Collected Wisdom

This week we look at Asciano, Metcash, JB Hi-Fi, Mineral Resources and Ramsay Health Care.

Summary: The newsletters are generally happy with the cost-cutting drive by rail and ports operator Asciano, but they have concerns over whether groceries wholesaler Metcash will deliver the financial goods. Analysts are listening closely to JB Hi-Fi, which has forecast higher full-year sales and earnings, but there are concerns over mining contractor Mineral Resources following the failure of its takeover offer for Aquila, and it’s a case of watch and see for Ramsay Health Care after its acquisition of a French private hospitals group.

Key take-out: Newsletters with buy recommendations on Asciano say the stock’s underperformance over the past year suggests the market is underappreciating the company’s ability to deliver on its savings plan.

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.

Asciano (AIO)

Newsletters are overwhelmingly rating Asciano as a buy following the company’s announcement that it was ramping up its cost-cutting program last week.

The rail and ports operator told an investor briefing on Thursday (June 19, 2014) its five-year business improvements program (BIP) has been accelerated to drive savings of $300 million by 2015-16, double the original plan, with 500 jobs being cut by the end of the month.

Asciano also maintained its earnings guidance, anticipating low single digit growth for its underlying net profit after tax for 2013-14. Moreover, the company forecast earnings before interest and tax (EBIT) to grow at a higher rate in the next financial year despite relatively low volume growth across the business.

The stock jumped 6.1% to $5.55 on Thursday – its biggest one-day increase in five years.

Newsletters with buy recommendations on the stock say Asciano’s underperformance over the past year suggests the market is underappreciating the company’s ability to deliver on its savings plan.

“Significant free cash forecast in 2015-16 should allow an increase in the dividend payout ratio to 50%-plus,” Asciano said.

Indeed, analysts on average are forecasting Asciano’s dividend yield to jump from this year’s 2.3% to 3% in 2014-15, then up to 4.1% in 2015-16. That’s not including Asciano’s full franking credits.

The few sources who advise their clients to hold the stock have reservations about excess capacity in the stevedoring market. They think this risk will drag on the share price, and that much of the upside has been already factored in.

However, analysts on average have a price target of $6.37 on the stock – 15% above current levels.

* According to our value investor partners, StocksInValue, the intrinsic value for Asciano is $3.49. To find out more visit http://www.stocksinvalue.com.au/.

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

Metcash (MTS)

The market’s warm reception to Metcash’s full-year results wasn’t reciprocated by the investment press yesterday, with the majority advising their clients to sell the stock.

Shares in Metcash rose 2.9% on Monday (June 23, 2014) to $2.85 after the wholesale distribution company posted earnings in line with its revised guidance set in March, despite battling “tough market conditions” in the food and grocery segment.

Underlying earnings per share (EPS) declined 13.2% to 28.3 cents per share for the 12 months to April 30, at the upper end of guidance for a 13-15% fall, while underlying net profit fell 10.9% to $250.1 million.

Two newsletters optimistic towards Metcash say the rebase in earnings suggests conservative accounting, implying somewhat of an earnings buffer going into 2014-15 when the company’s transformation strategy is implemented for supermarket retailer IGA.

While it may be difficult to time the earnings recovery, the sources say the stock should re-rate once the strategy reveals better sales.

But most newsletters say there are substantial risks to that occurring. With the results showing a steep slump in earnings for the second half of the year, guidance for 2014-15 could be at risk if the strategy doesn’t work.

As one source highlights, a key component of the reinvestment is to match the discounts offered by Woolworths and Coles by driving prices down on its key brands. For this strategy to work, higher sales volumes need to offset the lower prices.

Given the current environment with low consumer confidence and price deflation in the supermarket space, the lowest-cost suppliers of products with the greatest scale will ultimately win market share, the source says.

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

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

JB Hi-Fi (JBH)

JB Hi-Fi appears to have offset slower sales since the federal budget by improving gross margins, newsletters say, after the electronics retailer reaffirmed full-year earnings guidance.

Despite its revised expectations for sales to increase 5.3% – below prior guidance for 6-8% – JB Hi-Fi reiterated last week that net profit should be between $126 million and $129 million for 2013-14, an increase of 8.3% to 10.8% on the prior year.

