Collected Wisdom

Hold Investa Office Fund, Alesco and Qube Logistics, and sell Retail Food Group, the newsletters say.

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.

Investa Office Fund (IOF). Real estate investment trusts exploded onto markets as highly-geared growth stocks in the early 2000s – and then fell off again just as quickly after 2007 – but they are regaining their reputation as 'widows and orphans’ investments: relatively safe income generators.

Investa Office Fund is one such stock that is quickly backpedalling from its international adventures and repositioning itself as a local commercial office property investor. The move is gradually paying off, with net tangible assets (NTA) growing 8% in the first half as Sydney and Perth valuations improved.

Investa is still trading at a 23% discount to NTA, thanks to a 17% exposure to Europe (the company has completely sold out of the US). But that’s not entirely fair because the main exposure is a stake in the Dutch Office Fund – an entity with a high-quality portfolio, which is valued on Investa’s books at 10% below NTA (just to be conservative).

Operating income fell 8%, thanks to weaker overseas earnings, but income from the Australian assets (now 83% of the total portfolio) performed solidly, with a 97% occupancy rate and average lease term of 5.3 years. Look-through gearing also fell to 20.5% and will almost halve to 11% after all the overseas sales are settled.

Investa can’t just hand back all the extra cash to investors (well, it could, but it’s not planning to), so right now it’s looking at two possibilities: one is a 50% stake in Deutsche Bank Place in Sydney and the other is a 50% stake in the Melbourne Telstra Headquarters. They’ll cost about $602 million and throw off a 6.2% yield. The newsletters are all for both purchases, saying they’re high-quality buildings with long leases.

The fund has dealt with all the legacy conflict of interest issues since it took over management from ING, and is well on the way to returning to the fundamental point of what a real estate investment trust should be: a low-growth income stock.

  • Investors are advised to hold Investa Office Fund at current levels.

Retail Food Group (RFG). After an attempt to buy Oaks Hotels and Resorts in May last year, the board of food brand franchiser Retail Food Group has still not resiled from this questionable leap in strategy.

Retail Food Group owns low-transaction food brands that include Donut King, Michel’s Patisserie and Brumby’s Bakery, as well as smaller labels bb’s Cafe and Esquires. The investment press was understandably horrified when the board tried to undertake the sea-change foray into hotel hospitality, especially without consulting shareholders or adequately informing the market as to why it thought this would be a good idea. Onlookers are still perplexed over why the board, even now, is refusing to categorically reject the abrupt change in strategy.

Not that this is the only reason they advocate for selling shares in Retail Food Group. The other, more fundamental problem the group is facing has less to do with ditzy management, but a lack of growth in franchisor numbers.

Despite the Australian economy ticking over nicely, business and consumer confidence are very low. This is a problem for Retail Food Group, because most franchisors borrow against their homes to buy the business. When potential newcomers are nervous about where property values are heading and the level of consumer spending (especially on low-value food items, demand for which has admittedly remained high so far), fewer are going to make an about-$300,000 up-front investment to buy a franchise.

For Retail Food Group, this means very little growth is internal, with most coming from acquisitions.

The company’s first-half results demonstrated this, with a 6% lift in net profit to $15 million and 5% rise in earnings per share buoyed by the integration of Esquires and New Zealand-based Evolution Coffee Roasters Group into the business.

But a $30 million purchase of gourmet pizza outfit Pizza Capers will add yet more cash-generating capacity to Retail Food Group, and it’s the kind of diversification the newsletters think is good for the business (unlike the leap into hotel management). It’s a move away from shopping-centre based brands and into a slightly higher price-point.

The risk is market saturation, with big names such as Domino’s and Pizza Hut already well-established in the gourmet sector and middle-weight businesses like Crust joining the plethora of privately-owned pizza-makers.

But ultimately, the real problem, so the investment press warns, is that you just don’t know whether the board might get tired of the food business again and find another bright and shiny 'opportunity’ to make a tilt at.

  • Investors are advised to sell Retail Food Group at current levels.

Alesco Corporation (ALS). This time last year the newsletters were fairly positive about Alesco. It had just sold (another) highly unprofitable business that it had paid too much for, and it looked like the construction products supplier was perhaps turning a corner with Project Restore.

A year on, however, and it’s still selling off bad businesses. The latest sales are Parbury Decorative Surfaces and plastic mouldings business Dekorform, offloaded for $4 million (a long way from the $86 million paid in 2000).

