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.

Perilya (PEM). There are mixed views at the moment about the prospects for silver as it out-rallies gold – there is something strange when a Shetland out-runs a thoroughbred – but if you do have this stock, it can offer some exposure to the precious metal’s surge, with the added diversity of a zinc and lead base behind it.

Perilya’s reputation was built on the historic Broken Hill underground mine, and has going for it a pipeline of growth projects, exploration upside and good leverage to zinc and lead prices, the newsletters say.

The company has recently issued assurances that Broken Hill will remain its primary focus, after signing a deal to acquire all shares of Canada’s Globestar Mining Corporation. “Anything that underpins Perilya helps to underpin Broken Hill,” managing director Paul Arndt said of the acquisition.

Perilya has a range of smaller operations and exploration, including copper at Mt Oxide in Queensland, zinc at Flinders in South Australia, while it also has tenements in Malaysia where the company is exploring for copper and gold.

Where Perilya also benefits is from its strong cornerstone investor, the Chinese state-owned company Shenzhen Zhongjin with a 50% stake, which brings stability to the shareholder register, and which newsletters say should allow the company to focus on long-term plans.

Still, any resources venture, particularly one exposed to the rapid climb of silver and sometimes-volatile zinc and lead prices, makes this stock a higher risk investment, one suited to a risk-tolerant investor looking to profit from growth in production

Perilya does have net cash of $56 million to assist in expansion or acquisition plans, and which also provides a degree of insurance against volatile cash flows.

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

Incitec Pivot (IPL). Australian grain farmers enjoying bumper grain yields are boosting their use of input products, such as fertilisers, which is Incitec Pivot’s main game. Incitec Pivot has a solid reputation and considerable slice of the $3 billion Australian farmers spend each year on fertilisers. Its main challenge is that the strong dollar makes imports cheaper, opening the door to foreign fertiliser groups eyeing the Australian market.

Newsletters are imploring investors not to be distracted by currency matters, while acknowledging that there is the possibility of a 2011 full-year earnings per share (EPS) downgrade for Incitec Pivot.

One publication says Incitec Pivot offers one of the best stocks through which to play Australian equities on the back of the local currency’s strength. It says stocks with the highest historic beta to a rising dollar have been a wise investment to date. Newsletters have forecast a full-year 2010 dividend of 5¢, and EPS of 26¢.

Back in May the stock posted a 33% improvement in its first-half profit to $132.4 million, and chief executive James Fazzino said the company’s result would be skewed to the second half.

Thanks to BHP Billiton’s prominent play for Canada’s PotashCorp, one publication describes fertiliser as “the new black”, and among the phosphate players, Incitec Pivot represents an attractive buy at the right price.

• Investors are advised to buy Incitec Pivot shares at current levels.

GrainCorp (GNC). The increasing popularity of soft commodities has meant very few stocks exposed to this sector are yet to lift; and for some it’s a case of better late than never.

In the near term, analysts have rerated GrainCorp in light of fortuitous weather patterns and natural events. As Russia and the Ukraine suffer a severe drought that has led to bans on wheat exports, growers in eastern Australia have enjoyed favourable conditions and strong rains.

Grain yields are also expected to be higher, as farmers encouraged by current high prices for grain increase their use of fertilisers.

Waiting to handle the crop is eastern Australia’s dominant grain handling organization, GrainCorp. It stands to benefit from the increased production during the winter crop season, prompting some analysts to lift its price target as high as $9, compared with Friday’s close of $7.17.

GrainCorp has significant market shares in storage, handling and port elevation services. With a relatively high fixed cost base, it main source of leverage is changes in crop size.

In May, it reported a $21 million improvement in its first-half profit, up to $53 million, and chief executive Ian Wilton said the takeover of United Malt Holdings had contributed to the strong result.

Herein lies the key, the newsletters say, with the acquisition providing a unique buffer for the company. GrainCorp remains vulnerable to seasonal conditions, but its diversification into malt production reduces earnings volatility and provides new growth opportunities.

While the traditional grain business remains exposed to forces of nature and will continue to experience a degree of volatility in earnings, the malt business will help dampen volatility in cash flows and dividends.

GrainCorp gracefully stepped away from the merger plans with AWB – which would have created a $2 billion force in agribusiness – after AWB opted to accept a better offer from Canada’s Agrium.

Newsletters note that GrainCorp has a solid balance sheet and is expected to attain most growth from additional acquisitions as it seeks further vertical integration opportunities.

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

PaperlinX Ltd (PPX). PaperlinX has a few challenges on its plate, including rebuilding credibility after repeated profit downgrades and a debt covenant breach, and continues to look like a real gamble.

“New CEO but same unattractive business,” one newsletter says, as Toby Marchant, chief executive of PaperlinX Europe has been brought in to revive the paper merchanting business. Marchant may have 30 years’ experience in the paper industry, but he has an uphill battle to improve one of the markets consistent worst performers of recent years as it struggles with high debt levels.

Newsletters say about 90% of PaperlinX’s sales are generated in Europe and North America, where expectations are for only a modest recovery in economic activity. The company’s earnings outlook remains weak, although it did manage to narrow its loss for the full year to $225.3 million, from a loss of $798.2 million in the previous year. Market capitalisation at $278 million is at a fraction of what it was before the GFC, newsletters note.

