Collected Wisdom

This week we look at Transurban, Fortescue Metals Group, Western Areas, Woodside Petroleum and M2 Group.

Summary: Toll operator Transurban beat expectations once again with its March quarter report – and further strong growth is on the way, according to analysts. Meanwhile, the outlook for Fortescue Metals Group is challenging, but it may be already reflected in the share price. Elsewhere, Western Areas is undervalued despite the weaker conditions for nickel, Woodside should be able to maintain its payout ratio to shareholders and M2 Group has made another excellent acquisition, newsletters say.

Key take-out: Analysts expect strong revenue growth throughout the second half of FY15 for Transurban, underpinned by recent acquisitions and organic growth.

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.

Transurban (TCL)

Toll operator Transurban has beaten market expectations with its traffic and revenue data for the March quarter.

Proportional toll revenue, which the company believes more accurately reflects its performance, lifted 41.6 per cent to $387.6 million on the previous corresponding period (pcp). The pcp did not include Transurban’s recent acquisitions of Cross City Tunnel or Queensland Motorways.

On an underlying basis, proportional toll revenue grew 11.3 per cent to $304.8m – an impressive feat given tough macroeconomic conditions, analysts say.

The majority of analysts call Transurban a “buy” after the data release – though they are more divided than on previous occasions when Collected Wisdom wrote about the stock.

The last time Transurban was covered was in February this year, when analysts highlighted the company as the top pick in the transport infrastructure segment and said earnings appeared to be running ahead of estimates.

While that has been the case (and the stock has risen 6.5 per cent in the past two months), several analysts now believe Transurban’s current share price levels reflect full value. They highlight a softer traffic growth outlook on the Logan and Gateway Motorways in Brisbane and better infrastructure yield stocks elsewhere, such at Sydney Airport (SYD) and Duet Group (DUE).

But more analysts expect strong revenue growth throughout the second half of FY15, underpinned by double-digit organic growth from its Sydney M7 and M5 assets and from the recent acquisitions.

Transurban remains the preferred stock to other yield alternatives because of its funding potential and proven network strategy, one analyst says. This means the potential for higher dividends in the medium term is greater than for other yield stocks.

  • Investors are generally advised to buy Transurban at current levels.

Fortescue Metals (FMG)

Analysts are divided between telling their clients to exit Fortescue Metals shares or to hold onto them after the iron ore producer released its quarterly report last week.

Their recommendations come after the group raised its shipment target to 160-165m tonnes for FY15 and lowered its FY16 cash cost guidance to $18 per tonne – sending its shares up 5.4 per cent to $1.96 on the day (April 16, 2015).

Iron ore shipments for the quarter lifted 28 per cent to 40.4m tonnes, while cash costs declined 9 per cent to $US25.90 a tonne on the weaker $A, improvements to productivity and lower fuel prices.

But reducing costs aren’t the only challenges that Fortescue faces. As one newsletter highlights, Fortescue produces lower quality ore, reducing its realised price by about 10 per cent once the discount it receives on the Platts CFR index price is factored in.

Fortescue believes it requires $US39 per tonne to break even in FY16, but another analyst thinks this is too optimistic and will more likely have to be $US45 per tonne based on higher shipping costs and product discounts.

A number of analysts have cut their forecasts for iron ore prices. One source now predicts $US44 per tonne – down 22 per cent – in FY16, while another sees it at $US50 per tonne.

The other main problem is the balance sheet, which is loaded with about $US9bn in debt for Fortescue to repay, beginning in 2017. The company has abandoned recent attempts to refinance because it couldn’t obtain the loans at the interest rates it wanted.

Fortescue remains the marginal long-run producer of iron ore, an analyst says. Given a lower marginal cost and lower cost curve feeds a reduction in the long-term sustainable price of iron ore, the analyst doesn’t see how the company can cost-cut its way to prosperity.

However, most analysts think the risks are adequately reflected in the share price after it has plunged 65 per cent over the past year.

  • Investors are generally advised to hold Fortescue Metals Group at current levels.

Western Areas (WSA)

Newsletters believe nickel miner Western Areas is being undervalued by the market despite the worsening conditions for the base metal.

They now expect only modest deficits in the nickel market over the next two years. Previously, consensus expectations had been for a significant shortage of the material in FY15 due to Indonesia’s ban on exports.

However, supply has not waned – with the Philippines quickly filling the gap – and demand has recently faltered amid a weaker Chinese economy. In particular, growth in the demand for stainless steel (of which nickel is a key ingredient) appears non-existent.

