Collected Wisdom

This week we look at CSR, James Hardie, Downer EDI, Computershare, and GrainCorp.

Summary: The newsletters consider CSR and James Hardie have good exposure to the upturn in the building sector, and like the looks of both Downer EDI and Computershare.But they point to uncertainty at GrainCorp around the bid by US good group Archer Daniels Midland.
Key take-out: The investment press are broadly optimistic on the outlook for Computershare over the medium to long term.
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.

CSR (CSR)

Building materials group CSR almost doubled its net profit in the September half on the back of improved pricing and lower operating costs following ‘restructuring initiatives’. For the six months to September, CSR posted a net profit of $36.2 million, a 92% increase on the previous corresponding period.

In a sign of continued confidence in the recovery in the housing market, management expects net profit after tax (before significant items) will be towards the upper end of the current forecast analyst range of between $51 million and $70 million.

Following the strong result, a number of analysts upgraded their price targets for the stock, but a majority still rate it a hold at the current price of $2.67. The consensus price target among analysts is just shy of $2.50.

As expected, Viridian glass dragged down the result, with the division posting an earnings before interest and tax (EBIT) loss of $10.6 million for the six months. The investment press found the silver lining in these numbers, saying that the loss was “in line” with expectations and shows that the unit’s recovery is underway. Management is forecasting the division will break even by FY15.

For the most part, the newsletters are confident CSR will deliver solid earnings growth in the coming years on the back of a continued recovery in the housing market. That said, its four businesses (building products, aluminium, property and Veridian glass) are heavily exposed to the housing cycle, so any weakness in the sector will have a significant impact.

* According to our value investor partners, StocksInValue, the intrinsic value for CSR is $1.80. To find out more visit http://www.stocksinvalue.com.au/

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

James Hardie (JHX)

James Hardie posted its first-half results last week with net profit more than doubling to $US194 million amid signs the US housing market is improving.

Underlying profit increased by 31% to $US108.3 million (excluding asbestos and other adjustments) in the six months to September 30 on strong volumes and high margins, much of it driven by a 25% boost to group sales revenue driven by growth in the US market.

The building supplies manufacturer also impressed the newsletters by increasing its full-year guidance from between $US165 million and $US194 million to between $US180 million and $US195 million, above consensus forecasts, and by lifting its interim dividend by 60% to 8 cents a share. This puts the forecast dividend yield of the company at 3.8% for 2013-14.

Despite the strong result, the majority of the investment press rate the stock a hold, given recent share price gains. Shares in the company soared 15% to a record high of $12.07 on the news last week but closed lower at $11.90 today. At these levels the price-earnings ratio is around 23 times – well above the average 17 times of its peers in the US.

While the stock may be able to maintain such a premium given James Hardie’s strong cash flow generation providing support to its yield and reinvestments in the business, analysts don’t see it going higher with a consensus price target in line with the current price.

The newsletters also note that James Hardie continues to be dogged by asbestos liabilities that constrain its ability to grow at its normal rate as 35% of its cash flows are devoted to funding them. Claims for mesothelioma – a cancer caused by exposure to asbestos – are tracking higher, many of them large claims settling at more than $1 million each.

  • Investors are generally advised to hold James Hardie at current levels.

Downer EDI (DOW)

Engineering group Downer EDI has just won a four-and-a-half year contract worth $500 million for the provision of early mining services at Gina Rinehart’s Roy Hill iron ore project in Western Australia. Infrastructure construction is expected to start in early CY14, before proceeding to full-scale mining in the second half of the year.

The investment press was encouraged by the announcement, pointing out that this is one of the few mining contracts being tendered at the moment. The project will involve a fleet of 18 haul trucks and two excavators, and will employ over 220 people. The group expects capital required to come in at $110 million.

Leaving aside the new contract, the newsletters also point to efficiency improvements in Downer’s mining business as another positive development. This has helped the group stay on track with full-year guidance, unlike some of its peers. Downer reaffirmed guidance for 2013-14 at its recent annual general meeting, forecasting net profit of around $215 million.

Downer is the preferred pick in the sector for a number of reasons, one source says, including solid cash flow, a healthy balance sheet and management. Currently trading on a forward PE ratio of 10.6 times, Downer is hardly looking stretched.

That said, Alan Kohler’s recent interview with Downer chief executive Grant Fenn highlights the headwinds the group is facing (see Kohler's Week: US payrolls, The 3rd Plenary, RBA Vs the Dollar, The Banks). Mining services companies are currently out of favour with many investors, but for those with a long-term view and a healthy appetite for risk, Downer is one to consider buying, the newsletters say.

* According to our value investor partners, StocksInValue, the intrinsic value for Downer EDI is $2.78. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to buy Downer EDI at current levels.

Computershare (CPU)

Computershare maintained earnings guidance of 5% earnings per share growth for FY14 at its recent annual general meeting, despite ‘encouraging signs’ that the operating environment is improving. A number of sources point to upside risk to the current guidance from increased corporate activity in the market, but say Computershare’s caution is a sign of ongoing uncertainty for the second half.

Over the medium to long term, the newsletters are broadly optimistic on the outlook for Computershare, with a number pointing out that the group is in a favourable position to benefit from a sustained recovery in North America and the UK. Indeed, more than 40% of Computershare’s revenue is currently derived from the US. The acquisition of the Bank of New York Mellon's shareowner services business will be a strong driver of growth in the region, one source says.