As flagged in April, the company also announced that JB Hi-Fi’s chief executive, Terry Smart, would retire at June 30 this year. He is to be replaced by Richard Murray, the executive director and chief financial officer.

The drop in sales prompted the stock to fall 4.6% last Friday (June 20, 2014), taking the total slide over the past two months to 14%. Newsletters say JB Hi-Fi has been hit by the slump in consumer sentiment like other retailers covered by Collected Wisdom over the past two weeks (Pacific Brands, Flight Centre and Super Retail Group), as well as The Reject Shop and Kathmandu.

Nevertheless, most of the investment press declare the market update as pleasing. Sources are largely divided between advising their clients to buy or hold JB Hi-Fi, but at current share price levels, the majority call the stock a hold.

Though JB Hi-Fi is beset by macro-economic headwinds like others in the consumer discretionary sector, sources say the retailer holds a strong position in the market. While near-term earnings may be under pressure, the company will continue to benefit from its emerging home goods division and store roll-out.

However, other sources are worried about JB Hi-Fi’s earnings growth in the long-term. The company will find it increasingly hard to grow earnings once its portfolio of stores reaches maturity, they say.

* According to our value investor partners, StocksInValue, the intrinsic value for JB Hi-Fi is $13.78. To find out more visit http://www.stocksinvalue.com.au/.

  • Investors are generally advised to hold JB Hi-Fi at current levels.

Mineral Resources (MIN)

Mineral Resources has most likely overpaid for its 12.8% stake in Aquila Resources, newsletters say, but it’s the loss to its reputation from its failed takeover bid which will hurt the most.

The mining contractor announced last week (June 18, 2014) Aquila had rejected its all-scrip takeover offer at an effective price of $3.75 for the remaining stock. The iron ore explorer still recommends shareholders accept the existing joint all-cash offer of $3.40 from Chinese steel giant Baosteel and rail freight operator Aurizon.

Following the failed counter-offer, analysts predominantly say Mineral Resources is a hold, with one newsletter downgrading their recommendation in response.

Mineral Resources could either hold its stake to annoy Baosteel into giving it some contracting work, or sell out of the company to gain favour and some construction work, in which case it loses around $20 million from the endeavour, sources say.

This is the predicament facing mining services companies: more intense competition for less available work, says one source. It could be one reason why Aquila may have rejected the bid – that it sees Mineral Resources shares as slightly overvalued amid the macro environment.

However, other newsletters are somewhat relieved the takeover bid was rejected. While it was consistent with Mineral Resources’ strategy to be more involved in operations and infrastructure opportunities, the lack of information over the proposal made it difficult to assess the risks and potential value to shareholders.

Lastly, sources point out Mineral Resources is also facing a weak iron ore price environment after the 20% slump over the past two months, which will impact free cash flow generation.

* According to our value investor partners, StocksInValue, the intrinsic value for Mineral Resources is $11.88. To find out more visit http://www.stocksinvalue.com.au/.

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

Ramsay Health Care (RHC)

Ramsay Health Care has acquired Generale de Sante (GDS) for a reasonable price in a deal that makes sense, according to newsletters.

In somewhat of a complex arrangement, the private hospital operator has bought an 83.4% stake in GDS together with Credit Agricole Assurance at a price of €16 ex-dividend, equating to a maximum cost of €575 million for Ramsay’s 57% share of the acquisition.

Newsletters mainly say Ramsay is a hold following the acquisition. While it boosts Ramsay to the number one position in the French private hospital market with a 15% market share, the outlook for France is flat growth, sources say, given the French government is planning to save €25 billion over the next two years from its health system, including private hospitals.

However, at an enterprise value to earnings before interest, tax, depreciation and amortisation (EV/EBITDA) multiple of around 7.6 times, newsletters think the price of the acquisition was relatively cheap, even when considering the difficult funding conditions. Further, the acquisition is immediately EPS accretive at roughly 5% before considering synergies.

Given Ramsay’s share price has surged 34.3% to $46.57 over the past year, analysts say the stock appears to be fully valued at current levels.

