Collected Wisdom

This week we look at Origin Energy, UGL, SCA Property Group, Energy Resources of Australia and Greencross.

Summary: Investment houses like the outlook for Origin Energy after the energy company’s latest briefing, approving of its quick steps to minimise the impact of disruptive forces in the industry. Meanwhile, they are negative towards engineering services company UGL, real estate investment trust SCA Property Group and Energy Resources of Australia. Elsewhere, Greencross appeals to analysts for its exposure to the growing pet sector, but they remain concerned about the company’s roll-out strategy and balance sheet.

Key take-out: Origin’s recent initiatives will sustain momentum in the energy markets division, while the near-term start-up of the Australia Pacific LNG project should propel earnings, analysts 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.

Origin Energy (ORG)

Most analysts are optimistic about Origin Energy after its latest briefing, where the company advised it was focusing on expanding gas margins, cutting costs and growing its exposure to residential solar.

The energy company announced it aims to be the number one player in rooftop solar power and to extend into other home energy services including batteries. In the meantime, it plans to save $150m in its core energy markets up to 2015-16 by reducing capital and operating expenditure and to leverage its portfolio of assets to the rising demand for gas on the east coast.

Following the update, most newsletters call Origin a “buy”. They say that Origin’s recent initiatives will sustain momentum in the energy markets division. After declining for two years, the segment returned to growth in the first half of FY15.

Analysts expect the near-term start-up of the Australia Pacific LNG project – which Origin owns in a joint venture with ConocoPhillips and Sinopec –and the emerging recovery of the utilities business to propel earnings.

On average, analysts forecast a share price of $13.55 in 12 months, 4.7 per cent above current levels. They also forecast a dividend yield of 3.9 per cent in FY16 and 5.3 per cent in FY17.

Like its main competitor AGL Energy, Origin is moving quickly to ensure it minimises the impact of disruptive forces, one analyst says. What will drive the share price ahead is higher oil prices and management’s expertise in improving the balance sheet flexibility.

However, key risks to Origin’s outlook include delays to APLNG and weaker-than-expected retail utility margins and electricity demand.

  • Investors are generally advised to buy Origin Energy at current levels.

UGL (UGL)

Most analysts hold a negative outlook for UGL shares after the engineering services company announced a business restructuring and an update over its troubled Ichthys LNG project.

Shares in UGL jumped 10 per cent to $2.55 earlier this month (June 2, 2015) when the company said the Ichthys project – which is a joint venture between UGL and US firm CH2M Hill – has stabilised with productivity targets being achieved and that performance is tracking in line with its revised cost guidance set in February.

Further, UGL expects to save $33m in annual costs by cutting 200 full-time employees, with restructuring costs amounting to $36.7m in the second half of FY15. From FY16 the business structure will be divided into five operating divisions: rail and defence, asset services, technology systems, infrastructure engineering and construction, and international.

However, after the stock has risen 70 per cent over the past three months, most analysts call UGL a “sell”. Two investment houses downgraded their calls to “sell” on the update.

UGL’s guidance at the update of revenue of $3.1bn and an underlying EBIT of $75m points to a double-digit growth outlook, which the company expects to be underpinned by improved project execution, no longer incurring nil-margin revenue, restructuring benefits, growth in transport activity and LNG maintenance activity, one analyst says.

But this isn’t enough to counter the recent share price heat – with the stock trading at a 31 per cent premium to domestic peers on FY16 earnings – and too much project risk.

While Ichythis has stabilised for now, construction is only a third complete with over 18 months to go, a publication highlights. It expects no dividend until FY17 and says financial risk is above average with net debt to EBITDA approaching 2.5 times in FY16.

  • Investors are generally advised to sell UGL at current levels.

SCA Property Group

Investment houses support SCA Property Group’s latest acquisitions but believe the company’s share price remains overvalued.

