Collected Wisdom

Buy BHP Billiton and Independence Group, hold Tabcorp and Goodman Group, and sell Aquarius Platinum, 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.

Tabcorp (TAH). It’s the end of one era for Tabcorp and the beginning of another, as non-renewal of the company’s Victorian gaming licence sees a movement away from pokies and towards wagering. The newsletters aren’t overly concerned by the change, however, and it seems there are still plenty of reasons to hold onto the stock.

Full-year results were solid when reported last week. Net profit gained almost 13% to $340 million with some of the strongest performances in the continuing businesses of wagering and keno. Operating revenue from wagering was up 4.4% for the year, compared with 3.1% across the company, and there was strong growth in the computer-simulated racing business Trackside – with revenue up 66% to $82.3 million. Keno revenue was up 8%, and is aggressively expanding into Victoria with more than 600 venues in addition to over 2,800 venues in NSW and Queensland.

The loss of the pokies duopoly, with Tatts, will be a significant hit for the company – about 40% of total EBITDA this year – but there are three factors helping to offset this. First, Tabcorp plans to start a new business, Tabcorp Gaming Solutions, using its experience to provide services such as regulatory assistance and marketing to pokies venue operators and recover about a fifth of the lost earnings. Second, a legal challenge to the Victorian government is on the cards if, as expected, the original licence fee is not refunded when it expires this week (August 16). This is by no means certain to happen, and Tabcorp would by no means be assured of winning if it did, but a successful recovery of almost $700 million would add roughly 80c to the share price. Finally, the company spun off its casino division last year, Echo Entertainment, and the two leaner companies are both viewed as potential takeover targets.

In all, it is a very difficult and uncertain period for Tabcorp. The investment press has high hopes for the wagering side of the business, and sees reasonable strength in the other avenues the business is developing to make up for the loss of the Victorian gaming licence. It is not without some risk, but the odds of some growth aren’t too long for Tabcorp.

  • Investors are advised to hold Tabcorp at current levels.

BHP Billiton (BHP). The massive headline-grabbing write-downs on BHP’s American shale assets, as well its Australian nickel business, should not distract investors too much from the generally world-class collection of resources this company is sitting on and their long-term potential.

The big number was $US2.8 billion – the impairment on the carrying value of Fayetteville shale gas assets bought last year. However at least one analyst takes serious issue with the accounting treatment, given the Petrohawk Energy assets are not affected despite the actual gas being the same product. Moreso, when the gas price rises again, the asset will more than likely be written back up, distorting headline profit once again.

The real question hanging over BHP is less about the value of its gas investments, which was a long-term buy into a good quality area, but the development of the $30 billion Olympic Dam mine in South Australia and whether or not it will go ahead and when. This, and the expansion of the outer harbour at Port Hedland, are major developments and are currently under pressure from falling commodities prices and fears of a broader demand slowdown.

The company, and the investment press, do believe the long-term demand for many of BHP’s core assets is still firmly in place. Whether Olympic Dam or the harbour expansion go ahead now, down the line, or whenever it’s economic, the fact remains that BHP has the assets, the cash, and the ability to quickly ramp them up. The stock has underperformed the ASX S&P200 this year by more than 10% and the share price has fallen 15% in the past year. For a company expecting very impressive, albeit reduced, profit figures later this month it looks like as strong a ‘buy’ as it’s ever been, and cheaper for serious long-term investors to boot.

  • Investors are advised to buy BHP at current levels.

Independence Group (IGO). Staying on the topic of BHP for the moment, things also look reasonably good at Independence Group, a Western Australian nickel miner which sells concentrate to BHP. As well as the shale hit, the big Australian wrote $430 million off its Nickel West operations. But Independence is positive on the future of the nickel industry and despite forecasts of slightly lower near-term earning the newsletters still broadly agree this company could perform well.

Independence operates the Long and Jaguar nickel mines, the latter coming from the acquisition of Jabiru Metals last year. While not exactly a boon for the company, as Jaguar has struggled to meet targets for production and the nickel price remains very low, the acquisition has introduced copper exposure for the miner.

