Collected Wisdom

This week we look at Telstra, Transurban, Super Retail Group, Woodside Petroleum and GPT Group.

Summary: The newsletters like Telstra’s decision to sell most of its holding in Sensis, and believe Transurban is on the right road. They have mixed views on diversified retailer Super Retail Group, and are also divided over the outlook for Woodside Petroleum, while they are taking a cautious approach to positive developments at property trust GPT Group.
Key take-out: At current price levels, the vast majority of the investment press say Telstra is moderately overvalued and rate it as hold.
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.

Telstra (TLS)

Telstra made the correct decision in offloading a majority stake in directories business Sensis, despite it being sold so cheaply, newsletters say.

Last week Telstra sold 70% of Sensis (the operator of Yellow Pages, White Pages, The Trading Post and others) for $454 million to US-based private equity firm Platinum Equity. The sale implies a total value of $649 million for the business – significantly below consensus valuations for up to $3 billion.

But Sensis had been battling deteriorating earnings as Australians increasingly switch to the internet for directory information: earnings before interest, tax, depreciation and amortisation (EBITDA) were only $571 million in 2012-13 compared to $1.1 billion in 2009-10.

According to most newsletters, the transaction price of 2.4 times Sensis’ 2013-14 forecast EBITDA for this financial year is fair given Sensis’s structural decline.

Further, the sale allows Telstra to focus on its core operations with growth potential. Together with the sale of Hong Kong-based mobile business CSL in December last year, Telstra is getting rid of two major distractions, allowing management to focus on the core broadband and mobile businesses as well as other initiatives with growth potential.

The sale proceeds – which are incremental to Telstra’s cash flow guidance – also strengthen the balance sheet and increase management’s capacity to return more cash to shareholders, newsletters say, though further increases in the dividend may be unlikely given the shortage of franking credits available.

However, at current price levels, the vast majority of the investment press say Telstra is moderately overvalued and rate it as hold. Telstra’s share price has jumped 5.2% to yesterday’s close of $5.26 since mid-December, compared to an average price target of $5.

* According to our value investor partners, StocksInValue, the intrinsic value for Telstra is $4.08. To find out more visit http://www.stocksinvalue.com.au/

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

Transurban (TCL)

Transurban reported an impressive 13.3% surge in toll revenue to $450.6 million in the first-half of 2013-14, with motorists seemingly ambivalent to the roughly 17% increase in toll charges.

Traffic volume growth of 10.7% across the Westlink M7, Lane Cove Tunnel and Hill M2 for the three months to December underpinned the result. In particular, the upgrade to the Hills M2 delivered improvements in travel time, resulting in increased patronage, the toll operator said.

Newsletters overwhelmingly agree that the latest development supports Transurban’s status as a solid defensive stock with an attractive yield, and most say the stock is a buy. The average price target of the stock is $7.11, implying a potential return of 5.5% not including dividends.

The continuing growth in traffic should sustain Transurban’s around 10% growth in dividends, one source says, even if the company does acquire Queensland Motorways.

Transurban’s yield is forecast, on average, to increase from 5.1% this financial year to 6.3% by 2015-16.

Another positive factor for the investment press is management, who have a good record of carefully choosing good-quality projects to develop for toll-road concessions while being conscious of creating shareholder wealth.

However, one newsletter is concerned about Transurban’s long-term returns given the company has to hand its roads over to the government when its concessions finish. According to the source, the new assets it builds or acquires to replace the older ones will generate lower returns because of more competition and less lucrative deals with the government.

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

Super Retail Group (SUL)

Shares in market darling Super Retail Group slumped by 14.2% to $10.79 last Friday – the biggest drop in over five years – after the auto, leisure and sports retailer issued a trading update that failed to live up to expectations.

The company, which owns Super Cheap Auto and Rebel Sport among other brands, reported that sales growth had slowed to 6% ($1.096 billion) for the 26 weeks to December 28 and that it expects net profit to be between $61 million and $62 million for the period.

Analysts had forecast net profit to be around $68.6 million.

Chief executive Peter Birtles said the result reflected a number of short-term internal challenges across the three divisions, blaming poor execution in the implementation of new IT systems which have now been resolved.

Newsletters were deeply mixed on the news, with upgrades and downgrades from analysts coming across Eureka Report’s desk. While the leisure division was extremely disappointing – with sales growth collapsing to 1.6% from 5% – the auto division’s performance was solid despite ongoing competitive pressures.

Some of the investment press took management at its word that the one-off issues had been addressed, while others needed evidence that they wouldn’t re-occur.

However, the consensus was that the stock had been priced to perfection before the news and that at current depressed levels it’s a hold. If management can demonstrate a return to solid earnings growth later in 2014, one source believes it will outperform.

Since the share price crash the stock has clawed back 3.3% to sit at $11.15 as of Tuesday’s close. Its price-earnings ratio is now 16.7 times, still above the consumer discretionary sector’s 15 times.

* According to our value investor partners, StocksInValue, the intrinsic value for Super Retail Group is under review. To find out more visit http://www.stocksinvalue.com.au/

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

Woodside Petroleum (WPL)

Newsletters are divided over the outlook for Woodside Petroleum after Australia’s largest oil and gas company generated revenues slightly above analyst forecasts in its quarterly report.

The company announced sales revenue was $US1.65 billion for the fourth quarter to December 31, roughly $70 million more than consensus forecasts. The result was brought about by increased LNG output from Pluto (the project in Western Australia that was completed in 2012) as well as a sharp jump in LNG pricing.

