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.

ANZ Banking Group (ANZ). A fully franked dividend is one the best assets an investor can have in a low-tax or no-tax environment, and as self-managed super funds take hold of the Australian investment landscape solid stayers like ANZ will benefit from SMSFs looking for something more than capital growth to sustain them. Not that the newsletters are saying this is the only benefit of the bank – great things are expected of its Asian strategy.

There is a soupcon of the unknown about the Asia plan. While Westpac and CommBank are home-bodies and NAB’s foreign operations are at least in a country with a familiar-looking legal and political system, ANZ is venturing into the wild west of capitalism, where the market structures don’t look like those at home and ways of doing business are subtly different to what Australians are used to.

CEO Mike Smith is an Asian business veteran (he was once HSBC’s regional head) and the newsletters have faith in his strategy and ability to achieve it, but are divided over the short-term means of getting there. They were disappointed when full-year expenses rose 11% as ANZ built extra capacity in the institutional and Asian branches and the bottom line was driven not by underlying growth (as at NAB), but by a reduction in bad and doubtful debts in New Zealand (which also grew profit by a whopping 55%) and better institutional and Asian operations. But then again, sometimes to make money you have to spend some first, and profits in Asia shot up 20% over the year despite a slow second half.

Australia is still underpinning ANZ’s P&L sheet, accounting for 44% of total profit, though it needs to work on the wealth section. The integration of financial planning arm OnePath is still struggling and weak fund inflows, high insurance payouts and broking offset gains from the strong capital investments and advice sectors; OnePath’s full year profit fell 16%.

The main risks, therefore, are the wealth sector in Australia, which badly needs some TLC, and the Asian strategy for which an “aspiration timeline” is still hazy.

But an Asian arm is in existence and growing strongly. It gives ANZ access to the biggest savings depository in the world and opens up opportunities like trade financing as networks such as Asean further open regional borders.

The 64% payout ratio is conservative and, as of Friday’s close, was throwing off a yield of 6.66% (most recently – full year 2010-11, $1.40 per share). It has helped keep Tier-1 capital at a very high 10.9% and ANZ is well prepared for Basel III, with extra fat to make the Asian acquisition Smith is waiting for. Massive deposit growth also meant ANZ was able to drop the amount of wholesale funding it needed by one-third to $18 billion in 2010-11.

• Investors are advised to buy ANZ Banking Group at current levels.

Qantas (QAN). Last week we promised an update on what the newsletters are saying about Qantas now that the airline’s lockout is over and the company is back to work. Strangely enough, they remain fairly positive.

With a half-billion dollar profit in the bag in fiscal 2011, the long-term outlook is for similar results. The industrial relations decision at least provides certainty, and will forestall a repeat of the strikes two years ago that led to 2000 cancelled bookings and cost $130 million.

Qantas says the weekend grounding of all its planes will cost it about $20 million per day, on top of the $68 million already lost to 129 cancelled bookings and the 500 flights that had already been abandoned in the lead-up to management's strike action. There is no word yet on how interrupting 68,000 passengers’ travel plans will do to the bottom line.

The foundation on which the Qantas assessment rests is that while profit forecasts have been downgraded temporarily, due to the IR problems and a $500 million rise in fuel costs in the first half, the plans by management to make Qantas more competitive and strengthen its dominance of the domestic market (notwithstanding Virgin Australia’s grab for market share over the past week) are promising.

Separately, the fully owned Jetstar subsidiary is humming along nicely, while code sharing and commercial deals with the OneWorld airline network lends it a strong presence in overseas markets. The planned establishment of Jetstar Japan, in a market that currently lacks a domestic low-cost carrier, with international low-cost flights to Southeast Asia and China is one of Qantas’s moves to set up less expensive bases in Asia.

A premium airline, nominally called RedQ or OneAsia, is also planned for either Singapore or Kuala Lumpur.

These new ventures will need large capital spending, as will the updating of the Qantas fleet, which will rule out dividend payments in the medium future. All this is predicated on the hope that parliament does not embark on its knee-jerk impulse to tie Qantas down at home: the proposed “Still Call Australia Home” legislation has lawyers saying would force the divestment of the profitable (offshore) parts of the business.

• Investors are advised to hold Qantas at current levels.

Boral (BLD). One investment newsletter has Boral as a long-term buy, based on higher middle class spending in China, India and Indonesia, but fortunes have been lost before by people relying on those markets to save the day, and the other newsletters are still pessimistic about Boral and its fate.

Sure, well-run building materials companies aren’t going to disappear while people still need places to live, but for now the trading environment is unsettled because the US market is taking considerably longer to recover than was expected last year, and the Australian market is slowing.

Boral also took a $600 million punt on Asian plasterboard, paying $600 million to buy out Lafarge’s half of their joint venture. This is where the expectation of higher Asian sales comes in: as middle classes grow, so will their housing ambitions and use of plasterboard. But earlier this year Goldman Sachs said the half-share had produced a mini $16.9 million profit anyway, which wouldn’t compensate for weak growth in other major markets.

The company said in a trading update that net profit for the first half of 2011-12 was likely to be slightly lower than in the prior half, and that second-half profit would be similar to the first. The newsletters say it’s unlikely Boral will be able to hit the forecasts (about $190 million for full-year net profit) for 2011-12 and have downgraded profits and earnings per share expectations accordingly.

The largest division, construction materials, is projected to improve in the second half thanks to major public and private projects; though building products – a proxy for the residential construction market in Australia – is feeling the pressure as volumes and plant use suffer.

