Collected Wisdom

This week we look at IOOF Holdings, Ten Network Holdings, ResMed, Independence Group and Insurance Australia Group.

Summary: Newsletters like IOOF Holdings given its double-digit earnings growth and attractive yield, but are almost unanimously negative toward Ten Network Holdings after its first-half result. Calls have been downgraded for sleep apnoea device maker ResMed and nickel miner Independence Group, while they are mixed for Insurance Australia Group after the company updated the market about the costs associated with the NSW storms.

Key take-out: IOOF Holding’s earnings should be bolstered by solid net inflows, margin stability and realising synergies with recently acquired SFG Australia, 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.

IOOF Holdings (IFL)

Newsletters highlight how IOOF Holdings is offering investors double-digit earnings growth and a six-per-cent-plus yield, but are divided about whether this favourable outlook is already reflected in the share price.

Their analysis comes after the financial services company announced its funds under management and administration (FUMA) for the third quarter lifted 6 per cent to $118.7 billion compared to the previous quarter – marking its ninth straight period of net inflows.

While analysts are mixed on the outlook – with several rating the stock a “hold” – most recommend their clients buy the shares after the news, with two publications upgrading their calls.

Shares in the company edged up only 1.6 per cent to $9.96 on the day (April 24, 2015). They have, however, climbed 14 per cent this year amid expectations for 12 per cent earnings growth in FY16 and 10 per cent in FY17.

Newsletters expect the earnings growth to not only be bolstered by solid net inflows and margin stability, but also by realising synergies with the company’s recently acquired SFG Australia.

IOOF announced the acquisition in May last year when the share price was trading at $8.25. The investment press also liked the purchase at the time despite its hefty price tag, as it diversified IOOF’s business by increasing its exposure to the high-net-worth market.

SFG Australia has performed exceptionally well, accounting for 30 per cent of funds in the advice business and more than 45 per cent of inflows, one analyst says. In fact, excluding the acquisition investment management suffered net outflows of $801m for the first nine months of FY15, the source says.

This reliance on SFG, along with IOOF’s 12-month forward price-earnings multiple of around 15 times, has several analysts saying the current share price reflects fair value. But more believe there’s more upside to be had as IOOF still trades at a 20 per cent discount to its asset manager peers.

  • Investors are generally advised to buy IOOF Holdings at current levels.

Ten Network Holdings (TEN)

Analysts are almost unanimously negative towards Ten Network Holdings’ outlook after its first-half result, but many acknowledge the key risk to their call is merger and acquisition activity.

The embattled free-to-air TV company reported earnings before interest, tax, depreciation and amortisation (EBITDA) fell 26 per cent to $7.5m for the first half of 2015 compared to the previous corresponding period, while revenue slipped 1.7 per cent to $309.8m.

But while the results were weak (as analysts had forecast), the network’s ratings were encouraging – having their best start to the year since 2012.

“Network Ten was the only commercial network to increase its people 25 to 54 and total people audiences during the 2014-15 summer and achieved a 24.7 per cent revenue share in January 2015,” said chief executive Hamish McLennan.

Nevertheless, most analysts call Ten a “sell” after the results. While the programming platform is seeing some improvement and increased stability, this is from a low base and against the backdrop of a precarious financial position, they say.

Ten’s net debt position continues to lift: it grew to $92.3m as of February 28 from $35.9m just 12 months earlier.

Indeed, Ten said in the financial accounts that if it doesn’t achieve its forecasts for cash flow it would need to raise debt or equity funding in order to continue operating within its $200m funding facility.

“As a result of these matters, there is a material uncertainty that may cast significant doubt on the group’s ability to continue as a going concern,” the company said.

The significant lag time between Ten reinvesting in content and a potential revenue recovery represents a big risk in these conditions, says one investment publication.

But analysts say their fundamental views are based on intensifying competition and the structural challenges facing the TV medium as an advertising platform, not on speculation of a change in ownership.

  • Investors are generally advised to sell Ten Network Holdings at current levels.

ResMed (RMD)

Two newsletters have downgraded their recommendations for ResMed after the sleep disorder equipment maker failed to meet market expectations with its third-quarter results.

Despite rising 13 per cent on a constant currency basis to $422.5m, revenue missed forecasts with the market expecting $424.6m on average. Moreover, net income grew only 1 percent for the quarter to $91m – brought about by pressured gross margins at 59.5 per cent.

