Collected Wisdom

PORTFOLIO POINT: This is an edited summary of Australia's best-known investment newsletters and major daily newspapers. The recommendations offered represent the views published in other publications and may not represent those of Eureka Report.
Stock pickers have cast their eyes over uranium stock Energy Resources of Australia (ERA) and many like what they see. The Rio Tinto subsidiary pleased the market last week with a better-than-expected 1% fall in fourth quarter output. It also announced full-year production for 2007-08 of 3.54 million tonnes, above previous forecasts of 2.93 million.

One publication reckons lower supply levels (the market is forecast to have a deficit of 5 million pounds this year) and demand from China and India should push up spot prices in the March quarter, bringing good tidings to ERA. Others say it is possible 2009 production numbers will beat current expectations if higher grades are maintained.

Currently trading at $17.40, ERA is trading below most price targets, with one setting a target at $21, another at $19.20 and another still at $19.02. One newsletter has upped its earnings forecasts (ERA’s financial year is to December 31) by 9% to 94¢ for 2008, and 5% to 103¢ for 2009. It says that although ERA's price/earnings multiple of 32 is high compared to the rest of the market, the company delivers a healthy balance sheet. Most publications reckon ERA is firmly within “buy” territory. Investors are advised to buy ERA at current prices.

Shares in Wesfarmers (WES) dived last week after the West Australian conglomerate forecast a 10% fall in half-year profit to $850–880 million, announced $150 million in provisions and writedowns, and said it may cut its dividend from $2 a share.

Chief executive Richard Goyder says the group has $2.2 billion to refinance this year, of which $1 billion is expected to be rolled over; it also has $5 billion – related to its $18.2 billion Coles purchase – needing to be refinanced by October next year. It’s a big ask in tough markets, but Goyder is not too panicked, saying the company is considering its options: underwriting dividends, issuing new shares, going to the debt capital market and/or selling assets.

After a horror 2008, Australia’s second largest retailer is down almost 10% for the year already, on Monday morning trading at $16.48 (from above $40 in January last year). Still, some reckon the selloff was an over-reaction, pointing out that $150 million in write-offs and provisions ain’t too bad for a company with an enterprise value of more than $20 billion. And given Wesfarmers’ steep share price decline, the company's suggestion its $2 dividend may be cut – some brokers suggesting it may fall to as low as $1 – is not a huge surprise either. First-half earnings of between $850–880 million (up from last year’s $601 million) also give heart.

One publication has not given up on Wesfarmers, arguing the conglomerate is managing its divisions well and the Coles division in particular, which is estimated to have earned $420–430 million in the six months to December. Bunnings and Target were also good performers, although the coal division and Kmart were less impressive.

One newsletter has set a price target of $18.95 for Wesfarmers, but has cut its 2008-09 profit estimate to $1.695 billion, and 2009-10 forecast to $1.43 billion. An equity issue this year would pressure Wesfarmers’ share price, the publication says, and investors should be prepared for a weaker dividend. Nonetheless, investors are advised to hold Wesfarmers.

Bendigo and Adelaide Bank Limited (BEN) surprised many when it bought Macquarie Group’s $1.5 billion margin lending portfolio for $52 million. Why was the community bank becoming Australia’s third-largest margin lender? And despite Bendigo & Adelaide’s good track record in running its margin lending business, what were the chances the regional lender had come up trumps in its negotiations with the Millionaires’ Club? The margin lending purchase isn’t the only thing keeping Bendigo & Adelaide Bank busy: it has taken an 8% stake in the combined IOOF Holdings/Australian Wealth Management

According to one publication, there is still a great deal of goodwill from Bendigo’s decision in the 1990s to roll out branches in areas deserted by the Big Four. Bendigo’s merger with Adelaide Bank is anticipated to diversify its balance sheet and increase the bank’s geographical scope. The second-tier banks were given a lifeline by the government’s guarantee on deposits and overseas lending, but in the long-term many believe they are in for uphill battle as the Big Four boost their dominance of the home loan market – 92.3% of the mortgage market in November – and snap up the remaining non-bank lenders.

