Collected Wisdom

This week we look at Brickworks, Sigma Pharmaceuticals, Woodside Petroleum and Nufarm Limited.

Summary: Analysts were pleased with the Brickworks half year result, which gained strength through housing demand on the east coast, while Sigma Pharmaceuticals’ recent acquisitions look to add earnings and consensus is a hold with the belief it is fully priced. Consensus is also a hold on Woodside Petroleum, as analysts wait for management’s next move after the Browse floating LNG project was shelved.

Key take out: Consensus is that crop protection manufacturer Nufarm is fairly priced, with the market pleased, though not blown away, by the half-year result.

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.

Brickworks Limited (BKW)

The brick manufacturer produced a solid set of numbers for its half-year result, released just prior to Easter. The building products division performed strongly off the back of the positive housing headwinds, especially on the east coast.

Earnings before interest and tax (EBIT) for the building products division increased by 24.9 per cent on the prior corresponding period (PCP) to $32.6 million. EBIT for the land and development division increased by 17.3 per cent on the PCP to $45.4m. This came predominantly through a revaluation in the group's property trust. The investment division declined by 11 per cent on the PCP to $26.8m. This category is made up predominantly of BKW’s 42.7 per cent stake in the diversified investment company Washington H Soul Pattinson (SOL).

All round, analysts were pleased with the result and see further upside through the group’s higher margin building materials and the east coast housing cycle continuing to be strong. Management commented an “extremely strong order book” is an indication of this.

Analysts remain positive on the outlook for BKW and particularly like the diversified nature of the business during uncertain market times especially through the stability the stake in SOL provides.

The consensus has BKW as a hold with an average 12 month price target of $16.27. At the time of writing, the share price sat at $15.84.

Investors are generally advised to hold Brickworks Limited at current levels.

Sigma Pharmaceuticals Limited (SIP)

Sigma Pharmaceuticals management also rolled out the half year numbers just before Easter. Management and the board would have been able to enjoy their four day weekend knowing the result was well received.

The first half results for SIP focused on the successful string of recent acquisitions made by management to diversify the earnings base. Through the acquisitions, management expect EBIT to grow by at least five per cent pa for the next two years, ahead of expectations.

The investment in Central Healthcare Services (CHS) will look to drive growth by gaining market share in the $2.5 billion hospital wholesale pharmaceutical industry. Currently through CHS Sigma has a five per cent market share.

Management also expect the new Queensland based distribution centre will be complete towards the end of CY17. This will provide further cost efficiencies throughout the business. 

Analysts were positive on the outlook for SIP. With the company’s ungeared balance sheet they anticipate management to continue to look for further suitable M&A opportunities to complement the existing portfolio especially the potential that exists in the wholesale market.

Saying this, analysts are not leaping at the opportunity with a hold call all round. Some analysts even downgraded their call from a buy to a hold. The reason for this is the share price. The good news and growth is priced in with the share price sitting at $1.02 at the time of writing. The 12 month average price target for SIP is $1.03.

Investors are generally advised to hold Sigma Pharmaceuticals at current levels.

Woodside Petroleum Limited (WPL)

Coming as no surprise to analysts, Woodside formally announced last week (March 23) that the company was shelving the joint venture for the Browse floating LNG project.

The unfavourable market conditions were cited as the main reason not to continue with the project, which just completed the front-end engineering and design phase. The unfavourable market conditions refer to the collapse in the oil price and subsequently gas prices as well.

Management did say they were committed to resuming work on the JV at the earliest opportune time. While the project remains mothballed, management will continue to work on a cost reduction strategy for Browse.

Analysts were in favour of this decision as it now allows management to focus on cost outs but are also left scratching their heads questioning where growth will now come from. Speculation also has turned to whether or not WPL will continue to look for acquisitions now capital has been freed up. Chief executive Coleman has been quoted in articles to now have “headroom”.

Currently analysts maintain their collective hold call on Woodside and will continue to look for the oil and gas producer’s next move. The current 12 month average price target is $28.38. The share price at the time of writing was $26.95.

Investors are generally advised to hold Woodside Petroleum Limited at current levels.

Nufarm Limited (NUF)

The last time we had an update in Collected Wisdom on the crop protection manufacturer, Nufarm, was after its full year result (read about it here: Collected Wisdom, September 29, 2015). Back in September it was a story of its performance improvement program, essentially maximising efficiencies.

How did chief executive Greg Hunt and co fair? Reasonably well. Analysts were relatively pleased but not blown away by a sturdy set of numbers. Underlying earnings increased by 12 per cent over the PCP, up to $71.2m, and gross profit margins increased as well to 28.2 per cent from 26.7 per cent. Hunt said he believes the company's performance improvement program is on track to deliver $116m in benefits by FY18.

Analysts were impressed with the underlying growth in the face of macro headwinds including forex. All analyst talk went to the potential of NUF being a take over target as previously mentioned by Eureka’s Tom Elliot in his “Takeover Target” article in January (read more here: Our top takeover targets, January 20, 2016). Speculation around NUF and industry consolidation as a whole has been ongoing for some time now as the continuing demand from agricultural produce increases from China.

Takeover speculation aside, analysts believe NUF is fairly priced at current levels. The average 12 month price target is $8.05 with the share price sitting at $7.36 at the time of writing.

Investors are generally advised to hold Nufarm Limited at current levels.

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