Collected Wisdom

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.

Goodman Group (GMG)

The majority of newsletters are tipping Goodman Group to beat its earnings guidance for 2013-14 after the industrial property giant provided its third-quarter update last week.

“Goodman is well positioned to meet its growth expectations in current and future periods,” the company reported, as results in the third quarter came in slightly above what analysts had anticipated.

Total assets under management lifted by 13% to $26.4 billion, occupancy was strong at 96% and $1.5 billion of new development was secured.

No mention was made of the company’s guidance for operating earnings per security, which had been forecast in the half-year to rise by 6% to 34.3 cents.

The investment press were quick to point out that Goodman Group usually provides an update for its EPS guidance each quarter. The vague commentary this time around hints at a likely upgrade at the June investor update, several sources believe.

Most newsletters advise their clients to buy Goodman Group after the trading update, given the potential for an upgrade in the short term and attractive growth prospects over the next few years from the company’s global development business, especially from a ramp-up of activity in the US.

One source highlights that though the US market represents just $200 million of the Goodman’s total $2.7 billion in work-in-progress (WIP), this figure should rise strongly as the company has secured a pipeline worth $US1.4 billion.

However, a couple of other sources think the stock is approaching full value since it has climbed almost 10% to $5.07 in the past two months.

* According to our value investor partners, StocksInValue, the intrinsic value for Goodman Group is $2.72. To find out more visit http://www.stocksinvalue.com.au/

• Investors are generally advised to buy Goodman Group at current levels.

National Australia Bank (NAB)

Newsletter responses are mixed after NAB reported slightly underwhelming half-year results last week.

Despite boosting its dividend by six cents to 99 cents a share – above forecasts for 98 cents – NAB missed expectations with revenue and earnings for the six months to March 31. Cash profit for the first-half lifted by 8.5% to $3.15 billion, just below forecasts for $3.17 billion, while revenue came in at $9.2 billion when analysts were tipping $9.5 billion on average. 

Whereas shares in ANZ Bank and Westpac declined on the day of their better-than-expected half-year results, NAB shares lifted 0.9% to $34.14. However, that was after the stock had dropped 4.7% over seven consecutive trading days leading up to the announcement.

The investment press are largely split between buying and holding NAB, but with two downgrades outweighing one upgrade following the news, the consensus is to hold the stock.

Though NAB trades at a one-year forward price-earnings multiple of 12.5 times, compared to the wider financial sector’s 14.2 times, most newsletters believe the discount is warranted because of competitive challenges its core Australian businesses and the lingering issues in the UK.

One source says even if the potential divestment of Clydesdale in the UK does happen, NAB may not get its money back. The bank recently injected £300m into the division which lowered its sustainable equity to below 7%.

In Australia, sources say NAB’s underlying fundamentals remain soft, with group’s net interest margin falling nine basis points to 1.94%. They say the lift in cash earnings for the period was boosted by a substantially lower bad and doubtful debts charge – down 52% to $528 million.

* According to our value investor partners, StocksInValue, the intrinsic value for National Australia Bank is under review. To find out more visithttp://www.stocksinvalue.com.au/

• Investors are generally advised to hold National Australia Bank at current levels.

Leighton Holdings (LEI)

A strong first-quarter result from Leighton hasn’t shaken most newsletters’ pessimistic outlook for the stock.

The construction giant announced last Tuesday that revenue lifted 7% to $5.7 billion compared to the same time last year. Underlying net profit after tax (NPAT) surged 29% to $159 million.

Leighton reaffirmed guidance at between $540 million and $620 million for the full year.

“This result was driven by strong performances in infrastructure and oil and gas construction, and our ongoing focus on margin expansion initiatives,” said newly appointed chief executive Marcelino Fernández Verdes.

Despite the seemingly solid result – sending the share price up 1.8% to $19.49 on the day – the majority of the investment press say Leighton is a sell at current levels. While growth in domestic construction and the company’s cost containment strategy is overcoming weakness from the mining downturn for now, problems could emerge in the medium term.

One newsletter says the fall in Leighton’s work in hand (which slid 3% to $40.9 billion in the quarter) points to a fall in revenue over 2014-15. Further, the company’s organisational restructure could get in the way of revenue growth from Australia’s road and rail construction recovery in the second half.

