Collected Wisdom

This week we look at QBE Insurance, Metcash, Ansell, Blackmores and Beach Energy.

Summary: QBE Insurance should be able to deliver stable and predictable earnings ahead with higher dividends to shareholders, newsletters say. Metcash, on the other hand, may be struggling with its transformation program as it battles with more fierce competition. Elsewhere, Ansell has made a sensible acquisition at the right price, Blackmores’ valuation is looking full – even with its high growth outlook – and Beach Energy will have to minimise spending until it can find another partner to fund exploration, newsletters say.

Key take-out: A strengthened balance sheet, effective cost management and stable market conditions should enable QBE to lift dividends over the next two years, 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.

QBE Insurance (QBE)

Most newsletters are confident QBE Insurance can manage its costs to boost earnings for FY15 – and its dividends to shareholders.

Management confirmed at the insurer’s AGM earlier this month (April 2, 2015) that they are on track to achieve “stable and predictable” earnings ahead, which they had flagged in the company’s full-year results in February this year.

Chief executive John Neal said the results in the first-quarter are performing in line with expectations and that the company’s operational transformation program has delivered $250 million in run rate savings, with another $90m to come from claims-related procurement activities.

Following the AGM, the majority of analysts call QBE Insurance a “buy”. They say management’s initiatives to manage costs will continue to reap benefits, while overall market conditions are meeting expectations. The balance sheet is also being strengthened; Neal highlighted that the debt to equity ratio has fallen to 32.5 per cent at the end of December from 44.1 per cent a year beforehand.

This should enable QBE to lift dividends, with the medium-term payout ratio likely to rise to 60 per cent, say analysts. They forecast dividend payments to lift 25 per cent in FY15 and 20 per cent in FY16. This equates to 3.7 per cent and 4.4 per cent fully-franked yields respectively.

“Importantly, a combination of stronger profitability, with enhanced cash flow and a significantly strengthened balance sheet, will facilitate an uplift in dividend payments where market conditions support,” said Neal at the AGM.

QBE should also benefit from the lower Australian dollar, higher interest rates in the US and that the remediation in North America and Europe is largely complete, analysts say.

However, it’s not all positive among the analysts. One isn’t getting too excited about the profitability gains from lowering expenses, given this strategy has been a constant theme at AGMs in recent years. Further, QBE has already risen 22.2 per cent to $13.70 this year.

  • Investors are generally advised to buy QBE Insurance at current levels.

Metcash (MTS)

The recent departure of Metcash’s supermarkets chief executive could be a signal that the wholesale distribution company is failing to execute on its transformation plan, newsletters warn.

Metcash announced last month (March 27, 2015) that Fergus Collins, chief executive of supermarkets, is leaving the role. Group chief executive Ian Morrice is to take on the position until a replacement is found.

As one analyst highlights, departures at this time are difficult to justify when Metcash is arguably on the ‘journey’ segment of the turnaround – there was sufficient time for personnel to leave earlier.

Given Collins was building relationships with IGA customers, his removal indicates he has either lost some of these successful relationships or that he wasn’t able to develop them sufficiently in the first place, the analyst says.

Under the project Diamond transformation strategy, Metcash hopes to reignite top-line growth through six growth drivers, including infrastructure and technology investment and providing better support to the IGA retailers.

Metcash shares have lost about half of their value since Collected Wisdom last covered the company as a “sell” in June last year (now trading around $1.46), with the market concerned about Germany’s Aldi and US-based Costco growing their market share.

Analysts are also warning about the risk of a full-blown price war between Coles and Woolworths. Woolworths is likely to become more aggressive with pricing after it acknowledged cuts were needed to compete with Coles and Aldi. Its managing director of Australian supermarkets and petrol, Tjeerd Jegen, resigned in February.

After the share price slump, however, analysts are more divided over Metcash – with one publication upgrading its recommendation to “hold”.  It said the retailers have performed better in the last few months after a long period of underperformance and that the valuation is undemanding.

Nevertheless, most analysts say the environment is becoming even more challenging and rate Metcash a “sell”.

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

Ansell (ANN)

Analysts are mixed over the outlook for Ansell after the glove and condom maker acquired UK-based protective clothing manufacturer Microgard late last month.

The purchase cost Ansell £59m ($113m), equivalent to 9 times trailing 12-month adjusted EBITDA, and will be funded entirely by cash. It’s expected to be marginally dilutive to EPS in FY15 but accretive in FY16.

“This acquisition is another critical step in the Ansell body protection business as part of the industrial global business unit,” said chief executive Magnus Nicolin, referencing Ansell’s other acquisitions including Trelleborg Protective Products and BarrierSafe.

