Collected Wisdom

Boart Longyear gets even more support as a buy call, JB Hi-Fi is back in fashion while Telstra still reels in the recommendations.

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.

Boart Longyear (BLY). The last time we covered Boart Longyear the newsletters were saying it was a buy, but only if you had a strong appetite for risk.

That’s all changed now, as one newsletter calls it “good and getting stronger” – particularly with guidance forecasting EBITDA of $US330 million, up 48% on the prior year, and revenue of $US1.9 billion. The actual result may be higher still as a result of a sharp increase in demand.

There are three themes relevant to Boart: miners increasing the volume of their product as prices moderate; heightened demand for mining services companies; and its three new growth initiatives.

The first is mentioned in Tim Treadgold’s piece Take a bow, Australia, in which he details a report by Citigroup that effectively says the mining boom will continue and will continue to be underpinned by emerging nations such as India and China, but it is altering. As mineral prices moderate from the peaks of 2009 and 2010, miners will start to focus on producing more volume to counter the slightly lower prices.

This means they have more need for the services of companies that can help them, such as Boart which supplies drill rigs and drilling equipment mostly to gold, copper, nickel and iron ore miners. For the record, not only have the newsletters come out behind Boart, but it was also mentioned in the Citi report as one of the five Australian companies the global broker recommends investing in.

The next theme is demand. It’s a logical step from the first, and comes with some concrete examples. Miners are increasing their drilling programs, and while normally there would be a break over Christmas, this is being shortened as they scramble to produce more product. Higher use and demand equals higher prices.

When Boart released profit guidance for full year 2011 (it follows the calendar rather than financial year) it said utilisation of its 1184 rigs was at 75%. This is good, but greater demand will put this even higher. Pricing tends to be “keener” as miners lock in their rig capacity and prices are not far below the 2011 peak, and could shoot higher still in 2012.

Boart has long-term relationships with global miners BHP Billiton, Rio Tinto, Anglo America, Xstrata and De Beers, which solves to an extent fears about customers not being able to pay their bills.

The third theme is the creation of Boart Longyear Financial Services, a financing business for clients wanting to buy or lease equipment; expanding the mine water services business into Australia, Africa and South America; and the sale of its sonic drilling technology, which up until now had only been used in-house.

The financing business will be supported on a non-recourse basis by third-party providers so it doesn’t impact on the company’s debt profile, and will lend money for exploration products, rotary drilling and surface core drilling rigs, among others.

The water business will target the iron ore sector in WA, as well as Africa and South America. It’s primarily used by miners for monitoring and lowering water tables to allow efficient mining, and supplying water to operations. Boart allocated considerable sums to this area in the second half of 2011.

The third business is sonic drilling, which lets resource companies to obtain high-quality, undisturbed samples. The product sales will be accompanied by training services and other assistance on the side.

  • Investors are advised to buy Boart Longyear at current levels.

Washington H Soul Pattinson (SOL). Normally, the combination of disruptive asset sales and rowdy shareholders would be enough to put investment writers off their breakfast, but in this case they’re looking past the tension to what could be.

Washington is ultimately a play on what Robert Millner sees as the next money-making venture. Complicated cross-shareholdings between the company and Brickworks, the kind favoured by family conglomerates up until the 1980s, is frustrating major shareholder Perpetual no end, and its desperate for Washington and Brickworks to end the structure and give shareholders better transparency into what is going on inside the businesses.

It may get its wish as the sale of New Hope coal assets continues.

Washington owns 59.7% of coal miner New Hope and said in September that due to several offers, the miner would be put on the block. Millner later included the option of just asset sales.

The newsletters believe that tax-wise, asset sales would be preferable to Washington with the New Acland mine and Brisbane port loading facilities of wholly owned Queensland Bulk Handling at the forefront.

An asset sale would allow Washington to pay out a special full franked dividend which would especially benefit Brickworks, with its 42.85% holding in the company.

