Collected Wisdom

Buy IOOF Holdings, hold Seek, Adelaide Brighton and Woodside, and sell Gindalbie Metals, 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.

IOOF Holdings (IFL)

The lower and middle end of the financial services sector in Australia has continued to consolidate since the last time Collected Wisdom looked at IOOF back in June. Having bid for Plan B (PLB) successfully in the interim, the newsletters are of the view it was a prudent and well-timed purchase, and continue to see IOOF as a gem of the industry maintaining plenty of upside.

Eureka takeovers writer Tom Elliott names IOOF as one of his key players in the space at the moment, both as a buyer and a target. With the Plan B deal finalised in October (at a relatively impressive 11-times trailing earnings), the newsletters expect and immediate earnings boost, growing to a 4% lift from 2014 as the transition smooths.

But M&A is far from the only story with IOOF, or even the main one for investors to note. Funds under management, administration and supervision (FUMAS) continued a recent general upward trend in the September quarter, increasing 3.2%. The rising stock market pushed up funds under management and administration (FUMA) almost $3.5 billion higher, and FUMA gained 5.1% in the quarter.

On a technical level, the stock has broken out in a positive direction by some analysis, and after trading roughly inside a $5-6 range for much of the year has seen a lift in recent weeks to $6.76 at today’s close.

The newsletters see real upside in IOOF, in an improving equity market, a softening of movement toward defensive assets, and benefits from both its acquisitions at the smaller end of the space and the potential for it to be picked up by one of the financial services majors in the near-medium term.

  • Investors are advised to buy IOOF at current levels.

Seek (SEK)

As Australians head off for their summer holidays, many will be contemplating a job change during the course of 2013. When they do take to looking for a job, it’s highly probable they will start their search online. And, with a 70% share of the Australian online jobs market, it stands to reason that Seek will be the main internet portal for those in the employment hunt.

Seek’s revenue is driven almost entirely through recruitment firms and companies advertising for employees, and company revenue and profitability have been rising thanks to the resilience of the Australian employment market and the company’s aggressive international expansion strategy.

Seek not only remains the dominant online force in the domestic online employment advertising market, but it now holds the number one online market positions in Brazil, Mexico, Indonesia, Hong Kong, Singapore, Thailand, Malaysia and the Philippines. It also holds second position in China.

In the current year, Seek has been averaging around 140,000 jobs being advertised on its Australian site per week. That compares with around 25,000 jobs per week advertised on the Fairfax Media-owned jobsite MyCareer, and around 38,000 on the News Ltd site CareerOne.

In the latest financial year, Seek reported a 29% lift in revenue to a record $442.3 million, with earnings jumping 35% to $131.7 million. Earnings per share rose from 29c to 39.1c, and the group’s dividend was lifted from 7.5c to 9c a share. But after a strong run-up from around $5.90 in August to a peak above $7.20 in October, Seek shares have since dipped back and are currently trading around $6.50.

With the outlook for Australian jobs mixed, any major downturn in employment levels would have a direct impact on the company’s bottom line. That’s not a concern for the newsletters though, and they point to more upside in the share price over time. Seek shares closed today at $6.785.

  • Investors are advised to hold Seek at current levels.

Adelaide Brighton (ABC)

When Collected Wisdom thinks of lime and clinkers, it’s usually in the form of those green-coloured chocolate-coated candies. But the nation’s largest lime producer and second-largest concrete and clinker (essentially lumps of cement) supplier comes a close second. With Adelaide Brighton announcing a stake in a Malaysian cement business last week, the newsletters see evidence of the changing landscape towards imports in the cement industry – and securing supply adds to the case for holding onto the company.

Adelaide Brighton acquired a 30% stake in Aalborg Portland Malaysia for $28.5 million, and while the deal looks fairly small, it comprises a 180,000 tonne kiln capacity per annum, a roughly 200,000 tonne per annum grinding mill and a packaging plant.

It secures the company white clinker supply from there for 10 years, and with imported clinker estimated to account for 40% of Adelaide Brighton’s total by 2016 this is a useful development. Already the company is Australia’s major cement importer, and the view is that the most efficient way forward is to balance cheap imports with local production where viable.

