Collected Wisdom

This week we look at Whitehaven Coal, Super Retail Group,Transfield Services, Sonic Healthcare and Virgin Australia Holdings.

Summary: Whitehaven is achieving good results in a harsh environment and is well positioned for an upturn, while Super Retail Group’s valuation is enticing after it fell to its lowest level in more than two years, according to newsletters. Elsewhere, analysts think it may be time to take some profits with Transfield Services stock, Sonic Healthcare has wedged open more global growth opportunities and that it will be a gruelling journey for Virgin Airways to become profitable.

Key take-out: After Whitehaven has slumped more than 20% in 2014, most analysts advise to buy the stock due to well-run operations and a potentially stabilising coal market.

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.

Whitehaven Coal (WHC)

Newsletters say Whitehaven Coal has managed a good start to 2014-15, but they worry about whether the company’s balance sheet can withstand current coal prices.

Shares in Whitehaven fell 3.2% to $1.50 even as the coal miner boosted its run-of-mine (ROM) coal production by 40% to 3.29 million tonnes in the September quarter.

The weak operating environment detracted from the result. Whitehaven achieved an average price of $US89 a tonne from coking coal for the period – below its earlier guidance for $US91-92 a tonne – and realised an average price of $US68 a tonne from thermal coal.

Nevertheless, newsletters are largely divided between rating Whitehaven Coal as “hold” or “buy” after the report. And with Whitehaven plummeting more than 20% this year, the majority of them advise to “buy” the stock with an average 12-month target price of $2.05 – 34% above current levels.

The key challenge for Whitehaven is its debt laden balance sheet, say analysts. At current spot commodity prices they believe the company must make refinancing its $1.2 billion debt facility a high priority, though the company says it isn’t in a hurry and will wait until the pricing is right.

On the positive side, newsletters point out Whitehaven beat expectations with its production, with the Narrabri mine trending above guidance, and that the Maules Creek project remains on track for first railing of coal in the March 2015 quarter.

Whitehaven also flagged that the coal market could be stabilising, with coking coal “moving back towards balance” and possible cause for optimism for thermal coal.

“There are continuing signs that the thermal coal market is working through an adjustment phase, which began in 2013, to a more sustainable growth path,” Whitehaven said.

The company pointed to declining Indonesian exports (where coal exporters now have to be licensed) and more coal thermal projects in Australia being postponed.

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

  • Investors are generally advised to buy Whitehaven Coal at current levels.

Super Retail Group (SUL)

Newsletters have lowered their earnings forecasts for Super Retail Group after the company’s latest market update, but remain optimistic about the stock.

The retailer told the market at its AGM last Wednesday (October 22, 2014) that like-for-like sales grew 4% in its auto division and 3% in its sports division, but fell 8% in the leisure division as it encountered weak trading conditions in mining and regional areas as well as new store cannibalisation.

“Sales at Ray’s Outdoors and FCO businesses have been below expectations and a review of both businesses is underway,” said chief executive Peter Birtles.

What was also concerning to newsletters was margin pressure. They note that some of the sales growth is due to extra discounting at both the auto and sports divisions and that group EBITDA margins are now expected to be around their 2013-14 level of 10.8% – lower than what management had guided for.

Despite lowering their valuations for Super Retail Group, the majority of newsletters rate the company as a “buy” – even after two analysts downgraded their recommendations.

Super Retail Group now trades at a substantial discount to the market, analysts say. Indeed, after the update and newsletter responses shares in the company fell to $7.45 – their lowest level in more than two years.

However, the retailer must restore its earnings visibility and balance healthy like-for-like sales growth with margin expansion, several newsletters say. They think will happen in the second half of 2014-15.

Analysts have a 12-month target price of $9.62 on Super Retail Group, 30.2% above current levels. They also forecast a dividend yield of 5.4% in 2014-15 and 6% in 2015-16.

* According to our value investor partners, StocksInValue, the intrinsic value for Super Retail Group is $8.60. To find out more visit http://www.stocksinvalue.com.au/

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

Transfield Services (TSE)

Shares in Transfield surged the most in almost six years last week when the infrastructure and contracting firm rejected a takeover bid from Spanish firm Ferrovial.

Transfield said the cash bid of $1.95 – valuing the company at $1 billion – didn’t properly reflect the value of its shares, flagging a strong trading period in the first quarter of 2014-15. Nevertheless, the board decided to keep discussions open with Ferrovial and will provide limited due diligence.

The stock climbed 27% to $1.90 on the bid. It has now more than doubled since the start of the year.

Newsletters almost unanimously tell their clients to “hold” Transfield Services after the update as they believe the bid will provide a floor under the share price.

But as Transfield appears convinced of its ability to deliver on its earnings turnaround set by chief executive Graeme Hunt two years ago, analysts say the price of the bid will be a sticking point for a deal progressing.

One newsletter says a significantly higher bid is unlikely and that shareholders should take at least some profits now. The fact that Transfield is offering due diligence suggests the bid is within the ballpark of fair value, the source says, though it could also be because the directors fear future legal action if they fully reject the bid and the share price falls.

