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.

Alesco Corporation (ALS): On the face of it, Alesco doesn’t look like a great addition to any portfolio: it’s tied to the housing and commercial construction cycle and has a mixed history of success with a trail of acquisitions that started in the 1990s. But the newsletters have confidence that a company turnaround is almost complete after Alesco sold the last of its non-core assets.

Alesco last week sold Marathon Tyres for $23 million to a private Newcastle firm. Unlike the asset sale before it, Alesco will actually make a profit on the deal, of about $9.4 million. In January the company sold Water Products & Services to Anchorage Capital Partners for $20 million – it had paid $250 million for the business in mid-2007.

The proceeds of the Marathon sale will be used to pay down debt, reducing net debt to equity to 19%. It also means Alesco owns a more attractive range of businesses, and more money can be put into the successful Parchem Construction Supplies, a manufacturer and supplier of concrete equipment and products.

In the first half, Parchem’s EBIT contribution to the Construction & Mining division grew 15%, while Marathon’s contribution fell 45%. Alesco reported an 82% fall in first-half profit to $1.76 million compared with the prior corresponding period in January, due to an impairment charge on the now-sold water division.

The simplification of an unwieldy group of businesses is making the newsletters optimistic, while management’s focus on Project Restore, an improvement program looking at the company’s range of products and pricing, is further evidence that Alesco is getting back on track. Alesco is also stripping the fat from its staffing levels, planning redundancies that are expected to save $3 million a year.

It’s a risky bet, but the newsletters have faith that CEO Peter Boyd’s turnaround plans are coming together and Alesco is set to return to being the solid dividend and cash generator it was during the 2000s.

• Investors are advised to buy Alesco Corporation at current levels.

Leighton Holdings (LEI): Wal King’s departure seems to have set off a chain reaction of mishaps at the construction and industrial contractor. The newsletters are seriously concerned at what appears to be a culture of covering up mistakes amid poor due diligence, inadequate pricing of risk and under quoting.

Leighton announced losses on Brisbane’s Airport Link tunnel and the Victorian desalination plant of $526 million; adding further losses from the Middle Eastern Habtoor Leighton Group partnership brings the total to $907 million. This means instead of looking at a forecast full year net profit of $480 million, Leighton shareholders can now expect a $427 million net loss.

Australian projects in particular have suffered from extreme under-quoting, with the desalination plant 42% over the tendered price so far thanks to rises in the cost of labour and certain materials – such as structural steel, which is now running at more than 200% above the quote. The Airport Link overruns are due to overly optimistic weather forecasts – even given the stormy summer weather – while materials are running over estimates as well.

The Habtoor joint venture was hit by the global financial crisis, which saw non-paying debtors multiply and construction opportunities evaporating. But Leighton is still positive about growth in the region and is directing its attention towards oil and gas infrastructure.

New CEO David Stewart says the company must overhaul its due diligence and tendering procedures, and that it is facing its most serious crisis in 20 years. The newsletters are questioning whether Stewart himself contributed to Leighton’s malaise, given his previous position was as chief operating officer. Questions are also beginning to be asked about whether former CEO King will be called to account for the poor decisions that took place on his watch.

The newsletters recommend shareholder take up their rights in the $757 million capital raising, if only to avoid diluting their holding. They say that while Leighton is Australia’s biggest and most knowledgeable contractor, the booked losses are a timely reminder that construction is not a game where one wants to relax the reins.

• Investors are advised to hold Leighton Holdings at current levels.

Primary Health Care (PRY): Health Minister Nicola Roxon is very pleased with the new industry agreement on pathology funding, especially the fact it will reduce government spending by $550 million over five years. For companies like Primary Health Care, which source a large chunk of their earnings from pathology, this is going to have a big impact.

Roxon said the cap would limit increases in government pathology spending to 5% a year, because since 1984 it had been growing by an average 7.3% annually.

Primary relies heavily on its pathology division, with its Symbion Pathology wing contributing 55% of the wider company’s revenue and 40% of earnings before interest, tax, amortisation and depreciation (EBITDA). With revenue capped and little room to pass on or cut costs, margins are going to be squeezed hard.

What is really interesting is the method that the newsletters are suggesting to get around this. They say Primary, with its 30% share of the pathology market, could pool its assets with Healthscope, which has a 10% share, which would then deliver returns through decreased operating costs.

They also hint that this may be a welcome plan for founder and managing director Dr Ed Bateman, who could get back to his forte of running medical centres without the added impost of also looking after a pathology arm only acquired in 2008. Primary’s 24-hour medical centres contribute another 40% of EBITDA.

The newsletters suggest that Bateman may also not be wholly focused on the job, citing the fact he spent more than $1 million buying on three racehorses at the Inglis yearling sales in early April, and has spent a total of almost $2 million lately on his hobby.

But given Primary took Healthscope to court in May last year, alleging the rival had effectively bribed staff at Melbourne private hospitals to use its pathology services, a merger between their respective pathology units may not be on the radar just yet.

Something will have to give though, as Primary has already downgraded earnings guidance this year, by $8 million in March thanks to the Queensland floods impacting on pathology volumes, and this is the third downgrade since May last year.

