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.

Southern Cross Media (SXL)

Back in October amid the most recent Alan Jones furore, the newsletters took a look at Macquarie Radio and called the stock a hold, or even a potential buying opportunity, as the profitable small cap attracted some temporary bad publicity. Now the radio rage has shifted to Southern Cross Austereo’s Sydney station 2Day FM – but the investment message is much the same.

The unfortunate aftermath of a prank phone call made by two presenters on the station has reverberated around the world, and drawn sharp criticism. All advertising was suspended until further notice as part of damage control from the station, and the share price naturally took a hit.

However the newsletters recognise that this, much like the suspension of advertising following previous radio scandals, is likely temporary and revenue – or, more importantly, the ability to generate revenue – is unlikely to be seriously affected. The main point for the business and investors is that 2Day FM remains the top breakfast radio station in Australia’s biggest city, and has been for five years.

The newsletters acknowledge things are not exactly great for advertising in general, with ad revenue down roughly 4% year-on-year nationally for the company, but this is an issue not unique to Southern Cross, nor totally un-cyclical.

On the television side of things, Southern Cross’ affiliation with Ten Network (TEN) is also of concern to the newsletters, but with changes to media ownership laws this could also lay the groundwork for an eventual takeover – by either party.

It’s a blip for the company, already struggling with several other weighty negative factors, but the newsletters maintain radio assets are the best of the media bunch at the moment – and Southern Cross has a strong stable of them regardless.

• Investors are advised to hold Southern Cross Media at current levels.

Rio Tinto (RIO)

Much of the investment focus has been away from the mining sector in recent months, after the sharp (but so far temporary) fall in the price of iron ore sent the mid-tier miners tumbling. At the same time quantitative easing around the world, and strong yields, have sent the banks and other similar stocks higher.

Behind all of this, however, are the big miners – and as with BHP several weeks ago (Collected Wisdom), the investment press remains firmly behind the prospects of Rio Tinto in both ongoing strength and growth. The company is diversified both geographically and across a range of resources, and with the general consensus being that China has and will stabilise its growth in the coming year near 7-8% there are still plenty of attractive aspects to Rio.

For the bulk commodities, the newsletters note iron ore and coking coal demand is expected to grow by 25% in the coming decade. This strong growth (while weaker than the past decade, it remains very positive) is set to be exacerbated by 40% growth in the seaborne iron ore trade as the costlier domestic supply comes under price pressure. That, of course, means there’s plenty of headwinds ahead price-wise for Rio as well, but with scale, diversity and a strong balance sheet this is expected to be acceptable.

Rio’s real positive story is in copper, as well as strong potential from aluminium assets and thermal coal. Prices will come under pressure here as well – copper is set to remain well off 2011 highs – but a gradual deflation here is not as problematic where growth should be strong.

The newsletters see cost management and capex reduction as foci for the near and medium term, and the dividend is expected to be sustained, though not grown, as these savings take effect. The share price pullback throughout 2012 of this world-class miner, with a wide array of valuable and profitable assets, may be the perfect chance to buy in.

• Investors are advised to buy Rio Tinto at current levels.

Coca-Cola Amatil (CCL)

There’s a rather unappetising drink that did the rounds for a while called a ‘diesel’ – beer mixed with coke. As Coca-Cola Amatil’s re-entry to the Australian beer market looms over the coming year, the prospects for investors from such a mix are much tastier.

The company released quite a significant trading update last week, which reflected how much activity is going on across the business but also disappointed with guidance.

Forecast net profit growth of 4-5% for 2012, before significant items, saw analysts reduce expectations with only a few weeks of the year to go. The SPC Ardmona canned food business underperformed, along with the New Zealand market, with these businesses collectively dragging down group earnings growth by 2% for the year.

Much more positive was news the company is acquiring bottling assets in Indonesia after San Miguel decided to sell out of the region. These include a high-speed PET bottling line, a 5,000 square metre warehouse and 100,000 square metres of land with ample room for expansion.

More good news comes from the signing of a long-term exclusive contract to distribute Rekorderlig – the wildly popular Swedish flavoured alcoholic cider – from 2014, and the Fiji Brewing business is moving quickly with new product launches there.

