Collected Wisdom

This week we look at Sims Metal Management, Newcrest, Western Areas, Insurance Australia Group, and Atlas Iron.

Summary: The newsletters believe the cost-cutting and divestment program at Sims Metal will deliver returns, but they’re concerned over impairment charges and operational issues at gold miner Newcrest. Meanwhile, nickel producer Western Areas gets a tick of approval, some say it’s as good as it gets for Insurance Australia Group, and others wonder if the rust will set in for Atlas Iron.

Key take-out: A majority of analysts rate Sims Metal a buy, with the company’s CEO having unveiled plans to substantially boost earnings via a business optimisation program. They also expect the company to reinstate its dividend in 2014-15.

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.

Sims Metal Management (SGM)

Most newsletters are telling their clients to buy Sims Metal Management after the company unveiled its five-year plan to quadruple earnings last week.

Under the metal recycler’s new chief executive, Galdino Claro, the company plans to lift earnings before interest and tax (EBIT) by 350% above its 2012-13 underlying result via an optimisation program to drive significantly a higher return on capital without needing a macroeconomic or cyclical recovery.

“We expect streamlining actions, through cost reductions and exiting loss-making businesses, will generate $32 million in EBIT benefits, with 50% to be achieved in 2014-15 and fully realised during 2015-16,” Claro said.

The stock jumped 8.6% to $11.21 – its highest point since February 2013 – over Wednesday and Thursday last week (July 23-24) following the announcement.

While a few newsletters differ and call the stock either a hold or sell, consensus rates Sims Metal Management a buy.

Analysts forecast the company to reinstate its dividend in 2014-15. They estimate a yield for 2.6% this financial year, jumping to 4.1% in 2015-16.

One source, which upgraded its recommendation, says if Sims Metal can deliver on just part of Claro’s ambitious strategy the stock is cheap at current levels despite overcapacity in the scrap metal market continuing to be an issue and the fact that the turnaround will take some time.

However, another source is sceptical because the announcement relies on too many “trust me” elements. It still thinks the macro environment remains the primary driver, and will wait until the release of the company’s full-year results on August 22 before it updates its valuation.

* According to our value investor partners, StocksInValue, the intrinsic value for Sims Metal Management is $3.84. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to buy Sims Metal Management at current levels.

Newcrest (NCM)

Yet another impairment to the tune of up to $2.5 billion has overshadowed Newcrest’s otherwise strong results for 2013-14, newsletters say.

Shares in Australia’s largest gold miner fell 6.2% to $10.78 on Thursday last week (July 24, 2014) when the company told the market it may have to impair the value of its mines by between $1.5 billion and $2.5 billion after tax, primarily in relation to the troublesome Lihir mine.

The write down follows the $6 billion impairment of Newcrest’s mines 12 months ago, in which $3.6 billion related to Lihir. A class action has been launched over last year’s impairment on behalf of shareholders who bought the stock between August 2012 and June 2013.

The market took little notice that Newcrest produced 2,396,023 ounces of gold for 2013-14, exceeding guidance for between 2,000,000 and 2,300,000 ounces and 14% above the previous year, or that the company posted costs and capital expenditure at the bottom end of guidance.

Following the developments, the investment press largely call Newcrest a sell. While the company maintained its guidance for 2014-15, a number of newsletters anticipate weaker production ahead, largely due to lower milling rates at Lihir.

They don’t agree with Newcrest’s new chief executive, Sandeep Biswas, who maintains stronger free cash flow generation will produce higher return on invested capital, and in turn, enable the company to reduce debt and return to paying dividends.

One source’s calculations fail to see how Newcrest can generate significant free cash flows in the coming years and believes changes are needed to ensure a viable business that can withstand lower gold prices.

Another source thinks it’s simply Newcrest’s size and liquidity which make investors automatically reach for the company, rather than asset quality. Except for the Cadia Valley and Gosowong mines, Newcrest’s assets are poor, the source says.

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

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

Western Areas (WSA)

Shares in Western Areas jumped to their highest levels in over two years after the nickel producer reported production ahead of guidance for 2013-14.

Full-year production came in at 28,686 tonnes of nickel, ahead of guidance for 27,000 tonnes, while unit cash costs were $2.50 a pound for the period, 7.4% below guidance for $2.70 a pound.

More impressively to newsletters was that Western Areas’ balance sheet moved to net cash for the first time since 2004. Net cash lifted by $55 million in the June quarter to $230.5 million, higher than net debt of $220 million.

The stock lifted 3.8% to $5.15, a price last seen back in May, 2012. Following the lift Western Areas is the S&P/ASX 200’s second best performer over the past six months; it has delivered a total return to shareholders of 95.9% to Tuesday’s close amid a spike in the nickel price.

“The Indonesian government’s ongoing ban on the export of unprocessed laterite ore has continued to support the strengthening of the nickel price which has increased over 30% since January 2014,” the company said.

Despite the already impressive share price rise, the majority of newsletters say Western Areas is a buy at current levels. They call it the “go-to” stock for exposure to the rising nickel price because the company has an enviable operational track record, competitive cash costs and well-performing assets.