• Investors are advised to sell Primary Health Care at current levels.

Kagara (KZL): Kagara’s nickel and zinc mines are finally starting to make it some money, but the question for investors is whether they want to take on more exposure to these commodities right now.

The miner announced that the Lounge Lizard nickel mine and revamped Thalanga plant started production in the March quarter, and because the wet weather in Queensland over summer meant a lot of production was stockpiled, the second quarter accounts will see the benefit from the extra shipments needed to move the stockpile, worth $25–30 million.

Thalanga was started in 2006 to process copper, but the refurbishment means it can now treat zinc ores.

Kagara has some of the highest copper costs in the industry at $US1.68 a pound, notwithstanding the high quality of the ore, but costs for zinc are around the industry average, at US79¢ a pound. Provided commodities prices remain high this shouldn’t be a problem but, as one newsletter warns, Kagara has little margin for error and is more of a stock for people wanting to invest in an explorer with some production value, rather than the other way around.

Kagara is also in need of discovering new reserves or finding ways to significantly extend mines lives. It attempted to expand via acquisition in October last year with a $14.3 million bid for fellow Queensland miner Copper Strike. The takeover failed and left Kagara with a 17.5% stake, after receiving only 0.52% acceptances by the time it closed on March 1.

The price target is 80–86¢ and the company closed Friday at 62.5¢, so the newsletters are targeting 28–37.6% upside.

• Investors are advised to hold Kagara at current levels.

Seek (SEK): With unemployment at 4.9% and expected to fall even further by some, online job advertisers are watching the money roll in. And after a year of suggestions that it may be over the hill, the big daddy of them all is gradually getting back into the newsletters’ good books.

The online jobs ad market is a natural monopoly, with one big company able to dominate through brand recognition and often first-mover advantage; Seek owns that monopoly which means it’s well placed to benefit from the permanent shift to online advertising. Seek said in its half-year results that it had 4.9 million unique browsers, compared to rivals MyCareer with 1.3 million and CareerOne with 1.6 million.

The one concern that investors may have lies in Seek’s overseas arm, where it owns stakes in job advertising sites in China, Mexico, Brazil and South-East Asia. These markets are still quite fragmented and a monopoly-holder is yet to appear. They are largely also all yet to start adding to Seek’s bottom line.

Seek has also invested in the online learning sphere and this is expected to take the cyclicality out of the business as education and employment move in different directions. In the meantime, low unemployment levels and commodities-fuelled demand for skilled workers is great news for Seek, because it’s employers who pay for the privilege of placing the ads.

The newsletters have calculated that Seek has 76% of the online jobs market, which grew 21% to be worth $204 million in calendar 2010. Estimates see this growing 9% in 2011 to $222 million.

With a captive market, expansion into new markets and a plan to reduce earnings volatility, Seek is firmly back in favour with the investment community.

• Investors are advised to buy Seek at current levels.

Watching the directors

ASX (ASX) CEO Robert Elstone has sold 29,961 shares, leaving him with just 10,000 ASX units. The on-market sale was worth $901,085.77. Elstone was one of the main proponents behind the failed merger proposal with Singapore Exchange Group, although it was well known that he planned to resign in 2011 whether the merger went through or not.

Ramsay Health Care (RHC) director and former CEO Ian Grier (usually known as Pat) has sold almost 60% out of his personal holding. He sold 75,000 shares last week at an average of $18.83, collecting $1.4 million, and still holds 58,116 shares. Grier oversaw Ramsay’s float in 1997 and undertook several acquisitions to grow the company during the early 2000s.

Carsales (CRZ) director Richard Collins is selling his super fund's holdings of the popular online car classifieds business, but is hanging on to two other indirect holdings. Collins sold 300,000 shares on-market for $1.52 million. He is left with 125,000 options (his only direct holding), and 1.24 million shares spread across the super fund and two family trusts. Nine Entertainment recently sold its 49.1% stake in the company for $4.92 a share, a discount of about 6%.

Iluka Resources (ILU) CEO David Robb is doing some “personal financial planning”, selling 335,000 shares on-market just before having 78,560 transferred into his name under an incentive plan. The $4.6 million sale left Robb with 924,523 Iluka shares in his name, but the extra lifted the holding back up to 1.003 million. The Iluka share price has more than doubled over the past six months.

-Recent directors' trades worth more than $150,000
Date	Company	ASX	Director	Volume	Price	Value	Action
13/04/11	Carrick Gold	CRK	Laurence Freedman	300,000	$0.58	$174,329	Buy
07/04/11	Brickworks	BKW	Robert Millner	20,000	$11.08	$221,504	Buy
06/04/11	Cazaly Resources	CAZ	Nathan McMahon	588,235	$0.34	$200,000	Buy
05/04/11	WAM Research	WAX	Geoffrey Wilson	210,000	$0.73	$152,919	Buy
04/04/11	Cromwell Property	CMW	Geoffrey Levy	420,000	$0.71	$298,250	Buy

Source: The Inside Trader