One newsletter has sliced its earnings per share forecast for the bank by 2% for 2008-09, and 9% for 2009-10. Dividends per share are reduced to 68¢ and 70¢ for the two years, with higher provision charges expected to offset synergy and new business benefits. Investors are advised to hold Bendigo & Adelaide Bank below $11.70.

Orbis Investment Management has more than 6% of Galileo Japan Trust (GJT) and director Neil Werrett is also boosting his stake in the Japan-focused property trust. In November, GJT said it would not pay for distribution for the first half, and its dividend for the full year would be reduced to 1.5¢ per unit, subject to trading and market conditions. The trust is also seeking to sell at least ¥2.5 billion worth of assets this year. The Centro syndicate has been caned in the backlash against highly geared listed property trusts, but one stock picker believes Galileo Japan Trust at 8¢ is undervalued. Clients should hold in the expectation of a price recovery.

Now to drilling contractor Ausdrill (ASL), which slumped in October and has struggled ever since; at $1.10 per share it is capitalised at just $190 million. Managing director and founder Ronald Sayers spent about $24 million of his own money to protect Ausdrill from a takeover offer from contract mining group Macmahon Holdings; the pressure is now on for Ausdrill to prove it really is better off solo. In an investor update in November, Ausdrill said it had reaped a record order book worth $1.4 billion in 2007-08, with a record profit of $35.3 million and earnings per share of 22.7¢. For 2008-09, however, the China slowdown, volatile commodity prices, pressures on its margins and the project financing constraints of clients weigh heavily. On the positive side, Ausdrill has secured long-term work, its gearing is low, revenue is up, and the weakened Australian dollar help.

One publication says Ausdrill, trading at 60% of its stated net tangible assets, is a bargain. The newsletter is also tempted by Ausdrill’s 10% fully franked dividend. Investors are advised to buy Ausdrill at current prices.

Weak job figures do not bode well for online job site Seek (SEK). With companies deferring hiring, cutting back positions and slicing jobs altogether, 2009 looks to be a very tough year for the well-respected company. Some stock pickers have actually set price targets much higher than its current share price ($3, down from more than $7 last January) but others reckon it’s overvalued and not likely to see good times for quite a while. One has forecast a 2008-09 full-year dividend of 16¢, and earnings per share of 23¢. Investors are advised to hold Seek for now.

Some called the Rudd stimulus package the “Harvey Norman” bonus, but the good news does not extend to smaller rival Fantastic Holdings (FAN). The discount retailer of low-cost furniture is seen heading for rocky times; higher costs are hurting margins and trading conditions are more challenging. Investors are advised to sell Fantastic Holdings.

Watching the directors

Week to January 16

• Primary Health Care (PRY) director and active trader Edmund Gregory Thomas Bateman sold more than $20 million worth of Primary shares last week. Bateman sold 4.61 million shares on-market at an average price of $5.17 between January 12 and 16. He now has 12.35% or 46.37 million shares in Primary; down from 13.51% or 50.13 million shares.

Bateman was busy in December, too; selling 29,352 shares for $138,866.32 on December 24, and buying 35,000 shares for almost $150,000 a week earlier. He likewise bought and sold 10,000 shares; selling for $46,002 and purchasing for $45,400. In November, he picked up 163,017 shares for $639,087.

Primary shares are trading at about $5, down from $11.90 at the start of last year. Primary completed a $3.5 billion acquisition of Symbion Health last March, and then offloaded the Symbion Consumer and Symbion Pharmacy divisions to Sanofi-Aventis for $560 million and the Australian arm of privately owned Zuellig Group for $505 million respectively.

