Collected Wisdom

This week we look at BHP Billiton, Downer EDI, Newcrest Mining, GWA Group and Bank of Queensland.

Summary: BHP Billiton represents a compelling opportunity for investors despite the dour forecast for iron ore prices, say newsletters. So does mining services contractor Downer EDI, which the investment press are tipping could announce an acquisition in the next few months. Elsewhere, newsletters say the operations of Newcrest are still too risky, GWA Group’s exit from Australian manufacturing is the right decision, and that Bank of Queensland continues to deliver on most of its targets though some uncertainty remains.

Key take-out: As a global leader in the production of iron ore, BHP is well placed to withstand the downturn in the market and, moreover, could emerge from it with a consolidated market share, 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.

BHP Billiton (BHP)

Most newsletters call BHP shares a compelling opportunity for investors at the moment, despite the company delivering a sobering outlook for the iron ore market at its Pilbara site tour.

While the mining giant flagged substantial improvements to its cost base, forecasting operating costs to fall to less than $US20 a tonne in the medium term, it also said that high iron ore prices had incentivised new players to enter the market and flood supply.

“As a result, growth in seaborne supply is expected to exceed growth in demand over the short to medium term,” said iron ore president Jimmy Wilson.

A bearish outlook for iron ore prices, along with BHP’s decision to spin off some of its non-iron ore operations into another company (see The BHP split), has seen BHP shares fall from a peak of $39.68 in mid-August to Friday’s close of $32.31.

Though newsletters agree that the growth in demand for iron ore from China will slow dramatically and there will be oversupply, they say that global leaders like BHP Billiton, Rio Tinto (RIO) and Vale are better placed to withstand the downturn. Moreover, they will emerge from it with consolidated market shares.

Analysts have an average 12-month target price of $40.50 on BHP, 25.3% above current levels. They also forecast a dividend yield of 4.6% in 2014-15 and 4.8% in 2015-16 before franking credits are included.

The cost savings of 25-30% are achievable and potentially beatable, analysts say, particularly when taking into account the weaker AUD/USD exchange rate than the $A0.91 assumed in the guidance and the fact that around 90% of BHP’s mine to port costs are denominated in Australian dollars.

And unlike Rio where a new 50 million tonnes per annum operation will be required every five years, BHP believes it won’t need a new mining hub for 30 years – meaning a relatively low sustaining capital expenditure of $5 a tonne mid-term, one newsletter says.

* According to our value investor partners, StocksInValue, the intrinsic value for BHP Billiton is $40.58. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to buy BHP Billiton at current levels.

Downer EDI (DOW)

Newsletters are tipping Downer EDI has something big at play given the mining services contractor still hasn’t started its share buyback.

The share buyback was announced in early August and was scheduled to begin later that month but, even as shares in the company have fallen from as high as $4.95 to current levels of around $4.30, there’s still been no action, newsletters point out.

Chief executive Grant Fenn had expressed frustration because investors had shunned Downer EDI shares despite the company performing better than its peers. To combat this, the company had said it would buy back up to 43 million shares – representing up to 10% of total stock.

In the absence of the buyback, several analysts think Downer EDI could be sizing up an acquisition or a material contract, likely to be announced in next month’s AGM. They rate the stock a “buy” as they believe a sensible takeover at a good price would be well received by the market.

“Downer has a strong balance sheet and is in a good position to take advantage of growth opportunities, including mergers and acquisitions,” the company had also said in its full-year report. “Downer will focus on opportunities that are strategic, the right price and grow the company’s capability.”

Newsletters are aware of the difficult environment Downer is operating in – as evidenced by the company losing a major contract in June this year – but they say the stock has good valuation support at current levels.

Analysts have a 12-month price target of $4.97 on the stock, 22% above current levels, and forecast a dividend yield of 5.6% this year and 5.8% in 2015-16 before franking credits.

Further, management is pursuing the right strategy in stabilising the business, with operating costs set to be reduced as Downer works hard with its key customers, they say.

* According to our value investor partners, StocksInValue, the intrinsic value for Downer EDI is $4.76. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to buy Downer EDI at current levels.

Newcrest (NCM)

Investors wanting a quick fix to Newcrest’s troublesome Lihir mine and certainty around medium-term guidance will be disappointed by the company’s latest update, say newsletters.

After attending site visits and analysing the preliminary September 2014 quarter report released on October 7, newsletters either tell their clients to “hold” or “sell” shares in Australia’s biggest gold miner.

The high-cost Lihir operation in Papua New Guinea continues to be the key risk to the stock – especially with the gold price weakening to around $US1,200 an ounce this month – even as management has flagged it as their main priority within their “EDGE” company-wide improvement strategy.

Shares in Newcrest have fallen 9.3% to $9.64 this month amid the gold price fall.

“The focus at Lihir remains on progressive implementation of improvement programs to lift production, cost and cash performance,” said chief executive Sandeep Biswas.

But newsletters are unhappy there wasn’t any commentary about Newcrest’s cash balance and its guidance for 2014-15, as well as no production and cost guidance for the years after.

Because Lihir is so complex – with concerns about the sustainability of its stockpile strategy, ongoing landowner negotiations and the timing of the Kapit expansion – there is too much medium-term uncertainty, they say.

One newsletter also argues the productivity improvements should have been introduced some time ago, and that the operational cost reductions will most likely be balanced out by increases in sustaining capital expenditure.

For 2014-15, production guidance was unchanged at 2.2-2.4 million ounces of gold. The first quarter results represent around 24.4% of the target at 561,731 ounces, with a good performance from the Cadia mine in NSW offsetting soft production from Lihir and Gosowong in Indonesia.

