Collected Wisdom
Summary: Newsletters believe Sims Metal Management should find its way to growth despite the challenges facing the scrap metal recycler, but have little confidence about WorleyParsons' outlook amid its own macroeconomic difficulties. Elsewhere, Tabcorp appears to be trading at full value on solid earnings momentum, Ardent Leisure carries too much uncertainty for a positive recommendation and JB Hi-Fi's outlook relies on how well it can deal with weakening electronic sales. |
Key take-out: Sims Metal Management is cheap at current levels given its internal initiatives should overcome the difficult conditions in the sector, 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.
Sims Metal Management (SGM)
Sims Metal Management should find its way back to growth despite its earnings being swamped by seasonal factors at the moment, most newsletters believe.
Shares in the metal recycler fell 6.6 per cent to $10.79 at the end of April when the company said it expects underlying earnings before interest and tax (EBIT) in the second half to be flat compared to the previous corresponding period as a result of “severe conditions”.
“The steep drop in iron ore prices and adverse weather conditions in North America have resulted in a significant reduction of ferrous scrap prices and volumes during the third quarter of the current fiscal year,” said the company.
Despite the profit warning, most newsletters call Sims Metal Management a “buy” – with one publication upgrading its recommendation on the news.
The publication that upgraded to “buy” says that it had anticipated the news because it had been keeping a close watch on what SGM's peers had been reporting. What did come as a surprise, however, was the bigger than expected impact on the fourth quarter.
Nevertheless, the publication thinks share price weakness and the fact that management's five-year turnaround strategy remains on track provide a compelling reason to buy the shares – and most other analysts agree.
Management's guidance under the strategy is for underlying operating income to reach or exceed $320m by 2018 as the company exits loss-making businesses and reduces costs.
On average, analysts forecast a 12-month share price target of $12.07, 15.8 per cent above Friday's close. They also expect a dividend yield of 3.7 per cent in FY16 and 4.7 per cent in FY17.
However, several analysts differ from consensus as they believe the tough macroeconomic environment will continue to outweigh its internal initiatives.
- Investors are generally advised to buy Sims Metal Management at current levels.
WorleyParsons (WOR)
Newsletters have little confidence about their earnings forecasts for WorleyParsons for FY16 after the global engineering group announced another major restructuring.
Earlier this month Worley said it expects non-recurring charges totalling $125m in FY15 because of more than 2,000 redundancies and onerous lease charges. These charges, along with other cost initiatives announced in February, are expected to deliver annualised savings of $75-100m through to FY16.
“As a result of the sustained weakness in commodity prices, WorleyParsons has experienced deterioration in workload since February,” The company said. “This is particularly the case in North America and has impacted chargeability and margins.”
After coming out of a trading halt, the stock fell 9.6 per cent last Monday (May 4, 2015) to $10.36, reversing some of its recent gains over the past month.
Most analysts call WorleyParsons a “hold” following the update, commenting that the capital expenditure downgrade cycle continues to threaten the company's earnings margins in the short term.
And while Worley stands to benefit from any cyclical recovery – particularly in oil & gas – it's too uncertain about when this will occur. Indeed, the volatile environment could cause more project delays and deferrals within the global hydrocarbons sector, one analyst says.
On the other hand, Worley's balance sheet is in good shape, analysts point out. First-half gearing was at 27 per cent, in line with the target range. The business is also generating positive cash flows in the downturn.
Analysts forecast a yield of 6.7 per cent for FY15 and 6 per cent in FY16 on average. However, these returns are by no means secure given the potential risks to earnings in the short term and the policy to pay out 60-70 per cent of underlying earnings as dividends.
- Investors are generally advised to hold WorleyParsons at current levels.
Tabcorp (TAH)
Tabcorp shares have fallen in the past week following newsletter responses to its third-quarter trading update, with several saying the company is trading above value on the back of solid trading momentum.
The wagering and gaming company reported last week (May 4, 2015) that revenue rose 3.3 per cent to $508.7m for the quarter, largely driven by a 5.6 per cent lift in the wagering and media division.
“It was pleasing to see the momentum in wagering continue on the back of a strong first half, which included a successful soccer world cup,” said chief executive David Attenborough.
However, the Keno division slumped 13.8 per cent to $43.9m, mostly because of customers winning a much larger than usual number of jackpot prizes.
Following the update, “sell” is the most popular rating amongst the analysts. However, when combined, the “buy” and “hold” calls amount to around the same number – so consensus is far from unanimous.
