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.
Woolworths. Retail giant Woolworths might be ruling the roost in the supermarket game but its reputation as a defensive play on the Australian market is coming under some pressure.

Woolworths’ market strength has always ensured a steady flow of earnings but investors were a little underwhelmed by the retailer’s December-half net profit, sending its shares down 6.64% after the announcement last week.

The company forecast full-year net profit growth of up to 14% and posted a 10.3% increase in net profit to $983.3 million

The Australian food & liquor operations are turning in great results but the retailer’s New Zealand market and consumer electronics continue to be a drag on earnings.

One stock picker says Woolworths’ numbers were solid but demonstrated the risks of its premium price/earnings (P/E) multiple and these pressures were likely persist in the second half. Another agreed, saying the negative share price reaction from investors immediately after the results announcement highlighted the vulnerability of Woolworths' steep P/E premium.

Woolworths will have to work hard to build its strength in the consumer electronics business, while the New Zealand market will also demand some heavy lifting, which could be challenging under the current economic.

However, Woolworths remains a quality defensive with a strong balance sheet providing certain funding for future capital expenditure, corporate action and/or capital management. Investors are advised to accumulate Woolworths shares at current prices.

Harvey Norman. Now to another retail heavyweight, Harvey Norman, whose December-half net profit more than halved to $99.33 million as the worsening economic downturn puts pressure on discretionary spending.

The retailer took its deepest hits in the overseas market, especially Ireland, where it sustained a loss of $19.81 million.

However, chairman Gerry Harvey is unfazed by the sharp 56.8% profit plunge, saying Australian operations have not only held up, but managed to increase market share across all key categories.

A number of stock pickers agree that Harvey Norman is a well managed growth stock and still better placed than its rivals to handle the current situation. But there are increasing concerns that discretionary retailers will underperform, especially now that the recession genie is out of the bottle in Australia.

One stock picker says higher unemployment and less consumer spending will put pressure on costs and margins and that Harvey Norman’s balance sheet could take some damage if it is forced to sell some small stores or second-tier retailers. But the overall consensus does seem to suggest that the retailer’s poor result is cyclical rather than structural and it should be able to bounce back when the cycle turns.

Harvey Norman stocks are a good long-term buy at current prices.

Lihir Gold. The upswing in gold prices has been good news for Lihir but the gold miner is not taking any chances after raising about $502 million through a share placement to domestic and international institutional investors.

Some may have seen this as an unnecessary raising considering Lihir’s robust balance sheet, but the extra cash will allow it to stay debt-free as it ramps up the expansion of its Lihir Island facility in PNG and extend its footprint in West Africa.

One stock picker sees the capital raising as a perfectly timed defensive measure given the renewed interest in gold and uncertainty over the availability of debt in the next couple of years.

According to another publication, a cashed-up Lihir, one of Australia’s premier gold producers, could be on the prowl for possible acquisitions.

Lihir shares slipped after the news of the equity raising, but one stock picker says while the move is dilutive in an earnings sense it should be accretive in net present value terms. Investors are advised to hold Lihir shares at current prices.

Tabcorp. Tabcorp Holdings Limited is eagerly awaiting the delivery of the second round of stimulus cheques from the Rudd government, hoping it will support its gaming division after the first lot of cash payments buoyed gaming revenues in Victoria.

Victorian gaming revenue, which jumped more than 6% in January, is expected to grow steadily during 2009 and several publications believe the gaming company is well placed to take advantage of the situation.

Tabcorp, which saw its December-half profit drop 3.7%, recently shored up its balance sheet with a $450 million capital raising. The new cash should improve the company’s funding flexibility and strengthen its balance sheet.

The retail component of the placement also raised about $87 million on (Friday, March 6) closing 58% subscribed after a minor mix up with those using the BPay facility to pay. It has extended the offer period by three days.

The company’s wagering and casino divisions have performed below par and the gaming division is still dealing with the side-effects of Victoria’s smoking bans in venues. However, it does hold one of the two exclusive licences to operate poker machines in Victoria for now and that advantage will come in handy in the short term as more stimulus pennies head for the poker machines.

One publication says Tabcorp is managing its costs better but there is the looming spectre of 2012, when the Victorian gaming licence duopoly ends. With the renewal process still up in the air, the loss of the licence could have a severe impact on its competitiveness.

With uncertainty on the horizon conservative investors are advised to hold Tabcorp shares.

Origin Energy. Origin Energy has been a shining light in an otherwise gloomy reporting season posting a 38% rise in December-half profit, but challenging market conditions have forced a cut in its full-year profit forecast and a scrapping of the planned share buyback program.

