Collected Wisdom

Buy Westpac, hold Cabcharge, Amcor and Transfield, and sell Flight Centre, 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.

Westpac (WBC)

The third and final of the big banks to report in the off-season rush (after NAB and ANZ in recent weeks), Westpac also looks to be the best for investors in many regards.

Cash earnings, the measure of profit banks insist is most relevant to them, grew 5% to $6.598 billion year-on-year, and 7% half-on-half, in spite of a rise in impairment charges in the second half due to lower institutional banking write-backs (about which the newsletters are, and the market seems to be, largely unconcerned). Moreover, dividends grew 6%, with the final dividend lifting 2c to 84c per share fully franked – meaning a total of $1.66 per share for the year and a yield of more than 6.5%.

The newsletters praise the bank, which took a risk last year re-launching the Bank of Melbourne brand and focussing on the domestic, particularly Victorian, markets. This stands in contrast to its peers NAB, which has been heavily weighed down by its foray into the UK, and ANZ, which is seeking growth from gradual expansion into Asia. The move has been positive, with 50,000 new customers, and the brand has performed well along with RAMS and St George – the latter two helped by growth in mortgages as the housing market ticks up again. It is not entirely without Asia exposure either, and staff numbers there grew by more than 25% off a small base.

Deposits grew 11%, ahead of the crowd, though lending grew just 4%. The retail and business banks were the strongest performers, with cash earnings up 12.5% to $2.1 billion, and despite an earnings slide from BT Financial the overall Australian Financial Services group performed well.

The main point the investment press stress in favour of the bank however, is the lack of loan problems. With good cost management, smaller staff numbers, and relative insulation from troubled assets, the newsletters see Westpac as one of the best options for exposure to the Australian banking sector – a sector they are firmly bullish on.

  • Investors are advised to buy Westpac at current levels.

Cabcharge (CAB)

Headwinds are blowing for Cabcharge, as the loss of some major New South Wales bus contracts adds to an already increasingly competitive taxi fare field. The newsletters recognise the problems are concerning, but tend to be remaining in the stock on the basis of its strong market position and multiple avenues to earnings growth.

Cabcharge has a partnership with a company called ComfortDelGro to operate a fleet of more than 1600 buses in NSW and Victoria, which contributes about 25% of Cabcharge’s underlying profit. Re-tendering for two NSW bus regions was unsuccessful, affecting up to 300 of those vehicles from September 2013, and the share price swiftly fell more than 20% last Wednesday and Thursday. A statement of ‘further details’ after the market closed on Wednesday indicating the extent of the impact was unhelpful in stemming the red.

The investment press explains that while the direct impact is small, it was both unexpected and worrying in light of another major upcoming tender and the apparent strength of competition. The newsletters argue there are serious risks ahead for a NSW region tender in 2013 and the more significant Hillsbus tender which covers an estimated 650 of the partnerships’ buses.

This adds to lists of headaches for the company, including an expensive driver bonus scheme to retain taxi business, a potential regulatory overhaul following the taxi review in Victoria, potential changes to laws around credit and debit card surcharges, and newcomers to the market both in payments, payment systems, and even taxi services (with entrants such as Uber, which has grown in popularity in the US). The positives remain a massive first-mover advantage, room to cut costs, and its strong position and resources giving it the potential to lever some of those possible new payments or systems.

The upcoming bus tenders should be closely watched by investors, but if it can retain the majority of them without giving away too much to NSW government cost-cutting, the newsletters think there’s enough of a profitable company here to hold on.

  • Investors are advised to hold Cabcharge at current levels.

Amcor (AMC)

The major re-alignment of Amcor’s businesses over the past few years appears to have been a success, and with guidance confirmed and the fiscal year starting well, the road ahead looks good for investors too.

The newsletters explain that Amcor is chugging along quietly, but solidly, after buying tobacco packaging, rigid plastics and beverage packaging businesses, as well as selling $1.2 billion of assets and reinvesting the roughly $600 million profits.

Now this phase is over, the investment press is looking ahead for what to expect, all the signs are pointing to more of the current steady performance. Amcor is attractively defensive, deriving 85% of revenue from the food, beverage, healthcare and tobacco sectors (healthcare and tobacco!). Consumer demand is quiet currently, making the steady first-quarter trading update all the more encouraging as the company is well-positioned for general economic improvement across the world.

The geographic diversity of the business is also appealing, and the newsletters note approximately 20% of sales are derived from emerging markets, including Eastern Europe and South America, while volumes are steady in the developed markets. Growth is also expected from the acquisition of Aperio Group with an expected $25 million in synergy benefits there.

The newsletters praise Amcor particularly for a strategy which reduces exposure to commoditisation and avoids competing purely on scale. In fact, on almost every level the newsletters see an attractive company promising reasonable stability, a defensive portfolio of exposures holding up to weak demand, and gradual growth prospects – they’re firmly holding on.

  • Investors are advised to hold Amcor at current levels.

Transfield (TSE)

There’s really no nice way for a resources investment boom to end, but to date it has been reasonably gentle on all but the most exposed iron ore minnows. Transfield, a widely diversified services company with interests in mining, energy, utilities and defence, among other things, is expecting things to slow down a little as a result, but nothing major. The newsletters generally agree and are holding on.

Guidance was recently confirmed for a net profit of $125-35 million, before amortisation, for fiscal 2013, though falling spending in exploration and infrastructure is acknowledged. The newsletters note that ongoing problems such as contract execution and senior management changes are still weighing on the company to a reasonable extent, however there are positive signs.

With a new CEO at the helm – AGL director and former Lihir Gold chief Graeme Hunt – the businesses is focussing on productivity and efficiency gains, and the investment press expects a new direction. While this will likely see a greater focus on the energy sector, a total review into the portfolio of businesses and the company’s structure will be completed by February next year and provide investors with greater clarity as to direction.

Net debt stands at roughly half a billion dollars, with a nearly 50% debt to equity ratio, but the investment press notes operating cash flow increased by almost half in 2012, and the company has the capacity to bring the debt down.

Overall, the newsletters consider that Transfield’s extensive experience, customer relationships and new focus and CEO will help continue to steer the ship in a stronger direction despite the weaker environment.

  • Investors are advised to hold Transfield at current levels.

Flight Centre (FLT)

One of the best stocks for consistent surprises to the upside over the past couple of years has been Flight Centre – a broadly bricks and mortar travel agent that has grown into an international presence in the UK and US with a seemingly successful online integration.

The share price has improved almost 70% over 2012, and there is potential dividend upside for investors and a history of delivering profit growth ahead of guidance, which is currently at 5-8%.

In spite of all this, and partly because of it, the newsletters and the market are becoming increasingly wary and the calls have turned to sell. The price is now the highest it has been since the beginning of 2008, and the company is sitting on a forward PE of roughly 12. The investment press notes short selling has risen sharply over the past year, from a short position total of about 5% to more than 12%.

Further to this, the foundations of its businesses seem shaky. Australian outbound international travel remains elevated, with low airfares, but domestic travel is weak. Two thirds of group EBIT comes from Australia, followed by the UK, but the implications for that if the Australian dollar depreciates – as it is widely expected to do – are negative.

With a forward dividend yield of less than 4%, the newsletters feel the payoffs from a peaky-looking share price and modest profit growth are not there. Adding to this the threat of the internet not only remains large, but almost always will for the company as it reduces barriers to entry and creates a constantly changing environment. Flight Centre, at the moment, is another company the newsletters are reasonably positive on in the medium-term, but are taking some short term profits anticipating a correction.

  • Investors are advised to sell Flight Centre at current levels.

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