Collected Wisdom

This week we look at Bradken, James Hardie, Regis Resources, Spark Infrastructure and Adelaide Brighton.

Summary: The newsletters consider Bradken’s announced restructuring program is a positive, despite the company’s share price plunge, but they have mixed feelings on James Hardie, even after the company’s strong full-year results and upbeat outlook. The sharp drop in Regis Resources’ is being viewed as a possible turning point, but they are not impressed with Spark Infrastructure’s move to acquire a stake in Duet Group, nor with cement group Adelaide Brighton’s flat earnings outlook.

Key take-out: Bradken shares have taken a hammering since the company’s announcement on May 19 that it was slashing its Australian operations as part of a major restructure. But the newsletters see a buying opportunity, with a 12-month price target 30% above current levels.

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.

Bradken (BKN)

Bradken is undergoing a painful but necessary restructure of its operations so that it can better compete in a harsher environment, say the investment press.

The company announced last week it was downsizing its Australian manufacturing facilities to counter languishing demand in the mining services sector, where it doesn’t see any improvements in the short to medium term.

The changes, which include cutting its workforce by 10% to 4,700, are to reduce operating costs by $27 million a year. Of that, $22 million is expected to flow through to earnings before interest, tax, depreciation and amortisation (EBITDA).

A one-off cost of around $51.4 million before tax is expected to be incurred, relating to retrenchment, plant and equipment write-offs and site closures.

Bradken also downgraded its EBITDA guidance by 4% to $173 million for 2013-14.

Following the developments newsletters are divided between buying and holding Bradken, but the majority say to buy the stock at current levels – even after many cut their price targets on negative earnings revisions.

Indeed, shares in Bradken hovered at their lowest point in five years in response to the news. After slumping 7.7% on the day of the market update(May 19, 2014) to $3.62, the stock has slid another 7.2% to yesterday’s close of $3.36.

Priced at an earnings multiple of around 8 times on a one-year forward basis, the majority of analysts say Bradken shares are undervalued. They have a 12-month price target of $4.39 on the stock – 30% above current levels.

One source says the stock has limited downside, and that the cost reductions and efficiency improvements should result in earnings growth in 2014-15.

* According to our value investor partners, StocksInValue, the intrinsic value for Bradken is $4.20. To find out more visit http://www.stocksinvalue.com.au/.

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

James Hardie (JHX)

Newsletters are deeply mixed over James Hardie even after the company impressed the market with a surprise special dividend, strong full-year results and an upbeat outlook for its business in the US.

The building products manufacturer announced an adjusted net profit of $US197.2 million (excluding asbestos and other liabilities) for 2013-14, up 40% from the previous year and at the top end of guidance for $US190-200 million.

To the pleasure of its shareholders, the company upped its second-half dividend to US32 cents a share, announced a special dividend of US20 cents a share and said it was planning to buy back up to 5% of its shares in the next 12 months.

Shares in James Hardie lifted 5.7% to $14.47 on the day – their biggest one-day rise in three months.

However, newsletters reacted with a range of buys, holds and sells. But at current share price levels, the majority say James Hardie appears fully valued, and rate it a hold.

Those positive on the stock say James Hardie will continue benefiting from its leverage to the US housing recovery. They say the volume growth from the result shows that the company isn’t losing market share to Louisiana Pacific (as was feared), and though margins were below expectations, they are set to improve in 2014-15.

“It is expected that the EBIT margin will continue to expand in the coming years as the US operating environment continues to improve,” said chief executive Louis Gries.

But sources more pessimistic – despite still liking the business – believe the market is underappreciating the capital expenditure required in the US and the potential for more asbestos claims (James Hardie must pay up to 35% of its operating profit to compensate claimants). Though the market does factor in such claims, the increased liability this year is a reminder there are still risks, one source says.

  • Investors are generally advised to hold James Hardie at current levels.

Regis Resources (RRL)

Regis Resources has been hit by five downgrades from newsletters after it issued production guidance for 2014-15 in the wake of major flooding in February.

Regis forecast that it would produce between 305,000 ounces and 355 ounces next financial year following its review of the Garden Well and Rosemont operations in Western Australia. The guidance was far below analyst expectations, partly due to worse-than-anticipated grades at Rosemont.

The news sent the gold miner’s share price plummeting 25% to $1.71 on Friday (May 23, 2014).The stock has shed a further  9.4% this week to $1.55 at Tuesday’s close  – its lowest point since October, 2010 – amid the analyst downgrades.

As one newsletter declares, Regis is no longer the standout gold stock. After the slew of harsh cuts to earnings and valuations, analysts overwhelmingly say the stock is a hold around current share price levels.

Investors should take caution, the source says. Management has to restore confidence and work to differentiate the company as a low-cost Australian gold producer once again.

Another source believes the poor grades at Rosemont – which had followed earlier grade reconciliation issues at Garden Well – have significantly undermined the credibility of the company’s assets. Moreover, these grade issues point to long-term problems even before the flooding event.

However, the substantial fall in the share price could mark an inflection point in Regis’s fortunes, sources say, since the operating expenditure should be temporary and there is cause for optimism in 2015-16 as earnings-per-share growth picks up.

