Collected Wisdom

This week we look at Brambles, OZ Minerals, TPG Telecom, Transfield Services and Echo Entertainment.

Summary: The newsletters are impressed with developments at Brambles following the demerger of its Recall unit, but have concerns over downgraded production guidance from copper and gold group OZ Minerals. TPG Telecom’s latest acquisition also has caught their eye, and are watching developments at Transfield Services after its latest price slide. They are also hedging their bets on casinos group Echo Entertainment.
Key take-out: The investment press like the outcome from Brambles’ demerger of Recall, and also are keen on the company’s cost-cutting endeavours.
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.

Brambles (BXB)

The investment press have reviewed their recommendations for Brambles following its demerger from Recall and a shareholder update regarding its vision for the company.

Despite the loss of around 14% of total revenue (over $US800 million) from spinning off the document management business, Brambles’ share price closed on Tuesday at $8.61 – above its pre-divestment price of $8.45 last week.

Considering Recall shares are now hovering at over $4, and Brambles shareholders were entitled to one Recall share for every five Brambles shares, that’s roughly a 10% return from the demerger.

The divestment allows Brambles to focus on its core operations of providing wooden pallets, containers and crates to suppliers.

In its update, Brambles reaffirmed its guidance for earnings before interest and tax (excluding Recall) to be between $US930 million and $US965 million, which is between 4% and 8% growth from the previous year and is in line with the analysts’ consensus.

But more importantly to the investment press, Brambles has launched a thorough review of overheads and aims to cut $US100 million in costs by 2014-15. Management’s focus is to devote capital to expanding its reusable plastic crates (RPC) business, enter high-growth emerging markets and make new products in its already developed businesses.

Brambles is also expected to benefit from the weaker Australian dollar, as the company generates most of its revenue from overseas.

Most newsletters had Brambles as a hold when Collected Wisdom last looked at it back in September 18. After considering the latest developments, the majority now rate the stock as buy. The company’s strong network in its core pallet and RPC pooling operations, as well as its global scale and strong technology, will continue to provide competitive advantages over competitors, one source says.

Analysts on average have a price target of $9.26 on Brambles in the next 12 months.

* According to our value investor partners, StocksInValue, the intrinsic value for Brambles is $3.97. To find out more visit http://www.stocksinvalue.com.au/

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

OZ Minerals (OZL)

OZ Minerals has delivered weaker-than-expected production guidance and increased costs in the longer term for its Prominent Hill project in South Australia.

The miner now expects up to 80,000 tonnes of copper and between 130,000 ounces and 140,000 ounces of gold, 30% below its previous guidance.

But it was the long-term outlook for Prominent Hill – OZ’s only operating mine – that most concerned newsletters. Not only has OZ has been unable to extend the mine’s life but, to keep up with guidance, the company needs more ore from the higher-cost Malu underground project. OZ says this will require an extra $201 million in capital expenditure.

Shares in OZ Minerals plunged 14.2% on December 11 – the miner’s biggest fall in nearly five years – but bounced back 12.1% the following day as the market assessed the fall as a buying opportunity.

The news was disappointing to the investment press, with most lowering their valuations on the news. But, at the stock’s current depressed levels, most say the stock is a hold.

Even when the rebound is included, OZ has still more than halved this year compared to an 8.5% slide from the S&P/ASX 200 Resources Index. It closed on Tuesday at $2.88, 19.3% below when Eureka Report put a sell recommendation on the stock at October 30.

As Prominent Hill has a relatively short life with uncertain capital expenditure requirements, newsletters say that hope for OZ Minerals relies on its undeveloped Carrapateena project in the same state.

* 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 at current levels.

TPG Telecom (TPM)

Newsletters have applauded TPG Telecom’s purchase of AAPT for $450 million, but for the most part consider the stock at full value given its more than 80% surge this year.

The acquisition – which sent TPG shares up 13.6% to $4.68 on Monday last week – adds 11,000 kilometres of fibre-optic cabling across Australia and fibre access to 1,500 premises.

