Collected Wisdom

This week we look at Asciano, Iluka, Computershare and Ainsworth.

Summary: Analysts mostly thought Asciano’s result was above expectations but a takeover bid is overshadowing the earnings report. Reaction to Iluka’s half-year result was mixed and brokers expect a strong second half, while analysts think Computershare appears to lack near-term positive operational catalysts. The market is confident in an Ainsworth turnaround.  

Key take-out: The consensus price target on Asciano is about five per cent below the current price and analysts see a low chance of a higher takeover bid.

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)

The logistics, stevedoring and bulk rail operator has reported results that were generally well received by the market. Overshadowing the results though is the revised bid from Brookfield Infrastructure Partners to acquire the stock for $9.15 a share. 

Analysts mostly had a view that the profit result was above expectations. However, one broker was disappointed with top line growth and believed cost-outs saved the day. Another broker was disappointed with the earnings outlook and therefore suggested the formal bid from Brookfield is well timed.

The Asciano board’s decision to endorse the Brookfield bid for full ownership has resulted in two analysts downgrading their recommendation from buy to hold. Although they see little downside risk, there is now a low chance of a higher bid.

Current consensus estimates have the stock on a 2016 price-earnings ratio of 19.4, with a 24 cent dividend forecast for next year. The consensus price target of $8.24 is about five per cent below the current price of $8.66.

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

Iluka (ILU)

The reaction to Iluka Resources’ (ILU) half-year result was mixed. There are four analysts with buy recommendations, two holds and one sell.

Iluka is a major global mineral sands resource company, involved in the exploration, project development, operations and marketing of mineral sands products. Iluka is the largest producer of zircon globally and a significant producer of the high-grade titanium dioxide products of rutile and synthetic rutile.

Most brokers are expecting a strong second half, and have taken comfort from management confirming the prior full-year guidance. Positive drivers for the second half will be higher prices (in Australian dollars) and inventory releases.

One of the analysts with a hold recommendation has a target price 30 per cent above the current $7.54 price, but doesn’t see a catalyst on the horizon to remove the discount to valuation. The consensus price target is $9.23.

The analyst with a sell recommendation does not share management’s optimism for a strong second half. They believe volumes may improve but there is little prospect of price increases. They are also concerned that the low level of capex is not sustainable, and will affect the free cash flow of future years.

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

Computershare (CPU)

The Computershare share price has dropped 25 per cent in the last month on the back of weak guidance for next year’s earnings. The read-through is that there is a lack of cyclical growth and not enough upside from acquisitions.

After the share-price fall the company has announced a buyback beginning in September of $140 million over up to 12 months. This hasn’t been enough to lift analyst confidence though with the consensus view of a hold recommendation.

Past FY16 there should be cylical upside from higher interest rates but there appears to be a lack of near-term positive operational catalysts. Outside of the cyclical macro drivers, it appears that organic profit growth is difficult for the company.

The $5.5 billion global share registry business reports in US dollars, and has a wide range of other financial services with 15,000 employees worldwide.

Consensus implies a forecast PE of 14, with a dividend yield of 3.7 per cent. The consensus price target is $11.28.

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

Ainsworth (AGI)

AGI, an Australian- and US-based gaming machine production business, announced full-year results that were slightly behind market expectations. This continues a recent trend of slightly soft performance after a downgrade in June and a weak first-half result provided back in February.

Specifically, the result was below expectations from a profit perspective, but according to one broker, was also supported by some one-off benefits that are likely to make growth next year more difficult.

On balance, analysts touted the result as soft, but maintained faith in management’s ability to turn the business around. Stiff competition remains a concern as Aristocrat Leisure continues to perform well and the US market emerges from major M&A activity in recent years.

It is worth noting that there are some large differences in opinion on AGI, with price targets ranging from $3.45 to $4.00. This results in a range of 2016 price-earnings ratios of between 12 and 15. Arguably AGI isn’t expensive at current prices, but nor is there a clear agreement on what to expect in terms of potential upside.

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