Collected Wisdom

Hold Telstra, Leighton and IAG, and buy ERA, 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.

Telstra (TLS). If there is a blue-chip stock on the ASX garnering more love than Telstra this year it is hiding very well indeed.

It seems that investors and the investment press alike have developed a liking for the major telco, following the NBN negotiations and the large multi-billion-dollar guaranteed free cash pipeline the government is bestowing on the company. With dividends strong and expected to rise, and potential for growth or even acquisition, the stock has become a stand-out in terms of both income and growth. It has consistently maintained a dividend yield more than 4% above the 10-year bond rate over the past 12 months and its share price is up 15.3% year-to-date against a flat market.

It is in this context that Telstra announced the sale of its New Zealand business, TelstraClear, last week for $NZ840 million, or about $A660 million. The sale itself was not entirely unexpected, but the price tag was several hundred million dollars above market expectations. The loss-making business, which did not have a mobile network, is a more logical fit for the buyer (Vodafone New Zealand), which has an established major mobile network. The deal is subject to regulatory approvals, and the cash is largely consolidated already on Telstra’s books, but the newsletters view it as a logical and sensible decision.

One also makes the point, worth mentioning, that the NZ business provided a useful 'training ground’ for Telstra executives – with no less an example than current CEO David Thodey, who came up through the business.

Back in Australia, there is some risk that a change in government could see parts of the $11 billion total compensation package unwound, if the NBN were discontinued and Telstra had to keep its copper network, but this is unlikely to actually lead to a net financial disadvantage.

Telstra was also boosted last week by a public statement denying it was interested in buying the debt-heavy Nine Network from CVC Equity (and the various hedge funds slowly picking away at that stake), amid suggestions it was interested in expanding into digital media. Instead, growth prospects appear to be focussed in mobile – where Telstra is well into developing Australia’s 4G capacity – and data. Finally, the tentative News Corp (NWS) bid for Consolidated Media Holdings (CMJ) would see News take a greater stake in Foxtel, up to 50%, but Telstra’s 50% stake would leave the Pay TV operator with two large, controlling, cash-heavy owners looking to extract growth and value.

As the share price is inflated ahead of August’s dividend, and the strong rally through the first half of the year, some see Telstra as too expensive at present, but it’s viewed very positively by the investment press.

  • Investors are advised to hold Telstra at current levels.

Leighton (LEI). Following a string of cost blow-outs and horror profit warnings last year, Leighton has been through particularly trying times in a generally difficult construction sector. With debt being reduced through sales, and a very strong order book in mining Australia, some of the highly uncertain outlook for the company is being offset – at least enough for the newsletters to hold on for now.

The latest move from the group has been the sale of Thiess Waste Management, which went for $218 million to German group Remondis. The amount was less than expected, with Leighton said to be looking for as high as $275 million. It’s the second major sale for the business in the past 12 months, after the $700 million HWE mining business was sold to BHP Billiton (BHP) late last year. Proceeds from the Thiess sale will go to reducing debt, according to the company, and the newsletters suggest Leighton has a range of non-core stakes which could be sold to further this debt-reduction program including interests in Sedgman (SDM) and Macmahon (MAH).

The Queensland Airport Link and the Victorian Desalination Plant continue to weigh on the company despite nearing completion. Cost blow-outs at these projects have seen profits take a dive, and final commissioning of each of them in the coming months will end a troubled period for the business.

Worse off is the Al Habtoor Group joint venture in the United Arab Emirates, which has been written down in value several times in the past four years and further write-downs are not out of the question.

If Leighton can turn its saleable assets into a stronger balance sheet, and competitively bid for the more profitable mining services contracts as well as clean up the expensive loose ends it’s trailing in Queensland, Victoria and the UAE, the company may return to form. It’s on the path toward doing that, and the investment press are holding on, with conservative expectations.

  • Investors are advised to hold Leighton at current levels.

Energy Resources of Australia (ERA). Uranium is a touch-and-go commodity to be mining, as well as a touchy subject politically in many parts of Australia, and much depends on the global nuclear sentiment. However, with solid rises in production reported, excellent underlying resources, and the first Japanese nuclear reactor coming back online following the Fukushima disaster, the newsletters like the prospects for Energy Resources.

Energy Resources, 70% controlled by Rio Tinto (RIO), operates the Ranger mine in the Northern Territory, and has extensive exploration under way in the surrounding areas with good drilling results.

Ranger is tapering off, however. While production for the second quarter rose 3%, and grades rose 9% with the expectation of higher grades through the second half, the mine should be more focussed on lower grades from FY13.

Rains have eased and, as the northern wet season gives way to drier weather, exploration is ramping up again. The bulk of spending is going on the Ranger 3 Deeps potential resource, and this looks promising for Energy Resources, but it also has a proven high-grade deposit at Jabiluka tied up in a dispute with traditional owners.

Energy Resources’ share price has been broadly flat through 2012, bottoming out after a steep decline last year due to the general reduction in nuclear energy sentiment following Fukushima. It has a good net cash balance, and great potential from exploration, but the company’s single operating mine does give a much higher risk profile. Investors willing to bear that risk, however, may find a company positioned to take advantage of some of Australia’s best uranium deposits.

  • Investors are advised to buy ERA at current levels.

IAG (IAG). Australia’s largest insurer is looking overseas for growth, and while the investment press sees potential in the large Asian middle class there are lingering concerns.

Asia is the focus of the latest push from IAG, and CEO Mike Williams said almost three quarters of a billion dollars had been invested in five countries with the aim of contributing 10% of gross written premiums by 2016. Asia currently contributes about 6%.

Large stakes have been built in developed Malaysian and Thai insurers, while smaller and more speculative investments have been made in China, India and Vietnam.

The newsletters are divided on whether a potential move into Indonesia, which IAG describes as having “very attractive” characteristics, is a good opportunity or an added risk. One cites IAG’s attempt to enter the UK market as a painful reminder of what can happen when overseas investments do not go to plan.

However, broadly, the strategy to move into Asia is viewed with caution though, not dismissal. The investments appear considered and prudent, if risky, but the growth potential from Asia is far, far greater than the mature markets locally. The strategy – including which countries/businesses perform better than others within the Asian strategy – will be something to watch in the coming years.

  • Investors are advised to hold IAG at current levels.

Watching the directors

The directors trading has been much quieter after some big moves last week. The biggest splash appears to have been from Globe Metals (GBE) managing director Mark Sumich, who sold 4.8 million shares in on- and off-market trades for a total of $651,713, or 13.5c per share. Globe’s share price has slipped more than 30% in the past three months, though it recently announced the acquisition of a graphite project in Malawi.

On the buying side, there were a couple of companies that saw a bit of director support. Resource Equipment (RQL) chairman John Saleeba led the charge paying $380,000 for 1 million shares in the company, as chief executive Jamie Cullen bought 150,000 shares – also for 38c each. Non-executive director William Ryan bought 38,552 shares for just over $15,000. Resource Equipment shares are flat for the past month, at 38c.

Also buying were directors at Nexus Energy (NXS), with chairman Michael Fowler picking up almost 1.5 million shares in two sets of purchases for 10.1c and 10.5c a share, for a total of just under $150,000. Deputy chairman Michael Arnett came later to the party, buying 600,000 for 10.75c each, and non-executive directors Steven Lowden and Ian Boserio also made appearances. The trades look good on paper so far, with Nexus’ share price closing almost 10% higher today at 11.5c as it pushed to accelerate work on the Crus gas field in WA’s Browse Basin.

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