Collected Wisdom

This week we look at Transurban, Fortescue Metals Group, Alumina, Navitas and Energy Resources of Australia.

Summary: The newsletters see a smooth road ahead for Transurban and have revised their forecasts, while the drop in the iron ore price remains an obstacle for Fortescue. Meanwhile, expectations are that Alumina will improve over time, there are some concerns over education services provider Navitas, while views are mixed over uranium group Energy Resources of Australia.

Key take-out: The newsletters are positive on Transurban after the company’s latest updates, which demonstrate multiple growth fronts from its acquisitions and asset enhancements.

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.

Transurban (TCL)

Transurban has plenty going for it to drive growth in the years ahead after what has been a stellar performance in 2013-14, newsletters say.

Shares in Transurban edged up 0.4% to $7.58 last Thursday (July 10, 2014) after the company released its traffic and revenue data for the fourth quarter. Proportional revenue (which the company believes more accurately reflects its performance) increased by 11.8% to $286.7 million compared to the same period last year.

While newsletters remark the quarter was softer than the full year – in which proportional toll revenue lifted by 12.6% to $1.16 billion – they say the performance was strong given the unfavourable timing of Easter and Anzac Day.

Newsletters almost unanimously recommend buying Transurban after the updates because of the company’s multiple growth fronts from its acquisitions and asset enhancements.

This contrasts with the last time Collected Wisdom covered the stock in April when consensus was to hold as several sources were cautious about the company having to raise a lot of equity to purchase Queensland Motorways.

Despite Transurban’s shares rallying hard since then – even after dipping to a low of $7.10 in May following the announced $2.7 billion capital raising associated with the acquisition – newsletters are far more positive towards the stock.

While Transurban’s organic growth should moderate going into 2014-15, the completed acquisitions of Queensland Motorways and The Cross City Tunnel will boost total growth, sources say, along with the widening of the M5, the delivery of the I95 Express Lanes and the development of the NorthConnex project in Sydney.

However, the stock has continued to climb since newsletter responses, hovering at $7.71 on Tuesday’s close – just 1% below the average 12-month target price of $7.79.

Transurban also has an expected yield of 5.1% in 2014-15, with dividends historically franked at around 20%.

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

Fortescue Metals Group (FMG)

Fortescue’s export production was impressive in the fourth quarter, but the company’s lower realised prices for iron ore is increasingly concerning, newsletters say.

The iron ore miner shipped 38.7 million tonnes of iron ore in the June quarter, taking the full year’s amount shipped to 124.2 million tonnes – below the company’s guidance for 127 million tonnes.

But while many analysts had long been sceptical Fortescue Metals Group would meet such an ambitious target and said the result was solid regardless, they were surprised by how low the realised price per tonne was.

Fortescue’s average realised price for 2013-14 was $US106 per dry metric tonne, substantially lower than benchmark price which averaged at around $US122 per tonne.

“Fortescue expects the iron ore market to rebalance in the short term as higher cost production leaves the market flattening the global cost curve and stabilising the price,” the company said.

Following the production update the majority of newsletters advise to hold Fortescue, with two sources downgrading their recommendations, though several still call the stock a buy.

As one source notes, the discount to Fortescue’s lower grade iron ore blew out to 30% in the fourth quarter from 19% in the third quarter and 15% in the first half of 2013-14. The source says that while it is difficult to tell where the discount will settle, it is crucial because it has a huge impact on Fortescue’s valuation.

Newsletters with a more positive outlook for the company believe the fourth quarter was a soft period, as the company said, and that Fortescue’s discount to the benchmark iron ore price should improve over the medium to long term.

But consensus is that Fortescue shares reflect fair value around current levels. Discounts to the iron ore price will be structurally larger than they have been in the past, sources say, which will continue to present headwinds to the stock.

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

  • Investors are generally advised to hold Fortescue Metals Group at current levels.

