Collected Wisdom

Buy Newcrest and Beach Energy, hold Navitas and Suncorp, and sell Goodman Fielder, 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.

Newcrest (NCM). Often thought of second to BHP and Rio, the other true Australian mining giant Newcrest also reported solid fourth-quarter production results alongside them, and the newsletters see an excellent company in a favourable commodity trading at a big discount.

The Newcrest share price has dived in 2012, dropping more than 30% in the past six months to below $24 as the gold price eased and the copper outlook weakened. Expectations of a lower long-term gold price are not helped by increased cost pressures at Newcrest, but cash costs of gold production are still only just above the $US600 an ounce mark – very favourable even if the gold price falls by a third or more as some predict.

Fourth-quarter production lifted more than 10% quarter-on-quarter, though it fell annually. A roughly 12% rise in the gold price achieved was partially offset by a 12.5% fall in the copper price, however copper production was up 14% for the quarter and grades were up 4.5% and 15% for the quarter and year-on-year respectively.

Headwinds for the company obviously include China’s demand, particularly for copper, and something many of the large miners are watching closely, as well as an uncertain outlook for gold. Uncertain is by no means totally gloomy, though, as the continuing financial tumult in Europe could drive the price higher again in the medium-term. Sovereign risk is also a concern – a Citi analyst made headlines last week saying 63% of Newcrest assets were in “very high” risk countries, compared with 14% for Rio and 1% for BHP.

However the investment press see some real upside for the share price in the second half of the coming fiscal year as some major projects are commissioned. The expansion of its Lihir mine is roughly 90% completed and the Cadia East project is apparently on schedule and close to budget. Some of the investment press also suggest the Wafi-Golpu feasibility study could provide a kind of “new discovery” boost to the share price.

With the potential for strong production upside through a range of projects and exploration, and the chance of another global gold surge if inflation picks up from stimulus measures, Newcrest – with a subdued share price – still seems like a relatively attractive stock to be in.

  • Investors are advised to buy Newcrest at current levels.

Beach Energy (BPT). Eureka readers may remember Beach Energy was one of Tim Treadgold’s shale stocks to watch several months ago (http://www.eurekareport.com.au/article/2012/6/1/mining-stocks/shale-set-blaze), and investors who have been watching would have noted a very impressive FY12 production report. The newsletters like this company, though they recognise it is not without some serious risks, and are anticipating a strong full-year financial result on the back of the report.

Oil and gas production for the year increased by 15% to beat guidance of 7.4 million barrels of oil equivalent, coming in at 7.5mmboe. Analysts were quick to upgrade earnings forecasts in light of the 26% sales volume increase for the quarter that came with the higher volumes and favourable sales levels despite a declining oil price. Sales revenue was up 6.4% for the quarter and 25% for the year. Added trucks, better condensate output, and more hours worked in the days helped the result, as did the timing of its shipments.

More importantly is the outlook for Beach, which is sitting on several very strong exploratory shale drilling results in the Cooper Basin as well. The newsletters see this as potentially leading to joint ventures with some energy majors.

However, they also warn that strong early production results from shale gas require significant work to develop to profitability.

If this can be done, and some of the company’s remaining large cash balance is put towards further development, Beach could soon be making waves in the energy world.

  • Investors are advised that Beach Energy is a high-risk buy.

Navitas (NVT). After a rough year for the tertiary education provider, the results are in and the market is not happy with its performance. The investment press had expected more from the company in both earnings and dividend, but are still giving it a grudging ‘pass’ grade for now.

Net profit fell 5.5% to $73.1 million, and earnings per share slid 10% as the number of shares on issue expanded. This result was in spite of revenue growth of 7% and operating cash flow increases of 5%.

Navitas paid out its full 19.5c earnings per share as dividend, though will pay out slightly less in future now, moving to an 80% target payout ratio from 100%.

The key issues were changes in tightening visa regulations for foreign students, which makes Australia less attractive for study, as well as the high dollar. Second semester enrolment for the local campuses was well short of expected gains of up to 15%, gaining 2%, although US enrolments were up 36%. While domestic education does constitute about 60% of enrolment, Navitas has significant student bodies offshore in North America (14%) and Asia and Africa (17%).

Earning from audio-visual college SAE, which Navitas bought last year, were better than the prior half,  but down $3 million or so from the year before. However the American SAE schools have secured a key government accreditation for student loans, so enrolment is expected to improve sharply there.