And this is where it could get interesting. New Hope already has substantial cash but it may not need that $1.5 billion already on the balance sheet if some assets are sold, indicating that it could distribute some cash and the proceeds of the sale to shareholders. Without explaining how, the newsletters suggest this could lead to the unwinding of the cross shareholdings between Washington and Brickworks.

The sale process will take time but with a restive shareholder on its books and sizable amounts of money to distribute, there’s no doubt Washington is going to be an interesting study to watch over the next few months.

  • Investors are advised to hold Washington H Soul Pattinson at current levels.

JB Hi-Fi (JBH). Not six months ago newsletters were saying to sell music retailer JB Hi-Fi because they didn’t believe in the new concept store model and thought its highly discretionary product offering was under threat, even though they agree it’s one retailer that “gets” the dynamic of online/offline sales.

How times change. Two interest rate cuts later and a hastily approaching festive season and those fickle analysts have turned a whole 180 degrees.

JB Hi-Fi started to really perform after 2006, when people other than gamers and geeks realised tech could be fun (and it was also a good place to buy CDs and DVDs). The comment earlier this year was that gadgets like iPads and cameras are highly discretionary and as the economy bumbled along, with the occasional freak-out from Europe or the US, consumers would think twice about buying.

It turns out you consumers aren’t as easy to read as the newsletters think, and JB Hi-Fi wasn’t doing too badly. Now with consecutive rate cuts to put a spring in customers’ steps just before the crucial Christmas period (when JB makes 25% of its annual profit), times are looking good again. As one newsletter said, JB Hi-Fi is the way to play Christmas and the Australian consumers.

Anecdotal evidence from general retailers suggests that sales picked up a little after the November interest rate cut, and they said back-to-back cuts were just what people needed to be confident enough to buy things this year.

Now it’s happened and the banks are begrudgingly passing the 25 basis point difference on to mortgage customers (though the public appears to forget that a cut in lending interest rates also means a cut in deposit rates too (see Cash alert). These are strong signals that it’s OK for people to spend money, even though the reason for the rate cut was extra economic troubles offshore.

And this doesn’t even include JB Hi-Fi’s latest innovation, a music-streaming service called Now that supports Android (for those who don’t know, it’s now the fastest-growing smartphone operating system), Windows phones, Blackberry, Microsoft and, importantly, Mac. People are already saying it’s the first real rival iTunes has seen.

JB Hi-Fi is, and has been for a long time, one of the most heavily shorted stocks on the market, with over 20% of its register short sold, a level normally reserved for stocks in bad financial straits.

But one newsletter says the short sellers are playing with fire. It raises the possibility of a takeover – by Woolworths, no less. The supermarket chain is reviewing its underperforming Dick Smith chain and has previously suggested the possibility of a friendly takeover to JB Hi-Fi. The theory is that if Dick Smith doesn’t come up to scratch, JB Hi-Fi could be a better way for Woolworths to get exposure to the electronics sector.

  • Investors are advised to buy JB Hi-Fi at current levels.

Telstra (TLS). Australia’s dominant telco has closed a long year not with a whimper but certainly with far less of a bang than it started with.

It’s largely got the NBN deal done and dusted (if only the ACCC would get out of the way) and it’s picking up customers profitably, rather than by sacrificing average revenue per user as it has been accused of doing.

The latest update showed that Telstra is forecasting single-digit revenue and EBITDA growth for the year ahead as mobile and broadband services continue to grow, and the strategy is set and working. Mobile demand is up and the launch of the faster 4G network widens the gap between it and the other telcos in Australia.

For that gap is there and won’t disappear when the NBN really begins to operate. The $11 billion in payments Telstra is going to receive for giving up its copper network, leasing its pits, manholes and exchanges to NBN Co, and benefits from reduced infrastructure maintenance will give it extra firepower to please both customers and shareholders. Optus and Vodafone also find themselves in a tricky spot: they don’t have the coverage or efficiency of Telstra and the only way they can compete is on price, cutting into profit margins in the process.

Not all is well though, as Telstra also made clear the extent of Sensis’s troubles. It experienced the largest-ever fall in revenue for the Yellow Pages business this year – a worrying 18% – and Telstra is predicting falling revenue and EBITDA for the next three years.

