Collected Wisdom

This week we look at Nine Entertainment, OZ Minerals, Brambles, Whitehaven Coal and Arrium.

Summary: Newsletters support Nine Entertainment’s sale of its events business Nine Live, while they say OZ Minerals is pursuing a reasonable strategy to become a leaner business and target value accretive acquisitions. Elsewhere, Brambles disappointed with its pallets business in the US but remains a high-quality defensive stock, Whitehaven will continue to face depressed coal prices and Arrium’s deteriorating earnings will continue to add pressure to the stretched balance sheet, newsletters say.

Key take-out: Nine Entertainment sold its events business at a good price and has given itself significant capital management and balance sheet flexibility, newsletters 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.

Nine Entertainment (NEC)

The excellent price taken for selling events business Nine Live paves the way for Nine Entertainment to enhance returns to shareholders and acquire other businesses, newsletters say.

Earlier this month (April 16, 2015) the media company announced the sale of Nine Live to Asian private equity firm Affinity Equity Partners for $640m.

“With the sale of Nine Live, our focus now is on optimising the performance of our free-to-air TV, digital and subscription streaming businesses and maximising returns to our shareholders,” said chief executive David Gyngell.

Shares in Nine lifted 3.3 per cent to $2.22 on the day. They have now climbed 23 per cent this year compared to the wider S&P/ASX200 index’s 10.3 per cent rise.

As with Collected Wisdom’s previous coverage on Nine Entertainment, analysts overwhelmingly call the stock a “buy”.

While the events business had a favourable outlook from touring events as well as synergy opportunities, its sale price – at 9.3 times earnings before interest, tax, depreciation and amortisation (EBITDA) – looks like it was too good to turn down, analysts say.

One publication calculates that the divestment lifts Nine’s value by around 12 cents per share. This positive valuation outcome is most likely the primary reason why Nine decided to sell the business, it says.

Nine says it will be in a net cash position when it has completed the sale. The company intends to lift its payout ratio to 80-100 per cent of net profits from mid-FY16 (most of which will be franked) and increase its share buy-backs beyond the $150m program announced in February. It also has the flexibility to pursue mergers & acquisitions.

However, another publication warns that Nine has become more concentrated in free-to-air television, with the space now accounting for 90 per cent of earnings. While Nine is the clear number two player in the industry, the whole medium is under attack from digital alternatives like Netflix (see Screening Netflix’s potential) – threatening longer-term margins.

  • Investors are generally advised to buy Nine Entertainment at current levels.

OZ Minerals (OZL)

Newsletters back OZ Minerals’ newly announced strategy and are impressed by the miner beating expectations in its March quarter production report, but most remain cautious about the outlook for copper.

OZ Minerals beat analyst expectations with its first-quarter report for 2015 released last week (April 20, 2015), with copper production lifting 20 per cent to 31,160 tonnes. Guidance was upgraded for the full year to 110-120,000 tonnes of copper and gold production of 100,000-110,000 ounces.

Chief executive Andrew Cole announced the company is now focusing on becoming a leaner business and targeting the acquisition of value accretive assets across copper, gold and base metals around the world.

“The resources sector and cycle is shifting rapidly,” he said. “OZ Minerals’ response is to become a leaner, highly agile and decisive company focused on growth and creating long-term value.”

Analysts are divided between calling OZ Minerals a “buy” or a “hold”. They say OZ Minerals is pursuing a reasonable strategy. Prominent Hill – its flagship mine in South Australia – will deliver enough reliable cash flow to create a diversified operational portfolio, which is necessary given the mine’s life constraints, they say.

However, while the miner’s shares closed flat on the day, they have since lifted 12.6 per cent to Friday’s close of $4.38 following the newsletters’ responses.

Analysts also like how the company is reinstating its dividend policy, which targets a minimum shareholder return of 20 per cent of net cash generation when it isn’t required for reinvestment or maintaining the balance sheet. On average, they forecast a yield of 1.8 per cent in 2015 and 2.9 per cent in 2016.

But several publications don’t see any reason to rush into buying OZ Minerals shares due to a well-supplied copper market in the near term and lack of certainty around the acquisitions.

One analyst highlights that OZ Minerals management lacks an acquisition track record. Given growth by acquisition raises the risks of misallocating capital and comes down to the choice of assets and execution, it’s hard to make a judgment until the company makes any deals, the source says.

  • Investors are generally advised to buy OZ Minerals at current levels.

