Collected Wisdom

This week we look at Bank of Queensland, CLS, Cochlear, Mesoblast, and OZ Minerals.

Summary: The newsletters point for further challenges ahead for Bank of Queensland, despite recent improvements. Meanwhile, they are positive on the prospects for CSL, but are disappointed with Cochlear, and are neutral on both Mesoblast and OZ Minerals.
Key take-out: The investment press notes the profit turnaround at Bank of Queensland, and the subsequent rise in its dividend and share price, but believes competition from the “big four” will challenge the second-tier bank.
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.

Bank of Queensland (BOQ)

Bank of Queensland’s turnaround looks firmly on track, with the regional lender swinging back to profit in FY13 after recording a $17.1 million loss in 2012.

The bank posted a statutory profit of $185.8 million for the year and cash earnings after tax of $250.9 million, with the result driven by a reduction in loan impairment expenses and improved credit management. Indeed, the bank managed to reduce the loan impairment expense by 71% to $114.6 million.

Shareholders cheered the result, pushing the share price up more than 6% on the news. The increased dividend contributed to the bump in the share price, with the final dividend of 30 cents taking the full-year dividend to 58 cents, up 12% on last year. At the current share price, the dividend yield for shareholders is just over 5%.

Commenting on the result, chief executive Stuart Grimshaw said that all of the bank’s key management targets had been met during the year with the exception of retail asset growth. A recovery in the residential property market in Queensland still eludes the bank, but the newsletters are confident that the long-term fundamentals remain positive, despite short-term headwinds.

Grimshaw also commented on the competitive environment, saying any proposed Federal financial services inquiry should look to improve competition for consumers. One source says BOQ needs to focus on improving its own operations rather than worrying about the regulatory environment, but another points out that the big four’s dominance in the market and funding advantages inevitably mean BOQ struggles to compete.

Looking ahead, the investment press says that while the bank has staged an impressive turnaround in a short space of time, challenges will continue.

* Prior to the latest set of number our value investor partners, StocksInValue, valued BOQ at $7.08. This valuation is currently under review. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Bank of Queensland.

CSL (CSL)

Blood plasma group CSL recently settled a class action with a number of hospitals in the US and Puerto Rico, agreeing to pay $US64million, just a fraction of the $1 billion originally sought.

The settlement comes after a four-year legal battle that saw CSL accused of conspiring with its major competitor, US-listed Baxter, to fix the price of two of its dominant blood products over a seven-year period.

Chief executive Paul Perreault rejected the allegations, but said the group had negotiated a settlement in the best interest of the company and its shareholders.

Overall the investment press is relieved that the battle is coming to an end, but a couple of sources expressed disappointment that CSL settled, given the group remains adamant it did nothing wrong.

Still, there’s no doubt that the settlement, if approved by the US federal court, will allow CSL and shareholders to move on.

At today’s AGM, Perrault confirmed that the settlement will eat into CSL’s FY14 net profit, with the one-off charge reducing NPAT by an expected US$39 million. As a result, profit for the year is expected to grow by about 7% rather than the 10% forecast in mid-August.

CSL also today announced another buyback as part of its capital management program, this one for $950 million over 12 months.

While a couple of sources rate CSL a hold at the current share price, the majority think it has further to run. One source says industry dynamics remain supportive, while another concludes that the fundamentals remain sound for the group, given the continued strong demand and rising prices.

* According to our value investor partners, StocksInValue, the intrinsic value for CSL is $41.83. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to buy CSL.

Cochlear (COH)

Hearing implant maker Cochlear disappointed shareholders again this week, forecasting flat profit in the current financial year as its operating margin comes under pressure.

The investment press says the latest update, issued at the group’s annual general meeting, implies the FY14 result will be heavily biased to the second half. But while management sees headwinds as short term and is confident of long-term growth prospects, the majority of the investment press says the challenges are likely to continue, keeping the share price and earnings under pressure.

The highly competitive marketplace is an ongoing issue for Cochlear. The group is struggling to stem market share loss as competition heats up across all of its major markets. Last month, the group lost a large Chinese government tender to Swiss rival Sonova. (For more on this see Cochlear hard of hearing).

The dividend is another worry for the investment press. At the AGM, Cochlear forecast an interim dividend of $1.27, and a final dividend of the same amount. The newsletters point out that this would see the group pay a dividend above its earnings for the second year running.

Although a small number of sources still have faith in Cochlear and think the current share price may represent a buying opportunity, a majority of analysts rate it a sell.

* According to our value investor partners, StocksInValue, the intrinsic value for Cochlear is $40.19. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to sell Cochlear.

Mesoblast (MSB)

Mesoblast shares surged at the end of last week after the stem cell group announced it will buy the culture-expanded mesenchymal stem cell (MSC) business of NASDAQ-listed Osiris Therapeutics.

