Collected Wisdom

PORTFOLIO POINT: This is a sampling of the week's best research notes. In a world of too much information, we hope our selection helps you spot the market's key signals.
The announcement that Australia’s third largest lender, ANZ Banking Group Ltd (ANZ), would be cutting its 2009 dividend by 25% came as no big surprise to the market and is being seen as an indication that the bank is making some progress towards improving its position in difficult market conditions.

The dividend cut, which will save $500 million a year, is also widely seen as a precursor to similar moves by ANZ’s rivals and a sensible alternative to any capital raising, unless off course it sets its sights on acquisitions (It was reported over the weekend the bank may bid for Asian assets of the stricken Royal Bank of Scotland).

ANZ also reported an 18% jump in underlying cash in its trading update for the four months to January 2009, which is pretty much in line with Commonwealth Bank’s latest result.

One stock picker says the $500 million in cost savings should take ANZ's payout ratio for 2008-09 down from about 95% to about 70%, with the yield holding at about 8%.

However, bank shares are still a risky play in the current financial market. Investors are advised to hold ANZ shares at current levels.

Shareholders were not too pleased by Transfield Services Ltd’s (TSE) 25% fall in net profit for the first half 2008-09 but the engineering company did win support from stock pickers who said it was taking necessary steps to combat the sharp tightening in markets

Management still expects full-year profit to rise by about 10%, but investors were spooked by the negative news and dumped Transfield shares after the results announcement (Monday, February 23).

There’s no doubt that Transfield is facing some headwinds: although cash flow is recovering the slowdown in the resources sector, a geared balance sheet and weakness in the US market are severe problems facing the company in the second half of the year.

However, the company does have some strong points and, according to one publication, Transfield’s pipeline of long-term and integrated services contracts, a strong record of contract retention and good capital position are big positives.

Transfield has had a few missteps along the way, especially the blowout in debt following US acquisitions and a dilutive equity issue last December, but with a new chief executive it is hoping to rebuild improve investor confidence.

It is also well-positioned to make the most of the stimulus packages announced in Australia and in the US, as the construction of roads, schools and housing will provide the company opportunities.

One publication says Transfield traditionally has always recorded stronger second half results but in the current environment the management’s ambition of attaining 10% profit growth by the end of the year will be tested.

The stock is trading at a discount to its closest peers, but taking the current market conditions into account investors are urged to hold Transfield shares.

A deteriorating advertising market and substantial asset write-downs are making life difficult for Fairfax Media (FXJ). After much deliberation, the company has now conceded it needed to raise cash, announcing a three for five accelerated non-renounceable pro-rata rights issue at 75¢ a share last Friday, which has been well received by the market.

It has since raised about $500 million from institutional shareholders. The funds will be used to tackle about $2.5 billion in debt and will at least for the short term placate investors who have dumped Fairfax shares.

According to one stock picker, Fairfax management has little room for error, given the less than optimistic forecasts for advertising in 2009-10 and a further weakening in 2010-11 revenue could see the company breach its debt covenants.

Fairfax’s 25% fall in net profit was well within market expectations but it’s the company’s debt position that remains the main investment concern as cash flow falls in response to lower revenues.

Fairfax management has noted that conditions have worsened in January and February, and bookings for classified advertising, which is crucial to earnings, are expected to be weak "at least for the remainder of the financial year".

One publication says internet and regional ad flows are just not going to be enough to counter the downturn in classifieds. However, one stock picker says Fairfax’s current bank covenants do allow for some hedging benefits on foreign currency debt and could see debt levels effectively decreased by $303 million.

Investors are advised to hold Fairfax shares at current levels.

BlueScope Steel Ltd’s (BSL) shares have taken a beating after the steel maker posted a first-half profit of $406.9 million but forecast 2008-09 net profit to fall from $430 million to $275.7 million.

Although the first-half results were within expectations, a number of publications are mixed in their verdict on BlueScope, which also cut its interim dividend to 5¢ a share.

There are significant concerns about BlueScope’s balance sheet and the impact a declining steel price environment would have on the steel maker’s margins.

One publication, which cut its valuation from $2.50 to $1.75 a share, says BlueScope shares are a high-risk proposition heading into a cyclical economic downturn, and suggests a capital raising could be on the cards if conditions continue to deteriorate.

Another publication says the $1 billion of excess steel inventory is an asset for BlueScope and the $947 million in undrawn credit facilities also adds some security to the stock.

The steel business is capital-intensive and BlueScope’s net debt of about $2.5 billion may be an issue if financing remains tight. The steel maker has warned of a loss for the second half, the size of which will depend on how steel demand and spread pans out.

Investors are advised to sell BlueScope shares at current prices.

Suncorp-Metway Ltd’s (SUN) December-half results were within expectations but there are significant doubts emerging over the validity of the company’s business model.

Suncorp’s banking result was down 68% to $97 million; its insurance margin of 4.6% and profit of $136 million were below the corresponding period last year. Underlying wealth management earnings fell 20% to $68 million.

With chief executive John Mulcahy on the way out and interim CEO, chief financial officer Chris Skilton also set to bid farewell, one publication has expresses disappointment at the board’s insistence to find an internal candidate for the top job and also stick to its current business model.

The publication says Suncorp’s model of running a bank, a general insurer and a fund manager under the same roof has destroyed substantial shareholder value and caused shares to under-perform.

Despite the lingering doubts over the effectiveness of Suncorp’s business model and deteriorating credit quality, one stock picker says the company has improved transparency and encouraged existing shareholders to take up their rights in the retail entitlements offer and retained its “buy” recommendation.