The newsletters also note the company has recently confirmed some supply agreements with major customers through to 2014, and become the sole lime supplier to a major alumina business.

More generally, exposure to infrastructure and resources construction poses some headwinds for the company given a broadly hypothesised end to the mining investment boom, but green shoots in housing are a positive sign.

  • Investors are advised to hold Adelaide Brighton at current levels.

Woodside (WPL)

Collected Wisdom last looked at Woodside Petroleum in September, following a 2% fall in the oil and gas group’s first-half net profit to US$812 million due to increased costs and volume reductions. However, operating cash flow improved over the period, and underlying profit actually increased by 4.5%.

Woodside is a company on a growth path, and in addition to its major resources projects already under way on the North-West Shelf of Western Australia, there are plenty of other developments in the pipeline. The massive $15 billion Pluto LNG development in WA is a prime example, which is underpinned by 15-year sales agreements with Kansai Electric and Tokyo Gas and set to come on stream over the next decade. It promises to be another major money spinner for Woodside, delivering long-term returns to shareholders.

But the news doesn’t stop there. Earlier this month Woodside confirmed that, after extensive negotiations, it had agreed to pay US$696 million for a 30% interest in Israel’s Leviathan gas field – the biggest global discovery in 2010 – to develop an LNG operation there. The Leviathan Joint Venture participants, Noble Energy Mediterranean Ltd., Delek Drilling LP, Avner Oil Exploration LP and Ratio Oil Exploration (1992) LP, have reached agreement with Woodside on the key commercial terms under which Woodside will acquire a participating interest in each of the 349/Rachel and 350/Amit petroleum licences, which contain the 17 trillion cubic feet Leviathan field.

Many see the move as a positive for Woodside, as the price to be paid by the company is lower than forecast by some analysts. However, there are also concerns the project is located in a high-risk region, and will encounter environmental and political opposition.

Woodside shares have drifted lower, from a peak of $36 to a current trading level $33.88. However, they have gained some ground over the past few weeks, and there is every indication that its shares should build momentum based on existing projects and as Leviathan moves closer to production phase. Offsetting this is the overhang of the 23% stake held by Woodside’s biggest shareholder, Shell, and some believe the Israeli deal could prompt the oil giant to accelerate its sell-down of Woodside shares – a process it began two years ago.

  • Investors are advised to hold Woodside at current levels.

Gindalbie Metals (GBG)

The mid-tier iron ore sector has really been hit hard in 2012, and it comes as something of a sad but unsurprising note that Gindalbie has gone through a capital raising.

Unlike larger Western Australian iron ore players, Gindalbie is undiversified and its major asset is a 50% stake in the Karara iron ore project in the mid-west region. Trading at roughly 30c, Gindalbie placed $40 million of stock at 26c a share with institutional and sophisticated investors, and another $22 million with Ansteel at the same price. Shares on issue increased by just over 20%.

Once an attractive stock, as a key plank of the mid-west ‘second iron ore district’ strategy, the investment press has now given up on the company as costs rise, the iron ore story fades at the margin and Gindalbie’s balance sheet has been shown up.

The newsletters paint an ugly cost picture for the company. Despite some higher-grade and more easily processed magnetite iron ore expected to fetch a 15% price premium, on average costs are expected to be roughly US$120 a tonne with a break-even point of US$110 for the iron ore price if the dollar stays at current levels.

The ongoing slow-motion wreck of the vaunted Oakajee deep water port, which Gindalbie had planned to export through, does not help the longer-term prospects and vision for the company either, as hopes of major Chinese investment in the region to counter the dominance of the Pilbara fade.

Gindalbie is also selling its Lodestone iron ore project, magnetite deposit, but the newsletters hold little hope of achieving a decent price any time soon, pointing to high development costs, low recent similar sales, and the fact that Gindalbie would be best placed as the owner anyway – if they don’t want it then it’s hard to see who else would.

Despite once holding some hope for the company, the iron ore market has turned and Gindalbie is feeling the brunt. Retail investors may feel burned by the recent dilutive raising, but there may still be more downside to come for this high-risk play.

  • Investors are advised to sell Gindalbie at current levels.

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