• Bank of Queensland Ltd (BOQ) director Peter D Fox indirectly sold 99,047 shares worth $959,497 on-market between January 13 and 15. He directly holds 1000 shares and indirectly holds 9,774,499 shares. This follows the sale of 112,796 shares (held by Linfox Share Investment No. 2 Pty Ltd on his behalf) on December 29, 2008.
• Felix Resources (FLX) director Hans Juergen Mende indirectly bought $1.37 million worth of shares - 158,927 shares - on-market on December 6 and 7, 2007. He indirectly holds 37,760,651 shares.
• Macquarie (MQG) director Laurence Cox bought 36,135 Macquarie Group Ltd shares off-market on January 8, 2009. He directly holds 51,763 shares and indirectly holds 218,049 shares.
• Singapore Telecommunications Ltd (SGT) director Chua Sock Koong bought 434,000 shares for $S1,103,640 ($A1.1 million) on-market on January 9 and 12, 2009. He also indirectly bought 216,000 shares worth S$557,101 ($565,673) on-market on January 13.
• Bendigo and Adelaide Bank director Robert Niven Johanson sold 400 indirectly held shares off-market for $4060 on January 15. He now directly holds 2953 shares and indirectly holds 200,837 shares. Fellow director Robert Johanson also indirectly sold 600 shares for $6528 off-market on January 7.
• Pure Energy Resources Ltd director James Robert Steven Beardsall sold 60,000 shares for $302,634 on-market on January 8, 2009. He holds 4,585,833 shares.
• Village Roadshow Ltd director Graham William Burke bought 17,968 shares for $17,869 on-market on January 8, 2009. He holds 1,341,920 shares.
• Buying by Nicholas Mather of Bow Energy (BOW). Fellow director Ronald Prefontaine also bought 1,783,922 shares between August 17 and December 17, becoming a substantial shareholder with 9,006,609 shares (5.92%). He also holds 1,500,000 unquoted options.
• Seven Network Ltd director Bruce McWilliam sold 2500 TELYS3 for $202,643 on-market between January 7 and 9, 2009. He holds 1,157,015 shares, 1,000,000 options and 13,293 TELYS3.
• Denis Mackenzie of CSG Limited (CSV) has purchased $225,000 worth of stock.
• George Jones of Gindalbie Metals (GBG) purchased $350,000 worth of stock before Christmas. This is in addition to another $416,000 parcel he purchased in November.
• Buying by Peter Evans and Paul Ramsay of Prime Media Group Limited (PRT). Ramsay bought 1.5 million shares for $1,950,000 on-market on January 5. He holds 55,910,320 shares. He also bought 56,151 shares on-market for $65,046 on December 22 and 24 last year. Fellow director Peter John Evans bought 5000 shares on-market for $6750 on December 24.
• Ivanhoe Australia director David Korbin sold 10,000 shares on-market for $39,035 on January 13. He now holds 20,000 shares. Meanwhile, fellow director Douglas Kirwin bought 3382 shares for $C10,484 ($A12,693). He holds 100,000 ordinary shares and 1,500,000 performance rights.

nRecent directors' trades worth more than $200,000
Date	ASX	Director	Quantity	Price	Total	Action
05/01/09	PRT	Paul Ramsay	1,500,000	1.3	$1,950,000	BUY
23/12/08	SOL	Michael Millner	34,017	8.64	$293,979	BUY
23/12/08	CSV	Denis Mackenzie	500,000	0.45	$225,000	BUY
22/12/08	GBG	George Jones	600,000	0.586	$351,375	BUY
22/12/08	UMC	Matthew Hogan	950,000	0.35	$332,500	BUY
15/12/08	NHR	Dale Elphinstone	233,878	1.9	$444,933	BUY
15/12/08	JMB	Tom Kiing	1,228,023	0.39	$478,929	BUY
11/12/08	AQE	Drew Metcalfe	916,723	0.234	$214,841	BUY
11/12/08	NHR	Dale Elphinstone	941,711	1.88	$1,770,276	BUY
11/12/08	MLI	Bryan Frost	13,000,000	0.026	$340,000	BUY
09/12/08	CLH	Dennis Punches	3,707,283	0.35	$1,297,549	BUY
08/12/08	ORG	Gordon Cairns	23,000	16.22	$373,060	BUY
08/12/08	RHC	Kerry Roxburgh	21,439	9.679	$207,514	BUY
04/12/08	NAD	Joseph Gutnick	78,205,715	0.009	$706,174	BUY
01/12/08	CII	Lip Sin Tee	655,162	1.055	$691,196	BUY
01/12/08	HLD	Brent Dennison	16,375,000	0.13	$2,128,750	BUY

Source: The Inside Trader