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.
BHP Billiton (BHP). When opinion turns against a company after it posts its second-highest ever net profit for December-half – and that profit is $US9.9 billion – you’ve got to wonder whether we’ve had too much of a good thing.
Then again, when you’re in the middle of a commodities boom and that sector is the only thing that seems to be functioning right now, you may also have a right to feel a little nervous.
The questions around BHP lie not so much in the higher costs and lower volumes (largely from the Escondida copper mine in Chile) that took their toll in the first half of 2012 - although these points are being raised - but whether BHP over-extended itself in its $US17 billion US shale gas play.
CEO Marius Kloppers said gas prices in the US weren’t as good as BHP expected when it bought Chesapeake and Petrohawk, but volumes were higher than anticipated. Is this a case of a company with too much money ($US12.3 billion free cash in the first half) and throwing it away on bad deals at the top of the market? That’s still a wait-and-see question.
Rising labour and capital costs in the mining business – particularly in Australia – as well as weather wreaking havoc on operations, were the main source of the jump in costs to $US1.6 billion. Moderating prices for commodities were offset by higher volumes and, on the petroleum side, rising liquids prices due to heightened demand from Japan were a counterweight to those lower gas prices.
Kloppers made some remarks about needing to “prioritise” and keep a closer eye on costs in the future. Analysts leapt upon these as an indication that the company has bitten off more than it can chew (all at once, anyway, there’s no doubt it can finish the meal). Robert Gottliebsen followed up on this point on Friday when he speculated that it’s likely the Olympic Dam development and outer harbour expansion at Port Hedland will go ahead, while the Jansen Potash project in Canada would likely go into a doggy bag for later.
But there is no doubt BHP is the one stock to keep in your portfolio, if you have time on your side. The miner has decades of tier-one projects available to develop that will provide many more decades of production after that. The newsletters say it’s more diversified over the long term than competitor Rio Tinto, with projects spanning the current cash cows of iron ore and coal, potential future cash cows petroleum and gas, and assets such as manganese, copper, gold and base metals.
It was noted on the weekend that when markets rally Rio Tinto shares benefit while BHP shares are sold off, and vice versa when markets slide. BHP is the more defensive asset of the two but one with plenty of room for share price growth and cash generation for decades to come. In the long run, the questions around rising costs (which don’t come close to the amount of free cash BHP is making) and over-paying for assets may just seem like floss on top of a very, very large cake.
- Investors are advised to buy BHP Billiton at current levels.
Australand (ALZ). Like the idea of an 8% yield? That’s what Australand gave its shareholders in 2011, with a total dividend of 21.5¢ – the same size yield as what Telstra is paying. And although Australand’s yield isn’t AAA-backed like the telco’s (the NBN deal with the government means it’s effectively guaranteed), it is supported by property.
And we all know how much Australians like property, but after ANZ threw a spanner in the works last week with its historic and unilateral interest rates increase, has that sent sentiment around the whole sector spinning off the rails?
The first point to make is that Australand deals in residential, industrial and investment property, so is somewhat protected from the ructions in the home-buying sector and the exodus by long-term bank tenants, such as Macquarie Group, from Sydney’s CBD office blocks.
The industrial division is underpinned by a shortfall of decent sites in Melbourne and Sydney, which will keep driving earnings upwards. Not only that, but a $450 million joint venture with the Government Investment Corporation of Singapore will also help keep things ticking over nicely.
The investment property business is another positive and it’s expected to continue its strong run in 2012. Occupancy rates stand at 99.3% and yearly rent increases are about 3.5%. With 82% of the earnings from this section coming from the government, it has tenants that are unlikely to be moving on in the near future.
The residential division, however, could be a drag this year. One newsletter points out that house prices in Brisbane, Adelaide and Melbourne fell by 6% last year and even though this made housing more affordable, it has also worried investors who are choosing to remain on the sidelines. ANZ’s decision to decouple its interest rate decisions from the RBA’s official cash rate moves will add to the confusion of an already-pessimistic public.
Without the promise of interest rate falls from the RBA, there is little to spur the residential property market into gear and it is here that Australand could feel some pain.
- Investors are advised to hold Australand at current levels.
Transurban (TCL). Your view on Transurban may depend on whether you are of the Roger Montgomery school or adhere to the Robert Gottliebsen theory.
The Gottliebsen theory, canvassed extensively in Toll roads, for the long haul, A new toll road approach and The perfect investment?, says that once they’ve got past the over-estimating stage endemic to the early days of all toll roads, operators like Transurban provide annuity-like returns – provided, of course, they are not taken over.
The Montgomery school focuses on value (see ValueLine: Transurban, and it’s this model that the newsletters have adopted for Transurban.
The business reported some steady results to the market last week. These were affected by roadworks that caused free cash flow per share (the figure preferred by the newsletters to judge how the company is performing) to fall by 3% to 12.7¢. Net income (EBITDA), however, rose 7.5% to $390 million on the back of more Melburnians choosing convenience over cost and travelling via CitiLink.
Meanwhile, the man who saved Transurban from being bought on the cheap by two Canadian pension funds, Chris Lynch, remains CEO until the middle of this year.
Transurban came through the tricky early years of life reporting continuous losses and ever-increasing sums of debt (its liabilities still overhang its assets by $172.3 million as at December 31). On the other hand, now it’s well placed in Australia with all or part-shares in five operational Australian toll roads, two in the US and another one in development in Virginia.
