Collected Wisdom

Sell or avoid Fairfax Media, buy Computershare and AACo, hold Alesco and Boart Longyear.

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.

Fairfax (FXJ). There’s at least one person in Australia who thinks buying Fairfax shares is a good idea right now – Gina Rinehart. She’s the richest woman in the world, according to Fairfax’s BRW, but, while that kind of a wealth-building record might be worth following in some people’s eyes, the newsletters are more inclined to stay away.

There’s a lot happening both to and within the Fairfax business, but the real question for the company, and indeed any legacy 'old media’ major players, is whether the current savaged on-market prices are a buying opportunity or a reflection of diminished value.

The key developments are myriad: Rinehart has lifted her stake to somewhere in the range of 18%, and exact details are to be confirmed by tomorrow. A June 12 trading update provided full-year EBITDA guidance of $500 million, a downgrade, but importantly “excluding significant items and intangibles impairments”. This morning (June 18), the company announced it had sold down 15% of its stake in successful New Zealand online auction site Trade Me, for $160 million, and detailed a massive restructure that will cull 1,900 jobs over three years and completely close several major printing facilities.

While the investment press acknowledges cost cutting and a transition to digital is both occurring and inevitable, the view is that more pain will come before gain.

Specifically, Fairfax has $5.1 billion of intangibles booked, and most of that is tied up in the goodwill and names of its major mastheads The Sydney Morning Herald and The Age. Every indication suggests the board will have to significantly write-down these intangibles.

Then there is the argument that Fairfax represents a potential target for a takeover or asset break-up. However, the newsletters note that breaking up the company would not only subject it to very high costs but also risk industrial action, with no easy way out of the structural tailspin all media businesses are caught in.

The deadline has arrived for the media giant, and though Fairfax shares lifted about 7-8% today on the restructure plans presented, the road ahead looks rough for some way yet.

Investors are advised to sell/avoid Fairfax at current levels.

Computershare (CPU). It should come as no surprise to readers that European financial markets are not in the best shape at the moment, although some of the newsletters seemed to be blindsided by Computershare’s Continental Europe asset impairment charge announced late last week.

The share registry business will write-down the accounting (non-cash) value of its Continental Europe division by between $US55-65 million this half. Full-year earnings guidance was reconfirmed at the same time, and the company expects a 10-15% reduction in EPS compared with the prior year.

Computershare’s exposure is relatively simple to understand, as linked to market performance and investor and corporate sentiment. Thus its problems in the short-to-medium term are also easy to place. Europe is in a financial mess, with the Spanish outlook deeply uncertain and the threat of contagion to most of the continent deep and vast. A promising start to the year on Wall Street has also tailed off into northern Summer, and sharemarket activity in Australia has wiped any early 2012 gains.

However, the newsletters are decisively confident in Computershare in the medium-to-long term. Its exposure to market activity means that a broad recovery following the current malaise will be very beneficial, and the strong balance sheet, reasonable debt levels and highly recurrent revenue should easily see the company through until this time. They also point out this is an environment where stronger market players can gain ground and further position, and some bargain acquisitions in Europe may be a growth option.

Yield is not impressive for this stock at present, and the fate of Europe may weigh on its earnings for a period yet. But as a well-managed and stable longer-term global market recovery play, this company is ideal.

Investors are advised Computershare is a long-term buy at current levels.

Alesco (ALS). The precarious position the garage door maker finds itself in – with its share price inflated thanks to a Dulux (DLX) takeover offer of $2 a share, but having rejected that offer as too low with no certainty Dulux will be inclined to push on or raise the bid – makes for interesting times at Alesco.

The company has responded to the bid officially now, and helpfully put a price range on what it’s looking for – between $2.23 and $2.52. Whether Dulux coughs up that extra 23c a share or walks away is no sure thing, but it already owns just under 20% and the newsletters think it is unlikely to just sit on that.

Aside from the takeover limbo, the underlying issue for Alesco is the housing downturn. As the residential and commercial construction market flattens or backtracks across the country, so does the highly exposed Alesco.

Net debt is at about 16% of equity and the company is in reasonable shape even with Dulux out of the picture, however the newsletters aren’t expecting a property uptick in the near term. This puts the company at the bottom of an earnings cycle dip and EPS is predicted to drop by about 25% – although it strengthened full-year guidance a fortnight ago to $11.2-11.4 million, up from $9.9-10.7 million.

Management has also flagged a special 10c dividend in addition to the expected final dividend of 3c (6c total for the year).

