Collected Wisdom

This week we look at Asciano, Ausnet Services, Super Retail Group, DuluxGroup and James Hardie.

Summary: Newsletters are optimistic about Asciano after attending the rail and ports operator’s latest presentation, but are more cautious towards Ausnet Services because of regulatory risks. Elsewhere, Super Retail Group’s fortunes hinge on how well it can execute its restructuring initiatves, earnings from DuluxGroup’s core paints business should offset its poor performing garage doors business and James Hardie’s exposure to the resurgent US housing market looks fully factored into the share price, newsletters say.

Key take-out: Asciano should step up its dividends to shareholders over the next few years as capital expenditure winds down and cash flows soar, 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.

Asciano (AIO)

Newsletters have come away optimistic from Asciano’s latest presentation earlier this month, citing reducing risk and a higher payout ratio in the future as reasons to own the stock.

In a conference on May 7, the rail and ports operator confirmed its forecast earnings before interest and tax (EBIT) to be greater than the 5 per cent achieved in the prior year despite tackling subdued economic conditions and poor weather on the east coast.

Asciano also said that its five-year plan to cut costs was broadly on track. Under the program, $300m is expected to be saved by FY16 through improvements and cost reductions, while cash flow is anticipated to grow rapidly as capital expenditure is wound down – driving an increase in the payout ratio.

Following the conference the majority of newsletters call Asciano a “buy”. They say a lot of the risk associated with the stock has been reduced with the automation of its Port Botany stevedoring operation now complete.

Indeed, Asciano should win market share at Port Botany given the site’s upgraded assets, one analyst says. The company is conducting site visits on June 24, which should highlight its strengths.

The bigger attraction for shareholders is the step-up in free cash flow in the next few years, which analysts expect will result in a significantly higher dividend.

On average, they forecast the dividend yield to rise from 4 per cent in FY16 to 4.9 per cent in FY17 as the payout ratio is lifted to at least 50 per cent.

However, one publication says Asciano’s growth outlook may be challenged from FY17 after the cost initiatives are exhausted. Given the fixed cost leverage of the business, a significant driver would be a recovery in the broader economy, it says.

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

Ausnet Services (AST)

Electricity and gas company Ausnet Services has reported a better-than-expected result for FY15, but its revenue outlook looks dour in the face of distribution networks being reset in the next 12 months, newsletters warn.

While Ausnet’s reported profit plunged on one-off items, its underlying profit only slipped 2.5 per cent to $312.8m – ahead of forecasts for $288.9m on average. The final distribution was flat at 4.18 per stapled security, taking the distribution for the year to 8.36 cents.

Expectations are for lower returns in FY17 because the distribution networks in South Australia will be reset. Due to community and political pressure, they will most likely become tougher regulatory environments for utility companies.

Nevertheless, newsletters almost unanimously recommend investors “hold” Ausnet Services following the full-year result as, at an enterprise valuation to regulated asset base (EV/RAB) of around 1.2 times, it broadly trades in line with their valuations.

To some extent Ausnet is countering the poor outlook for regulated returns by improving its operating efficiencies. Its new SAP software platform, for example, is expected to generate cost savings of $20m per annum.

Investors should also be encouraged by Ausnet’s franked dividend yield – which is better than its peers and the broader market in general – given that bond yields and utility sector performance are generally inversely correlated, one publication says.

Despite the impending tougher environment, Ausnet is forecasting a higher distribution in FY16 of 8.53 cents per security, while analysts are anticipating a franked dividend yield of 5.9 per cent in FY16 and 6 per cent in FY17.

The gross yield is expected to benefit from Ausnet’s restructuring proposal under which a new company called Ausnet Services Ltd would become the single head entity in place of the current triple stapled structure.

If approved by shareholders prior to the final distribution payment date of June 26, the franked component should rise to 60 per cent from 53 per cent for FY15 and should lift to 75 per cent in FY16.

  • Investors are generally advised to hold Ausnet Services at current levels.

Super Retail Group (SUL)

Analysts are deeply divided over the earnings outlook for Super Retail Group, with their disparate views hinging on how well the retailer can execute its restructuring initiatives.

The company, which owns brands including Ray’s Outdoors, Rebel and Supercheap Auto, provided a trading update for the second half up to May 2 earlier this month (May 8, 2015), where like-for-like sales lifted 2 per cent in auto, dipped 1.3 per cent in leisure and jumped 7.4 per cent in sports.

