Summary: The newsletters believe Oil Search is primed for growth, but are mixed on the prospects for goldminer Newcrest. Meanwhile, analysts do like the earnings outlook for sleep device maker ResMed, but have mixed views on retailer JB Hi-Fi and junior iron ore miner Atlas Iron.
Key take-out: The ramp-up of Oil Search’s PNG LNG project, ahead of schedule, and an increase in oil and gas production forecasts, has the newsletters excited – although some are concerned over Papua New Guinea’s elevated sovereign risk profile.
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.
Oil Search (OSH)
Oil Search’s cash flow profile is about to be transformed amid PNG LNG’s imminent ramp-up, enabling it to pay out substantial dividends to shareholders and fund further growth opportunities, the investment press say.
Exxon Mobil, Oil Search’s partner in the PNG LNG project, said yesterday first cargo is now expected to be shipped before mid-year.
Consequently Oil Search now expects its 2014 production to be in the range of 14.5 to 17.5 million barrels of oil equivalent (mmboe), up from its previous guidance for between 13 and 16 mmboe.
Newsletters overwhelmingly rate Oil Search as a buy following the developments. With cash flows from PNG LNG expected to last for more than 30 years, the company can pursue valuable, high-growth options (such as the development at Elk/Antelope in PNG) when many of its peers are concentrating more on short-term returns to shareholders.
And Oil Search won’t be lacking in that regard either. Managing director, Peter Botten, said the cash flows also provide the company with the ability to pay out “material dividends”. It is anticipated the company will reveal a dividend policy at its half-year results in August.
On average analysts forecast Oil Search’s dividend yield to lift to 2.1% in 2015, up from this year’s 0.5%, and for the share price to climb 10.8% to $9.81 in the next 12 months.
However, a few sources disagree with consensus because they think the sovereign risk in PNG isn’t being sufficiently incorporated in the company’s valuation. They believe much of the potential upside is already attributed in the share price, and any further upside isn’t enticing enough given the risks.
* According to our value investor partners, StocksInValue, the intrinsic value for Oil Search is $4.49 (The StocksInValue analyst team values companies based on their financial performance so far, rather than their potential performance in the future). To find out more visit http://www.stocksinvalue.com.au/
- Investors are generally advised to buy Oil Search at current levels.
Analyst recommendations for Newcrest remain distinctly mixed following the gold miner’s third-quarter report last week.
On the surface the results were predictable: gold production declined 11% to 552,000 ounces, and Newcrest forecast full-year production to come in at the top end of previous guidance at around 2.3 million ounces – as most analysts were expecting.
However, even when their divergent forecasts on the gold price aren’t considered, newsletters disagree over whether risks to Newcrest’s flagship mine, Lihir, and a subdued outlook for 2014-15, outweigh the company’s ongoing productivity efforts and cost controls.
One source, which downgraded its recommendation on the news, said Lihir is a key uncertainty because it contributes such a large proportion of output, adding that management hasn’t communicated to investors a long-term plan for the mine.
That, in combination with the revelation that production at Cadia Valley in 2014-15 will be below this year’s guidance, has several newsletters questioning whether Newcrest will meet consensus expectations in the medium term.
For other sources, however, Newcrest is undervalued by the market. They say the company still has a lot of room to optimise and improve its operations, with a large reserve base that provides valuable long-term options.
Outgoing chief executive, Greg Robinson, said the company’s focus on reducing costs enabled operating margins to expand substantially in the quarter, despite lower gold prices.
Robinson, who oversaw a tumultuous year for Newcrest in 2013, will be replaced by chief operating officer, Sandeep Biswas, on July 4.
Following the news, consensus for Newcrest is difficult to gauge. Analysts’ recommendations are almost evenly splayed across buys, holds and sells. However, investors are generally advised to hold onto the stock given an average target price of $10.78, roughly in line with current share price levels.
* According to our value investor partners, StocksInValue, the intrinsic value for Newcrest is $4.02.To find out more visit http://www.stocksinvalue.com.au/
- Investors are generally advised to hold Newcrest at current levels.
Shares in ResMed leapt to their highest point since January despite the sleep disorder device maker missing analysts’ forecasts with its third-quarter results.
The stock jumped 3.1% to $5.26 last Thursday when ResMed announced revenue rose 4% to $US397.8 million and net income lifted 6% to $90 million compared to the same time last year. Consensus expectations were for $US401 million in revenue.
Investors appeared to ignore the top-line miss, instead focusing on an improved result in the troubled US division where revenue was flat. ResMed’s operations in the region have been affected by having to charge lower prices for its medical devices because of the US government’s competitive bidding policy.
“Our Americas business showed encouraging trends and we continue to benefit from our globally diversified business,” said chief executive Michael Farrell.
By and large, the investment press remain convinced ResMed is a buy at current share price levels. As the dominant company in the market with well-differentiated and innovative production introductions rolling in, sources say ResMed is best positioned to capitalise on the growing reliance on sleep apnoea devices.
One source anticipates new product launches to drive a sales and earnings margin recovery by 2014-15. It highlights that ResMed will launch a new flow generator platform at the major sleep conference in the fourth quarter. Historically, such launches result in between 16-43% growth in the aftermath.
The average 12-month target price for ResMed is $6.13 – 22% above Tuesday’s close.
However, some sources aren’t as optimistic. They say earnings risk is attached to the stock because the uncertain pricing dynamics in the US, given the market is highly competitive and still evolving.