* According to our value investor partners, StocksInValue, the intrinsic value for Newcrest is $2.18. To find out more visit http://www.stocksinvalue.com.au/

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

GWA Group (GWA)

The move from GWA Group to exit from Australian manufacturing may harm earnings in the short term, but is hard to fault strategically, according to the investment press.

GWA announced last Wednesday (October 8, 2014) that it plans on exiting its manufacturing operations in Adelaide and Sydney. The Norwood plastics operation in Adelaide will be phased out over the next three years, while the Wetherill Park vitreous china facility will cease production at the end of 2014.

The initiatives will result in 164 redundancies – 10% of GWA’s workforce – and will transition the company to an import-based model (apart from the manufacture of garage doors and Austral locks). The changes amount to a $29 million restructuring charge but proposed annualised savings of $4 million.

Shares in the bathroom fixtures and homewares group fell 1.18% on the day of the news, but bounced back 4% to $2.62 the following day as three analysts upgraded their recommendations on the stock.

Even after the upgrades, consensus is to “hold” GWA Group. On the positive side, newsletters say momentum in the residential market is yet to be fully reflected in GWA’s production volumes and that the initiatives turn the company into a leaner, more focused business in the medium term.

However, their valuations are constrained by the short-term execution risks of the changes. As one analyst says, asset sales, manufacturing closures, redundancies, offshoring production and a sell down in inventory are all combining to make 2014-15 a complicated year on the earnings front.

Several newsletters believe the dividend for the first half of the year is at risk, keeping in mind that it was only reinstated in the second half of last year. On average, however, analysts forecast a yield of 5.2% in 2014-15 and 6% in 2015-16.

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

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

Bank of Queensland (BOQ)

Revenue at Bank of Queensland looks strong and the company is delivering on most of its targets, however, some uncertainty remains, according to the investment press.

Shares in Australia’s sixth largest bank jumped 2.7% to $12.10 last Thursday (October 9, 2014) when BOQ announced its full-year results. Cash earnings lifted 21% to $301.2 million for 2013-14, ahead of the company’s August forecast for $298 million. Revenue climbed 10% to $938.6 million.

“Barring any unforeseen macroeconomic impacts, BOQ expects sustainable growth in earnings and dividends as we realise the benefits of our four pillar strategy,” said John Sutton, who is acting as chief executive after Stuart Grimshaw suddenly departed from the role in August.

Under the four pillar strategy, Bank of Queensland is focusing on risk and return, opening its doors to more customers, further efficiency gains and getting people with talent and capability to execute.

But even with these prospective improvements, newsletters say Bank of Queensland is a “hold” at current levels. While earnings growth and improving asset quality was a highlight, analysts note that margin improvement (partly thanks to the high-margin Investec acquisition) was offset by subdued lending volumes during the year.

“In a low retail credit environment, we’ve maintained our disciplined approach to growth,” said Sutton. “We’re not prepared to join the race to the bottom on pricing.”

Rising costs and falling capital also concern newsletters, as well as the uncertainty around when the new chief executive will be appointed and who it will be.

Nevertheless, newsletters say the stock will find support at current levels thanks to its hefty dividend payouts. Analysts forecast a dividend yield of 6% in 2014-15 and 6.3% the year after.

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

  • Investors are generally advised to hold Bank of Queensland at current levels.

Directors’ trades

  • Primary Health Care’s founding director, Edmund Bateman, topped directors’ trades this week with the sale of $12,494,939 worth of stock in the medical centre operator. He sold the shares at $4.215 each.
  • Elsewhere, Kathmandu’s departing chief executive, Peter Halkett, offloaded most of his stock in the outdoor adventure retailer. He sold $3,992,457 worth of shares at $2.45 each.
  • On the buying front, three directors bought NetComm Wireless scrip for a total of $158,544 for around 54 cents per share, with the lion’s share acquired by chairman Justin Milne. You can see Simon Dumaresq’s coverage of the company here.

Takeover Action October 7-13, 2014

DateTargetASXBidder(%)Notes
10/10/2014Cape AluminaCBXMetroCoal64.52
09/09/2014Clinuvel PharmaceuticalsCUVRetrophin7.80
07/10/2014Iron Ore HoldingsIOHBC Iron90.37Compulsory acquisition
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
07/10/2014Nido PetroleumNDOBCP Energy International81.41Offer closed
22/09/2014Reef Casino TrustRCTAquis Casino Acquisitions 80.31
09/10/2014Robust ResourcesROLStanhill Capital Partners & Droxford International59.06
10/10/2014Roc Oil CompanyROCFosun International16.16
Schemes of Arrangement
06/10/2014Crowe Horwath AustralasiaCRHFindex Australia0.00Vote December
08/09/2014Goodman FielderGFFWilmar International and First Pacific Company10.10Vote Q1, 2015
28/08/2014Intrepid MinesIAUBlackthorn Resources0.00Vote November
09/10/2014Wotif.com HoldingsWTFExpedia Group19.90Approved
Foreshadowed Offers
21/07/2014Antares EnergyAZZUnnamed party0.00Indicative proposal
08/08/2014Gondwana ResourcesGDAUnnamed party0.00Indicative proposal
25/09/2014Guildford CoalGUFSino Construction0.00Intends to make bid
13/10/2014Orbis GoldOBSSEMAFO0.00Indicative proposal
13/05/2014PanAustPNAGuangdong Rising Assets Management23.00Indicative proposal
13/10/2014SAI GlobalSAIPacific Equity Partners and KKR Asia 0.00Discussions ended
13/10/2014SAI GlobalSAIUnnamed parties0.00Discussions ended
07/07/2014Ten Network HoldingsTENPrivate equity firms0.00Media speculation
25/06/2014WorleyParsonsWORUnnamed party0.00

Media speculation

Source: Newsbites

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