Further, shares in the company have declined 3.6 per cent since the newsletter recommendations to Friday's close of $4.57 when, on average, the average 12-month price target for Tabcorp is $4.84.
Analysts who recommend their clients exit the shares say investors are enamoured with Tabcorp's 4 per cent fully franked dividend yields and are basing their optimism too much on past trading momentum.
One publication notes sales growth has slowed from the previous quarter (when revenues climbed 6.7 per cent) and expects earnings hurdles to become larger next quarter, particularly for wagering.
At a 12-month forward price-earnings multiple of 21 times, the share price doesn't encapsulate these risks, analyst say.
But other analysts disagree. They expect Keno and the gaming services division to improve as new investment takes effect and for dividends to be upgraded. With more special dividends on the cards, Tabcorp could give shareholders 10 per cent total return over the next 12 months, an analyst says.
- Investors are generally advised to hold Tabcorp at current levels.
Ardent Leisure (AAD)
An attractive yield and growth profile tempt analysts to recommend Ardent Leisure, but they remain cautious due to management uncertainty and several lacklustre divisional performances.
The leisure and entertainment operator reported its third-quarter results last week (May 5, 2015), revealing that revenue climbed 17.2 per cent to $444.9m compared to the previous corresponding period and total divisional EBITDA lifted 10.9 per cent to $101.6m – tracking ahead of expectations for the full year.
Shares in the company leapt 11 per cent to $2.20 on the day of the news. However, they have still lost nearly a third of their value this year amid a worse-than-expected interim result and the shock replacement of long-standing chief executive Greg Shaw with Deborah Thomas.
Newsletters almost unanimously call Ardent Leisure a “hold” following the latest report. They acknowledge at current levels the company offers a dividend yield of 6.7 per cent in FY16 and 7.6 per cent in FY17 and that Main Event – its indoor family entertainment business based in the US – is firing on all cylinders.
But while that division grew its EBITDA by 63.7 per cent to $US27.05m for the first nine months of the year – again beating consensus forecasts – other divisions are disappointing the analysts, particularly health clubs.
“The Goodlife health clubs business continued to face competitive pressure on membership sales and retentions, but early signs from executed 24/7 clubs – and pre-marketing of the gyms planned for 24/7 conversions – are positive,” said chairman Neil Balnaves.
However, analysts say they can't properly assess how well the converted clubs are performing for at least six months to see whether the new members choose to ‘stick' with them.
Newsletters are also unfamiliar with Thomas, who has been running the business since April. She was previously a non-executive director and had been the former Australian Women's weekly editor for almost a decade.
- Investors are generally advised to hold Ardent Leisure at current levels.
JB Hi-Fi (JBH)
Analysts are divided over how much JB Hi-Fi's new HOME format can compensate for weakening sales in electronics following the company's latest trading update.
In the third quarter JB Hi-Fi posted 6.9 per cent comparable sales growth and 8.7 per cent total sales growth, keeping the company on track to delivering its full-year guidance of $3.6bn in sales and net profit of between $127m and $131m.
The result was bolstered by the JB Hi-Fi HOME segment, which generated sales growth of 11.8 per cent for the quarter. The long-term target of 214 HOME stores was reaffirmed.
“In Australia we have seen a pleasing trend of positive comparable store sales since Christmas, including an increasing percentage of appliance sales in stores converted to our HOME concept,” said the company.
Back when Collected Wisdom last covered JB Hi-Fi in February, the key question for analysts had been whether the company could maintain its January sales momentum for the rest of FY15.
Thanks to HOME and other categories including computers, fitness and wearables, telcos and accessories, the strong momentum has only moderated slightly into February and March, analysts say.
Analysts with “buy” recommendations say JB Hi-Fi is showing encouraging operational performance despite limited benefit from major product launches during the period. Further, the company is winning market share and should continue to benefit from the strong housing backdrop and roll-out as it rolls out its margin accretive HOME format.
But others say the market is extrapolating the current sales momentum too far into the future. While the HOME store rollout should partially mitigate the headwinds of spending-wary consumers and a lower currency, the electronics and home appliance market is too highly competitive and JB Hi-Fi lacks competitive advantages.
On balance, consensus is to “hold” JB Hi-Fi shares after the update. They have already climbed 26 per cent this year and trade at a price-earnings multiple of 14.6 times, above peers' 13 times.
- Investors are generally advised to hold JB Hi-Fi at current levels.