Collected Wisdom

The outlook for Sims Group (SGM) in the aftermath of its merger announcement with the Chicago-based Metal Management is less than encouraging. Concerns mainly centre on the group’s exposure to the US, despite Metal Management’s occupying the preferred position as market leader. The merger is a straight up scrip-for-scrip deal, with a 13% premium to the Metals Management share price based on the volume-weighted average over the month to September 21. Sims Group has had a good run over the past 12 months, gaining 52% to September 28 and it’s hard to make the case that it is undervalued at current prices. Heavy fluctuations in scrap prices remain a fact of life and barriers to entry in this type of business are not especially high. Sell Sims Group at current levels.

Now the dust has settled on the protracted and convoluted battle for Alinta, AGL Energy (AGK) has two choices. It can either sell its 33% stake in the merged Alinta-AGL entity to Babcock & Brown Power or it can buy Babcock & Brown Power’s 67% stake in Alinta-AGL. (To read a full analysis of the AGL dilemma click here for Robert Gottliebsen’s analysis.) If they have overpaid for the assets than Babcock & Brown Power will be looking to extract a pound a pound of flesh when time comes to deal. AGL Energy has more than 500,000 retail gas customers and another 10,000 business account holders on its books. Should the company exit Alinta-AGL and return focus to growing the business in the eastern states, then one newsletter believes the upside is greatly enhanced. With state governments in NSW and Queensland preparing to sell electricity assets in the near future, acquire AGL Energy to $16.70.

A reserves upgrade from Energy Resources of Australia (ERA) has had a strong psychological impact on investors, pushing the uranium stock back above $20 for the first time since July. The upgrade has not been welcomed in all quarters, with some grumbling that the news amounts to an increase of a mere 886 tonnes to 51,775. The upgrade will effectively extend the life of the Ranger mine to 2012, which was previously expected to shut down in 2008. The mine has been subject to flooding, which has laid waste to previous forecasts, but the good news is that the mine will be clear of water by November. When it comes to uranium miners, one of our most well read tipsters seems to favour the “bird in the hand” approach as opposed to the higher-risk game of uranium exploration. Energy Resources of Australia is a long-term buy at current levels.

Management at Orica (ORI) have a tough job ahead of them. After the company rejected a $32 bid from private equity as “opportunistic”, its stock price has struggled to get above $30 – closing at $30.10 on September 28. Orica has realigned its focus towards mining in recent years with divisions related to resources generating about 70% of the company’s profit. Orica is in an acquisitive mood, the most recent purchase was the US-based Excel Mining Services. Orica paid $775 million for the group, which sells ancillary products to coal miners. The fee works out to be 9.9 times EBITDA. Orica has hinted that more opportunities exist in the emerging economies of the BRIC nations (Brazil, Russia, India and China). Competitive issues remain on home turf, with Incitec-Pivot likely to increase its stake in explosives player Dyno Nobel. But there is still plenty of upside for investors including the increased exposure to the mining boom. Hold Orica at current levels.

St George (SGB) is Australia’s fifth-largest bank but on a price/earnings multiple of 16.5 times means it is certainly not the cheapest. Investors have been cautious in recent months and the stock is yet to retest its May highs of $37.50. Part of this is because the bank is yet to confirm outgoing chief executive Gail Kelly’s replacement and partly because of its reliance on the securitisation market. The appeal of the securitisation process to banks are obvious: it is less capital intensive, loans are held off the balance sheet and the risks are transferred to the new owners of the securitised loan. In the six months to March 31 residential loans at the bank grew by 10% while securitised housing loans grew by 30%. The disruption to the securitisation market has been severe, but St George is in a far better position that the struggling non–bank lender RAMS. Reduce your holding in St George at current levels.

One of our favourite speculators has struck paydirt with TZ Limited (TZL), an Australian company based in the US that develops “intelligent fastening systems” that have applications on various forms of transport. One particularly lucrative sector is bus transport, while the Federal Government’s $40 million commitment to installing seal belts on rural buses is distinctly small fry compared with a mooted deal that could lead to TZ systems being fitted to 38,000 buses in the US. Since the start of the year TZ’s share price TZ has been fluctuating around $2.50 but on September 19 it really started to move, and now trades around $5.70. The catalyst for the movement appears to be a series of large purchase orders from an unnamed automotive manufacturer. However, the announcements were not released to the market until September 26, which has raised the ire of the ASX, which saw fit to issue two separate speeding tickets. New investors should note that the horse appears to have bolted on this one. Existing shareholders with a tolerance for risk are advised to hang on. Hold TZ Limited at current levels.

Many investors were watching the Commonwealth Bank bid for Investorweb (IWL) with keen interest, and with good reason. Earlier this year, ANZ Bank was forced to raise its bid for Etrade, a company not dissimilar to Investorweb. Both companies facilitate online share transactions but Investorweb also has a research arm. So aside from the customer base, the bank is also purchasing bolt-on content for its existing CommSec service. The bid is $6.57 cash minus the 12¢ dividend paid for the period ending June 30. Another predator could emerge, but one investment newsletter views this as unlikely. The deal has been recommended by the board and the details of the scheme have been mailed to shareholders. Shareholders will be offered either cash or the equivalent in Commonwealth Bank shares by November 19 but this publication recommends that you cash out before hand and make your money work harder. Sell Investorweb at current levels.

Watching the directors

Week to September 28

• Buying by two directors, Julian Hanna and Terence Streeter, of Western Areas NL (WSA). Hanna has just purchased more than $1 million worth of shares. This follows on from a lot of buying activity over the past couple of months
• Two directors, Terence Hogan and Craig Rosendorff of Venus Resources (VNS), have recently purchased stock.
• Gerry Masters, a director of The Reject Shop (TRS), has bought stock in four transactions over the past month.
• Michael Millner, a director of SP Telemedia (SOT), has recently purchased shares. The SOT share price has fallen considerably over the last few months.
• Buying by two directors of Fairfax Media (FXJ).
• Buying by two directors of Just Group Limited (JST).
• Mark Scott, a director of Jindalee Resources (JRL), has purchased about $150,000 worth of stock in three transactions over the past fortnight.
• Almost $200,000 worth of stock bought by Kenneth Moss, a director of Centennial Coal Company Limited (CEY).
• Buying by Tan Yam Pin, a director of BlueScope Steel (BSL). He has purchased just over $100,000 worth of stock.
• EG Albers, a director Bass Strait Oil Company (BAS), has bought $275,000 worth of stock in the past few weeks. Another director, Andrew Adams, purchased a parcel of shares in late August.

Previous week

• Mark Ashley, a director of Apex Minerals NL (AXM), has bought almost $330,000 worth of stock in two transactions this week. This is in addition to the $390,000 worth another director bought in late August.
• More buying by the directors of Venus Resources (VNS). Terence Hogan has just bought $44,000 worth of stock this week.
• Buying by the directors of Virgin Blue Holdings (VBA). Three directors have purchased shares in the past month.
• Large buying (almost $640,000) by Dr Vagif Soultanov, a director of Solagran Limited (SLA).
• Two directors buying shares in Collection House (CLH).
• David Klingner, director of Codan (CDA), has purchased shares in two transactions totalling almost $90,000 this week.
• Mark Lawrence, a director of Boom Logistics (BOL), has just bought $90,000 worth of stock this week. The BOL share price has fallen significantly over the last few months.

Source: The Inside Trader