Brambles (BXB)

A disappointing performance from the pallets business in the Americas and a slight downgrade to top-line growth hasn’t discouraged analysts about Brambles’ qualities as a defensive stock, though it does appear to most as fully valued.

For the nine months to March 31, Brambles reported sales of $4.044bn  – an increase of 8 per cent in constant currency terms on the previous corresponding period. It slightly reduced sales growth to 8 per cent from 8-9 per cent, but stuck with its earnings before interest and tax (EBIT) guidance of $US1,055-1,085m.

Shares in the company had traded as high as $11.89 in early April but fell 3.8 per cent in the two days before the announcement and another 2.7 per cent to $11.02 on the day.

Unlike the last time Collected Wisdom looked at Brambles in November last year – when the stock was trading at $9.67 – more analysts call the stock a “hold” at current levels than a “buy”.

What was most telling to the analysts was that while sales growth in the first half had been 5 per cent (when including exchange rate fluctuations), it has fallen to just 2 per cent after nine months.

This was primarily due to the weak performance of the pallets business in the US which had been affected by a contract loss, lower growth in Latin America and the stronger $US, they say.

However, they note that while the stronger $US does harm top-line growth, it also results in a stronger $A share price valuation.

But after climbing 15 per cent in the past 12 months, the stock is fully valued as a low risk, defensive stock, most newsletters say.

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

Whitehaven Coal (WHC)

Whitehaven Coal has boosted coal production and sales in its latest quarterly report, but is only likely to be generating modest positive cash flows given the depressed coal prices, according to the investment press.

The coal miner produced 4.1m tonnes of total saleable coal for the quarter, up 85 per cent from the same time last year, partly thanks to the start-up of the new Maules Creek mine. Guidance for the full year was increased to 7-7.2m tonnes of run-of-mine production at its Narrabri mine.

However, Whitehaven said it no longer expects increasing thermal coal prices this year. Instead, it expects the commodity to be remain balanced.

On the one hand Chinese demand for imported thermal has fallen due to the introduction of regulations aimed at supporting domestic coal production, but, on the other hand, coal mining giants Glencore and Shenhua are cutting production.

As for metallurgical coal – which comprised 15 per cent of total saleable production in the quarter – Whitehaven doesn’t expect prices to improve until 2016.

Whitehaven is rated either a “buy” or “hold” after the production report, with consensus being to “hold” the shares after they have risen around 12 per cent this year.

Most analysts say any investment decision around buying the stock relies on the view about whether the coal price can recover in the next two to three years, provided costs and production can stay on track.

However, one analyst thinks investor optimism over a recovery has made the stock overvalued. It expects the company to be EBIT break-even this year and only a muted recovery for coal over the next few years as China seeks alternative power solutions in its crack down on pollution.

  • Investors are generally advised to hold Whitehaven Coal at current levels.

Arrium (ARI)

Analysts are divided over Arrium after the iron and steel group revealed to the market it had sold iron ore at close to a $9 per tonne loss during the first quarter – even before corporate costs were included.

In its quarterly production report, Arrium announced that its average realised price for iron ore fell 28 per cent to $58 per tonne, below its total cash cost of $66.9 per tonne, reflecting lower quality ore and timing issues.

During the quarter 3.1m tonnes of iron ore were shipped, down from 3.3 in the previous quarter due to closing down the high-cost Southern Iron operations.

The stock plunged 12 per cent to 15 cents on the day (April 20, 2015).

Even at these depressed share price levels most newsletters either call Arrium a “hold” or a “sell”, though one sets itself apart from the crowd and rates it a “buy”.

Analysts with neutral or negative views say that the deterioration in earnings continues to add pressure to an already stretched balance sheet, which carries over $1.4bn in debt.

While Arrium has targeted a further 15 per cent reduction in cash costs to $57 per tonne in FY16, the iron ore business will likely continue to consume cash unless prices increase or further cost reductions can be identified, they say.

But one publication differs. It acknowledges the iron ore business has limited value, but says investors have overlooked the mining consumables business in their negative sentiment towards iron ore. The mining consumables segment not only benefits from the falling $A – boosting steel margins – but is performing well and provides a stable earnings base.

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

Takeover Action April 21-27, 2015

24/04/2015Australian IndustrialANI360 Capital Industrial23.46
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 Corporation37.07Closed
30/03/2015PanAustPNAGuangdong Rising Assets Management22.50
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
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
27/04/2015iiNetIINM2 Group0.00Scheme proposal
15/12/2014Recall HoldingsRECIron Mountain Inc0.00Indicative proposal

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