But the newsletters say at least it stems another haemorrhage, and management’s admission that it’s not going to be able to bring Alesco back to “acceptable” levels of profitability in the near future provides hope that it will focus on areas where its talents will lay the foundations for better days in the future.

Alesco’s earnings are tied to the housing and commercial construction cycles, neither of which is in a good way. Australian Bureau of Statistics fourth quarter data for 2011 shows that dwelling starts fell 6.9%, while seasonally adjusted non-residential construction work fell 12.1% in the quarter, compared to the prior corresponding period.

That is having a big impact on Alesco’s bottom line, with profit in the first half falling 40% to $7.2 million. While the company is a good generator of cash and pays out a decent enough dividend in spite of its financial troubles, its past acquisition trail is still causing trouble and the market it operates in seems to be getting worse, rather than better.

Management is being honest about its ability to turn the company around though, and it’s this transparency that is maintaining the newsletters’ confidence that Alesco will be perfectly positioned for when the construction industry does bounce back into action.

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

Qube Logistics (QUB). Is Qube’s share price running too far, too fast? As the Chris Corrigan-led port logistics operator makes acquisition after acquisition, the investment press is asking whether the market is pricing too much expectation into Qube and not enough reality.

The latest deal is to buy Stockland’s 55% share of the 83 hectare Moorebanke site, part of a proposed $1 billion intermodal terminal to link Port Botany with Sydney’s rail lines that will end the dock’s crippling dependence on road transport.

The deal will cost $123 million and will bring Qube’s stake up to 85%, unless QR National exercises its right to buy a proportional stake and lift its holding to 33% – something that logic would suggest fits nicely with its current rail-to-port strategy.

The plan is to move containers from the port to Moorebank (where they are loaded onto trucks) via train. The government supports the plan, but the whole project has been delayed by six months due to the Commonwealth Government budget planning process, and Qube also needs to negotiate the extension of the freight rail line to Moorebank (talks with Sydney’s Railcorp are moving ahead well).

The deal follows the $50 million purchase of an 18-year lease at Victoria Dock in Melbourne and the $119 million cash acquisition of WA commodities transport and storage company, Gucci Holdings.

Meanwhile, Qube produced its first result as a listed company in February, revealing a first-half statutory net profit of $8.2 million and net debt of $57 million, equating to about 5% net debt to equity.

The company is benefiting from mining and agriculture exports, and although the retail sector is pained, container volumes aren’t falling. The biggest problem has been industrial action, and costs are sure to rise as the push for higher wages continues.

Qube has a lot going for it right now and an investment in the company is less a question of how good it can become, and more one of whether, at $1.79 on Friday (that’s a $1.56 billion market cap), the market is setting the company up for a fall.

  • Investors are advised to hold Qube Logistics at current levels.

Watching the directors

The large-scale director selling continues, as Tox Free Solutions (TOX) managing director Steve Gostlow gave up 366,000 shares from his investment in the company. The sale made him $969,900 and he still owns 1.1 million shares. Gostlow reassured the market that he’s not just selling out – he needs the money to pay a tax bill that came from exercising 366,000 options.

Mineral Resources (MIN) executive chairman, CEO and managing director Peter Wade, on the other hand, didn’t give a reason for the $25 million sale that went through on Friday. The Wade Family Trust sold 2 million shares, or about two-thirds of the holding, on market. It still owns 1.4 million shares.

Non-executive chairman of Computershare (CPU), Christopher Morris, peeled off 525,000 shares from his sole stake, held via a separate business. He made $4.3 million in the on-market trade and still owns 44.6 million shares. Morris has only sold shares in the last six months, offloading 1.5 million shares in six separate transactions, which have made him $11.8 million.

-Recent large directors' trades
Date Company ASX Director
16/03/2012 Tox Free Solutions TOX Steve Gostlow
13/03/2012 Fortescue Metals Group FMG William Rowley
13/03/2012 Mineral Resources MIN Peter Wade
13/03/2012 Kagara Mining KZL Kim Robinson
9/03/2012 JB Hi-Hi JBH Terry Smart
8/03/2012 Matrix Composites & Engineering MCE Paul Wright
7/03/2012 Origin Energy ORG Grant King
6/03/2012 Computershare CPU Christopher Morris
6/03/2012 Nexbis NBS Peter Dykes

Source: The Inside Trader

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