Collected Wisdom

This week we look at BHP Billiton, TPG Telecom, Boral, Orica and Sirtex Medical.

Summary: The newsletters are encouraged by the information released by BHP over its proposed South32 merger, while they back the decision by TPG Telecom to acquire its smaller peer iiNet. Elsewhere, Boral’s on-market buy-back is a good move, the resignation of Orica’s chief executive could increase the explosive giant’s short-term risk and the devastating share price reaction over Sirtex Medical’s clinical trial results appears fair, analysts say.

Key take-out: The South32 demerger will allow BHP to focus on its best assets and cutting costs until the iron ore price recovers, newsletters say. In the meantime, the miner’s attractive yield should help support the share price.

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.

BHP (BHP)

Newsletters are encouraged by the information released by BHP on the South32 demerger, even with the hefty costs involved.

The mining giant reported last week (March 18, 2015) that the demerger will cost $US641 million after tax – not a cheap exercise, analysts highlight. In return, the company expects to generate functional cost savings of $US100m before tax per annum and insists that its more streamlined structure will deliver more than the $US4 billion cost reductions it had targeted earlier.

“More challenging markets demand a sharper focus on the businesses that drive the majority of our earnings and the push for productivity must continue,” said chief executive Andrew Mackenzie.

With one publication upgrading its recommendation on the news, consensus is to “buy” BHP shares. After the demerger the miner will hold 19 large assets in eight countries as opposed to 41 assets in 13 countries, allowing it to focus on its best assets and cut costs in the difficult market.

On average, analysts forecast the iron ore price to be pressured in the short term but to recover back to over $US70 a tonne by 2017.

Most analysts believe BHP’s attractive yield will also help support the share price; they forecast a 12-month target price of $34.25 for BHP, 11.7 per cent above current levels, and estimate a fully-franked dividend yield of 5.4 per cent in FY15 and 5.5 per cent in FY16.

After the demerger, several analysts point out the yield could rise to as high as 6.1 per cent in FY16, though one questions whether free cash flow will be enough to cover dividends in the long term. Further, South32 could be a high-yielding stock in its own right, with the company distributing 40 per cent of underlying earnings as dividends to shareholders.

In comparison, CBA’s fully-franked dividend yield is expected to be 4.4 per cent in FY15 and 4.6 per cent in FY16.

Eligible shareholders are to receive one South32 share for every BHP share under the proposed demerger. To see more on South32, see Spinoffs: The secret of success and BHP’s spin-off moves from ‘DudCo’ to ‘TopCo’.

  • Investors are generally advised to buy BHP Billiton at current levels.

TPG Telecom (TPM)

The takeover of iiNet makes TPG Telecom the second largest telco in Australia and provides numerous benefits, but it’s hard to find value in the company at current share price levels, newsletters say.

Shares in TPG soared 18 per cent to $9.14 – a record high – earlier this month (March 13, 2014) after the company announced the proposed acquisition. Under the bid, iiNet shareholders will receive a cash consideration of $8.60 per share and a fully franked interim dividend of 10.5 cents per share for FY15.

The acquisition is expected to be immediately EPS accretive. It provides TPG with scale benefits entering into the NBN (giving it a 25 per cent market share behind Telstra’s 50 per cent) and scope for more customers to leverage its fixed infrastructure and fibre to the premises (FTTB), newsletters say.

It could also help protect TPG from lower gross profit margins when the NBN begins to compete by consolidating iiNet’s cost base.

While details were scant about synergies, analysts are sceptical management would commit to a $1.4 billion purchase without knowing these facts and think they will be significant.

“iiNet and TPG are highly complementary businesses in terms of geographic presence, market segments and corporate customer base,” said chief executive and executive chairman David Teoh.

iiNet’s directors unanimously recommend the scheme, siting its significant premium to the recent share price, attractive multiples and certainty of value in the cash offer. However, today the company’s founder and former chief executive, Michael Malone, said he did not believe the deal was in the best interests of shareholders, staff or customers. He owns around 4 per cent of the company.

Indeed, newsletters say it was more of an opportunistic bid since iiNet shares had fallen after a soft first-half result in February. While it was 31 per cent above the prior closing price, it was only a 4 per cent premium to iiNet’s previous record high share price of $8.36 in 2014.

One analyst thinks the offer is too low and that a competing bid could emerge. TPG’s market cap increase of $1.1bn suggests investors agree TPG is getting quite a bargain, the analyst says.

However, at current share price levels consensus is to “hold” the stock after it has risen more than 50 per cent this year. One publication downgraded its recommendation to “sell”, stressing that the deal hasn’t been completed yet and it’s a good opportunity to take money off the table.

  • Investors are generally advised to hold TPG Telecom at current levels.

Boral (BLD)

Newsletters support Boral’s decision to reward investors with an on-market buy-back, saying it should be earnings accretive and takes advantages of the company’s under-levered balance sheet.

Shares in Boral climbed 4.3 per cent last week to Friday’s close of $6.28 after the building products and construction materials company announced it would buy up to 5 per cent of its issued capital, or around 39 million shares, over the next 12 months.

Following the announced buy-back most newsletters rate Boral a “hold”, though there are several “buys” and “sells” as well.

While analysts all agree the buy-back is a positive – with it estimated to be 3-4 EPS accretive in FY16 and FY17 – several say that the move reflects increased confidence from management in the Australian housing and infrastructure cycles.

