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.

Insurance Australia Group. The turnaround under way at IAG is a case of too little, too late for most of the newsletters. The highly competitive nature of the insurance market is beginning to pick up steam, with one newsletter warning of the imminent arrival of new competitors in Virgin, Australia Post, Coles and potentially even Woolworths.

With competitive advantages elusive, and products that are generally indistinguishable from one another, most of the newsletters agree that investors can get quality exposure to insurance though QBE at the large cap level or Tower Australia at the mid cap level. IAG has some fans out there, who laud the company’s conservative approach, yet they also concede that this lowers the rate of return.

One newsletter points out that the stock price has largely moved sideways over the past 18 months, and it believes the company will play a role in further industry consolidation. With profitability under pressure, due to natural disasters well outside management’s control, and the poor regard in which the company is generally held, we can’t help but wonder if this is wishful thinking.

• Investors are advised to sell Insurance Australia Group shares at current levels.

Elders. The newsletters are starting to discuss the upside in this embattled agricultural group once more on the strength of its plans to restructure and reduce debt. And yet it still faces many challenges.

The $550 million in capital raised will be used to pay down debt accrued by the company, formerly known as Futuris. Asset sales have assisted its cash position, but that wasn’t enough to prevent it from falling 37% in a furious selloff on Friday. Apart from broader strategic concerns about the business, one newsletter notes that the volatile cash flows of agricultural stocks are particularly apparent with Elders and weigh heavily on the minds of investors.

Another newsletter agrees, saying Elders is only suitable for investors that are comfortable with speculative stocks. It is far too volatile for conservative investors who may rely on their portfolio for income given that dividends seem to be off the menu for at least three years.

• Investors are advised to hold Elders shares at current levels.

Foster’s Group. It’s probably a good idea to have another look at this beverage behemoth, with its corporate appeal increasing following the $US16.5 billion bid Kraft made for Cadbury last week. One publication says the idea is that fast-moving consumer goods stocks are looking good to M&A types after having been marked down to their lowest valuation multiples.

After flat profits for the year just ended, Foster’s is trading on 14 times earnings and has gained about 10% from a 12-month low of $4.85 on April 22. The company says total cost savings are on track to reach $100 million by 2011. Everyone agrees that Foster’s has a great beer business, but it is the wine division that really needs attention. Publications generally agree that it will take about two years before the results of the wine business review become apparent, which suggests considerable improvement is possible if Foster’s gets it right.

One publication remains sceptical. It cites a report by a university researcher, which says a recent billion dollar loss on mainland China is an example of how the company can get big investments wrong. But one can’t help but think that corporate activity would trigger a complete rerating of the stock, especially consider the consolidation the sector has undergone in recent times.

• Investors are advised to buy Foster’s shares at current levels.

Sigma Pharmaceuticals. It is worth mentioning the broad applause Sigma received for its recent $297 million share offers, conducted with the utmost consideration for the retail investor (see What about me? I want my share). One newsletter notes that while the acquisition may be earnings per share accretive it expects the balance of the new equity to be dilutive, however the lower financial risk compensates for any loss in value.

The company plans to use the extra cash to finance a $60 million acquisition of the distribution rights in Australia and New Zealand for 15 pharmaceutical and healthcare brands from Bristol-Myers Squibb and its manufacturing facility, which it may be able to extract synergies. Recent results had Sigma posting a 5% rise in first-half net profit and maintaining guidance for the full year, saying it expects modest growth to continue.

Some newsletters remain concerned that Sigma faces competition from an increasing number of generic brands and the less likely possibility of supermarkets competing openly with chemists. Directing more of its earnings away from wholesaling will mean the company is less exposed to regulation if the future risks amount to anything. Sigma is a decent stock to have, but the newsletters are concerned that it is currently too expensive to buy into.

• Investors are advised to participate in the share offer and hold Sigma Pharmaceuticals at current levels.

