Collected Wisdom

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.

National Australia Bank (NAB)

Chief executive Cameron Clyne once again faced up to investors and media last week to bemoan the troubles of NAB’s British businesses. However, in spite of renewed confirmation of the dog the bank wishes it could let off its leash in the mother country, the newsletters still like the look of bank for investors – at least those with a longer-term perspective.

Cash earnings, the banks’ preferred measure of profit, came in 0.5% lower at $5.43 billion for the year as guidance had indicated. But a flat result there belied that reported net profit fell 22% to $4.08 billion while second-half cash earnings were down 6.7% on the corresponding 2011 half.

The real kick came from the UK division, which lost £139 million ($215 million) in the year as a result of higher funding costs and a £335 million lift in bad and doubtful debts. Then there was the $250 million in topped-up ‘provisioning’, set aside for further expected problems.

Riding out the woes of Yorkshire and Clydesdale banks won’t be a quick and painless investor experience, but given the rising core earnings and dividend yields on offer, as well as plenty of share price headroom,  the newsletters think it’s worth it in the long run.

• Investors are advised that NAB is a long-term buy at current levels.

Virgin Australia (VAH)

Readers who are not yet familiar with Warren Buffett’s famous advice regarding the pain of owning airline stocks must be living on the investment equivalent of a remote outback station. A station like those Virgin may soon service through its bid for regional carrier Skywest (SXR). Buffett’s home-spun wisdom aside, the newsletters like the direction Virgin is flying, and suggest investors should hold on for now.

Virgin was the talk of the skies last week, after announcing the $95 million cash and scrip takeover offer, as well as the purchase of 60% of Singapore-listed Tiger Airways’ Australian division and a $105 million placement to Singaporean-government-owned Singapore Airlines.

The strategy in the move is two-pronged. With Tiger, Virgin can compete on low-fare routes with Qantas offshoot Jetstar while Skywest (with which Virgin already has codeshare agreements and a reasonably developed relationship, including holding about 10% of the stock in convertible notes) would provide access to the Western Australian Pilbara Fly-In Fly-Out work.

Virgin has been on the up-and-up lately, with the share price rallying more than 70% in the year to date, as it both returned to profit and saw rival Qantas swing to a loss. Qantas’ underperforming international division remains a serious drag on the flying kangaroo, while Virgin has developed a viable business-class challenger, upgraded its airport lounge and frequent flyer programs, and now offers such relative ‘perks’ like meals and beverages on longer domestic flights. These were all previously strictly Qantas selling points, and with some careful acquisitions and continued erosion of the lucrative domestic business customers Virgin looks more like a serious airline (rather than a cut-price upstart) by the day. Airlines are volatile, and things can turn quickly, but for now they’re turning in Virgin’s favour.

• Investors are advised to hold Virgin Australia at current levels.

Westfield (WDC)

There were a couple of asset sales confirmed for Westfield last week, but the main development to note was the large restructure with AMP Capital and Westfield Retail Trust (WRT). With capital released from some property expected to pay down expensive debt, the newsletters like the move and are sticking with the property giant.

Westfield will pocket $200 million from the deal, in which AMP is taking full ownership of three formerly-joint venture malls in Perth, Sydney and the Gold Coast. In return Westfield has increased its stake in four other sites, including Knox City in Melbourne and Mt Gravatt in Brisbane.

The other move from the company was the sale of its interest in a UK development while securing the rights to manage the centre after completion.

The newsletters see the collective moves as a pathway to an increased development pipeline over the medium term and the higher returns that go with that activity compared to direct ownership. Also notable for investors is Westfield’s costs of funding, which are falling in the low-interest rate environment. Average borrowing costs fell to 5.2% in 2011, from 5.4% the year before, and are expected to fall again in 2012 as hundreds of millions of dollars are refinanced at much lower rates – benefits that will flow through the loan tenures of roughly a decade.

The company also apparently escaped damage from Hurricane Sandy in the US last week, and said retail conditions and leasing demand in America were both strong.

Westfield confirmed its guidance for the year in Friday’s third-quarter trading update for funds from operations (FFO) of 65c a share, and 49.5c a share distributions. Its global portfolio at the end of September was 97.7% leased, and the newsletters see some further share price upside from an on-market buyback and a stronger yield than immediate competitors – all compelling reasons to keep holding the company as it shifts its stance for the future.

• Investors are advised to hold Westfield at current levels.