TPG said it expects the purchase to be immediately cash flow accretive. TPG paid Telecom NZ (AAPT’s parent company) 6.4 times AAPT’s current recurring annualised earnings before interest, tax, depreciation and amortisation (EBITDA) of $70 million.

The main reason newsletters support the acquisition is because AAPT’s extensive infrastructure adds scale to TPG’s strategy to provide fibre-to-the-building (FTTB). With 1,600 premises already connected, FTTB aims to provide customers with similar speeds to the National Broadband Network at price points that compare to slower offerings from competitors.

That the acquisition is completely funded by debt is also attractive to the investment press, as shareholders won’t have to endure any dilution in their shares. TPG has to increase and extend its debt facility, but this shouldn’t be a problem as TPG generates strong cash flows, one source says.

Going forward, properly executing the FTTB network and integrating AAPT’s assets will be crucial, but given TPG’s strong track record, newsletters are confident in management.

However, the absence of missteps from management has also meant a premium to the company’s share price. TPG’s price-earnings multiple is 21.6 times, well above its peers’ 16.5 times. As a result, most newsletters say the stock is a hold.

Eureka Report columnist John Abernethy gave TPG a neutral recommendation when he wrote about it on October 9, labelling it as an overvalued quality stock.

* According to our value investor partners, StocksInValue, the intrinsic value for TPG Telecom is $2.89. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold TPG Telecom at current levels.

Transfield Services (TSE)

Shares in Transfield Services slid to their lowest point since August last week, despite the company reaffirming earnings guidance at between $65 million and $70 million for 2013-14.

Transfield’s share price fell 13.8% to 84.5 cents last Thursday, the day after Transfield said it was confident it would achieve its earnings forecast. The market may have been sceptical given the company’s reputation for profit warnings; the stock is still more than 30% below May levels this year when the company last cut its earnings guidance.

As one newsletter pointed out, Transfield traditionally makes 60% of revenue in the second-half of the year. All indications are that it will have to make more than that this year, which will be challenging since the company is battling increasingly difficult market conditions.

Transfield, which is in infrastructure construction and project management services, is exposed to a variety of sectors including roads and public transport, telecommunications and mining. The gloom around mining and mining services has been a big factor in harming Transfield’s profits this year.

Despite the uncertainty surrounding its full-year earnings, most newsletters say Transfield is a hold. Mining services malaise has made the stock appear cheap: it has a price-earnings multiple at 6.6 times when the company’s five-year average is 20.4 times.

The investment press have also taken into account Transfield’s assertion that investment in the mining sector is at the bottom of the cycle and output from new management that it will be able to change the company’s fortunes.

Diane Smith-Gander, who replaced Tony Shepherd as chairman of Transfield at the beginning of September, is focusing on running its core businesses while reducing costs.

* According to our value investor partners, StocksInValue, the intrinsic value for Transfield Services is $0.75. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Transfield Services at current levels.

Echo Entertainment

Echo Entertainment has incurred a one-off charge of $22 million after restructuring its financing arrangements, but the casino operator says the move will save finance costs from the second-half of 2014 to 2015-16.

Newsletters revisited their forecasts for Echo following the news – and after the stock’s persistent slide over the past few months – but the developments didn’t shake their recommendations and most say the company is a hold.

Risks in the long term for Echo constrain newsletters’ outlooks, even though the stock has tumbled around 30% to $2.34 since Crown won regulatory approval to build a casino in New South Wales in May this year. The stock’s one-year forward price-earnings multiple sits at 13.9 times, a far cry below its five-year average of 43.9 times.

This is because Echo’s The Star casino in NSW (which Echo gets more than 70% of its revenue from) is likely to face direct competition from Crown in 2019. For one newsletter, The Star’s returns have already been disappointing to date despite current favourable competitive structure, though the source recognises Echo has a lot of time to build VIP market share before Crown opens its resort.

