Collected Wisdom

This week we look at JB Hi-Fi, Regis Resources, Coca-Cola Amatil, Echo Entertainment Group and Ardent Leisure.

Summary: Most newsletters label JB Hi-Fi shares as “on sale” after the retailer lifted its sales performance this financial year thanks to key product launches. Meanwhile, several publications upgraded their ratings for Regis Resources as the gold miner hit record production at its Duketon project in WA. Elsewhere, Coca-Cola Amatil is moving in the right direction with its latest strategic review, while the share prices for Echo Entertainment Group and Ardent Leisure represent full value after their impressive runs, according to the investment press.

Key take-out: JB Hi-Fi trades at a significant discount to the wider S&P/ASX 200 index, at odds with its improved performance, 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.

JB Hi-Fi (JBH)

Most newsletters believe JB Hi-Fi shares are effectively “on sale” right now, even after they surged in response to improved trading conditions so far in 2014-15.

Shares in the retailer leapt 9% to $16.10 after new chief executive, Richard Murray, announced that sales were up 0.5% with comparable sales down 2.1% for the year-to-date at the company’s AGM. The results marked a significant step-up from the sales performance at the beginning of the financial year (see Collected Wisdom’s previous coverage of JB Hi-Fi).

The volatile conditions can be explained by the timing of product launches, analysts say, with the iPhone 6 and iPhone 6 Plus boosting sales in the first quarter.

Positive momentum will keep building up to the key Christmas trading period as consumers pick up much-anticipated console games, most analysts believe. Sales should also be helped by more Playstation 4 and Xbox One consoles becoming available.

Given the positive short-term outlook for the store, the majority of newsletters call JB Hi-Fi a “buy” with two newsletters upgrading their recommendations. JB Hi-Fi is trading at a 15% discount to the S&P/ASX 200 index after falling 26% this year, which is at odds with its better performance, newsletters say.

Analysts on average have a 12-month price-target of $18.84 on JB Hi-Fi, 16.5% above the stock’s closing price on Friday (November 7, 2014).

One publication calls this is a once-in-a-decade opportunity for investors, particularly when there is plenty of room for upside to full-year guidance for sales of around $3.6 billion.

But not all newsletters agree the stock currently represents good value. Another publication which downgraded its rating to “hold” from “buy” says operating costs and capital expenditure will lift as revenue growth operations are developed, harming margins.

An analyst with a “sell” recommendation doesn’t see the improved conditions lasting beyond Christmas due to the weak pipeline of products and forecasts JB Hi-Fi to slightly miss its full-year guidance.

  • Investors are generally advised to buy JB Hi-Fi at current levels.

Regis Resources (RRL)

Four newsletters have upgraded their recommendations for Regis Resources following the gold miner’s record production for the first quarter of 2014-15, despite the weaker outlook for gold prices.

Regis announced gold production of 88,818 ounces at a pre-royalty cash cost of $745 per ounce for the three months to September 30. The output beat the company’s guidance range, while the costs were lower than forecast.

Most newsletters now rate Regis Resources as a “buy” at current share price levels with an average 12-month target price of $1.75. By and large, they say weak sentiment towards gold has driven shares in the company well below their fundamental value, though investors should be careful as the gold price remains the key driver.

Indeed, the stock plunged 8% to $1.27 last Monday (November 3, 2014) as the gold price dropped below the key $US1,200 an ounce threshold. Regis shares have now fallen 55% this year.

The results prompt suggestions that Regis could potentially beat its full-year guidance for between 300,000 to 355,000 ounces at cash costs of between $835 and $915 an ounce.

While analysts note not all the operations in Western Australia performed well (Moolart Well and Rosemont set production records but Garden Well still has issues), they say the company has reasserted itself as a premier Australian gold miner after recovering from the flooding earlier in the year.

Further, Regis has a strong balance sheet with just $21 million in net debt and healthy operating cash flows greater than $100 million, newsletters say.

This enables the miner to weather a potentially worsening environment, analysts say. In the meantime management is trying to reduce the cash costs – which aren’t the industry’s lowest – and working to improve the relatively short life of its mines through exploration.

  • Investors are generally advised to buy Regis Resources at current levels.

Coca-Cola Amatil (CCL)

Newsletters believe Coca-Cola Amatil is taking the right steps to improve operations and reignite growth, but they aren’t convinced it will be enough to overcome the structural challenges in the industry.

Their responses come after the soft drink maker’s strategy day at the end of October where the company announced the results of its strategic review, including a $US500 million injection into CCA Indonesia from The Coca-Cola Company for a 29.4% equity stake.

For the most part newsletters call CCL a “hold” following the news, with two analysts upgrading their recommendations. They say the price paid by The Coca-Cola Company implies an enterprise valuation of $1.6 billion for CCA Indonesia – adding substantial value to CCL.

Moreover, the sale removes part of a long-term cash flow drain for the company. While CCL indicated CCA Indonesia would be able to fund its own capital expenditure in the medium term, analysts are sceptical: if it is such a good growth avenue, why not go it alone and fund the Indonesian business through debt?

Other strategies include the introduction of new products in April 2015 with the launch of Coke Life and restructuring the cost base, which is expected to achieve savings of over $100 million over the next three years.

“We are confident that the combination of revenue and cost initiatives we have underway will restore the business to growth,” said managing director Alison Watkins. “The pace of the recovery will however depend on the success of revenue initiatives in Australia and Indonesian economic factors.”