Even the source calling Ramsay a sell agrees that it is a quality business with good prospects, and that the acquisition was a risk worth taking. However, it differs in that it believes any upside has already been more than factored into the company’s share price over the next 12 months. Over the longer term, the source believes Ramsay could be an attractive investment, though it depends on the French funding environment improving.

* According to our value investor partners, StocksInValue, the intrinsic value for Ramsay Health Care is $28.59. To find out more visit http://www.stocksinvalue.com.au/.

  • Investors are generally advised to hold Ramsay Health Care at current levels.

Watching the Directors

  • Yet again, Andrew Forrest topped the directors’ trades this week as he once more bought Fortescue Metals scrip. This time he picked up a meaty $6,956,369 worth of the iron ore miner’s shares at a price of $3.975 a share.
  • On the selling side, My Net Fone co-founder, Rene Sugo, made $2,430,000 from offloading 1,000,000 shares in the company at $2.43 each. My Net Fone operates the largest voice over internet protocol (VoIP) network in Australia.
  • Elsewhere, Robert Hosking sold 500,000 shares in oil and gas explorer Karoon Gas at $3.35 each for $1,675,000. The executive chairman said the sale was due to current tax obligations, and that he had no intention to sell any more shares in the foreseeable future.

Takeover Action June 19-25, 2014

DateTargetASXBidder(%)Notes
16/06/2014Ambassador Oil and GasAQODrillsearch Energy52.66
10/06/2014Ambassador Oil and GasAQOMagnum Hunter Resources Corporation0.00
05/05/2014Aquila ResourcesAQABaosteel Resources International and Aurizon Holdings19.79
04/06/2014Australand Property GroupALZFrasers Centrepoint0.00
16/06/2014Bullabulling GoldBABNorton Gold Fields18.73
24/06/2014Country RoadCTYWoolworths Holdings87.88
30/05/2014EnvestraENVCheung Kong Group17.46
24/01/2014Genesis ResourcesGESBlumont Group0.00
09/05/2014Gondwana ResourcesGDAOchre Group Holdings17.65
28/05/2014Merlin DiamondsMEDBlumont Group8.22
06/06/2014Reef Casino TrustRCTAquis Casino Acquisitions 78.19
18/06/2014Strategic Minerals CorporationSMCQGold51.75
24/04/2014Westside CorporationWCLLandbridge Group Co19.99
Scheme of Arrangement
07/04/2014Atlantic GoldATVSpur Ventures0.00Vote July
19/06/2014David JonesDJSWoolworths0.00Postponed to July 14
30/05/2014EnvestraENVAPA Group33.00Meeting cancelled
29/04/2014Horizon OilHZNRoc Oil Company0.00Vote July
19/06/2014Murchison MetalsMMXMercantile Investment CompanyApproved
12/06/2014Nexus EnergyNXSSeven Group Holdings0.00Rejected by shareholders
03/06/2014Papillon ResourcesPIRB2Gold Corp0.00Vote September
16/05/2014SFG AustraliaSFWIOOF Holdings15.66Vote August
10/03/2014TriAusMinTROHeron Resources0.00Vote June
Foreshadowed Offers
28/05/2014Australand Property GroupALZStockland19.90Increased final proposal
04/06/2014Crowe Horwath AustralasiaCRHFindex Australia0.00Scheme proposal
28/04/2014Goodman FielderGFFWilmar Intenational and First Pacific Company10.10Non-binding scheme proposal
09/06/2014Kresta HoldingsKRSNingbo Xianfeng New Material Co0.00Takeover proposal
13/05/2014PanAustPNAGuangdong Rising Assets Management23.00Indicative proposal
25/06/2014ROC Oil CompanyROCUnnamed party0.00Indicative proposal
26/05/2014SAI GlobalSAIPacific Equity Partners0.00Indicative scheme proposal
02/06/2014SAI GlobalSAIUnnamed parties0.00Expressions of interest
20/05/2014Treasury Wine EstatesTWEKohlberg Kravis Roberts & Co0.00Indicative scheme proposal
25/06/2014WorleyParsonsWORUnnamed party0.00Media speculation
Source: Newsbites

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