Alumina (AWC)

The outlook for Alumina remains bright despite posting a poor result in the second quarter, according to most newsletters.

Alumina’s US partner Alcoa revealed last week (July 9, 2014) its alumina division earnings (which Alumina is primarily exposed to) fell 40% to $US38 million – the first decline in six quarters.

“Margins for the alumina segment declined over the second quarter from the first quarter predominantly due to the high Australian dollar and Brazilian Real, the timing of maintenance, and higher oil costs,” said chief executive Peter Wasow.

The stock fell 3.1% to $$1.395 in response to the news on the day, though it is still up more than 25% this year.

The majority of the investment press call Alumina a buy after the result, though their recommendations are deeply mixed with several holds and sells amid two downgrades.

Those newsletters more cautious toward the stock expect earnings before interest, tax, depreciation and amortisation (EBITDA) margins to slide further in the third quarter as alumina prices weaken and flat costs. They don’t expect an interim or final dividend as capital costs, corporate costs and interest consume the payout from AWAC.

But more sources say the margin reduction was mostly attributable to one-off costs and exceptional items and that it should revert in the third quarter as the alumina price increases amid higher bauxite prices and the tightening of the alumina market.

Analysts on average anticipate a dividend yield of 1.1% in 2014.

Alumina and Alcoa jointly own Alcoa World Alumina and Chemicals (AWAC), which focuses on Australian alumina refineries. Alumina received capital and income payments from AWAC of $20 million in the second quarter.

* According to our value investor partners, StocksInValue, the intrinsic value for Alumina is $0.28. To find out more visit http://www.stocksinvalue.com.au/

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

Navitas (NVT)

Newsletters are divided over whether the favourable macro-economic environment for Navitas can overcome other industry risks after the education services company lost a key contract last week.

Shares in Navitas plunged 31% to $4.86 – their biggest one-day fall on record – last Wednesday (July 9, 2014) when the company announced its 18-year partnership agreement with Macquarie University would end on February 12, 2016.

From that point onwards Macquarie University will establish its own pathway college in the campus, leaving the Navitas-owned Sydney Institute of Business and Technology to operate in the Sydney CBD. Its role will be curtailed to placing students into the university via a streamlined visa processing program.

Analysts issued a number of upgrades and downgrades to their recommendations in response to the news, with consensus settling at holding the stock at current share price levels.

Newsletters agree the update is undoubtedly a material loss; while no details were given on the financial damage (only that there would be a negative impact), sources estimate earnings to be cut by around 7% in the second half of 2015-16 and roughly 13% in 2016-17.

Nevertheless, newsletters which upgraded their calls suggest the sell-off to the stock may have been overdone. They say not enough is being factored into the success of attaining new contracts in North America and, moreover, the strong returns to be generated from the favourable thematic of Asia’s emerging middle class.

But most newsletters believe the share price accurately reflects the competitiveness of the education sector and the risk – such as with Macquarie – for universities to begin offering their own pathway courses instead.

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

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

Energy Resources of Australia (ERA)

Energy Resources of Australia (ERA) should be able to hit its production guidance, say the newsletters, but its future valuation hinges much more on developing its underground mine.

The uranium producer, which is a subsidiary of Rio Tinto (RIO), was approved to resume production at the Ranger uranium mine in the Northern Territory by the federal and state governments in early June. Since then it has treated 46,000 tonnes of ore, with a mill head grade of 8% uranium oxide.

Production guidance for between 1,100 tonnes to 1,500 tonnes should bet met, sources say, at least at the lower end. The company is also guiding for a first-half earnings loss of between $120 million and $140 million.

But the much bigger concern is the development of the Ranger 3 Deeps exploration decline and underground project, the investment press says.

While most analysts say the stock is a hold at current levels due to the project risks and the battered uranium price, their valuations have significant upside and downside potential depending on the project staying on schedule and not encountering future problems.

Indeed, newsletters emphasise that the company mentioned geotechnical conditions which were less favourable than assumed in earlier studies. It’s too difficult to assess what impact this will have, one source says, but it could add to the cost of mine development.

