Collected Wisdom

This week we look at Nufarm, Metcash, Challenger, Seek and Recall Holdings.

Summary: Newsletters maintain their positive outlook for Nufarm following the agribusiness’s forecast for growth at its latest AGM, but dislike Metcash, with most telling their clients to get out of the wholesale distribution company. The rule change over Challenger’s niche care annuity highlights the company’s regulatory risk, it appears Seek has a limited chance to beat earnings expectations this year and Recall’s latest acquisition is a good fit for the document management company, according to the investment press.

Key take-out: Nufarm, a quality agricultural exposure for investors, is in a position to deliver solid earnings over the next few years as seasonal conditions in Australia improve. It is also a beneficiary of a falling Australian dollar.

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)

Most newsletters are encouraged by Nufarm’s forecast for growth at its latest AGM as overseas improvements outweigh dry conditions in Australia.

The agribusiness company reported last week (December 4, 2014) that it anticipates underlying earnings before interest and tax (EBIT) to grow in the first half of 2014-15 and for the entire year.

Chief executive Doug Rathbone told the AGM dry weather in Australia had seen a slight fall in sales in the country – with widespread rains required in December and January to see an uplift by the first half. However, this has been balanced out by outstanding results in South America and strong results in Asia and Europe.

Shares in Nufarm leapt 4.2% to $4.52 on the update, after falling 6.1% the previous day when it was cut to “hold” by one analyst. The stock has now lifted 18% since Collected Wisdom covered it in April this year.

Despite the downgrade, newsletters overwhelmingly call Nufarm a “buy” at current share price levels. While seasonal conditions in Australia were somewhat below expectations, they say Nufarm is heading in the right direction with its new product development, margin focus and stronger balance sheet.

“We are looking at our manufacturing base, supply chain and procurement structures right across our global business with a view that more can be done to improve our efficiency and lower our costs,” said Rathbone.

Moreover, newsletters say the company can deliver solid earnings growth over the next few years if seasonal conditions in Australia improve. Current share price levels – at a one-year forward earnings multiple of around 10 times – already reflect earnings risk in the Australian and Brazilian businesses, they say.

Further, the company is a beneficiary of the falling Australian dollar, analysts point out.

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

Metcash (MTS)

Most newsletters are telling their clients to get out of Metcash even after the wholesale distribution company plunged to its lowest levels in more than a decade late last month.

Metcash fell16.5% to $2.18 – prices last seen in August, 2003 – when it reported a disappointing first-half result and lacklustre earnings guidance for the full year.

Underlying net profit fell 9% to $101.7 million, while sales revenue edged upwards 1% to $6.6 billion. EBIT is expected to be between $315 million and $330 million for 2014-15 – up to 22% below the previous year and missing expectations.

Though Metcash said it had made progress with its five-year transformation strategy in the participating IGA stores, dubbed Project Diamond, it also warned the environment remained challenging.

“The general trading environment continues to be highly competitive with price deflation expected to continue and consumers remaining value conscious,” said chief executive Ian Morrice.

Metcash has fallen 30% since Collected Wisdom covered the stock back in June. Even with the slide, however, the majority of newsletters still call the stock a “sell”.

While one publication maintains that the company’s shares should find support as underlying grocery sales turn positive in the second half of the year and earnings per share (EPS) stabilises in 2015-16, every other newsletter thinks it might take multiple years for the company’s strategy to pay off.

Food and grocery margins are likely to stay pressured, newsletters say, with the initiatives in their early stages and margins hurting as the company tries to compete on price. In the meantime, Aldi and Costco will keep eating into market share and the supermarket giants, Coles and Woolworths, will continue to ramp up promotional activity.

That being said, however, shares in Metcash have plunged another 15% to $1.86 since the newsletter recommendations.

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

Challenger (CGF)

The latest rule change may not hit Challenger’s earnings too much in the long term, but it does highlight the regulatory risk when investing in the annuity provider, newsletters say.

Challenger announced late last month (November 28, 2014) that the Department of Social Services plans to reverse its means test assessment for the company’s niche care annuity. Under the current system, part of each annuity payment is treated as capital – not income – which lifts the eligibility for social security entitlements.

Challenger said it’s difficult to predict the effect of the decision on net book growth for Life (the annuity division). It lowered cash operating earnings guidance by $10 million to between $525 million and $535 million. Care annuity sales were $274 million out of Life’s total sales of $3.38 billion in 2013-14.

By and large, newsletters think the regulatory change will harm earnings by 2-5% in 2014-15. The more pressing concern is that it reduces the net book growth outlook from an attractive product and heightens uncertainty surrounding regulations in the annuity sector, with the private sector more cautious about investing in product innovation and retirees less willing to buy retirement products.

Despite the more negative outlook, however, newsletters are mostly divided between rating Challenger as a “buy” or “hold”, with most labelling the stock a “hold”.

