Collected Wisdom

This week we look at FlexiGroup, Crown Resorts, BWP Trust, JB Hi-Fi and REA Group.

Summary: The newsletters are keen on consumer finance company FlexiGroup, and they also like Crown Resorts in view of both its domestic and offshore growth. Retailer JB Hi-Fi is still seen as being well positioned in the consumer electronics space after its latest full-year result, which spurred a 7.9% fall in its share price. But there are concerns around BWP Trust, which leases its properties out to Wesfarmers-owned Bunnings, and over online real estate company REA Group, whose shares suffered their biggest fall in six years after the company’s latest results.

Key take-out: FlexiGroup’s growth in 2014-15 is regarded as solid, newsletters say, given the step-up in IT investment during the year and the company’s changing product mix.

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.

FlexiGroup (FXL)

Almost every newsletter is advising clients to buy FlexiGroup following the consumer financing group’s full-year report.

In what analysts describe as a solid and predictable result, the company reported cash net profit after tax (NPAT) of $85 million for 2013-14, up 18% on the previous year and right in the middle of guidance for $84-86 million.

Despite lower flagged growth for the year ahead – with cash NPAT set to grow up to 7% to $90-91 million – newsletters are overwhelmingly bullish on the stock.

Details behind the headline figures have helped to dispel fears that FlexiGroup’s growth is winding down. Indeed, shares in the company had fallen to as low as $3.10 in June amid negative sentiment for the company’s outlook, but have since climbed back to $3.80 as of last Friday.

For one, the growth in 2014-15 is solid, newsletters say, given the step-up in IT investment during the year and the company’s changing product mix.

“Interest free cards is the latest example of FlexiGroup’s ability to identify impressive growth segments, secure the right opportunities within those segments and rapidly realise value through integration into the Flexi-fold,” said chief executive Tarek Robbiati.

Moreover, newsletters are confident the company should return to double-digit growth in 2015-16 and beyond. Growth avenues include a greater presence in New Zealand, increasing penetration from interest free cards and the Enterprise division, where the lift in volumes and receivables during the second half impressed analysts.

With conservative gearing and excellent cash flow generation, sources say the company is also well-placed to grow by acquisitions as well as deliver on earnings in a market where it’s becoming increasingly difficult to justify current valuations.

Analysts have a price target of $4.45 on the stock, 17.1% above current levels. They forecast a grossed-up yield of 6.9% in 2014-15 and 7.6% in 2015-16.

* According to our value investor partners, StocksInValue, the intrinsic value for FlexiGroup is $3.71. To find out more visit http://www.stocksinvalue.com.au/

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

Crown Resorts (CWN)

A large majority of the investment press rate Crown Resorts as a buy after the leisure and entertainment company beat market expectations in its 2013-14 results.

Crown told the market last Thursday (August 14, 2014) that net profit surged 65.7% to $655.8 million last financial year, above average analyst forecasts for $618.6 million.

The better-than-anticipated result was largely thanks to strong performances from joint venture Melco Crown Entertainment in Macau (which Crown has a 33.6% stake in) and from operations in Australia, where a strong second half reversed the weaker first half.

Chief executive Rowen Craigie’s comments on persisting weak consumer confidence in Melbourne and Perth appeared to have little impact, with the stock jumping 5.6% to $15.66 – its biggest one-day boost in a year.

Newsletters also took the comments in stride. While no guidance was offered, they are optimistic about Crown’s ability to grow despite soft consumer confidence; earnings before interest, tax, depreciation and amortisation (EBITDA) in Melbourne and Perth still managed to grow in the tough environment, they point out.

Such performances demonstrate Crown’s marketing and operational expertise, one source says. With the Melbourne and Perth operations less likely to be downgraded, Crown can now focus on the wide range of growth initiatives it’s considering.

Higher dividends to shareholders were another reason for positive responses. While the final dividend met expectations at 19 cents a share, future dividends are set to increase thanks to the commencement of dividends from Melco.

As a result, Crown revised its dividend policy and will pay shareholders the higher of 37 cents a share or 65% of normalised net profit in future years.

Analysts, on average, forecast the share price to rise 20.4% to $18.91 over the next 12 months. They estimate a dividend yield of 2.5% in 2014-15 and 2.7% in 2015-16 (Crown franks dividends at 50%).

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

  • Investors are generally advised to buy Crown Resorts at current levels.

JB Hi-Fi (JBH)

The investment press don’t agree on the outlook for JB Hi-Fi after the electronics retailer disappointed the market with its full-year report.

JB Hi-Fi’s full-year result for 2013-14 was in line with estimates, with group NPAT rising 10% to $128.4 million compared to the previous year and total sales lifting 5.3% to $3.48 billion.

But what sent the company’s shares down 7.9% to $17.84 last Tuesday (August 11, 2014) – their biggest one-day slide since December, 2011 – was the company’s trading update and outlook.

Management announced like-for-like sales fell 5.5% in July (a stark change from the 2% rise for the entire year) and that it expects total sales for 2014-15 to be around $3.6 billion – below the consensus forecasts for $3.74 billion.

Falling tablet sales and poor consumer confidence were responsible for July’s slump, and chief executive Richard Murray anticipates these factors to continue to impact sales for the first half of 2014-15.

By and large, analysts either rate JB Hi-Fi a buy or a hold after the release of the results and consequent share price slide. However, with one source downgrading its recommendation, most say the stock is a hold at current levels.

Analysts with buy recommendations say that while weak current trading is a concern, JB Hi-Fi will still be able to build sales growth through its new store roll-out and expansion into the home appliances market with its HOME division.