Boral is indicating that it can generate sufficient free cash flow to fund growth while also returning cash to shareholders, a publication says. It believes the buy-back is the most tax-effective way to return capital. The amount, which at current prices equates to about $240m, also leaves plenty of headroom for the company to pursue accretive M&A.

The industry dynamics are favourable for Boral over the next few years. One newsletter lifted its forecasts in FY17, reflecting increased spending by the federal and NSW governments on infrastructure as they focus on large-scale privatisation initiatives.

But more pessimistic analysts are wary about Boral’s valuation and the construction materials division, which saw EBIT fall 7 per cent on the previous corresponding period when excluding property. Boral is trading at a premium to the broader industrial market with the market already fully factoring in the expected earnings recovery, the analyst says.

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

Orica (ORI)

Analysts are divided about whether the sudden departure of Orica’s chief executive, Ian Smith, is a good or bad outcome for the explosives giant.

The market certainly thought it was the latter, with the stock losing 5.1 per cent to $18.21 last Wednesday (March 19, 2014). However, the stock has since regained some ground and closed at $19.10 today after the company announced that it had replaced Smith with Alberto Calderon, a former BHP executive.

Under Smith’s oversight, Orica had extended its value-add strategy to earn higher returns on capital and generate free capital, improved its environmental performance (its social licence to operate), moved to a more functional structure (away from regional) and had recently began a significant cost-reduction program.

But Smith was also known to display an aggressive and confrontational management style, with a recent event triggering conversations among the board about replacing him.

“The board and Ian agree that this is an appropriate time to move forward with transition to a new leader with a different management style who will consolidate and build on the foundations that have been laid,” said chairman Russell Caplan.

Consensus for Orica is hard to find after Ian Smith’s departure, but on balance it is to “hold” the stock.

Investors should be wary about the execution of the cost-reduction program, one publication says. Given Smith’s exit comes at a time when it is only part-way through, the publication is particularly cautious about the program’s progress during the interim period.

But another publication says while Smith’s strategy was appropriate, his management style caused unintended consequences and collateral damage. Calderon, on the other hand, has been described as a gentleman.

Most newsletters believe Orica is facing difficult conditions at the moment. The first half of 2015 will most likely be challenging given the weaker eastern Australian volumes of ammonium nitrate in the second half of last year, lower sodium cyanide pricing and tough markets in Indonesia and Latin America.

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

Sirtex Medical (SRX)

Shares in Sirtex Medical fell the most on record last week when the company announced that its seven-year study of its selective radiation therapy failed to achieve a significant improvement over conventional chemotherapy.

“The preliminary analysis shows that adding SIR-Spheres Y-90 resin microspheres to a current first-line systematic chemotherapy regimen for the treatment of non-resectable metatastic colorectal cancer (mCRC) does not result in a statistical improvement in the overall progression-free survival (PFS),” Sirtex said.

The stock lost more than half of its value last Monday (March 17, 2015), falling 55 per cent to $17.53.

Currently, Sirtex’s spheres are used as a last resort by oncologists to treat liver tumours when standard chemotherapy has failed. Sirtex – and the market – had hoped the study would not only turn its therapy into the first line of defence in treating the liver, but would work elsewhere as well.

While the primary endpoint of overall survival wasn’t achieved in the SIRFLOX study, it did achieve one of its secondary endpoints with the spheres showing a significant improvement in PFS in the liver.

Following the news, newsletters are mixed on the outlook for Sirtex.

One publication remains optimistic because it thinks utilisation will grow beyond the current salvage market thanks to the success of the secondary endpoint. There is now the opportunity to treat the liver as part of a broader treatment regime in addressing the wider metastasis of the cancer through the body, it says.

On balance, however, analysts call Sirtex a “hold”. The extent of the share price reaction was probably fair, considering Sirtex still trades at a price-earnings multiple of more than 30 times when much uncertainty remains until the full data is published in six to seven weeks’ time.

Things yet to be assessed include the outcomes for five other metrics measured in the study: overall survival, quality of life, liver resection rate, recurrence rate and tumour response rate.

  • Investors are generally advised to hold Sirtex Medical at current levels.

Directors’ trades

  • Seek’s chief executive and co-founder, Andrew Bassat, executed the biggest directors’ trade this week. He sold 1,400,000 shares in the online jobs business at $17.90 each for a total of $25,061,120.
  • Elsewhere, James Hardie chief executive Louis Gries offloaded $2,605,877 in the building products manufacturer at $14.95 per share.
  • Another seller this week was non-executive director of NextDC, Edward Pretty, who netted $1,818,529 from the sale of 750,000 shares in the data centre company.

Takeover Action March 17-23, 2015

DateTargetASXBidder(%)Notes
23/03/2015Australian IndustrialANI360 Capital Industrial14.89
24/11/2014Clinuvel PharmaceuticalsCUVRetrophin6.73
19/03/2015Cue EnergyCUENew Zealand Oil & Gas27.53
13/03/2015MEO AustraliaMEOMosman Oil and Gas1.10
11/03/2015Neon EnergyNENEvoworld Corporation30.60New bid for 50%
27/02/2015TandouTANWebster0.00
Schemes of Arrangement
17/12/2014Amcom TelecommunicationsAMMVocus Communications10.00Vote April
30/01/2015Black Range MineralsBLRWestern Uranium0.00Vote June
14/01/2015Chandler MacleodCMGRecruit Holdings Co0.00Vote March
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 May
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