Suncorp-Metway is still a good stock on value grounds and there is a possibility of a medium-term break-up of its divisions. Bargain hunters are advised to examine Suncorp shares.

Infrastructure giant Asciano (AIO) has struck a confident note despite posting a net loss of $93.4 million for the first half of 2008-09, but investors are not fully convinced

Despite strong market positions, Asciano’s rail freight and port businesses are coming under increasing pressure as the financial crisis weakens trading activity between Australia and Asia as well and domestically.

One publication says Asciano’s earnings profile has become less certain in the face of the credit crisis, with $4.6 billion in net bank debt the company’s weakened share price is also likely to reduce the chance of any prospective capital raising.

Asciano has said talks are advanced talks with a buyer for its Pacific National coal business. The transaction is expected to fetch more than $1 billion and while it would have some positive impact on interest cover ratios, it will still leave Asciano with high balance sheet gearing as it confronts potentially significantly weaker demand.

This does set up an intriguing possibility of an outright takeover by a cashed-up party for the company. Asciano rejected a $2.9 billion takeover offer last August from private equity groups TPG Capital and Global Infrastructure Partners; this time around the price would be expected to be lower than the $4.40 a share offered then.

With the possibility of prospective buyers circling around the company, Asciano provides a speculative buy opportunity for investors.

Watching the directors

Week to February 27

• St Barbara director Eduard Eshuys bought 1.3 million shares for $590,000. He holds 10,967,403 shares.*
• Billabong International director Derek O'Neill directly bought 80,000 shares on February 25. He holds 1,307,665 shares and 629,007 options.
• West Australian Newspapers Holdings Ltd director Kerry Matthew Stokes bought 4,276 shares for $17,849 on-market on February 19. He indirectly holds 46,563,707 shares.
• Credit Corp Group Ltd director Donald Evan McLay indirectly bought 410,000 shares for $259,165 on-market between February 18 and 23. He directly holds 129,916 shares and indirectly holds 447,694 shares.
• Prime Retirement and Aged Care Property Trust director Philip John Powell bought 50,000 units on-market on February 25. He holds 80,000 units.
• Leighton Holdings Ltd director Dieter Siegfried Adamsas sold 20,000 shares for $379,351 on-market on February 19, 2009. He holds 191,851 shares and 400,000 options.
• Specialty Fashion Group Ltd director Geoffrey Levy indirectly bought 1,256,166 shares worth $274,926 on-market on February 20, 2009.
• Wide Bay Australia Ltd director Peter John Sawyer bought 110,000 shares and sold 71,440 for net consideration of $246,784 off-market on February 23. He holds 490,216 shares.
• Synergy Equities Group Ltd director Ronald Moir bought 600,000 shares for $3,197 on-market on February 26. He holds 27,350,000 shares and 30,000,000 unquoted options.
• CogState Ltd director Martyn Myer bought 331,044 shares for $72,534 on-market on between February 25 and 26. He holds 10,964,160 shares and 1,735,962 options.
• Hunter Hall International Ltd director David Buckland sold 60,520 shares for $200,640 on-market between February 20 and 26. He holds 833,480 shares and 195,000 options.
• Stirling Resources director Paul Lewis Page bought 7,350,005 shares worth $147,735 on February 24, increasing from 33,350,645 shares (7.5%) to 40,700,650 shares (9.19%).
• Moby Oil & Gas Ltd director Ernest Albers bought 20,000 shares on-market on January 15. He directly holds 4,056,648 shares and indirectly holds 23,871,998 shares.
• Spotless Group Ltd director Alan Edward Beanland bought 7,750 shares for $16,120 on-market on February 24. He holds 12,723 shares. Director Bronwyn Kay Morris bought 7,750 shares for $16,120.She holds 23,454 shares. Director Dean Antony Pritchard bought 7,750 shares for $16,120.He holds 42,838 shares. Director Elizabeth Mary Proust bought 7,750 shares for $16,120. She holds 25,969 shares. Director Peter John Smedley bought 30,911 shares for $64,295. He holds 157,237 shares
• Fortescue Metals Group Ltd director Herbert James Elliott bought 2,440 shares for $6,517 on-market via the non-executive director plan on February 17. He holds 2,161,862 shares. Director Geoffrey Frank Brayshaw bought 1,348 shares for $3,600 on-market on February 17. He holds 27,849 shares. Director Kenneth Charles Ambrecht bought 2,621 shares for $7,000 on-market on February 17. He holds 6,302,810 shares.

nRecent directors' trades worth more than $200,000
Date	Company	ASX	Director	Volume	Price	Value	Action
27/02/09	Primary Healthcare	PRY	Edmund Bateman	87,408	4.42	$386,343	BUY
25/02/09	Billabong Int	BBG	Derek O'Neill	80,000	6.822	$545,760	BUY
23/02/09	Ebet Ltd	EBT	Michael Hale	300,000	2.8	$840,000	BUY
19/02/09	Healthscope	HSP	Bruce Dixon	200,000	4.33	$866,444	SELL
19/02/09	Leighton Holdings	LEI	Dieter Adamsas	20,000	18.97	$379,351	SELL
19/02/09	Coca-Cola Amatil	CCL	Terry Davis	125,000	8.733	$1,091,563	SELL
18/02/09	JB Hi-Fi	JBH	Terry Smart	140,000	10.89	$1,524,609	SELL
12/02/09	ResMed Inc	RMD	Michael Quinn	10,000	42.5	$425,000	SELL
06/02/09	Dominion Mining	DOM	Peter Alexander	135,000	4.18	$564,277	SELL

* An earlier version of this story said Ed Eshuys had bought 5 million shares, he bought 1.3 million shares.

Source: The Inside Trader