Collected Wisdom

This week we look at Qantas, Nine Entertainment, Harvey Norman, Suncorp and Cabcharge.

Summary: The newsletters are upbeat on Qantas and Nine Entertainment as management initiatives and more favourable environment dynamics reward the stocks. But while the same can be said for Harvey Norman amid the heated housing market, most analysts think it’s already reflected in the retailer’s shares. Elsewhere, Suncorp’s latest warning over Cyclone Marcia highlights the inherent risk of insurance companies, while Cabcharge’s results show the company is responding well to its negative earnings outlook.

Key take-out: As Qantas turns into a more agile company under its effective transformation program, it’s likely to beat profit forecasts again in the future, analysts say. 

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.

Qantas (QAN)

More newsletters are recommending investors buy shares in Qantas after the airline released its half-year results, with two analysts upgrading their recommendations.

The report, issued on February 26, was above expectations. First-half underlying profit before tax came in at $367m, higher than average analyst forecasts for $339.3 million.

“The decisive factor in our best half-year result for four years was our complete focus on the Qantas transformation program,” said chief executive Alan Joyce.

When Collected Wisdom covered Qantas in December last year, the majority of newsletters called the stock a “buy” because they believed it was in the midst of a significant recovery from the transformation program.

Despite Qantas rising 22 per cent to $2.87 since then – putting the total gains over the past year at 150 per cent – there’s now even more consensus among the analysts to pick up the shares.

The transformation benefits of $374m in the first half are delivering ahead of targets, newsletters say, enabling Qantas to surprise the market again with better-than-expected profits in the future. The group is now targeting $675m worth of transformation benefits for FY15, up from its previous target of $600m.

And they aren’t the only benefits either. Qantas has indicated that capacity growth has moderated, with declines expected in both the domestic and international markets for the second half.

Fuel costs in the second half will also be lower thanks to the oil price declines. Management expect them to be below $4 billion for FY15 at current prices.

One publication thinks the share price should also garner support in the longer term from a potential share buy-back. It expects Qantas to announced a share buy-back this year and pay shareholders $500m per annum from FY16.

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

Nine Entertainment (NEC)

Shares in Nine Entertainment jumped the most on record in late February when the media company overcame tough market conditions to deliver earnings in line with guidance.

Adjusted NPAT fell 7 per cent to $88.8m, at the top end of guidance for $85-90m. While metro and advertising markets declined 3 per cent for the period, Nine’s revenue share improved from 38.7 per cent to 39.2 per cent.

The company also surprised a number of newsletters by instituting a share buy-back program. The $180m buy-back over the next 12 months equates to 80m shares, or 9 per cent of those on issue, and should be EPS accretive at current prices, one analyst calculates.

An unfranked dividend of 4.2 cents per share was declared. Analysts expect dividends to be fully franked in the future and forecast a yield of 4.3 per cent this year and 5.1 per cent next year before franking credits.

“In what has been a difficult advertising market, NEC has reported a solid result,” said chief executive David Gyngell. “We are confident about our schedule for 2015, and see a clear path to our 40 per cent revenue share target.”

The stock leapt 9.8 per cent to $2.03 on the day (February 26, 2015).

Following the results and management’s positive commentary, newsletters overwhelmingly rate Nine Entertainment as a “buy”.

For one, advertising markets appear to have returned to growth in the second half and analysts don’t think this is reflected in the share price yet as it trades at an undemanding PE multiple of just 12 times.

Nine is well placed in this environment due to its aggressive season launch, the inclusion of World Cup cricket and the absence of the Winter Olympics on Ten, a publication says. However, it also notes that Nine has had a mixed start to the second half, with Gallipoli disappointing on ratings and The Block being weaker than expected.

Nine’s events business, which represents 22 per cent of EBITDA, is also set to benefit from favourable themes, including the number of touring events and strong synergies across ticketing, promotion and venue assets, another publication says.

  • Investors are generally advised to buy Nine Entertainment at current levels.

Harvey Norman (HVN)

Shares in Harvey Norman have climbed to their highest levels in more than five and a half years after the retailer’s first-half net profit beat market forecasts.

Net profit after tax for the six months to December 31 surge 27.4 per cent to $141.98m compared to the previous corresponding period (pcp), ahead of analyst estimates for $136m. Global like-for-like sales lifted 3.4 per cent, with total sales up 3.2 per cent to $3.09bn.

An interim dividend of 9 cents per share was issued, 50 per cent above the pcp.

