Collected Wisdom

This week we look at Transurban, Cochlear, Computershare, Ansell and SCA Property Group.

Summary: The newsletters think the market underestimates Transurban’s growth profile, even with the stock trading at record highs after its half-year results. The same can’t be said for Cochlear, however, as analysts highlight stagnant new unit sales as a reason to stay away from the medical device maker’s shares. Elsewhere, the reception for Computershare and Ansell is more mixed amid both companies’ macroeconomic challenges, while it’s slightly more negative for shopping centre portfolio owner SCA Property Group.

Key take-out: For many analysts Transurban is the top pick in the transport infrastructure segment because of its unparalleled suite of assets, high growth prospects and its healthy returns to shareholders.

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.

Transurban (TCL)

Most analysts remain convinced Transurban is undervalued after the toll operator beat their earnings estimates in its first-half results.

Adjusted proportional earnings before interest, tax, depreciation and amortisation (EBITDA) surged 37 per cent to $636 million on organic growth, the Queensland Motorways and Cross City Tunnel acquisitions and excellent cost controls, analysts say.

Despite reporting a statutory net loss of $354 million – which sprung from costs relating to the acquisitions – Transurban lifted its full-year dividend guidance to 39.5 cents from 39 cents. This represents a dividend yield of around 4.2 per cent at current share price levels.

The solid earnings figures and dividend lift satisfied the market, with shares in Transurban holding firm at around $9.20. They have risen more than 20 per cent since Collected Wisdom last covered the stock as a “buy” in July last year and are at record highs.

Even after the impressive share price levels, the majority of analysts still call Transurban a “buy”. For many it is a top pick in the transport infrastructure segment because of its unparalleled suite of assets, high growth prospects and its healthy returns to shareholders.

Traffic growth and earnings margins appear to be running ahead of estimates and, given the funding environment is favourable for reducing interest costs, analysts expect more upside to the market’s forecasts versus management expectations.

On average, analysts forecast the dividend yield to rise to 4.6 per cent in FY16 and 5 per cent in FY17 as lower funding costs, cost cutting and toll increases for the M7 lead to further dividend increases.

With no funding constraints, Transurban is well positioned to exploit the infrastructure focus of both federal and state governments, one analyst says.

You can read about Alan Kohler’s take on Transurban in his weekend briefing and watch his interview with chief executive Scott Charlton here.

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

Cochlear (COH)

Most of the investment press don’t like the outlook for Cochlear despite the medical device maker’s huge boost to net profit in the first half of FY15.

Underlying net profit surged 94 per cent to $71.4 million compared to the first half of FY14 (which had been a depressed period), while revenue climbed 18 per cent to $438.3 million. The results were in line with consensus.

“A focus for FY15 was continuing the sales momentum of products launched in FY14,” said chief executive Roberts. “In particular, the doubling of revenue from sound processor upgrades reflected strong market enthusiasm for Nucleus 6.”

Shares in Cochlear had a muted response on the day. However, they have risen 60 per cent over the past year and around 25 per cent since consensus was to “sell” the stock last August.

Nonetheless, the vast majority of newsletters again call Cochlear a “sell” after the results. They point to the same worrying trend: that while sales are growing for device upgrades, new unit sales are largely stagnant.

At a valuation of around 27 times earnings per share for FY15, analysts think Cochlear should at least be posting new patient growth.

But this is a problem that has been persisting for the last three to four years, with Cochlear operating in a difficult market, analysts highlight. Emerging market sales have seemingly disappeared, and as improvements in the core implant technology are becoming harder to generate, more integrated competitors are gaining advantages, they say.

One publication also suggests that after the product recall in 2011 many potential customers viewed Cochlear as less reliable, making the company susceptible to competitor innovation.

However, another publication – which differs from consensus – expects upgrade sales and foreign exchange tailwinds to overcome poor new unit sales. And because the market’s expectations are so diminished in this segment of the business, there is room for a positive surprise, it says.

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

Computershare (CPU)

Newsletters are pleased with Computershare’s diligence in controlling costs for the first half of FY15, as the global share registry company battles with a stronger US currency and a low interest rate environment.

Underlying net profit slipped 1.8 per cent to $US160.6 million compared to the previous corresponding period, in line with guidance, while revenue declined 2.2 per cent to $US959.5 million. Full-year guidance was revised down for management EPS to be “modestly higher than FY14” rather than 5 per cent higher.

“The operating environment continues to be mixed with weak levels of completed M&A activity exacerbated by the persistently low interest rate environment,” said chief executive Stuart Irving. “More volatile equity markets also impacted transactional activities across a range of businesses.”

Low interest rates harm Computershare’s earnings because client balances return a lower yield; margin income fell 15 per cent for the period.

As Computershare reports in US dollars, the stronger greenback translates into lower earnings from operations outside the US.