In all, the Australian higher education sector is still deeply desirable for foreign students, and while it may be moving through some logistical and reputational hiccups at the moment the foundations remain strong. If Navitas just applies itself in the coming year and works to its full potential, it could still graduate with honours.

  • Investors are advised to hold Navitas at current levels.

Suncorp (SUN). The newsletters have high hopes for Suncorp’s full-year results this year, after a spate of natural disasters last year subsided and the company outlined a promising plan for savings.

The key for the second half is that Australia has managed to avoid some of the larger natural disasters that have hit the insurer’s earnings in other periods. This, combined with rising premiums and new risk pricing systems, should see profits rise considerably.

Suncorp stock has been bouncing along a share price range of $7.50 to $10 for several years now, and has spent most of this year between $7.50 and $8.50, closing at the latter figure on Friday. There is some upside expected however if favourable weather conditions continue through the winter and a ‘simplification’ program announced last month delivers the planned $200 million in savings. The plan hopes to streamline systems and upgrade technology, as well as move to more variable costs, and along with several other programs could help boost the bottom line by up to 10%.

The banking division is also expected to perform well financially, although concerns are mounting on home loan arrears. However an $80 million-$220 million asset impairment earlier in the year as a result of some fairly large loans shook some confidence in the bank.

More than anything, though, the newsletters are keen to hold onto Suncorp because of its vast excess capital balance. Some form of special dividend is anticipated, possibly as early as the end of the year, with $1.2 billion surplus capital to regulatory requirements in 2011. While some of this may go to firming up capital standards for its insurance business, there are estimates more than 50c a share could be returned in the short to medium term, and the company has $600 million of franking credits available.

  • Investors are advised to hold Suncorp at current levels.

Goodman Fielder (GFF). As both major supermarkets posted strong quarterly sales numbers last week, amid falling prices for consumers, it was evident someone had to be losing out. That someone is Goodman Fielder.

Goodman announced its earnings would be impacted by $260-275 million of charges this year, as a result of reviews of its business and restructuring. $110 million is set to be written off the carrying value of its Australian and New Zealand baking business, and another $70-75 million will come from costs of bakery closures and redundancies.

There are a series of confluent events hurting Goodman at the moment, and together they dim the investment press’s belief in a possible rebound. Firstly, input prices are rising. Wheat and grain prices continue to soar after poor northern hemisphere crops and raw agriculture materials generally are becoming more costly. Secondly, consumer sentiment is weak and households are attentive to shopping budgets. Thirdly, at the same as all this supermarkets are pushing ahead with ‘home brand’ private label products at heavily reduced prices. For a company heavily reliant on branded, easily replicable products such as bread, milk, margarine and cooking oil – which have poor brand allegiance – this is a terrible combination of pressures.

Efficiencies and savings from the expensive restructure are expected to help, though, and the outlook for FY13 is better than this year, though still only on par with a fairly average FY11. Net profit is expected to be much weakened, after first-half profit came in 77% lower at just $21.5 million.

One positive for some shareholders is takeover potential, and plenty of analysts see it as a potential target following the current sale process of its edible oils and fats division, Integro. Singaporean group Wilmar, which owns 10% of Goodman, is rumoured to be interested in Integro, and the New Zealand milling business could also be on the chopping block.

However, the newsletters also note the hefty $1.6 billion of intangible assets that leave Goodman open to plenty of further write-downs unless the consumer cycle sharply changes direction in the near future.

  • Investors are advised to sell Goodman Fielder at current levels.

Watching the directors

In a very quiet week of director trading ahead of earnings season, there was little movement of note. Galaxy Resources (GXY) chief executive Kim-Seng “Iggy” Tan paid $114,250 for 224,019 shares in the company, or 51c each. The company announced late last month that it has achieved production of battery-grade lithium carbonate at its Jiangsu plant. Galaxy shares are up almost 13% since the announcement at 52.5c.

Axiom Mining (AVQ) managing director Ryan Mount was also in a buying mood, picking up more than 32.4 million shares for 0.6c each – or just over $200,000. Axiom is currently in a trading halt, announced this afternoon that it had several successful drilling results at its North Queensland operations.

Nigel Webb continued his sales of BCD Resources (BCD) shares, the 1c stock of the company best known for the Beaconsfield mine disaster. After offloading 70 million shares (see last week), he followed up selling just over 57 million shares for a total of about $570,000.

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