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.
James Hardie (JHX) Last week’s jobs numbers in the US were very strong, with the unemployment rate dropping below 8% for the first time since the global financial crisis. Even considering margins of error, the numbers add up to growing signs of a more general recovery in the world’s largest economy – and that means property as well. It’s not without some risk, but the newsletters generally prefer James Hardie for exposure to this recovery, and are calling a ‘buy’.
First quarter results were encouraging, with underlying profit and sales each improving roughly 10% and both the Europe and US fibre cements sales divisions lifting even further. Those segments lifted sales by 15% and the outlook for the US housing market is for a moderately paced improvement from here.
The Australian side of things was weaker for the business, as housing approvals slipped and sales subsequently decreased 7%. However a further cut in the official cash rate from the Reserve Bank last week, and expectations a further 25 basis points could be cut by the end of the year, provides some upside – as does the ongoing statistical housing shortage.
Some of the investment press view the company as a little pricey, and it has rallied strongly – with the share price improving more than a third this year. However James Hardie has growing US market share, technological advantage, sound management and, most importantly, underlying conditions in its main markets that are either improving – or at least no longer deteriorating.
- Investors are advised to buy James Hardie at current levels.
Leighton (LEI) After a very weak and disappointing couple of years for investors, those still holding the stock are seeing some positive signs. The latest two come from the planned sale of its communications infrastructure businesses and re-affirmed profit guidance.
The company’s net debt-to-equity ratio is above 66%, and that excludes some off-balance sheet items, and has blown out more than half a billion dollars this year as a result of its well-publicised problems with the Brisbane Airport Link and Victorian Desalination Plant projects. After selling Thiess Waste Management several months ago (see Collected Wisdom), the potential sale of Nextgen Networks (an NBN contractor), Metronode and Infoplex businesses would continue the shedding of non-core assets to pay down debt. The newsletters estimate proceeds from the sale to be between $500-750 million, which could see net debt reduced to less than $1 billion – under 40% – once any sale is completed.
Underlying profit guidance for fiscal 2012, which ends for Leighton in December, has been maintained at $400-450 million. The year should also hopefully see the completion of the desalination plant, which has led to more than $600 million in losses, although the completion of the remaining 5% or so of that project without further cost overruns should not be taken as a given considering the project’s history.
In spite of the iron ore price tumult, Leighton also signed a major iron ore mining and operations contract with Fortescue Metals Group (FMG) last month, worth $1.5 billion over five years, as well as two other mining services contracts. Losses stemming from the United Arab Emirates business Al-Habtoor Leighton could be a continuing problem for Leighton, the newsletters warn, with further writedowns expected, but they are firmly holding on with some much more positive signs ahead.
- Investors are advised to hold Leighton at current levels.
Newcrest (NCM) Of the listed gold exposure in Australia, Newcrest remains the newsletters’ favoured play because of its size, stability, track record, diversity and reasonable costs. With gold back in favour recently, little has changed and the view of the stock remains positive.
A sticking point for Newcrest in the past has been rising cost pressure. Both the costs of contractors, and the higher-than-expected production and improvement expenses from the somewhat messy Lihir takeover, meant that while the gold price was subdued the company’s margins were less favourable.
However the newsletters note there have been important changes – not only is the gold price on the rise again, back near $US1,800 an ounce, but the pricing power has shifted back in favour of the miners over the contractors as resources projects everywhere are canned and the boom dries up. The market has reflected this, with the share price up 10% in the past month, but it remains well off historical levels and below where it started the year.
At the end of September Newcrest joined the growing list of companies issuing corporate bonds in the US, raising $1 billion with 10-year and 30-year notes at 4.2% and 5.75%. This represents a relatively cheap funding opportunity for the company, and the money will be used to refinance existing unsecured debt.
The Wafi-Golpu gold and copper resource is considered to be an extremely high-class undeveloped asset, which gives Newcrest significant future upside. And though capital costs could be high, supply and demand dynamics of both minerals looks favourable for prices in the long term. Newcrest remains a firm recommendation from the investment press for gold and resources exposure.
- Investors are advised to buy Newcrest at current levels.
Mineral Resources (MIN) On the other side of the resources coin are those now-disadvantaged mining services providers mentioned above. Mineral Resources is heavily exposed to iron ore and manganese mining, and while it does still offer some value the newsletters consider it to be overpriced given the current environment and outlook.
