the general view is that AWE is still undervalued and a good buy at the current price.

  • Investors are generally advised to buy AWE Ltd at current levels.

Mirvac Group (MGR)

Mirvac Group reported operating profit of $377.6 million for fiscal 2013, slightly ahead of guidance and analyst expectations. The investment press in the main thinks this is one to hold given the outlook for growth.

The newsletters were pretty satisfied with the residential division’s performance in the year and are expecting more of the same going forward. During the year 1,809 lots were settled, above the previously forecast 1,600-1,700. Lower interest rates contributed to the welcome boost, the newsletters say, and some have since raised medium-term earnings forecasts for the division as a result.

One source also notes that strong residential sales at Harold Park in Sydney allow for further visibility into FY15.

Elsewhere, the office division performed OK during the year in a tough market, although one source is looking for profitability to pick up.

Mirvac issued FY14 guidance of between 11.7 to 12 cents per share, implying growth of between 7-10% for the year, which impressed the newsletters.

But there could be storm clouds on the way. One source is concerned that deteriorating economic conditions could see price declines, putting pressure on margins.

The group’s solid balance sheet offsets some of these concerns. The newsletters think Mirvac is in pretty decent financial health, with no substantial debt maturing until 2015.

The newsletters also pointed to the outlook for the company's development division, with major projects in Sydney and Melbourne expected to deliver additional earnings in the coming years.

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

Carsales (CRZ)

Online classifieds operator Carsales.com is in a very strong position to benefit from the car advertising market migrating online, and its expansion plans overseas deliver further potential for growth, the newsletters say.

Earlier this month, the company reported net profit after tax of $83.5 million for fiscal 2013, a 17% rise on the previous year. Enquiry volumes on new cars were higher than the previous year, as were the number of cars advertised.

The company is in very good financial health, with no debt and excess cash flow. The newsletters are keen to point out its considerable competitive advantage but some are concerned that it’s headed for slower growth at home given its core markets are maturing, although not all share this view.

Expansion plans offshore should offset these concerns. During the year, Carsales bought a 19.9% stake in iCar Asia, which operates in South-East Asian markets and a 30% stake in Webmotors SA, the largest online car classifieds site in Brazil. But the move into emerging markets isn’t without its risks, and some of the newsletters are cautious.

Product development is another encouraging sign for growth. Apart from the automobile market, the company also owns websites for motorbikes and marine classifieds. General classifieds website quicksales.com.au was also launched during the year. CEO Greg Roebuck has deemed the general classifieds website a “priority”, given the potential for growth. This one’s rated hold for now.

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

Caltex Australia (CTX)

Caltex Australia reported first-half replacement cost net profit – a measure that excludes the value of stockpiles – of $171 million, a 13% decline from the previous corresponding period but at the upper end of the company’s forecast range. The newsletters see challenging times ahead, but still rate it a hold.

The decline in profit came on the back of a lower Australian dollar and following an outage at its Brisbane refinery. As Eureka Report’s Ian Verrender noted earlier this week, the weaker Australian dollar translated to higher short-term costs for crude and product payables (see Dollar drop too late for Caltex).

But it’s not all bad news. While the short-term impact of the lower dollar has been a hindrance, over the medium term Caltex expects that it could deliver a welcome boost to refining margins.

The Kurnell refinery closure plan is on track, but one source thinks it will leave the company more exposed to the risk of rising oil prices. Another says there is also the risk that the cost of the closure will run over, since it’s an older refinery and there could be environmental issues.

The increasingly competitive environment is one to watch, the investment press says. During the year to June, Coles ramped up price discounting on its shopping dockets, putting pressure on Caltex’s bottom line. The Australian Competition and Consumer Commission (ACCC) is currently reviewing the petrol discounting scheme operated by both major supermarkets and investors will be keen to see how it plays out.

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

Watching the Directors

BHP Billiton dominated on the director’s trades front last week, with a number of the management team selling shares. About $16 million worth of shares were offloaded by directors after they received a hefty chunk of free scrip, mostly to meet tax obligations. New chief executive Andrew Mackenzie featured prominently on the list, selling 137,842 shares on the London Stock Exchange at an average price of £18.75 to satisfy expected tax obligations and to fund the cost of exercising $520,724 Group Incentive Scheme (GIS) Options.

There were also a couple of BHP directors on the buyers list last week. Non-executive director Carolyn Hewson bought 7,000 shares at a price of $34.88 apiece in on-market trades, while Lindsay Maxsted, also a non-executive director, bought 3,500 shares at $35.95 each in on-market trades.

Elsewhere Domino’s Pizza chief executive, Donald Meij, sold 400,000 of the company’s shares at 13.03 apiece in off-market trades.

Takeover Action August 21-28, 2013

DateTargetASXBidder(%)Notes
02/07/2013Argosy MineralsAGYBaru Resources0.00
23/08/2013Australian Power & Gas CompanyAPKAGL Energy41.42
28/08/2013Breakaway ResourcesBRWMinotaur Exploration44.89
28/08/2013Central Australian PhosphateCENRum Jungle Resources76.24
05/06/2013CIC AustraliaCNBPeet85.18
01/07/2013Elemental MineralsELMDingyi Group Investment13.69
18/03/2013Energia MineralsEMXCauldron Energy0.00
31/07/2013Firestone EnergyFSEWaterberg Coal Co45.07
26/08/2013GraincorpGNCArcher Daniels Midland26.82
08/08/2013Lemur ResourcesLMRBushveld Minerals16.77
13/08/2013Red River ResourcesRVRIron Mountain Mining69.11Closed
07/05/2013Trust CompanyTRUEquity Trustees2.54
11/06/2013World Oil ResourcesWLRHoldrey15.10
28/08/2013EnvestraENVAPA Group33.00
Schemes of Arrangement
20/08/2013PolymetalsSXGSouthern Cross Goldfields100.00
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
10/07/2013RHGRHGPepper Australia0.00Competing proposal
28/08/2013Rockwell MineralsELTElementos0.0090% acceptance condition satisfied 
Source: NewsBites