Collected Wisdom

This week we look at Macquarie Group, Regis Resources, Ardent Leisure, Myer and Acrux.

Summary: Newsletters approve of Macquarie Group’s latest aircraft leasing acquisition, and they have lifted their recommendations for Regis Resources after the gold miner reported more production problems at its flagship mine. Elsewhere, they are nervous about the outlooks for leisure and park theme operator Ardent Leisure and retailer Myer following the surprise departures of their chief executives, while they think latest FDA hurdle for Acrux has made the risks too great for the drug delivery business.

Key take-out:  Reasons to buy Macquarie Group include near-term earnings certainty, solid momentum across the business, the falling Australian dollar, a reasonable valuation and attractive yield.

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.

Macquarie Group (MQG)

Macquarie Group’s latest aircraft leasing acquisition fits in with the investment bank’s strategy and could help lift earnings above the market’s expectations, analysts say.

The company announced earlier this month (March 4, 2015) that it would purchase a portfolio comprising 90 modern, current-generation commercial passenger aircraft leased to 40 airlines with an average remaining lease term of six and a half years.

The purchase price is $US4 billion and will be funded from existing funding sources, debt and a capital raising consisting of an institutional placement and share purchase plan, which was also announced on the day.

“This acquisition builds on the strong growth of our corporate and asset finance business and the ongoing investment in our annuity-style businesses,” said chief executive Nicholas Moore.

Following the update, most newsletters call Macquarie Group a “buy”. The acquisition, which management expects to be earnings-per-share and return-on-equity accretive, adds more weight to the story Macquarie is going through an earnings upgrade cycle as it uses its share price (at a PE multiple of 16 times) to make attractive acquisitions.

The focus on annuity-style businesses is the main reason why Macquarie Group has improved its ROE in recent years, one publication says.  It believes the company’s ROE is above its cost of capital for the first time since FY08.

Reasons to buy Macquarie Group now include near-term earnings certainty, solid momentum across the business, the falling Australian dollar – with 65 per cent of earnings offshore – and a reasonable valuation at a price-earnings multiple of 13.6 times for FY16 while providing a yield of around 5 per cent (historically franked at 40 per cent), another publication says.

Analysts also recommend investors participate in the share purchase plan, which has a maximum issue price of $73.50. While the maximum price is near the current price, it provides a cost-effective way for shareholders to top up their holdings. Further, they will be eligible for the final dividend.

  • Investors are generally advised to buy Macquarie Group at current levels.

Regis Resources (RRL)

Several newsletters have lifted their recommendations for Regis Resources despite the company reporting more production problems at its flagship Duketon gold project.

Regis expects to deliver production guidance at the lower end of its previous forecast for 305-355,000 ounces of gold after its Garden Well mine was hampered by lower-than-expected head grades and its Rosemont mine was hit by heavy rainfall, restricting access, as well as wall failures within the main pit.

The update echoes February last year, when mining was suspended for more than a month due to rainfall flooding. Duketon is located 350kms north east of Kalgoorlie in Western Australia.

The stock plunged 26.7 per cent to $1.36 on the day of the latest the market update (March 6, 2015). It has since fallen further to $1.28 – its lowest point in nearly five years.

Following the share price fall, most analysts think Regis Resources has been oversold. With five newsletters upgrading their calls, consensus is to “buy” the stock.

Even after lowering what they believe to be conservative production forecasts, many analysts see substantial upside at current prices.

The catalysts going forward will be regaining control of higher grades at Garden Well and returning to stable production, one analyst says.

However, the positive outlook is by no means unanimous. A history of operational issues and a lack of investor relations is a bad combination, another analyst says, meaning that the market is understandably cautious now. Because of this the stock will likely continue to trade at a substantial discount, the analyst says.

  • Investors are generally advised to buy Regis Resources at current levels.

Ardent Leisure (AAD)

The surprise replacement of Ardent Leisure’s long-standing chief with non-executive director Deborah Thomas has made newsletters more nervous about the company, but most believe the ensuing share price reaction has captured the uncertainty.

Shares in the leisure and entertainment operator plunged 19.1 per cent to $1.965 last Wednesday in response to Greg Shaw retiring after 13 years at the helm and Thomas, the former editor of The Australian Women’s Weekly, running the business from April.

As one publication says, Thomas brings a wealth of experience in fields including media, advertising and communications – which will be of value – but she lacks operational leisure experience. It believes one of Shaw’s key strengths was his ability to extract efficiencies and deliver a lean operating platform which enabled the company to grow irrespective of market conditions.

Another analyst points out that Shaw not only steered Ardent through the GFC, but was also responsible for diversifying the business away from its domestic set of stable, mature assets – theme parks and bowling alleys – to its main growth driver today, Main Event in the US.

