Collected Wisdom

This week we look at Treasury Wines Estates, Premier Investments, Boral, Brickworks and Washington H Soul Pattinson.

Summary: The newsletters are wary of possible additional asset write-downs at Treasury Wine Estates and rate it a sell, while they are impressed with the building materials group Brickworks and rate it a buy. Meanwhile, the newsletters rate retailer Premier Investment, Boral and Brickworks’ affiliate Washington H Soul Pattinson as holds.
Key take-out: The investment press are not convinced that the resignation of Treasury Wine Estate’s CEO will solve the company’s key issues, and are concerned over the future of its troubled US division.
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.

Treasury Wine Estates (TWE)

Treasury Wine Estates saw its share price fall sharply on Monday, before recovering slightly, following the news that chief executive David Dearie was leaving the company, effective immediately. The group is apparently looking for a CEO with more “operational focus”.

Dearie’s departure is linked to the company’s decision to destroy $35 million of worth of wine earlier this year, with chairman Paul Rayner saying that the company had undertaken a review of the write-down and “concluded that now is the right time to look for a new CEO”. Analysts didn’t take the news too favourably and are wary of the prospect of further write-downs in the US division.

One source says Dearie’s departure came as no surprise, given the inventory issue in the US had been going on for some time and shows a lack of control by senior management. Another says Dearie’s removal and the lack of succession planning shows incompetence on the board’s part.

A number of the investment press are of the view that the US division may be offloaded in the near term, likely at a decent discount to the $US2.9 billion Foster’s paid for Beringer Wine Estates in 2000. But one says such a move would be a mistake, given US earnings are depressed due to de-stocking and the cycle may turn in producers favour.

Despite the sharp share price drop earlier this week, the investment press still rate Treasury Wine a sell given the extremely uncertain future of the US division and the prospect that more bad news could be on the way.

* According to our value investor partners, StocksInValue, the intrinsic value for Treasury Wine Estates is $1.23. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to sell Treasury Wine Estates.

Premier Investments (PMV)

A glimpse at the latest set of numbers from Premier Investments is another reminder of the challenges retailers face in the current environment, but Premier is putting up an impressive fight, the newsletters say.

The group reported net profit of $174.5 million in the year to July 27, up from $68.3 million in the previous 12 months. This was partly due to an accounting change, with the 25.7% stake in Breville Group now being equity accounted and producing an after-tax benefit of $105.2 million. Excluding this change, Premier’s net earnings for the year rose 1.9% to $75 million, with earnings per share of 48.3c.

Compared with department stores Myer and David Jones, Premier’s result was none too shabby, the newsletters say. Myer’s net profit fell 8.7%, while David Jones, which reported full-year results earlier today, saw net profit decline 6% in FY13.

The result shows that the strategic review initiatives driven by chief executive Mark McInnes are starting to take hold, one source says.

But it seems not all seven brands are winning the battle. While Peter Alexander and Smiggle were top performers and Dotti and Portmans delivered solid numbers, Jacqui-E, Just Jeans and Jay Jays all lost sales during the year.

The launch of Smiggle in the UK is one initiative that could potentially drive a Europe-wide expansion if successful, the newsletters say. The first five to eight stores are expected to be operating by July 2014, while the UK could potentially see 200 stores established over the next five years. This follows a successful expansion into Singapore, where it has 17 stores. But the planned expansion into Japan is on hold for now.

* According to our value investor partners, StocksInValue, the intrinsic value for Premier Investments is $6.50. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Premier Investments.

Boral (BLD)

At an analyst presentation in the US last week, Boral said it expects its US division to return to profitability this year given the revival of the US housing market. Not all of the analysts are convinced, but a majority rate it a hold.

In the presentation, Boral forecast a “breakthrough to profitability’’ in the second half of FY14, by focusing on “market share and price, cost and cash management’’. The US division has been operating at a loss at the earnings before interest and tax (EBIT) level for the past five years, recording a $64 million loss in FY13.

Boral said the US housing market has seen 2% average quarterly growth since late 2009, and while the economy is still recovering, consumer confidence is now at a six-year high. What’s more, lending conditions are improving and foreclosures are down 61% from the peak in March 2010.

Management is also taking action to reduce the division’s reliance on the residential housing market, meaning it will be better protected in times of volatility. Currently, 66% of the division’s revenue comes from residential homes. Management wants to cut this to 50% by lifting both the non-residential and repair/remodel segments to 25% each.

US operations account for just over 10% of the group’s total revenues, with 78% coming from Australia and 11% from Asia. So, for Boral, it’s really the Australian property market that needs to kick up a notch, one source says.

However, there’s no denying shareholders will be relieved once US operations become profitable, with one source labelling it the “swing” division in regards to improved earnings.

* According to our value investor partners, StocksInValue, the intrinsic value for Boral Limited is $1.98. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Boral.

Brickworks (BKW)

Building products group Brickworks is also pinning its hopes on a sustained recovery in the housing market, but it’s testament to management’s strength that it delivered a 26.9% increase in normalised net profit after tax of $100 million in the 12 months to July 31, despite weak market conditions. Price increases and cost reductions in building products helped drive the result higher, the investment press say.

