Collected Wisdom

This week we look at Flight Centre, IOOF Holdings, Breville, Duet Group and PanAust.

Summary: The newsletters think more growth is in store for Flight Centre despite the challenges it faces from subdued consumer demand and they are more bullish on IOOF in response to its comforting full-year results. Elsewhere, the disturbing trends in Breville’s US business have analysts concerned, while Duet’s cash generation could fall short of forecasts, harming future dividends. Meanwhile, bidding tension could erupt over PanAust after it opened a data room for its suitors, potentially resulting in a higher takeover offer.

Key take-out: Flight Centre could beat its conservative guidance in 2014-15 and is in a good position for strong top-line growth in the years ahead, newsletters say.

Key beneficiaries: General investors. Category: Shares.

This is an edited summary of the Australian investment press: It includes investment newsletters, major daily newspapers and broker reports. The recommendations offered represent the views published in the other publications and may not represent those of Eureka Report. This article is general advice only which has been prepared without taking into account your objectives, financial situation or needs. Before acting on it you should consider its appropriateness, having regard to your objectives, financial situation and needs.

Flight Centre (FLT)

Most newsletters believe Flight Centre still offers compelling top-line growth despite facing a relatively tough market in 2014-15.

The travel services company said it expects its relatively flat performance to persist in the first half of this financial year before picking up in the second half amid what it describes as “the golden era of travel” for consumers.

“While we cannot predict a timeframe for full recovery, our experience shows that short-term downturns are often followed by healthy uplifts in demand as Australian leisure travellers get itchy feet,” said managing director Graham Turner.

Flight Centre anticipates an underlying profit before tax of $395-405 million for 2014-15 – representing 5-8% growth on the previous year.

The guidance reflects ongoing issues from 2013-14, where there was a slump in consumer confidence in response to the federal budget. Underlying PBT last financial year, which was pre-released in July, lifted by 9.7% to $376.5 million, with total transaction value up 12.6% to $16 billion.

Following the results the investment press are divided between calling Flight Centre a buy or a hold, however, more advise their clients to buy the stock at current levels. Subdued consumer confidence is likely to linger in 2014-15, but management’s guidance may still be conservative, several sources say.

Other newsletters less convinced about Flight Centre beating guidance say that, if investors are prepared to look past 2014-15, the company’s valuation is still undemanding given the growth potential from its international business and its ongoing focus on acquisitions.

Along with the results Flight Centre announced the purchase of UK-based Topdeck Tours, a group which caters to young travellers.

Analysts on average forecast the stock to climb 10.7% to $51.91 in the next 12 months. Combined with a forecast fully-franked dividend of 5.3% in 2014-15, that’s a potential total return of 16%.

* According to our value investor partners, StocksInValue, the intrinsic value for Flight Centre is under review. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to buy Flight Centre at current levels.

IOOF Holdings (IFL)

Earnings growth momentum and a high payout ratio should help IOOF Holdings provide healthy returns to its shareholders in the near term, most newsletters say.

Their outlooks come after the financial services company posted comforting full-year results. Underlying net income increased 13% to $123 million, in line with expectations, while the final dividend jumped 11% to 25 cents a share – above what analysts had pencilled in for the period.

“IOOF’s increased scale following the acquisition of SFG Australia in early August creates opportunities for the group and accelerates our ability for future growth,” said managing director Christopher Kelaher.

Shares in the company lifted 5.6% to $9.45 on the day (22 August, 2014) – their biggest one-day rise in exactly three years.

The last time Collected Wisdom covered IOOF in May after the acquisition of SFG Australia (when the stock traded at $8.52) most newsletters rated the stock a buy, with two sources upgrading their recommendations on the news.

Following the company’s full-year results, two more newsletters have upgraded their recommendations and there is more consensus to buy the stock.

Analysts say the acquisition of SFG Australia propels earnings-per-share growth in the near-term. IOOF is excellent at realising cost synergies across its acquisitions, they say, adding credence to management’s target of at least $20 million in savings by 2015-16.

Like IOOF, SFG Australia provides wealth management services; however, its clients are generally high net-worth individuals.

Higher earnings growth should allow IOOF to pay out dividends at the top end of its guidance range, sources say. Analysts forecast a grossed-up yield of 7.7% in 2014-15 and 8.7% in 2015-16.

Across what is a fully-valued wealth management sector, IOOF offers investors more defensive profits than pure-play fund managers and twice the earnings growth of AMP, said one source which upgraded its recommendation to buy.

