Collected Wisdom

This week we look at FlexiGroup, Echo Entertainment, REA Group, JB Hi-Fi and Navitas.

Summary: February earnings season is under way, with a raft of newsletters updating their recommendations in response. FlexiGroup is seen as undervalued given the consumer financing company’s strategy appears to be working, while Echo Entertainment is capitalising on a resurgent performance from its casino The Star.  REA Group looks fully valued after rising to near-record highs, JB Hi-Fi needs to maintain its recent pick-up in sales momentum and Navitas is still suffering from its loss of a key contract, the newsletters say.

Key take-out: An attractive yield of five per cent, predictable earnings and several potential growth avenues should propel FlexiGroup’s share price higher, say analysts.

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.

FlexiGroup (FXL)

Almost all newsletters believe FlexiGroup to be undervalued in response to the consumer financing group’s half-year results last week.

Shares in FlexiGroup jumped 14.8 per cent to $3.49 – their biggest one-day rise since August, 2009 – after the company announced cash net profit lifted 9 per cent to $42.5 million and reconfirmed full-year guidance of between $90-91 million.

While earnings only just beat consensus forecasts, they helped to assuage the market’s concerns about the company’s growth path. Return on equity grew 22 per cent for the half-year, in line with its previous years of above 20 per cent.

The stock had fallen more than 25 per cent over the last 12 months before the announcement.

All but one publication that crossed Eureka Report’s desk call FlexiGroup a “buy” following the results. They say the company’s strategy to increase repeat-customer sales, grow market share in interest-free credit cards and to expand successfully into New Zealand appears to be working.

“We are increasingly focused on the digital finance opportunity and are well positioned to become the digital finance leader in Australia and New Zealand,” said chief executive Tarek Robbiati. “There are fantastic areas to pursue where we are not competing with banks and we are already starting to deliver strong earnings momentum.”

Analysts also think FlexiGroup will be supported by its attractive yield of around five per cent, given it has predictable earnings with low funding costs and a benign bad debt environment.

Despite the attractive valuation and yield, however, one analyst cautions growth may become harder to achieve beyond FY15 as competition increases.

You can watch Alan Kohler’s interview with Robbiati here.

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

Echo Entertainment Group (EGP)

Newsletters have increased their earnings forecasts for Echo Entertainment Group after its first-half results, with two analysts upgrading their recommendations.

The company reported a 78 per cent surge in underlying net profit to $112.6 million for the six months to December 31 compared to the same time last year, boosted by a revitalised performance from its flagship casino The Star.

Interim earnings before interest, tax, depreciation and amortisation (EBITDA) increased 32 per cent to $261.4 million – just above guidance for $245-260 million.

Despite newsletters lifting their numbers over the news, a big majority believe the stock is a “hold” after the share price has doubled in the past year. It now trades at a P/E multiple of 17.5 times, compared to Crown’s roughly 16 times.

Management’s initiatives, like the revamped customer loyalty program at The Star, appear to have rebased earnings, analysts say, setting Echo up for solid growth from here. The Star had been underperforming, but the loyalty program and increased sales force have succeeded in attracting punters into the casino.

The dividend per share pay out of five cents – 25 per cent above the previous year – underscores how the company has achieved higher and more predictable cash flows from these higher margin businesses, another analyst says.

But newsletters worry about emerging competitive threats in the medium term, such as if Echo loses the bid to Crown to build a casino resort at Queen’s Wharf in Brisbane. One analyst estimates the downside may be as much as 54 cents, while the upside could to winning the project could be 47 cents.

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

REA Group (REA)

The interim results for REA Group were undeniably exceptional, but they aren’t enough to justify buying the stock at current levels, most newsletters say.

Net profit grew 34 per cent to $94.7 million for the six months to December 31 compared to the same time last year, largely thanks to a big performance from its Australian segment. Revenue lifted 25 per cent to $261.5 million.

As one analyst says, the results showed improvement in just about every metric that matters. The balance sheet is in great shape, with no debt and $42 million in cash.

The share price leapt 4 per cent to $51.28 – its highest level in 12 months – but more than reversed those gains the following day amid the newsletter reactions. It closed on Friday at $48.52.

It’s difficult to find consensus for REA Group after the results. One newsletter upgraded its call to “buy” from “sell”, but three others issued downgrades (with one now rating the stock as a “sell”). On balance, clients are generally advised to “hold” the stock.

The newsletter advising clients to exit the stock calculates REA needs to generate five years of 20 per cent compound growth before it could provide a five per cent yield to investors. This is too much to ask.