“In Australia, our stores are benefiting from improved consumer confidence on the back of strong equity markets and strong growth in the housing market,” said chairman Gerry Harvey.

But analysts are split over whether accelerating consumer spending and the robust housing backdrop is already built into the share price. The stock has lifted 30 per cent to $4.39 this year.

On balance, consensus is to “hold” the stock after two analysts downgraded their calls on the interim results. However, there are also a variety of “buys” and “sells”.

Along with the share price running too high, one publication – which downgraded its recommendation – says a reason to sell the stock is that the franchise store network is shrinking. This will be a headwind for sales growth, the analyst says.

But others say Harvey Norman is set to capture more impressive gains in the current environment. The company is rapidly changing its product mix to the higher-margin homemaker category, which is far less exposed than electrical goods to online retail, an analyst says.

This focus will leverage the momentum in the housing market, particularly in NSW, another analyst says.

  • Investors are generally advised to hold Harvey Norman at current levels.

Suncorp (SUN)

The harm done to Suncorp’s earnings from Cyclone Marcia and the Brisbane hailstorm highlights the inherent risk of investing in general insurance companies, say the investment press.

Suncorp told the market last Tuesday (March 3, 2015) it likely won’t be able to meet its return on equity target of 10 per cent for FY15 because of the two events recently.

The financial services group expects Cyclone Marcia to cost it between $120m and $150m and anticipates the natural hazard expense for FY15 to now be in the range of $690m to $720m, above its allowance for $595m.

“It’s disappointing that our return on equity target will unlikely be met, however, the group remains well placed with a resilient balance sheet, solid underlying earnings and a strong culture focused on supporting customers,” said chief executive Patrick Snowball.

Newsletters mostly agree. They say the company remains well capitalised and more excess capital will be returned in the form of special dividends. They forecast a yield of 7.4 per cent in FY15 and 6.7 per cent in FY16.

But they question whether the hazard allowance is adequate, with several forecasting it to be higher for FY15. One analyst points out Suncorp has only performed ahead of allowances once in the past decade.

More claims, as well as an unfavourable outcome from the reinsurance “issue”, could threaten the special dividend, they say.

In its half-year results Suncorp said it was advised that this issue, which relates to the placement of reinsurance cover after the string of disasters in 2010 and 2011, could have an after-tax impact of up to $118m.

It’s believed these factors could also pose a risk to the final dividend, though it’s more likely Suncorp will increase its payout ratio above its desired level of 80 per cent instead.

Nevertheless, more analysts advise to “hold” Suncorp rather than sell the shares at current share price levels.

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

Cabcharge (CAB)

Cabcharge is responding well to revenue pressure from cuts to service fees, but analysts are divided over whether its initiatives can offset a negative earnings outlook over the next few years.

Net profit fell 13.4 per cent to $31.2m in the first half compared to the same time last year and revenue declined 2 per cent to $100.5m. An interim dividend of 15 cents per share was declared, well below the 10 cents per share in the first half of FY14.

“We will actively continue to review our cost base in light of the revenue challenges we face,” said chief executive Andrew Skelton.

“The enduring solution to our challenges will come from new revenue streams and we are determined to leverage our payments expertise outside the taxi industry.”

Newsletters aren’t convinced, with most issuing either “hold” or “sells” after the interim results.

Several believe the market is underestimating the regulatory and technological threats. As the company said in its report, the remainder of the financial year will see the full impact of the government cuts to taxi fees introduced in Victoria, NSW and Western Australia.

Meanwhile disruptors, like Uber, are ramping up competition in the bookings and payments app market.

However, other newsletters think there could be pleasant surprises from strategic initiatives and further cost savings under the relatively new chief executive. But with such an uncertain earnings outlook, they think it is fully reflected in the share price.

Cabcharge shares have climbed 19 per cent to $5.16 in the past 12 months, but remain well below their all-time peak of $13.62 in 2007.

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

Directors’ trades

  • Director trading was again overwhelmingly slanted to the sellers this week, headed by Jamie Pherous, chief executive of Corporate Travel Management. He offloaded $23,400,000 in the company at $11.70 per share.
  • Two other big sellers were Platinum Asset Management’s Andrew Clifford and Elizabeth Norman. Clifford netted $11,564,070 from selling shares in the global investment company at $8.581 per share, while Norman made $3,143,185 from trading shares at $8.484 each.
  • Greencross executive director Paul Wilson also contributed heavily to the sellers tally with the sale of $5,711,029 worth of shares in the veterinary services company at $9.518 per share.

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