Collected Wisdom

This week we look at IOOF Holdings, FlexiGroup, SP AusNet, Singapore Telecommunications, and GrainCorp.

Summary: The newsletters generally like the look of IOOF following its acquisition of SFG Australia, and say financing company FlexiGroup looks cheap at current levels. There are short-term uncertainties around energy infrastructure group SP AusNet, while Optus is being recognised as a drag on Singapore Telecommunications’ performance. And one-time takeover target GrainCorp is being seen as fair value, with a result roughly in line with expectations.

Key take-out: Although paying what was perceived to be a high price for SFG, analysts believe IOOF’s purchase is a positive as it boosts the group’s funds under management by 25% to $154 billion and also diversifies its wealth management operations.

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.

IOOF Holdings (IFL)

For the most part newsletters support IOOF Holdings’ purchase of SFG Australia (SFW), despite the hefty price tag attached.

The financial services company entered into a scheme of arrangement to acquire all the shares of SFG Australia on Friday. SFG shareholders will be offered 0.104 of an IOOF share for each SFG share, implying a value of $0.90 per share – a 17.5% premium to IOOF’s closing share price the day before the deal was announced.

IOOF has also set a maximum cash component of $100 million in total if SFG shareholders wish to cash out of their holdings.

Like IOOF, SFG provides wealth management services; however, it targets high net-worth (HNW) individuals and derives more revenue from financial advice fees.

Analysts’ recommendations are mixed following the acquisition, but the majority advise their clients to buy IOOF after two sources upgraded their calls on the news.

Though the acquisition appears expensive as it implies a 16.4 price-earnings multiple in 2013-14 when IOOF currently trades at 14.7 times, newsletters are confident that management can achieve its goal of being earnings-per-share accretive of around 8% in 2015-16, given its strong record with previous acquisitions.

The investment press like the acquisition because it boosts IOOF’s funds under management, administration and advice (FUMAS) by 25% to $154 billion, propelling the company to rank as the third-largest financial advice business in Australia.

The acquisition also diversifies IOOF’s business. It reduces its dependence on its platforms – a segment of the business where one source believes the greatest margin pressure exists – and increases its exposure to the HNW market.

* According to our value investor partners, StocksInValue, the intrinsic value for IOOF Holdings is $5.57. To find out more visit http://www.stocksinvalue.com.au/.

  • Investors are generally advised to buy IOOF Holdings at current levels.

FlexiGroup (FXL)

Concerns about FlexiGroup’s growth outlook are overblown, say the newsletters, after they attended the company’s investor day last week.

The consumer financing group outlined to the market a number of growth strategies that it believes would push it back into double-digit earnings-per-share growth in the medium term. These include a new mobile plan bundle launched in Harvey Norman (HVN), new omni-channel retail and enterprise platforms that enable faster processing and a renewed focus on growth in New Zealand.

However, these initiatives will increase FlexiGroup’s cost base, with IT investment likely to pick up to 9% of income in 2013-14 from 4-5% the year before, the company said.

Nevertheless, guidance was reaffirmed for a net profit of $84-86 million in 2013-14.

Shares in FlexiGroup have plummeted 20.6% to Tuesday’s close of $3.44 since the start of the year as investors worry the company won’t be able to replicate its high levels of growth in the coming years.

But most newsletters say the stock appears cheap and are advising their clients to buy it at current levels. They say the more moderate growth profile has been factored too heavily into the share price, and that the market isn’t properly considering tailwinds that will support the underlying business.

Further, sources say additional growth avenues exist through its interest free credit cards business by leveraging relationships with merchants and retailers to provide unique benefits to consumers.

FlexiGroup can also pursue accretive mergers and acquisitions, for which it has a strong track record for discipline, sources say.

On average analysts have set a price target of $$4.57 on the stock, about 35% above current levels.

* According to our value investor partners, StocksInValue, the intrinsic value for FlexiGroup is $3.64. To find out more visit http://www.stocksinvalue.com.au/.

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

SP AusNet (SPN)

Newsletters agree SP AusNet is a structurally sound business after it reported its full-year results, but several question whether the stock is worth investing in due to risks in the short term.

The diversified energy infrastructure business announced a solid set of figures for 2013-14: revenue lifted by 9.8% to $1.8 billion and earnings before interest, tax, depreciation and amortisation (EBITDA) increased 4.5% to around $1 billion.

Net profit fell 34.8% to $178.3 million, but it was significantly impacted one-off payments to the Australian Taxation Office and Singapore subsidiary SPI Management Services to complete a restructure and terminate its management services agreement.

To the disappointment of a few sources, the company kept its distribution guidance flat at 8.36 cents a share, flat on 2013-14. One source says the guidance seems to indicate that SP AusNet favours maintaining its A- credit rating at the expense of distribution growth, which it believes may not be necessary. Another says the company is favouring growth over yield.

The majority of newsletters say SP AusNet is a hold following the results. Despite a strong operating result, sources say that the bushfire litigation, tax audit risks, and tougher regulation pose a degree of uncertainty.

SP AusNet faces a class action from bushfire victims in Kilmore East, where the company owned and operated a power line that sparked the fire back in 2009. Outcomes for litigation are hard to predict and even harder to quantify, one source says.

And while the ATO’s back down on its dispute with peer Spark Infrastructure suggests lower tax audit risk, the outcome is still uncertain.

The third concern surrounds SP AusNet’s rollout of its Advanced Metering Infrastructure. The cardinal sin for regulated entities is to spend capital which the regulatory doesn’t approve of for inclusion in the company’s regulated asset base (RAB), one source says, which may see it wasted.