The real estate investment trust (REIT), which was spun out of Woolworths in 2012, announced the purchases of three shopping centres in Tasmania for $99.4m last week (June 11, 2015). The deals reflect a weighted average capitalisation rate of 7.93 per cent.

To fund its recent acquisitions – which include the shopping centre bought in Queensland in April – SCA raised $80m at $2.02 per unit via an institutional placement, which was upsized from $50m due to strong demand.

“The combined impact of the acquisitions and placement is expected to be neutral for FY15 and over 2 per cent accretive to FY16 distributable earnings,” the company said. “SCP will also have pro forma gearing at 35.3 per cent, at the middle of its 30-40 per cent target gearing range.”

SCA also upgraded full-year distributable earnings guidance to 0.128 per unit from 0.126 thanks to the accretive acquisitions as well as lower borrowing costs.

Analysts welcome the acquisitions. The purchases are consistent with SCA’s strategy to focus on shopping centres with ample car parking and offer high initial yields, they say.

One publication expects the group to continue to exploit lower debt costs to diversify away from what is an immature portfolio that is still strongly tied to the performance of Woolworths.

However, consensus is to “sell” SCA Property Group after the update after its shares have climbed 14.3 per cent to Friday’s close of 2.12 this year.

A high yield has supported the share price until now, but at current levels investors should expect only a 5.7 per cent income return in FY16 and 5.9 per cent in FY17.

  • Investors are generally advised to sell SCA Property Group at current levels.

Energy Resources of Australia (ERA)

Shares in Energy Resources of Australia fell the most on record last Friday when the uranium miner decided to shelve its Ranger 3 Deeps expansion project in the Northern Territory.

The decision to not proceed the project to the final feasibility study was based on two factors: uncertainty around uranium prices (which haven’t improved as expected), and because the economics of the project require operations to continue after the ranger lease expires, which is at 2021.

The stock halved to 63.5 cents on the day.

While not too many broker reports that cross Eureka Report’s desk cover Energy Resources of Australia, those that do call the stock a “sell” after the news.

One publication which downgraded its recommendation lowered its probability of the underground project proceeding from 50 per cent to 20 per cent.

The source says the decision not to proceed may be more due to the need to extend the mining lease given the outlook for uranium prices, which it believes will tread higher in the longer term as Japan restarts its nuclear fleet.

Another publication says the lease could be extended. ERA has commenced discussions with traditional owners and the Federal Government, however, in the past management has said an extension requires an Act of Parliament, the source says.

  • Investors are generally advised to sell Energy Resources of Australia at current levels.

Greencross (GXL)

Analysts like Greencross for the veterinary clinic operator’s exposure to the growing pet sector, but are concerned about the company’s execution and balance sheet.

Last month at an investor conference in Sydney Greencross cut its EPS guidance by 3 per cent to between 33.5 cents per share and 35 cents per share, noting that operations in Western Australia are suffering from weaker trading conditions and that its supply chain has been disrupted by severe weather in Queensland and NSW.

Shares in the company fell 8 per cent to $6.56 on the day of the news (May 5, 2015).

Nevertheless, Greencross’s growth has been astonishing: In FY15 the company has increased its retail network by 49 per cent as it acquired and established 68 new stores and remains on track for opening another 25.

Following the earnings downgrade and presentation most analysts call Greencross a “hold”. They say the company benefits from being in a burgeoning industry – the addressable market is approaching $9 billion – but its rapid growth via a roll-up strategy generates increased risk through higher gearing.

Analysts also worry about competition. While the vet services industry is highly fragmented, the business has few barriers to entry and Greencross’s market share (currently at 8 per cent) is too low for cost advantages to generate a competitive advantage.

Indeed, former employee of Greencross, Tomas Steenackers, has formed his own roll-up veterinary clinic company National Veterinary Care and aims to be the second biggest player in the industry within a short term.

However, the share price has now fallen more than 30 per cent over the past 12 months. With the company now trading on a price-earnings multiple in line with the market for FY16 forecasts, value is emerging, one analyst suggests.

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

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