Collected Wisdom

This week we look at ResMed, The Reject Shop, PanAust, GUD Holdings and Nufarm.

Summary: The newsletters say investors should wake up to the opportunities at ResMed, and that patience is warranted at out-of-favour retailer The Reject Shop. Most are impressed with miner PanAust, and point to improved prospects at diversified industrial company GUD, while they advise investors to watch developments at crop protection group Nufarm.
Key take-out: The newsletters aren’t losing sleep over the recent fall in ResMed’s shares. They remain impressed with the company’s prospects, and see further strong growth 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.

ResMed

ResMed shares fell 4.9% to $5 last Friday when the sleep disorder equipment maker reported second-quarter revenue that didn’t reach market expectations.

The results were very much a repeat of the first quarter: sales disappointed, this time rising 2% to $US384.3 million, but gross margin improved (up 2.9%) thanks to the weakening Australian dollar and more efficient supply chains as the company moves manufacturing increasingly to Singapore. As a result, net profit managed to climb 12% to $US167.6 million.

Despite the slowdown in sales growth, most newsletters remain positive on the stock and say the price fall represents a buying opportunity at its current price-earnings ratio of 17 times. Most accept management’s view that the disruption in the US caused by competitive Medicare bidding and increased competition is temporary, given how well the company is performing elsewhere in the world (revenue outside of the US increased by 8% in the second quarter).

“Competitive bidding’s impact on the market on volume in the US is beginning to moderate, and we are partnering with our US customers to position for the growth that we see ahead,” said chief executive Mick Farrell.

ResMed holds technological superiority in treating sleep apnoea with its effective and increasingly comfortable products, the investment press says. As long as its research and development keeps the company ahead of its peers, growth shouldn’t be a problem in the large and underdeveloped market in the medium to long term.

With a dividend yield of 2.7% unfranked, that’s good value at its current share price, one source says.

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

The Reject Shop

Shares in The Reject Shop (TRS) crashed 32% last Friday – their biggest fall on record –after the discount retailer slashed its net profit forecast for the first half of 2013-14.

The Reject Shop said net profit would be between $16.6 million and $16.9 million for the six months to December compared to $20.1 million the same time last year.

Some newsletters were surprised that the negative result wasn’t caused by higher costs in the company’s aggressive store roll-out. Rather, same-store sales were flat as stores located in major shopping centres performed poorly over Christmas, and gross margins slimmed because of heavy discounting, lacklustre returns from the higher margin products and the weakening Australian dollar.

The retailer anticipates the challenging conditions to extend into the second half of the year, and is forecasting net profit to be between $17 million and $18 million. The previous year’s net profit was $19.5 million.

Newsletters advise shareholders to hold on to The Reject Shop despite the result being far worse than they had anticipated. While most sliced their valuations for the company, the market’s severe reaction has factored in the new developments.

Indeed, The Reject Shop slumped a further 5.7% to close at $10.85 on Tuesday – below the average target price of $13.64. At these levels the retailer trades at a price earnings multiple of 13.6 times, slightly above the wider consumer discretionary sector’s 13 times.

The Reject Shop’s store roll-out could also begin to pay off with an earnings uplift by 2014-15, one source says. The retailer opened 33 new stores during the half-year and expects to open another 12 in the next six months.

“We remain confident of our ability to leverage off the significant growth in stores and infrastructure over the past 18 months,” said chief executive Chris Bryce.

* According to our value investor partners, StocksInValue, the intrinsic value for The Reject Shop is $10.69. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold The Reject Shop at current levels.

PanAust (PNA)

PanAust met its earnings guidance of $US271 million for 2013 as the copper and gold miner’s rising production output offset falling commodity prices.

Copper production rose 2.5% to 64,885 tonnes, at the upper end of guidance, while gold production surged 35% to 183,769 ounces, beating guidance for between 160,000 ounces and 175,000 ounces.

Newsletters were impressed with the result, with the vast majority restating their buy recommendations. They say the stock remains significantly undervalued given the miner’s growth potential, disciplined management team and production stability.

On average analysts forecast a target price of $2.21 for PanAust – 33.1% above its current share price. Many lifted their forecasts after the 5.8% lift in the copper price in the past six months and a more bullish outlook for gold.

This year PanAust anticipates it will produce between 160,000 ounces and 165,000 ounces of gold and between 65,000 tonnes and 70,000 tonnes of copper. 

The investment press also likes how PanAust has the flexibility to develop three projects to expand production: KTL in Laos, Inca de Oro in Chile and Frieda River in Papua New Guinea. PanAust’s decision to go with the lower capital intensity and higher operating cost option at KTL was met with approval as it gives the option to provide supplementary high-grade ore at Phu Kham after 2017.

While one source questions the threat to free cash flow with Freida, potentially risking future dividends, another believes such concerns are overstated as management won’t commit to project capital funding until at least 2015.