Earnings guidance did disappoint, and it has been a very strong year of share price growth for Coca-Cola Amatil, but the newsletters think there’s enough innovative action, with potential for real growth, in the mix to keep holding on.

• Investors are advised to hold Coca-Cola Amatil at current levels.

Carsales.com (CRZ)

A company benefitting greatly this year from the digital and online growth story, as well as Australia’s undeterred consumer appetite for cars, Carsales.com is rewarding shareholders along for the ride.

The business will enter the ranks of the S&P ASX100 at the end of the week, marking its ascent into the ranks of Australia’s largest companies and potentially putting further wind in its sails as larger investors are nudged to take a bigger look.

Carsales has had a stellar year on the bourse, with the share price increasing more than 60% in the year to date. The core to its success is the dominance of its market position – estimates give it more than three quarters of the online automotive market – and the reduced cost and asset nature of the business model.

Forward dividend yield consensus for 2013 is 3.6% even with that strong price rally, though forward price to earnings consensus is a premium 22x.

The newsletters assess that the biggest potential headwind for the company is competition, although most agree Carsales is fairly well protected. The revamped Carsguide website (owned by News Limited, publisher of Eureka Report), is seen as the major threat but has not significantly impacted on Carsales to date.

The newsletters also note Carsales’ expansion testing the waters of non-vehicle online sales. Already the business operates a range of sites for boat, caravan, bike and other vehicle sales, and online shopping and auction site Quicksales has plenty of room to add some upside surprise in the future.

It’s been a strong year for Carsales, and the share price has flattened out somewhat following the growth, but the newsletters see no reason to put the brakes on going into the new year.

• Investors are advised to hold Carsales.com at current levels.

JB Hi-Fi (JBH)

He knows when you are sleeping, he knows when you’re awake, he knows when consumer sentiment is on the way down, so watch out for goodness sake. Santa Claus is coming to town and the investment press think there may be coal in the stocking for a few retailers, including JB Hi-Fi.

Heading into the peak weeks of early December, JB Hi Fi announced the launch of its new ‘HOME’ stores – essentially home entertainment and audio-visual stores expanded to include whitegoods, appliances and other similar products. The “concept stores” will be four converted former Clive Anthonys stores in Queensland, with two more to come in the new year, which could be rolled out across other larger JB stores if successful.

The share price dropped roughly 7% immediately following the announcement, which indicates what investors thought of the idea of JB getting involved in one of the more noticeably struggling sectors of an already weak retail environment.

The investment press did find some good news – JB is the preferred outlet of consumers in most major electronic product categories, such as cameras, laptops and televisions, beating out Harvey Norman (HVN), Dick Smith and the Good Guys by a large margin. But those same consumers were planning to buy online next, and the key Westpac/Melbourne Institute consumer sentiment index released this week fell 4.1 points for December.

The newsletters note a recent rally in JB Hi-Fi shares, likely heading into a reasonable Christmas period, but the wider story is not as pretty and the view that conditions have not improved enough to warrant the rise. It may be time to cash it in.

• Investors are advised to sell JB Hi-Fi at current levels.

Watching the Directors

• Directors were showing some faith in the embattled Gindalbie Metals (GBG), covered last week in Collected Wisdom, with several adding to stakes with on-market purchases. Managing director Tim Netscher bought 100,000 shares at 24.5c each, and non-executive independent director Andrew Marshall bought the same amount, for the same price. Chairman George Jones bought half a million shares for just over 23c apiece earlier in the week, for a total of $116,000.
• On the selling side, philanthropist and Wotif (WTF) founder and director Graeme Wood shifted two million shares in the online business, for a total of $10.1 million. He sold the shares in three parcels for between $5.08 and $5.10 each, and still retains 43.8 million shares in the business. It follows the sale the week before of 178,500 shares by departing CEO Robert Cooke, for between $4.83 and $4.91 a share. Wotif closed today at $5.13.
• Also selling was Metcash (MTS) CEO Andrew Reitzer, who offloaded 873,941 shares for just shy of $3 million. Metcash shares have weakened considerably in the second half of the year, and are down 6% in the past month, to levels not seen since early 2005. The business has recently launched Value Depot, a rebranded chain aiming to compete with bulk discounter Costco.