At the AGM, Computershare also reiterated its focus on driving growth through loan servicing, employee share plans and back office, while protecting its mature businesses and keeping costs down. Expectations for a lower Australian dollar and a recovery in global interest rates are also expected to be of benefit to the group over the long term, one source notes.

While the outlook is broadly positive for the group, some are a bit concerned about its strategy of growth through acquisition. While Computershare has had much success in acquiring and integrating new businesses into its share registry division in the past, the group will need to look outside this core business for growth in the future, which poses a risk, one source says.

* According to our value investor partners, StocksInValue, the intrinsic value for Computershare is $7.73. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to buy Computershare at current levels.

GrainCorp (GNC)

GrainCorp’s share price continues to decline on speculation that the government may reject US food giant Archer Daniels Midland’s (ADM’s) takeover bid.

With the share price sitting at $11.16, the newsletters say it may be best to wait and see how the takeover plays out in the coming weeks. That said, while one source is quietly confident the deal will be approved, others are less so and say risk-averse shareholders may want to exit now. For the most part, the newsletters still rate GrainCorp a hold.

The offer as it stands is $13.20 per share, consisting of $12.20 in cash from ADM and a $1 special dividend from GrainCorp. An additional fully franked dividend of 3.5 cents is also payable for each month of delay from October 1.

Treasurer Joe Hockey has given December 17 as the date by which the Foreign Investment Review Board, or FIRB, will make a decision on the takeover, but media speculation has shareholders spooked. Reports last week suggested that Prime Minister Tony Abbott was poised to veto the bid or impose conditions that would make the takeover unworkable. Just a week ago, GrainCorp shares were trading at $12.19. They closed today’s session at $11.155. Abbott has since denied that he’s been putting pressure on Hockey to reject the bid, but shareholders remain concerned.

Amid all the takeover speculation, GrainCorp has just released FY13 numbers, with adjusted net profit after tax (NPAT) falling 15% in the year, to $175 million. The outlook for the coming year is challenging, GrainCorp said, with the group expecting lower than average grain receivables and exports amid poor weather conditions.

* According to our value investor partners, StocksInValue, the intrinsic value for GrainCorp is $7.37. To find out more visit http://www.stocksinvalue.com.au/

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

Watching the Directors

  • Fortescue Metals chairman Andrew Forrest topped the buying list last week, splashing out $10,993,722 for 2,000,000 shares in the iron ore miner.
  • Elsewhere, four of the six Webjet directors went on a buying spree last week: Non-executive director Steven Scheuer spent $404,706 for 150,000 shares, while directors Roger Sharp, Allan Nuham and David Clarke spent a combined $301,875 for a total of 111,133 of the company’s shares.
  • On the selling side, Westpac chief executive Gail Kelly netted herself $11,956,000 after selling 350,000 Westpac shares on-market.
  • Meanwhile, Magellan Financial Group director, Naomi Milgrom, offloaded 654,509 of the company’s shares for $7,237,768, while chairman Brett Cairns also sold 100,000 shares for $1,101,485.

Takeover Action November 14-20, 2013

DateTargetASXBidder(%)Notes
15/11/2013Argosy MineralsAGYBaru Resources87.85Closing Oct 31
18/11/2013Central Australian PhosphateCENRum Jungle Resources90.34Compulsory acquisition
01/11/2013CoalbankCBQLoyal Strategic Investment62.2775% proportional offer
19/11/2013Commonwealth Property OfficeCPAGPT Management6.46
14/11/2013Elemental MineralsELMDingyi Group Investment30.58Ext to Jan 31
20/11/2013Emerald Oil & GasEMRConfederate Capital Pty Ltd24.7330% proportional offer. Closes Nov 30
06/11/2013Energia MineralsEMXCauldron Energy0.00Closing Feb 6
28/08/2013EnvestraENVAPA Group33.00
15/11/2013Inova ResourcesIVAShanxi Donghui95.37Compulsory acquisition
29/10/2013GraincorpGNCArcher Daniels Midland28.32FIRB decision by Dec 17
19/11/2013Kuth EnergyKENGeodynamics79.84
21/10/2013Marathon ResourcesMTNBentley Capital19.98
13/11/2013Scott CorporationSCCK & S Corporation0.0075% minimum
13/11/2013Trust CompanyTRUEquity Trustees1.85Revised offer unconditional
31/10/2013Warrnambool Cheese & ButterWCBBega Cheese18.00ACCC clearance
12/11/2013Warrnambool Cheese & ButterWCBSaputo Inc0.00FIRB clearance. Closing early Dec 
18/10/2013Warrnambool Cheese & ButterWCBMurray Goulburn Co-operative Co0.00
Schemes of Arrangement
15/11/2013CloughCLOMurray & Roberts Holdings61.60Approved
07/11/2013RHGRHGResimac-Australian Mortgage Acquisition Co0.00Vote Dec 18
03/09/2013Trust CompanyTRUIOOF Holdings0.00Vote Nov
16/10/2013Trust CompanyTRUPerpetual0.00Board supports proposal. ACCC and Monetary Auth S'pore, NZIO clearance. Vote Nov 28
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
12/11/2013Commonwealth Property Office FundCPADexus Property & Canada Pension Plan24.73Indicative offer
Source: NewsBites

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