Collected Wisdom

This week we look at ResMed, Cochlear, Kathmandu Holdings, Adelaide Brighton, and Regis Resources.

Summary: The newsletters say it’s time to wake up to the opportunities at ResMed, but they have concerns over Cochlear despite the company’s strong results and latest share price surge. Meanwhile, cold weather conditions are improving the forecast for retailer Kathmandu, but the newsletters are uncertain about the mix at Adelaide Brighton, and there are concerns around new impairment charges at gold miner Regis Resources.

Key take-out: Sleep apnoea device maker ResMed suffered a share price fall after announcing disappointing fourth-quarter results, but analysts are overwhelmingly bullish and expect the share price to climb over the next 12 months.

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.

ResMed (RMD)

Most newsletters call ResMed’s recent share price fall as a buying opportunity despite the company’s disappointing fourth-quarter results.

Shares in the sleep apnoea device maker shed 5.1% to $5.23 on Friday, August 1, after sales declined 1% to $415.2 million on a constant currency basis over the period, when analysts were forecasting a 3.9% lift to $435.6 million on average.

Rising revenues in Europe and other parts of the world weren’t enough to offset declining sales in the US, where the government’s competitive bidding policy again weighed on results. Under the policy, introduced on July 1, 2013, ResMed was required to drop its prices in line with competitors.

Nevertheless, the investment press are overwhelmingly bullish on ResMed and rate the stock a buy at current levels. Continually growing patient volumes and new product launches – particularly the “Airsense 10” flow generator platform expected soon – should at least stop the decline in US sales, they say.

On average analysts forecast the share price to climb 13.8% to $6.03 over the next 12 months. After the latest share price fall, ResMed trades at a price-earnings multiple of around 15 times – below its five-year average of between 18 and 20 times.

Newsletters are also quick to point out ResMed’s gross margin is still high at 62.9%, at the top end of guidance, even after the change in pricing. They believe these margins will stay stable in 2014-15 amid the product launches, keeping cash flows high.

One source, which labels ResMed as its preferred stock in its coverage universe, says cash flows in 2014-15 will support high dividends as well as a capital management campaign.

ResMed has a dividend yield of 2.4% in 2014-15 and 2.7% in 2015-16. The company doesn’t distribute franking credits.

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

Cochlear (COH)

Shares in Cochlear received their biggest one-day boost in nearly three years last week when the company doubled earnings for the second half of 2013-14 and issued an upbeat outlook in its full-year results.

Against many analysts’ expectations, the hearing aid device maker managed to meet guidance of between $70 million and $80 million for the second half of the year, with net profit coming in at $72.7 million compared to the first-half’s $36.8 million.

Sales in the second half lifted 28% to $443.9 million, excluding a $10 million currency hedging loss.

“While it is still early in the product release cycle, record sales in the second half gives us confidence going into 2014-15,” said chief executive Chris Roberts.

The stock surged 10.3% to $69 on the day – its biggest lift since December 2011. It has now gone up 18.9% over the past three months.

However, a large majority of newsletters say Cochlear is a sell after the news with an average 12-month target price of $57.98 – 14.9% below current share price levels.

Analysts say the results were largely driven by cyclical upgrades to the hearing devices, not the patient growth which Cochlear truly needs.

They find it difficult to reconcile the company’s price-earnings ratio of around 28 times – around an 80% premium to the S&P/ASX 200 – with the fact that unit sales growth for Cochlear implants was only around 3% year-on-year even after the launch of the Nucleus 6 sound processor.

Cochlear is battling declining earnings growth amid either continued market share loss to competitors or a global slowdown in the industry, sources say.

One source also points out Cochlear’s dividends could be cut by 30%-plus in 2014-15 as a result of the board’s expectation of a more historic payout ratio of approximately 70% of NPAT, given the ratio in the second half was 109%.

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

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

Kathmandu Holdings (KMD)

Kathmandu’s quick earnings recovery amid a cold July highlights the company’s strong competitive position, newsletters say, but it also reveals how exposed the stock is to weather trends.

The outdoor adventure apparel retailer told the market on Friday (August 1, 2014) that NPAT is now expected to be between $39.5 million and $42.5 million, up to 10.6% below the previous year’s $44.2 million.

The announcement follows a trading update just five weeks beforehand where Kathmandu said NPAT would be 10-15% lower because of unseasonably warm weather during the start of the company’s winter sales promotion.

“The improvement in sales and earnings in July once colder winter became established has resulted in a satisfactory outcome from our key winter sale event,” said chief executive Peter Halkett.

The stock jumped 3.3% to $3.12 following the news.

Following the update, newsletters mostly advise their clients to buy Kathmandu. Led by an excellent management team with a focus on branding, product quality and diversification, sources say Kathmandu represents a sustainable growth story as it continues to roll-out stores.

Analysts on average have a price target of $3.47 on the stock, 17.6% above current levels.

However, one source cautions it is difficult to extrapolate a few weeks’ worth of data to a medium-term outlook for the company, especially when the turnaround over the period has been so dramatic.

Indeed, the last six months has been a stark reminder of how volatile earnings are to changes in weather conditions, the source says.

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

Adelaide Brighton (ABC)

Three newsletters downgraded their recommendations for Adelaide Brighton (ABC) after the construction materials and lime producer announced two acquisitions last week.

Adelaide Brighton bought Direct Mix Concentrate in South Australia and BM Webb Construction Materials in Queensland. Together with the purchase of Penrice Quarry in late July, Adelaide Brighton has spent $174 million on recent acquisitions.