But newsletters aren’t as sure CCL can get EPS growth again – at least in the short to medium term – as they expect intense competition to continue in the supermarkets.

Nevertheless, shares in Coca-Cola Amatil lifted 4.5% to $9.07 in response to the news – their biggest one-day increase in 16 months.

  • Investors are generally advised to hold Coca-Cola Amatil at current levels.

Echo Entertainment Group (EGP)

Shares in Echo Entertainment Group have soared to their highest levels in more than two years after the casino operator delivered a better-than-expected trading update for the first half of 2015.

Echo expects normalised earnings before interest, tax, depreciation and amortisation of between $245 million and $260 million for the period – up to 31% above the previous corresponding period.

Chief executive Matt Bekier attributed the strong performance to good trading momentum from the second half of last year, good demand for electronic gaming and an excellent performance from the company’s VIP rebate business.

Gross revenues for the segment (which involves giving foreign gamblers certain incentives such as hospitality and cash rebates to participate) surged 78% to $231 million, contributing around two-thirds of total growth.

However, most newsletters recommend their clients “hold” Echo Entertainment shares after the update. They say that while it was a solid upgrade for the company, the share price has already run and it accurately reflects fair value at the moment.

The stock jumped 6.2% to $3.76 on the day (October 30, 2014), bringing its total gains to 60% for 2014.

Though Sydney’s The Star is beginning to fire up thanks to its revamped loyalty program and increased sales force, with non-VIP revenue growing 13% so far in 2014-15, most newsletters believe its performance will be anchored by unfavourable longer term dynamics – such as losing licence exclusivity in late 2019.

Analysts also caution about extending the performance of the VIP business to the full year as it can be volatile.

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

Ardent Leisure (AAD)

Ardent Leisure has been hit by three downgrades from newsletters despite posting another robust trading update for the first quarter of 2014-15.

The leisure and entertainment company lifted its revenue by 10.2% to $139.10 million compared to the same time last year, while earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 5.2% to $34.17 million.

“A material increase in Main Event earnings from the USA, with strengthening constant centre performance and exceptional performance from new centres, is the standout of a strong first quarter result,” said chairman Neil Balnaves.

But more newsletters now think the potential earnings growth from leverage to improving domestic tourism in Australia, the falling Australian dollar and Main Event’s long-term rollout of more than 80 stores in the US is fully reflected in the share price (see Collected Wisdom’s last coverage of the stock).

The consensus view is to “hold” Ardent Leisure shares after three analysts pulled their recommendations down from “buy”.

While the trading update on October 29 barely moved Ardent Leisure’s share price, the newsletter responses the next day pushed it down 6.1% to $3.23. Even after the fall, the stock has climbed 53.7% this year and trades at a trailing price-earnings multiple of around 25 times.

The performances from several of Ardent’s divisions also cause some concern. Firstly, analysts are mixed over the outlook for the health club division. Its flat revenue growth of around 9% highlights competitive pressures in the area, one newsletter says, but others expect earnings to accelerate after the acquisition of the Western Australian Fitness First gyms in September.

Secondly, the earnings from the bowling division were better than some analysts had pencilled in with EBITDA growth of 7%, but one publication needs more evidence that the once-embattled division is in fact recovering.

As for the theme park division’s earnings, they were universally disappointing – and analysts don’t expect a pick-up any time soon with subdued attendance.

  • Investors are generally advised to hold Ardent Leisure at current levels.

Directors’ trades

  • The tally of directors’ trades registered more heavily to the sellers this week, headed by CSL’s chief executive, Paul Perreault, who collected $3,267,172 from the sale of 42,210 shares in the pharmaceutical company at $77.403 each.
  • Elsewhere, Don Meij, the managing director of Domino’s Pizza Enterprises, offloaded $2,164,800 worth of shares in the group at $27.060 per share.
  • On the buying side, Vocation chief executive, Mark Hutchinson, bought $499,954 at 88 cents per share in the education and training group. 

Takeover Action November 4-10, 2014

DateTargetASXBidder(%)Notes
10/11/2014Cape AluminaCBXMetroCoal90.00
09/09/2014Clinuvel PharmaceuticalsCUVRetrophin7.80
18/08/2014Genesis ResourcesGESBlumont Group5.81
04/11/2014Gondwana ResourcesGDAOchre Group Holdings27.07
25/08/2014Merlin DiamondsMEDBlumont Group13.19
28/10/2014Mutiny GoldMYGDoray Minerals18.68
25/09/2014Neon EnergyNENEvoworld Corporation19.99Unsolicited proportional bid
07/11/2014Noni BNBLAlceon Group76.02
03/11/2014Reef Casino TrustRCTAquis Casino Acquisitions 82.47
07/11/2014Roc Oil CompanyROCFosun International67.02
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
05/11/2014MEO AustraliaMEONeon Energy0.00Vote January 2015
Foreshadowed Offers
10/11/2014Amcom TelecommunicationsAMMVocus Communications10.00Due diligence
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
10/07/2014Ten Network HoldingsTENTime Warner0.00Expression of interest
20/10/2014Transfield ServicesTSEFerrovial Servicios0.00Indicative proposal
25/06/2014WorleyParsonsWORUnnamed party0.00Media speculation
Source: Newsbites