Collected Wisdom

This week we look at ResMed, G8 Education, AMP, AGL Energy and Domino's Pizza Enterprises.

Summary: Most newsletters see more good news ahead for ResMed after the sleep apnoea device maker beat analyst forecasts in its first-quarter report, while they are almost unanimous in their belief that childcare centre operator G8 Education’s acquisition strategy will reap more benefits. For 2014-15 softer equity markets may restrict AMP’s growth, weather is likely to be the key swing factor for AGL Energy and future earnings will truly have to be astounding to send Domino’s Pizza Enterprises share price higher, analysts say.

Key take-out: ResMed shares remain a “buy” for most analysts as new product launches propel the company’s revenue in the year ahead.

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.

ResMed (RMD)

Shares in ResMed jumped the most in nearly two years last week when the company’s first-quarter revenue beat analyst forecasts.

Sales for the three months to September 30 lifted 6% to $380.4 million – above consensus forecasts for $375.1 million – compared to the previous year. Revenue outside the US was largely responsible for the beat, growing 11% to $173.2 million, while its 3% increase within the US was in line.

Net income climbed 3% to $83.3 million for the period, also in line with analyst estimates

“We had a successful start to fiscal year 2015, as new products launches drove revenue growth,” said chief executive Mick Farrell.

Indeed, the last time Collected Wisdom covered ResMed in August – when the stock traded at $5.23 – the investment press were overwhelmingly bullish on the sleep apnoea device maker because of its impending product launches, particularly the “Airsense 10” flow generator platform.

After rising 6.5% to $5.72 on the impressive result, ResMed shares remain a “buy” for the majority of newsletters, though there are several “holds” with one publication downgrading its recommendation.

Several analysts say the Airsense 10 sales are more robust than they had envisaged and will continue to ramp up for the rest of the year. Further, the “Aircurve 10” bilevel machine is expected in the second quarter and will add even more growth, they say.

On the other hand mask sales were weak, which is concerning as ResMed requires high margins and repeat business, one analyst says. Within the US this is difficult due to the government’s competitive bidding policy. Introduced in mid-2013, it forced ResMed to drop its prices in line with competitors.

But others say the first quarter may not have properly represented the trend of mask sales. Once masks are bundled together with the Airsense 10, sales should improve, they say.

  • Investors are generally advised to buy ResMed at current levels.

G8 Education (GEM)

G8 Education is capturing value for its shareholders by acquiring childcare centres at low earnings multiples and raising equity at high multiples, according to newsletters.

The childcare centre operator announced late last month (October 22, 2014) it purchased 20 centres for $37 million. The acquisitions add to the tally of 115 centres bought in the first half of this year.

A private placement funded the purchases. G8 Education raised $100 million at a 4.5% discount to its trading price of $5.14 before going into a trading halt.

Newsletters call G8 Education a “buy” after the acquisitions, except for one publication which downgraded its recommendation to “sell”.

The newsletters bullish on G8 Education believe the company’s consolidation strategy is successful and more growth awaits. They highlight the stores are immediately earnings accretive, with 17 representing around four times their forward earnings before interest and tax (EBIT) and the other three at 6.2 times.

Even with the slightly dilutive placement, one analyst estimates the combined effect will be 2.3% accretive. The extra funding also recharges the balance sheet, providing flexibility and capacity to continue the acquisition strategy.

But the publication which downgraded its call says while the consolidation model is working for now, it relies too heavily on the market keeping its faith. This is asking too much and can’t justify G8 Education’s trailing price-earnings multiple of 40 times, the analyst says.

On top of that, the source thinks G8 Education’s recent entry into the S&P/ASX 100 index will impact valuation, it may not be able to keep acquiring centres so cheaply and that debt funding remains a challenge.

Most newsletters, however, believe the highly fragmented market offers many more opportunities to expand through purchases. While they continue to screen for evidence of increasing multiples, they respect management’s discipline so far.

Analysts have a 12-month target price of $6.25 on the stock, 25% above current levels.

  • Investors are generally advised to buy G8 Education at current levels.


Newsletters are mixed over AMP after the financial services group provided a strong third quarter update for 2014.

AMP revealed net cash flows for the quarter were $476 million in its wealth management division, more than doubling cash flows the same time last year, and that it retained more policyholders in life insurance – a segment which had been struggling.

“Our current products are performing well, the focus on Asia continues to deliver results and the performance of our insurance business is in line with guidance,” said chief executive Craig Meller.

Shares in AMP jumped 3.2% to $5.56 on the news and another 2.5% the day after. At these levels, most newsletters say the stock represents fair value even with the improved performance and rate it as a “hold”.

AMP’s wrap investment platform North was largely responsible for the 1.3% increase in assets under management, newsletters note, offsetting weakness elsewhere in wealth management. The star division saw $1.5 billion head its way, with most coming into its pension module.

But even with North, improving trends in life insurance, as well as good growth in the SMSF division, most newsletters can’t see the share price lifting much higher. Softer equity markets during 2014-15 will restrict EPS gains, they say.

Others think differently. One newsletter which upgraded its recommendation says earnings have found a floor and that AMP trades below its historical premium of 15% to the market on a price-earnings basis. With positive news flow ahead the stock should lift, according to the analyst.

* According to our value investor partners, StocksInValue, the intrinsic value for AMP is $3.97. To find out more visit

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

AGL Energy (AGK)

Weather will be a key swing factor for AGL Energy’s earnings in 2014-15, say newsletters.

That’s what most investment publications can at least agree on, with their outlook for the gas and electricity company divided following its AGM late last month (October 23, 2014).

