Collected Wisdom

This week we look at Treasury Wine Estates, Domino’s Pizza Enterprises, Regis Resources and Whitehaven Coal.

Summary: Analysts are lukewarm on Treasury Wine Estates’ acquisition of Diageo Wine’s assets, while the market is positive on Domino’s Pizza’s purchase of French chain Pizza Spring. Analysts were pleased with Regis Resources’ quarterly update but think the upside has now been priced in. Investors see upside risk in Whitehaven Coal’s strong operations but point out the issues posed by low coal prices.

Key take-out: Investors think Treasury’s deal has clear synergies but warn the brands it is buying have been in decline for some time now and some hope TWE management will reverse these trends.

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.

Treasury Wine Estates (TWE)

Last week (October 14) the Foster’s spin-off Treasury Wine Estates announced the acquisition of the majority of assets of Diageo Wine, the US and UK wine operations of UK-listed Diageo Plc. The acquisition comes at a cost of $754 million with $486m of that coming from a fully underwritten 2 for 15 pro-rata accelerated renounceable entitlement offer. 

The deal will have an instant impact, doubling TWE’s luxury and masstige net sales revenue in America. It is also expected to add $34m per annum before FY20. The acquisition also brings in a new currency risk between USD and GBP.

The move has been met with a lukewarm reception from analysts. On the positive side they believe the deal has clear synergies due to Treasury’s US business and it may also have increased growth in Asia with the increased volumes of fruit for its Californian brands. On the negative side the brands TWE is taking over have been in decline for some time now. Those with a positive view are looking for TWE management to be able to reverse these trends.

The average 12-month price target for TWE is $6.92 with the most positive analyst at $7.40 and the most pessimistic at $5.45. At the time of writing the stock was trading at $7.30.

  • Investors are generally advised to hold Treasury Wine Estates at current levels.

Domino’s Pizza Enterprises (DMP)

Last week (October 14) Domino’s announced the acquisition of French pizza chain Pizza Sprint. The leading chain in western France generated EBITDA of €3.5m in FY15.

The Pizza Sprint acquisition will net Domino’s a further 89 stores and take the total to 330 stores in France. The acquisition will cost DMP €35m and management has now revised their forecast on stores in Europe from 1350 to 1500.

Analysts see instant synergies with the Sprint acquisition as it adds scale to the existing French business through greater efficiencies in logistics. Despite it being viewed as a small acquisition it is viewed positively as Domino’s superior technology will be rolled out throughout the Sprint network, improving profitability. Given the small size of this deal analysts would not be surprised to see further acquisitions made.

Many analysts commented that valuations for DMP are already stretched thinner than the dough for a thin and crispy but that did not stop the bulk of analysts still calling the pizza maker a buy. The 12-month average target price is $42.82 with the most positive stretching as far as $55 and $39.34 for the only analyst with a sell on DMP.

  • Investors are generally advised to buy Domino’s Pizza Enterprises at current levels.

Regis Resources Limited (RRL)

Over the course of last week Regis Resources gave its quarterly update on the Duketon operations and it was another positive one. The gold miner’s share price has been on a terrific run over the course of the last six months, increasing by 66 per cent.

All analysts were pleased with the strong result which was either in line with, or exceeding, their expectations. The update saw a number of analysts increasing their FY16 forecasts. Regis’ ability to pull back the all in sustaining cost per ounce to $973 from $1,148 was widely pleasing as well.

With the solid results comes a materially stronger share price. Off the back of this the consensus has shifted on RRL, with analysts downgrading their rating to a sell. The view is the upside has been well and truly priced in. The forward looking returns from here are not appealing with the average 12-month price target sitting at $1.88. The share price at the time of writing was $2.01. The most optimistic of the bunch has a price target of $2.30 and the most bearish is $1.30.

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

Whitehaven Coal (WHC)

On Thursday (October 15) Whitehaven Coal presented its September quarterly report to the market. The share price responded positively to a quarterly report that showed the company continued on course without event. Coal sales for the quarter totaled 4.481 million tonnes, up 31 per cent on the same quarter last year. 

The quarterly report also included information showing that the Maules Creek mining operations were tracking to the targeted 6.0 million tonnes as an annualised production run rate. 

For most analysts, this quarterly report was confirmation of some good operating performance. However, many analysts point out the issues posed by persistently low coal prices. Many provided base case valuation, but continue to believe that the strong operations provide upside risk to the current price. The average price target is $1.55. 

  • Investors are generally advised to buy Whitehaven Coal at current levels.

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