The investment press who are optimistic on Woodside’s future point to the company’s growing cash stockpile in the face of reducing capital expenditure. This should translate to continued high dividends for shareholders: analysts forecast the company to declare a final dividend of 83 cents per share, almost 30% above the previous corresponding period.

A repeat special dividend is also a good chance this year given Woodside revealed it will collect a Petroleum Resource Rent Tax (PRRT) benefit of between $200 million and $250 million for 2013 – more than the company had been anticipating.

But other newsletters question Woodside’s growth going forward as management chases cheaper exploration opportunities, such as in New Zealand. They don’t see the increased revenues lasting into the medium term and say the focus on yield is destroying growth opportunities. If project sanctions and/or acquisitions aren’t made, earnings will fall substantially over the next few years, they say.

While newsletters are deeply split, the consensus view is to hold the stock. It’s looking increasingly like that Shell will sell its 23% stake in Woodside to help fund future projects, and if that happens, Woodside’s share price should lift as the company gets more interest from institutional investors and becomes a more attractive takeover target.

* According to our value investor partners, StocksInValue, the intrinsic value for Woodside Petroleum is $29.33. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Woodside Petroleum at current levels.

GPT Group (GPT)

GPT Group has bowed out of the takeover battle for Commonwealth Property Office Fund (CPA), but most newsletters are pleased with the outcome.

While GPT’s offer remains open until January 24, the CPA board has recommended shareholders accept the sweetened offer from Dexus (DXS) and the Canada Pension Plan Investment Board.

Chief executive Michael Cameron said the decision not to increase the offer reflected GPT’s strategic priorities. These include an increased emphasis on total return for security holders, maintaining a frugal approach given GPT’s balance sheet capacity and its goal of expanding funds under management (FUM) by $10 billion.

While walking away from CPA doesn’t help FUM expansion, newsletters approve of the separate deal with the competing Dexus consortium to buy stakes in four office towers and one retail asset worth $1.2 billion. The deal, which only proceeds if the Dexus takeover is successful, lifts FUM by 17% since September last year, one source notes.

Many newsletters also believed the offer for CPA was too high and that if GPT had been successful, it would have over-exposed the REIT to the Australian office sector. Because of oversupply, Australian offices may find it difficult to maintain rents and increase occupancy, says a newsletter.

Cameron stressed that buying back equity would be on the agenda to increase total returns to shareholders. The investment press expect GPT to return to buying back shares after its full-year results in February, providing a floor under the share price.

Despite the positive developments, most newsletters say GPT is a hold. With a price-earnings ratio at 14 times, the REIT trades marginally above the wider sector’s 13.6 times. Further, GPT’s retail portfolio – which takes up 50% of the group’s assets – is expected to slow down as online retailers steal more market share.

* According to our value investor partners, StocksInValue, the intrinsic value for GPT Group is $3.03. To find out more visit http://www.stocksinvalue.com.au/

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

Director’s trades

  • Billabong chief executive McNeil Seymour Fiske, who replaced Laura Inman last September, splashed out almost $500,000 for 1,785,714 of the surf retailer’s shares at 28 cents each on-market. The shares will be held in voluntary escrow for just under two years.
  • On the selling side, the chief executive of Vocus Communications, James Spenceley, indirectly sold 1,800,000 shares in the telco – 30% of his total holdings – at $3.49 cents a share. Spenceley Management (in which Spenceley is the sole shareholder) bagged $6,274,209 from the trade.
  • Elsewhere, managing director Peter Bowler offloaded 3,000,000 shares in gold miner Beadell Resources through his superannuation fund for 77.5 cents each, netting himself $2,326,020.

Takeover Action January 16-22, 2014

DateTargetASXBidder(%)Notes
21/01/2014Ampella MiningAMXCentamin21.47
21/01/2014Blackwood CorporationBWDCockatoo Coal81.73Closing Jan 31
21/01/2014Carabella ResourcesCLRChina Kingho Energy Group65.77
01/11/2013CoalbankCBQLoyal Strategic Investment62.2775% proportional offer
21/01/2014Commonwealth Property OfficeCPADexus Property & Canada Pension Plan26.47
14/01/2014Commonwealth Property OfficeCPAGPT Management11.72Not to lift offer
14/01/2014Continuation InvestmentsCOTDMX Corporation0.07
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
16/01/2014e-pay AsiaEPYGHL Systems84.49Ext to Feb 21
21/01/2014Galilee EnergyGLLMercantile Investing Co0.00Proportional offer withdrawn
20/01/2014Glory ResourcesGLYEldorado Gold58.74
21/01/2014Jacka ResourcesJKATangiers Petroleum0.50
21/01/2014Keybridge CapitalKBCOceania Capital Partners20.77Ext to Feb 14
19/12/2013Marathon ResourcesMTNBentley Capital20.98Closed Dec 18
20/01/2014PaperlinX SPSPXUPaperlinX2.14Offer for all step-up preference securities
20/01/2014Scott CorporationSCCK & S Corporation78.6075% minimum
17/01/2014Tranzact Financial ServicesTFSGro-Aust79.29
21/01/2014Warrnambool Cheese & ButterWCBSaputo Inc52.70FIRB clearance. Closing Jan 10
18/10/2013Warrnambool Cheese & ButterWCBMurray Goulburn Co-operative Co0.00
Schemes of Arrangement
17/12/2013EnvestraENVAPA Group33.00
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
Source: NewsBites

Related Articles