Collected Wisdom

This week we look at Lend Lease; Westpac; Cardno; Adelaide Brighton and Regis Resources.

Summary: The newsletters have a buy on Lend Lease; and holds on Westpac, Adelaide Brighton and Regis Resources.
Key take-out: The announcement of $2 billion in new road projects has prompted a flurry of interest in by the newsletters, which point to hopes for strong growth in its engineering business from 2015-16.
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.

Lend Lease (LLC)

Shares in Lend Lease have climbed to their highest point in six years after the property and infrastructure company secured $2 billion worth of road project contracts on Monday.

Lend Lease was named preferred tenderer to design the NorthConnex motorway tunnel project in New South Wales and construct its road section, while joint venture partner Bouygues, a French construction firm, is responsible for the construction of the nine kilometre twin tunnel.

The project will be overseen by Transurban and has an estimated value of $2.65 billion, of which Lend Lease’s share is $1.3 billion.

Separately Lend Lease was awarded a $580 million contract to upgrade the Pacific Highway in NSW.

Though the initial response from the market was muted – with shares in the company edging 0.88% higher on the day – newsletter responses to the developments sent the shares 3.6% higher to $11.77 on Tuesday.

Indeed, the majority of the investment press rate Lend Lease a buy at Monday’s share price levels. They say the company has an excellent pipeline of new contracts in addition to Monday’s wins, including several large engineering projects that could contribute strong growth in its engineering business from 2015-16.

One source also points out that Lend Lease may also benefit from Leighton being distracted by its management restructure.

On the other hand, another source more cautious about Lend Lease says earnings visibility and cash generation are likely to remain poor in the next 12 to 18 months. Further, the fire at the Barangaroo office tower last week – which delayed Lend Lease’s construction –highlights the potential for execution risks at one of Lend Lease’s numerous projects.

* According to our value investor partners, StocksInValue, the intrinsic value for Lend Lease is $7.59. To find out more visit http://www.stocksinvalue.com.au/.

  • Investors are generally advised to buy Lend Lease at current levels.

Westpac (WBC)

Newsletters came away impressed from Westpac’s Australian Financial Services (AFS) update on Friday, saying the division is executing on its strategy for growth.

Australia’s second largest bank believes underlying momentum is improving for AFS. While business lending remains tepid, housing lending is building momentum with mortgage growth now back at 90% of system growth.

AFS, which includes Westpac’s Australian retail, business banking and wealth businesses, made 63% of the bank’s cash earnings in 2012-13. After the RBA’s last rate cut to 2.5%, the bank’s strategic priorities have shifted away from “strength” – focusing on deposit funding improvement and capital ratios – and are now tilting towards growth.

Following the update, most of the investment press advise to hold Westpac. Though the news was certainly positive, the majority say much of the growth is already reflected in Westpac’s share price of $33.59.

Indeed, analysts’ average target price for the stock is $34.03, a mere 1.5% premium to yesterday’s price.

That being said, several newsletters say Westpac could beat analyst estimates for earnings growth if credit growth continues to accelerate, given how well it has positioned itself in the mortgage market.

The bank has been able to achieve mortgage momentum without sacrificing its standard variable rate and its net interest margin remains solid – more than offsetting the pressure on mortgages.

Interestingly, one source noted that despite the element of telling the audience what they want to hear, Westpac was more positive about the division than it had been in several years.

According to our value investor partners, StocksInValue, the intrinsic value for Westpac Banking Corporation is $31.54. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Westpac Banking Corporation at current levels.

Cardno (CDD)

Cardno struck a good deal in acquiring Texas-based PPI but the takeover may be risky given the pressure its core businesses currently face, newsletters say.

The provider of civil, structural and environmental engineering services bought PPI for $US145 million – its largest acquisition to date – at 6.7 times PPI’s earnings before interest, tax, depreciation and amortisation (EBITDA), a discount to its 7.7 times.

Cardno says the acquisition will be immediately earnings accretive, contributing two cents a share in 2013-14 and a full-year contribution of five cents a share.

“This acquisition will strengthen Cardno’s ability to service the expanding oil and gas sector in the US and in key emerging markets,” chief executive Michael Renshaw said.

The move is to be funded by 75% in cash and 25% in shares, with 5.4 million Cardno shares issued to PPI shareholders at a price of $6.38. Cardno also raised $A50 million through a private placement.

The majority of newsletters have kept their hold recommendations on Cardno. They say the acquisition appears to be well targeted strategically and geographically given it increases exposure to oil and gas in a growing market, but several question the timing.

Cardno is pursuing an aggressive acquisition strategy when organic growth rate of its core business is low. This increases the risk profile of the business, one newsletter says, though it seems to be reflected in the share price at current levels. The company’s principal challenge is to lift its organic growth rate.

And as another newsletter says, such a strategy also increases the probability the company disappoints the market.

* According to our value investor partners, StocksInValue, the intrinsic value for Cardno is $5.56. To find out more visit http://www.stocksinvalue.com.au/

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

Adelaide Brighton (ABC)

Adelaide Brighton slumped the most in a decade last Friday after announcing it could lose a major customer.

Shares in the cement manufacturer plunged 13.6% to $3.75 on the day. The customer, Cement Australia (CA) – which currently buys around 120,000 tonnes of cement a year from ABC in South Australia – is intending to construct its own cement facilities in Adelaide.

