Collected Wisdom

This week we look at Myer, Rio Tinto, Westpac and AGL.

Summary: Myer’s capital raising and in-line annual result did nothing to turn brokers’ views on the challenged retailer. Rio Tinto’s production guidance was below consensus which led to a fall in profit expectations. Most analysts remain buoyant on Westpac, while brokers suggest AGL has the potential to conduct capital management.

Key take-out: Over the last 12 months Myer has fallen from a high of $2.32 to $0.91 – and even at this low level, it is still not a buy for analysts.

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.

Myer Holdings Limited (MYR)

Last week the battling retailer announced it would be out there rattling the can as it looked to raise a total of $221 million through an institutional and retail entitlement offer. This was announced as part of its annual result which was in line with consensus estimates.

In the new strategy Myer will be placing greater emphasis on its CBD stores with a focus on optimising brands. Nothing in the results or the entitlement offer could turn the brokers’ views on the challenged retailer with four having MYR as a sell, two a hold and two gallantly calling it a buy.

It has been a slippery slope for the share price over the last 12 months with it coming off a high of $2.32 to its current position of $0.91 as at close on September 8. The 12-month average price target is $1.12 with a high point of $1.31 and the lowest at $1. It is interesting to note even with the current price of $0.91, 9 cents below the lowest price target, it is still not a buy for analysts. It is important to note the price targets are not the be all and end all and there may be more underlying structural issues than can be presented in the numbers.

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

Rio Tinto Limited (RIO)

Iron ore heavy Rio Tinto held a dog and pony show for investors and analysts last Thursday (September 3). The presentation outlined China’s demand for steel and the global growth outlook for iron ore in general. The company also took the opportunity to highlight its Pilbara iron ore business and mentioned that a decision on the full development of Silvergrass will be made in 2016.

Rio’s guidance on Pilbara production numbers for 2016 and 2017 of 335mt and 350mt respectively have come in below analysts’ consensus figures and subsequently led to a fall in profit expectations of 1.5 per cent for 2015 and 3 per cent for 2016. Analysts used this as an opportunity to reaffirm their views which remain divided with five labelling Rio as a buy, six as a hold and one outlier with a sell. Those who have Rio as a buy state it is their preferred option right now out of the large miners.

Looking at the analysts’ 12-month price target figures the average is $59.62 with the optimistic at $64 and the pessimistic at $45. With an average price target of $59.62 the analysts with a hold are still seeing a share price re-rating of 18 per cent going off yesterday’s (September 8) close of $50.22.

  • Investors are generally advised to hold Rio Tinto at current levels – but analysts are close to an even split between hold and buy.

Westpac Banking Corporation (WBC)

Westpac has had a busy few days trotting out its strategy presentation and then announcing the successful raising of $1.32 billion from its Westpac Capital Notes 3.

The big four bank’s strategy presentation was littered with the words “service”, “technology” and “efficiency” as it outlined its plan. In fact, if you had a dollar for every time the word “service” was used you could pick yourself up a nice moderately priced red on the way home tonight to see off winter. WBC will be increasing spending in the above mentioned areas.

The majority of analysts remain buoyant on the bank with eight out of the nine surveyed having WBC as a buy at the current price of $30.52 (price at market close September 8). The one outlier is sitting as a hold and thought the presentation to be a bit too optimistic from the bank.

The forward looking 12-month price average price target is $34.58 with the bullish case set at $36.75 and the bearish at $30.70. As mentioned the majority of analysts see WBC as good value at current levels.

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

AGL Energy (AGL)

AGL is one of Australia’s leading integrated energy companies and largest ASX-listed owner, operator and developer of renewable energy generation in the country.

AGL has a diverse power generation portfolio including base, peaking and intermediate generation plants, spread across traditional thermal generation as well as renewable sources including hydro, wind, landfill gas, solar and biomass.

AGL has sold 50 per cent of its Macarthur wind farm for $532m to an infrastructure investment company, recovering book value. The important component is selling to a company with a lower cost of capital while retaining offtake, therefore freeing up cash. One broker suggests there is now capacity for $1bn of share buybacks. 

Gearing is expected to fall to 25 per cent, but there will also be slight earnings declines for FY16 and FY17. AGL will continue to operate and maintain the wind farm. One broker suggests the divestment was well flagged and believes the sale will de-risk the potential to conduct capital management over the next one to two years.

Another broker suggested the renewable energy opportunity has not quite developed but it should do so in the medium term. This broker suggests the sale will provide an opportunity to reinvest capital released from coal assets.

Of the brokers that have recently updated their recommendations there are three buys and one hold. The consensus PE is 11.4 and dividend yield is 4.7 per cent.

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

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