Mesoblast will pay Osiris $US20 million cash and $US15 million in Mesoblast stock, while a further $US15 million cash will be paid in six months’ time. Osiris will also receive up to $US50 million “in milestones contingent on the achievement of future late-stage clinical or regulatory targets (for example, United States or European regulatory approvals),” the group said.

The investment press says the acquisition brings more infrastructure and expertise to the group as well as complementing Mesoblast’s existing pipeline. The deal will see Mesoblast gain access to two products for the treatment of Crohn’s disease that are in the final stages of clinical trials. But the investment press is quick to point out that while Mesoblast provides shareholders with a unique exposure to the pharmaceutical sector, it is still a high-risk holding. Uncertainty surrounding future earnings makes it difficult to estimate fair value, one source says. And while its share price will drive higher as product development continues, there are still risks around clinical trials. After all, the group has still not successfully developed a product that has been commercialised…yet.

One positive element that the investment press has picked up on is the strong balance sheet. Mesoblast currently has an impressive $315 million sitting on its balance sheet, which the newsletters say will likely be earmarked for further product development, last-stage clinical trials and commercial manufacturing.

  • Investors are generally advised to hold Mesoblast.

OZ Minerals (OZL)

The bad news just keeps on coming for OZ Minerals. The copper and gold miner revealed earlier this week that it will miss its full-year production target after a weak third quarter. Shareholders ran for the exit on the news, with the share price dropping 9%. While some say at the shares look undervalued at current levels, others are more cautious.

Updating the market on the September quarter, Oz Minerals said copper grades at the Prominent Hill mine were lower than expected. One source thinks there may be further bad news at December's reserve and life of mine update, while another says FY14 guidance may be revised in the near future.

Managing director Terry Burgess had previously warned that 2013 would be a difficult year, but the quarterly numbers still came in lower than expected. In this latest update, Burgess said the lower guidance was a result of the company taking a long-term approach to mining the pit rather than focusing on short-term guidance targets.

Some of the investment press expects mining conditions to improve in 2014, which will in turn lead to production growth, but as a whole analysts seem to be waiting for December’s review before making any big calls on FY14 expectations. The general view is that near term uncertainties will remain for Oz Minerals. Analysts will be counting down the days to December’s update.

* According to our value investor partners, StocksInValue, the intrinsic value for OZ Minerals is $2.29. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold OZ Minerals.

Watching the Directors

  • Lend Lease chief executive Stephen McCann was one of last week’s biggest sellers. He sold 200,000 of the company’s shares on market for a cool $4,700,000 to “fund income tax obligations and reduce debt”.
  • Elsewhere, Carsales.com chairman Walter Pisciotta was also in a selling mood, offloading 101,593 shares for $1,165,203 through a family trust.
  • On the buying side, Treasury Wine interim chief executive Warwick Every-Burns splashed out $114,489 for 25,000 of the company’s shares on market.

Takeover Action October 10-16, 2013

DateTargetASXBidder(%)Notes
15/10/2013Argosy MineralsAGYBaru Resources80.66Closing Oct 31
11/10/2013Australian Power & Gas CompanyAPKAGL Energy97.86
11/10/2013Breakaway ResourcesBRWMinotaur Exploration89.00
09/10/2013Central Australian PhosphateCENRum Jungle Resources83.43Ext to Oct 11
14/10/2013CoalbankCBQLoyal Strategic Investment46.2875% proportional offer
11/10/2013Elemental MineralsELMDingyi Group Investment27.40
01/10/2013Emerald Oil & GasEMRConfederate Capital Pty Ltd14.0730% proportional offer
26/07/2013Energia MineralsEMXCauldron Energy0.00Closing Nov 16
28/08/2013EnvestraENVAPA Group33.00
04/10/2013GraincorpGNCArcher Daniels Midland27.98FIRB decision by Dec 17
10/10/2013Kuth EnergyKENGeodynamics0.00
26/09/2013Lemur ResourcesLMRBushveld Minerals53.67
17/09/2013Trust CompanyTRUEquity Trustees2.54Mutual due diligence. Ext to Nov 29
12/09/2013Warrnambool Cheese & ButterWCBBega Cheese18.00
08/10/2013Warrnambool Cheese & ButterWCBSaputo Inc0.00Closing early Dec 
Schemes of Arrangement
11/10/2013CloughCLOMurray & Roberts Holdings61.60Vote Nov 15
23/08/2013Platinum AustraliaPLAJubilee Platinum0.00Vote adjourned for amendments. Suspended from ASX.
15/10/2013RHGRHGResimac-Australian Mortgage Acquisition Co0.00Trading halt, pending announcement
03/09/2013Trust CompanyTRUIOOF Holdings0.00Vote Nov
27/09/2013Trust CompanyTRUPerpetual0.00Board supports proposal. ACCC and Monetary Auth S'pore, NZIO clearance
Foreshadowed Offers
04/10/2013Billabong InternationalBBGCoastal Capital7.59Post 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
15/10/2013RHGRHGPepper Australia0.00Trading halt, pending announcement 
Source: NewsBites