A newsletter more positive toward ERA says the market isn’t crediting the company’s development potential sufficiently and looking enough into the long term, where the uranium price should improve as China builds nuclear reactors and Japan recommissions its own reactors.

But more newsletters say the risks involved are too high. Further, one source prefers Paladin Energy (PDN) because of its greater leverage to the recovering uranium market.

* According to our value investor partners, StocksInValue, the intrinsic value for Energy Resources of Australia is $0.05. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Energy Resources of Australia at current levels.

Watching the Directors

  • Active global investor Stephen Copulos made all the big trades this week. As non-executive director of Collins Foods he bought $5,989,539 worth of shares in the KFC franchisee, at $2.217 each, and as a chairman of Crusader Resources he purchased 2,639,539 shares in the mineral explorer at 37.3 cents each for a total of $984,378.

Takeover Action July 10-16, 2014

DateTargetASXBidder(%)Notes
27/06/2014Ambassador Oil and GasAQODrillsearch Energy52.97
10/06/2014Ambassador Oil and GasAQOMagnum Hunter Resources Corporation0.00
11/07/2014Aquila ResourcesAQABaosteel Resources International and Aurizon Holdings94.22
04/06/2014Australand Property GroupALZFrasers Centrepoint0.00
15/07/2014Bullabulling GoldBABNorton Gold Fields61.09
24/06/2014Country RoadCTYWoolworths Holdings87.88
14/07/2014EnvestraENVCheung Kong Group18.73
24/01/2014Genesis ResourcesGESBlumont Group0.00
09/05/2014Gondwana ResourcesGDAOchre Group Holdings17.65
15/07/2014Kresta HoldingsKRSNingbo Xianfeng New Material Co22.77
28/05/2014Merlin DiamondsMEDBlumont Group8.22
06/06/2014Reef Casino TrustRCTAquis Casino Acquisitions 78.19
01/07/2014Robust ResourcesROLStanhill Capital Partners Holdings0.00
18/06/2014Strategic Minerals CorporationSMCQGold51.75
14/07/2014Westside CorporationWCLLandbridge Group Co52.95
Scheme of Arrangement
07/04/2014Atlantic GoldATVSpur Ventures0.00Vote July
14/07/2014David JonesDJSWoolworths0.00Approved
30/05/2014EnvestraENVAPA Group33.00Meeting cancelled
02/07/2014Goodman FielderGFFWilmar Intenational and First Pacific Company10.10Vote November
29/04/2014Horizon OilHZNRoc Oil Company0.00Vote August
03/06/2014Papillon ResourcesPIRB2Gold Corp0.00Vote September
16/05/2014SFG AustraliaSFWIOOF Holdings15.66Vote August
01/07/2014TriAusMinTROHeron Resources0.00Vote late July
07/07/2014Wotif.com HoldingsWTFExpedia Group19.90Vote September
Foreshadowed Offers
28/05/2014Australand Property GroupALZStockland19.90Increased final proposal
04/06/2014Crowe Horwath AustralasiaCRHFindex Australia0.00Scheme proposal
13/05/2014PanAustPNAGuangdong Rising Assets Management23.00Indicative proposal
25/06/2014Roc Oil CompanyROCUnnamed party0.00Indicative proposal
10/07/2014Roc Oil CompanyROCUnnamed party0.00Indicative proposal
26/05/2014SAI GlobalSAIPacific Equity Partners0.00Indicative scheme proposal
02/06/2014SAI GlobalSAIUnnamed parties0.00Expressions of interest
07/07/2014Ten Network HoldingsTENPrivate equity firms0.00Media speculation
20/05/2014Treasury Wine EstatesTWEKohlberg Kravis Roberts & Co0.00Indicative scheme proposal
25/06/2014WorleyParsonsWORUnnamed party0.00Media speculation
Source: Newsbites