Many analysts also question the timing, with the move announced only shortly after disappointing half-year results (arising from challenges in the healthcare division) which saw the share price fall 16 per cent. The stock has lost a quarter of its value this year.

Nevertheless, while the replacement is seen as a negative, the share price fall appears to have overshot fair value in response to the half-year results and chief replacement, an analyst says.

On balance, however, newsletters rate Ardent Leisure a “hold”, with the share price fall offsetting the increased risk from the new chief.

To see more about Ardent Leisure, see James Kirby and Alan Kohler's discussion about it in today's Inside Line.

  • Investors are generally advised to hold Ardent Leisure at current levels.

Myer (MYR)

Most analysts are divided between calling Myer a “hold” or a “sell” following the departures of chief executive Bernie Brookes and chief financial officer Mark Ashby.

Announced at the beginning of March, Brookes has been replaced with Richard Umbers, who was previously Myer’s chief information and supply chain officer. No decision has been made for the replacement of Ashby, who has taken up a role overseas.

“The board and management team have agreed that the transformation work has reached a pivotal point and it is appropriate for a new chief executive to be given the opportunity to own, lead and drive the transformation program over the coming years,” Myer said.

Shares in Myer fell 10.3 per cent to $1.65 on the day of the news (March 1, 2014).

While Brookes’ resignation had been flagged, analysts believe it was ill-timed and could signal a near-term earnings downgrade. Prior to the announcement the stock had outperformed the market on expectations of improved January sales, but analysts now question its quality.

Were sales really that good, or was discounting needed – meaning a cut in margins?

Analysts suggest Myer may not meet its earnings guidance this year, with consensus assuming a 10 per cent decline in earnings versus the company’s forecast for ‘an increase’ this year. However, one publication notes that the chairman reiterated guidance, implying that underperformance is unlikely to be material.

To restructure, a capital raising is likely given Myer’s currently stretched balance sheet, newsletters say. And even if the company does make legitimate steps to transform, the structural challenges it faces will moderate the extent of a turnaround.

However, much of the poor outlook appears to be factored into current share price levels with the market factoring in a weak first-half result, and most analysts recommend holding onto the shares.

The first-half result is due to be released this Thursday (March 19, 2015).

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

Acrux (ACR)

Shares in Acrux fell to their lowest level in nearly a year after the US Food and Drug Administration (FDA) cautioned the use of testosterone replacement therapy (TRT) by older people.

In a deal with pharmaceutical giant Eli Lilly, Acrux receives royalty and milestone payments for the sale of Axiron, a product that it developed that supplements testosterone via an underarm treatment.

“Based on the FDA’s statement, the agency is requiring labelling changes for all prescription testosterone products to reflect the possible increased risk of heart attacks and strokes associated with testosterone use,” Acrux said in response to the ruling.

But they aren’t the only prerequisites. One newsletter notes that while the changes to labelling were anticipated, other requirements issued by the FDA were not.

The FDA requires mandatory testing by healthcare professionals to confirm low testosterone levels which aren’t related to age, and for manufacturers to conduct clinical trials to produce robust evidence of the risks involved.

Acrux believes this testing could take years to complete, another publication says.

Following the update, the majority of analysts are advising their clients to “sell” the stock. The FDA seems to be aiming at curbing over-prescription by those people who use TRT for lifestyle or age-related reasons, they say.

While there doesn’t appear to be any data about the proportion of TRT being used by the demographic, it represents a clear risk, an analyst says. Further, the analyst notes that marketing campaigns in the US have been intensive and that they suggest TRT will help with symptoms of aging by improving sex drive, mood and energy levels.

Shares in Acrux have fallen 40 per cent this year. In late February they fell 23 per cent after the company reported a lacklustre half-year report, with net profit plunging 71 per cent to $7m compared to the same period last year.

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

Takeover Action March 3-16, 2015

19/12/2014Australian IndustrialANI360 Capital Industrial12.89
24/11/2014Clinuvel PharmaceuticalsCUVRetrophin6.73
13/03/2015Cue EnergyCUENew Zealand Oil & Gas27.37
13/03/2015MEO AustraliaMEOMosman Oil and Gas1.10
11/03/2015Neon EnergyNENEvoworld Corporation30.60New bid for 50%
03/03/2015Orbis GoldOBSSEMAFO97.60
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
16/03/2015Elk PetroleumELKMetgasco0.00Merger terminated
13/03/2015iiNetIINTPG Telecom0.00Vote June
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
03/03/2015CokalCKAPT Cakra Mineral0.00Indicative proposal
06/03/2015John Shearer (Holdings)SHRArrowcrest Group80.00Intends to make bid
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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