Collected Wisdom

This week we look at Oil Search, AWE, M2 Group, Lend Lease and Caltex.

Summary: Oil & gas producers Oil Search and AWE are newsletter favourites despite the slump in the oil price, with most analysts believing them to be undervalued at the moment. Elsewhere, telecommunications company M2 Group has showed the market its ability to grow organically, Lend Lease is exposed to attractive residential markets (but how much is already reflected in the share price?) and Caltex has run too hard on favourable market conditions, newsletters say.

Key take-out: Newsletters are attracted to Oil Search’s low-cost production at the PNG LNG Project, its long-term growth prospects and the fact the company is naturally at the low point of its investment cycle given the current price environment.

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.

Oil Search (OSH)

Oil Search is at the perfect point of its investment cycle to weather the lower oil&gas price environment, with its low-cost PNG LNG project propelling cash flows at current prices, most newsletters believe.

Underlying earnings for the company more than doubled to $482.8 million for the 12 months to December 31. While profits were hit by the slump in crude oil, this was compensated by production tripling thanks to the PNG LNG project.

The company also undertook a strategic review amid the new environment. It believes it can still drive continued top quartile returns over the next five years.

“The strategic review has confirmed that our gas growth opportunities in PNG, where we have a major competitive advantage, are robust, while the long-term legacy cash flows from the PNG LNG project will continue to bolster the company’s balance sheet,” said managing director Peter Botten.

Most newsletters agree, with the vast majority calling Oil Search a “buy” at current levels. The company has significant available liquidity, they say, and is entering a period of lower capital expenditure in 2015 irrespective of the new oil price climate.

Indeed, the special dividend of US4 cents a share on top of the US8 cents a share dividend underscores the low-cost nature of Oil Search’s operations, one analyst says. The payout ratio remains at 35-50 per cent of underlying NPAT and the dividend reinvestment plan has been suspended given the recent fall in the share price.

Shares in Oil Search have fallen 15 per cent over the past six month to Friday’s close of $8.16.

Analysts are also optimistic about the long-term growth prospects for Oil Search. One expects Oil Search to participate in two to three additional LNG trains, with construction commencing in 2017.

  • Investors are generally advised to buy Oil Search at current levels.


Most of the investment press label AWE as a high-risk “buy”, with the oil and gas producer’s first-half results showing how highly leveraged the company is to moves in the oil price.

AWE reported an underlying net loss of $13.9m for the six months to December 31 compared to a $10.8m profit in the previous corresponding period, with sales revenue declining 8 per cent to $161.3m. The statutory net loss was $61.7m, reflecting $50.1m in non-cash impairments.

“We have four cornerstone assets in various stages of development, a diverse asset portfolio with healthy reserves and resources, a clear growth strategy and a sound balance sheet,” said managing director Bruce Clement.

But while AWE’s portfolio is well diversified across both geographies and product types, it’s hard to escape the reality that the company isn’t profitable at current oil prices, one analyst says. Another analyst points out that AWE lacks a cost advantage.

There’s also substantial risk with undeveloped projects. The Ande  Ande Lumut (AAL) project in Indonesia, which AWE has a 50 per cent stake in, has been pushed back by Santos (the operator), with the final investment decision on the project now expected by the second half of FY16.

Nevertheless, most analysts are bullish on AWE. For one thing, its reserve life of 16 years is impressive compared to its peers, they say.

Secondly, the company’s solid production growth and greater mixture of gas assets is attractive. Its gas projects include BassGas in Tasmania, the Casino/Henry Gas Project in Victoria and Perth Basin in Western Australia.

The Sugarloaf oil project in Texas – where AWE is devoting most of its reduced capex in FY16 – is also booming, with production up 38 per cent in the period.

Production guidance was maintained for the full year of between 4.6 to 5.1mmboe.

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

M2 Group (MTU)

M2 Group’s latest half-year results have boosted newsletters’ confidence that the company can grow organically as well as by acquisitions.

The telco announced last week (February 23, 2015) that underlying net profit lifted 16 per cent to $50.6 million compared to the same time last year, while revenue grew 8 per cent to $546.2 million. A fully-franked interim dividend of 15 cents was declared, up 30 per cent on the prior corresponding period.

Importantly, M2 Group made no acquisitions during the half-year – meaning the 8 per cent top-line growth has largely been organic, say the newsletters. Management confirmed they expect this to persist through to the second half.

What once had been purely an acquisition roll-up story – with M2 Group making more than $500 million in acquisitions over the past five years as the industry consolidated – has now transitioned into something more, analysts say.

The consumer segment, in particular, is driving organic growth. Traditionally M2 had been focused on small to medium enterprises, but thanks to the Dodo acquisition in FY13 the consumer division is increasingly powering gross profits. Dodo’s energy business gives M2 the ability to bundle power and broadband – something no other telco can replicate, one analyst mentions.

