Collected Wisdom

Investors with a long-term view would be familiar with the Perpetual (PPT) story. The wealth management company is leveraged to Australia’s sharemarket and has a long history of earnings and dividend growth. Disappointing news delivered at the AGM has shaved about 8% off the share price and may have created a buying opportunity for investors. Like most financials, Perpetual was re-rated after the credit crunch. Perpetual’s exposure was born of its cash funds where the company guaranteed a bank bill return while investing in non-bank bill securities and keeping the upside for itself. When the securities value fell the company was obligated to cough up the headline rate from profits.

Net inflows for its Australian equities division is also suffering as investors look to diversify their holdings. Separately its new Dublin operation burned through $200 million over the last 12 months. . The company has reduced its profit growth guidance for 2008 from 15% to 10% but many analysts see no need to reduce it for the following year. The guidance for 2008 is looking considerably pessimistic and the losses experienced in August may yet be recovered through other avenues. Buy Perpetual to $73.

The appointment of former Promina CEO Mike Wilkins to the management team at IAG Insurance (IAG) is good news for everyone except the incumbent CEO, Mike Hawker. Wilkins’ reputation in the sector is second-to-none and he should prove to be an excellent candidate for the top job should it become vacant. The stock has suffered this year, falling from $6.59 on January 22 to $4.72 on November 2, or around 28%. Much of this decrease was related to the underperformance of the British motor insurance sector, which IAG bought into on expectation of an eventual upturn. While this is a strategic failure, one member of the investment press believes that profitability and growth will improve. Investors considering IAG will invariably compare the stock with the outperformer of the sector, QBE. As management at QBE continues to impress, there is a feeling that it is closer to the top of the earnings cycle and therefore offers less upside than IAG. Buy IAG to $4.79.

Canny investors can often create opportunities buying oversold companies on the basis of earnings potential and underlying assets: Origin Energy sharp fall in August of 2006 was a good example. In the case of AGL Energy (AGK) things remain slightly murky. Its revised profit guidance came as something of a surprise to everyone including chief executive Paul Anthony, who has since joined the Centrelink queue. The company has explained the reasons behind the losses but has not confirmed that they will be contained to the current financial year. On Bloomberg’s numbers the company is trading on a price-to-earnings ratio of 15.5 times, which is not attractive for an operation of this type but it is trading at a 20% discount relative to net assets. The nature of the energy business is risky, because while wholesale prices can fluctuate retail prices are heavily regulated. One tip sheet expects AGL Energy to fall further in coming months, which should produce a buying opportunity. Wait for a buying opportunity.

Industrial brands company Alesco Corporation (ALS) has weakened considerably and is not far off 12-month lows, however the company is well positioned for an eventual turnaround in the property market. The company has reaffirmed earnings guidance for 2008 and expects even better results than the 12.2% achieved last year. Organic growth has been minimal but the integration of eight bolt-on acquisitions is proving successful. Alesco’s acquisition of TEM water products in July was not considered to be overly good value but is expected to be earnings accretive by the second half of 2008.The company has strong positions in the market and enjoys margins of around 13%. More value could be unlocked by the sale of the underperforming B&D Doors and Openers division. The recovery in housing and construction has been delayed, with analysts not expecting any uptick until the end of 2008. Acquire Alesco to $12.20.

One publication has taken a contrarian position on Amcor (AMC) after we published a 'sell’ recommendation last week. The new management team has gone some way to inspire confidence by focusing its global packaging business in the key areas of PET recyclables, food and tobacco packaging but choosing to still offer the full suite of packaging products domestically. Expect further upside as excess capacity emerges in the Ukraine. Net profit and earnings-per-share forecasts for 2008 and 2009 remain unchanged. Investors are advised to keep currency movements in mind as each 1¢ advancement of the Australian dollar against the US dollar above 90¢ will strike $3 million from the bottom line. Amcor also faces larger-than-expected legal action in the courts following its role in the recent price fixing scandal within the packaging sector. At current prices the company maintains a price-to-earnings ratio of around 13.6 and a partially franked 5% dividend. Acquire Amcor up to $7.40.

Another company that suffers every time the dollar rises is Foster’s (FGL). Foster’s wine exports to the US have been savaged by the strong Australian dollar and analysts believe that every 1¢ rise costs the company $4.5 million. In addition, there is some concern among larger producers about the tight supply of grapes. Management at Foster’s has dismissed worries by suggesting that such a scenario would simply lift per case revenues and encourage consumers to move toward premium priced wines. A recent note from Merrill Lynch suggested the only way for Foster’s to stop destroying value is to spin off various brands. Demergers have a long history of creating value for Australian shareholders and spinning off all or part of the Southcorp business could give the share price a much needed shot in the arm. Spin off or no spin off, management needs to communicate a very clear vision of the company’s challenges and how it plans to overcome them. One for investors with a view to the long term. Buy Foster’s at current levels.

The speculators among us will be keen to capitalise on the bout of nickel fever that emerged after the announcement of Xstrata’s $3.1 billion takeover bid for Jubilee Mines. Image Resources (IMA), first mentioned in this column on October 9, 2006, is an explorer that stands to benefit. Image is set to spin off Emu Nickel NL in a free one-for-two bonus issue for Image shareholders. Emu Nickel includes around 12 projects in WA, covering about 2500 square kilometres. Importantly Jubilee has agreed to spend $3.25 million on exploration in order to earn 66.6% equity. The region is 70km north-east of Kalgoorlie and 30 km east of the Silver Swan nickel mine. A six-month exploration program is due to finish at the site in March 2008. Since the Jubilee bid was made public, Image has risen by around 44¢ or 22%. The Emu Nickel projects offer investors the possibility of even more upside. Buy Image Resources for Emu Nickel rights at current levels.

Watching the directors

This week

* Macarthur Coal’s Kenneth Talbot and George Jones have increased their shareholdings in Sundance Resources (SDL) by purchasing stock to the value of $1.1 million and $290K respectively.
* Buying by John Ward, John Massey, Peter Crosby, three directors of Ventracor Limited (VCR).
* Two directors of TSV Holdings (TSH) have purchased shares this month.
* Two directors have purchased a total of over $570K worth of stock in St Barbara Limited (SBM).
* Buying by two directors of Sydney Attractions Group (SAQ).
* Buying by two directors of PaperlinX Limited (PPX). The share price of this company has fallen considerably over recent months.
* Buying by Robert Kirtlan, director of NGM Resources Limited (NGM). The share price of this company has fallen considerable over the last four months or so.
* James Kennedy, director of GWA International Limited (GWT), has just purchased over $380K worth of stock.
* Buying by Robert McDonald, director of Emperor Mines Limited (EMP).
* Lots of small parcels of shares being purchased by Bruce Cameron, director of Advanced Nanotechnology Limited (ANO).

Last Week

* Ronald Dewhurst, director of Australian United Investment Company (AUI), has just purchased $230K worth of stock.
* John Roy a director of Eagle Bay Resources NL (EBR) has just purchased stock (on 22/10/2007). The price has risen significantly since then.
* Michael Hale, director of Ebet (EBT) has recently purchased two parcel of shares.
* Three directors have purchased shares in Goldstar Resources NL (GDR) in the last week.
* More buying by Eddie Smith, director of Impress Ventures (ITC). He has been continually buying small parcels of shares over the last few months.
* Over $300K worth of stock purchased by Christopher Mackay, director of Magellan Flagship Fund (MFF).
* $740K worth of stock purchased by a director of MFS Limited (MFS). That is the second large transaction for the month!
* Large buying by Geoffrey Wilson, a director of Wilson Investment Fund (WIL).

Source: The Inside Trader