PanAust’s dividend yield is expected to fall to 3.4% this calendar year from 4.3% in 2013.

* According to our value investor partners, StocksInValue, the intrinsic value for PanAust is $1.11. To find out more visit http://www.stocksinvalue.com.au/

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

GUD Holdings

Newsletters are increasingly confident GUD Holdings can achieve its guidance for pre-tax earnings to fall 20% in 2013-14 after posting half-year results that were slightly better than anticipated.

Earnings before interest and tax (EBIT) declined by 27% to $24 million for the period, slightly above the company’s guidance for a drop of 30%. The result was underpinned by strong performance from GUD’s automotive division, but pallet racking manufacturer Dexion and small appliances brand Sunbeam continued to drag on earnings.

GUD manages a number of brands across the industrial, consumer, water and automotive segments.

Two profit warnings late last year had seen GUD’s share price fall to its lowest point in nearly five years on December 12. Since then the company has mostly recovered, climbing 19.4% to Tuesday’s close of $6.15.

Following the half-year results, most newsletters recommend investors hold onto the stock. They say GUD’s ongoing restructuring initiatives across the industrial and consumer divisions should cut costs, improving earnings for the full year.

However, newsletters also point out the stock carries plenty of risk, including the Australian dollar weakening further – especially for GUD’s businesses with little brand power – and getting the timing right for its turnaround forecasts.

Newly-appointed chief executive Jonathan Ling said improvements from Sunbeam and Dexion are expected to flow through to the results in 2014-15.

For the most part, newsletters thought GUD’s strong balance sheet should be able to support its dividend payout ratio of 86% despite weak cash flow for the period, though one source questioned whether dividends will be compromised to fund growth.

Analysts estimate GUD’s dividend yield to be 6.1% on average for 2013-14.

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

  • Investors are generally advised to hold GUD Holdings at current levels.

Nufarm

Newsletters trimmed their forecasts for Nufarm following the crop protection company’s market update last week, but the majority kept their recommendations at hold.

Nufarm expects earnings before interest and tax (EBIT) to come in at the lower end of its guidance for between $50 million and $60 million after Australia’s hot and dry weather impeded sales and slimmed margins.

Neither the investment press nor the market were too surprised; shares in the company slipped 1.9% on the day to $4.09. Nufarm is a cyclical business highly leveraged to climatic conditions, and the weather in key growing areas – particularly New South Wales and Queensland – had been bad in December and January.

Despite the challenging conditions, management is confident Nufarm will generate earnings growth for 2013-14. Nufarm’s European, North American and Asian businesses track in line with expectations, while Brazil is performing strongly thanks to positive business conditions.

At current share price levels, most of the investment press believe Nufarm trades at fair value given its growth prospects in the competitive crop protection market and the risks associated with its volatile earnings. The company has a price-earnings ratio of 10.5 times, in line with its global peers.

Another concern was the increasing level of net working capital and debt in the first half of the year. Before the update, newsletters already thought Nufarm’s debt was too high for a company exposed to cyclical earnings: net debt to equity was 62% at the end of 2012-13 and Nufarm’s interest coverage ratio was too low at 3.5 times, one source says.

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

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

Takeover Action January 23-29, 2014

DateTargetASXBidder(%)Notes
22/01/2014Ampella MiningAMXCentamin23.08
24/01/2014Blackwood CorporationBWDCockatoo Coal83.70Closing Jan 31
28/01/2014Carabella ResourcesCLRChina Kingho Energy Group82.20
01/11/2013CoalbankCBQLoyal Strategic Investment62.2775% proportional offer
28/01/2014Commonwealth Property OfficeCPADexus Property & Canada Pension Plan27.63
28/01/2014Commonwealth Property OfficeCPAGPT Management11.72Closed Jan 24
14/01/2014Continuation InvestmentsCOTDMX Corporation0.07
18/12/2013Elemental MineralsELMDingyi Group Investment31.61Ext to Jan 31.
06/11/2013Energia MineralsEMXCauldron Energy0.00Closing Feb 6
22/01/2014e-pay AsiaEPYGHL Systems93.42Ext to Feb 21
24/01/2014Genesis ResourcesGESBlumont Group0.00
24/01/2014Glory ResourcesGLYEldorado Gold65.45
21/01/2014Jacka ResourcesJKATangiers Petroleum0.50
21/01/2014Keybridge CapitalKBCOceania Capital Partners20.77Ext to Feb 14
28/01/2014PaperlinX SPSPXUPaperlinX2.14Offer for all step-up preference securities. Ext to Feb 28
23/01/2014Scott CorporationSCCK & S Corporation80.2375% minimum
24/01/2014Tranzact Financial ServicesTFSGro-Aust80.18
28/01/2014Warrnambool Cheese & ButterWCBSaputo Inc77.02FIRB clearance. 
18/10/2013Warrnambool Cheese & ButterWCBMurray Goulburn Co-operative Co0.00
Scheme 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