Collected Wisdom

This week we look at QBE Insurance, WorleyParsons, ALS, Westfield Group, and Amcor.

Summary: The newsletters consider insurer QBE is well positioned, but have a watching brief over mining services group WorleyParsons. They’re less impressed with fellow services group ALS, while shopping centres group Westfield and packaging giant Amcor are considered holds.
Key take-out: The investment press notes that QBE had limited exposure to recent natural disasters in the US and UK, and expect the stock to outperform in the period ahead.
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.

QBE Insurance (QBE)

The recent tornadoes that have devastated the US Midwest haven’t shaken newsletters’ positive perception of QBE Insurance, despite the company’s exposure to the US market.

This is because the insurance company, which derives nearly 40% of its revenue from the US, has only a 0.7% market share in the affected states. Other US states that QBE has a heavy presence in have experienced a relatively benign year, with the hurricane season officially finished at the end of this month.

Analysts expect QBE to also avoid claims from recent disasters in the UK, as the segments affected were in the retail (residential) space, while QBE operates in the commercial and reinsurance space. On top of the quiet year in the US, this will give QBE breathing space to strengthen its balance sheet and boost its risk margins.

Another reason newsletters recommend investors buy the stock is QBE’s share price correlation with the rising US dollar and increasing US treasury bond yields. As the Federal Reserve begins tapering stimulus, QBE should act as a natural hedge.

But it’s not just macro themes supporting newsletters’ positive takes on the company.

In particular, the investment press see QBE as being “unfairly priced” (with a price-earnings ratio at 13 times, well below its five-year average of 18.3 times) despite forecasts for double-digit growth in 2013-14 and 2014-15. This can largely be attributed to QBE’s chequered past: the stock has plummeted from around $30 at its peak in 2007 to today’s $15.80.

On average, analysts expect the share price to climb to $16.72 in the next 12 months and the dividend yield to rise from this year’s 3.3% to 4.6% in 2014-15.

* According to our value investor partners, StocksInValue, the intrinsic value for QBE Insurance is $11.62. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to buy QBE Insurance at current levels.

WorleyParsons (WOR)

Shares in WorleyParsons dropped the most on record last Wednesday after the mining services giant warned that its net profit is now expected to be between $260 million and $300 million for 2013-14. The company attributed the fall to a range of factors, including additional costs and project deferrals.

The market’s extreme reaction – to send the stock plummeting 25.9% to GFC lows of $16 – can partially be blamed on management’s relatively upbeat outlook at the company’s AGM on October 15, where chairman John Grill said full-year net profit would exceed the previous year’s $322 million.

Newsletters were perturbed by how such a transformation could take place in just six weeks, and now question their confidence in management. With no apparent short-term catalysts for the company, most newsletters advise investors to hold the stock until there is evidence of a sustained earnings recovery.

Given the high earnings volatility, the increased possibility for more downgrades this year is also a growing concern. WorleyParsons historically makes 54% of its earnings the second-half of the year, but this year it would have to make 65% during that period as the company is forecasting earnings to be between $90 million and $100 million in the current half.

However, most of the investment press still see value in WorleyParsons through its longer-term prospects from growing its asset management and maintenance contracts and further establishing global client relationships.

After the share price crash WorleyParsons is also trading in line or below global engineering peers and its dividend yield has lifted to an attractive 4.9% for 2013-14.

* According to our value investor partners, StocksInValue, the intrinsic value for WorleyParsons is $14.85. To find out more visit http://www.stocksinvalue.com.au/

Collected Wisdom reported WorleyParsons as an outperform on September 11, 2013.

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

ALS (ALQ)

WorleyParsons wasn’t the only mining services company to disappoint investors over the past week. ALS, which derives over 50% of its operating income by providing analytical testing services for mining companies, posted a 27.9% fall in interim net profit to $97.7 million on Monday.

This was at the lower end of guidance for between $95 million and $105 million that had been set in July.

The lacklustre result, coupled with the company’s inability to provide full-year guidance due to lack of visibility in the minerals and oil and gas sectors, sent the share price falling over the past three days.

“Markets for geochemical and coal services were challenging, in an environment of falling commodity prices, scarcity of development capital and a strong cost focus by most producers,” said ALS chairman Nerolie Withnall.

ALS also cut its half-year dividend to 19 cents a share from 21 cents a share, putting the company’s one-year yield at 4.3% for 2013-14.

Given the deterioration in market conditions and the possibility for commodity prices to fall further, most newsletters believe ALS’s share price is overvalued with a price-earnings ratio of 16 times and say the stock is a sell.

However, the investment press do see possible growth potential in the company in the longer term as it continues to diversify geographically and across to the life sciences and energy sectors. Though ALS dominates the Australian market, it is struggling to make inroads globally at the moment.