AGL announced earnings guidance of $575 million to $635 million for 2014-15, which includes a $156 million one-off charge from its recent acquisition of Macquarie Generation in September this year.

Newsletters are almost evenly split between rating the stock a “buy” or “hold”, with more calling it a “hold” at current levels.

The majority of analysts believe the electricity industry will remain under pressure with lower demand and generation oversupply. They note guidance was below consensus expectations of around $637 million, reflecting the impact of the carbon tax repeal and the closure of AGL’s Kurnell LPG plant.

Record warm winter last year had reduced customer demand, they say. While conditions in July and August were more encouraging, the weather during the incoming summer and winter next year is a big risk to earnings.

But other analysts believe 2014-15 earnings per share represent a low point and that the stock appears to be under value after falling 9.4% to $13.63 this year.

Given AGL has a fixed-cost base, it is leveraged to an increase in electricity and gas prices – which two analysts say are set to improve between 2014-15 and 2015-16. Further, since AGL is the largest electricity generator, it is best positioned as coal supply contracts expire – leading to higher equilibrium prices.

* According to our value investor partners, StocksInValue, the intrinsic value for AGL Energy is $11.21. To find out more visit

  • Investors are generally advised to hold AGL Energy at current levels.

Domino’s Pizza Enterprises (DMP)

Shares in Domino’s Pizza Enterprises slipped last week despite the market darling announcing a surprise profit upgrade at its AGM.

The company now expects underlying net profit to grow 25% in 2014-15 thanks to positive momentum across the business in the first quarter, particularly from its Australian and New Zealand operations. This compares with its previous guidance for up to 20% growth.

“While we remain cautious with eight months of trading ahead, we are confident of continuing the current momentum,” said chief executive Don Meij.

Following the update newsletters all describe Domino’s as a high quality business that deserves to trade at a premium to the market, but they disagree over to what extent that should be.

The stock appears to be priced to more than perfection – falling 8.5% over two days after the announcement. Even with the latest fall, however, it has soared more than 65% this year and trades at a trailing price-earnings (P/E) multiple of around 40 times.

Most newsletters either rate Domino’s as a “buy” or “hold”, with only one publication calling it a “sell”. Consensus at these share price levels is to “hold” the stock.

Analysts who believe the stock is still undervalued believe guidance is too conservative as flows should increase substantially from franchisee repayments – which they highlight is typically 100% recouped within three years. The new store roll-out target of between 175 to 185 stores was reiterated by management.

And while the P/E multiple causes them concern, it also opens up more doors for potentially accretive acquisitions, they say.

But the majority of analysts think the positive medium-to-long-term outlook is factored into the share price.

* According to our value investor partners, StocksInValue, the intrinsic value for Domino’s Pizza Enterprises is $11.72. To find out more visit

  • Investors are generally advised to hold Domino’s Pizza Enterprises at current levels.

Directors’ trades

  • Director trading was heavily skewed to the sellers this week, thanks to two directors of Shine Corporate. Managing director Simon Morrison and non-executive director Stephen Roche netted $20,000,000 each in the plaintiff litigator at $2.50 per share.
  • Elsewhere, Liberato Petango sold $7,478,402 in New-Zealand based company Infratil. Petango is the chief investment officer of HRL Morrison & Co, which manages the dual-listed infrastructure investment company.
  • On the buying front, Magellan Financial co-founder and chief executive, Hamish Douglas, traded $1,903,445 for 149,291 shares in the investment funds management business at $12.75 per share.

Takeover Action October 28-November 3, 2014

20/10/2014Cape AluminaCBXMetroCoal76.00
09/09/2014Clinuvel PharmaceuticalsCUVRetrophin7.80
18/08/2014Genesis ResourcesGESBlumont Group5.81
04/09/2014Gondwana ResourcesGDAOchre Group Holdings18.23
25/08/2014Merlin DiamondsMEDBlumont Group13.19
28/10/2014Mutiny GoldMYGDoray Minerals18.68
25/09/2014Neon EnergyNENEvoworld Corporation19.99Unsolicited proportional bid
31/10/2014Noni BNBLAlceon Group64.75
15/10/2014Reef Casino TrustRCTAquis Casino Acquisitions 81.31
30/10/2014Robust ResourcesROLStanhill Capital Partners & Droxford International96.78Compulsory acquisition
31/10/2014Roc Oil CompanyROCFosun International65.00
Schemes of Arrangement
06/10/2014Crowe Horwath AustralasiaCRHFindex Australia0.00Vote December
08/09/2014Goodman FielderGFFWilmar International and First Pacific Company10.10Vote Q1, 2015
28/08/2014Intrepid MinesIAUBlackthorn Resources0.00Vote November
Foreshadowed Offers
24/10/2014Amcom TelecommunicationsAMMVocus Communications10.00Non-binding proposal
21/07/2014Antares EnergyAZZUnnamed party0.00Indicative proposal
22/10/2014Central PetroleumCTPUnnamed party0.00Speculation due to director share purchases
08/08/2014Gondwana ResourcesGDAUnnamed party0.00Indicative proposal
25/09/2014Guildford CoalGUFSino Construction0.00Intends to make bid
13/10/2014Orbis GoldOBSSEMAFO0.00Indicative proposal
13/05/2014PanAustPNAGuangdong Rising Assets Management23.00Indicative proposal
07/07/2014Ten Network HoldingsTENPrivate equity firms0.00Media speculation
20/10/2014Transfield ServicesTSEFerrovial Servicios0.00Indicative proposal
25/06/2014WorleyParsonsWORUnnamed party0.00Media speculation
Source: Newsbites

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