Collected Wisdom

Sell David Jones, buy Alumina, and hold Cochlear, WorleyParsons and GPT Group, the newsletters say.

Summary: Analysts rate David Jones a sell and Alumina a buy, while Cochlear, WorleyParsons and GPT Group are rated hold.
Key take out: CITIC taking a stake in Alumina should allow more cash to flow through to shareholders.
Key beneficiaries: General investors. Category: Portfolio management.

David Jones (DJS)

David Jones will be hoping to cash in on the recent rise in consumer sentiment but, with headwinds failing to ease, the newsletters aren’t convinced the retailer can win this uphill battle. Now’s the time to consider selling, the investment press says.

David Jones, like all retailers, has suffered a tough few years as consumers took a hiatus from shopping and confidence fell through the floor. While consumer sentiment has lifted considerably, with the Westpac-Melbourne Institute Monthly Index hitting 108.3 points in February (the highest reading since December 2010), for department stores like David Jones the underlying issues have gone nowhere.

The retailer has confirmed it is exiting the DVD, music and games category so it can focus on fashion and cosmetics, areas that deliver a higher margin. This was seen by the investment press as a logical move, but given it was such a small segment for David Jones it is unlikely to have any real impact anyway.

David Jones is facing increasing competition from online retailers, yet has failed to implement a forward-thinking strategy to bring online customers back. The retailer is trying to increase its customer base to include the 25 to 35 age group, but it’s hard to see how it will appeal to this group without embracing a better online presence.

David Jones has also signalled it will move away from attracting customers through discounting, with chief executive Paul Zahra saying that the focus will from now on be on improving the profitability of sales, and reducing “the depth and breadth of our promotional discounting events”

DJs may be an exclusive retailer focusing on serving the upper crust, but that doesn’t necessarily pay the bills at the end of the day. Moving away from discounting at a time when consumers are moving online to get better deals signals just how out of touch David Jones really is. In the long term, the headwinds are only likely to have an increasing impact on the retailer, the investment press says. Investors are advised to sell David Jones at current levels.

Alumina (AWC)

Shares in Alumina Ltd surged last week following the news that China’s government-owned CITIC has taken a 13% stake in the company. With alumina and bauxite prices tipped to rise on increasing demand from China, now is the time to look at buying into the company, the investment press says.

The $452 million placement had some analysts confused at first, as for most part they didn’t see any pressing need for a capital raising – the company’s net debt to equity sits at just 25%. But overall it was seen as a positive, with net debt set to fall by almost two-thirds, from $US681 million to $US216 million, and shareholders likely to benefit from more cash flowing through from Alcoa World Alumina and Chemicals (AWAC), in which Alumina has a 40% interest.

The terms of the placement mean CITIC can't increase its interest beyond 15% without the Alumina board’s approval for the next two years. After that, it can only move from 15% to a 19.9% stake on approval of the Foreign Investment Review Board.

Alumina has reasoned that its relationship with CITIC is a strategic one and that the company, although government owned, is run as a commercial operation and has valuable insights into the aluminium industry, the investment press says.

There’s no escaping the fact that the high Australian dollar and falling alumina prices have hit Alumina hard. The company swung to a loss of $US14.6 million ($A14.19 million) in the first half of 2012. Still, CITIC would likely have valuable knowledge and insight into future demand for alumina from China. All signs point to buy, the newsletters say.

  • Investors are advised to buy Alumina at current levels.

Cochlear (COH)

After its latest earnings results failed to cut the mustard, the heat is on for Cochlear. But is the hearing implant maker up to the challenge? The newsletters say hold onto the stock for now, but keep an ear to the ground for any further developments.

In the six months to December, revenue grew just 1% on the previous corresponding period, to $392 million. On a positive note, net profit after tax (NPAT) came in at $77.7 million, from a $20.4 million loss the previous year, which was largely due to it having to recall its defective CI500 implant. Excluding the impact of the product recall in the previous year, NPAT actually fell 3%.

Earnings per share softened 3% to $1.36, while the dividend payout increased 4% to $1.25 per share, 40% franked.

