Collected Wisdom

This week we look at Slater & Gordon, G8 Education, Computershare, PanAust and Bank of Queensland.

Summary: The newsletters support Slater and Gordon’s recent acquisition – making it the number one personal injury firm in the UK – while they think the delay in G8 Education’s recent childcare centre purchases won’t affect the company’s excellent outlook. Elsewhere, Computershare’s investor day hasn’t alleviated short-term concerns, a second takeover bid for PanAust from another suitor looks unlikely and the composition of Bank of Queensland’s latest interim results appears increasingly shaky, newsletters say.

Key take-out: Slater & Gordon’s acquisition of Quindell’s professional services division boosts the law firm’s earnings and positions it for inclusion to the S&P/ASX100 index in June – making for compelling reasons to buy the stock, say newsletters.

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.

Slater & Gordon (SGH)

The advantages for Slater & Gordon of acquiring Quindell’s Professional Services Division (PSD) in the UK by far outweigh the risks, say the investment press.

SGH became the clear number one personal injury law firm in the UK with the much-anticipated $1.23 billion purchase of PSD late last month (March 30, 2015).  

The acquisition was at a multiple of 6.9 times earnings before interest, tax, depreciation and amortisation (EBITDA) and is expected to be more than 30 per cent earnings per share (EPS) accretive from the first full year of ownership. It’s to be funded by an $890 million two-for-three pro-rata share issue to institutional and retail investors, as well as $375m of debt.

“The acquisition of PSD is a transformational opportunity, and will allow Slater and Gordon to further penetrate the highly fragmented £2.5bn UK personal injury market,” said managing director Andrew Grech.

Newsletters agree, with most advising their clients to “buy” SGH following the news. The acquisition boosts the earnings outlook for SGH and positions it for inclusion to the S&P/ASX100 index in June – a highly compelling proposition, analysts say.

The acquisition is also consistent with SGH’s strategy. Not only does the company’s UK market share grow from 5 per cent to 12 per cent in personal injury law (which is five to six times the size of the Australian market), but it also broadens claims to insurance and insurance brokers.

One publication which upgraded its recommendation to “buy” also thinks the estimates for earnings appear conservative as no synergies have been assumed.

However, analysts acknowledge the inherent risks in taking on an acquisition of this size, including integration and an exceptionally large equity raising. The biggest risk will be sustaining PSD’s earnings going forward, one analyst says.

Retail investors have until 5pm on Monday, April 20 to participate in the entitlement offer.

  • Investors are generally advised to buy Slater & Gordon at current levels.

G8 Education (GEM)

Newsletters have slightly reduced their earnings forecasts for G8 Education in response to its delay in acquiring new childcare centres, but most remain optimistic about the company’s outlook.

Shares in G8 Education slid 5.4 per cent to $3.36 last week (March 31, 2015) when the childcare operator announced settlement had been pushed back for eight of the 25 centres it had purchased in August last year due to regulatory and licensing issues.

The eight centres were expected to add $10 million in earnings before interest and tax (EBIT) for the 12 months following the settlement.

The stock fell another 4.2 per cent the following day, taking its decline to more than 30 per cent over the past year.

Despite lowering their earnings forecasts in response, most analysts call G8 Education a “buy”. The delay is merely a timing issue and, while it will lower EBIT by 5 per cent in FY16, it shouldn’t noticeably harm earnings for FY16, newsletters say.

Analysts have a 12-month target price of $5.40 on the stock – 70 per cent above current levels. They also forecast a whopping fully-franked dividend yield of 7.9 per cent in FY15 and 8.8 per cent in FY16.

The market underestimates G8 Education’s wide scope for further acquisitions in what is a fragmented market, most analysts think. Current estimates are for around 75 acquisitions each year from FY15 to FY17, but if G8 Education can increase this number it will have a big effect on its valuation.

However, others are uncertain about whether the company can keep paying only four times EBIT for acquisitions – particularly with increased competition. The danger is that another player could easily replicate G8 Education’s acquisition strategy, one publication says.

  • Investors are generally advised to buy G8 Education at current levels.

Computershare (CPU)

Computershare is striving to control its costs against a difficult backdrop, but its initiatives are unlikely to propel earnings in the near term, analysts say.

Their responses come after attending the share registry company’s investor and analyst briefing day late last month (March 26, 2015). While management didn’t announce any new financials, they discussed the competitive environment, business conditions, recent acquisitions and current challenges and opportunities across the globe.

Following the presentation, the majority of analysts call Computershare a “hold” after the stock has lifted 8 per cent to $12.72 this year.

Further cost savings will come from the global service model and the new US operations centre in Kentucky, but they won’t outweigh the persistent weakness in the company’s core business in the current environment, they say.

Low interest rates are harming Computershare’s registry business because client balances return a lower yield. It also dampens the benefit of any corporate activity.

Competition remains fierce in most areas of the business. While Computershare appears to be holding market share, it’s unclear what impact this is having on its fees, says an analyst.

