Collected Wisdom

This week we look at Qantas, Bradken, OceanaGold, APA Group and Primary Health Care.

Summary: The newsletters believe Qantas is in the middle of a significant recovery and there’s more potential upside after the stock’s 120% surge this year, while they say the takeover bid for Bradken reflects the mining services company’s better position than its peers. Elsewhere, OceanaGold should be able to weather an uncertain gold price environment, APA Group has purchased a quality asset (but did it pay too much?) and Primary Health Care earnings shouldn’t be too harmed by the rebate cut to GPs, newsletters say.

Key take-out: Qantas shares can soar even higher as the airline benefits from its transformation program, the positive yield environment and lower fuel prices, according to newsletters.

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.

Qantas (QAN)

Most newsletters believe Qantas is in the midst of a significant recovery as it reaps the benefits from its $2 billion transformation program and lower fuel costs.

The airline announced last week that it expects underlying earnings before interest and tax (EBIT) of between $300 million and $350 million for the first half of 2014-15.

“This demonstrates that the strategy we have outlined to transform our business is working,” said chief executive Alan Joyce. “This is an improvement of over $550 million compared with the first half last year, with Qantas Transformation being the primary driver of the turnaround.”

Shares in Qantas soared 13.8% to $2.39 on the day of the news (December 8, 2014) – their highest levels since February, 2011. They have now climbed 120% this year.

Even after Qantas has gained so much ground, newsletters for the most part call the stock a “buy”. They say the benefits from the transformation program, which is about a third of the way through, are delivering much faster than anticipated. One analyst anticipates them to exceed $800 million by the end of 2014-15, beyond Qantas’s target of $600 million.

And while the oil price fall is only a minor contributor to the strong guidance – with Qantas expecting a $30 million benefit in the first half from lower Australian fuel prices – it will assist earnings even further throughout 2014-15 and 2015-16.

Analysts also mention the positive yield environment, with larger revenue due to passenger growth into key markets, and the company’s discipline over capacity.

But one newsletter warns the market is too focused on short-term earnings increases. Investors need to be aware of the inherent volatility and aggressive competitive behaviour within the airline market, the analyst says, which makes it difficult to forecast long-term value.

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

Bradken (BKN)

The takeover bid for Bradken reflects the mining services company’s better position than its peers in what is a tough environment, according to the investment press.

Bradken reported last week it had received a non-binding and indicative proposal from Pacific Equity Partners and Bain Capital to acquire it at $5.10 a share, conditional on the completion of due diligence and the board’s recommendation.

While the board didn’t hint whether it would recommend the offer, it said the proposal had been made at a low point in the mining cycle during a time of significant share price volatility. It stressed there’s no guarantee that the takeover will eventuate but that it’s important shareholders be aware of the development.

Shares in Bradken leapt 36.5% on the day to $4.53. They have now climbed 30% since Collected Wisdom covered the stock as a “buy” in May, but are still down 25% in 2014.

Newsletters are split between calling Bradken a “buy” or a “hold” after the bid. With one newsletter downgrading its recommendation, however, consensus is to “hold” the stock. They say Bradken was one of the more likely targets within the mining services sector due to its production leverage, fixed asset base and structural advantage relative to contractors.

One newsletter recommends that its clients hold onto the stock to wait and see whether a higher bid may occur, though it warns the existing takeover bid isn’t locked in – representing a risk to the current share price.

Bradken did mention it has had further inquiries since the takeover bid.

The newsletter which downgraded its call to “hold” says the takeover bid values Bradken at 13.2 times its 2014-15 price-earnings multiple, which is high compared to its peers and recent trading history. It also says the company’s balance sheet capacity is more limited than it expected and that the company’s comments around a potential capital raising warrant caution.

“The board had approved a small capital raising, via a placement, to assist Bradken in maintaining balance sheet flexibility,” Bradken said in the statement. “In light of the current proposal, this has been put on hold.”

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

OceanaGold (OGC)

A strong balance sheet and low-cost, long-life operations offer OceanaGold some protection in an uncertain gold price environment, newsletters say.

Their analysis comes after the gold producer announced its production and cost guidance for calendar 2015, which were largely in line with market forecasts.

Group production is expected to be between 295,000 to 335,000 ounces of gold, above guidance of between 275,000 and 305,000 ounces in 2014, while all-in sustaining costs are anticipated to range between $770 and $840 per ounce.

“In this volatile and persistently challenging environment for gold producers, OceanaGold is uniquely positioned as one of the lowest cost producers globally, underpinning strong free cash flows from our business,” said managing director Mick Wilkes.

By and large, newsletters agree. OceanaGold’s all-in sustaining costs are highly competitive and well below the current gold price spot of above $US1,200 an ounce, they say, enabling the company to weather potentially worsening gold prices.

