Collected Wisdom

This week we look at Kathmandu, Macquarie Group, Myer, Metcash and Stockland.

Summary: The newsletters like the look of outdoor clothing retailer Kathmandu after its latest profit result, while Macquarie Group is considered a hold in light of upgraded profit forecasts. Retailer Myer is also viewed as a hold at this stage, but grocery wholesaler Metcash is seen as a sell. Meanwhile, there are divided views on real estate conglomerate Stockland, which has bought a key stake in Australand.

Key take-out: Kathmandu is targeting an improved profit outcome in 2013-14, after adjusting for the effect of exchange rates.

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.

Kathmandu (KMD)

The investment press remains positive about Kathmandu after the outdoor clothing retailer jumped to a record high on impressive half-year results.

Shares in Kathmandu leapt 11.3% to $3.45 on Monday following the company’s announcement that net profit increased by 10.7% to $NZ11.4 million and sales edged upwards 1% to $167.6 million.

Australia was the standout outperformer with same-store sales growth up 6.6%. Several analysts are expecting the strong earnings to continue as Kathmandu opens up eight more stores in the country in the second half.

“We are targeting an improved profit outcome in 2013-14, after adjusting for the effect of exchange rates,” chief executive Peter Halkett said.

Halkett also said Kathmandu is increasingly focusing on global sales potential in the UK and then in the US to provide longer-term growth as the Australian business matured, as well as enhancing its rapidly expanding online offering.

Most newsletters say Kathmandu is a buy after the developments. The consensus is that the retailer is doing a fantastic job in a difficult environment by using its scale, good management, and the best IT platforms available to steal market share from its poorer-performing competitors.

Given the major sales periods ahead, analysts weren’t surprised that Kathmandu declined to give full-year guidance.

Though the company’s profits are being harmed by the weakness in the Australian dollar against the New Zealand currency, newsletters say this is more than offset by Kathmandu’s gross margin expansion. The brand continues to be enhanced in the outdoor adventure segment of retail – an attractive market, one source says.

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

Macquarie Group (MQG)

Macquarie Group climbed the most in three months on Monday when the investment bank told the market it expects net profit to surge 40-45% to around $1.2 billion for 2013-14.

The stock climbed 2.9% to $56.42 on the day, as the guidance was at the top end of consensus expectations for 39% growth. Macquarie attributed the turnaround performance to its fixed income, currencies and commodities (FICC) division, which is now expected to report flat to slightly profitable earnings.

Analysts say the outlook for the FICC division may have improved because of recent increases in commodity prices and recent strong trading conditions in the North American energy markets.

Despite the impressive earnings growth of the company, newsletters overwhelmingly say Macquarie is a hold. With a forecast return on equity of 10% and a current price-to-book ratio of 1.5 times, Macquarie appears fully valued at current levels compared to its overseas peers, they say.

The main benefit from the update is that it defines expectations for 2013-14 (Macquarie has a March 31 year-end), limits any risks to the stock in the short term and confirms the group’s positive earnings trajectory, one source says.

Newsletters agree that Macquarie Group could beat expectations if its market-facing businesses – FICC, Macquarie Securities Group and Macquarie Capital – show some strength. In the report Macquarie said they experienced mixed trading conditions, with combined net profit in the December quarter down on the previous corresponding period.

This could be possible if the US economy continues to recover and Macquarie increases its market share, one source says, but it doesn’t want to bet much of its portfolio on that outcome.

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

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

Myer (MYR)

Shares in Myer have fallen to a nine-month low after the embattled retailer posted a fall in net profit and cut its half-year dividend for the second time in a row.

Net profit for the six months to December 31 fell 8.1% to $81 million and sales crept up 0.3% to around $1.7 million amid higher cost pressures as Myer invests in the store portfolio and its online platform.

As a result Myer cut its interim dividend by 10% to nine cents a share. The reduction follows an 11.1% cut to the final dividend in 2012-13.

Myer shares dropped 5.3% to $2.50 on Thursday and have been in free-fall since then, closing at $2.29 yesterday.

The developments provoked upgrades and downgrades from the investment press, however, they almost unanimously recommend to hold the stock in response. They say value may be beginning to emerge in the stock given its price-earnings ratio of 11.6 times compared to the consumer discretionary sector’s 14.2 times, but it is tempered by a modest earnings outlook.

Myer also carries the added risks of the uncertain implications from the structural changes facing the transforming retail sector, one source says.

Another source points out that Myer’s cost-reducing initiatives in previous periods make it increasingly difficult to sustain its gross earnings margins when revenue weakens. Indeed, gross margins were weaker than many analysts expected.

No detail was provided about the proposed merger with David Jones. However, one newsletter says a premium will most likely be required when considering the recent outperformance of David Jones compared to Myer, estimating the ratio would have to be 1.27 new Myer shares per one David Jones share.

