Collected Wisdom

This week we look at AWE, Premier Investments, Arrium, Macquarie Group and SAI Global.

Summary: A huge gas discovery in Western Australia is a positive for AWE, newsletters say. Premier Investments is also in favour after reporting double-digit earnings growth and offering an update on its UK expansion. But newsletters are wary on Arrium after institutional shareholders chose not to subscribe to their full entitlements in the group’s capital raising, while Macquarie Group’s upgrade to full-year earnings met with a mixed reaction. They were also disappointed that two private equity groups have walked away from a full takeover of SAI Global.

Key take-out: Newsletters are upbeat on AWE, saying its recent gas discovery has amazing potential. The company is also involved in other compelling projects, 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.

AWE (AWE)

AWE’s gas discovery in Western Australia has amazing potential given its huge size and convenient location, according to newsletters.

The oil and gas producer announced last Thursday that it had identified 360 billion cubic feet of gross contingent resources at the Senecio and Waitsia fields at its Perth Basin site. AWE and Origin Energy own 50% each of the acreage in a joint venture.

“AWE believes the Senecio/Waitsia discovery could represent the largest onshore conventional gas discovery in Western Australia since the Dongara gas field was discovered in the 1960s,” said managing director Bruce Clement.

The stock surged 13.7% – its biggest one-day lift in almost four years – to $1.91 on the day and another 3.14% on Friday in response to the development.

Newsletters are almost unanimous in issuing “buy” recommendations following the news, with one analyst upgrading their call. As well potentially adding about a third to AWE’s proven and probable reserves, the most exciting thing about the gas discovery is how it can use existing gas plant and pipeline infrastructure just seven kilometres away, they say.

However, one analyst notes how AWE shares are finally trading at “core” valuation after their rise – meaning the potential returns for new shareholders won’t be as enticing – while another questions the reservoir quality based on a review of the geological data.

But other opportunities are also compelling. As with the last time Collected Wisdom covered AWE in early August, newsletters also cite improved performance from the Sugarloaf project in Texas, US and the offshore BassGas joint venture in Tasmania as reasons to own the stock.

* According to our value investor partners, StocksInValue, the intrinsic value for AWE is $0.96. To find out more visit http://www.stocksinvalue.com.au/

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

Premier Investments (PMV)

Shares in Premier Investments surged to a record high on double-digit earnings growth in its 2013-14 results and its expansion plans in the UK.

The stock jumped 7.8% to $10.60 after Premier Investments reported underlying profit before tax (PBT) of $106 million, up 10.3% on the previous year, and total sales growth of 6.2% to $888.5 million.

While the results could not be faulted, the bigger kick to the share price came from the response to Smiggle’s launch into the UK which had begun in February. Premier expects Smiggle UK to be profitable in 2014-15 and sees potential for up to 200 stores in the region in the next five years.

“We were delighted to see the excellent customer response to Smiggle UK during the year, with eight stores now trading and a further 10 stores planned to open ahead of the peak Christmas trading period,” said chairman Solomon Lew.

Despite the positive share market reaction and Premier’s ambitious growth plans, newsletters are deeply mixed over the outlook for the company with several “buy”, “hold” and “sell” calls.

Analysts positive toward the stock expect Premier Investment’s core business to keep performing well as the retailer pursues meaningful growth opportunities in the UK as well as the turnaround of Peter Alexander and Jay Jays.

But others say the stock is too expensive after surging more than 25% this year. Indeed, two analysts who downgraded their recommendations believe the share price has overshot fair value and that slower sales in the future will result in a lower price-earnings (P/E) ratio.

However, newsletters rate Premier Investments as “buy”. They agree that the company’s success compared to other embattled retailers is largely due to the strategic direction of Lew and his chief executive Mark McInnes.

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

  • Investors are generally advised to buy Premier Investments at current levels.

Arrium (ARI)

Arrium lost more than a third of its market value last week after institutional shareholders chose not to subscribe to their full entitlements in the company’s capital raising.

The stock crashed by 29.2% to 40 cents – its lowest level on record since the company was spun-off from BHP in 2000 – last Thursday following its announcement that existing institutional shareholders only took up around 79% of their entitlements, raising $367 million of Arrium’s total $754 million capital raising.

The capital raising has two parts: a 15% institutional placement of $98 million, underwritten at a minimum of 48 cents a share, and a $656 million one-for-one entitlement offer for existing shareholders.

“Iron ore prices have fallen significantly over the last month to five-year lows and there is increased uncertainty over the extent and timing of a recovery,” said chairman Peter Smedley. “We are taking this action to position Arrium with a more appropriate capital structure in the current environment.”

Despite the dramatic cut to Arrium’s share price, newsletters are still wary. By and large they are divided between recommending the stock as a “hold” or a sell”, but most call the stock a “hold” at current levels.

While the capital raising is fully underwritten – meaning Arrium will get its much-needed equity injection to deleverage its balance sheet – the share price tumble won’t bode well for shareholders if it stays at current levels, newsletters say.