While the New Zealand assets are high cost and have short mine lives, the Didipio high-grade gold-copper mine in the Philippines has a mine life of 16 years and cash costs between $390 and $430 an ounce. It is expected to produce between 100,000 ounces and 120,000 ounces in 2015.

The majority of newsletters call OceanaGold a “buy” at current levels. The stock trades at a discount to its peers despite a good history of operational performance and low costs, they say, even after it has run up more than 32% to $2.10 this year.

Analysts have an average 12-month target price of $2.75 on the stock.

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

APA Group (APA)

Newsletters are deeply divided over whether APA Group paid too much in its $US5 billion ($A6.3 billion) acquisition of BG Group’s QCLNG pipeline.

The price paid for the pipeline, which links gas fields in Queensland’s Surat Basin to BG Group’s LNG project in Gladstone, represents a 2015-16 enterprise value to EBITDA multiple of 13 times and is operating cash flow accretive at 10% from the first full year of ownership.

APA Group is funding the purchase via a $US4.1 billion debt facility and a $A1.84 billion fully underwritten one-for-three entitlement offer.

“The acquisition of the QCLNG pipeline allows APA to obtain exposure to the globally-significant east coast LNG sector and expands APA’s contracted revenue base with revenue from highly creditworthy counterparties under 20 take-or-pay contracts,” said managing director Mick McCormack.

Several newsletters agree with APA on the value of the asset. The pipeline provides the company with low risk, direct exposure to the LNG projects in Gladstone, they say, and will generate substantial earnings and cash flow improvement over the two decades.

Two newsletters also advise their clients to take up the entitlement offer. At $6.60 per share, the offer price implies a yield of 5.7%, they point out.

But others say the price is too high and see little upside outside the current terms of the agreement from third party demand. Further, they say the internal rate of return is uncertain over the long term.

On balance, however, newsletters call APA Group a “hold” after the development. While APA Group fell 2.5% to $7.63 on the news, it has climbed 33% this year – where most analysts believe it is around fair value.

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

Primary Health Care (PRY)

Primary Health Care endured its biggest one-day fall in nearly five years last week when the federal government dumped its $7 GP co-payment and issued a watered-down version instead.

Rather than charging patients an extra $7 fee to go to the doctor, the federal government is cutting the rebate paid to doctors by $5 a visit under a revised proposal. Doctors then have the option to collect the $5 from non-concessional patients or absorb the cost.

The government also announced that the rebate would be frozen to July, 2018 and that doctor consultations must be at least 10 minutes to receive the standard rebate.

Newsletters are mixed, with most calling the stock a “hold” after the share price fell 6% to $4.52 on Wednesday (December 10, 2014) in response to the news.

Most analysts believe the cut to rebates will have only a modest impact. One estimates just a 2% reduction in EPS, while another points out that well over half of Primary’s patients are pensioners or under 16 – meaning they will be exempt.

Further, the optional nature of the revised proposal means the company can either recoup lost revenues or swallow the costs with the view of taking market share.

But Primary Health Care will be hit by the government plan more than its peer, Sonic Healthcare, because it gets more revenue from local doctor services and its business model focus is affordability, a newsletter warns. Medical centres made up 41% of Primary’s EBITDA in 2013-14.

Newsletters agree the 10-minute rule won’t be too much of an issue given the company has commented that most visits last longer already, but that the freeze to the rebate is a clear negative.

  • Investors are generally advised to hold Primary Health Care at current levels.

Directors’ trades

  • Six Santos directors bought $672,299 worth of shares last week after the oil and gas producer plunged more than 40% in the past month. The biggest trade was from non-executive director Jane Hemstritch at $7.06 per share for a total of $176,500.
  • On the selling side, executive chairman Adrian Di Marco and non-executive director John Mactaggart sold $17,700,000 worth of shares in Technology One. They offloaded the shares in the software company at $2.95 each.

Takeover Action December 9-15, 2014

DateTargetASXBidder(%)Notes
24/11/2014Clinuvel PharmaceuticalsCUVRetrophin6.73
18/08/2014Genesis ResourcesGESBlumont Group5.81
11/12/2014MEO AustraliaMEOMosman and Gas0.00MEO favours Neon scheme
27/11/2014Merlin DiamondsMEDBlumont Group11.35
12/12/2014Mutiny GoldMYGDoray Minerals50.34
12/11/2014Neon EnergyNENEvoworld Corporation19.99Shareholders vote against takeover
17/11/2014Noni BNBLAlceon Group77.02
Schemes of Arrangement
15/12/2014Crowe Horwath AustralasiaCRHFindex Australia0.00Approved
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
15/12/2014Recall HoldingsRECIron Mountain Inc0.00Indicative 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 party0.00

Media speculation

Source: Newsbites

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