Collected Wisdom

This week we look at QBE, Regis Resources, AGL Energy, Primary Health Care and NIB Holdings.

Summary: The investment press back QBE Insurance’s sale of its US Mortgage & Lender Services business, while they approve of Regis Resources’ latest initiatives to regain investor confidence. Elsewhere, AGL’s latest write-downs reflect the company’s new and improved strategy, Primary Health Care is making the right decisions in a challenging industry and NIB Holdings’ latest acquisition sets it up for new channels of revenue but increases risks.

Key take-out:  Following the sale, investment houses overwhelmingly rate QBE as a “buy”. They say the deal is consistent with QBE’s strategy to exit non-core businesses and fast tracks the North American division’s turnaround.

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.

QBE Insurance (QBE)

Analysts support QBE Insurance’s sale of its Mortgage & Lender Services (M&LS) business in the US, saying it cleans up the group’s balance sheet and lifts profitability.

After an extended period of searching for a buyer, last week (July 16, 2015) QBE announced it had sold M&LS to New York-based National General Holdings for $US90 million. M&LS had been a woeful underperformer for QBE as a provider of “lender placed” insurance – a high risk form of insurance that lenders buy when a home borrower defaults on their mortgage.

“As previously advised, we have been evaluating a range of strategic options with regards to the M&LS business in North America,” said chief executive John Neal. “The sale of this business is a pleasing result as we look to focus on commercial lines and significantly build out our specialty underwriting capabilities in North America.”

Though the exit of the business leads to a $US120m loss, QBE expects it to improve the North American division’s combined operating ratio by 1.5 per cent and return on capital by 1.8 per cent. One analyst calculates this implies the business was budgeted to generate an underwriting loss of $US40m in FY16.

Following the sale, investment houses overwhelmingly rate QBE as a “buy”. They say the deal is consistent with QBE’s strategy to exit non-core businesses and fast tracks the North American division’s turnaround.

With earnings quality improved and a sound balance sheet being formed, QBE’s progressive dividend policy should enable greater dividends in the future; analysts tip a yield of 4.5 per cent in FY16 and 4.9 per cent in FY17.

At a FY16 price-earnings (PE) multiple of around 13 times, the company also trades at a discount to its peers, with Suncorp (SUN) and Insurance Australia Group (IAG) trading at 13.6 times and 15.3 times respectively.

  • Investors are generally advised to buy QBE Insurance at current levels.

Regis Resources (RRL)

Shares in Regis Resources jumped by more than a quarter of its value last Thursday and could rise higher as the gold miner bounces back from what has been a troubled period for its operations, analysts believe.

Amid a slew of announcements from the company on the day, key take-outs were production in FY15 of 310,000 ounces of gold at all-in sustaining cost (AISC) of $1,020/oz, FY16 guidance of 275-305,000 ounces of gold at an AISC of $1,020/oz, a pledge to pay a dividend later in the year and plans to buy back 5 per cent of its capital in FY16.

The stock jumped 25.6 per cent to $1.45 on the day (July 16, 2015) as the company met expectations for FY15, set realistic targets for FY16 and conveyed its optimism through capital management.

Analysts are divided between calling Regis Resources a “hold” or “buy” following the news, with most rating the stock the latter. The announcements show management is keen to rebuild confidence after its operations went through significant difficulties, including major flooding in February 2014 (see Collected Wisdom’s last coverage of the stock).

With a strong balance sheet, achievable guidance and a potentially increased dividend policy, investors should begin re-engaging with the company, they say.

Regis intends to pay a 5-7 cents per share dividend in FY15, which equates to a dividend yield of 4-6 per cent, one analyst highlights. In the future Regis suggests it will aim for a 60 per cent payout ratio, equating to dividend yields of 7-10 per cent.

However, while analysts say Regis is undervalued at current levels, they warn that the stock is a high-risk investment with cash costs in the middle of its peers and a mine life that’s uncomfortably short.

  • Investors are generally advised to buy Regis Resources at current levels.

AGL Energy (AGL)

AGL Energy’s $603m in write-downs reflects the energy company’s new direction under recently appointed chief executive Andrew Vesey, analysts say.