However, the naysayers discount Telstra’s ability to reposition itself in a world of almost-universal super-fast broadband and the fact that it’s in a structural turnaround.

Sensis, Big Pond, Trading Post, IPTV and Telstra’s 50% share of Foxtel are being brought together under a new media division called Telstra Digital Media. It will contribute annual revenue of $4 billion and is a clear signal that the company recognises the need to integrate all of its content to deliver it across all platforms. The historic deal for the AFL rights shows Telstra is keenly aware that it needs content to maximise its mobile penetration.

Telstra is also fairly safe if something does go wrong and the NBN is never completed. This deal been two years in the making, and expected for more than 10, so the government is not going to let it fail, be it due to budgetary issues or a recalcitrant ACCC.

The company also negotiated a good deal for itself so that if the Coalition wins the next election and scrap as much of the project as it can, Telstra will still receive up to $11 billion in compensation and other benefits for cooperating now, according to independent expert Grant Samuel.

Likewise, it was tactically clever to hold the shareholder vote before the ACCC scrutinised the deal. The near universal approval gives Telstra leverage as it promised any substantial changes to the plan shareholders voted on would be sent back to them to vote on again. This sends a clear message to the ACCC that if it tries to rein in the telco too hard it will delay the process even further – and you know the government won’t like that at all.

  • Investors are advised to buy Telstra at current levels.

Watching the directors

Ivanhoe Australia (IVA) director Sam Riggall has stakes in all three of the Ivanhoe companies: Ivanhoe Mines (the Canadian parent), Ivanhoe Australia and South Gobi Resources. But it was the parent from which he sold 50,000 shares at $C21.40 a pop ($C1.07 million). Riggall now owns only 4581 shares in Ivanhoe Mines, although he still has a significant number of options and contractual shares owning. He’s also one of four members on the nine-member Ivanhoe Australia board who once worked at Rio Tinto, assisting conspiracy theories if you’re that way inclined, about the bigger miner’s intentions for the 46.5% it owns in the parent.

The chairman of tiny explorer Haranga Resources, Matthew Wood, managed to make one of the largest director trades on the ASX last week, buying 1.5 million shares in the $65 million company. The trade was worth $418,334, or 28¢ a share. Mongolia-focused Haranga is consolidating its presence and as of November owns 80% of the joint venture that holds five exploration licences in the Selenge project, north of the capital Ulaanbaatar and on the opposite side of the country from Rio Tinto’s enormous Oyu Tolgoi project.

Starpharma (SPL) chairman Peter Bartels went out last week and bought a very strange number of shares: 31,012 to be precise. The price, $37,119.28 or slightly less than $1.20 each, wasn’t a whole figure and neither is his holding now of 163,277 shares. Starpharma has just finished a capital raising to fund the last trial of its bacterial vaginosis gel, the last before Ansell, Durex and Japan’s Okamato start using it on condoms.

And at least one Woolworths (WOW) director took up his allocation of the enormously popular convertible notes issue, as New Zealander Roderick Deane told the market today he’d spent $300,000 on them. He bought 3000 of the Notes II at a face value of $100 each. The 70 year-old’s Woolworths fortune now stands at $1.3 million, in the form of the notes and 40,000 shares.

-Recent large directors' trades
Date Company
ASX
Director
Volume
Price
Value
Action
05/12/11 Ivanhoe Australia
IVA
Sam Riggall
50,000
21.40
$C1,070,000
SELL
05/12/11 Haranga Resources
HAR
Matthew Wood
1,494,053
0.28
$418,335
BUY
02/12/11 Adelaide Energy
ADE
Carl Dorsch
4,235,079
0.20
$847,016
SELL
01/12/11 Western Areas
WSA
Julian Hanna
90,000
5.78
$520,200
SELL
01/12/11 Campbell Brothers
CPB
Gregory Kilmister
15,000
50.00
$750,029
SELL

Source: The Inside Trader