But more newsletters believe JB Hi-Fi’s revenue outlook will remain challenging. While the expansion into new categories along with cost management should offset declines in tablet revenues, underlying operating cash flows will be sacrificed, they say.

JB Hi-Fi is well positioned in the consumer electronics industry with high sales density and a low-cost model, but the growth which investors are accustomed to will be harder to come by as its store roll-out matures and digital delivery becomes more threatening.

* According to our value investor partners, StocksInValue, the intrinsic value for JB Hi-Fi is $17.09. To find out more visit http://www.stocksinvalue.com.au/

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

BWP Trust (BWP)

The market is too optimistic about BWP Trust given the more subdued outlook as market rent reviews come up and Bunnings vacates several smaller properties, newsletters say.

The real estate investment trust (REIT) released its full-year results earlier in the month (August 7, 2014). Distributable profit climbed 22% to $92.8 million for the year while the total dividends per share to shareholders rose to 14.71 cents from 14.14 cents.

BWP, which leases its properties out to Wesfarmers-owned Bunnings, said the increase in net income was largely thanks to acquisitions, upgrades to existing properties and rent reviews.

But newsletters, for the most part, don’t think BWP can replicate its performance next year. Asset acquisitions and lower debt costs will be offset by lower market rental growth and less leases with short-term market rent growth clauses, sources say.

BWP also warned shareholders that growth may be more moderate because Bunnings is developing most of its new stores, giving it greater control over commencing rents through sale and lease back transactions than it would have through leasing deals with third-party developers.

Most analysts rate the stock as a sell. The company’s valuation versus its peers is hard to justify, they say, with the market factoring in too much cap rate compression too soon. BWP Trust trades at a one-year forward price-earnings multiple of 15.8 times, above the REIT sector’s average of 13.6 times.

The cap rate is the ratio of net operating income of a property to its market value. When cap rates compress, property values are being bid higher.

One source, which downgraded its recommendation to sell, says BWP’s implied cap rate is 6.6% including the management fee, while it estimates that 7.3% is more appropriate to the REIT’s net asset valuation.

* According to our value investor partners, StocksInValue, the intrinsic value for BWP Trust is $2.07. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to sell BWP Trust at current levels.

REA Group (REA)

Shares in REA Group suffered their biggest fall in six years after the online real estate company failed to meet the market’s high expectations with its annual results.

The stock fell 8.7% to $42.78 earlier this month (August 8, 2014) when the group announced NPAT grew 37% to$149.9 million, slightly below average analyst forecasts for $153 million. Revenue climbed 30% to $437.5 million.

Lower-than-anticipated margins were responsible for the miss, newsletters say, as operating expenses lifted 23%. The increased costs reflect ongoing investment in products and promotional activity.

But the market darling’s slide from grace was short-lived: the stock rebounded 5.2% to $45 last Monday (August 11, 2014), with the market perceiving the fall as a buying opportunity as two newsletters upgraded their recommendations to buy.

Since then the stock has fully recovered, closing at $46.52 on Friday (August 15, 2014).

Most newsletters call REA Group a hold – even before the recovery in the share price. With a price-earnings multiple of 29 times on a one-year forward basis, they say the potential for future double-digit earnings growth appears to be already priced into the stock.

REA Group increasingly dominates the Australian residential listings market, they say, and it will continue to generate most of its revenue and earnings growth momentum from there as the company shifts its strategy to depth listing products.

One source says REA’s business model could be tested in the next few years as the migration from print advertising nears its end and competition increases. Print’s component of real estate classifieds has fallen from around 74% in 2008-9 to roughly 38% in 2013-14.

REA’s international operations are unlikely to help the company during this period given their immaterial earnings, with the Italian and Hong Kong operations in need of urgent renovation or an exit strategy, another source says.

* According to our value investor partners, StocksInValue, the intrinsic value for REA Group is $41.44. To find out more visit http://www.stocksinvalue.com.au/

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

Takeover Action August 12-18, 2014

DateTargetASXBidder(%)Notes
12/08/2014Ambassador Oil and GasAQODrillsearch Energy18.55Decrease from Takeovers Panel order
10/06/2014Ambassador Oil and GasAQOMagnum Hunter Resources Corporation0.00
15/08/2014Australand Property GroupALZFrasers Centrepoint83.42
15/08/2014Bullabulling GoldBABNorton Gold Fields83.07
28/07/2014Clinuvel PharmaceuticalsCUVRetrophin6.70
14/08/2014EnvestraENVCheung Kong Group88.28
13/08/2014Genesis ResourcesGESBlumont Group3.37
21/07/2014Gondwana ResourcesGDAOchre Group Holdings18.23
14/08/2014Kresta HoldingsKRSNingbo Xianfeng New Material Co36.19
28/05/2014Merlin DiamondsMEDBlumont Group8.22
06/06/2014Reef Casino TrustRCTAquis Casino Acquisitions 78.19
14/08/2014Robust ResourcesROLStanhill Capital Partners Holdings & Droxford International46.60Potential joint offer
04/08/2014Roc Oil CompanyROCFosun International0.00
13/08/2014Strategic Minerals CorporationSMCQGold61.33
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
08/08/2014Gondwana ResourcesGDAUnnamed party0.00Indicative 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
12/08/2014Wilson HTM Investment GroupWIGShaw Stockbroking0.00Preliminary due diligence
25/06/2014WorleyParsonsWORUnnamed party0.00Media speculation
Source: Newsbites

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