“Sales in the sports division have continued to be very strong benefiting from an improved stock position in stores compared to the prior year, the interest generated by major sporting events and successful marketing and promotional campaigns,” the company said.

Total restructuring costs for three of its brands, Ray’s Outdoors, FCO and Workout World, are projected to cost $27m, in line with what had been recognised in the half-year report.

Recommendations from analysts following the update range across the spectrum, with one publication downgrading its call. On balance, however, investors are advised to “hold” Super Retail Group.

Analysts who are bullish say the group could return to double-digit earnings growth in FY16 from its initiatives in the second half and its current momentum. Super Retail Group is an attractive business with growth opportunities in store numbers, sales productivity, gross margin and supply chain costs, they say.

But others say the restructure of the leisure division isn’t enough to induce a turnaround, while the sports division will be weighed down by lower margin businesses Workout World and Infinite Retail. While the auto division has historically been the big earnings driver, competition from peers like Repco is increasing.

Newsletters staking a middle ground, however, say Super Retail Group trades at around fair value after the stock has risen over 50 per cent to $10.81 this year, and that its price may be supported by its fully-franked dividend yield of 4.2 per cent in FY16 and 4.7 per cent in FY17.

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

DuluxGroup (DLX)

Strength in DuluxGroup’s core paints and coatings business should offset the disappointing performance in its garage doors and openers segment, most newsletters believe.

Their analysis comes after the company delivered underlying earnings before interest and tax (EBIT) of $94.1m for the six months to March 31, 2015, 3.6 per cent above the previous corresponding period, while sales lifted 4 per cent to $836.9m.

On an underlying basis, earnings for paints and coatings grew 9 per cent but shrunk 26.7 per cent for garage doors and openers.

 “Two of our businesses, B&D garage doors and openers and Parchem construction products, experienced revenue and profit challenges during the half, due in part to softer markets and the transitional impact associated with the implementation of important strategic initiatives,” said managing director Patrick Houlihan.

“We are confident that we have the strategies in place to improve and grow these businesses,” he said. The company is guiding for underlying NPAT for FY15 to be greater than the previous year’s $111.9m.

But newsletters and the market aren’t so sure, with shares in the company falling 3.6 per cent to $5.93 on the day of the news. At around 20 times forward EPS estimates, the stock is fully valued as it reflects a 10 per cent premium to its industrial peers but little if any EPS growth, they say.

Newsletters note that the non-paints businesses appear to require additional investment in their product, brand and distribution networks to drive growth – meaning shareholders will have to take up higher costs up front for potential benefits later on.

Nevertheless, most analysts think the core business – which comprises 70 per cent of EBIT – will continue to support earnings amid a resilient housing market. They don’t say the same for garage doors: With lot sizes becoming smaller, the average number of garage doors per house is falling.

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

James Hardie (JHX)

James Hardie beat analyst expectations with its earnings for FY15 as it benefited from its exposure to the overseas housing markets.

Shares in the building products group surged 11.5 per cent to $16.84 last Thursday after the company reported net adjusted profit of $US221.4m for the full year, up 12 per cent on the previous corresponding period and at the upper end of guidance. Sales lifted 11 per cent to $1,656.9m for the period.

Fourth-quarter results revealed accelerating sales and expanding margins, with James Hardie quick to return cash to shareholders.

As part of the capital management strategy, a special dividend of US22 cents was declared along with the final dividend of US27 cents per share and a share buy-back was announced to acquire up to 5 per cent of issued capital. Analysts now forecast a dividend yield of 3.7 per cent for both FY16 and FY17.

“As we look into the future, we continue to expect EBIT of our US and European segments to grow and EBIT margins to stay in our target range as the US housing market recovers and we increase market penetration,” said chief executive Louis Gries.

Consensus is to “hold” James Hardie, with one analyst downgrading their recommendation. However, consensus is that the stock is relatively safe given the excellent outlook and the buy-back program – with one source saying there is potential to buy back between 3 and 11 per cent of shares on issue in FY16.

Newsletters acknowledge earnings were better than they expected and the best is yet to come: cash flow is surging, manufacturing is becoming more efficient and earnings margins in the US are around 25 per cent.

But they believe the market has now efficiently priced in the implied earnings upgrade and wait for more attractive entry points into the stock. James Hardie has now lifted 55 per cent over the past two years.

  • Investors are generally advised to hold James Hardie at current levels.

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