Collected Wisdom

This week we look at Graincorp, Sims Metal Management, 3P Learning and Cover-More Group.

Summary: Graincorp expects another soft year for grains but analysts think this will be offset by the company’s diversification program. Sims Metal Management reported a softer than anticipated start to the year, with analysts wondering how falling prices slipped management last time it gave guidance. The market sees further growth from 3P Learning, while investors expect Cover-More Group’s margins to improve over time.

Key take-out: Analysts are concerned about increasing competition for Graincorp, as well as the potential effect of El Niño.

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.

Graincorp Limited (GNC)

The last 12 months have been a tough time for grain producer Graincorp with grain production down, resulting in a 36.2 per cent decrease in net profit to $32.1 million. This was not shied away from in the company's annual report released last Thursday (November 12).

Chairman Don Taylor flagged another soft year ahead for grains but analysts expect this to be offset by the diversification program GNC has been undertaking over the last five years. The report highlights that grains historically made up 87 per cent of earnings before interest, tax, depreciation and amortisation (EBITDA). This is now reduced to 14 per cent with malt and oils making up 50 per cent and 26 per cent of EBITDA respectively.

Analysts highlighted concerns around the potential effect El Niño will have on future crops and several also expressed concerns going forward around increasing competition.

The consensus view is a hold for GNC with the average 12-month price target currently sitting at $8.22 and the share price trading at $8.01 at the time of writing.

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

Sims Metal Management Limited (SGM)

Last Thursday it was global metal and electronics recycling company Sims Metal Management’s turn to face shareholders at its AGM. Sims management took the opportunity to highlight tough times ahead for FY16 with a softer than anticipated start to the year.

Recycled metals market volumes have slumped in the first quarter off the back of a 42 per cent decline in ferrous scrap metal prices. The market’s reaction to this announcement was swift selling SGM down from $9.58 (closing price on November 11) to as low as $6.79.

Collectively analysts scratched their heads wondering how the declining ferrous price slipped management by when it gave guidance only three months ago. Analysts also noted a lack of comments on the company's previously stated FY18 earnings target of $321m.

Analysts who are positive on the stock (and there are a few of them out there) believe the worst is currently priced into the share price. Also highlighted by the positive analysts was the strong balance sheet of Sims and the potential for a turnaround story when the ferrous prices stabilise.

The 12-month average price target for Sims is $8.77 and at the time of writing the share price sat at $7.17. To give you a range, those most bullish have a price target of $10.45 while the bearish sit at $7.69.

  • Investors are generally advised to hold Sims Metal Management at current levels.

3P Learning Limited (3PL)

The cloud-based education group 3P Learning held investor briefings last week and this week around the country. The group used the briefings to recap its first year of trading since being listed and to also give guidance for the first quarter of FY16.

The trading update did not provide a lot of tangible information except that group revenue is up 20 per cent on the prior corresponding quarter. The announcement also further highlighted 3P Learning’s ongoing push into the US market and gave an indication that they expected margins to be maintained.

The revenue growth pleased most but it did come in materially lower than the expectations of one analyst who had forecasted growth of 30 per cent. The analyst put this down to increasing competition in Australia and the UK which has led to lower retention rates. This forced a downgrade from that analyst taking 3PL from a buy to a hold in their eyes.

On the whole though, analysts see further growth coming from the online education group and are excited by the margins and the low cost structure of the cloud-based business.

The average 12-month price target for 3PL is $2.46 with the bullish case set at $2.92.

  • Investors are generally advised to buy 3P Learning at current levels.

Cover-More Group Limited (CVO)

It was travel insurance company Cover-More Group’s management’s turn to face shareholders on Friday just past (November 13). Management read over the highlights from FY15 and took the opportunity to give guidance for FY16.

Guidance given by the insurer was in line with analyst expectations and analysts were pleased to see the business still delivering despite the weaker Australian dollar. Pleasingly travel insurance sales were up 10.2 per cent in the first quarter of FY16 and the group's international presence is growing strongly with revenue growth in India up 60 per cent in the first quarter too.

Analysts all expect margins to improve over time and gradually edge higher. With negative market sentiment abounding analysts see the short-term price pressure as an opportunity and see CVO as value at current levels with an average 12-month price target of $2.63.

  • Investors are generally advised to buy Cover-More Group at current levels.

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