At current share price levels they say the increased risks are reflected in the share price; indeed, after the update the stock fell 7.3% to $6.35, erasing all of its gains since the start of the year.

One publication which upgraded its recommendation on the news says that Challenger has good news from the Financial Services Inquiry. Indeed the inquiry, which was released yesterday (December 7), has recommended that super fund trustees be forced to pre-select a “comprehensive income product” – benefiting the annuity provider industry.

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

Seek (SEK)

Most newsletters think Seek has a limited chance to beat expectations in 2014-15 after the company’s market update in late November.

The online jobs and education group reaffirmed its full-year guidance for solid growth in revenue and EBITDA in 2014-15 at its AGM (November 27, 2014), but also stressed that there would be higher cost growth and lower net profit growth.

“We are making strong inroads into our placement strategy which will be highly applicable across all our international businesses,” said chief executive Andrew Bassat. “To support the strategy, Seek is continuing to invest aggressively to capture the exciting opportunities it presents.”

Newsletters unanimously believe Seek is conducting the right investment strategies for the longer term, but they don’t see the numbers being reflected in 2014-15. While employment trends are ahead of internal expectations, producing strong revenue growth, the higher operational expenditure growth makes beating consensus difficult.

Currently, expectations are for around 21% growth in adjusted net profit for 2014-15, according to Bloomberg.

The investment press are mostly split between calling Seek a “hold” or a “sell”, with one newsletter downgrading its call on the market update.

Newsletters say everything is pointing in the right direction for Seek, with domestic employment volumes improving, solid pricing growth and international assets continuing to expand. At a one-year forward price-earnings (P/E) multiple of around 30 times, however, most believe the upside is fully factored in. Consensus is to “hold” the stock.

On the day of downcast newsletter responses (November 28, 2014), the stock fell 5.1% to $17.09 – its biggest one-day fall in 18 months.

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

Recall Holdings (REC)

The latest acquisition by Recall is a strong fit that could lift the document management company’s takeover price to suitors of its own, according to the investment press.

In what is its sixth – and biggest – acquisition since being spun out from Brambles in December last year, Recall announced last week (December 3, 2014) the purchase of Business Records Management (BRC) in the US for $77 million on a valuation of less than seven times EBITDA.

With the acquisition, Recall lifted its revenue guidance to approach double digits from its previous forecast of high single digits.

Following the update newsletters largely call Recall a “hold”. While they note the acquisition is a good one, their attention is very much focused on how the news affects Recall’s potential valuation in the event of being taken over itself.

Recall has climbed more than 20% to Friday’s close of $6.14 since late September when media reports emerged that the company had been approached by US giant Iron Mountain. It has surged 50% since the demerger.

Newsletters believe Iron Mountain’s acquisition of Recall makes compelling financial sense due to factors including cost synergies, low cost of equity and higher tax savings with Recall converting to a real estate investment trust (REIT).

In fact, one publication raises the potential takeover price to $9 from its earlier forecast of $8 after Recall’s acquisition – valuing Recall at around $2.8 billion. At this price Iron Mountain could generate 15% cash flow accretion, the source says.

However, Recall has so far denied the media reports and most newsletters are reluctant – given the uncertainty – to include any further upside in the company’s valuation, particularly since it has already run up.

One uncertainty is competition clearance. If Iron Mountain were to take over Recall, the merged entity would become the world’s largest data management company and would account for 50-75% of the vended market in the US, UK and Australia.

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

Takeover Action December 2-8, 2014

24/11/2014Clinuvel PharmaceuticalsCUVRetrophin6.73
18/08/2014Genesis ResourcesGESBlumont Group5.81
27/11/2014Merlin DiamondsMEDBlumont Group11.35
04/12/2014Mutiny GoldMYGDoray Minerals37.89
12/11/2014Neon EnergyNENEvoworld Corporation19.99Shareholders vote against takeover
17/11/2014Noni BNBLAlceon Group77.02
14/11/2014Roc Oil CompanyROCFosun International92.60
Schemes of Arrangement
06/10/2014Crowe Horwath AustralasiaCRHFindex Australia0.00Vote December
13/11/2014Folkestone Social InfrastructureFSTFolkestone Education0.00Vote December
08/09/2014Goodman FielderGFFWilmar International and First Pacific Company10.10Vote Q1, 2015
23/09/2014Indophil ResourcesIRNAlsons Prime Investments Coropration19.99Vote December
05/11/2014MEO AustraliaMEONeon Energy0.00Vote January 2015
Foreshadowed Offers
10/11/2014Amcom TelecommunicationsAMMVocus Communications10.00Due diligence
21/07/2014Antares EnergyAZZUnnamed party0.00Indicative proposal
05/12/2014BradkenBKNPacific Equity Partners and Bain Capital Asia0.00Indicative 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

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