Operations in Queensland – where Echo derives the rest of its revenue – also face significant challenges. The three licences the state government is proposing will either introduce a new competitor in Brisbane or, if Echo is successful in the tender process, will require a large amount of capital that may need to be sourced from shareholders.

Until Echo is certain about how the market will operate in Queensland, it isn’t redeveloping its key casinos in the state. This means earnings are likely to be flat in the medium term, one source says.

* According to our value investor partners, StocksInValue, the intrinsic value for Echo Entertainment is $1.19. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Echo Entertainment at current levels.

Watching the Directors

  • Most of the big trades were on the selling side this week, with the largest from Technology One executive chairman, Adrian Di Marco, and fellow director, John MacTaggart. They netted $13.5 million each after selling a total of 12 million shares in the Queensland-based software company.
  • They weren’t the only director duo in selling moods. Computershare non-executive chairman Christopher Morris offloaded 1,216,333 shares for $13,200,739 and director Penelope Maclagan sold 330,000 shares in the investor services company for $3,611,618.
  • On the buying side, Seven Group Holdings director Richard Uechtritz topped up his holdings in the media group for the second consecutive week, this time spending $557,600 for 80,000 shares.
  • Elsewhere, Brambles chief executive, Thomas Gorman, bagged $2,828,627 in the sale of 300,000 shares in the pallet pooling and logistics business.

Takeover Action December 12-18, 2013

DateTargetASXBidder(%)Notes
10/12/2013Ampella MiningAMXCentamin18.88
12/12/2013Argosy MineralsAGYBaru Resources88.64Closed
13/12/2013Blackwood CorporationBWDCockatoo Coal9.75
05/12/2013Carabella ResourcesCLRChina Kingho Energy Group11.06
01/11/2013CoalbankCBQLoyal Strategic Investment62.2775% proportional offer
13/12/2013Commonwealth Property OfficeCPADexus Property & Canada Pension Plan25.20
03/12/2013Commonwealth Property OfficeCPAGPT Management7.97
25/11/2013Continuation InvestmentsCOTDMX Corporation0.00
18/12/2013Elemental MineralsELMDingyi Group Investment31.61Ext to Jan 31. Trading halt
29/11/2013Emerald Oil & GasEMRConfederate Capital Pty Ltd34.5430% proportional offer. Closes Nov 30. Unconditional
06/11/2013Energia MineralsEMXCauldron Energy0.00Closing Feb 6
17/12/2013e-pay AsiaEPYGHL Systems81.48
13/12/2013Glory ResourcesGLYEldorado Gold42.77
05/12/2013Jacka ResourcesJKATangiers Petroleum0.00
28/11/2013Keybridge CapitalKBCOceania Capital Partners20.77
11/12/2013Kuth EnergyKENGeodynamics90.45Compulsory acquisition
21/10/2013Marathon ResourcesMTNBentley Capital19.98
05/12/2013PaperlinX SPSPXUPaperlinX0.00Offer for all step-up preference securities
13/11/2013Scott CorporationSCCK & S Corporation0.0075% minimum
13/12/2013Tranzact Financial ServicesTFSGro-Aust69.09
11/12/2013Warrnambool Cheese & ButterWCBBega Cheese18.00ACCC clearance. Ext to Dec 20
17/12/2013Warrnambool Cheese & ButterWCBSaputo Inc16.92FIRB clearance. Closing Jan 10
18/10/2013Warrnambool Cheese & ButterWCBMurray Goulburn Co-operative Co0.00
Schemes of Arrangement
17/12/2013EnvestraENVAPA Group33.00
07/11/2013RHGRHGResimac-Australian Mortgage Acquisition Co0.00Vote Dec 18
Foreshadowed Offers
17/12/2013Automotive HoldingsAHEAP Eagers19.50No APE comment on AFR offer speculation
16/12/2013AWEAWESenex0.00Previously undisclosed indicative offer withdrawn
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
Source: NewsBites

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