And while Boral is in the fortunate position of not having as much exposure to the US market as James Hardie, but losses are increasing there with plant closures on the cards following the buyout of the remaining 50% of MonierLife and Cultured Stone, both of which are loss-making ventures.

• Investors are advised to sell Boral at current levels.

Oil Search (OSH). Much like Santos, Oil Search is in line to make some excellent profits, if its main PNG LNG project is not derailed by sovereign or development risk.

The 30% stake in the PNG project is Oil Search’s main hope, and with September-quarter production nosediving 16%, the 2014 start-date can’t come too soon. This fall was due to a two week stoppage at the Central and Agogo processing plants to allow them to be linked to gas delivery systems from the PNG LNG field, but further shutdowns will have an effect on Oil Search’s bottom line in the leadup to revenues from the project.

Other than that black spot, Oil Search fields that are already in production performed as expected and group output remains at the upper end of the 6.2–6.7 million barrels of oil equivalent (mmboe) guidance, and the better-than-expected $US117.54 a barrel oil price in the quarter was a welcome counterweight to lower output.

Oil Search is also undertaking exploration starting in the December quarter in the PNG Highlands to find standalone projects; the potential is there to expand the current two-plant PNG LNG project.

The 2014 production start date for PNG LNG is on track to be achieved and Oil Search says a liquefaction plant, to produce 6.6 million tonnes per annum, is rising swiftly. Development risk is always something to take into account, however, as weather or a shortage of labour or equipment can put a dent in proceedings.

One newsletter is concerned that most of the value latent in Oil Search is situated in a Third World country, but consoles itself with the thought that PNG has been relatively politically stable for some years and the operating partner, ExxonMobil, is experienced in working in the country.

• Investors are advised to hold Oil Search at current levels.

AMP (AMP). AMP is in the fortunate position of being one of Australia’s largest fund managers just at the time the government is set on lifting the superannuation guarantee from 9% to 12% – a 33% rise in mandatory fund inflows. Yet it also faces a history of bad calls on acquisitions and its sheer size means a speedy adjustment to changing circumstances is limited. AMP shares closed on Friday at $4.24, giving a price/earnings multiple of 13.4.

The 18 month-old AMP Flexible Super product – the MySuper compliant offering – already has $3.5 billion in funds under management. That was a 24% increase in the third quarter alone, despite fearful investors socking their cash away in cash and term deposits, though the AMP bank won here too with a 16% increase in deposits.

The integration of AXA Australia and the savings it is supposed to produce have surpassed AMP’s $140 million target, and if this pace continues it could be one of the few large listed companies to receive an earnings upgrade from the investment press. The North wrap platform (a significant motive for the takeover) keeps raking in money and there’s still plenty of room for it to grow.

The main risk for AMP now is a mass defection of planner groups. Some have already flown the coop, with Hillross’s exit in 2010 leading to a $192 million outflow of funds, and the antipathy between AMP and AXA advisers was well known when the two groups merged, but so far most have been happy to stay put.

• Investors are advised to buy AMP at current levels.

Watching the directors

Webjet (WEB) non-executive chairman David Clarke sold 80,000 shares on Friday at $2.43 each, or a total of $194,400; he now owns 15,443 shares. There’s nothing suspicious about this huge selldown though, because also on Friday he exercised options over 80,000 securities at a price of $1.34 each ($106,921.60 in total), which equates to a tidy $78,478.40 profit. Clarke has been vocal over the past week about Qantas and the long battle it faces in winning back customer trust.

Seven West Media (SWM) chairman Kerry Stokes spent $41.2 million on 11.5 million new shares in the media conglomerate via Seven Media Group. The buy-in brings Seven Group’s stake to 32.5% and cost an average of $3.58 a share. Stokes owns 245,265 Seven West Media shares in his own name, 209.7 million via Seven Media Group and 32,294 via National Australia Trustee. Stokes has a track record of acquisition by stealth, meaning he slowly builds up large stakes in a company only to buy out the remaining share for less than it would cost if he had made a formal takeover bid in the first place.

Iluka (ILU) CEO and managing director David Robb did a personal finance reshuffle with a chunky $1.9 million sale of 114,455 shares. At $16.63 each, at least he didn’t sell out at the $14.59 low of last week. Robb still owns 888,528 securities. Iluka is something of a “reformed ugly duckling”, as one newspaper put it, and appears to be back on track after cracking the $1 billion revenue mark in the first nine months of 2011.

CSL (CSL) director Peter Turner sold 45,000 shares at $29.38 each, for a total of $1.3 million, leaving him with 122,196 shares. Turner stepped down from being president of the CSL Bering division in July after a management reshuffle. He has worked for about 40 years in the medical plasma sector and for CSL in the US and Switzerland. The company said it was glad to have him in Melbourne and to retain an executive of his experience.

-Recent large directors' trades
Date	Company	ASX	Director	Volume	Price	Value	Action
31/10/11	Morning Star Gold	MCO	Alexei Motlokhov	4,000,000	0.32	$1,287,183	Buy
31/10/11	Eastern Star Gas	ESG	Alexander Sundich	1,600,000	0.895	$1,432,000	Sell
28/10/11	Iluka Resources	ILU	David Robb	114,455	16.63	$1,903,721	Sell
28/10/11	Washington H Soul Pattinson	SOL	Thomas/Michael Millner	30,000	13.67	$410,153	Buy
25/10/11	Origin Energy	ORG	Karen Moses	120,000	14.34	$1,720,800	Sell
Source: The Inside Trader