Collected Wisdom

This week we look at Brambles, Pact Group, NIB Holdings, Sigma Pharmaceutical and Evolution Mining.

Summary: A mixed reaction to the takeover of Ferguson Group hasn’t deterred a positive stance toward industrial leader Brambles. Newsletters are also upbeat on Pact Group as its shares finally consolidate above their IPO price, but they are divided over NIB Holdings amid challenging claims conditions. Sigma Pharmaceutical’s acquisition strategy and capital management plan should offset industry challenges, they say, while Evolution Mining is well positioned within a deteriorating gold price environment.

Key take-out: Most newsletters anticipate strong earnings growth from Brambles over the next few years, particularly from its strengthened containers division.

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.

Brambles (BXB)

The acquisition of UK-based Ferguson Group isn’t a game-changer for Brambles, but it does compliment the industrial leader's strategy to expand into the oil & gas sector, according to the newsletters.

Brambles announced last week (September 9, 2014) that it paid £320 million ($A555 million) to acquire Ferguson, a specialist container business which services the offshore oil & gas sector, via its existing debt facilities. It is expected to be completed by the end of the month.

“Combined with our presence in the downstream refining sector through CHEP catalyst & chemical containers, Ferguson Group provides a platform for further expansion of our containers offering in oil & gas,” said chief executive Tom Gorman.

But newsletters are mixed over whether the acquisition price – representing 10 times Ferguson’s forecast earnings before interest, tax, depreciation and amortisation (EBITDA) – was reasonable.

While one analyst says the implied enterprise value to EBITDA compares favourably to another takeover in the sector, KKR’s purchase of Singapore packaging group Goodpack, it struggled to see how Brambles could get a good return on the investment.

Brambles expects the acquisition to be accretive to its underlying earnings per share from 2014-15, however, the benefit to net profit looks incremental when interest costs are taken into account this financial year, another analyst says.

Newsletters point out the acquisition represents a 7% return on capital, well below management’s targeted range of 20% for existing businesses by 2018-19.

Nevertheless, the majority of analysts raised their target prices on the stock after the takeover and call Brambles a buy. On average, they forecast the stock to climb to $10.14 from current levels of around $9.64.

With recent contract wins in other parts of the containers division and the Ferguson takeover giving Brambles the scale it had previously lacked, most newsletters anticipate strong growth over the next few years.

* According to our value investor partners, StocksInValue, the intrinsic value for Brambles is $5.87. To find out more visit http://www.stocksinvalue.com.au/

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

Pact Group (PGH)

Shares in Pact Group have at last consolidated above their initial public offer (IPO) price after the company beat profit expectations in its full-year results.

Australia’s largest packaging manufacturer exceeded its profit forecasts, with net profit before significant items coming in at $59.7 million, 13.5% higher than the prospectus forecast for $52.6 million.

Pact Group was the biggest float in 2013, raising $649 million, but it was also one of the most disappointing. From an IPO price of $3.80 when it listed in December, the stock plunged almost immediately to as low as $3.20. In the past three months, however, the stock has recovered by 21.8% to Friday’s close of $3.90

Newsletters are overwhelmingly positive on the outlook for the stock despite management flagging that tough macroeconomic conditions would persist into 2014-15. Almost all rate the stock a buy, with an average target price of $4.28 – 10% above current levels.

Analysts also expect a dividend yield of 5% from the stock in 2014-15, increasing to 5.7% in 2015-16 and 6.1% in 2016-17.

The investment press respect chairman Raphael Geminder's display of discipline with recent decisions, particularly when considering Pact Group’s ambitious growth plans.

“Pact’s inspiration vision is to be ‘5 cubed’ – to be a $5 billion company with operations in five regions within five years,” said chief executive Brian Cridland.

After acquiring plastic waste manufacturer Sulu Group in August, management said it is actively seeking further acquisition opportunities in the sector, but one particular option it was considering – Dynapack Asia – needed further scrutiny.

Further, newsletters like how Pact Group isn’t chasing volume at the expense of margins.

* According to our value investor partners, StocksInValue, the intrinsic value for Pact Group is $2.76. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to buy Pact Group at current levels.

NIB Holdings (NHF)

Shares in NIB Holdings plunged the most in three months last Wednesday – not on bad news as one might think – but on the market darling’s ex-dividend date.

The stock plunged 23 cents, or 6.9%, to $3.13 the day after its shareholders were locked into receive the private health insurer’s 5.75 cents a share final dividend and 9 cents a share special dividend (September 9, 2014), both of which were fully franked.

Usually the share price falls by around the same level as the dividend payout on the ex-dividend date. The more extreme reaction suggests NIB Holdings had been bid up to abnormally high levels as investors hankered for the stock’s attractive yield.

Mixed responses from newsletters to NIB Holdings’ full-year results late last month (August 25, 2014) also wouldn’t have helped. While there were a range of buys, holds and sell recommendations – with most analysts rating the stock as hold – there was also one downgrade to sell.

NIB Holdings reported a net profit of $69.9 million, slightly above consensus forecasts. It guided for consolidated operating profit to be between $75 million and $82 million in 2014-15 (up to 13.4% above the previous year) despite flagging challenging claims conditions and lapse rates in its core Australian resident health insurance business.

The analyst with the downgraded recommendation said that while NIB Holdings offers good earnings growth potential in the long term, the guidance for 2014-15 was weaker than what had been implied just two months earlier.

After running up 50% over the past year, the stock appears too expensive at current levels, the publication said.

