Collected Wisdom

This week we look at Nufarm, TPG, ALS, Atlas Iron and New Hope Corporation.

Summary: More newsletters have upgraded their outlook for Nufarm following the company’s impressive full-year results and commentary about better operating conditions. Elsewhere, analysts are divided over whether TPG has overshot fair value in response to yet another beat in its results, while they are almost unanimous in their downcast predictions for mining services company ALS. For mining stocks Atlas Iron and New Hope Corporation it’s a case of whether they can withstand poor commodity prices.

Key take-out: Nufarm is set for double-digit earnings growth this financial year given high demand in South America, strong forward sales, and an improving outlook in Australia, say the newsletters.

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.

Nufarm (NUF)

More newsletters are anticipating Nufarm shares to outperform in the year ahead following the crop protection group’s stellar full-year report last week.

Shares in Nufarm leapt 12.6% – their biggest one-day rise in more than five years – to $4.52 in response to the company’s outlook and improving financial position on Tuesday (September 23, 2014).

“With a return to more normal seasonal conditions in Australia and the USA, the company is strongly positioned to generate growth at an underlying EBIT level in 2015,” Nufarm said.

The last time Collected Wisdom covered Nufarm in April this year – when the share price was $3.85 – most newsletters called the stock a “buy”. With three newsletters upgrading their recommendations over the latest development, there is now even more consensus to buy the stock.

That being said, the share price has continued to climb after their responses, closing at $4.86 on Friday, September 26. Analysts have a 12-month price target of $5.11 on the stock and forecast a yield of 2.4% in 2014-15 and 2.8% in 2015-16.

The balance sheet from the results was a highlight for the newsletters. Net operating cash flow was strong at $268.1 million, driven by the global seeds segment and the European crop protection business, while a lower year-end working capital exceeded expectations at $842 million.

Now Nufarm can guide to double digit earnings growth in 2014-15 due to strong forward sales and high demand from South America, analysts say, along with the improving outlook in Australia.

For the full-year results, net profit fell 53% to $37.7 million, weighed down by restructuring costs, underlying net profit after tax (NPAT) increased by 4% to $86.4 million and sales climbed 15% to $2.62 billion.

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

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

TPG (TPM)

Shares in TPG Telecom shot to a record high last week when the telecommunications provider beat earnings forecasts in both its full-year results and guidance for 2014-15.

Including the recent acquisition of AAPT, earnings before interest, tax, depreciation and amortisation (EBITDA) climbed 24% to $363.7 million compared to the previous year, above the company’s March forecast for between $340 million and $355 million and above analyst estimates.

EBITDA guidance for 2014-15 was set at between $455 million and $460 million – up to 26% above this financial year’s numbers and higher than consensus forecasts for $440.6 million.

The stock responded with a 6.1% rise to $7 on the day. It has since lifted even higher to $7.19.

Despite TPG demonstrating yet again its ability to surprise on the upside with its results, newsletters are largely divided between rating the stock a “hold” or a “sell”.

While analysts all agree the result was excellent, those more pessimistic about TPG say the current price-earnings (P/E) multiple implies high earnings margins continue indefinitely – an impossible task. TPG trades at a one-year forward P/E multiple of around 25 times compared to the telco sector’s 18 times.

Though the main revenue driver has been subscriber growth, newsletters note that mobile growth has been lacklustre. This raises the question about whether TPG will sacrifice margins to win customers in the NBN environment.

On balance, however, newsletters rate the stock as a “hold”. Most analysts expect subscriber growth to accelerate amid synergies from the AAPT acquisition, driving 20%-plus earnings growth over the next few years.

TPG didn’t provide much information about its two potentially huge projects – the fibre-to-the-premises (FTTP) network and its 2.6GHz mobile spectrum – but advances from them could unlock more value in the company, analysts say.

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

  • Investors are generally advised to hold TPG Telecom at current levels.

ALS (ALQ)

The latest trading update from ALS has validated newsletter concerns it hadn’t yet reached the bottom of the market cycle despite management’s positive commentary earlier.

Shares in ALS plunged 17.2% – their biggest one-day fall since October 1987 – to $5.77 last Monday when the mining services company announced underlying NPAT is expected to be $64 million for the first half of the year, below its previous guidance for $74 million at its AGM.

“This was based on expectations that business conditions would improve during the September quarter, having achieved a result of $30 million in the first quarter of June 2014,” ALS said.

Newsletters hadn’t believed ALS at its AGM (when Collected Wisdom last covered the company), and they remain negative now even after the share price slide. They almost unanimously call the stock a “sell”.

ALS’s minerals division is the most battered as a result of subdued mining exploration activity and low commodity prices, but the problems aren’t confined there.

The energy and life science divisions are facing challenges of their own and can’t seem to be able to fill the earnings void left by the minerals division, newsletters say. ALS flagged that operating profit would fall in the energy division partly because of “market structural changes and internal issues in the oil and gas businesses.”

ALS still has a lot of work to do to get the Reservoir Group acquisition in shape, one publication suggests. Reservoir, a US-based provider of oil and gas specialist services, derives 60% to 70% of its revenue from exploration spending at a time when oil and gas customers are transitioning towards production-related spending in the US, another publication points out.

On the positive side ALS is leveraged to a recovery in the minerals division. While that most likely won’t take place in the next 12 months, the company’s balance sheet is strong enough to ward off an equity raising, newsletters say.

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

  • Investors are generally advised to sell ALS at current levels.

