Collected Wisdom

This week we look at Santos, AGL Energy, Iluka Resources, Cardno and Macquarie Atlas Roads.

Summary: The newsletters like Santos based on the ramp-up of its PNG LNG project and expectations oil output will rise in the second half, but they’re less enamoured with AGL Energy after the retailer foreshadowed a profit hit after the axing of the carbon tax. Meanwhile, they say mineral sands group Iluka Resources is set for a turnaround, while there are concerns around mining services contractor Cardno, and toll roads owner Macquarie Atlas Roads is receiving mixed reviews.

Key take-out: Analysts are expecting more good news from Santos as the oil and gas group ramps up production from existing LNG and oil projects in the second half, and then receives another major fuel injection with the start-up of the Gladstone LNG project in Queensland next year.

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.

Santos (STO)

Strong short-term oil prices and the ramp up of the PNG LNG project have contributed to a strong second quarter result for Santos, newsletters say.

Australia’s second-largest oil and gas company reported $974 million in sales revenue for the three months to June, 22% above the same time last year and 7% above the first quarter.

The successful start-up of the PNG LNG project, which shipped seven LNG cargoes by the end of the quarter, drove the sound result and has built momentum for a stronger second half, chief executive David Knox said.

For the most part, newsletters agree. Most tell their clients to buy the stock, with a 12-month price target of $15.50 – 9.1% above current levels.

Newsletters say that while oil production during the period of 12.8 million barrels of oil equivalent – just 3% above the same time last year – was weaker than many expected, it should rebound in the second half of the year.

Problems associated with production in the first half were temporary, sources say, after a late start to winter and customers banking gas ahead of the price rises.

Moreover, they expect Santos’ growth projects to continue to crank up output. PNG LNG’s output should reach its plateau in the second half, followed by the start-up of the Gladstone LNG (GLNG) project next year and consequent ramp-up from 2016 to 2018.

Santos maintained its guidance for 52-57 mmboe for the full year, which was surprising to one source because the company usually narrows the range in the second quarter report. It may have chosen not to do so this time around due to uncertainty surrounding future gas customer nominations in the Cooper Basin and Western Australia, the source says.

* According to our value investor partners, StocksInValue, the intrinsic value for Santos is $7.79. To find out more visit http://www.stocksinvalue.com.au/

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

AGL Energy (AGK)

Several newsletters downgraded their recommendations for AGL Energy after the gas and electricity retailer warned last week that repealing the carbon tax would hit earnings by $186 million in 2014-15.

AGL expects earnings before interest and tax (EBIT) to be hit by $100 million in lost subsidies for the carbon pollution of its Loy Yang A power station in Victoria and another $86 million in its renewable energy and gas portfolios as wholesale electricity prices fall.

The company also advised that underlying net profit would be $561 million or 2013-14, in line with market consensus, despite the impact on profitability from warm weather in May and June.

That wasn’t enough to satisfy the market, with shares in AGL Energy diving 5.5% to $14.91 in response to the news – their biggest one-day fall in five and a half years.

Despite the negative reaction from newsletters, most still call AGL Energy a hold. Sources say the repeal of the carbon tax has mixed implications for the company: while it has a short-term negative impact, it’s beneficial in the long term because its generation fleet is more profitable.

Most sources say current depressed share price levels reflect poor visibility in the short term. Along with the carbon tax, the market is trying to absorb the start-up of LNG, deregulation, privatisation and other regulatory risks in 2014-15.

Newsletters are also mixed about whether the acquisition of MacGen will have a positive impact on AGL.

One source says MacGen is more valuable without the carbon tax, which will boost earnings, while another source (which downgraded its recommendation to sell) says the impending capital raising would make it neutral to earnings per share at best.

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

  • Investors are generally advised to hold AGL Energy at current levels.

Iluka Resources (ILU)

Iluka Resources should be positively re-rated as the mineral sands market begins to turn around, according to most newsletters.

Their optimism about the stock comes after the mineral sands miner released its second-quarter results last week (July 16, 2014). Mineral sands revenues fell 10.1% to $343.2 million for the quarter, mainly due to lower realised prices compared to the previous period, while the production of zircon, rutile and synthetic rutile climbed 5.9% to 252,000 tonnes.

Despite the slide in revenue, most newsletters expect Iluka Resources to report a much better second half. They overwhelmingly rate the stock as buy, with an average 12-month price target of $10.01 – 11% above Tuesday’s close of $9.02.

Shares in Iluka lifted 7.8% to $8.86 last Wednesday and Thursday in response to the announcement and newsletter responses – the stock’s biggest two-day rise in seven months.

Market conditions look to be improving, newsletters say. While mineral sands revenues were down compared to last year, they were up a sharp 62% on the first quarter with zircon and rutile prices seemingly stabilising.

By and large, newsletters expect higher demand for zircon and rutile to lift prices in the future, though they are uncertain about the timing. Encouragingly, Iluka said it expects zircon sales to be better in the second half of the year and expects a gradual recovery of demand for synthetic rutile (its higher quality product) which could lead the company to reactivate one of its kilns.