But analysts on average have a price target of $3.20 on the stock, marginally above its current share price. They also forecast a 4% dividend yield in 2014-15 and a 4.3% yield in the next financial year. Most believe the 7.99% increase in premiums which became effective on April 1 will help offset the tough environment.

* According to our value investor partners, StocksInValue, the intrinsic value for NIB Holdings is $2.41. To find out more visit http://www.stocksinvalue.com.au/

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

Sigma Pharmaceuticals (SIP)

Sigma Pharmaceuticals can offset losses from the Federal Government’s cuts to the Pharmaceutical Benefits Scheme (PBS) by stealing market share through acquisitions, according to the investment press.

They were responding to Sigma’s first-half results for 2014-15, where underlying earnings before interest and tax (EBIT) lifted 5% to $33.5 million for the six months to July 31 and sales rose 2.6% to $1.5 billion on higher volumes and lower prices.

Sigma elected not to pay out an interim dividend on the basis it didn’t have enough franking credits – which was a surprise to the newsletters.

“We do not expect our recent acquisitions and upcoming investments to compromise our ability to pay a high level of dividends into the future,” said chairman Brian Jamieson.

Indeed, analysts forecast the company’s dividend yield to rise from 3.3% this financial year to 5.6% next year.

Most newsletters rate Sigma as a hold after the first-half results. While the tough industry conditions will persist – with Sigma noting flat to negative PBS growth for the rest of the year – analysts say the company can grow its EPS via its acquisitions and the appetite for more ahead.

Earlier last week the company announced it had purchased Queensland chemist chain Discount Drug Stores for $26.7 million. The chain adds to Sigma’s recently completed acquisition of wholesaler Central Healthcare Services for $24.5 million.

Sigma’s market share gains have also been assisted by the fast growth of its customer Chemist Warehouse, one newsletter says. While this is a positive, it also represents a greater risk as Sigma relies more on the retail pharmacy chain.

* According to our value investor partners, StocksInValue, the intrinsic value for Sigma Pharmaceuticals is $0.38. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Sigma Pharmaceuticals at current levels.

Evolution Mining (EVN)

Evolution Mining has done an excellent job generating cash in what is a weak gold price environment, newsletters say.

The miner, which owns and operates five gold and silver mines in Queensland and Western Australia, increased its revenue by 5% to $634.4 million as production lifted 9% to 427,703 ounces of gold equivalent in its full-year results for 2013-14.

Net profit came in at $49.3 million, up from the $307.4 million loss the year before when the company wrote down the value of its gold operations by more than $350 million.

Most newsletters rate the stock as a hold after the full-year results, though one publication upgraded its recommendation to buy. While the headline figures slightly missed most of their forecasts, the operating cash flow at $245 million was seen as impressive.

Indeed, executive chairman Jake Klein said all the company’s mines achieved positive cash flow and meaningful cost savings and that the company is confident it will achieve production and guidance for 2014-15.

The strong operating cash flow enabled Evolution Mining to distribute a 1 cent per share final dividend. Analysts forecast the stock to yield 2.6% in 2014-15.

However, newsletters are also mindful of the slim earnings margins amid current gold prices. Evolution is looking to cut costs and capital expenditure while searching for mergers & acquisition opportunities and exploration success, analysts says, but most of the operating cash flow will still be used to sustain production.

It must also be said that since newsletter responses on August 29, Evolution Mining’s share price has fallen  8.1% to 68 cents as the gold price dropped to as low as US1,230 an ounce.

  • Investors are generally advised to hold Evolution Mining at current levels.

Directors’ trades

  • The sellers again dominated the buyers this week, headed by Gregory Goodman. The chief executive of Goodman Group disposed of $24,574,000 worth of shares in the property group at $5.585 each.
  • Meanwhile, Mineral Resources chief executive and co-founder Chris Ellison banked $9,047,474 from the sale of 895,372 shares in the mining contractor and iron ore producer at $10.105 each.
  • Two Wesfarmers directors also lightened their load. Managing director Richard Goyder sold off 46,144 shares at $44.001 each in the conglomerate to the tune of $2,030,396, while finance director Terence Bowen traded 6,094 shares for $268,120.

Takeover Action September 9-15, 2014
DateTargetASXBidder(%)Notes
04/09/2014Ambassador Oil and GasAQODrillsearch Energy88.34
12/09/2014Bullabulling GoldBABNorton Gold Fields90.97Compulsory acquisition
12/09/2014Cape AluminaCBXMetroCoal58.49
09/09/2014Clinuvel PharmaceuticalsCUVRetrophin7.80
05/09/2014EnvestraENVCheung Kong Group96.59Compulsory acquisition
10/09/2014Iron Ore HoldingsIOHBC Iron59.50
18/08/2014Genesis ResourcesGESBlumont Group5.81
04/09/2014Gondwana ResourcesGDAOchre Group Holdings18.23
25/08/2014Merlin DiamondsMEDBlumont Group13.19
10/09/2014Neon EnergyNENEvoworld Corporation15.66Unsolicited proportional bid
08/09/2014Nido PetroleumNDOBCP Energy International36.86
25/08/2014Reef Casino TrustRCTAquis Casino Acquisitions 79.23
14/08/2014Robust ResourcesROLStanhill Capital Partners & Droxford International46.60
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
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
12/09/2014SAI GlobalSAIPacific Equity Partners0.00Final offers due Sept 16
12/09/2014SAI GlobalSAIUnnamed parties0.00Final offers due Sept 16
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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