Collected Wisdom

This week we look at Rio Tinto, New Hope, Japara Healthcare, ANZ and Origin.

Summary: New Hope’s purchase of Rio Tinto’s 40 per cent stake in the Bengalla coal mine will improve sales and the quality mix for the coal miner, analysts say. The market likes Japara Healthcare’s acquisition of a residential aged care portfolio, while analysts are pleased to see ANZ has recruited its new chief executive from within. Origin’s capital raising is seen as necessary, but some investors suggest it might not be enough to remove all the risks.

Key take-out: Analysts see New Hope’s purchase of Rio Tinto’s coal asset as a positive move for both parties.

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.

New Hope Corporation (NHC) and Rio Tinto (RIO)

Last Wednesday (September 30) RIO and NHC announced they had reached a binding agreement for NHC to purchase a 40 per cent interest in the Bengalla coal mine in the Hunter Valley. NHC paid $865 million for the open cut mine which produces approximately 8.6m tonnes of thermal coal per year.

Bengalla was the smallest of RIO’s Hunter Valley coal mines and the sale takes RIO’s total divestments since 2013 to $US4.5 billion. RIO also simplified the ownership of Coal & Allied moving to owning 100 per cent of the business. Despite Bengalla being a higher margin operation for RIO all analysts see this as a positive move for the diversified miner and it continues to be the pick among them. The average 12-month price target for RIO is $57.63 with the most optimistic outlook at $62 and the lowest at $55. At the time of writing RIO’s share price was $49.89.

For NHC this purchase means the bulk of the $1.1bn cash on its books is now spoken for. Analysts see this as a positive move for the coal miner which will improve sales by 60 per cent and improve the quality mix of NHC’s product. The Bengalla mine has a 25 year mine life.

The average 12-month price target for NHC is $1.98 with the most bullish case coming in at $2.40 and the most bearish at $1.95. At the time of writing NHC’s share price was $1.87.

  • Investors are generally advised to buy Rio Tinto and New Hope at current levels.

Japara Healthcare (JHC)

Aged care service provider JHC last Thursday (October 1) announced an acquisition of the Profke residential aged care portfolio. For the price of $79.5m JHC adds a further 587 beds to its portfolio. This acquisition brings JHC into the Queensland market; previously JHC had operations in Victoria, South Australia, NSW and Tasmania.

Since listing in April 2014 JHC has added 845 beds to its portfolio. This brings the company's total beds to 3,976. Once the acquisition is fully integrated analysts anticipate an increase in the aged care portfolio earnings of 17 per cent. Analysts estimate an increase in EPS by 5 per cent for FY16 and 11 per cent in FY17.

Out of five analysts surveyed four had a buy on JHC with one analyst having the company as a hold due to the share price closing in on their target share price. The 12-month average price target for JHC is $3.07 with the highest target at $3.50. The share price at the time of writing was closing in on the average price target, it currently sits at $2.97.

  • Investors are generally advised to buy Japara Healthcare at current levels.

ANZ Banking Group (ANZ)

ANZ has announced after eight years at the helm, chief executive Mike Smith will be replaced by Shayne Elliott as of January 1, 2016. Elliot will step up from being the group's chief financial officer. He has been at ANZ since 2009.

The recruitment from within has been positively received among analysts. While there will be no material change analysts took the chance to restate their position on the bank. Those negative/neutral on ANZ point towards the Asian exposure and the risk of the new chief executive rebasing earnings expectations. On a positive note the average price target for ANZ sits at $32.75 implying an upside of 16.4 per cent.

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

Origin Energy Limited (ORG)

Origin announced a $2.5bn capital raising in the form of a rights issue at $4 in a move to resolve its debt problem. ORG will also look to resolve the debt issue with asset divestment, slashing the dividend from $0.50 to $0.20 and cutting the capex budget by $1bn for the next two years.

Analysts had said this measure is needed as the energy company had too much debt at the time the oil price collapsed. Some suggest it might not be enough to remove all the risks. Analysts positive on the issue believe the LNG business will be a good long-term business for the next 20 years.

Consensus view is positive on this rights issue with the opportunity to buy ORG at $4 and the average 12-month price target at $6.75.

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