Collected Wisdom

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.

Aurizon Holdings (AZJ)

The investment press approve Aurizon Holdings' on-market share buyback, calling it a sign of confidence about earnings and management's ability to fund future growth projects.

Australia's largest rail freight operator announced that it will buy up to 5% of issued share capital in a program starting from November 27 and running for 12 months.

“The buy-back reflects Aurizon's strong balance sheet … while also maintaining the flexibility to fund appropriate growth projects,” said chief executive Lance Hockridge.

Shares in Aurizon climbed 2.1% to $4.80 on the day of the news (November 12, 2014).

Newsletters almost unanimously call Aurizon Holdings a “buy” after update, with more analysts optimistic over the stock than when Collected Wisdom last covered it as a “hold” back in August this year.

Analysts forecast an average 12-month target price of $5.28 on the stock and a dividend yield of 4.1% in 2014-15.

Not only is the buyback earnings accretive for investors at between 2.4 to 3%, but it also leverages Aurizon's lazy balance sheet, say analysts.

Moreover, the buyback highlights the lack of capital required to fund growth projects in the near-term, analysts say. Indeed, one publication believes Aurizon still has around $1 billion in balance sheet capacity.

But it also allays fears around Aurizon starting major growth projects such as the Western Pilbara iron ore project (WPIOP) in the short term amid softening iron ore and coal prices. The buyback has been opportunistic, another newsletter says, providing flexibility and indicating demand for growth projects will be pushed ahead.

Separately, at its AGM the next day Aurizon confirmed its volume guidance for 2014-15 coal haulage of 210-220 million tonnes and iron ore haulage of 23 million tonnes – adding to newsletters' confidence.

* According to our value investor partners, StocksInValue, the intrinsic value for Aurizon Holdings is $2.45. To find out more visit http://www.stocksinvalue.com.au/

• Investors are generally advised to buy Aurizon Holdings at current levels.

Duet Group (DUE)

Three newsletters have downgraded their recommendations for Duet Group in the wake of the company announcing a capital raising for the purpose of de-gearing its balance sheet.

The $400 million raising is a one-for-eight entitlements offer at a price of $2.39 per share – 6% below Duet Group's share price on the day (November 19, 2014) of $2.56.

Chief executive David Bartholomeuw said the proceeds of the offer would be used to strengthen the credit outlook for the Dampier to Bunpury pipeline (DBP), as well as fund growth at United Energy and Multinet Gas. Credit ratings agencies had recently downgraded their outlook for DBP.

With newsletters cutting their calls on Duet Group, consensus is to now “sell” the stock.

The last time Collected Wisdom covered Duet Group back in September newsletters were concerned that Duet Group wouldn't be able to sustain its distribution guidance, but the majority called the stock a “hold”.

While the update addressed immediate balance sheet problems, it raised fresh fears about the sustainability of Duet Group's distributions – which were reaffirmed at 17.5 cents per stapled security in 2014-15.

Newsletters can't see how such a dividend policy can be kept up in the coming years, particularly when Duet Group also decided to suspend its dividend reinvestment plan (DRP). One analyst forecasts a higher share count and the DRP suspension will lift cash distributions by around 50% – meaning a substantial portion of the capital raising will end up as dividend payments.

The need for an equity raising highlights another analyst's main criticism of Duet Group: its high distribution payout ratio combined with high financial leverage. It points out the company has had to more than double its shares on issue since the GFC via a number of equity raisings.

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

• Investors are generally advised to sell Duet Group at current levels.

Myer Holdings (MYR)

Shares in Myer Holdings have dropped to their lowest levels in more than two years after the embattled retailer released yet another set of displeasing results.

Myer announced earlier this month (November 12, 2014) that sales edged upwards 0.1% to $691.6 million for the first quarter of 2014-15, while like-for-like sales grew 0.7%.

The results missed market estimates, sending the retailer's stock down 7.4% to $1.76 on the day.

Newsletters are deeply mixed over the outlook for Myer following the update. Two analysts rate the stock as a “buy”, but most are split between calling it a “hold” or “sell”.

Analysts upbeat say that while the result shows how structural challenges remain for the department store sector, there is the potential for Myer to surprise the market with a better result if sales momentum maintained during the critical Christmas trading period.