The Sydney-based company, which fended of a $13 billion raid from UK energy giant BG Group last year, saw its profit jump to $6.66 billion, boosted by the $6.7 billion sale of coal seam gas assets in Queensland to ConocoPhillips.

Origin’s cash levels have been affected by a higher than anticipated first-half capital expenditure of $1.3 billion, but it is the $4.1 billion in the bank that has stock pickers excited.

One stock picker says the market has been unfairly harsh on Origin, as lower oil price sent energy stocks into a tailspin. While oil companies will see their earnings "evaporate” in the short term, the stock picker says that Origin is not quite on the same boat.

The power retailer is cashed-up, has a big list of existing projects that can provide organic growth and is well placed to make any acquisitions that crop up.

Origin management has conceded that the company is feeling the effects of the downturn but it still retains significant competitive edge in the energy sector. The NSW government’s recently announced energy reform package, which includes the proposed sell-down of its electricity retailing operations, should also help Origin expand its holdings in the state’s lucrative electricity market.

The company’s shares have come under some pressure and more may be on the cards but one publication says Origin’s healthy balance sheet and its integrated business model and utility characteristics make for a stronger than average business. Investors are advised to buy Origin shares at current levels.

Macquarie Group. Australia’s most successful investment bank, Macquarie Group, has its hands full at the moment, as its shares take a beating and it fends off speculation regarding a capital raising as short sellers wreak havoc on its satellite funds. The stock, which has shed $23 billion, or 84%, since its $97.10 peak in May 2007, has been buffeted by speculation that it might have to write down the value of stakes in the satellite funds.

A sharp fall in the value of its holdings has fuelled speculation that Macquarie may have no choice but to raise new equity. An issue at current prices would be highly dilutive and the board’s reluctance seems understandable, one publication says.

Macquarie has moved quickly to allay fears with regard to the listed funds, saying it has no capital commitments to them and has no plans to increase its investment in them.

The funds are likely to contribute less than 5% of the company’s operating income before impairments this fiscal year, Macquarie says.

One stock picker, which has maintained its “Buy” rating on Macquarie, says the investment bank can accommodate another $2.5 billion of write-downs before equity would need to be raised, and that its underlying earnings continue to track ahead of otherwise weak market trends.

Another has retained its long-term fair value, saying that with a growing pipeline of projects and a strengthening balance sheet Macquarie is still in good shape. Investors are advised to buy Macquarie shares but need to exercise caution in the volatile financial sector.

Watching the directors

Week to March 6

• Billabong International (BBG), the surfwear company, has been in the news in recent days as its former supremo Matthew Perrin somehow managed to slump into a spectacular bankruptcy, dropping $28 million on supermarket and property interests in China. The last time Perrin made the news in director’s trades was his surprise – and controversial – exit from Billabong in 2003 when he sold eight million shares at short notice. However, Derek O’Neill, a long time lieutenant at Billabong and now chief executive, is showing resilience in the face of these dramas purchasing a hefty $545,000 worth of Billabong stock in recent days. Billabong is trading at under $7 from a high of $13 last September.
• Graeme Bignell, director of Adtrans Group (ADG), has purchased two parcels of shares this week.
• Clarius Group (CND) director Geoffrey Moles has purchased $487,000 worth of stock this week.
• Anthony Kinnane of Runge Limited (RUL) has been buying stock.
• Two Flight Centre (FLT) directors have purchased parcels of shares this week. Gary Smith bought 10,000 shares for $40,050 on-market on March 3 and 4.He holds 15,000 shares. Peter Morahan bought 11,500 shares for $49,255.He holds 14,712 shares.
• Hill Iron Ltd director Neil Tomkinson bought 425,706 shares for $429,963 on-market between February 25 and March 2. He indirectly holds 7,697,844 shares.
• Futuris Corporation Ltd director Ian Graham MacDonald bought 200,000 shares for $52,000 on-market on March 4. He directly holds 200,000 shares and indirectly holds 60,000 shares.
• Three Mirvac Group directors have purchased 23, 978 shares. Richard Turner bought 3978 stapled securities for $3,501 via non-executive director securities purchase plan on March 4. Penelope Morris bought 10,909 securities for $9,600, and Peter John Oswin Hawkins bought 9,091 securities for $8,000.
• Hunter Hall International Ltd director David Buckland sold 220,000 shares off-market for $704,000 on March 3.

Source: The Inside Trader