Analysts agree. They say Microgard is a sensible acquisition that fits in well with the other acquisitions. It has an established brand position and a mid-level clothing range offering that targets the industrial, chemical, oil and gas and life science markets.

The purchase price also appears reasonable given it is consistent with previous acquisitions. The BarrierSafe acquisition in 2013 was at 9.7 times EBITDA.

Those analysts who are optimistic think Ansell could beat FY15 EPS guidance for 7-15 per cent growth because of falling input costs, the strong first-half and that earnings are leveraged to the falling $A.

But others don’t think the macro-environment will be supportive enough. While the acquisition should deliver margin increases to earnings, they say discounting (which was flagged by management in the first-half result) will erode these benefits amid patchy economic conditions.

On balance, however, analysts call Ansell a “hold”. With the stock currently trading at a forward PE multiple of 16.2 times (above its5-year average of 14.4 times), they advise to wait for a better entry point.

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

Blackmores (BKL)

Most newsletters are advising their clients to hold off buying Blackmores shares despite the natural health company beating expectations again with its latest earnings update.

Shares in Blackmores climbed 9.8 per cent to $54.26 at the end of March when the company announced it expects third-quarter group sales and net profit after tax (NPAT) to surge around 10 per cent and 20 per cent respectively compared to the previous quarter.

The growth equates to around $118.3m in sales and $12m in NPAT for the quarter, setting Blackmores up for a strong second half.

Analysts attribute the growth to several factors: less fierce price competition from competitors in the domestic vitamin market (like Swisse), a bigger contribution from BioCeuticals – a practioner-only supplements brand that Blackmores acquired in FY13 – and the boost to offshore earnings from a weaker Australian dollar.

Analysts remain optimistic about Blackmore’s earnings going forward. Growth should come from both the pharmacy and practitioner channels as consumers become more health aware, price competition continuing to alleviate, big sales momentum from key customer Chemist Warehouse and more demand from Asia.

But after the stock has risen 54 per cent this year – kick started by better-than-expected earnings guidance in January – most analysts call Blackmores a “hold”. They note that the company trades on a forecast PE multiple of 26 times – where Blackmore’s favourable earnings outlook is priced into the stock.

Further, the increased business from Chemist Warehouse (which make up 40 per cent of total sales in Australia) could be negative for margins in the longer term, one publication says. It highlights pricing there was 20-30 per cent lower in the March quarter than it was in December.

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

Beach Energy (BPT)

Two analysts have cut their recommendations for Beach Energy after Chevron abandoned its shale exploration venture with the oil & gas producer.

Beach Energy announced late last month (March 30, 2015) that its partner Chevron would not participate in stage two of the Nappamerri Trough Natural Gas (NTNG) project – the largest unconventional joint venture in Australia.

While Chevron informed Beach that technical evaluation confirmed a large gas resource, it said “at this time the opportunity does not align strategically with Chevron’s global exploration development portfolio”.

The move closely follows Chevron selling its $4.6bn stake in fuel supplier and retailer Caltex (CTX).

With Chevron’s exit from the JV – and no other deals forthcoming from unconventional plays – several analysts believe Beach Energy to be largely devoid of near-term share price catalysts in what is a low-priced oil environment. 

They expect Beach Energy to minimise spending until it can find another partner to fund exploration. Shale exploration in the Cooper has been slower than expected, an analyst notes, with more time and capital being required to determine the commerciality of the prospects.

A new chief executive (Rob Cole took over the position on March 10) also means that it might take several months before new strategies are announced, another analyst says.

However, another publication believes Beach Energy could be a potential takeover target, especially with Seven Group taking a strategic stake. It comments that a merger with Drillsearch (DLS) looks logical.

Most analysts are split between “holds” and “sells”, but the majority advise their clients to keep the shares after the update.

Shares in Beach Energy fell 5.6 per cent to $1.02 on the day of the news, though they have since risen to Friday’s close of $1.12.

  • Investors are generally advised to hold Beach Energy at current levels.

Takeover Action April 7-13, 2015

DateTargetASXBidder(%)Notes
13/04/2015Australian IndustrialANI360 Capital Industrial22.51
24/11/2014Clinuvel PharmaceuticalsCUVRetrophin6.73
08/04/2015John Shearer (Holdings)SHRArrowcrest Group80.00
13/03/2015MEO AustraliaMEOMosman Oil and Gas1.10
09/04/2015Neon EnergyNENEvoworld Corporation36.95New bid for 50%
27/02/2015TandouTANWebster0.00
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
08/04/2015Norton Gold FieldsNGFZijin Mining Group Co82.43Vote May 21
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
02/04/2015CokalCKAPT Cakra Mineral0.00Discussions continue
15/12/2014Recall HoldingsRECIron Mountain Inc0.00Indicative proposal
Source: Newsbites

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