Following a comprehensive review of its upstream gas businesses the company reported earlier this month (July 6, 2015) impairment charges to its Gloucester, Moranbah and Cooper Oil assets. Camden, Newcastle LNG and the wider Silver Springs project will be kept, while non-core assets will be divested.

Analysts almost unanimously call AGL Energy a “hold” after the update. They weren’t surprised by the divestments as AGL hasn’t needed to produce much of the gas it sells, instead deciding to contract gas at competitive prices.

“This position enables AGL to focus on a smaller number of gas projects including strategically important gas storage while avoiding significant capital expenditure, releasing poorly performing assets and allowing management to concentrate on enhancing shareholder value across the group,” the company said.

Analysts agree. One points out that while development of gas assets can be successful, it comes with commodity price, development and reputational risks. In NSW, for example, AGL faces opposition for the development of coal seam gas assets.

The write-downs and divestments remove most downside risk – with the market holding little value for upstream gas – while leaving a potential opportunity in the longer term, another analyst says. Its underground storage facilities should become increasingly valuable given volatility in gas markets is likely to exist for many years, the analyst says.

But after climbing 10 per cent to $16.37 over the past 12 months, most analysts believe the share price fully incorporates AGL’s strong strategy.

  • Investors are generally advised to hold AGL Energy at current levels.

Primary Health Care (PRY)

Analysts agree Primary Health Care is making the right decisions in a challenging industry, but differ over whether the moves will be enough to unlock more value.

Their responses come after the medical centre operator reported underlying earnings before interest, tax, depreciation and amortisation (EBITDA) for FY15 would be $400m compared to its previous guidance of $410-425m.

“This has been driven by a range of factors, including extreme weather events particularly in NSW, and a relatively mild cold and flu season compared to the previous season,” the company said in the statement.

Primary Health Care also said it has agreed with the Australian Taxation Office to settle its doctors’ tax liabilities for $105m. The amount will be deducted from a tax refund of $155m the company was expecting. 

Shares in the company fell 8 per cent to $4.76 on the day (July 15, 2015).

Investment firms are extremely mixed over the outlook for Primary Health Care after the news, with an almost even number of “buys”, “holds” and “sells”. On balance, however, investors are recommended to “hold” the stock.

Analysts who are optimistic highlight how with a new chief executive and high levels of debt, Primary Health Care is undergoing a strategic review of operations. They see value in the sale of non-core assets with the funds to be reinvested into the core GP and diagnostics businesses.

But others say the earnings downgrade underlines the extent of challenges facing the industry. They point out the federal government’s Medicare rebates freeze began this month, putting pressure on already modest rates of growth.

  • Investors are generally advised to hold Primary Health Care at current levels.

NIB Holdings (NHF)

NIB Holdings’ acquisition of World Nomads Group (WNG) has generated a mixed response from analysts, not only from the change in direction for the financial services provider but also over its deal metrics.

NIB announced earlier this month (July 8, 2015) the acquisition of WNG, Australia’s third largest travel insurance provider, for $95m. The transaction is to be funded via surplus capital and debt.

“WNG has a portfolio of high quality brands including World Nomads, Travel Insurance Direct and SuperSave, as well as an extensive range of domestic and international partners such as Lonely Planet,” said managing director Mark Fitzgibbon. “Its focus on direct-to-consumer distribution gives it the flexibility to adapt to evolving market conditions.”

Several analysts aren’t so sure, pointing out that the deal increases risk. These include NIB’s gearing ratio lifting to 32 per cent – above its long-term target of 30 per cent – and online threats to the travel insurance industry.

One analyst also doesn’t expect significant revenue or cost synergies. While WNG is arguably a good business in its own right, the analyst questions whether it belongs at NIB.

Moreover, the investment metrics aren’t attractive despite the acquisition being immediately EPS and ROE accretive, the analyst says. Based on FY15 estimated earnings from Nomad the implied return on capital is only 6 per cent, much lower than NIB’s estimated weighted average cost of capital.

But others say the acquisition creates a new channel for growth, does bring revenue synergies and diversifies the top line away from the tightly regulated Australian residents health insurance business.

Though analysts disagree over the merits of the acquisition, almost all of them call NIB Holdings a “hold”.

  • Investors are generally advised to hold NIB Holdings at current levels.

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