Iluka should be able to free up its cash flow by drawing down its sizeable inventory in 2014 and 2015, one source says. This will bolster Iluka’s already formidable balance sheet, cutting its debt and boosting its net cash position.

Sources on average estimate Iluka’s yield to climb from this year’s 1.6% to 2.8% in 2015, then to 4% in 2016.

* According to our value investor partners, StocksInValue, the intrinsic value for Iluka Resources is $4.92. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to buy Iluka Resources at current levels.

Cardno (CDD)

Newsletters were disappointed by Cardno’s profit guidance for 2013-14 despite already being aware of the difficult conditions plaguing the company.

The provider of civil, structural and engineering services announced last Thursday (July 17, 2014) that it expects net profit after tax (NPAT) to be between $77.5 million and $78 million, broadly flat with the previous year.

Newsletters weren’t too surprised since the impacts from poor weather and from Australia’s slowing economy were well known, but the extent of the decline in the second half was concerning.

As one source notes, Cardno’s guidance implies net profit fell 10% in the second half even though the company benefited from a contribution from the acquisition of PPI, a Texas-based technology services company, as well as the fall in the Australian dollar.

Shares in the company fell 3.2% to $6.36 on the day, and have since slipped further to $6.15.

However, newsletters overwhelmingly call Cardno a hold after the result. While meaningful earnings revisions are likely, they say corporate activity in the sector should underpin the share price given the industry is relatively fragmented and peers trade at a premium.

Further, newsletters anticipate growth to return in 2014-15. Work-in-hand is up 11% on the previous period, sources say, which should provide some comfort that management’s expectations can be achieved.

“Our team is focused on organic growth and on achieving improved operational efficiency,” said chief executive Michael Renshaw. “Overall we expect improved performance in 2014-15.”

A key consideration for one source’s investment case is whether Cardno can secure organic growth, which should be detailed in its backlog in the full-year release in August.

* According to our value investor partners, StocksInValue, the intrinsic value for Cardno is $5.65. To find out more visit http://www.stocksinvalue.com.au/

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

Macquarie Atlas Roads (MQA)

The investment press are split over whether Macquarie Atlas Roads made a fair deal when it increased its stake in Autoroutes Paris-Rhin-Rhône (APRR) last week.

The toll operator, which holds a global portfolio of roads across Europe and the US, acquired an additional 0.7% interest APRR from other Macquarie managed funds last Wednesday (July 16, 2014), lifting its holding in Europe’s fourth largest motorway group to 20.14%.

The acquisition was funded via a $60 million placement and $900,000 in cash, which values APRR at an enterprise value to earnings before interest, tax, depreciation and amortisation (EBITDA) of 10.1 times.

While the deal compares favourably to other recent transactions in the sector, some newsletters say it implies a discount to MQA’s share price of $3.35. Others say the transaction supports the current share price when ignoring cash and corporate costs, management fees and the Dulles Greenway (which may be sold off to the state government of Virginia).

Macquarie Atlas Roads also released its second-quarter results yesterday. Toll revenue increased 4.2% compared to the previous corresponding period, while weighted average traffic was 3% higher.

Nevertheless, newsletters are divided between rating Macquarie Atlas Roads a buy or a hold, with the majority calling the stock a hold at current levels. The acquisition may have been at a discount, but they say it still provides the company with the strategic benefit of owning more than 20% of APRR.

The deal also supports its future distributions. Indeed, the company raised its distribution guidance for the second half of 2013-14 to 8.2 cents per security – above consensus for 7.5 cents per security.

Analysts forecast a yield of 5% in 2014-15 and 6% in 2015-16. The company does not issue franking credits.

One source points out positive influences for the stock include disposing non-core assets, better-than-expected economic conditions and congestion on competing roads, while risks can be traffic declines, competing infrastructure and adverse bond yield movements.

  • Investors are generally advised to hold Macquarie Atlas Roads at current levels.

Watching the Directors

Stephen Copulus again registered as the highest directors’ purchase of the week, once more snapping up shares in Collins Foods. As non-executive director he bought $455,992 worth of the KFC franchisee’s stock at $2.435.

Takeover Action July 17-23, 2014

DateTargetASXBidder(%)Notes
17/07/2014Ambassador Oil and GasAQODrillsearch Energy54.14
10/06/2014Ambassador Oil and GasAQOMagnum Hunter Resources Corporation0.00
22/07/2014Aquila ResourcesAQABaosteel Resources International and Aurizon Holdings96.57
04/06/2014Australand Property GroupALZFrasers Centrepoint0.00
22/07/2014Bullabulling GoldBABNorton Gold Fields65.34
24/06/2014Country RoadCTYWoolworths Holdings87.88
22/07/2014EnvestraENVCheung Kong Group19.94
24/01/2014Genesis ResourcesGESBlumont Group0.00
21/07/2014Gondwana ResourcesGDAOchre Group Holdings18.23
22/07/2014Kresta HoldingsKRSNingbo Xianfeng New Material Co26.63
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
22/07/2014Westside CorporationWCLLandbridge Group Co86.51
Scheme of Arrangement
07/04/2014Atlantic GoldATVSpur Ventures0.00Vote July
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
21/07/2014Antares EnergyAZZUnnamed party0.00Indicative proposal
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