Others with a neutral view think REA should hold value as it increases its share of property transactions online. While they like the underlying economics of the industry, they see REA’s one-year forward P/E multiple as fully factoring in the growth opportunity.

Those bullish towards REA say the company still has room to surprise on earnings; it is only part way through the conversion of customers to market-based pricing – supporting growth into FY16 – and the US expansion represents a compelling opportunity.

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

JB Hi-Fi (JBH)

JB Hi-Fi managed to meet the market’s expectations in its first-half results, as improving sales momentum and tight cost controls overcame a seemingly soft Christmas trading period.

Net profit after tax (NPAT) fell 1.9 per cent to $88.5 million for the six months to December 31, marginally below consensus forecasts for $90.6 million. The result was underpinned by the company’s program of fewer labour hours per store – an initiative that analysts think won’t add further support looking ahead.

However, while like-for-like sales fell 0.7 per cent in the first half, they grew seven per cent in January, giving chief executive Richard Murray confidence about momentum for the remainder of FY15.

The stock edged up 1.1 per cent to $17.02 on the day (February 2, 2015).

Newsletters’ outlook for JB Hi-Fi is reasonably mixed following the results, but the majority rate the stock as a “hold” at current share price levels.

The key question is whether the company can maintain its momentum for the rest of FY15. Most analysts expect sales growth to remain solid, aided by many stores being fully converted to the new HOME format and a broader pick-up in the discretionary retail sector due to lower fuel prices and the RBA cash rate cut.

But one analyst points out that in the past the January sales haven’t provided a reliable guide to growth in the second half, while another highlights that the month benefited from recent product releases including the iPhone 6 and Microsoft Surface 3.

The outlook for the HOME division in the longer term – which many analysts had seen as the key growth driver for the business given the size of the home appliances market – is also disappointing. The company still targets incremental sales of $3 million at its stores converted to the HOME format by year one, but the target of $5 million by the second year was extended to “the medium term”.

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

Navitas (NVT)

Shares in Navitas fell sharply for the second time in seven months last week when the education services company released lacklustre interim results.

While Navitas reaffirmed its full-year guidance of $162-172 million EBITDA, the company’s commentary suggested to analysts it would be at the bottom of the range due to an earnings slowdown in its University Programs Division and Professional and English Programs segment.

Reported net profit fell 13 per cent to $31.3 million, dragged down by the goodwill impairment in relation to losing a key contract with Macquarie University (see Collected Wisdom’s last coverage of the stock). Underlying EBITDA rose 13 per cent to $71.1 million, while revenue climbed 14 per cent to $479.5 million.

The stock declined 9.5 per cent to $4.75 on Tuesday (February 3, 2014) and has since fallen further to $4.45 at Friday’s close. It has lost more than 40 per cent of its value since its peak of $7.81 in June last year.

Two publications downgraded their recommendations to “sell” after the results; however, more analysts still call the stock a “hold” at current share price levels.

The drop in forecast revenues from the loss of key contracts looms large for Navitas, newsletters say. Along with the loss of its Sydney Institute of Business and Technology contract, Navitas has also been told its Macquarie City Campus contract won’t be renewed when it expires in January 2016.

Nevertheless, most analysts continue to like the company’s longer-term macro story. While competition in the sector is growing, Navitas has a sound reputation and strong relationships with universities – enabling it to take advantage of the increasing demand for education services from the growing middle class in developing nations.

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

Takeover Action February 3-9, 2015

19/12/2014Australian IndustrialANI360 Capital Industrial12.89
24/11/2014Clinuvel PharmaceuticalsCUVRetrophin6.73
18/08/2014Genesis ResourcesGESBlumont Group5.81
24/12/2014Guildford CoalGUFSino Construction0.00
05/02/2015Mutiny GoldMYGDoray Minerals91.58
19/12/2014Neon EnergyNENEvoworld Corporation19.99New bid for 50%
05/02/2015Orbis GoldOBSSEMAFO7.94
03/02/2015Resource EquipmentRQLPump Services80.15
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
06/02/2015Norton Gold FieldsNGFZijin Mining Group Co82.43Vote May
03/02/2015Novion PropertyNVNFederation Centres0.00Vote May
24/12/2014Trafford ResourcesTRFIronClad Mining0.00Vote April 2
Foreshadowed Offers
22/10/2014Central PetroleumCTPUnnamed party0.00Speculation due to director share purchases
08/08/2014Gondwana ResourcesGDAUnnamed party0.00Indicative 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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