Based on its modelling, one source says Western Area’s share price only factors in a flat nickel price of $US10.26 a pound. Sources more cautious to the stock see the nickel price staying level or falling.

* According to our value investor partners, StocksInValue, the intrinsic value for Western Areas is $0.86. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to buy Western Areas at current levels.

Insurance Australia Group (IAG)

Most newsletters caution that the 2013-14 year is arguably the best it will get for IAG, with the favourable environment unlikely to last and top-line growth slowing.

The company, which offers insurance under several brands including CGU and NMRA, told the market it expects to report an insurance margin of between 18% and 18.3% for 2013-14, ahead of guidance for between 14.5% and 16.5%.

“This reflects the relatively benign natural peril activity in the second half of the year, notably in Australia, and a more favourable financial impact from narrower credit spreads than previously anticipated,” said chief executive Mike Wilkins.

The stock climbed 2.2% on the day, then another 1.9% the next to $6.29 – its highest point since February, 2007.

Given IAG’s heady share price levels and benign outlook, consensus among the investment press is to rate the company as a hold. They say that insurance margins may have peaked due to several factors: the inclusion of the lower-margin business bought off Wesfarmers (WES), lower interest rates and very soft trends for its gross written premium (GWP).

IAG achieved only 3% growth in GWP for 2013-14, at the low end of guidance for between 3% and 5%. One source notes that this figure implies the second half grew by just 1.9%.

That being said, several sources think IAG can hold its margins in the near term through its aggressive cost-cutting initiatives.

The company’s appealing dividend yield will also continue to attract interest. Analysts forecast a grossed-up yield of 7.6% on average for the current financial year.

* According to our value investor partners, StocksInValue, the intrinsic value for Insurance Australia Group is $4.89. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Insurance Australia Group at current levels.

Atlas Iron (AGO)

Newsletters are divided between rating Atlas Iron either a hold or a sell following the iron ore miner’s quarterly report and guidance for 2014-15.

While the iron ore miner achieved record production for the quarter and for 2013-14, at 3.1 million tonnes and 10.9 million tonnes respectively, it was forced to sell its iron ore on extremely thin margins in the June quarter amid lower iron ore prices and discounting.

In a separate statement Atlas also announced it is on track to produce between 12.2 and 12.8 million tonnes of iron ore for 2014-15, with a C1 cash cost of between $47 and $50 a tonne.

Several newsletters call Atlas Iron a sell following the developments. They say the company is ill-equipped to deal with the lower iron ore price environment because meaningful cash flow will be difficult to achieve as strong production is offset by ongoing price discounts for lower grades.

But more sources say the company is a hold with the share price representing fair value at current levels. As with Fortescue in Collected Wisdom two weeks ago, they say Atlas Iron is undergoing a structural shift towards higher discounts to the iron ore price which restricts the stock from climbing higher.

However, one source questions whether Atlas is becoming an appealing takeover target. Port and trucking charges hamper an otherwise low cost mine, the source says, but this could be changed with enough capital expenditure.

* According to our value investor partners, StocksInValue, the intrinsic value for Atlas Iron is $0.49. To find out more visit http://www.stocksinvalue.com.au/

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

Watching the Directors

For the third week in a row Stephen Copulos, non-executive director of Collins Foods, appeared as the biggest buyer. The Copulos Group bought $2,460,148 worth of shares in the KFC franchisee at $2.385 per share.

  • On the selling side, managing director Jamie Odell netted $1,636,631 from the sale of 285,000 shares in gaming machine maker Aristocrat Leisure at $5.743 each.
  • Elsewhere, Gilman Wong sold off $959,835 worth shares in Sirtex Medical. The managing director traded 51,947 shares at $18.477 each in the biotechnology company.

Takeover Action July 24-30, 2014

DateTargetASXBidder(%)Notes
17/07/2014Ambassador Oil and GasAQODrillsearch Energy54.14
10/06/2014Ambassador Oil and GasAQOMagnum Hunter Resources Corporation0.00
24/07/2014Aquila ResourcesAQABaosteel Resources International and Aurizon Holdings98.49
29/07/2014Australand Property GroupALZFrasers Centrepoint2.90
28/07/2014Bullabulling GoldBABNorton Gold Fields74.83
28/07/2014Clinuvel PharmaceuticalsCUVRetrophin4.88
25/07/2014Country RoadCTYWoolworths Holdings99.84
29/07/2014EnvestraENVCheung Kong Group22.40
24/01/2014Genesis ResourcesGESBlumont Group0.00
21/07/2014Gondwana ResourcesGDAOchre Group Holdings18.23
29/07/2014Kresta HoldingsKRSNingbo Xianfeng New Material Co27.83
28/05/2014Merlin DiamondsMEDBlumont Group8.22
06/06/2014Reef Casino TrustRCTAquis Casino Acquisitions 78.19
01/07/2014Robust ResourcesROLStanhill Capital Partners Holdings0.00
15/07/2014Strategic Minerals CorporationSMCQGold58.90
25/07/2014Westside CorporationWCLLandbridge Group Co90.01
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
28/07/2014TriAusMinTROHeron Resources0.00Approved
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