Mortgage servicing appears to be the key growth opportunity in FY16 through Specialized Loan Servicing, a US-based fee-based servicer of residential mortgage loans that Computershare acquired back in 2011, another analyst says.

As one of the few direct beneficiaries of rising interest rates, the longer-term outlook for Computershare appears bright as the US Federal Reserve begins to lift interest rates. However, most of the investment press believe much of this has already been captured in the share price.

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

PanAust (PNA)

Seven analysts have downgraded their recommendations for PanAust in the wake of the company receiving a formal takeover bid from Guangdong Rising Assets Management (GRAM) last week.

Shares in PanAust surged 40 per cent to $1.72 on Friday March 27 when GRAM, a Chinese state-owned resources company, made an unconditional, off-market $1.71 cash offer for the copper and gold miner.

The bid was at a huge premium to PanAust’s latest share price but was heavily reduced from GRAM’s earlier offer of $2.30 made back in May 2014. That being said, the earlier offer had been incomplete and conditional, and a formal offer at that price was never made.

“The takeover officer is unsolicited and has been made at a time when both the PanAust share price and spot prices for copper and gold have been trading at near five-year lows,” PanAust said on Friday.

After a slew of downgrades, consensus is to “hold” PanAust shares after the offer. Despite describing the offer from GRAM as opportunistic and well-timed, most analysts believe the bid will eventually be successful.

The bid values PanAust appropriately in the current backdrop of depressed commodity prices, even if it does come at a time when the stock is trading near six-year lows, most analysts say. One publication differs and believes GRAM may have to improve the bid price by about 10-20 per cent to get board approval.

A counterbid also looks unlikely to the newsletters. They can’t identify who another suitor could possibly be and are sceptical given no one launched a bid in the period after GRAM’s first offer last year.

Investors should sell into the proposal, one analyst says, particularly when there is better medium-term value in other ASX-listed copper producers.

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

Bank of Queensland (BOQ)

The first-half result for Bank of Queensland in FY15 revealed headline figures in line with analyst expectations, but it was let down on its composition, most newsletters say.

The market took the same view: shares in the bank fell 3.3 per cent to $13.90 on the day of the results (March 26, 2015) despite cash earnings rising 19 per cent to $167m compared to the previous corresponding period, a lift in the net interest margin of 20 basis points to 1.97 per cent and a dividend of 36 cents per share.

Though it was a big dividend and lifts BOQ’s forecast yield to 5.4 per cent for FY15, most analysts don’t think it’s sustainable when EPS fell slightly and it was at a payout ratio of 79 per cent. What’s more, to fund it BOQ had to issue shares at a 1.5 per cent discount via its dividend reinvestment plan (DRP).

Such a high payout ratio also means that BOQ generates limited excess capital to fund growth, an analyst who downgraded his recommendation to “sell” points out. Given growth is coming from its more capital intensive businesses at the moment (such as its Specialist business), the analyst expects return on total equity to be restricted at 14.5 per cent going forward – reducing the valuation.

But most analysts call BOQ a “hold” at current levels after the bank’s share price fall. They note the company faces a number of challenges, with many highlighting higher expenses and the risk of a sharp deterioration of economic conditions in Queensland.

However, the stock adequately reflects these risks at a 1.5 times book multiple and at 13.2 times prospective earnings – in line with Bendigo and Adelaide Bank and at a 9 per cent discount to the majors – analysts say.

  • Investors are generally advised to hold Bank of Queensland at current levels.

Takeover Action March 31 - April 6, 2015

31/03/2015Australian IndustrialANI360 Capital Industrial20.56
24/11/2014Clinuvel PharmaceuticalsCUVRetrophin6.73
30/03/2015Cue EnergyCUENew Zealand Oil & Gas48.11
13/03/2015MEO AustraliaMEOMosman Oil and Gas1.10
01/04/2015Neon EnergyNENEvoworld Corporation33.98New bid for 50%
Schemes of Arrangement
30/03/2015Amcom TelecommunicationsAMMVocus Communications10.00Vote May 6
30/01/2015Black Range MineralsBLRWestern Uranium0.00Vote June
13/03/2015iiNetIINTPG Telecom0.00Vote June
06/02/2015Norton Gold FieldsNGFZijin Mining Group Co82.43Vote May
03/02/2015Novion PropertyNVNFederation Centres0.00Vote May
17/03/2015Trafford ResourcesTRFIronClad Mining0.00Vote May 1
Foreshadowed Offers
02/04/2015BradkenBKNKoch Industries and Pacific Equity Partners0.00Unsolicited non-binding offer
22/10/2014Central PetroleumCTPUnnamed party0.00Speculation due to director share purchases
02/04/2015CokalCKAPT Cakra Mineral0.00Discussions continue
06/03/2015John Shearer (Holdings)SHRArrowcrest Group80.00Intends to make bid
15/12/2014Recall HoldingsRECIron Mountain Inc0.00Indicative proposal
Source: Newsbites

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