Collected Wisdom

This week we look at Ardent Leisure, Fairfax Media, Dick Smith, Amcor and Aurizon Holdings.

Summary: The newsletters like leisure and entertainment company Ardent Leisure in lieu of its growing US business Main Event, but they’re not as convinced with Fairfax Media after reading between its profit lines. Meanwhile, the latest results from retailer Dick Smith have impressed analysts, as has the profit upturn from global paper and packaging group Amcor, while rail freight operator Aurizon has raised concerns over its capital spending forecasts.

Key take-out: Further share price growth for Ardent Leisure depends on the leisure and entertainment company’s execution on the roll-out of its Main Event centres in the US, newsletters say.

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.

Ardent Leisure (AAD)

Further share price growth for Ardent Leisure depends on the leisure and entertainment company’s execution on the roll-out of its Main Event centres in the US, newsletters say.

The full-year results posted last Monday (August 18, 2014) offered no major surprises to analysts; they had largely been pre-announced earlier in the month when Ardent Leisure announced the acquisition of Fitness First in Western Australia and the faster roll-out of its Main Event centres in the US.

Nevertheless, the stock jumped 3.6% to $2.90 as the company posted a 15.7% rise in core earnings to $58.2 million and a lift in total revenue to 11.3% to $499.7 million. The market may have also been enthused by the momentum in growth for Main Event in July, with constant centre revenues growing by 13.3% compared to in July, 2013.

The stock has now surged 18.9% this month amid the positive news and 53.23% this year, making it one of the best performers among the S&P/ASX 200 index.

Even after the impressive share price rise and high price-earnings multiple of 18.3 times, the majority of newsletters say Ardent Leisure is a buy thanks to its future earnings potential.

Encouragingly, the bowling division in Australia appears to be turning around and there is continued success with the company acquisition strategy in the health club space, newsletters say.

But these developments are immaterial to the growth from Main Event. Ardent has accelerated the roll-out of the large format family entertainment centres, with the portfolio set to more than double to 35 stores by the end of 2016-17.

Analysts forecast double-digit earnings growth over the next three years. They estimate the dividend yield to grow from 4.9% in 2014-15 to 5.6% in 2015-16 despite Ardent reiterating that the payout ratio would decline to 85% from 90% to fund growth.

* According to our value investor partners, StocksInValue, the intrinsic value for Ardent Leisure is under review. To find out more visit

  • Investors are generally advised to buy Ardent Leisure at current levels.

Fairfax Media (FXJ)

The investment press don’t share the market’s enthusiasm for Fairfax shares after the struggling media group delivered better-than-anticipated earnings for 2013-14.

Fairfax returned to profit with net earnings of $224.4 million, a much better result than the $16.4 million loss it incurred in the previous year, with a large gain coming from the sale of Stayz totalling $100.4 million.

Underlying net profit for the period climbed 23% to $157.7 million, beyond what analysts had pencilled in at $137.6 million on average.

The stock surged 6.2% to 99 cents on the earnings release, but lost over half those gains the following day amid the newsletter responses and since then has drifted to 90.5 cents.

By and large newsletters either rate Fairfax as a hold or a sell after the update, with most labelling the stock a hold at current levels.

They say that the improved earnings prospects are already factored into the share price and that management must look for growth opportunities elsewhere as, excluding Domain, it lacks a portfolio of strong digital growth assets.

“We are in a position to use our balance sheet to build and invest in new business areas where our content gives us competitive strength,” said chief executive Greg Hywood.

While Fairfax returned to a net cash position of $68 million, newsletters question its sustainability. The company’s aggressive cost cutting – which management has flagged will continue – can’t last amid the continuing fall in revenues, one source says.

Revenue was down 3% to $1.97 billion in the year, and management has seen this trend continuing with a 1-2% decline in the first five weeks of 2014-15.

* According to our value investor partners, StocksInValue, the intrinsic value for Fairfax Media is $0.46. To find out more visit

  • Investors are generally advised to hold Fairfax Media at current levels.

Dick Smith (DSH)

Shares in Dick Smith surged the most on record when the electronics retailer beat its prospectus forecasts in its first full-year earnings report since listing on the ASX.

Net profit for 2013-14 came in at $42.1 million, 5.3% above Dick Smith’s guidance in its prospectus, while sales grew 4.2% to $1.2 billion, 0.1% ahead of the prospectus.

“We have stayed focused on our core growth strategy which includes new stores and store formats, a compelling omni-channel offer, private label and accessories,” said chief executive Nick Abboud.

The final dividend also impressed analysts at 8 cents per share. They now forecast a dividend yield of 6% in 2014-15 and 6.6% in 2015-16 before franking credits are included.

The stock jumped 8.8% to $2.17 on the day – still below the IPO price of $2.20 – but has since drifted higher to $2.25.

Consensus is to buy Dick Smith shares after the result. While no guidance was provided as expected, newsletters say the turnaround in the New Zealand market and the expansion of its Move concept stores (a fusion of fashion and technology for mobile devices and wireless devices) should generate strong sales and profits.

Dick Smith trades at a sizeable discount to peers with a price-earnings multiple of around 10.6 times compared to the consumer discretionary sector’s 12.1 times, one newsletter says. Once the company delivers on its forecasts and establishes a track record, the source anticipates the stock to get rerated.