ResMed expects more of the same in the fourth quarter; it dropped its margin guidance to 59-60 per cent from its previous target of 60-62 per cent for the period.

The news sent the stock down 10 per cent to $8.43 on the day (April 24, 2015). However, it is still up 18 per cent this year compared to the S&P/ASX 200’s 7.5 per cent rise.

Analysts note that while flow generator sales in the US grew 42 per cent to $US133.1m compared to the previous corresponding period, mask sales could not match this – falling four per cent.

Even after the analyst downgrades, newsletters are almost evenly split between rating ResMed as a “buy” or “hold”.

Analysts still bullish towards ResMed anticipate mask sales to at least stabilise and gross margins to rebound as long as the EUR/USD exchange rate doesn’t fall further. Cost reduction programs should outweigh price erosion as the company tackles discounting from its peers, they say.

ResMed is attractive at current share price levels at a 12-month forward price-earnings multiple of 21 times, given EPS is expected to grow 20 per cent in FY16 and FY17 and cash is net positive at $US400m, they say.

But others warn of a threat to sales next financial year. Rather than viewing strong flow generator sales as a positive, one publication which downgraded its recommendation says they represent a risk because, when that product upgrade cycle comes to an end in FY16, it becomes an earnings headwind.

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

Independence Group (IGO)

Shares in Independence Group have reached four-year highs following the diversified miner’s third-quarter report, leading more newsletters to believe they are now fully valued.

While the stock remained flat at $5.66 on the day (April 22, 2015) of the report’s release, it has climbed 13.5 per cent in the past month and 35 per cent since the start of the year. It closed on Friday at $5.90 – its highest point since July, 2011.

The share price highs come amid what analysts describe as a solid quarterly result, with gold and nickel production rising slightly to 37,000 ounces and 2,700 tonnes respectively but copper and zinc output falling by more than 30 per cent.

Costs were a highlight with two mines beating expectations. The Tropicana gold mine delivered all-in sustaining costs of $781 an ounce, while the Long nickel mine had C1 cash costs of $3.63/lb. The Jaguar mine, however, disappointed.

With two analysts downgrading their commendations, consensus is to “hold” Independence Group shares. When Collected Wisdom last covered the stock in October last year the majority of analysts rated it a “buy”.

Analysts acknowledge Independence Group will stay a favourite for investors given it is producing strong cash flows – it is expected to generate its market cap in cash in the next three years – and has no debt.

However, at a forecast PE multiple of around 13 times, most say the miner is starting to become expensive in its current situation. The Jaguar and Long mines have a short mine life, placing increasing pressure on management to spend more on risky exploration, acquisitions or developing a marginal project, one analyst says.

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

Insurance Australia Group (IAG)

IAG’s update to the market about the costs of the NSW storms and their impact on margin guidance has generated mixed responses from analysts about the company’s outlook.

Last Wednesday (April 29, 2015) IAG announced that it has revised its net natural peril claim cost assumption to $1bn from $700m and lowered its FY15 insurance margin guidance range to 10.5-12.5 per cent.

“As an insurer, managing events like those we have seen in the past few months is part of our normal business activity, but their incidence and size is unpredictable,” said chief executive Mike Wilkins.

Shares in IAG fell 4 per cent to $5.65 on the day, but recovered the next day to $5.81.

Following the update recommendations from investment publications range across “buys”, “holds” and “sells”, with two sources upgrading their calls and another downgrading theirs. On balance, however, consensus is to “hold” IAG shares.

Analysts optimistic about IAG say investor focus is likely to shift to the FY16 outlook, when cash earnings will benefit from a favourable reinsurance position. The events this year have caused IAG to be within just $10m from having $450m protection provided under its aggregate reinsurance – increasing earnings certainty up to the first half of FY16, one analyst says.

Synergies from the acquisition of Wesfarmers’ insurance business are also expected to hit a $230m per annum run-rate by the end of FY16, another analyst says.

But other analysts don’t think IAG is cheap because they believe current insurance margins are unsustainable and that earnings growth will soften from here. Share price catalysts remain hard.

Despite a reasonable 5 per cent yield, IAG is in line with fair value at around 12.5 times FY16 EPS, they say.

  • Investors are generally advised to hold Insurance Australia Group at current levels.