Ramsay Healthcare (RHC)

Is there such a thing as too much of a good thing? When it comes to Ramsay Healthcare’s share price rise, the newsletters think so.

Ramsay is the largest private hospital group in Australia, and has seen strong earnings growth both over the year to date and the past decade – in which it has averaged 16% annual growth. It’s been a great ride for investors too, as Ramsay’s share price has gained more than 20% this year, more than doubled since 2008, and improved more than 500% in the past decade, with barely a blip over the global financial crisis.

However, several things are worrying the investment press, the first of which is the combination of 17.7 consensus forward PE estimates, with an estimated dividend yield over the same period of just 2.9%. Coupled with some technical analysis suggesting the stock could be in for a downward turn, the newsletters thinks Ramsay is now an acceptable company at an unacceptable price.

To this view is added the federal government’s broader attitude toward the private health insurance rebate, which took a hit in the recent Mid-Year Economic Fiscal Outlook (MYEFO) budget update. As the government saves money by changing the way it calculates the rebate and considers premiums (and charges extra for those who didn’t take out private health insurance before the age of 30 on an increasing sliding scale) the cost of private health will rise. As it does, there may be indirect headwinds for Ramsay, though the newsletters point out this is not easily quantifiable at this time and will depend on consumer behaviour.

The bottom line is that health and hospitals are a decent investment prospect, but there are profits to be taken from Ramsay at the current price.

• Investors are advised to sell Ramsay at current levels.

Blackmores (BKL)

From health to pseudo-health, the vitamin and supplements business Blackmores has reported a big jump in sales for the first quarter. Despite high costs, and some concerning trends, with pleasing levels of sales growth and a strong brand presence the investment press thinks the stock is worth holding.

Sales for the first quarter jumped 27.7% to more than $85 million, which included the acquisition of the BioCeuticals group, but CEO Christine Holgate said the sales quarter would have been a record for the group even without its contribution.

The problem for the company is turning that into profits, and EBIT for the quarter fell 1.1% in spite of the strong sales. Net profit was close to flat on the corresponding period, up 0.2% to $7.8 million, and the newsletters consider that the last two quarters of good sales growth without bottom line benefits is worrying.

Asian sales are considered to be strong, and with new products continuing to be launched in China there is plenty of upside for the business there. The BioCeuticals practitioner-only business enhances the diversity of the group, and the newsletters expect it will help to combat price pressure from dominant supermarket retailers, the Chemist Warehouse chain, and competitive pressure from Swisse.

The positives for Blackmores are growing sales and an ageing population, while headwinds include competition, cost pressure and a very high debt-to-equity ratio with refinancing risk in 2014. The positive story continues for now, and if sales can stay this healthy going forward it’s good news for portfolio fitness.

• Investors are advised to hold Blackmores at current levels.

Watching the Directors

Wine grape season may still be some months away, but buying season is well and truly afoot on the Treasury Wine Estates (TWE) board. Four directors have boosted their stake – so far – with non-executive director Garry Hounsell leading the way buying 30,000 shares at $4.875 apiece, or roughly $146,000, quadrupling his holding. Non-executive independent director Lyndsey Cattermole lifted her holding by 18,218 shares for $4.93 each. Chairman Paul Rayner bought a total of 8000 shares over a couple of days for just under $40,000 and non-executive director Michael Cheek then bought 10,000 shares for just shy of $50,000.

On the selling side, digital and television pre-media company Wellcom’s (WLL) executive chairman Wayne Sidwell sold 2 million shares in an off-market trade. He moved the stake at $2.85 a share, or $5.7 million, at the end of October, and TOWER Asset Management was announced as a new substantial shareholder from that date with 5.46% of the company.

Also selling, Guinness Peat (GPG) non-executive director Sir Ron Brierley pocketed roughly $2.28 million after shifting 5 million shares in the London-based company at $NZ0.57 and $NZ0.58 in two parcels. Brierley retains 2.89% of the investment holding company.

Finally, one man feeling a sting to the hip pocket this Melbourne Cup week is Fantastic Holdings (FAN) managing director Julian Tertini, who disposed of 10 million shares – or 9.73% of the company – off-market “in connection with a family law settlement”. Yaquina Pty Ltd, with its director Judith Tertini, comes onto the register with a notice of substantial holding. That takes a tidy $28.5 million off Mr Tertini’s worth on paper, at $2.85 a share – hopefully a lot more than the rest of us will lose this Spring racing season.