Collected Wisdom

This week we look at Nine Entertainment, Qantas, Harvey Norman, Seek and Boart Longyear.

Summary: The newsletters almost all say Nine Entertainment is cheap even after it signalled a soft trading environment, while they think Qantas is back on the right course after its massive asset write down. Analysts are deeply mixed over both Harvey Norman and also Seek after their impressive share price runs this year, but they all agree there is too much risk in Boart Longyear given uncertainty surrounding whether it can continue operating.

Key take-out: Nine can rely on its improving events business along with a solid TV-line up to propel earnings growth ahead, according to newsletters. They forecast a total return of around 25% on average 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.

Nine Entertainment (NEC)

Newsletters are virtually unanimous in recommending investors buy Nine Entertainment despite the media company flagging a soft outlook for 2014-15 in its full-year results.

Free-to-air (FTA) advertising has failed to recover from the uncertainty arising from the Federal Budget, according to Nine. For the September quarter, it expects the market to be 5-10% down compared to the same time last year.

“In light of the soft FTA market over the first quarter of the new financial year, first-half results are likely to be subdued,” the company said.

Nevertheless, analysts suggest though the environment may be softer, the company is cheap due to its good prospects for top-line growth as it steals market share from competitors.

They forecast an average target price of $2.50 on the stock, 19% above current levels. With an expected grossed-up yield of 6.5% in 2014-15, that’s around a 25.5% total return over the next 12 months.

Shares in Nine had fallen 6.6% over two-days to $2.03 – their biggest two-day fall on record since the company listed in December last year at an IPO price of $2.05 – in response to full-year results published on August 28, but have since recovered to Friday’s close of $2.10. It has traded above its IPO price for most of the year.

Along with a solid TV line-up for the remainder of 2014, such as the cricket, Nine can rely on improving growth from its events business to achieve its earnings targets, newsletters say.

For the 2013-14 year, earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 4.7% to $311 million, 2% above guidance, while revenue lifted 5.8% to $1.578 billion – an outperformance of 0.8%.

Moreover, the market should be encouraged by Nine’s cash conversion ratio of 87%, another publication says, given the soft revenue trends in the second half of the year. The cash conversion ratio measures the proportion of profits that are converted to cash flow.

* According to our value investor partners, StocksInValue, the intrinsic value for Nine Entertainment is $1.54. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to buy Nine Entertainment at current levels.

Qantas (QAN)

The mammoth $2.6 billion asset write-down at Qantas has put the embattled airline back on the right course, most newsletters say.

Qantas announced a headline loss of $2.84 billion in its full-year results on August 28, with most of the amount attributed to the $2.6 billion of non-cash write downs to the value of its international fleet. The international business will also be split off into its own entity called Qantas International as part of the group’s transformation plans.

Despite the loss the stock surged– climbing 18.9% to $1.54 in the seven trading days since the results – as the market focused on the underlying results (which beat expectations) and chief executive Alan Joyce’s positive comments.

“We expect a rapid improvement in the group’s financial performance – and a return to underlying profit before tax (PBT) in the first half of 2014-15, subject to factors outside our control,” Joyce said.

While a few newsletters advise to buy the stock, the rise in the stock price has generally exceeded their target prices forecasts (which average $1.44). Most newsletters rate Qantas as a hold – even before its impressive share price run up.

The asset impairment will boost future earnings given the absence of depreciation charges on those assets, sources say, and investors should be aware Qantas will trade on more attractive price-earnings multiples from now on.

However, even against the lower capital base one newsletter forecasts Qantas’s mid-cycle returns on its invested capital will be 8-9% – below the source’s 10.5% weighted-average cost of capital estimate.

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

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

Harvey Norman (HVN)

Shares in Harvey Norman have climbed to their highest levels in nearly four years after the retailer returned to profit growth and posted a dividend way ahead of expectations.

After bouncing 7.9% to $3.55 on the day (August 29, 2014), the stock has since lifted further to Friday’s close of $3.79 as investors digest the results.

Underlying net profit increased 20% to $220.1 million and revenue lifted 14.4% to $1.514 billion – the first time both metrics increased since 2011.

But the bigger surprise was that the final dividend increased by 77% to 8 cents a share, above consensus estimates for 5 cents a share. This could signal that chief executive Gerry Harvey may finally be bowing to investor pressure to release the company’s huge franking credit balance, newsletters say.

Analysts forecast a grossed-up dividend yield of 6% in 2014-15 and 6.6% in 2015-16.

However, newsletters are deeply mixed on Harvey Norman following the results, with a range of buys (with one source upgrading its recommendation), holds and sells. After the share price rise, the majority call the stock a hold.

Analysts positive toward Harvey Norman point to the company’s leverage to the improving housing market – driving earnings momentum – and its opportunity for franchisee market expansion. But more believe the profit growth to be factored into the share price at the moment.

One source questions how long the earnings momentum can last. With the company closing underperforming stores amid a highly competitive market, it doesn’t see any long-term potential for the stock, particularly given the structural threats it faces from the online space.

Harvey Norman’s big franking credit balance leads another newsletter to speculate that capital management could occur. That being said, the amount of debt on the balance sheet could limit a release of funds to shareholders.

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

  • Investors are generally advised to hold Harvey Norman at current levels.

Seek (SEK)

The third consecutive year of double-digit earnings growth and management’s outlook for more solid growth ahead wasn’t enough to win over many newsletters.

The online jobs and education group increased net profit by 27% to $179.7 million and lifted revenue by 22% to $756.4 million in its full-year results posted last month (August 20, 2014). The figures were largely in line with expectations.