The newsletter source says Fernández Verdes may accelerate organisational change at Leighton by moving the company to a centralised divisional model, away from its operating company model. Such a restructure could deliver material cost savings, the source says, but it could also lose the company market share and senior management in the near term.

Newsletters agree Leighton needs to remove some of the risk to its balance sheet for investors to consider the stock a viable investment. This would include providing positive updates about receivables collections from the Gorgon Jetty project, oil and gas projects in Iraq and mining contracts in Indonesia, a source says.

 * According to our value investor partners, StocksInValue, the intrinsic value for Leighton Holdings is $21.57. To find out more visit http://www.stocksinvalue.com.au/

• Investors are generally advised to sell Leighton Holdings at current levels.

AMP (AMP)

Shares in AMP leapt to their highest point in a year when the company reported encouraging results for the first quarter of 2014.

Net cash flows for AMP’s wealth management business surged to $363 million, up 72% from the previous corresponding period. Total assets under management rose to $101.1 billion for the three months to March 31, higher than the previous quarter’s $100.5 billion.

The stock jumped 2.7% to $5.32 on Thursday in response to the news.

Aside from the strong performance from wealth management, the other good surprise for newsletters was from AMP Capital. The funds management business achieved a positive quarter in net flows, which is unusual, largely due to its strategic partnerships with China Life and MUTB in Japan.

“Our contemporary products continue to perform well, our focus on Asia is starting to deliver results and the performance of our insurance business is in line with guidance,” said chief executive Craig Meller.

While the investment press are positive on the outlook for AMP, at current share price levels the majority believe the stock is fully valued and rate it as hold. After surging 20.7% to Tuesday’s close of $5.30 in the year to date, the stock is priced at a multiple of 15.8 times on a one-year forward basis when the broader sector trades at 14.3 times.

That being said, sources believe AMP’s share price will be protected in the next 12 months – meaning limited downside risk as well.

In the meantime, AMP is expected to deliver a dividend yield of 4.9% for 2014, not including franking credits (AMP franked its dividends at 70% last year).

* According to our value investor partners, StocksInValue, the intrinsic value for AMP is $3.62. To find out more visithttp://www.stocksinvalue.com.au/

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

Bendigo and Adelaide Bank (BEN)

Bendigo and Adelaide’s Bank’s decision to acquire Rural Finance Corporation of Victoria was strategically sound with minimal risks incurred, according to newsletters.

The regional bank said on Monday last week that it had reached a deal to buy the government-owned Rural Finance, a provider of finance to family farms across Victoria, for $1.78 billion.

Under the deal, Adelaide and Bendigo Bank acquires a loan book of $1.7 billion. The acquisition is to be funded through a combination of retail deposits, wholesale funding, a $230 million institutional placement and a share purchase plan of around $50 million.

Each newsletter that crossed Eureka Report’s desk sees the acquisition as sensible. Though it is only modestly accretive to earnings per share, sources say the valuation is reasonable at a purchase price of around 8.5 times earnings and 1.5 times book value.

The investment press overwhelmingly rate Adelaide and Bendigo Bank as neutral after the development. After surging 60% to Tuesday’s close of $11.45 over the past two years, analysts believe the stock trades around fair value at its PE ratio of 12.6 times, given the bank lacks the pricing power of its larger competitors and involves higher risks.

One risk weighing most on newsletters’ minds is the Great Southern class action. Adelaide and Bendigo Bank said the proceedings had concluded on October 24 last year and that it was awaiting judgement. Settlement talks were ongoing, but no agreement had been reached.

Analysts say if the bank loses the case – which is a material possibility – it may be forced to recognise a loss that could threaten capital requirements, thereby provoking the need for more capital raisings.

* According to our value investor partners, StocksInValue, the intrinsic value for Bendigo and Adelaide Bank is $9.10. To find out more visithttp://www.stocksinvalue.com.au/

• Investors are generally advised to hold Bendigo and Adelaide Bank at current levels.

Watching the Directors

• The largest trades were on the selling side this week, with Beach Energy’s chief executive, Reginald Nelson, netting $3,570,000 from the sale of 200,000 shares at $17.85 after exercising options.
• Elsewhere, John Seymour, founding director of Seymour Whyte, offloaded 1 million shares in the infrastructure, engineering and construction company for $1.8 million. The company has soared around 60% since the beginning of the year.
• Meanwhile, executive director of Henderson, Andrew Formica, disposed of 241,193 shares in the investment manager for $1,079,273.