* According to our value investor partners, StocksInValue, the intrinsic value for Myer is $2.44. To find out more visit http://www.stocksinvalue.com.au/.

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

Metcash (MTS)

Myer wasn’t the only company maligned for cutting its dividend this week, with grocery wholesaler Metcash announcing it would reduce its dividend payout ratio to provide more funding to restructure the business.

The company suffered its worst sell off in 16 years – falling 14.8% to $2.70 over two days – when it downgraded its earnings and announced a transformation plan that may require up to $700 million in total capital expenditure.

The transformation involves implementing six key growth drivers that include upgrading IGA stores (where Metcash and the retailers contributes an equal amount of capital) and expanding its digital platform to better compete with Coles and Woolworths.

On top of working capital improvements of between $30-40 million over 2014-15 and 2015-16 to fund the changes, Metcash said it will cut its dividend payout ratio to 60%. The company paid out 86% of underlying earnings per share in 2012-13.

Analysts now forecast a final dividend of 10 cents – down 39.4% on the previous corresponding period.

Management expects earnings per share to decline between 13-15% – including around 3% of dilution of issuing new equity –for 2013-14, from its previous guidance for a fall of 10%.

The majority of newsletters say Metcash is a sell after the updates. One analyst – which downgraded its recommendation to sell – said that while a sell recommendation feels late given what’s happened, it will take at least 12 months before investors should invest in the stock for any growth potential as it doesn’t see a catalyst over the period.

Moreover, the transformation plan doesn’t get to the root of the problem – Metcash’s distribution-focused business model, another source says. When the business is to license retailers and then distribute groceries to them, it’s more difficult to focus on selling rather than buying. Further, the model cannot provide the consistency and control with investing that Woolworths and Coles can.

* According to our value investor partners, StocksInValue, the intrinsic value for Metcash is $2.14. To find out more visit http://www.stocksinvalue.com.au/.

  • Investors are generally advised to sell* Metcash at current levels.

Stockland (SGP)

Newsletters are divided over Stockland after the real estate investment trust (REIT) acquired a 19.9% stake in rival Australand (ALZ) last week.

The acquisition, which is to be funded through cash and debt facilities and is expected to be earnings-per-share (EPS) neutral, was made possible when CapitaLand divested its 39.1% holding on market. With it, Stockland becomes the largest shareholder of Australand.

The development elicited both upgrades and downgrades from analysts, but the majority of newsletters advise to hold on to Stockland. While they don’t see any synergies this year, several sources pointed to the opportunities for the two businesses to work together and to build benefits through scale in the longer term.

The stake won’t make much of a change to Stockland’s portfolio weighting between commercial property ownership and residential development, with most still being allocated to quality retail shopping centres, one source says.

The source also points out that when the two companies own residential development sites next to each other, they can share costs of marketing and various building facilities. That being said, unless operations are merged it won’t be material.

Meanwhile, shares in Australand have climbed around 7.5% over takeover speculation. Such a move would enhance the company’s development capabilities in industrial and medium-density property, a newsletter says, even though it might weigh on Stockland’s share price in the short term.

Those more negative towards Stockland say the acquisition should have been earlier and at a lower price, when CapitaLand first started selling down four months ago.

They also say Stockland appears marginally overvalued. The company has a price-earnings multiple of around 14.6 times, above the REIT sector’s 13 times.

* According to our value investor partners, StocksInValue, the intrinsic value for Stockland is $2.94. To find out more visit http://www.stocksinvalue.com.au/.

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

Watching the directors

  • Fortescue Metals Group (FMG) chairman, Andrew Forrest, topped the directors’ trades this week, snapping up $4,934,191 worth of shares this week in the iron ore miner. He bought 1 million shares in the company at $4.93 each.
  • The next biggest buyer was NewSat non-executive director Ching Chiat Kwong, who spent $1,308,409 for 2,907,575 shares in the satellite company.
  • On the selling side, Andrew Formica, the chief executive of Henderson Group, netted $1,624,361 in the global investment management company. He said the cash was to pay for national insurance costs and tax in the UK.

Takeover Action March 20-26, 2014

DateTargetASXBidder(%)Notes
24/03/2014Ampella MiningAMXCentamin94.12
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
28/02/2014Merlin DiamondsMEDBlumont Group0.00
25/03/2014Real Estate CorpRNCLittle Group85.03
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 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
19/03/2014Crowe Horwath AustralasiaCRHAnchorage Capital Partners0.00Indicative proposal
Source: NewsBites

*In error, the previous iteration of the article had said investors are generally advised to buy sell Metcash at current levels. The correct sentence is investors are generally advised to sell Metcash at current levels.

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