The company’s main source of earnings is its ore crushing and screening business, which it derives largely from Fortescue Metals (FMG) and Rio Tinto (RIO). Roughly a third of revenue comes from Fortescue, and therein lies a major risk – that its chief sources of income are increasingly looking to bring services in-house to save money. While total iron ore volumes are expected to remain high, even growing, in Australia – as the widely reported slowdown is more focused in investment and expansion – there’s a real risk price and cost dynamics will curb the amount of ore that passes through Mineral Resources.
Making matters worse, the company has developed its own mines, the largest in WA’s up-and-coming but higher-cost Mid West region, and produced 3.8 million tonnes of iron ore in fiscal 2012. This leaves the company doubly exposed to iron ore price weakness.
Mineral Resources’ share price has lifted more than 13% in the past month, rising back above $8, and many of the downsides are possible risks, rather than crystalised negative events. There is a reasonably good dividend yield on offer, more than 6% before franking credits are taken into account, which does help floor the share price a little. However, considering its position and the generally expected outlook for mining services companies’ bargaining position in the post-boom era, the newsletters are selling out of Mineral Resources at these relatively strong prices.
- Investors are advised to sell Mineral Resources at current levels.
Oil Search (OSH) Oil Search has had an average year, and a relatively expensive one, but the newsletters note this is expected to be the top of the hill for its Papua New Guinea development costs and production is about to take off.
First gas from the company’s PNG LNG interest is expected in 2014, and is running on schedule, and Oil Search is in full construction flight. As well as this, exploration continues with several major drilling operations turning up promising results.
First half results were released roughly six weeks ago now, but are worth touching upon. Net profit fell 6% to $107.5 million, as production fell 8% and total oil and gas sales held flat. This production decline reversed direction in the year, however, and is expected to hold flat or rise slightly in the lead up to 2014.
Net debt is quite high, at $1.5 billion, and Oil Search spent almost a billion dollars this year on development – so that’s some costly searching. But investors don’t have to look far to find the long-term value and upside in this company, and with plenty of exploration upside to boot.
- Investors are advised to hold Oil Search at current levels.
Watching the Directors
BHP Billiton (BHP) directors cashed in en masse last week, with chief executive Marius Kloppers leading the way. Kloppers sold 157,913 shares in total, 59,913 of those in London for £19.13 apiece and the remainder here for $33.52 each, and exercised some long-term incentives. The sale meant an estimated payout of more than $5 million in total for Kloppers, but he wasn’t the only one selling. Also picking up free performance shares, and selling some on market, were CFO Graham Kerr (selling 21,591 at $33.41), ferrous and coal chief executive Marcus Randolph (145,000 at $33.41), nickel and aluminium chief executive Alberto Calderon (116,027 in London for £19.63 each), petroleum chief executive J. Michael Yeager (80,350 at $33.41) and chief public affairs officer Karen Wood (60,000 at $33.53). Alright for some, then, particularly those who picked up an extra 10c on market, but all sold above where BHP closed today, slipping slightly to $33.25.
Carsales.com (CRZ) chairman Walter Pisciotta continued to sell stock. After shifting just shy of $15 million of indirectly-held stock a fortnight ago, or 10% of his stake, Pisciotta this week sold a further $9.2 million of stock owned indirectly – or a total of 1,180,042 shares over four days for an average price of $7.79. Carsales.com shares dropped almost 4% today, to close at $7.64, though it remains up more than 60% year to date.
Also selling was IOOF (IFL) non-executive director Ian Griffiths, who pocketed more than half a million from the sale of 95,000 shares in the financial services business. Griffiths sold at an average of $5.79 a share over two days, and retains 3.2 million shares in the company, which last traded today at $5.82.
Finally, Nicholas Politis continues to buy up automotive sales group AP Eagers (APE) shares, grabbing a further 185,000 shares over two days last week for a total of $703,000 or $3.80 apiece. It’s more than he had to pay last week, when he bought 5,658 shares for $3.70 each, and more than in June when he picked up a million shares at $3.55 each. Politis, through his company WFM Motors, now owns close to 61.4 million shares in AP Eagers, or roughly 37% of the company.