* According to our value investor partners, StocksInValue, the intrinsic value for IOOF Holdings is under review. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to buy IOOF Holdings at current levels.

Breville (BRG)

Shares in Breville Group plummeted to their lowest level in a year when the home appliance manufacturer shocked investors with a steep fall in earnings from its North American division and the sudden departure of global chief executive Jack Lord.

The overall earnings were in line with expectations and company guidance, with net profit falling 1.9% to $48.8 million during 2013-14. But headline figures masked disturbing trends in the second half, where juicer sales in the US were lower.

The stock dropped 18.8% to $7.10 in response to the news.

“The group, in the face of several key challenges, has delivered a result largely filling the gap created by the end of the majority of the Keurig distribution arrangement,” said chairman Steven Fisher.

But the majority newsletters are concerned about the near-term earnings outlook in the US after the end of the agreement with Keurig and the likelihood that juicer sales decline further. The juicer category had been one of the company’s explosive growth segments in recent years, rising to represent around 25% of Breville’s total revenue.

Lord’s unexpected resignation has also compounded negative sentiment, newsletters say, as he had been well-regarded in his five years with the company and two as chief executive.

After two analysts downgraded their recommendations in response to the results, consensus is to hold the stock as – even after the fall – it still trades at a premium to the market with a price-earnings multiple of 17.8 times.

But while the North American division poses problems going forward, newsletters were impressed by the result in the rest of the world (ROW) and they expect this trend to continue.

Newsletters are also more supportive of the company’s long-term strategy. Net cash of $47 million helps to make up a strong balance sheet, and its focus on premium products in the mid to upper market categories should continue to promote earnings growth.

* According to our value investor partners, StocksInValue, the intrinsic value for Breville Group is $6.15. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Breville Group at current levels.

Duet Group (DUE)

The investment press are divided about whether Duet Group can sustain its future distributions following its full-year results.

Duet, which owns a number of infrastructure assets including the Dampier to Bunbury Pipeline (DBP), United Energy (UED) and Multinet Gas (MNG), posted full-year results roughly in line with analyst forecasts.

Proportionate revenue fell 2% to $829 million and earnings before interest, tax, depreciation and amortisation (EBITDA) slipped 1% to $599 million.

“In addition to a solid set of results, we recently successfully recontracted the majority of the firm full standard contracts at DBP,” said chief executive David Bartholomew. “This important achievement provides greater revenue certainty for the group through to 2021.”

But several newsletters expect cash generation to fall short of forecasts, potentially harming future distributions.

One newsletter downgraded its recommendation to sell on the grounds that a distribution gap is emerging – there isn’t enough free cash to pay out staple holders – with concerns over DBP’s level of debt after S&P downgraded its outlook to negative from stable.

The source says that based on proportion cash earnings per share, the 2013-14 distribution was 88% covered. Because the higher distribution of 17.5 cents per security offsets the growth in cash flow, the source expects coverage to remain below 90% in 2014-15.

Other newsletters acknowledge debt is an issue, considering the ratio of funds from operations (FFO) to net debt is less than 5%, but think it should improve over time from operations.

At current levels most of the investment press call Duet Group a hold. At current levels it trades at an enterprise value to regulated asset base (RAB) of 1.25 times, which is reasonably compared to its peers, one source says.

The stock is also a takeover candidate after Spark Infrastructure (SKI) bought a 14% stake in the company earlier this year, sources highlight.

* According to our value investor partners, StocksInValue, the intrinsic value for Duet Group is under review. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Duet Group at current levels.

PanAust (PNA)

Newsletters are split between advising to buy PanAust shares or hold them after the copper-gold miner posted its half-year results.

In a result which had been well-flagged in advance, first-half net earnings fell 25% to $US 28.1 million despite revenue rising 3.8% to $338.5 million, as increased copper sales mostly offset lower commodity prices.

Managing director Gary Stafford said PanAust’s operations should perform better in the second half and that the company is on track to meet full-year production guidance of between 65,000 and 70,000 tonnes of copper in concentrate and between 160,000 and 165,000 ounces of gold.

The last time Collected Wisdom covered PanAust in early May newsletters were almost unanimous in advising to buy the stock. A large number still do as they believe the company could beat its full-year production guidance and, in turn, beat EBITDA guidance for between $200 million and $225 million.