- Investors are generally advised to buy ResMed at current levels.
JB Hi-Fi (JBH)
Terry Smart’s resignation as chief executive of JB Hi-Fi is surprising, but it won’t be detrimental in regards to the retailer’s outlook, according to the investment press.
JB Hi-Fi announced last week that Smart would depart in August this year. He is to be replaced by Richard Murray, who has been the chief financial officer of the company for more than 10 years.
The company also reaffirmed earnings guidance for 2013-14, anticipating total sales to increase 6-8% and net profit after tax to be in the range of $126 million and $129 million.
Newsletters are divided over their outlook for JB Hi-Fi following the update, though their differing views depend more on factors outside of management control.
Murray is an experienced and a well-credentialed choice for the top job, they say. JB Hi-Fi needed a chief executive steeped in the company’s unique culture and well-versed in its low-cost business structure – for which Murray best fits the bill.
Sources highlight Murray has been a key member of the senior management team in driving the group’s strategy since listing, and that he has been instrumental in growing JB Hi-Fi’s commercial sales.
Most newsletters rate the company either as buy or as hold. At current share price levels however, and with an average target price of $20.70 in 12 months, consensus is to hold the stock.
While sources don’t foresee any adverse impact from the management change, several are wary about the company’s long-term viability as its stores reach maturity and online competition increases.
The majority of newsletters, however, believe the company can overcome this through new product launches and diversifying into other areas, such as the $4.6 billion home category via its ‘JB Hi-Fi HOME’ format. Top-line growth will accelerate amid the strengthening housing market, they say.
* According to our value investor partners, StocksInValue, the intrinsic value for JB Hi-Fi is $14.81.To find out more visit http://www.stocksinvalue.com.au/
- Investors are generally advised to hold JB Hi-Fi at current levels.
Atlas Iron (AGO)
The investment press are divided over Atlas Iron after the company achieved record shipments of iron ore in the third quarter of 2013-14.
Despite battling wet weather, Atlas shipped 2.73 million tonnes in the three months to March 31, 4% above the December quarter and in line with or above analysts’ estimates. It now expects to deliver at the top end of full-year production guidance of 10.2-10.7 million tonnes, with Mt Webber on track to begin shipping in the fourth quarter.
But while production was strong during the period, prices were weaker than what many newsletters had tipped amid lower-than-expected iron ore grades and higher costs.
Consequently, unaudited earnings before interest, tax, depreciation and amortisation (EBITDA) was $57-63 million, below expectations, and cash flow for the quarter was negative, falling $17 million to $372 million.
Overwhelmingly, newsletters either advise their clients to buy or hold Atlas Iron, but consensus is to hold the stock.
While Atlas shares trade at a discount to most newsletter valuations (the average 12-month price target is $1.18), most believe there is too much uncertainty with the company’s growth plans, capital expenditure and cost profile.
Along with the outlook for the iron ore price, sources agree that the decision to invest in Atlas in the longer term hinges on its second growth program, Horizon II, going ahead. If successful, Atlas anticipates its production base to surge to up to 46 million tonnes per annum from its short-term target of 15 million tonnes.
But for that to happen Atlas must secure a rail haulage agreement, which requires significant capital expenditure and could face delays.
* According to our value investor partners, StocksInValue, the intrinsic value for Atlas Iron is $0.50.To find out more visit http://www.stocksinvalue.com.au/
- Investors are generally advised to hold Atlas Iron at current levels.
Takeover Action April 24-30, 2014
Date Target ASX Bidder (%) Notes 17/04/2014 Bullabulling Gold BAB Norton Gold Fields 0.00 17/04/2014 Cape Alumina CBX MetroCoal 57.23 29/04/2014 Challenger Diversified Property Group CDI Challenger 72.64 29/04/2014 Dampier Gold DAU Ord River Resources 0.00 06/11/2013 Energia Minerals EMX Cauldron Energy 0.00 Ext to May 1 24/01/2014 Genesis Resources GES Blumont Group 0.00 29/04/2014 Leighton Holdings LEI HOCHTIEF 61.09 28/02/2014 Merlin Diamonds MED Blumont Group 0.00 09/04/2014 Reef Casino Trust RCT Aquis Casino Acquisitions 76.03 24/04/2014 Westside Corporation WCL Landbridge Group Co 19.99 Scheme of Arrangement 07/04/2014 Atlantic Gold ATV Spur Ventures 0.00 09/04/2014 David Jones DJS Woolworths 0.00 Vote June 17/12/2013 Envestra ENV APA Group 33.00 Vote May 29/04/2014 Horizon Oil HZN Roc Oil Company 0.00 Vote July 17/03/2014 Murchison Metals MMX Mercantile Investment Company Vote June 31/03/2014 Nexus Energy NXS Seven Group Holdings 0.00 24/02/2014 Sierra Mining SRM RTG Mining 0.00 Vote April 27/03/2014 SteriHealth STP Catilina Nominees 47.00 Vote May 10/03/2014 TriAusMin TRO Heron Resources 0.00 Vote June Foreshadowed Offers 23/04/2014 Australand Property ALZ Stockland 19.90 Indicative proposal 28/04/2014 Azure Healthcare AZV Unknown party 0.00 Indicative proposal 19/03/2014 Crowe Horwath Australasia CRH Anchorage Capital Partners 0.00 Indicative proposal 28/04/2014 Goodman Fielder GFF Wilmar Intenational and First Pacific Company 10.10 Non-binding scheme proposal Source: NewsBytes