Another publication isn’t convinced a small increase in the bid will be enough to entice Transfield to accept. The sector is on low enterprise valuation to earnings multiples at the moment and Transfield has significant customer concentration with its immigration processing contract, the publication says.

* According to our value investor partners, StocksInValue, the intrinsic value for Transfield Services is $1.16. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Transfield Services at current levels.

Sonic Healthcare (SHL)

The potential contract win for Sonic Healthcare in Canada not only secures attractive earnings but also opens the door to future global opportunities, according to the investment press.

The medical diagnostics company announced earlier this month (October 17, 2014) that it had been nominated by Alberta Health Services as the preferred bidder for a contract to operate a new laboratory in Edmonton.

The contract, if won by Sonic Healthcare, will begin on July 1, 2015 and is expected to generate annual revenue of more than $C200 million over 15 years.

The stock lifted 3.7% to $17.71 over two days in response to the update and newsletter responses.

Analysts are largely mixed between calling Sonic Healthcare a “buy” or “hold”. The majority believe the stock reflects fair value at current levels, however, they are still positive on the outlook for the company.

Several analysts highlight how the low setup costs should deliver more than a 3% net profit upgrade in 2015-16. Moreover, Sonic Healthcare will be well positioned to provide additional pathology services both in Alberta and also across other Canadian provinces.

But other analysts haven’t factored in any changes to earnings yet. They want more information about capital expenditure requirements for a new hub laboratory, which will be set out in the contract negotiations.

In the meantime Sonic Healthcare’s strategy to target public healthcare system through strategic partnerships is working, newsletters say. It reduces financial risk, provides an entry point into new markets and allows for bolt-on acquisitions and synergies in the future.

* According to our value investor partners, StocksInValue, the intrinsic value for Sonic Healthcare is $11.41. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Sonic Healthcare at current levels.

Virgin Australia Holdings (VAH)

Newsletters say Virgin Australia is trending in the right direction after its proposed purchase of the rest of Tiger Airways and its recent quarterly results, but that challenging industry conditions will persist.

The airline aims to buy out the 40% remaining Tiger Airways stake for $1 to take full control of the budget carrier, 15 months after acquiring 60% for $35 million. As one newsletter says, the acquisition price appears comically low – but it reflects the fact Tiger is loss-making and will continue to require financial support.

Virgin said in the announcement that performance from the airline has been impacted by weak consumer sentiment. Virgin believes the acquisition will have a positive effect on operations despite the lack of consumer confidence having a more pronounced impact on Tiger, with earnings harmed by having to align capacity with underlying demand.

“Under this proposed transaction, we will benefit from the economies of sales and achieve profitability ahead of schedule by the end of 2016 by leveraging the resources of the wider Virgin Australia Group,” said chief executive John Borgetti.

Analysts, who either rate Virgin as “hold” or “sell” after the news, aren’t as confident. They say it’s not clear what changes are expected to help achieve this outcome quicker other than the likely reduction of capacity growth for Tiger domestically.

For the quarter Virgin reported an underlying loss before tax of $45 million, an improvement of 18% from a year ago. However, revenue only edged upwards 1.3%.

While management has a good track record of delivering on long-term objectives, its vision for maintaining a solid balance sheet, improving yields and lowering costs is fraught with risks, one newsletter says.

The passenger aviation industry is simply too competitive and there are so many factors beyond management’s control. That being said, the newsletter still anticipates Virgin will return to profitability overall by 2017.

  • Investors are generally advised to hold Virgin Australia at current levels.

Directors’ trades

  • Shaun Bonett, non-executive director of iSelect, topped directors’ trades this week. He bought $2,518,500 worth of shares in the insurance comparison company at $1.38 each.
  • Elsewhere, Slater & Gordon managing director, Andrew Grech, disposed of 102,000 shares in the law firm at $5.93 per share for a total value of $604,902.

Takeover Action October 21-27, 2014

DateTargetASXBidder(%)Notes
20/10/2014Cape AluminaCBXMetroCoal76.00
09/09/2014Clinuvel PharmaceuticalsCUVRetrophin7.80
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
24/10/2014Noni BNBLAlceon Group59.90
15/10/2014Reef Casino TrustRCTAquis Casino Acquisitions 81.31
27/10/2014Robust ResourcesROLStanhill Capital Partners & Droxford International91.97Compulsory acquisition
24/10/2014Roc Oil CompanyROCFosun International60.90
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
Foreshadowed Offers
24/10/2014Amcom TelecommunicationsAMMVocus Communications10.00Non-binding proposal
21/07/2014Antares EnergyAZZUnnamed party0.00Indicative proposal
22/10/2014Central PetroleumCTPUnnamed party0.00Speculation due to director share purchases
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
07/07/2014Ten Network HoldingsTENPrivate equity firms0.00Media speculation
20/10/2014Transfield ServicesTSEFerrovial Servicios0.00Indicative proposal
25/06/2014WorleyParsonsWORUnnamed party0.00Media speculation
Source: Newsbites

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