Collected Wisdom

This week we look at Aristocrat Leisure, Karoon Gas, Premier Investments, New Hope Corporation and Nufarm.

Summary: Newsletters support Aristocrat Leisure’s strategy to focus more on its operations with recurring revenue because of the advantages they have over its traditional business. Meanwhile, analysts call Karoon Gas undervalued after the company plummeted in response to not finding any oil or gas at one of its exploration wells. Elsewhere, Premier Investments beat expectations with its interim result, New Hope Corporation showed why it’s one of the most resilient coal miners in the challenged industry and Nufarm overcame poor weather conditions with its earnings.

Key take-out: Reasons to buy Aristocrat Leisure shares include its increasing share of recurring revenues in the US, its return to dominance in Australia, exposure to the growing gaming market in Asia and its rapidly growing digital business.

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.

Aristocrat Leisure

Aristocrat Leisure’s recent investor day reinforced how the poker machine maker’s decision to shift to recurrent revenue streams is the right one, the newsletters say.

The investor day, held in Sydney last week (March 24, 2015), didn’t provide a trading update for the company. It did, however, offer further insights into the company’s focus on prioritising earnings from recurrent revenue streams.

This is a vision that was strengthened by the acquisition of Video Gaming Technologies (VGT) last year, a North American developer of casino games for Class II (Native American bingo-based gaming) and emerging markets.

Newsletters agree that recurring revenues, which climbed to 42 per cent of revenue in FY14 from 17 per cent in FY10, have significant strategic merit for Aristocrat Leisure. They not only smooth earnings volatility from its electronic gaming machine market, but they are also higher margin, higher cash flow businesses, a publication says.

Following the investor day, the majority of analysts call Aristocrat Leisure a “buy”. While the stock has climbed nearly 30 per cent since Collected Wisdom covered it as a “buy” for the second consecutive time in December last year, analysts see more value than what’s reflected in the share price.

The investment thesis for Aristocrat rests on four main themes: its increasing share of recurring revenue space in North America, its return to dominance in Australia, its exposure to the growing gaming market in Asia and a rapidly growing digital business that leverages existing content.

However, the stock jumped 3.9 per cent in response to analysts’ recommendations on March 25 – marking its seventh straight day of gains. It closed on Friday at $8.31.

  • Investors are generally advised to buy Aristocrat Leisure at current levels.

Karoon Gas (KAR)

Karoon Gas shares tumbled the most in five years earlier this month (March 20, 2015) after the company announced it didn’t find any oil or gas in one of its exploration wells off the coast of Brazil.

The well, called Kangaroo West-1, had been targeting a gross resource of 510 million barrels of oil equivalent  – which would have provided critical mass to the existing Kangaroo discovery where recoverable resources still remains uncertain, one analyst says.

Together in a joint venture with Pacific Rubiales Energy Corp, Karoon owns five offshore exploration blocks in the Santos Basin, located 200km off the coast of Santa Catarina, Brazil. Kangaroo West-1 exists in one of the blocks – S-M-1165. Karoon is the operator with a 65 per cent stake.

Recent gains the oil&gas producer had made in anticipation of good news evaporated, with the stock plunging 20 per cent on the day to $2.16.

If a positive can be drawn from the result, it’s that the drilling costs attributed to Karoon Gas were limited to $US34m, an analyst says.

Despite the absence of oil and gas at the exploration well, analysts unanimously call Karoon Gas a “buy” after the update. While the lack of success at Kangaroo West-1 is disappointing, the share price is now fully discounting the region as a potential discovery, they say.

Right now the stock trades at around a 12 per cent premium to its net cash position (which equates to $1.92 including Kangaroo West well costs). This is unjustified because it largely ignores any value for milestone payments, or exploration potential from Kangaroo – which still has a 75 per cent chance of development going ahead – or at its one of its other projects offshore Peru, a publication says.

  • Investors are generally advised to buy Karoon Gas at current levels.

Premier Investments (PMV)

Premier Investments has navigated a tricky environment to report a stellar result for the first half of FY15, the newsletters say.

Shares in the clothing retailer jumped 10 per cent last Monday (March 23, 2015) after the company announced group net profit climbed 9 per cent to $57m and sales lifted 4.8 per cent to $491m. Like-for-like sales were up 1.1 per cent.

The good result was bolstered by strong growth in the Smiggle and Peter Alexander stores but other brands – Jay Jays, Just Jeans and Jacqui E. Gross – also improved. While sales declined at Portmans and Dotti, the two brands made a “strong start” to the second half.

An interim dividend of 21 cents per share was declared along with a special dividend of 9 cents per share.

“This is an excellent result in a challenging environment in which consumer confidence remains volatile,” said chairman Solomon Lew. “Management has achieved top line sales growth, disciplined cost management and continued margin expansion.”

Nevertheless, newsletters almost unanimously rate Premier Investments as a “hold” after the first-half results. While they are more confident about the growth prospects of Smiggle and its bold expansion into the UK – with the division on track for profitability this year – most think the upside is fully reflected in the share price.

One newsletter which downgraded its call to “hold” from “buy” advised its clients to take some profits after the retailer’s share price rally. The stock has surged 58 per cent over the past year and 20 per cent since Collected Wisdom last covered it as a “buy” back in September.

The publication also pointed out, however, that further special dividends are likely in the absence of acquisitions, with the company holding $205m in franking credits. Analysts on average anticipate a fully-franked dividend yield of 3.7 per cent in FY15 and 3.8 per cent in FY16.