Atlas Iron (AGO)

Atlas Iron’s portfolio is uneconomic in the current iron ore environment despite the company’s efforts to reduce costs, newsletters say.

While analysts were generally impressed with Atlas’s various cost-cutting implementations after attending a two-day site trip to its mine and port operations in mid-September, most think it will be too difficult for the iron ore miner to generate positive free cash flows within the next two years.

As the iron ore price has dropped below $US80 a tonne over the course of September, Atlas Iron’s share price has tumbled almost 20% to Friday’s close of 47 cents. The stock has more than halved this year.

For the most part newsletters rate Atlas Iron as a “hold” or a “sell” following the site visit and iron ore price plunge. With an average 12-month target price of 64 cents, however, consensus is to hold the stock.

Publications say Atlas Iron is the most exposed to the iron ore price out of its peers.

Chief executive Ken Brinsden asserts Atlas is break-even to slightly cash positive at the moment, however, one analyst believes the company will operate at break-even at around $US84 a tonne in the next two years – and that’s including the company’s cost reduction savings of up to $US7 a tonne by the end of that period.

The cost reductions, totalling between $50 million and $80 million, are to come through from four categories: operational efficiencies, streamlining the company’s structure, reducing its external spending and integrating its planning process.

But newsletters still believe the low iron ore price will hit the company’s cash balance; one analyst forecasts the cash balance to fall by $147 million in 2014-15. Atlas Iron had $264 million of cash in the bank at June 30, 2014.

Generally, the investment press expect the iron ore market to be well supplied for the short to medium term, with global leaders BHP, Rio Tinto and Vale the best placed to withstand the lower price environment (see Tim Treadgold’s Rusting out: Iron ore at a crossroads).

* According to our value investor partners, StocksInValue, the intrinsic value for Atlas Iron is $0.36. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Atlas Iron at current levels.

New Hope Corporation (NHC)

A stable balance sheet and good management team will help New Hope withstand what appears to be a tough year ahead, according to the investment press.

The coal miner, which is controlled by Soul Pattinson, reported that net profit after tax fell 21.2% to $58.4 million and revenue dropped 16% to $548.9 million for 2013-14 as falling coal prices and a strong Australian dollar converged to create difficult operating conditions.

The final dividend was cut to two cents from five cents a share and the special dividend was lowered to 3.5 cents from five cents a share. Nevertheless, analysts estimate a yield of 4.4% in 2014-15 and 4.8% in 2015-16 from the stock.

“New Hope’s focus remained on the tight control of costs, whilst also steadily advancing project approvals, to position the company for growth when market conditions improve,” said chief executive Shane Stephan.

Following the results most newsletters rate New Hope as a “hold”. While coal prices are expected to remain weak in the short term, they say the miner is well positioned relative to its peers given its cash pile of $1.1 billion, long-life and efficient assets and experienced board.

New Hope’s valuation is leveraged to higher thermal coal prices and the falling Australian dollar, plus the potential for coal asset acquisitions, they say.

“New Hope’s strong balance sheet provides the financial strength to not only weather the current downturn, but also to take advantage of these conditions by exploring asset acquisition opportunities,” said Stephan.

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

  • Investors are generally advised to hold New Hope Corporation at current levels.

Directors’ trades

  • Brian Benari topped the directors’ trades this week, offloading $6,562,958 worth of shares in Challenger. The managing director of the investment management group traded 908,997 shares at $7.22 each.
  • Meanwhile, on the buying side, the executive chairman of Wellcom Group, Wayne Sidwell, took 500,000 shares in the advertising and marketing production agency at $3.30 each for a total value of $1,650,000.
  • Elsewhere, non-executive director Graeme Liebelt bought 82,289 shares in Australian Foundation Investment Company at $6.078 a piece for $500,169.
Takeover Action September 23-29, 2014
DateTargetASXBidder(%)Notes
23/09/2014Ambassador Oil and GasAQODrillsearch Energy99.16Compulsory acquisition
29/09/2014Cape AluminaCBXMetroCoal61.50
09/09/2014Clinuvel PharmaceuticalsCUVRetrophin7.80
26/09/2014Iron Ore HoldingsIOHBC Iron80.70
18/08/2014Genesis ResourcesGESBlumont Group5.81
04/09/2014Gondwana ResourcesGDAOchre Group Holdings18.23
25/08/2014Merlin DiamondsMEDBlumont Group13.19
25/09/2014Neon EnergyNENEvoworld Corporation19.99Unsolicited proportional bid
26/09/2014Nido PetroleumNDOBCP Energy International64.38
22/09/2014Reef Casino TrustRCTAquis Casino Acquisitions 80.31
14/08/2014Robust ResourcesROLStanhill Capital Partners & Droxford International46.60
26/09/2014Roc Oil CompanyROCFosun International4.62
Schemes of Arrangement
08/09/2014Goodman FielderGFFWilmar International and First Pacific Company10.10Vote Q1, 2015
28/08/2014Intrepid MinesIAUBlackthorn Resources0.00Vote November
23/09/2014Papillon ResourcesPIRB2Gold Corp0.00Scheme effective
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
25/09/2014Guildford CoalGUFSino Construction0.00Intends to make bid
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
29/09/2014Treasury Wine EstatesTWEKohlberg Kravis Roberts & Co and Rhone Capital0.00Discussions ceased
29/09/2014Treasury Wine EstatesTWEUnnamed party0.00Discussions ceased
25/06/2014WorleyParsonsWORUnnamed party0.00Media speculation
Source: Newsbites

Related Articles