The good news for Cochlear is that the market recall doesn’t seem to have had a lasting impact on its market share. It is still the market leader in bionic ears, and its reputation as an innovator is intact - but for how long?

Cochlear currently spends 15% of total sales on research and development, but has indicated that it is looking at reducing this to 12%. As well as this, the lack of new product launches in the pipeline is a concern, the newsletters say. One source even notes that it has lost 5% of its market share to competitors in the past six months alone. Competitor Sonova has re-released a hearing implant following its own product recall, while Advanced Bionics is on the prowl for increased market share. At a time when the company has itself pointed to China’s growing affluence as a “huge potential market”, it seems hardly an ideal time to be cutting back on R&D.

Cochlear will have to up its game if it wants to stay top dog, but with solid long-term growth prospects, the investment press is giving it the benefit of the doubt.

  • Investors are advised to hold Cochlear at current levels.

WorleyParsons (WOR)

WorleyParsons may have caused the worrywarts a bit of distress with its latest results, but the possibility of a growing dividend stream and a decent long-term growth outlook have the newsletters convinced this is a good one to hold on to.

WorleyParsons has just reported first-half earnings, coming in with a net profit of $155.1 million for the six months to December, a tiddly 2.1% increase on the previous corresponding period. This is despite revenue rising 33.7% to $4.4 billion. It seems the company grew its revenue mostly in its procurement services, where it makes no margin.

On a more positive note, cash flows rose sharply to $124.6 million, and net debt to equity remained at a modest 25%. One source notes that this, combined with its capex requirements, means there is a decent chance of a growing dividend stream in the future. This time around, WorleyParsons confirmed an interim dividend of 41.5 cents per share, fully franked.

Volatile commodity prices – especially iron ore – remain a concern, but the group has reiterated its positive outlook and expects growth in FY13. Its focus on building global relationships will further strengthen its competitive advantage, while analysts expect it to perform well in the oil and gas sector in the coming years.

All of this leads the newsletters to believe WorleyParsons is a safe bet for those looking for a long-term investment.

  • Investors are advised to hold WorleyParsons at current levels.

GPT Group (GPT)

GPT Group’s strategy to move away from retail and instead concentrate on office and commercial real estate doesn’t sit well with some analysts. In spite of this, the newsletters believe the group’s performance earns it a hold recommendation for now.

For the full year, GPT Group more than doubled its net profit due to an increase in the value of its property portfolio, jumping to $594.5 million from $246.2 million in 2011. The company says it is “cautiously optimistic” for the coming year, and will use developments, acquisitions and its wholesale funds business to achieve growth.

Still, the group’s decision to focus on office and commercial property in favour of retail is seen by some as a move in the wrong direction, with one source believing it would make more sense to reverse this decision, since office supply is tipped to exceed demand in the coming years.

Nonetheless, the latest figures are hard to argue with, as rising asset values resulted in a better than expected net profit. Dividend-wise, GPT will pay investors a cash distribution of 19.3 cents per share, up from 17.8 cents last year.

The investment press says GPT is a hold at current levels, and while its strategy is a concern, there’s no need to be overly anxious just yet.

  • Investors are advised to hold GPT Group at current levels.

Watching the Directors

  • Geoffrey Cousins, a non-executive board member of Telstra, spent a pretty penny doubling his holding in the telco following its latest earnings release. On the board for the past six years, Cousins bought 50,000 shares for $232,750. Meanwhile, Nora Scheinkestel, also a non-executive board member, went a little lighter on her wallet, buying 4,315 shares for $20,022.
  • Directors in engineering group Coffey International most certainly look to have faith in the company’s plans to deliver earnings growth, with five of the seven-member board buying up a combined 326,031 shares for $129,554 last week. Following the company’s announcement that profit had fallen 21% in the first half, managing director John Douglas (who himself bought 100,000 shares) remarked that the business turnaround was “very much on track”.
  • Elsewhere, Jennifer Hill-Ling, chairman of Hills Holdings, splurged $100,747 for 100,000 shares in the company after it reported a $73.6 million after-tax loss in the first half of fiscal 2013.

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