Collected Wisdom

This week we look at Myer, Rio Tinto, Crown, McMillan Shakespeare, and Westfield Group.

Summary: The newsletters believe there is still much work to do around retailer Myer, while mining giant Rio Tinto has strong growth potential, entertainment group Crown is a good play, shopping centre group Westfield is a hold, while McMillan Shakespeare is set to underperform.
Key take-out: The investment press is concerned over Myer’s weaker than expected result and poor sales outlook, despite moves by the group to improve operations and margins.
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.

Myer Holdings (MYR)

Investors punished Myer when the retailer came out with its full-year results last week, with the share price dropping more than 5% on the day. Myer’s result was weaker than expected, with net profit after tax sliding 8.7% to $127 million on like-for-like sales growth of just 0.4% to $3.145 billion.

What disappointed investors most was the outlook provided by chief executive Bernie Brookes, who warned that weaker sales are expected for the next six months alongside another profit fall for 2014. Costs rose faster than sales in the year and a similar trend is expected in FY14. Myer expects the cost of doing business will increase by 4% to 5% in FY14, putting another dent in earnings. Profit growth isn’t expected to return until 2015.

There were, however, some positives in the numbers, the newsletters say. The operating gross profit gained 1.8% to $1.312 billion on the back of growth in its “Myer Exclusive Brands”, reduced losses from theft –now under 1% – and improved “markdown management” (discounting strategies). Another looks at the price/earnings ratio, saying at 12.9 times, Myer is trading at a discount to its peers.

The investment press says Brookes is fighting the good fight, but for the most part they just don’t see enough to like about Myer. Sales are 5% lower than five years ago, despite more stores being opened. The newsletters’ advice: Brookes needs to increase staffing levels in order to grow sales faster than costs, but also needs to invest more in the online business.

* According to our value investor partners, StocksInValue, the intrinsic value for Myer Holdings is $2.42. To find out more visit http://www.stocksinvalue.com.au/

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

Rio Tinto (RIO)

Mining giant Rio Tinto has taken a bullish view of its growth plans in the Pilbara, and analysts are convinced. Resources companies have been hit hard for most of this year over fears of a slump in demand for iron ore, but fears have thus far proved unfounded. Prices of the base metal are currently at about $US135 a tonne, a significant improvement from the $US86 a tonne this time last year.

Rio chief Sam Walsh has big plans for the future: he is looking to stem the operating and capital cost escalation that has plagued the miner in recent years. Analysts say the plan is to slash cash costs from $US47 a tonne in 2012 to $US35.50 a tonne by 2020. Capital expenditure is also expected to be cut back over the period, with a target of $US140 a tonne for each additional tonne of capacity in its expected increased production rate of 290 million tonnes to 360 million tonnes per annum. See Tim Treadgold’s article last week, A rethink on Rio.

The forecast cost reductions are as a result of easing inflationary pressures and a lower dollar, as well as technology improvements and the benefits of scale, the newsletters say.

Rio’s update comes amid strong data from China, but in the short term some analysts forecast further weakness in the iron ore price as Chinese steel mills begin seasonal easing of production rates.

Rio’s current price of $63 is well below the consensus price forecast of $76, leading a majority of analysts to rate it a buy.

* According to our value investor partners, StocksInValue, the intrinsic value for Rio Tinto is $58.75. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to buy Rio Tinto at current levels.

Crown (CWN)

James Packer’s Crown had an impressive FY13, beating analyst expectations with a 14% increase in underlying earnings, but it’s not just domestic operations that are getting attention: the group’s progress offshore has also captured the attention of the investment press.

Packer’s Macau casino investment, Melco Crown, is a shining light for the group and remains a key driver of growth, the newsletters say. Melco Crown now accounts for more than a third of overall earnings and half of Crown’s market capitalisation, says one source. The division saw a 65% lift in profit contributions in FY13.

Packer’s strategy of targeting the premium end of the mass market rather than just VIP high rollers certainly sits well with some: according to government data released last week, Macau gaming revenue rose to 30.7 billion patacas ($A4.3 billion) in August.

Looking forward, Melco Crown is expected to begin construction on a fifth tower at its City of Dreams property on Macau's Cotai strip this year, while its $2 billion Studio City resort, also in Macau, is due to open in mid-2015.

Expansion plans for Sri Lanka are also progressing nicely. Last week, Crown received a key approval to build a $380 million hotel and leisure resort in the Sri Lankan capital of Colombo. The government has given the go-ahead to Crown and its local partner, Rank Entertainment Holdings, in a deal that is said to include generous tax concessions and a two-tower design. The deal still requires approval by Sri Lanka's parliament.

Back at home, analysts say Crown is a good choice for those looking to play to an increase in Chinese consumerism and tourism.

* According to our value investor partners, StocksInValue, the intrinsic value for Crown Limited is $8.13. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Crown Limited at current levels.

McMillan Shakespeare (MMS)

The federal election is done and dusted and McMillan Shakespeare can breathe a little easier: With a Coalition government at the helm, there’s not much risk of the current fringe benefits tax scheme for novated car leases being axed anytime soon.

The change in government has prompted analysts to take a fresh look at McMillan but for the most part the newsletters still rate it a sell, given the sensitivity of the stock.

The investment press says FY14 is likely to be a volatile year for the company, given the rollercoaster it’s been on in recent months. McMillan chief Michael Kay echoed these concerns when he gave his assessment of the damage done at the company’s full-year results presentation.