The biggest question on analysts’ minds is why Arrium’s management chose to pay out dividends (with an increased dividend only a month ago) and decided to acquire and develop Southern Iron. Avoiding either the dividend payments or the acquisition would have made this equity raising unnecessary, they say.

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

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

Macquarie Group (MQG)

The latest upgrade from Macquarie Group reveals how the company is benefiting from stronger markets, but it also illustrates how lumpy the earnings are, newsletters say.

Australia’s largest investment bank now expects full-year earnings for 2014-15 to be “slightly up” on the previous year, compared to its previous forecast for earnings to be “broadly in line”. In the year ended March 31, 2014 Macquarie had boosted its net profit by 49% to $1.265 billion.

The earnings upgrade can mostly be attributed to higher performance fees from Macquarie’s unlisted and listed funds, according to the investment press. A number of Macquarie’s infrastructure funds have reached the end of their 10-year investment term and have been unwound, allowing the company to book performance fees.

After the update, newsletters say Macquarie Group is either a “hold” or a “buy”, but more advise to hold onto the stock. On average they forecast a 12-month target price of $62.98 – 7.8% above Friday's close - and a dividend yield of 5.1% in 2014-15 and 5.7% the following financial year.

Newsletters are optimistic about the earnings outlook, driven by their forecast for improved business conditions as well as more IPO activity and mergers and acquisitions. One of the largest mandates Macquarie Group has snagged, for example, is the upcoming float of Medibank Private.

But several point out transaction volumes for the company remain sluggish and continue to affect the franchises leveraged to the market. Indeed, one analyst noted Macquarie’s comment that further upside depended on “improved market conditions” when earlier commentary had been about continued improvement – implying the recovery has stalled in some areas.

Further, the timing of financial transactions significantly impacts the earnings: first-half net profit for 2014-15 is expected to be 25-30% higher than the $501 million in the first half of the previous year, but that’s still much lower than the $764 million profit in the second half.

* According to our value investor partners, StocksInValue, the intrinsic value for Macquarie Group is $38.54. To find out more visit http://www.stocksinvalue.com.au/

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

SAI Global (SAI)

That two private equity partners have walked away from buying SAI Global in its entirety is disappointing, newsletters say.

Shares in SAI Global fell 5.6% to $4.18 after the company announced that the Pacific Equity Partners  (PEP) and KKR Asia consortium had not submitted a final offer for the company after four months of due diligence.

SAI Global helps companies around the world comply with industry and government rules, including health and safety and supply-chain management.

In May this year the stock had leapt more than 20% to $5.17 when PEP made a conditional and non-binding proposal to acquire all of the shares at between $5.10 and $5.25. PEP was later joined by KKR.

While SAI Global says that other interested parties have approached the company for parts of the business, newsletters are less optimistic. They say the lower share price accurately reflects the value of the company and rate the stock as a “hold”.

Uncertainty about whether the Australian Standards Publishing Licence Agreement (PLA) would be extended in 2018 was the main reason KKR and PEP walked away, analysts believe. PLA is a big contributor to the company’s earnings.

With tepid underlying earnings growth over the past two years, a lack of scale in its operations outside of Australia and the sacking of chief executive Stephen Porges, newsletters don’t see any reasons for the share price to lift in the near term.

And because SAI Global has such a disparate set of assets, it’s unlikely the company will be a neat fit with any one peer, an analyst says.

That being said, another publication points out that SAI Global has strong positions in its key markets and has established global leadership in ethics and governance, risk and compliance training.

* According to our value investor partners, StocksInValue, the intrinsic value for SAI Global is $2.92. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold SAI Global at current levels.

Directors' trades

  • The amount of director selling eased this week, but Ramsay Health Care boss Christopher Rex was the biggest seller, pocketing $3.73 million. He disposed of 71,871 shares at $51.963 each.
  • Meanwhile, Credit Corp chairman Donald McLay sold 215,807 shares at $10.001 each, taking home $2.16 million.
  • Two CogState directors were among the biggest buyers. David Dolby purchased 6.17 million shares for 26.5 cents each, at a cost of $1.64 million, while Martyn Myer bought 1 million shares at the same price for $265,000.

Takeover Action

September 16-22, 2014

DateTargetASXBidder(%)Notes
15/09/2014Ambassador Oil and GasAQODrillsearch Energy98.81
15/09/2014Bullabulling GoldBABNorton Gold Fields92.79Compulsory acquisition
19/09/2014Cape AluminaCBXMetroCoal59.58
09/09/2014Clinuvel PharmaceuticalsCUVRetrophin7.80
18/09/2014Iron Ore HoldingsIOHBC Iron71.97
18/08/2014Genesis ResourcesGESBlumont Group5.81
04/09/2014Gondwana ResourcesGDAOchre Group Holdings18.23
25/08/2014Merlin DiamondsMEDBlumont Group13.19
15/09/2014Neon EnergyNENEvoworld Corporation16.81Unsolicited proportional bid
19/09/2014Nido PetroleumNDOBCP Energy International59.86
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
17/09/2014SAI GlobalSAIPacific Equity Partners and KKR Asia 0.00No final offer
17/09/2014SAI GlobalSAIUnnamed parties0.00Proposals received
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