While discussions with Guandong Rising Assets Management (GRAM) are continuing after its rejected $2.30 offer price, a higher takeover bid is likely, newsletters say. PanAust’s move to open up a data room to allow interested parties to undertake due diligence should elicit some bidding tension, one newsletter says.

Suitors are now more able to appropriately gauge the value of PanAust since the company’s acquisition of the Frieda River project in Papua New Guinea was completed last week (August 25, 2014) – making more data available, another newsletter says.

But after the stock has risen more than 50% to $2.33 amid the takeover speculation, most analysts now call it a hold. Current share price levels reflect the short reserve life of PanAust’s mines (of about 10 years) and production costs which don’t ensure returns on invested capital will be better than the cost of capital.

* According to our value investor partners, StocksInValue, the intrinsic value for PanAust is $1.10. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold PanAust at current levels.

Directors’ trades

  • Chairman Christopher Morris and his sister, non-executive director Penelope Maclagan, sold out of almost $9 million worth of Computer shares this week. Morris offloaded $6,555,679 worth of shares in the share registry company at $12.203 a share, while Maclagan netted $2,197,538 from selling shares at $12.209 each.
  • Elsewhere, it was pay day for BHP directors with several selling a number of newly vested shares. The biggest seller was Jimmy Wilson, president of the iron ore division, who traded 106,111 shares for a total value of $4,062,949.
  • On the buying side, Pat Regan, new chief financial officer of QBE Insurance, spent $1,336,516 on 118,960 shares at $11.235 each in the company.
Takeover Action August 26-September 1, 2014
DateTargetASXBidder(%)Notes
26/08/2014Ambassador Oil and GasAQODrillsearch Energy84.18
10/06/2014Ambassador Oil and GasAQOMagnum Hunter Resources Corporation0.00
21/08/2014Australand Property GroupALZFrasers Centrepoint96.07
21/08/2014Bullabulling GoldBABNorton Gold Fields86.24
04/08/2014Cape AluminaCBXMetroCoal57.00
28/07/2014Clinuvel PharmaceuticalsCUVRetrophin6.70
21/08/2014EnvestraENVCheung Kong Group96.59
11/08/2014Iron Ore HoldingsIOHBC Iron0.00
18/08/2014Genesis ResourcesGESBlumont Group5.81
21/07/2014Gondwana ResourcesGDAOchre Group Holdings18.23
29/08/2014Kresta HoldingsKRSNingbo Xianfeng New Material Co85.38Closed
25/08/2014Merlin DiamondsMEDBlumont Group13.19
28/08/2014Nido PetroleumNDOBCP Energy International25.75
25/08/2014Reef Casino TrustRCTAquis Casino Acquisitions 79.23
14/08/2014Robust ResourcesROLStanhill Capital Partners Holdings & Droxford International46.60Potential joint offer
04/08/2014Roc Oil CompanyROCFosun International0.00
22/08/2014Strategic Minerals CorporationSMCQGold66.51Closed
Scheme of Arrangement
02/07/2014Goodman FielderGFFWilmar International and First Pacific Company10.10Vote November
28/08/2014Intrepid MinesIAUBlackthorn Resources0.00Vote November
03/06/2014Papillon ResourcesPIRB2Gold Corp0.00Vote September
07/07/2014Wotif.com HoldingsWTFExpedia Group19.90Vote September
Foreshadowed Offers
21/07/2014Antares EnergyAZZUnnamed party0.00Indicative proposal
28/05/2014Australand Property GroupALZStockland19.90Increased final proposal
04/06/2014Crowe Horwath AustralasiaCRHFindex Australia0.00Scheme proposal
08/08/2014Gondwana ResourcesGDAUnnamed party0.00Indicative proposal
13/05/2014PanAustPNAGuangdong Rising Assets Management23.00Indicative proposal
26/05/2014SAI GlobalSAIPacific Equity Partners0.00Indicative scheme proposal
02/06/2014SAI GlobalSAIUnnamed parties0.00Expressions of interest
07/07/2014Ten Network HoldingsTENPrivate equity firms0.00Media speculation
04/08/2014Treasury Wine EstatesTWEKohlberg Kravis Roberts & Co and Rhone Capital0.00Revised scheme proposal
11/08/2014Treasury Wine EstatesTWEUnnamed party0.00Indicative scheme proposal
01/09/2014Wilson HTM Investment GroupWIGShaw Stockbroking0.00Discussions ended
25/06/2014WorleyParsonsWORUnnamed party0.00Media speculation

         Source: Newsbites