The newsletters were impressed with the result and a small majority rate it a buy, although the more than 30% share price rally over the past year has some exercising a bit more caution.

The property division was the star performer for the year, contributing EBIT of $49.6 million, a 161% rise on the previous year. The result was boosted by the sale of Oakdale South into the JV Property Trust for a profit of $23.4 million, the newsletters say.

Building products saw a 3.8% increase in revenue to $568.7 million and a 14.9% lift in EBIT to $32.8 million, while earnings from investments came in weaker than expected, declining 11.4% to $60 million.

After Washington H Soul Pattinson (in which it has a major cross shareholding), New Hope Coal and TPG Telecom are the group’s second and third-largest investment holdings. Holding such a diversified portfolio should deliver stable earnings over the long term, the newsletters say.

While no specific guidance was given at the results presentation, the investment press judged the commentary as positive and the building products group is expected to deliver improved earnings in FY14. Though the group remains optimistic about improving conditions, continued cost reductions and business improvement strategies will further boost margins, the newsletters say.

For more on Brickworks, see John Abernethy’s article Brickworks cements growth outlook.

* According to our value investor partners, StocksInValue, the intrinsic value for Brickworks is $12.53. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to buy Brickworks.

Washington H Soul Pattinson

For Washington H Soul Pattinson, higher contributions from Brickworks (in which it has a major cross shareholding) and TPG Telecom, as well as an improved result from CopperChem, were offset by lower earnings from the group’s holding in coal company New Hope. The newsletters aren’t discouraged, and note that conservative management and a strong balance sheet provide a measure of security for shareholders.

The investment house reported a 26.3% drop in net profit to $105 million for the 12 months to July 31, with the majority of the decline relating to impairments of $30.7 million taken by New Hope. Despite this, the group remains convinced its coal assets are well positioned to weather soft market conditions.

The newsletters expect profit to decline further in FY14 as lower earnings from New Hope continue to offset growth at TPG Telecom and an expected improvement at Brickworks. But growth is expected from FY15, and New Hope is cashed up enough to weather the current cycle, one source says.

The group is in a good position to make acquisitions should the opportunity arise, with a strong balance sheet and very little debt, although one source says chairman Robert Millner doesn’t think there are too many bargains in the market right now.

Looking at the long-term picture, as Ian Verrender wrote last week, the board has had to fend off prior attacks from Perpetual and investor Mark Carnegie to unwind the company’s cross holding with Brickworks (see: Soul Patts sticks to tradition). For the time being, from Millner’s point of view, there doesn’t seem to be too much of an incentive to separate the two.  The cross holding protects both from hostile takeover bids, but critics argue that it benefits the Millner family more than minority shareholders and that unwinding the pair could potentially unlock billions of dollars in value for shareholders.

* According to our value investor partners, StocksInValue, the intrinsic value for Washington H Soul Pattinson is $13.67. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Washington H Soul Pattinson.

Watching the Directors

On the buying side, Fortescue Metal Group’s Andrew “Twiggy” Forrest made headlines earlier this week after he splashed out $23,609,032 to add another 5,207,812 shares to his majority stake.

Meanwhile, Computershare’s Christopher Morris topped the sellers’ list last week, offloading 1,500,000 of the company’s shares to the tune of $14,918,227 in on-market trades.

Elsewhere, Ramsay Healthcare chief Christopher Rex was also a seller, netting himself $10,877,160 from the sale of 300,000 of the company’s shares in on-market trades.

Takeover Action September 19-25, 2013

DateTargetASXBidder(%)Notes
23/09/2013Argosy MineralsAGYBaru Resources62.81Closing Oct 3
24/09/2013Australian Power & Gas CompanyAPKAGL Energy90.26
24/09/2013Breakaway ResourcesBRWMinotaur Exploration76.25
20/09/2013Central Australian PhosphateCENRum Jungle Resources81.05Ext to Oct 11
24/09/2013CoalbankCBQLoyal Strategic Investment39.8175% ppl offer
24/09/2013Elemental MineralsELMDingyi Group Investment24.70
26/07/2013Energia MineralsEMXCauldron Energy0.00Closing Nov 16
28/08/2013EnvestraENVAPA Group33.00
18/09/2013Firestone EnergyFSEWaterberg Coal Co45.07Ext to Sep 23
30/08/2013GraincorpGNCArcher Daniels Midland27.98
25/09/2013Lemur ResourcesLMRBushveld Minerals52.00Trading halt
17/09/2013Trust CompanyTRUEquity Trustees2.54Mutual due diligence. Ext to Nov 29
11/06/2013World Oil ResourcesWLRHoldrey15.10
Schemes of Arrangement
23/09/2013Bravura SolutionsBVAIronbridge Capital0.00Approved
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
24/09/2013Trust CompanyTRUPerpetual0.00Board supports proposal. ACCC and Monetary Auth S'pore clearance
Foreshadowed Offers
19/09/2013Billabong InternationalBBGCoastal Capital0.00Post re-financing/equity proposal
19/09/2013Billabong InternationalBBGAltamont Consortium4.00Post re-financing/equity proposal
19/09/2013Billabong InternationalBBGCenterbidge/Oaktree Consortium33.90Post re-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

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