An update on the recent acquisition of JobStreet – a job site which operates across Asia – was also provided. Seek will pay a revised purchase price of $636 million and the deal is expected to be completed by September.

In common with Harvey Norman, newsletters are varied in their outlook for Seek with numerous buys, holds and sells.

Those negative toward the stock (with one source downgrading to sell on the results) say management’s guidance for “solid growth” doesn’t justify the price-earnings (P/E) multiple. After rising around 30% this year, Seek shares trade at a one-year forward P/E of around 27 times.

Further, they see several factors impeding earnings growth ahead, including a subdued employment outlook in Australia, regulatory risk over the JobStreet takeover and declining margins as cost growth harms Seek’s natural operating leverage.

But others optimistic toward Seek say its placement strategy – which is yet to generate revenues but is currently adding to costs – will drive the company’s earnings growth over the next 12-18 months. The strategy aims at better matching job seekers to roles with users establishing profiles on the website.

All things considered, however, the consensus is to hold the stock; analysts on average have a 12-month target price of $17.12 – just 2.2% below the current share price.

* According to our value investor partners, StocksInValue, the intrinsic value for Seek is $11.83. To find out more visit http://www.stocksinvalue.com.au/

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

Boart Longyear (BLY)

It’s uncertain whether Boart Longyear can survive amid such poor industry conditions, and even if it does any solution is likely to leave shareholders worse off, according to newsletters.

As the company had foreshadowed two weeks beforehand, the adjusted net loss after tax for the first half of 2013-14 ballooned out to $68 million from the previous half-year’s $24 million loss. Revenue slid 41.3% to $422 million.

The results were a sideline to the key question on analysts’ minds: whether there has been any progress in the company’s ability to continue as a going concern.

Boart, which provides drilling services and equipment to mining companies, has been one of the companies most savaged by the end of the mining boom – particularly since it is heavily exposed to exploration. Its shares have plunged 58% to 16 cents this year.

“We are optimistic we will be able to identify an effective solution to our capital structure and liquidity requirements through the ongoing strategic review,” said chief executive Richard O’Brien.

But newsletters are dubious. An overwhelming majority tell their clients to sell the stock as they don’t see industry conditions improving any time soon – despite Boart believing it’s approached the bottom of the cycle – and the company is now in the horrible situation where it is borrowing to make debt payments.

Gearing levels are unsustainable, newsletters say, as they don’t expect any meaningful free cash flow to flow through over the next two years.

The investment case for Boart entirely hinges on its ongoing investment review, sources say. This has the potential to fundamentally change the structure of the business and of its capital – but it also leaves shareholders exposed to the risk of a heavily dilutive equity raising.

  • Investors are generally advised to sell Boart Longyear at current levels.

Directors’ trades

  • Directors were mostly selling their holdings this week after reporting season, headed by Andrew Hansen. The chief executive of Hansen Technologies sold $21 million worth of shares in the IT solutions company at $1.40 each.
  • Next up was Collection House non-executive director Dennis Punches, who offloaded 7,000,000 shares in the debt collection services company for a total of $15,050,000.
  • Elsewhere, Christopher Morris again sold shares in Computershare. This time the non-executive chairman netted $12,813,387 from trading 1,050,000 shares at $12.203 each.
  • Another big sale was from Greencross’s chief commercial officer Paul Wilson. He made $12,187,500 from selling shares in the veterinary clinic company at $9.75 each.

Takeover Action September 2-8, 2014
DateTargetASXBidder(%)Notes
04/09/2014Ambassador Oil and GasAQODrillsearch Energy88.34
10/06/2014Ambassador Oil and GasAQOMagnum Hunter Resources Corporation0.00
05/09/2014Australand Property GroupALZFrasers Centrepoint98.39Closed
03/09/2014Bullabulling GoldBABNorton Gold Fields87.53
04/08/2014Cape AluminaCBXMetroCoal57.00
28/07/2014Clinuvel PharmaceuticalsCUVRetrophin6.70
05/09/2014EnvestraENVCheung Kong Group96.59Compulsory acquisition
04/09/2014Iron Ore HoldingsIOHBC Iron4.99
18/08/2014Genesis ResourcesGESBlumont Group5.81
04/09/2014Gondwana ResourcesGDAOchre Group Holdings18.23Ext to Sept 4
25/08/2014Merlin DiamondsMEDBlumont Group13.19
04/09/2014Nido PetroleumNDOBCP Energy International31.72
25/08/2014Reef Casino TrustRCTAquis Casino Acquisitions 79.23
14/08/2014Robust ResourcesROLStanhill Capital Partners & Droxford International46.60Potential joint offer
04/08/2014Roc Oil CompanyROCFosun International0.00
Schemes of Arrangement
08/09/2014Goodman FielderGFFWilmar International and First Pacific Company10.10Vote Q1, 2015
28/08/2014Intrepid MinesIAUBlackthorn Resources0.00Vote November
03/06/2014Papillon ResourcesPIRB2Gold Corp0.00Vote September
05/09/2014Wotif.com HoldingsWTFExpedia Group19.90Vote Oct 9
Foreshadowed Offers
21/07/2014Antares EnergyAZZUnnamed party0.00Indicative proposal
28/05/2014Australand Property GroupALZStockland19.90Increased final proposal
13/08/2014Crowe Horwath AustralasiaCRHFindex Australia0.00Updated non-binding proposal
08/08/2014Gondwana ResourcesGDAUnnamed party0.00Indicative proposal
13/05/2014PanAustPNAGuangdong Rising Assets Management23.00Indicative proposal
29/08/2014SAI GlobalSAIPacific Equity Partners0.00Final offer due Sept 12
29/08/2014SAI GlobalSAIUnnamed parties0.00Final offers due Sept 12
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