Looking at Dulux recently, the newsletters were wary of its high debt levels, risky takeover strategy and exposure to similar downturns. Alesco at least is in a better position financially if the deal falls over, and if it picks up an increase of 10% or so it would provide shareholders a reasonably healthy place to cash out – so they’re holding on for now.

Investors are advised to hold Alesco at current levels.

Boart Longyear (BLY). Opinions on the value or otherwise of mining services stocks seem to be falling somewhere between cautious bullishness and apprehension of a commodities slowdown – and nowhere is this more apparent than the investment press’ views of Boart Longyear.

BL has been hit hard by the latest sharemarket dip, losing 24.3% since the start of May. At the end of last month the company had the cheapest Price to Earnings ratio of any of its major competitors, either in drilling services or mining services – about 6x compared with 8-12x at companies such as Orica, Leighton, Mullen or Layne Christiansen.

At its most recent update in late May, BL affirmed guidance for revenue growth of 14% for the financial year to $US2.3 billion, off the back of greatly increased revenue (37%) and net profit (89%) reported in the prior year. Estimates for FY12 profit range from $US210-230 million, rising from just under $US160 million in 2011.

The company also pays a fairly small dividend, which the newsletters expect to yield about 4-5% this year.

Where the views diverge, however, is on the projected demand for BL’s drill rigs and manufacturing plants toward the end of FY12 into FY13, and the effect that potentially reduced mining industry capex could have. Some argue that fears of a commodities slowdown has unfairly depressed the share price and that the key exposed industries – copper (40% of BL's drilling) and gold (20%) – are not seeing any spending reductions. However, others point out that contracts are short, lasting only 1-2 years, and current figures such as 80% utilisation and EBITDA margins near 20% could change rapidly if budgets tighten and funding dries up for exploration. They argue this would be the likely result of a financial market freeze in Europe and a prolonged slowdown in China.

The bottom line is that BL currently has significant share price upside and is expected to post excellent full-year growth numbers, however there are raising questions about its sustainability.

Investors are advised to hold Boart Longyear at current levels.

Australian Agricultural Company (AAC). Recently Collected Wisdom looked at Graincorp, which is in the midst of a bumper crop season boosted by strong rains and a full export schedule. While technical price analysis and a hesitation over seasonality saw a hold recommendation for Graincorp, the newsletters firmly view AACo as a 'buy’.

The company seems to have been minimally impacted by last year’s live cattle export ban in the long term, and its strategy to build a meat processing facility in Darwin, which partly stemmed from that crisis, is well on track. The facility would shift the company’s reliance on outside processors and is aimed at increasing vertical integration and making the most of its dominant position in the cattle market.

One newsletter points out that while AACo might be prepared to take on the full cost of this facility, it would be better if it could find an investment partner given its already less-than-attractive debt-to-equity ratio above 50%.

Strong rains and favourable seasonal conditions have helped both AACo’s cotton business which is on track for a strong winter crop, and set up pasture and feed for the next few years for cattle.

Weight gains are looking positive, and total cattle sales by head should be both higher than FY11 and include live sales with a higher percentage of wagyu – which is more valuable. Global demand is holding up, and total herd numbers are expected to remain roughly where they were last year near 667,000.

Though this is a highly seasonal business, the agricultural sector is being viewed with increasing positivity by the investment press as global demand for food rises often regardless of other economic cycles. Rains and good crops have set AACo up for at least two years of strong growth, and potentially small dividends in the medium term.

Investors are advised to buy AACo at current levels.

Watching the directors

Some sizable sales dominated the movements of directors this week, with a big chunk of M2 Telecommunications (MTU) CEO Vaughan Bowen’s stake sold off. Bowen sold nearly a third of his stake in the company, or 2.5 million shares at $3.44 each – a total of just over $8.6 million. M2 most recently made headlines in April when it acquired Primus Telecom for about $190 million.

Another chief executive cashing in was James Hardie (JHX) CEO Louis Gries, who disposed of 308,818 shares in the building products company for $7.23 apiece, or a total of $3.32 million. James Hardie shares lifted by 2.2% today to $7.78, amid a broad market gain, as the company is reportedly looking to increase exposure to possible US housing recovery.

On the buying side, but staying in building products, Adelaide Brighton (ABC) non-executive director Raymond Barro picked up 1.2 million shares at just under $3 each, for a total consideration of $3,590,194. Barro now holds just under 30% of the company.

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