The main positive in the pipeline for the company is the Tropicana gold resource, which is expected to begin production in late 2013. This is a negative at the moment, as construction costs and the associated risk will cost Independence in the short term, but there is a reasonable argument to be made that gold is a promising asset to be moving into in the medium term.

Managing director Chris Bonwick says he’s positive on the long-term nickel future, and that BHP, its main customer, had not notified of any change despite the write-down. Production results for the fourth quarter were also solid, and the Long mine performed particularly well, so the business appears to be performing well operationally.

There is also reasonable exploration upside, and when the bulk of Tropicana’s costly construction is complete the investment press expects Independence’s strong history of significant exploration success to resume. In all, it’s a risky play but has good exposure to a range of some of the better-looking hard commodities. Improvements in both price and production in the coming 12-18 months should see it move increasingly in the right direction.

  • Investors are advised Independence is a high-risk buy at current levels.

Goodman Group (GMG). The warehouse property manager and developer Goodman had a solid year, with net profit rising 4.2% and underlying profit up 21%, but the really good news is in future expansion overseas.

Guidance for the coming fiscal year was given as 13% underlying profit growth, and chief executive Greg Goodman said the company was expanding its presence offshore. Currently Australia contributes roughly 60% of earnings, but this is expected to trend closer to 50% in coming years as it enters the US market as well as ongoing activity in China and Japan.

The Goodman North American Partnership (GNAP) is looking at logistics investments in major US east and west coast transport hubs in a 55-45 split with Canadian Pension Plan Investment Board. Exposure to the UK and Europe is expected to remain weak for the near to medium term, and Goodman is expected to limit its presence in the UK where it is economic. The deal with CPPIB adds to several other pension plan partnerships Goodman has in Asia and the Netherlands, a trend it is expected to continue with due to the attractiveness of high-yielding industrial property. The company is also establishing a presence in South America, with due diligence being undertaken in Brazil.

Full-year unfranked dividends totalled 18c, and this is expected to rise by a cent or so in coming years. If earnings growth materialises along the lines of current guidance, it looks like a solid year ahead for the company with modest growth and diversified offshore development.

  • Investors are advised to hold Goodman Group at current levels.

Aquarius Platinum (AQP). It has been a bad week for Aquarius, and a worse week if you were unlucky enough to be a shareholder, after the company followed up news of further fatal violence from labour disputes at one of its mines with a $US158 million loss for the full year.

Aquarius, which has four mines in Africa and is listed on four different exchanges in Australia, South Africa, the US and the UK, massively extended its $US10 million loss of last year and its share price is down more than 75% for the year to date.

Platinum group metals (that is platinum as well as some similar transition metals like palladium and iridium) prices have fallen 7% and are well off 2008 peaks, and most of the company’s mines are unprofitable.

Aquarius estimated 2,800 tonnes of production was lost at the Kroondal mine in South Africa at the start of August when former employees attacked a shaft killing three people and wounding 20, a result of ongoing labour disputes. The incident serves to further highlight the elevated sovereign risk of Aquarius’ mines, where eight people died in fiscal 2012, and the location of the company’s only profitable mine in Zimbabwe only serves to heighten this.

Tax risk, infrastructure provision, labour disputes and safety stoppages all paint an ugly picture for the miner, but more than anything negative operating cash flow in three of the past four years tells the story. Suspension of some mines will see production fall by an estimated 30% to 40% in the coming year, and the proposed nationalisation of part of the Zimbabwean Mimosa mine adds further negative outlook.

This is a company that simply cannot continue to be viable in the longer term in its current position, and a rapidly mounting $125 million of net debt will only add pressure. Comments from British analysts also backed the view locally that, despite the massive price fall, there was plenty of room to for the company’s shares to fall further. If for some reason you are still holding onto Aquarius, hoping for a turnaround, it’s hard to see why.

  • Investors are advised to sell Aquarius at current levels.

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