Nevertheless, newsletters overwhelmingly call Western Areas a “buy” after the miner’s shares have plunged from a peak of $4.55 in February to $3.47 on Friday’s close.

While lower nickel prices has translated into cuts to earnings forecasts and valuations, Western Areas remains significantly undervalued to the analysts with an average forecast 12-month target price of $4.61.

Importantly, Western Areas is a low-cost producer that is cash-flow positive at current spot prices of around $7.48/lb, analysts say. Meanwhile, higher-cost producers (such as Mincor Resources – see our analysis of the stock in today’s edition) are more leveraged and see bigger reductions in earnings.

Western Areas announced last week (April 15, 2015) it is guiding for cash costs at the lower end of $2.40-$250/lb for FY15 with mine production guidance at near the top of 24,500 to 25,500 nickel tonnes.

Analysts on average forecast a fully-franked dividend yield of 2.9 per cent in FY15 and 5.5 per cent in FY16.

  • Investors are generally advised to buy Western Areas at current levels.

Woodside Petroleum (WPL)

Analysts expect Woodside Petroleum to maintain its payout ratio to shareholders, but most don’t see many short-term positive catalysts for the share price.

Last week (April 15, 2015), the oil & gas producer reported its first-quarter results for 2015. Revenues declined 20 per cent to $1.4bn, which was better than analysts had forecast – particularly in the context of an average oil price of $US77 per barrel.

Woodside said it delivered $560m in cost savings and plans on pushing its target beyond $800m, enabling the company to maintain its payout ratio of 80 per cent.

“We expect to be able to continue with this ratio for the foreseeable future, subject to the demands of significant new capital investments or material changes in the business environment,” said chairman Michael Chaney.

“Of course with lower oil prices, our profits and dividends will also be lower,” he said.   

But several analysts worry that Shell’s acquisition of BG Group could slow the development of Woodside’s Browse LNG venture in Australia. With Shell is targeting $30bn of divestment in three years, it could be intending to sell its 13.5 stake in the project.

Further, Woodside won’t be able to buy it back because it doesn’t have sufficient capital after spending $4.6bn late last year in Apache’s two LNG projects in Australia and Canada, which was finalised this quarter.

Currently Woodside is targeting pre-front end engineering and design work (FEED) by mid-2015 and a final investment decision by 2016.

Analysts see a fully-franked yield of 3.9 per cent in 2015 and 4.8 per cent in 2016.

  • Investors are generally advised to hold Woodside Petroleum at current levels.

M2 Group (MTU)

Shares in M2 Group soared to record highs last week when the company announced the acquisition of New Zealand’s third largest internet services provider.

M2 will acquire Call Plus – described by newsletters as a highly profitable and growing business – for $245m through debt. The acquisition is expected to be 15 per cent earnings per share (EPS) accretive in FY16.

“M2 will be maintaining Call Plus as a self-contained operating business, thus presenting minimal integration risk or distraction to M2’s aggressive growth ambitions in Australia,” said chief executive Geoff Horth.

The stock 10.7 per cent to $11.55 on the day (April 13, 2015).

Newsletters approve the move. After proving that it can grow organically, M2 Group is returning to what it does well – growth by acquisition, they say.

Call Plus fits in with M2Group’s products, drivers and strategy; both companies employ a multi-brand ‘go-to-market’ strategy where the consumer is the primary source of revenue and voice & data dominate the product offering, they say.

Analysts say the deal is well priced at 5.6 times enterprise value to earnings before interest, tax, depreciation and amortisation (EV/EBITDA).

But while they upgraded their price targets on the acquisition, most analysts call M2 Group a “hold” after the update. M2 Group now trades at the same underlying price-earnings multiple as Telstra at around 17.6 times in FY16, where its high near-term growth prospects are fully priced in.

That being said, analysts acknowledge M2 could surprise again if it delivers more accretive acquisitions (which their discounted cash flow valuations cannot capture), lifts its retail energy share and improves its relatively high rate of customer churn.

  • Investors are generally advised to hold M2 Group current levels.

Takeover Action April 14-20, 2015

DateTargetASXBidder(%)Notes
13/04/2015Australian IndustrialANI360 Capital Industrial22.51
24/11/2014Clinuvel PharmaceuticalsCUVRetrophin6.73
15/04/2015John Shearer (Holdings)SHRArrowcrest Group82.14
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
15/04/2015Novion PropertyNVNFederation Centres0.00Vote May 27
31/03/2015Trafford 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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