* According to our value investor partners, StocksInValue, the intrinsic value for ALS is $8.41. To find out more visit http://www.stocksinvalue.com.au/

Collected Wisdom also reported ALS as an underperform on July 24, 2013.

  • Investors are generally advised to sell ALS at current levels.

Westfield Group (WDC)

Westfield Group won approval to rebuild a mall in south London along with Hammerson as part of a project worth $1.6 billion. This fits in with Westfield Group’s ongoing strategy to offload non-core assets and instead develop and own premium malls in key locations, with such properties already established in other parts of London as well as Sydney, Melbourne, San Francisco and Los Angeles.

Though the newsletters are concerned with how consumers are increasingly turning to online retail, particularly in Australia, they believe there is enough demand for upscale retail destinations to offset the flat sales growth across the wider retail sector and for the most part rate the stock as hold. As Westfield currently has a $12 billion pipeline for developing these properties, there is significant growth potential, says one source.

Westfield has also revealed a modest improvement in its third quarter update for the nine months to September 30 and confirmed its full-year forecast for funds from operations to increase by 2.3% to 66.5 cents per security.

Westfield’s portfolio of malls in the US continued to perform better than those in Australia over the period. While rents for renewed and new leases declined 6% on average domestically, they have grown 10.8% on average in the US – illustrating the benefit of the company’s global diversification, according to one newsletter.

Other factors could also provide a buffer to Westfield’s share price, according to the investment press. While a weaker Australian dollar could provide a tailwind to the year-end results, the company’s share buy-back scheme – with 150.3 million securities bought back so far this year – will help improve its return on equity.

* 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/

Collected Wisdom also reported Westfield Group as a neutral on September 18, 2013.

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

Amcor (AMC)

Global packaging giant Amcor has signed an agreement to acquire privately-owned Australian packaging business Detmold Flexibles for $50 million. The acquisition comes as shareholders prepare to vote on Amcor’s demerger from Orora Limited, with the vote scheduled to take place on December 9.

The investment press is mixed on Amcor but a majority rate it a neutral, given the moderate anticipated benefits from both the demerger and new acquisition. The acquisition enhances the group’s position in the local flexibles market, and gives Amcor the option to invest in both product and process innovation, while the demerger allows Amcor to position itself as a stable, defensive business with strong cash flow, the newsletters say.

The purchase price for Detmold Flexibles represents an earnings before interest, tax, depreciation and amortisation (EBITDA) multiple of 6.6 times, which the newsletters view as reasonable. What’s more, Amcor says that “after the realisation of synergy benefits return on funds employed are expected to be more that 20%.”

Investors should keep in mind that the deal is still subject to regulatory approval from the Australian Competition and Consumer Commission (ACCC), which could take some time.

In general, the investment press likes the globally-diversified nature of the business and says Amcor is in a prime position to benefit from an uptick in economic conditions, but at the current share price, it looks fairly priced right now.

* According to our value investor partners, StocksInValue, the intrinsic value for Amcor is $4.20. To find out more visit http://www.stocksinvalue.com.au/

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

Takeover Action November 21-27, 2013
DateTargetASXBidder(%)Notes
15/11/2013Argosy MineralsAGYBaru Resources87.85Closing Nov 30
26/11/2013Central Australian PhosphateCENRum Jungle Resources90.80Compulsory acquisition
01/11/2013CoalbankCBQLoyal Strategic Investment62.2775% proportional offer
19/11/2013Commonwealth Property OfficeCPAGPT Management6.46
26/11/2013Elemental MineralsELMDingyi Group Investment31.61Ext to Jan 31
22/11/2013Emerald Oil & GasEMRConfederate Capital Pty Ltd25.7330% proportional offer. Closes Nov 30. Unconditional
06/11/2013Energia MineralsEMXCauldron Energy0.00Closing Feb 6
28/08/2013EnvestraENVAPA Group33.00
22/11/2013Glory ResourcesGLYEldorado Gold19.90
22/11/2013e-pay AsiaEPYGHL Systems61.60
29/10/2013GraincorpGNCArcher Daniels Midland28.32FIRB decision by Dec 17
25/11/2013Kuth EnergyKENGeodynamics83.79
21/10/2013Marathon ResourcesMTNBentley Capital19.98
13/11/2013Scott CorporationSCCK & S Corporation0.0075% minimum
21/11/2013Tranzact Financial ServicesTFSGro-Aust60.43
13/11/2013Trust CompanyTRUEquity Trustees1.85Revised offer unconditional
26/11/2013Warrnambool Cheese & ButterWCBBega Cheese18.00ACCC clearance. Closes Dec 12
26/11/2013Warrnambool Cheese & ButterWCBSaputo Inc4.80FIRB clearance. Closing early Dec 
18/10/2013Warrnambool Cheese & ButterWCBMurray Goulburn Co-operative Co0.00
Schemes of Arrangement
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 OfficeCPADexus Property & Canada Pension Plan24.73Indicative offer
Source: NewsBites