The market has also failed to realise the how timing of refurbishments and new store openings will add to momentum over the coming months, analysts say, along with the development of online initiatives.

But those who advise to hold the stock – where there is the most consensus – believe more competition from international players such as Zara, H&M and Topshop will pressure pricing during Christmas.

Other newsletters that don't yet think Myer has fallen to fair value say structural challenges will create an ongoing earnings risk. On top of international competition, Myer faces rising costs, a falling Australian dollar, market share losses to specialty retailers and increased investment by David Jones under new owners, they say.

* According to our value investor partners, StocksInValue, the intrinsic value for Myer is $1.81. To find out more visit http://www.stocksinvalue.com.au/

• Investors are generally advised to hold Myer Holdings at current levels.

Graincorp (GNC)

Newsletters say 2014-15 is shaping up to be the most challenging year for GrainCorp in a long time following the grain handler's full-year results.

GrainCorp reported an operating net profit fall of 46% to $95 million earlier this month (November 13, 2014), as persistent dry weather in eastern Australia challenged its grain businesses.

While the result was at the higher end of management's guidance for an operating net profit of $80-100 million, management doused any hope for improved conditions ahead, with new chief executive Mark Palmquist anticipating the environment to “remain tight”.  

“The current eastern Australian harvest is expected to be below average, this year's carry-in is a near record low of 1.9 million tonnes, there is a smaller exportable surplus and there will again be competition for grain,” said Palmquist.

Shares in the company fell 5.3% to $8.09 over two days in response to the news – their biggest fall in nearly a year.

The vast majority of newsletters call GrainCorp a “hold” following the full-year report. The falling Australian dollar and downstream businesses – particularly the Malt segment – are providing some relief with earnings growth, but not enough to counteract the weakness from its storage & logistics and marketing businesses, they say.

Analysts point out that Australian Crop Forecasters (ACF) anticipate another weak crop harvest in 2015, down 6% on the previous year.

Despite the challenging outlook, GrainCorp's share price is being supported by the likelihood of corporate activity emerging at some point in the near future, newsletters say. However, one analyst believes a bid is unlikely before the next federal election in 2016.

Newsletters are also impressed with the new chief, whom they say could drive a long-term opportunity by expanding selectively offshore and diversifying its grain business domestically.

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

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

Ausnet Services (AST)

Newsletters are warning it may be difficult for Ausnet Services to maintain its level of distributions in the coming years as a higher tax rate and tough regulatory decisions harm the bottom line.

The energy infrastructure business posted its half-year results earlier this month, (November 12, 2014), where adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) decreased by 4.5% to $566.9 million. Revenue lifted 1.1% to $971.3 million.

The figure included a $15 million one-off cost from the writedown of the advanced metering infrastructure (AMI) program. Ausnet has now completed a review of the technology and has a plan to stabilise the systems and complete the network coverage.

The investment press are divided between calling Ausnet a “hold” or “sell”, with the majority calling the stock a “hold” at current price levels. While the company's 6.2% yield looks attractive, they believe higher costs and shrinking revenue from its businesses – which are regulated – may make the distribution unsustainable.

Declining revenues in the transmission and gas distributions have so far been offset by growth in electricity distribution, however, electricity distribution's regulatory reset will be applicable from 2016, newsletters point out.

One cost revolves around the remediation of the smart meters. Ausnet is spending $210 million to rectify the problems across calendar years 2014 and 2015, but it appears there's only a small chance of full regulatory reimbursement for the costs, they say.

The settlement with the Australian Taxation Office, where Ausnet can no longer deduct tax from intra-group loans, will also create headwinds for earnings and credit metrics, analysts say. Under the settlement Ausnet must make a cash payment of $25 million and forgo tax losses from prior years.

On the other hand, one newsletter notes this won't be material for investors – at least in the short term – because the higher tax will be offset by more franking credits.

* According to our value investor partners, StocksInValue, the intrinsic value for Ausnet Services is $0.84. To find out more visit http://www.stocksinvalue.com.au/

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

Directors' trades

• Andrew Forrest dominated directors' trades this week with his purchase of $11,004,500 worth of Fortescue Metals scrip. He bought the shares in the iron ore miner at $2.751 each.
• Elsewhere, Michael Wilkins, managing director of Insurance Australia Group, sold 44,750 shares in the company at $6.466 each for a total of $2,862,875.