* According to our value investor partners, StocksInValue, the intrinsic value for Regis Resources is $2.59. To find out more visit http://www.stocksinvalue.com.au/.

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

Spark Infrastructure (SKI)

Neither the market nor the newsletters were impressed with Spark Infrastructure’s move to acquire a stake in Duet Group.

Shares in Spark fell 5.1% to $1.79 last week when the electricity distribution business announced it had purchased a 14.1% stake in peer Duet at an average entry price of $2.16 per stapled security, a 4% discount to Duet Group’s share price on May 19. The interest was acquired through derivative contracts.

“In the current circumstances, particularly given the relative scale of the two entities, Spark does not intend to make a takeover bid for Duet,” the company said.

The stake is to be funded via a $200 million equity placement at a price of $1.75 per security, a 7% discount to the trading price the day before the announcement, and through debt totalling $275 million.

The majority of newsletters are telling that their clients hold on to the stock following the news after several downgraded their recommendations. Though most say the price was modestly attractive, they question the acquisition’s strategic merit and find the stated justifications – to capture shareholder value at a time of consolidation in the sector – to be weak.

Rather, one source believes the recent pick-up in takeover activity and strong investor demand in the space has pushed Spark, a company that struggles with strategic acquisitions, to make a move on Duet.

The source says the method of funding the purchase is unwise, since Spark is leveraging itself to fund an investment in a leveraged company.

Other sources interpret the move as primarily strategic to obtain a presence on the register if Duet should become a takeover target. Such an investment could be taken to be attractive to another buyer, a source says.

* According to our value investor partners, StocksInValue, the intrinsic value for Spark Infrastructure Group is $1.87. To find out more visit http://www.stocksinvalue.com.au/.

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

Adelaide Brighton (ABC)

Shares in Adelaide Brighton dropped to their lowest level in eight months when the construction materials and lime producer said net profit for 2013-14 would be similar to the previous year at its annual general meeting.

The earnings guidance was around 7% below average analyst forecasts for $161.5 million, much of which was due to a 5% decline in lime volumes. Demand for the mineral had dropped because a major customer in the Northern Territory suspended its operations and gold mines had closed in the second half of 2013, the company said.

Following the 5.9% share price fall to $3.53, newsletters are mixed on Adelaide Brighton, but the majority say the stock is a hold and perceive it to be fairly valued around current levels.

Martin Brydon, who replaced long-term server Mark Chellew as chief executive after the AGM, has his work cut out for him, says one source, with flat net profits in 2013-14 marking the fifth consecutive year of virtually no earnings growth.

Adelaide Brighton’s leverage to the residential housing recovery is likely to be negated by the loss of key cement contracts in South Australia and Western Australia (see Collected Wisdom in March), according to several newsletters.

Other issues newsletters point out include production issues at Adelaide Brighton’s Birkenhead operation and higher hedging costs on clinker imports.

“Management is renewing efforts to further reduce the cost base across the group,” Brydon said. “The approach is to keep the business as simple as possible and remove all unnecessary activity.”

However, newsletters say Adelaide Brighton’s share price will nevertheless be supported. It has an attractive yield of nearly 6% (and that’s not including fully-franked dividends) and its longer-term investment appeal is enhanced by a strong management team and relatively healthy balance sheet.

* According to our value investor partners, StocksInValue, the intrinsic value for Adelaide Brighton is $3.61. To find out more visit http://www.stocksinvalue.com.au/.

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

Watching the Directors

  • Stewart Elliott, the chairman and managing director of Energy World Corporation, topped the buyers this week with ease. He traded $2,112,676 for 8,030,270 shares in the power and natural gas producer at a price of 26.3 cents a share.
  • Elsewhere, the Millner family bought scrip in Washington H. Soul Pattinson once again. This time the family acquired $119,434 shares in the investment company at $14.36 per share.
  • Meanwhile on the selling side, Guido Staltari, chairman of Saracen Minerals, offloaded $1,840,661 in the gold producer at 33.5 cents a share. He said the sale was to fund tax commitments and rebalance his portfolio under legislative requirements.

Takeover Action May 22-28, 2014

DateTargetASXBidder(%)Notes
28/05/2014Ambassador Oil and GasAQODrillsearch Energy19.90
05/05/2014Aquila ResourcesAQABaosteel Resources International and Aurizon Holdings19.79
26/05/2014Bullabulling GoldBABNorton Gold Fields8.10
27/05/2014Challenger Diversified Property GroupCDIChallenger93.49
26/05/2014Dampier GoldDAUOrd River Resources1.01
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
27/03/2014SteriHealthSTPCatilina Nominees47.00Vote June
10/03/2014TriAusMinTROHeron Resources0.00Vote June
Foreshadowed Offers
28/05/2014Australand PropertyALZStockland19.90Increased final 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
26/05/2014SAI GlobalSAIPacific Equity Partners0.00Indicative scheme proposal
20/05/2014Treasury Wine EstatesTWEKohlberg Kravis Roberts & Co0.00Indicative scheme proposal
Source: Newsbites

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