Given the uncertainty about how long it will take to construct the facilities, ABC couldn’t tell investors the exact change in CA’s requirements. It did, however, say that all of Cement Australia’s business was lost by the start of 2016, profit before tax (PBT) could take a $15 million hit – 7.2% of total PBT in 2013.

The majority of newsletters have told their clients to hold onto ABC, with the share price slide more than factoring in their cuts to earnings forecasts following the development.

However, one source says there is now increased valuation risk to the company as the outcome of the loss of CA’s business is unknown. It says the stated impact of $15 million is under a defined (and unlikely) set of circumstances, such as Cement Australia not stealing market share in the state with its facility, and ABC not attempting to mitigate this loss by increasing volumes in other regions.

Another newsletter says CA’s remaining contract in Western Australia could also be at risk. CA has already taken 50% of ABC’s contract in the state at a loss of around $10 million PBT. As a result, the source removed its forecast for a special dividend over the next three years and cuts its dividend forecast for 2016.

Despite the uncertain outlook, analysts’ forecast target price for ABC is now $3.93 – 4.5% above Tuesday’s close. Barro Group’s 33% stake in ABC could limit the downside to the share price, one source says.

* According to our value investor partners, StocksInValue, the intrinsic value for Adelaide Brighton is $3.44. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Adelaide Brighton at current levels.

Regis Resources (RRL)

Newsletters are mixed over the outlook for Regis Resources after the emerging gold miner reported a drop in first-half profit on higher costs on Thursday.

Regis announced that PBT declined 32% to $65.8 million because of higher cost production at its Duketon Gold Project in Western Australia. Costs were 40% higher than the prior period, impacted by disappointing iron ore grades at the Garden Well gold mine.

Also harming the result was an 8% fall in the average price of gold Regis sold to $1,488 an ounce.

But as one newsletter highlighted, Regis’s half-year results were largely irrelevant given the dramatic events that unfolded during February.

Shares in Regis plummeted 17.2% to $2.56 on February 20 when the company announced that about 4.7 million cubic metres of water flooded the Garden Well and Rosemont pits – suspending operations for at least four weeks. Six days later the chief operating officer, Morgan Hart, resigned.

The stock got some temporary relief when the company said the recommencement of full mining activities were going to plan in the half-year report, bumping up 5.6% to $2.65, but has since dropped again to $2.37 at Tuesday’s close.

There are a range of buy, hold and sell calls following Thursday’s report. However, consensus is to hold the stock given how badly investors have reacted over the past month.

One source noted that the maiden dividend of 13 cents per share in 2013 left Regis short of cash to deal with the rain event. As a result, the miner will have a higher debt position now than its reported $10 million, though it’s still relatively insignificant as Regis has a strong balance sheet.

Regis hasn’t declared any further dividends after the flooding.

* According to our value investor partners, StocksInValue, the intrinsic value for Regis Resources is $2.69. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Regis Resources at current levels.

Watching the directors

  • The biggest trade of the week went to James Hardie (JHX) chief executive Louis Gries. The building construction company’s boss offloaded 1,453,058 shares at $14.67, netting himself $21,311,321.
  • A batch of directors in Ainsworth Game Technology (AGI) also sold around $21 million in their company’s stock at $4.25 per share. The largest trade in the gaming machine company came from executive chairman and founder Leonard Ainsworth, who banked $5,921,024 from the sale of 1,393,182 shares. He was followed by chief executive Daniel Gladstone, who netted $2,125,000.
  • Meanwhile, on the buying side, another group of directors and employees picked up around $5 million worth of shares in specialist financial services group Euroz (EZL). Executive chairman Andrew McKenzie and executive director Jay Hughes were the largest buyers, investing $625,000 each in the company at a price of $1.25 a share.

Takeover Action March 13-19, 2014

DateTargetASXBidder(%)Notes
18/03/2014Ampella MiningAMXCentamin90.12Ext to March 24
06/03/2014Armidale Investment CorporationAIKGEGM Investments15.19
27/02/2014Blackwood CorporationBWDCockatoo Coal91.65
01/11/2013CoalbankCBQLoyal Strategic Investment62.2775% proportional offer
06/11/2013Energia MineralsEMXCauldron Energy0.00Ext to May 1
24/01/2014Genesis ResourcesGESBlumont Group0.00
18/03/2014Jacka ResourcesJKATangiers Petroleum15.18Bid unsuccessful
28/02/2014Merlin DiamondsMEDBlumont Group0.00
18/03/2014Real Estate CorpRNCLittle Group67.45
04/03/2014Scott CorporationSCCK & S Corporation98.2575% minimum
10/03/2014Westside CorporationWCLLandbridge Group Co0.00
Scheme of Arrangement
17/12/2013EnvestraENVAPA Group33.00Vote May
17/03/2014Murchison MetalsMMXMercantile Investment CompanyVote June
10/03/2014TriAusMinTROHeron Resources0.00Vote June
Foreshadowed Offers
04/10/2013Billabong International (2)BBGCoastal Capital7.59Post re-financing/equity proposal
19/09/2013Billabong International (2)BBGAltamont Consortium4.00Post re-financing/equity proposal
19/09/2013Billabong International (2)BBGCenterbidge/Oaktree Consortium33.90Post re-financing/equity proposal

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