Collected Wisdom

This week we look at Asciano, Carsales.com, Bendigo and Adelaide Bank, Amcor and Coca-Cola Amatil.

Summary: The newsletters say Asciano’s business improvements program is paying dividends – with more funds likely to be returned to shareholders in the future from the rail and ports operator. Carsales.com has posted solid earnings in challenging market conditions, but it’s more rocky for Bendigo and Adelaide Bank due to the low quality of its results. Amcor may be shelving plans for an acquisition in the short term, while Coca-Cola faces more challenges in its return earnings growth, analysts say.

Key take-out: Asciano’s dividend payout ratio could increase up to 70 per cent from 40 per cent over the next few years as the company’s capital expenditure program winds down, say 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.

Asciano (AIO)

Investors in Asciano should expect dividends to grow substantially over the next few years as the company’s capital expenditure program winds down, say newsletters.

Though top-line growth in the rail and ports operator was absent in its first-half result last Tuesday (February 17, 2015) – where operating revenue fell 2.1 per cent to $1.9 billion – underlying net profit after tax increased by 6.2 per cent to $201 million.

The lift in earnings was possible thanks to savings from Asciano’s cost-cutting initiatives, with its business improvements program delivering $56.9 million in savings for the period. In June last year the company announced it was accelerating the five-year program to save $300 million by 2015-16 – double the original plan.

Earnings guidance for FY15 was reaffirmed for underlying EBIT to grow at a higher rate than the 5 per cent growth in FY14.

But the big improvement for newsletters was the lift in free cash flow. Operating cash flows lifted 28 per cent to $303 million due to better working capital management, while capital expenditure declined. This enabled Asciano to boost its interim dividend by 44 per cent to 8.25 cents per share.

“This represents a payout ratio of 40 per cent which is at the top of our policy range,” said chief executive John Mullen. “The board will review the payout ratio at the FY15 results.”

Following the results, an overwhelming majority of analysts again rate Asciano as a “buy”, even with the share price rising 15 per cent to $6.53 since Collected Wisdom last covered the stock.

Analysts say that management could increase the payout ratio up to 70 per cent over the next few years. Capital expenditure will continue to fall, with the company either returning excess free cash flow to shareholders or using it to retire debt, they say.

Asciano is nearing the end of a large capital investment phase which will see capital expenditure drop from $600-700 million in 2014-15 to $390-440 million in 2015-16 and $300-400 thereafter.

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

Carsales.com (CRZ)

Carsales.com has posted a solid first-half result in what are challenging market conditions, say the investment press.

The online classifieds company reported net profit of $46.7 million for the six months to December 31, up 7 per cent on the previous corresponding period but slightly missing consensus expectations for $49.4 million. Sales growth was much higher, lifting 34 per cent to $150.9 million.

“We continue to closely monitor our performance and market conditions,” said chief executive Greg Roebuck. “Assuming these are stable, we anticipate revenue and EBITDA to remain solid throughout H2FY15, while NPAT will grow more moderately.”

While most analysts are factoring in slight downgrades to earnings over the results and updated earnings guidance – with signs of maturity appearing in the growth drivers that had driven earnings in recent years – they believe the results were nevertheless strong.

Revenue growth – which was 9 per cent excluding the recent acquisition of Stratton Finance (an online finance company for buying cars and other assets) – was 9%, an excellent achievement given the backdrop of sluggish ad market conditions and the impact from original equipment manufacturers (OEMs) withdrawing new car listings from Carsales.com.

The majority of analysts call the stock a “buy” at today’s share price levels. With the core business maturing, they believe the new investments like Stratton and overseas will propel the stock over the next few years.

At a PE of 24 times for FY15, Carsales trades at a multiple well below online classified peers Seek and REA Group and is our top pick in the sector, one investment house says.

  • Investors are generally advised to buy Carsales.com at current levels.

Bendigo and Adelaide Bank (BEN)

Newsletters aren’t impressed with the quality of Bendigo and Adelaide Bank’s first-half earnings result, with one publication suggesting the company won’t be able to sustain its dividends.

Shares in Australia’s fifth largest bank fell 3.9 per cent to $13.78 last Monday (February 17, 2015) after the company reported a 17.2% rise in cash profit to $217.9 million, largely thanks to its recent acquisition of Rural Finance in Victoria.

While double-digit growth in cash profits appears strong on the surface, its composition disappointed analysts. Net interest margin growth stalled, having improved in previous periods, and home loan growth came in at a meagre 3.2% – below the industry average of 7.1%.

Instead the result was propped up by a boost from Homesafe (a joint venture that gives home owners cash in exchange for a share of the future price of the property), a fall in the bad debt charge and a rise in capitalised software.

After the share price fall most newsletters call Bendigo and Adelaide Bank a “hold”, though one publication downgraded its recommendation to “sell”.