Although PaperlinX has a strong global paper-sales franchise and a leading brand in Reflex office paper, the industry is highly cyclical with earnings highly dependent on strong economic activity.

The company has completed a restructure involving the sale of its Australian Paper packaging papers business, and completed the transfer of its Tasmanian operations in 2010. In the long term, its pay-down of debts from asset sales and the restructure of its finance facilities will improve its financial position, but for now the stock remains an unattractive prospect even in a cyclical upswing.

• Investors are advised to sell PaperlinX shares at current levels.

Monadelphous Group (MND). This engineering group has just won contracts worth $120 million for projects in Papua New Guinea and Western Australia, which managing director Rob Velletri says is just another part of its efforts to diversify into selected infrastructure areas such as pipelines and water.

Monadelphous, highly leveraged to the growth sectors of the economy, is organised across four distinct business groups: engineering construction; maintenance and industrial services; electrical and instrumentation services; and aviation support services.

It is important to be aware, newsletters caution, that these fields are subject to an industry-wide shortage of human and capital resources and are also exposed to the inherent cyclical nature of engineering construction contracting. Now is not a bad time to hold Monadelphous in your portfolio, however, as expansion of the maintenance and industrial services arm and recent contract wins in the oil and gas sector help diversify revenues even further.

The company’s management is highly regarded by the newsletters and clients include large, blue-chip multinational groups. Recently, Monadelphous has also won a contract to undertake structural and mechanical work for BHP’s iron ore port facilities at Port Hedland. The company is WA-based and has strong exposure to the state’s booming resources sector and associated infrastructural projects.

First-half profit rose 10% to $40.55 million and Monadelphous has noted that the energy division’s contribution to revenue had grown to 27%, more than four times that of the 2006-07 full-year period.

If the company can manage certain capacity issues which have resurfaced – particularly skills shortages – then it should capitalise well on its strong industry position.

Monadelphous is suitable for investors who have a higher than average appetite for risk, and are looking for diversified exposure to resource and energy services.

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

Watching the directors

Diversified United Investment Ltd (DUI) chairman Charles Goode, the former chairman of ANZ, has done a little light shopping and picked up $282,000 worth of shares in the tightly held listed investment company. His indirect purchase on October 5 of 100,000 shares on market at $2.82 each brings his entire DUI stake close to $11 million.

Carsales.com (CRZ) chairman Walter Pisciotta has also picked up some shares indirectly, acquiring $114,412 worth, or 24,447 ordinary securities for $4.68 per share. Pisciotta has the second-largest holding in the company, at about 8%, which was one of the most oversubscribed floats of 2009.

Origin Energy (ORG) chief Grant King on September 29 sold 200,000 shares in the company for the princely sum of $3.17 million. Joining him on the same day with another sale was the well regarded chief operating officer Karen Moses, who disposed of 165,000 shares at $15.97 each, or $2.63 million in total. Recently, Origin has rejected analyst speculation that it may cut back plans for its Queensland LNG project.

Leighton Holdings Ltd (LEI) director Dieter Adamsas disposed of 31,500 shares at $33.87 each for $1.06 million. There may be more to go yet, as shortly after that sale, Adamsas announced he will resign at next month’s AGM in Sydney. He is believed to be close friends with outgoing Leighton CEO Wal King, and is leaving after more than 20 years at the helm.

-Recent directors' trades worth more than $200,000
Date	Company	ASX	Director	Volume	Price	Value	Action
01/10/10	Conquest Mining	CQT	Paul Marks	500,000	$0.50	$251,264	Buy
01/10/10	Eureka Energy	EKA	Mark Wilson	700,000	$0.30	$209,829	Buy
28/09/10	Oroton Group	ORL	James Vicars	150,712	$7.20	$1,085,126	Buy
28/09/10	Cellnet Group	CLT	Mel Brookman	2,000,000	$0.32	$640,000	Buy
21/09/10	Prime Media Group	PRT	Paul Ramsay	810,000	$0.64	$519,350	Buy
20/09/10	Ramsay Health Care	RHC	Christopher Rex	21,906	$14.75	$321,466	Buy
16/09/10	Symex Holdings	SYM	Allister Tomkins	1,501,000	$0.56	$840,560	Buy
15/09/10	Niplats Australia	NIP	Anthony Barton	750,000	$0.40	$301,650	Buy
14/09/10	Trafalgar Corporate	TGP	Tony Pitt	219,699	$1.05	$230,413	Buy
09/09/10	European Nickel	ENK	Neil Herbert	900,000	$0.24	£216,000	Buy
01/09/10	Adelaide Brighton	ABC	Mark Chellew	301,040	$3.28	$986,809	Buy
01/09/10	Billabong International	BBG	Derek O'Neill	64,500	$7.70	$496,758	Buy
31/08/10	Cedar Woods Properties	CWP	Ronald Packer	97,183	$2.64	$256,563	Buy
30/08/10	MyState Limited	MYS	Miles Hampton	123,688	$3.17	$391,747	Buy
27/08/10	GBST Holdings	GBT	Joakim Sundell	450,000	$0.80	$360,000	Buy

Source: The Inside Trader