While the share price reaction was muted towards the in-line results, it has risen 50 per cent to Friday’s close of $9.87 over the past year.

Indeed, the majority of newsletters say M2’s exceptional profit growth is priced in to the shares. As a result, consensus is to “hold” the stock. The stock trades at an FY15 PE of around 18 times, a mild discount to Telstra at 19.4 times.

  • Investors are generally advised to hold M2 Group at current levels.

Lend Lease (LLC)

Newsletters say Lend Lease remains exposed to highly attractive themes such as the urban renewal projects and the Sydney and London residential markets, but several contend the opportunities are already reflected in the share price.

The international property and infrastructure company reported half-year earnings last week (February 23, 2015), where profit after tax surged 25 per cent to $315.6m.  The company is now comfortably placed to meet full-year guidance of $604-$608m.

“Our $40.4 billion global development pipeline, including a significant number of urban regeneration projects, continues to drive solid growth and earnings visibility for the group,” said chief executive officer Steve McCann.

One of the biggest movers for the first-half was in infrastructure development due to the close of two Australian public-private partnership projects – including the suspension of the East West Link project in Melbourne.

Compensation for termination of the project hasn’t yet been included, an analyst notes, though if paid it could be enough to offset lost earnings for the project in FY16.

Following the update, most newsletters either call Lend Lease a “buy” or “hold”. Those more bullish highlight the stock only trades at around 13 times FY16 earnings with strong visibility for the next three years – a “super profits” period, one analyst says. 

They highlight residential pre-sales in the half were roughly $3.6bn – three times those of the previous period – driven by apartment sales in Australia and London. These sales should grow more, with further launches expected in the two cities.

But more analysts say Lend Lease is at fair value. Like M2 Group, it has soared more than 50 per cent over the past year. They also don’t see any material catalysts to lift the share price higher.

  • Investors are generally advised to hold Lend Lease at current levels.

Caltex (CTX)

Analysts are divided between advising their clients to sell Caltex or hold onto the shares despite the company beating their estimates and its own guidance in its full-year results.

Profit on a replacement cost basis (which doesn’t include oil price changes and aims to show underlying performance) surged 50 per cent to $493m for 2014, above market estimates and guidance for between $450-470m.

The drop in the oil price was a major contributor to stronger refiner margins in the second half as product prices haven’t fallen as quickly as crude prices, the company said. The weak Australian dollar also supported earnings.

While Caltex is maintaining consistent performance from its marketing & distribution business and the benefits to meet cost savings of $80-100m in 2016 are on track, its valuation has become too stretched, several newsletters say.

The final dividend more than tripled to 50 cents per share compared to last year. Including an interim dividend of 20 cents per share, the 12-month trailing yield is only around 2 per cent. However, investors have enjoyed an 80 per cent rise in the stock over the period.

One publication with a “sell” says it’s hard to justify Caltex’s valuation because the current excellent growth rate doesn’t look like it can be achieved indefinitely – as the share price would suggest.

Risks include increasing competition in the transport fuels marketing margin, volatility in the crude oil price and the AUD/USD exchange rate.

However, others note that the new Caltex generates stronger and less volatile earnings, it has increased its payout ratio to 40-60 per cent and that it has $1.1bn in franking credits it could release to shareholders. Assuming they are all distributable, they imply a value of $4.17 per share, one analyst calculates.

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

Directors' trades

  • Directors selling stakes dominated proceedings this week, headed by founder of ERM Power Trevor St Baker. He offloaded $21,139,000 worth of shares in the electricity and sales generation company at $2.058 per share.
  • Meanwhile, Computershare non-executive chairman Christopher Morris netted $3,379,450 from selling shares in the stock transfer company at $12.20 per share.
  • Another big seller was Cochlear chief executive Chris Roberts, who sold 38,938 shares in the medical device maker at $86.41 each for a total of $3,364,633.

Takeover Action February 24 – March 2, 2015

19/12/2014Australian IndustrialANI360 Capital Industrial12.89
24/11/2014Clinuvel PharmaceuticalsCUVRetrophin6.73
12/02/2015Cue EnergyCUENew Zealand Oil & Gas19.99
02/03/2015Genesis ResourcesGESBlumont Group8.01Bid terminated
26/02/2015Guildford CoalGUFSino Construction0.00Bid lapsed
26/02/2015Neon EnergyNENEvoworld Corporation23.36New bid for 50%
26/02/2015Orbis GoldOBSSEMAFO96.67
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
26/02/2015Goodman FielderGFFWilmar International and First Pacific Company10.10Approved
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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