The analyst with the downgrade says that while future interest rate cuts may support the share price, it is too dangerous for the company to capitalise mark-to-market house price gains.

Indeed, another analyst notes that around $30 million from Homesafe was of poor quality and may become troublesome when house price growth eases, potentially harming the bank’s ability to maintain dividends.

The interim fully franked dividend was 33 cents for the first-half, 2 cents above the same time last year.

Most newsletters agree that the results illustrate Bendigo and Adelaide Bank’s lack of competitive advantages compared to its larger peers. It is difficult to compete on pricing because of its capital requirements, a lower credit rating and smaller scale operations.

  • Investors are generally advised to hold Bendigo and Adelaide Bank at current levels.

Amcor (AMC)

Amcor’s $500 million share buy-back could be a signal that large, value accretive acquisitions won’t be forthcoming in the short term, according to the investment press.

Last week (February 17, 2015), the global packaging giant met analyst expectations with its first-half results: net profit after tax lifted 6.7 per cent to $321.3 million, supported by sales growth in emerging markets and productivity efficiencies.

But the focus for analysts was the share buy-back and its implications for acquisitions. When Collected Wisdom last covered the stock in August last year, analysts had said the big question was how many potential takeover targets met the company’s strict criteria of achieving a 20 per cent return on funds by the end of year three.

Now several caution that the share buy-back – which they estimate is only about 2 per cent earnings accretive – could be a concession that large acquisitions aren’t possible right now.

“Given our solid financial metrics and ongoing cash generation, a $500 million share buy-back achieves the appropriate balance between returning capital to shareholders, maintaining flexibility to pursue growth and retaining strong credit metrics,” said chief executive Ken MacKenzie.

The buy-back, along with the recently announced news that MacKenzie will retire at the end of FY15, may give investors reason to pause, one analyst says.

Nevertheless, analysts all think Amcor remains a quality business with a high-quality management team when MacKenzie is replaced with chief financial officer Ron Delia. Further, the scale of operations and the evolving portfolio of innovative products leave Amcor in good stead to maintain its competitive position and growth path.

However, after the share price has soared XX per cent to a record high of $XX in the past week, analysts say the growth is fairly reflected in the share price.

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

Coca-Cola (CCL)

Shares in Coca-Cola Amatil (CCA) leapt the most in five-and-a-half years last week when the soft drink maker announced it would return to earnings growth within several years.

As analysts had expected, its results for the 12 months to December 31 were weak. Underlying net profit fell 25.3 per cent to $375.5 million, while total revenue slipped 1.7 per cent to $5.03 billion. On the other hand, the company said its cost reduction benefits will exceed $100 million over the next three years.

“We are confident that the combination of revenue and cost initiatives we have underway will restore the business to growth,” said chief executive Alison Watkins. “The pace of the recovery, however, will depend on the success of revenue initiatives in Australia and Indonesian economic factors.”

The stock jumped 6.3 per cent to $10.60 – its biggest one-day rise since August, 2009.

Despite the optimistic outlook, newsletters are deeply mixed towards CCA with a range of “buys”, “holds” and “sells”. On balance, however, analysts rate it as a “hold” at current share price levels.

Those analysts with higher valuations say that Indonesia provides the biggest boost to earnings going forward. Importantly, structural issues around price and the supply chain have now been addressed and volume share has been restored.

CCA will also benefit from its investments into marketing and innovation and the sale of a 29.4 per cent stake of its Indonesian segment to The Coca-Cola Company for $500 million, they say.

But others continue to see challenges, particularly in the Australia where the division is under pressure from competitive pricing. One analyst also highlights that industry data is yet to show any turnaround for the carbonated soft drink market, with volumes declining 2.2 per cent globally in 2014.

  • Investors are generally advised to hold Coca-Cola Amatil at current levels.

Directors’ trades

  • Two directors picked up scrip in G8 Education this week after the childcare operator disappointed the market with its yearly results. Chairperson Jennifer Hutson bought $652,500 worth of shares at $4.35 each, while non-executive director Andrew Kemp paid $41.5 per share for $295,929 worth of shares.
  • On the selling side, executive director Bradley Cooper offloaded 169,860 shares in Westpac at $36.51 each for a total of $6,201,589.
  • Meanwhile, chief executive Chris Roberts netted $1,964,832 from the sale of 23,056 shares at $85.22 each in medical device maker Cochlear.
  • Elsewhere, executive director at Goodman Group, Danny Peters, traded 300,000 shares in the property group at $6.449 each for a total of $1,934,802.

Takeover Action February 17-23, 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
19/12/2014Neon EnergyNENEvoworld Corporation19.99New bid for 50%
20/02/2015Orbis GoldOBSSEMAFO77.53
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
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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