Collected Wisdom

This week we look at ResMed, Iluka Resources, Atlas Iron, Bradken and GPT Group.

Summary: Analysts are divided over ResMed after the sleep disorder equipment maker’s exceptional result, while they are more optimistic towards Iluka in lieu of a potentially improving mineral sands market. Elsewhere, Atlas Iron is in deep trouble at current iron ore prices, Bradken faces a host of risks after the dumped takeover and GPT Group is trading around fair value after its pre-released results, newsletters say.

Key take-out: Newsletters agree the outlook for ResMed’s earnings remains stellar as the company benefits from its new products, the falling Australian dollar and from efficiency gains, but several question how much is already priced into the stock.

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.

ResMed (RMD)

Analysts are divided over ResMed after the sleep disorder equipment maker beat expectations in its second quarter results.

For the quarter ended December 31, the company’s revenue climbed 10% to $423 million, above consensus estimates for $406.4 million. Earnings per share for the period also beat the market’s expectations, coming in at 64 cents compared to the average forecast for 61 cents.

“We drove top-line revenue growth in the first half of this fiscal year by launching a strong, innovative portfolio of products and solutions,” said chief executive Mick Farrell.

Shares in the company lifted 5.9% on Thursday (January 22, 2014) to $7.81 and another 7.2% the following day to $8.37 – a record high.

Analysts either call ResMed a “buy” or “hold”, with most advising to buy the stock after the update.

Newsletters agree that the outlook for ResMed’s earnings remains stellar. Though the company is targeting a lower gross margin of 60-62% for 2014-15 – below its previous forecast for 61-63% – most analysts expect this to improve significantly into 2015-16 as the company benefits from the falling Australian dollar and from efficiency gains.

Earnings momentum should persist for at least the next few periods, analysts say. With existing ResMed users upgrading to the new AirSense 10 platform, the third and fourth quarter should also reveal strong sales growth, one publication says.

But analysts are mixed about how much of the double-digit earnings growth is already priced in to the stock after it has climbed 68% over the past year. At current levels ResMed trades at a price-earnings multiple of 23 times, above the healthcare index’s 21 times.

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

Iluka Resources (ILU)

Iluka Resources’ lift in production volumes during its fourth quarter could be the beginnings of a recovery in the mineral sands market, according to the investment press.

For calendar year 2014 the miner produced 535,000 tonnes of zircon, rutile and synthetic rutile, above its production of 471,000 tonnes the previous year. Annual sales of 616,000 tonnes  – a rise of 5% – were strengthened by a better-than-expected second half, though they were offset by slightly weaker prices.

Following the update newsletters largely rate Iluka as a “buy”. Though the commentary surrounding the mineral sands market remains mixed – with weakness in Europe diminishing the gains from the US and China – analysts are optimistic that volumes will continue to improve. Stable and rising volumes are often the first sign of a recovery, they say, with prices set to follow.

But prices are unlikely to rise in the short term, analysts believe. Rather, Iluka should benefit from increased sales during 2015 as it clears excess inventory along with other producers and more signs of higher demand materialise.

Iluka is also better placed than a lot of its peers with a strong balance sheet and its low-cost, high-grade mines, analysts say.

A higher-than-expected dividend could also be on the way. One analyst anticipates a final dividend of 12 cents per share, far above the 4 cents per share final dividend in 2013, given Iluka’s strong free cash flow of $197 million for the year and its policy for paying out 40% of free cash flows as dividends. This would represent a full-year yield of around 2.5%. 

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

Atlas Iron (AGO)

It looks increasingly unlikely that Atlas Iron will be able to repay its debt obligations despite its efforts to reduce costs amid the challenging market conditions, analysts say.

Their responses come after the iron ore miner released its December quarterly results on January 15. Atlas shipped 6.9 million metric tonnes of iron ore during the first half of the year – exceeding broker expectations and setting the company up to beat its full-year guidance of 13.5 million tonnes.

But costs continue to present a grim outlook for the company, despite all-in cash costs falling 4% to $67 per tonne for the quarter. At these levels Atlas is operating at around break even, realising an average selling price of $66 per wet metric tonnes.

The benchmark for iron ore delivery to the port of Tianjin in China 2015 has been trading at five-year lows of around $US60 a tonne.

With this in mind, analysts don’t see how Atlas can repay the $US270 million debt facility that matures in 2017. They advise to “sell” the stock.

The miner needs to achieve better than break even cash flow to repay the debt, which will be incredibly difficult in the current environment.

The entire industry is reducing costs in a race to the bottom, one analyst points out, with low-cost producers BHP and Rio Tinto shaping the market and cost savings likely to be passed on to consumers. In such a scenario there isn’t any room for small, marginal producers like Atlas.

Another analyst highlights that there is now limited scope to reduce costs more due to the lack of rail access for the miner.