Seven Network. Nothing is as it first appears with Seven, one newsletter is quick to warn, after the company announced it has committed $50 million to build a 4G wireless broadband network in Perth. The newsletter extrapolates from that figure that a roll out of the technology across the nation’s capitals would cost $250 million, but we remain unconvinced. Another newsletter says the project looks bigger on paper than it actually is, and that Seven’s agenda lies elsewhere.

Seven has its fingers in a lot of pies at the moment. Pay TV company Austar is the one to watch as it may be planning its own wireless offering, which could easily link with Seven’s network to create a national footprint. The project would also complement the government’s national broadband network, but the newsletters are quick to point to the uncertainty surrounding its development.

Another newsletter says the direction Seven takes depends on where Kerry Stokes – who owns 44% of Seven – is looking to dabble next. His recent arrival on the register and board of Consolidated Media is testament to that.

One newsletter says this latest venture is risky and is another reminder of way the company is run like a personal fiefdom. The newsletter also asks questions about the cash Seven it sitting on, given the strong recovery in values in the equity market over the last quarter. But Stokes has brushed this aside, saying he is comfortable and sees no reason to increase his equity holdings. Watch this space.

• Investors are advised to hold Seven shares at current levels.

Watching the directors

• Virgin Blue top dog Brett Godfrey bought a cheeky $5,864,814 million worth of shares on September 8, a little over six weeks after the airline announced a $231 million capital raising. Following on from a number of complaints about unfair and dilutive capital raisings, in which institutions received preferential treatment, Godfrey seems to have done quite well for himself by purchasing the ordinary shares as part of the institutional placement and entitlement offer included in the capital raising. He bought 28,147,413 shares indirectly and 1,176,661 directly.

• Challenger’s Ashok Jacob may be James Packer’s right hand man but a recent $800,000 purchase of company shares proved that even he isn’t privy to the to the inner thoughts of Australia’s best-known billionaire. The purchase of 250,000 shares in the diversified financial came just one week before Packer dumped his entire stake in the company for $422 million in order to fend off the advances of rival media mogul Kerry Stokes. Packer and Stokes both subsequently resigned from the board of Challenger, which has long been associated with the Packer family name, leaving Jacob with about $875,000 in company scrip. After coming off a high of $6.50 in late 2007, the stock plummeted alongside the rest of the sector during the crisis to a low of 90¢. Market momentum has pushed it slightly north of the $3.20 Jacob bought in at, although there is no indication that he is looking to get out just yet.

• iiNet managing director Michael Malone has arranged for 3.3 million shares to be placed with institutional investors at $2 a pop, netting the Perth-based technology entrepreneur a tidy $6,632,010. Unusually, Malone even went so far as to release a separate statement to the ASX explaining that the sale represented the last of a bundle of shares he bought in July 2006, when the share price was under extreme pressure. With a purchase price of around 68¢ each, this recent sale represents a gain of about 194%.

• Billabong chief executive Derek O’Neill appears to have decided that conditions in equity markets are “closing out” and offloaded 350,263 shares for $3,780,458. O’Neill, who claims that he has never had to wear a tie in his adult life, began working for the company aged 26 and spearheaded the company’s European division which remains one of the company’s biggest profit centres. In a curious development, he was awarded the Chevalier d'Ordre de Merite Nationale for services to business in France, which just goes to show that the popularity of board shorts knows no bounds. Billabong shareholders can breathe easy, though, because with 1.25 million shares still under his name, he does not appear to be chasing an endless summer just yet.

• Bradken managing director Brian Hodges sold off 226,240 shares in the heavy industries group on-market between September 3 and 7, for $1,378,066 million. Hodges also exercised 64,877 performance rights and reinvested 9,551 shares under a dividend reinvestment plan. In August, Bradken posted an 11% rise in full-year profit and said it expected more of the same into 2010. A few days before the August 6 result, some media were speculating Bradken had received a number of preliminary takeover offers.

Source: The Inside Trader