The industry has high barriers to entry and one that will pay out long-term dividends until such time as Transurban has to give the roads back to the government, when the public-private partnership expires.
And herein lies the problem. As an infrastructure investment toll roads are not renowned for their high yields or capital growth potential and, to top that off, having enjoyed the constant benefits (and maintenance costs) of a toll road over a contracted period, the company then has to give it back – not sell it back – to the government.
And at $5.56 on Friday, Transurban is pricier than the upper end of the newsletters’ fair value estimates of $5, so following the Montgomery school, they say it’s too expensive to own.
- Investors are advised to sell Transurban at current levels.
Fairfax Media (FXJ). The investment press is maintaining a sense of calm as the media hyperventilates over mining mogul Gina Rinehart’s raid on Fairfax.
Among the speculation that Rinehart’s buyup has engendered (including a share swap deal for the Age, the Sydney Morning Herald and the Australian Financial Review, and a takeover in order to turn the company into a mouthpiece for miners) one sensible comment has emerged: Rinehart’s 12.59% doesn’t alter the state of Fairfax’s assets.
And it’s not just 7.29% shareholder Orbis Investment Management that is sceptical about her ability to revive these assets: the investment press doesn’t think Rinehart will provide any insights or has the experience to stem the flow of advertising dollars from the company.
As these “rivers of gold” dry up and circulation continues to fall, CEO Greg Hywood is attempting to turn Fairfax into a digital company but there are problems in this, too.
First, as the circulation for hard copy newspapers falls, the capital- and labour-intensive printeries and distribution networks become increasingly unsustainable and loss-making.
Meanwhile, it’s going to be difficult asking consumers to pay for what they’ve been getting for free for the past 20 years. iPads may make news easier to access and navigate, and it’s simple to collate visitor data when they log on to sites and then create products they may wish to purchase based on that information, but ultimately the democratisation of the internet makes it harder to sell an increasingly commoditised product.
With $5.3 billion of Fairfax’s assets in goodwill and mastheads, even Rinehart – who is possibly the world’s richest person – isn’t going to be able to do much about the fundamental industry changes the company is bravely (if belatedly) trying to navigate.
- Investors are advised to hold Fairfax Media at current levels.
Macquarie Group (MQG). Profit is expected to fall 25%, 500 staff were cut in the December quarter with more likely to go, and the investment banking and equities divisions are starting to look like money vacuums. Where will the bad news end?
With the investment newsletters, apparently. Although disappointed with the earnings downgrade they are not falling for all the bad press; they note that changes are afoot and that one bad year doesn’t equate to a bad business.
CEO Nicholas Moore is finally recognising that, four years after the financial crisis of 2008, things are not going to get better in a hurry. He wants to cut costs by 20-25% (something previously unheard of at Macquarie) and is cutting staff in the underperforming divisions as a consequence.
But like much about Australia’s only investment bank, this is drawing mixed reviews. On the one hand, banking is a people business and redundancies can mean the loss of quality employees, yet on the other it shows Moore is pulling back on the free-wheeling side of the bank that worked so well in the boom but is a drawback in the bust.
Meanwhile, despite the middling-to-bad results expected from the equities, investment bank, fixed income, currencies and commodities, and general banking sections, the funds management and asset finance divisions are going to help pull Macquarie through the slow times.
These two businesses are a buffer against downturns in corporate activity that other investment banks don’t have, and they should tide the company over until healthier economic times arrive.
And one last thing: Macquarie also has a strong balance sheet. The plan to buy back about 10% of issued capital will eat into this, but it doesn’t change the fact that its funding base is well diversified and it has $3.7 billion in excess capital (as required under Basel III). One bad year (and a lot of bad press) does not beget a bad business and while Macquarie may look like it is struggling, the seeds to a recovery are being noticed and tended.
- Investors are advised that Macquarie Group is a long-term buy at current levels.
Watching the directors
The Jagatramka family lifted its ownership of Gujarat NRE Coking Coal (GNM) to 70% last week, buying 5.2 million shares for $1.04 million. The shares, bought for an average of 19.9¢ each, were bought by Arun and Mona Jagatramka. The purchase came just before Arun was forced to deny that his coal empire is being threatened by profit downgrades, project delays and a tumbling share price.
Catalyst Metals (CYL) non-executive chairman Stephen Boston spent $135,000 on Friday buying up shares in the Perth-based resources private equity firm. The purchase added 572,096 shares to his now-5.4 million strong portfolio. Catalyst got stuck into mining and gas facilities manager Morris Corp two weeks ago when it bought 49% of the company.
Kingsrose Mining (KRM) director and geologist Peter Cook peeled off two million shares – exactly half – from his sole stake. The $1.36 a share trade was worth a total of $2.7 million and took place just weeks after the company said it would pay its first dividend in the June quarter.
A December-half loss has been an incentive for Talent2 International (TWO) founders Andrew Banks and Geoffrey Morgan to start buying up stock. Between them, they spent $547,591 on 1.056 million shares for a joint company called Morgan & Banks Investment. The first lot was for 56,000 shares at 49¢ each, or $27,591, and a second round of one million shares for $520,000, or 52¢ each.
|-Recent large directors' trades|
|30/11/2012||Mirabela Nickel||MBN||Colin Steyn||
|2/02/2012||Kingsrose Mining||KRM||Peter Cook||
|1/02/2012||Saracen Mineral Holdgs||SAR||Guido Staltail||
Source: The Inside Trader