"We think Labor's announcement on the proposed taxes and air bubble created in our system is likely to have a material adverse effect on our remuneration services segment in FY14," he said.

Kay said that while “some people will take the view regulatory risk has increased; others will take the view it has significantly decreased". If nothing else, Labor’s attack on FBT and McMillan’s subsequent share price plunge will have set off alarm bells in many investors’ minds and gives a clue as to what to expect when another government looks at FBT.

The lack of guidance given by McMillan certainly hasn’t helped matters either. Instead, investors will have to wait until the company's annual general meeting in October.

* According to our value investor partners, StocksInValue, the intrinsic value for McMillan Shakespeare is $10.91. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to sell McMillan Shakespeare at current levels.

Westfield Group (WDC)

Westfield Group is continuing with its strategy to divest non-core lower-quality assets in the US, having just sold majority stakes in seven shopping centres to a Starwood Capital affiliate for $US1.64 billion. The group will retain a 10% common equity interest, while the centres will be owned and managed by Starwood Capital. Having taken a close look at this latest development, the newsletters for the most part say Westfield’s a hold.

It follows the group’s decision to sell six Florida malls to O’Connor Capital Partners for $US700 million in March, while Westfield also divested seven US malls to Starwood for $US1 billion in April 2012.

The group plans to redeploy capital into superior retail destinations in major cities, Westfield chief executive Peter Lowy said in a statement. One source says the strategy should in part mitigate the impact of reduced consumer spending in shopping malls and will also help ensure the tenant mix is largely made up of successful retailers, which will help support higher rents.

The move comes after Westfield Group and Westfield Retail Trust last week sold their combined 33% stake in the Karrinyup shopping centre in Perth to UniSuper for $246 million. That sale surprised the market, but at a 19% premium to book value, the $740 million price proved too tempting to ignore, one source says.

Another notes that while the latest sale dilutes funds from operations (FFO) by 4.5 cents per security, the redeployment of capital as well as the ongoing share buyback means FFO for the year to December 31 should still come in at 66.5 cents per security, with a distribution of 51 cents per security.

* According to our value investor partners, StocksInValue, the intrinsic value for Westfield Group is $6.58. To find out more visit http://www.stocksinvalue.com.au/

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

Watching the Directors

Woolworths' chairman Ralph Waters topped the buyers list last week, forking out $999,168 for 28,300 of the company’s shares on market.

Elsewhere, iSelect co-founder Damien Waller bought 176,000 of the company’s shares for $245,108, or an average price of $1.39 apiece. He wasn’t the only one looking to buy. Aside from Waller, four other iSelect directors spent about $120,000 buying up shares in the company last week.

On the selling side, Wesfarmers' chief executive Richard Goyder netted $2,281,333 after offloading 55,834 shares on market “to raise funds to meet a tax liability associated with the shares allocated as part of the 2009/10 annual incentive plan”.

Takeover Action September 12-18, 2013

DateTargetASXBidder(%)Notes
13/09/2013Argosy MineralsAGYBaru Resources33.22Closing Oct 3
18/09/2013Australian Power & Gas CompanyAPKAGL Energy87.89
18/09/2013Breakaway ResourcesBRWMinotaur Exploration73.80
18/09/2013Central Australian PhosphateCENRum Jungle Resources80 Ext to Oct 11
18/09/2013Elemental MineralsELMDingyi Group Investment22.70
26/07/2013Energia MineralsEMXCauldron Energy0.00Closing Nov 16
28/08/2013EnvestraENVAPA Group33.00
06/09/2013Firestone EnergyFSEWaterberg Coal Co45.07Ext to Sep 18
30/08/2013GraincorpGNCArcher Daniels Midland27.98
03/09/2013Lemur ResourcesLMRBushveld Minerals48.27
17/09/2013Trust CompanyTRUEquity Trustees2.54Mutual due diligence. Ext to Nov 29
11/06/2013World Oil ResourcesWLRHoldrey15.10
Schemes of Arrangement
21/08/2013Bravura SolutionsBVAIronbridge Capital0.00Vote Sep 23
29/08/2013CloughCLOMurray & Roberts Holdings61.60Vote mid-Nov
02/08/2013Emerald Oil & GasEMROchre Group Holdings16.00Vote Nov 1
23/08/2013Platinum AustraliaPLAJubilee Platinum0.00Vote adjourned for amendments. Suspended from ASX.
11/09/2013RHGRHGResimac-Australian Mortgage Acquisition Co0.00Superior to Pepper's
03/09/2013Trust CompanyTRUIOOF Holdings0.00Vote Nov
09/09/2013Trust CompanyTRUPerpetual0.00Board supports proposal
Foreshadowed Offers
02/09/2013Billabong InternationalBBGCoastal Capital0.00Re-financing/equity proposal
02/09/2013Billabong InternationalBBGAltamont Consortium0.00Re-financing/equity proposal
02/09/2013Billabong InternationalBBGCenterbidge/Oaktree Consortium0.00Re-financing/equity proposal
17/09/2013Continuation InvestmentsCOTDMX Corporation2.91Bid for two thirds of shares delayed. Rejected by 72.3% of holding
10/07/2013RHGRHGPepper Australia0.00Competing proposal
12/09/2013Warrnambool Cheese & ButterWCBBega Cheese18.00
Source: NewsBites