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

  • Investors are generally advised to hold SP AusNet at current levels.

Singapore Telecommunications (SGT)

Optus is dragging on Singapore Telecommunications’ (SingTel) otherwise stand-out fourth-quarter results, according to the investment press.

The telecommunications company reported net profit was up 4% to $SG898 million for the fourth quarter of 2013-14, just shy of expectations for $SG904 million. Much of that may have been due to the surprising stall in earnings momentum at Optus, where net profit for the quarter slid 10.2% to $223 million from a year earlier, as well as depreciation of the Australian dollar.

Optus had been seeing its net profit accelerate into double-digit growth in the past three quarters despite falling revenue, as the company reshaped its business to focus more generating profits from existing customers, rather than chasing new ones.

While Optus blamed a cautious business environment, depreciation and amortisation charges and $25 million in non-recurring revenue in the prior year, most newsletters anticipate earnings from Optus to decline further.

Though Optus is progressively rolling out its 4G network and will target subscriber growth in 2014-15, sources see this as challenging due to Telstra’s superior quality in coverage and speed.

SingTel’s domestic operations, however, are expected to offset this weakness as the company aggressively acquires market share and pursues new initiatives.

Most newsletters say SingTel is a hold after the results, with a consensus target price of $3.46%, relatively flat on Tuesday’s closing price.

  • Investors are generally advised to hold Singapore Telecommunications at current levels.

GrainCorp (GNC)

Newsletters are overwhelmingly advising to hold GrainCorp shares after the group reported half-year results roughly in line with expectations.

On the one hand, sources say the long-term fundamentals of the company remain intact despite half-year underlying net profit declining 44% to $61 million from the previous year. They say the processing businesses continue to perform well, and there is still room for the company to reduce costs in the poorer-performing storage and logistics business.

GrainCorp kept its earnings guidance at a net profit of $80-100 million for the full year, even though it expects earnings to be heavily slanted to the first half, as is usual for the company.

But on the other hand, sources are warning their clients about the short-term risks to the stock. One threat is an El Nino weather event, which the Bureau of Meteorology anticipates will develop around July this year. Such events are typically associated with drier conditions – reducing the amount of grain GrainCorp can receive.

Further, competition in the storage and logistics business is increasing. As detailed in Collected Wisdom back in April, Qube Logistics is developing a new grain export, storage and handling facility in Port Kembla via a joint venture with Noble Group.

Another catalyst mentioned is the announcement of a new chief executive, which GrainCorp said would happen in the middle of calendar 2014.

One source believes GrainCorp is trading slightly above fair value, as the market is factoring in the future likelihood of corporate activity rather than the risks the company faces. Indeed, the average target price on the stock is $8.84, 4% below current levels.

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

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

Watching the Directors

  • Westpac chief executive, Gail Kelly, took the mantle for the biggest trade this week. Two days after the bank’s half-year results she offloaded 200,000 shares at $34.48 each, netting $6,895,800.
  • The only other substantial trade of the week was also on the selling side. Pulse Health director, Andrew Gregory, made $2,400,000 from selling 4,000,000 shares in the small cap private healthcare operator. The company has soared 130% in the past year.

Takeover Action May 15-21, 2014

DateTargetASXBidder(%)Notes
05/05/2014Aquila ResourcesAQABaosteel Resources International and Aurizon Holdings19.79
17/04/2014Bullabulling GoldBABNorton Gold Fields0.00
16/05/2014Challenger Diversified Property GroupCDIChallenger84.57
29/04/2014Dampier GoldDAUOrd River Resources0.00
24/01/2014Genesis ResourcesGESBlumont Group0.00
09/05/2014Gondwana ResourcesGDAOchre Group Holdings17.65
28/02/2014Merlin DiamondsMEDBlumont Group0.00
30/04/2014Reef Casino TrustRCTAquis Casino Acquisitions 77.03
24/04/2014Westside CorporationWCLLandbridge Group Co19.99
Scheme of Arrangement
07/04/2014Atlantic GoldATVSpur Ventures0.00Vote July
09/04/2014David JonesDJSWoolworths0.00Vote June
09/05/2014EnvestraENVAPA Group33.00Meeting adjourned due to CKI proposal
29/04/2014Horizon OilHZNRoc Oil Company0.00Vote July
17/03/2014Murchison MetalsMMXMercantile Investment CompanyVote June
31/03/2014Nexus EnergyNXSSeven Group Holdings0.00
16/05/2014SFG AustraliaSFWIOOF Holdings15.66Vote August
16/05/2014Sierra MiningSRMRTG Mining0.00Approved
27/03/2014SteriHealthSTPCatilina Nominees47.00Vote May
10/03/2014TriAusMinTROHeron Resources0.00Vote June
Foreshadowed Offers
23/04/2014Australand PropertyALZStockland19.90Indicative proposal
19/03/2014Crowe Horwath AustralasiaCRHAnchorage Capital Partners0.00Indicative proposal
08/05/2014EnvestraENVCheung Kong Group17.46Indicative proposal
28/04/2014Goodman FielderGFFWilmar Intenational and First Pacific Company10.10Non-binding scheme proposal
13/05/2014PanAustPNAGuangdong Rising Assets Management23.00Indicative proposal
20/05/2014Treasury Wine EstatesTWEKohlberg Kravis Roberts & Co0.00Indicative scheme proposal
Source: Newsbites

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