  • Investors are generally advised to hold Premier Investments at current levels.

New Hope Corporation (NHC)

New Hope’s first-half report displays the still challenging short-term outlook for coal, but it also reminds investors of the company’s resilience and its opportunities within the embattled industry, newsletters say.

The thermal coal producer reported adjusted net profit of 34.2m, up 51 per cent on the previous corresponding period. While sales volumes increased 2 per cent to 3.1m tonnes, revenue from continuing operations declined 5.5 per cent to $269.1 million on the lower thermal coal price.

Most publications rate New Hope as a “hold” following the result. The company’s earnings are being weighed down by the slump in the commodity, but it is dealing with the weak environment exceptionally well, they say.

New Hope’s rise in profit was primarily driven by reducing unit costs by 15 per cent – further than analysts had expected – at Acland, its flagship mine.

The weaker Australian dollar is also offsetting the falling thermal coal price, which is traded in US dollars.

But what sets New Hope most apart from other miners in the industry is its cash pile, which at the half sat over $1.1bn. This gives the miner the ability to take advantage of the challenging conditions and purchase assets.

“We are actively pursuing asset-level acquisition opportunities, with a focus on either adding additional near-term coal production activity, or complementing our existing portfolio of longer-term development projects,” said managing director Shane Stephan.

One analyst who is more optimistic than consensus says New Hope suits the patient, value-orientated investor. While the analyst doesn’t expect the thermal coal price to bounce any time soon, there’s increasing evidence the worst is over and it could slowly recover in two to three years’ time.

  • Investors are generally advised to hold New Hope Corporation at current levels.

Nufarm (NUF)

Analysts say Nufarm’s share price may have captured fair value after rising to its highest levels in nearly five years.

The agribusiness reported a strong interim result for the six months ended January 31 despite poor seasonal conditions in its key markets. Net profit surged 41 per cent to $26.5m compared to the previous corresponding period, while group revenues climbed 4 per cent to $1.18bn.

Growth was supported by a better-than-expected result from its Australia and New Zealand segment – with EBIT rising 25 per cent – even though it endured a hot and dry summer cropping season. However, analysts note that it has rained more since the first half though the main rainfall period is yet to come.

Last time Collected Wisdom covered Nufarm in December, most analysts rated the stock as a “buy”. After surging 40 per cent since then to as high as $7.27 earlier this month, however, consensus is now to “hold” the stock, with two publications downgrading their recommendations on the latest result.

Analysts believe earnings are set to grow at double digits over the next few years due to improved seasonal conditions, market share wins, new products, entering new regions and its cost restructuring program.

But they also say the market has moved quickly to factor this into the share price. More proof that it can deliver on its stated goals will be necessary for further stock gains.

In the interim result Nufarm reiterated its $100m cost-cutting program over the next two to three years. This is driven by optimising its manufacturing, restructuring its European operations, improvements to its supply chain and reducing selling, general and administrative expenses.

However, analysts at this stage are unwilling to give Nufarm full credit for these efficiencies, with one source assuming 75 per cent of the benefits are delivered. In their experience, cost saves tend to be partly offset by underlying inflation and competitive end-markets.

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

Directors’ trades

  • Oroton Group directors went on a shopping spree this week, with four picking up around $3.4 million in the retailer. The biggest buyer was non-executive director William Vicars, who traded $2,666,218 for 1,110,924 shares in the company at $2.40 per share.
  • Meanwhile, chief investment officer of Platinum Asset Management topped the selling list, offloading $8,160,140 worth of shares at $8.16 per share.
  • Elsewhere, Primary Health Care non-executive director Edmund Bateman sold 500,000 shares in the healthcare company at $5.10 per share for a total of $2,550,000.

Takeover Action March 24-30, 2015

Date Target ASX Bidder (%) Notes
25/03/2015 Australian Industrial ANI 360 Capital Industrial 16.60
24/11/2014 Clinuvel Pharmaceuticals CUV Retrophin 6.73
26/03/2015 Cue Energy CUE New Zealand Oil & Gas 45.60
13/03/2015 MEO Australia MEO Mosman Oil and Gas 1.10
27/03/2015 Neon Energy NEN Evoworld Corporation 31.49 New bid for 50%
27/02/2015 Tandou TAN Webster 0.00
Schemes of Arrangement
17/12/2014 Amcom Telecommunications AMM Vocus Communications 10.00 Vote April
30/01/2015 Black Range Minerals BLR Western Uranium 0.00 Vote June
25/03/2015 Chandler Macleod CMG Recruit Holdings Co 0.00 Approved
13/03/2015 iiNet IIN TPG Telecom 0.00 Vote June
06/02/2015 Norton Gold Fields NGF Zijin Mining Group Co 82.43 Vote May
03/02/2015 Novion Property NVN Federation Centres 0.00 Vote May
17/03/2015 Trafford Resources TRF IronClad Mining 0.00 Vote May 1
Foreshadowed Offers
22/10/2014 Central Petroleum CTP Unnamed party 0.00 Speculation due to director share purchases
03/03/2015 Cokal CKA PT Cakra Mineral 0.00 Indicative proposal
06/03/2015 John Shearer (Holdings) SHR Arrowcrest Group 80.00 Intends to make bid
15/12/2014 Recall Holdings REC Iron Mountain Inc 0.00 Indicative proposal
Source: Newsbites

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