The acquisitions, which are to be funded by existing cash and debt, represent an enterprise value to earnings before interest, tax, depreciation and amortisation (EBITDA) of 9.8 times and is earnings-per-share accretive in 2013-14, according to management.

With the revised recommendations the investment press are divisive over Adelaide Brighton, but consensus is to hold the stock at current levels. Adelaide Brighton is trading around fair value, they say, with improvements to the residential construction sector fully factored in.

And while most sources acknowledge the acquisitions’ strategic merit in the long term, particularly in the quarry assets, they also say the purchase price seems excessive.

Newsletters which downgraded their recommendations say the acquisitions appear defensive with little earnings growth in the short term and that Adelaide Brighton’s balance sheet – which had been a point of strength – is now fully utilised, with net debt to equity increasing to around 34% from 16.8% previously.

They no longer anticipate any special dividends in the short term because, historically, they had only been paid when net debt to equity is below the company’s target range of 25-45%.

Indeed, average forecasts for Adelaide Brighton’s dividend yield for 2014-15 have slipped to 5.4% from 6% since the last time Collected Wisdom covered the stock in May when there was a similar share price.

* According to our value investor partners, StocksInValue, the intrinsic value for Adelaide Brighton is $3.82. To find out more visit http://www.stocksinvalue.com.au/

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

Regis Resources (RRL)

Regis Resources has reset investor expectations again with its impairments of up to $280 million, but there are still more hurdles to overcome, newsletters say.

Regis flagged an impairment charge of between $230 million and $280 million to its full-year results at July 30, overshadowing an otherwise solid fourth-quarter result.

Production for the quarter was 66,000 ounces of gold at a cash cost of $1,007 an ounce, slightly better than some analysts’ forecasts, taking full-year production to 270,759 ounces. Guidance for 2014-15 was left unchanged at between 305,000 ounces and 355,000 ounces.

Most newsletters say Regis is a hold after the updates. At between 37-45% of total non-current assets the write-downs are significant, they say, but aren’t too surprising given the flooding and negative grade reconciliations announced earlier in the year.

The bulk of the impairments ($150 million to $190 million) were to the Garden Well and Rosemont operations at Duketon – the two mines which had been flooded in February. They relate to open pit pre-strip mining, deferred waste mining and preproduction costs.

Analysts say current share price levels reflect the short-term risks as well as longer-term concerns around growth. They expect the next catalyst for the share price to be an update on the company’s reserve base at Duketon, with one source anticipating a 10% write-down.

In the longer term, another source thinks Regis’s portfolio makeup will come into scrutiny in the next 12 months as Moolart Well – the company’s sole consistently performing asset – has only three years left of production. In the announcement Regis put its McPhillamys project on hold because it had become uneconomical amid the fall in the gold price.

Sources also point out Regis is extremely leveraged. This means only small movements in commodity or currency rates could hugely influence the share price.

* According to our value investor partners, StocksInValue, the intrinsic value for Regis Resources is $2.75. To find out more visit http://www.stocksinvalue.com.au/

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

Watching the Directors

Maurice Brand, founder and managing director of Liquefied Natural Gas, sold 27% of his stake in the company. After seeing the stock rise from 27 cents near the start of the year, Brand offloaded 1,670,000 shares at $3.65 for a total of $6,098,793. Liquefied Natural Gas is developing an LNG facility in Louisiana, US.

Takeover Action August 5-11, 2014

DateTargetASXBidder(%)Notes
08/08/2014Ambassador Oil and GasAQODrillsearch Energy21.29Decrease from Takeovers Panel order
10/06/2014Ambassador Oil and GasAQOMagnum Hunter Resources Corporation0.00
24/07/2014Aquila ResourcesAQABaosteel Resources International and Aurizon Holdings98.49
07/08/2014Australand Property GroupALZFrasers Centrepoint60.14
05/08/2014Bullabulling GoldBABNorton Gold Fields77.13
28/07/2014Clinuvel PharmaceuticalsCUVRetrophin6.70
25/07/2014Country RoadCTYWoolworths Holdings99.84
08/08/2014EnvestraENVCheung Kong Group85.52
24/01/2014Genesis ResourcesGESBlumont Group0.00
21/07/2014Gondwana ResourcesGDAOchre Group Holdings18.23
05/08/2014Kresta HoldingsKRSNingbo Xianfeng New Material Co30.83
28/05/2014Merlin DiamondsMEDBlumont Group8.22
06/06/2014Reef Casino TrustRCTAquis Casino Acquisitions 78.19
01/07/2014Robust ResourcesROLStanhill Capital Partners Holdings0.00
04/08/2014Roc Oil CompanyROCFosun International0.00
15/07/2014Strategic Minerals CorporationSMCQGold58.90
05/08/2014Westside CorporationWCLLandbridge Group Co93.75
Scheme of Arrangement
02/07/2014Goodman FielderGFFWilmar Intenational and First Pacific Company10.10Vote November
04/08/2014Horizon OilHZNRoc Oil Company0.00To be terminated due to Roc takeover
03/06/2014Papillon ResourcesPIRB2Gold Corp0.00Vote September
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
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
04/08/2014Treasury Wine EstatesTWEKohlberg Kravis Roberts & Co and Rhone Capital0.00Revised scheme proposal
11/08/2014Treasury Wine EstatesTWEUnnamed party0.00Indicative scheme proposal
25/06/2014WorleyParsonsWORUnnamed party0.00Media speculation
Source: Newsbites

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