Analysts also point out that Dick Smith is off to a good start in 2014-15, with 1.8% like-for-like sales growth in the first seven weeks, unlike peer JB Hi-Fi (see last week’s Collected Wisdom). One source suggests Dick Smith’s aggressive store rollout and promotions with Apple products has harmed JB Hi-Fi’s sales.

  • Investors are generally advised to buy Dick Smith at current levels.

Amcor (AMC)

Strong balance sheet firepower provides Amcor with several options in what is a backdrop of slower underlying organic growth, according to the investment press.

The global packaging giant announced that net profit after tax increased by 24.6% to $737 million in its full-year report for 2013-14, beating consensus forecasts for $711 million and sending its shares up 4.6% on Tuesday and another 4.6% on Wednesday to a record high of $11.21.

Sales lifted 14.4% to $10.85 billion, with bolt-on acquisitions and the declining Australian dollar boosting the top line.

“Acquisitions remain a key component of our growth strategy going forward,” said chief executive Ken MacKenzie, adding that while the company will maintain a disciplined approach to takeovers it is eyeing an increased pipeline worth $3 billion.

For the most part, newsletters rate Amcor as a hold – though several are more optimistic. While the consensus is that the optimism surrounding the global economic recovery is already factored into the share price at current levels, the company may be able to unlock more value via its exceptional free cash flow, sources say.

There is balance sheet capacity of around $1.3 billion, one source highlights, on top of undrawn debt facilities of $1.6 billion.

The big question is how much of the acquisition pipeline meets Amcor’s strict return criteria of 20% return on funds employed by the end of year three, another source says. It believes a buyback is likely in the next six months in the absence of acquisitions.

In the meantime analysts have a 12-month target price of $11.23 on the stock, roughly in line with current levels, and forecast a dividend yield of 4.1% in 2014-15 and 4.3% in 2015-16. Amcor doesn’t distribute franking credits.

* According to our value investor partners, StocksInValue, the intrinsic value for Amcor is $7.07. To find out more visit

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

Aurizon Holdings (AZJ)

Aurizon Holding disappointed the market when it missed earnings expectations in its full-year results, but the big negative for analysts was the increase in guidance for maintenance capital expenditure.

Shares in Aurizon fell 3% to $4.88 last Monday (August 18, 2014) when the rail freight operator reported that earnings before interest and tax grew 13.3% to $851 million, below the consensus forecast for $878 million.

The coal division was the standout performer during the year, most newsletters agree, while the underlying freight business remain subdued, with profit increasing by $11 million.

What caused the biggest impact to analyst valuations was the 60% increase in forecast sustaining capital expenditure to $600 million in 2015-16 and 2016-17. This is particularly detrimental because it appears to be related to maintenance and not linked to revenue increases, sources say.

Most newsletters call Aurizon a hold after the result. While upside potential exists around the cost reduction program – with savings to range between $250 million and $300 million in 2014-15 – the company has to clarify the details behind its capital expenditure forecasts, newsletters say, such as whether any upside to cash flow can be realised.

There’s also added risk relating to Aurizon’s recent acquisition. In July Aurizon acquired Aquila Resources in a joint venture with Baosteel. Aurizon is now investigating the creation of an independent rail network in the Pilbara iron ore region.

Once the project is successfully developed, Aurizon says that it intends to divest its shareholding in Aquila.

* According to our value investor partners, StocksInValue, the intrinsic value for Aurizon Holdings is $2.54. To find out more visit

  • Investors are generally advised to hold Aurizon Holdings at current levels.

Watching the Directors

  • Bendigo and Adelaide Bank’s chief executive, Michael Hirst, offloaded $3,813,05 worth of shares in the regional bank after it reported full-year results at a price of $12.71 a share.
  • Elsewhere, Donald McLay, chairman of Credit Corp, sold 155,450 shares in the receivables management company at $9.626 each for a total of $1,496,338 – also after the company posted its 2013-14 results.
  • But not all directors were selling scrip on results. Hamish Douglas, co-founder and chief executive of Magellan Financial Group, bought 120,000 shares in the fund management company for a total value of $1,486,157.
  • G8 Education’s chairperson also bought shares post-results, with Jennifer Hutson buying $778,500 worth of scrip in the childcare centre operator at $5.19 a share.

Takeover Action August 19-25, 2014

21/08/2014Ambassador Oil and GasAQODrillsearch Energy36.07
10/06/2014Ambassador Oil and GasAQOMagnum Hunter Resources Corporation0.00
21/08/2014Australand Property GroupALZFrasers Centrepoint96.07
21/08/2014Bullabulling GoldBABNorton Gold Fields86.24
04/08/2014Cape AluminaCBXMetroCoal57.00
28/07/2014Clinuvel PharmaceuticalsCUVRetrophin6.70
21/08/2014EnvestraENVCheung Kong Group96.59
11/08/2014Iron Ore HoldingsIOHBC Iron0.00
18/08/2014Genesis ResourcesGESBlumont Group5.81
21/07/2014Gondwana ResourcesGDAOchre Group Holdings18.23
22/08/2014Kresta HoldingsKRSNingbo Xianfeng New Material Co60.91
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
22/08/2014Strategic Minerals CorporationSMCQGold66.51
05/08/2014Westside CorporationWCLLandbridge Group Co93.75
Scheme of Arrangement
02/07/2014Goodman FielderGFFWilmar International and First Pacific Company10.10Vote November
03/06/2014Papillon ResourcesPIRB2Gold Corp0.00Vote September
07/07/ 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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