Despite the weak conditions, analysts are split between recommending Computershare as a “buy” or “hold” after the results.

Those who see the stock as undervalued believe the market is ignoring higher earnings in the future as global economies recover and the larger growth profile from future acquisitions.

“There is a renewed focus on acquisition opportunities that strongly align with our core competencies,” Computershare said.

They also point out that, for Australian investors, the value of the company has hardly budged on the weaker figures due to the fall in our local currency. One analyst forecasts EPS to fall by 2.9 per cent in $US in FY15 but only by 0.4 per cent in $A.

But others who see Computershare at value think the state of the world economy will continue to prevent growth – at least for the short term. 

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

Ansell (ANN)

Ansell has reported impressive half-year figures, but worsening macroeconomic conditions may prevent the protective wear manufacturer from sustaining this momentum, most newsletters say.

The company leapt 5.2 per cent to $24.21 last week (February 9, 2014) after reporting net profit after tax of $US87.7 million compared to $US65.6 million the same period last year, in line with consensus, and a 20 per cent lift in sales to $847.3 million.

Full-year earnings guidance was maintained at $US1.18 to $US1.26 per share.

“Recent acquisitions are delivering ahead of expectations, organic growth is improving, and we continue to increase cash returns to shareholders by announcing today an 18 per cent increase in US dollar terms,” said chairman Glenn Barnes.

While one newsletter upgraded its recommendation to “buy” in response to the results, three others chose to cut their calls – with two now rating the stock as a “sell”. However, most newsletters still rate Ansell as a “hold” at current share price levels.

Most analysts highlight that organic sales growth was only at 2.6 per cent – broadly in line with the global market – with the good result bolstered by the BarrierSafe acquisition in the US. This will be difficult to repeat in FY16 when there’s a weaker industry outlook, no acquisition benefit and foreign exchange headwinds.

Ansell, which is geographically diversified, reports in US dollars and is expected to incur a slight hit to earnings from the weaker euro – though it does traditionally hedge around 50-70 per cent of its profits.

The publication with a “buy” call recognises organic sales growth is a problem, but it says guidance is very achievable for FY15, that the company is in a good position to make another acquisition and that the falling AUD/USD exchange rate provides a tailwind.

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

SCA Property Group (SCP)

More modest earnings in the future and a share price that has run to record highs are tempering analysts’ views of SCA Property Group.

The Australian real estate investment trust (A-REIT), which is one of the first stocks in the sector to report half-year earnings, told the market last week (February 9, 2015) that distributable earnings lifted 4.1 per cent to $41.1 million, or to 6.3 cents per unit, which was roughly in line with expectations.

Full-year guidance was marginally upgraded to 12.6 cents per unit, up from 12.5 cents per unit, thanks to recent acquisitions and declining borrowing costs.

Despite the upgrade, analysts are almost evenly divided between calling SCA Property Group a “hold” or “sell” after the interim results.

Those advising their clients to keep the shares believe the declining costs of debt will continue to support earnings per share. Further, demand for the assets remains high and property values keep rising.

Others don’t think SCA Property Group should be trading at such a pricey valuation. It’s one-year forward price-earnings multiple is 16.6 times, well above the sector’s average of 15 times.

The trust doesn’t deserve to trade at a premium because earnings will most likely moderate in the future, they say. The portfolio of supermarkets is maturing, making the comparable sales growth rates of 4.2 per cent in Australia and 5.2 per cent in New Zealand harder to replicate going forward, they say.

“These growth rates are higher than our listed market peers and above Coles and Woolworths’ comparable store sales growth averages,” SCA Property said. “The higher growth rates in our centres are due to the relative youth of our portfolio, larger than average supermarket store sizes, and many of the properties being located in growth corridors.”

However, it’s this exposure to central growth corridors, along with the currently strong sales growth, that makes several analysts raise the possibility of SCA Property being a potential takeover target – supporting the stock price.

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

Takeover Action February 10-16, 2015

DateTargetASXBidder(%)Notes
19/12/2014Australian IndustrialANI360 Capital Industrial12.89
24/11/2014Clinuvel PharmaceuticalsCUVRetrophin6.73
12/02/2015Cue EnergyCUENew Zealand Oil & Gas19.99
11/02/2015Genesis ResourcesGESBlumont Group8.01
24/12/2014Guildford CoalGUFSino Construction0.00
11/02/2015Mutiny GoldMYGDoray Minerals92.79
19/12/2014Neon EnergyNENEvoworld Corporation19.99New bid for 50%
13/02/2015Orbis GoldOBSSEMAFO61.60
06/02/2015World Titanium ResourcesWTRBase Resources0.00Bid lapse
Schemes of Arrangement
17/12/2014Amcom TelecommunicationsAMMVocus Communications10.00Vote April
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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