  • Investors are generally advised to sell Atlas Iron at current levels.

Bradken (BKN)

Shares in Bradken plunged the most in more than seven years last week when the company’s suitors withdrew their bid in the face of weakened commodity prices.

The mining services company announced last Wednesday (January 28, 2014) that the consortium of private equity fund managers, Pacific Equity Partners and Bain Capital, has decided that it is not in a position to making a binding proposal despite completing satisfactory due diligence.

The stock fell 35.8% to $2.64 on the day of the news – its lowest point since April, 2009. It had traded as high as $4.74 following the consortium’s indicative bid of $5.10 per share in December.

Even after the share price plunge most newsletters rate Bradken as a “hold”, with one publication downgrading its recommendation on the update.

While analysts acknowledge the company appears cheap at less than seven times earnings before interest and tax (EBIT), they think the risks are too great and will weigh on the share price in the short term.

One analyst is concerned about a potential equity raising. When Bradken had received the takeover bid, it had said it had been considering the initiative to fund its growth plans – such as the acquisition of the foundry in India – and provide balance sheet flexibility.

But another publication believes Bradken is more likely to repay its debt by lowering dividends in the near term – as it did during the GFC – after the share price reaction last week.

Two other big issues for analysts are that there are no signs of a turnaround in the mining cycle (the resources industry represented 92.5% of Bradken’s sales in 2013-14) and that the company’s high level of debt will limit any growth initiatives in the future.

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

GPT Group (GPT)

GPT Group’s pre-released results suggest a positive short-term outlook for the company and the broader real estate investment trust (REIT) sector, but this already appears to be priced in to the market, according to the investment press.

The REIT announced on January 21 that funds from operations were $452 million in 2014, 4.1% above the previous year. While the earnings were in line with forecasts, its guidance for 2015 came in above expectations at growth of 5%.

GPT released the figures early in order to raise $325 million through an equity raising at $4.23 per share. The funds have been used to redeem exchangeable securities from GIC, Singapore’s sovereign wealth fund.

Newsletters largely call GPT a “hold” after the developments. Though little detail around the results were released, they say that management implied operational improvements from strong office leasing momentum, a greater weighting to higher yielding logistics assets and growth in funds under management.

Further, they say the decision to trade expensive debt with cheaper equity was the right one. The group is essentially replacing 10% cost of debt with 7.7% cost of equity in its capital structure, an analyst says, which will be slightly earnings accretive in 2015.

However, GPT appears to have reached full value after climbing more than 23% over the past year, newsletters believe.

And though several newsletters think the February reporting season will be positive for A-REITs at large, they warn clients that the sector appears overheated. One analyst highlights that the sector is already priced at a 31% premium to net tangible assets (NTA).

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

Takeover Action December 30, 2014 - February 2, 2015

DateTargetASXBidder(%)Notes
19/12/2014Australian IndustrialANI360 Capital Industrial0.00
24/11/2014Clinuvel PharmaceuticalsCUVRetrophin6.73
18/08/2014Genesis ResourcesGESBlumont Group5.81
24/12/2014Guildford CoalGUFSino Construction0.00
16/01/2015Merlin DiamondsMEDBlumont Group4.17Offer withdrawn
23/01/2015Mutiny GoldMYGDoray Minerals88.15
19/12/2014Neon EnergyNENEvoworld Corporation19.99New bid for 50%
15/01/2015Orbis GoldOBSSEMAFO2.07
30/01/2015Resource EquipmentRQLPump Services77.29
23/12/2014World Titanium ResourcesWTRBase Resources7.80
Schemes of Arrangement
17/12/2014Amcom TelecommunicationsAMMVocus Communications10.00
30/01/2015Black Range MineralsBLRWestern Uranium0.00
14/01/2015Chandler MacleodCMGRecruit Holdings Co0.00Vote March
22/12/2014Elk PetroleumELKMetgasco0.00Vote May
08/09/2014Goodman FielderGFFWilmar International and First Pacific Company10.10Vote Q1, 2015
24/12/2014Trafford ResourcesTRFIronClad Mining0.00Vote April 2
Foreshadowed Offers
28/01/2015BradkenBKNPacific Equity Partners and Bain Capital Asia0.00Discussions ceased
22/10/2014Central PetroleumCTPUnnamed party0.00Speculation due to director share purchases
08/08/2014Gondwana ResourcesGDAUnnamed party0.00Indicative proposal
13/01/2015Norton Gold FieldsNGFZijin Mining Group Co82.00Scheme proposal
15/12/2014Recall HoldingsRECIron Mountain Inc0.00Indicative proposal
22/01/2015Skilled GroupSKEProgrammed0.00Skilled rejects proposal
22/12/2014Transfield ServicesTSEFerrovial Servicios0.00No interest in new proposal
Source: Newsbites

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