Collected Wisdom

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.

Aristocrat Leisure (ALL)

Newsletters agree Aristocrat Leisure commands an enticing growth profile after the poker machine maker's full-year results, but they are divided about how much of it is priced into the stock.

As newsletters had forecast earlier this year, Aristocrat Leisure enjoyed a strong second half, propelling the company's net profit by 10% to $118 million for the 12 months to September 30. Revenue lifted 6.9% to $870.3 million.

“We expect to see a significant lift in the percentage of total revenues that are recurring in nature, as we integrate VGT and continue to grow recurring revenues in our Class III and digital businesses over the course of 2015,” said chief executive Jamie Odell.

While Aristocrat has surged 23% since Collected Wisdom last covered it as a “buy” in June this year, the majority of newsletters remain optimistic about the stock. For the most part recommendations are split between “buys” and “holds”, though one call was downgraded on the latest update.

The newsletter that cut its rating remains attracted to the company's investment case of long-term growth in global gaming markets, relatively high barriers to entry, leverage to improving US consumer trends and the recent acquisition of VGT, which was completed in October.

However, Aristocrat's impressive growth trajectory is fully factored in with its price-earnings multiple of around 20 times in 2014-15, the source says.

Another analyst thinks the share price is trading above fair value because of the market's enthusiastic view on the company's strong fundamentals. While it doesn't know when this momentum will cease, it is cautious due to the volatile and competitive nature of the industry.

But more newsletters see the stock rising higher, particularly as the growth flows through from Aristocrat's compelling content and the addition of VGT. The North American-based gaming machine company, which Aristocrat paid $US1.3 billion for, provides more stable and recurring revenue, a newsletter says.

• Investors are generally advised to buy Aristocrat Leisure at current levels.

ALS (ALQ)

Shares in ALS surged the most in six years last week when the mining services company beat guidance in its half-year results.

Underlying net profit fell 33% to $67.7 million for the six months to September 30 compared to the previous year, above guidance for $64 million. Revenue climbed 3% to $769.1 million.

“The group remains focused on cost management and right-sizing the business for the current market,” said chairman Nerolie Withnall. “This, together with the ongoing development and integration of the oil & gas business stream … positions the company strongly for future growth as markets recover.”

The stock leapt 17.9% to $5.28 on the day of the news (November 24, 2014). Even after the gains, however, it has still plunged 42.8% this year.

Newsletters are divided between calling ALS a “hold” or a “sell” after the update, with more rating the stock as a “sell” at current levels. They note earnings was only marginally higher than guidance – which had been downgraded from $74 million in late September anyway.

Moreover, while the results suggest the minerals business has stabilised, newsletters remain cautious. There have been bouts of optimism over ALS throughout 2014, publications point out, but they have always been followed by a tone-down in expectations as earnings margins continue to be squeezed.

Consensus forecasts for 20% net profit growth in 2015-16 could also be challenging, newsletters say.  With such ambitious expectations a lingering downgrade cycle may undermine confidence and limit any share price recovery.

But others see value in ALS on a two-to-three year view. One analyst says investors will have to be nimble to capture any price gains as the stock will re-rate long before earnings show signs of a recovery.

• Investors are generally advised to sell ALS at current levels.

OzForex (OFX)

OzForex jumped the most in 12 months last week after reporting double-digit earnings growth at its interim 2014-15 results.

Net profit grew 26% to $12 million as the number of active clients lifted by 21% to 129,900 for the six months ending September 30, with the foreign exchange services provider beating expectations and its prospectus guidance for the first time since listing.

“We will continue to invest in the business with a focus on our customers, scalability and speed to market,” said chief executive Neil Helm.

Shares in the company soared 8.9% to $2.46 on Tuesday (November 25, 2014) and 7.6% over the following two days.

With these gains the stock has surpassed its first-day closing price of $2.56 when it listed on October 11, 2013.

Currently, the four broker recommendations which crossed Eureka Report's desk since the update all rate OzForex as a “buy”. Analysts have a 12-month target price of $3.01, 13.2% above Friday's close, and predict a fully-franked dividend yield of 3% in 2014-15 and 3.7% in 2015-16.

Newsletters say OzForex is trading well below value at the moment because the market is too worried about the company's potential to grow its client base, despite posting strong profit growth and beating guidance.

OzForex is a high-quality business with substantial medium-term growth opportunities in domestic and international markets, analysts say. Its low-cost, fast and convenient offering will see it steal market share from competitors, they say.

While no explicit guidance was provided, newsletters agree with management that it has a clear strategy to drive continued growth in a large and growing market, driven by increases in global population and migration.

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

Cardno (CDD)

Three newsletters have downgraded their calls for Cardno after the company revealed first-half earnings would be significantly below market expectations.

The provider of civil, structural and engineering services announced operating guidance of between $27 and $31 million for the first half of 2014-15, up to 37% below the previous corresponding period, due to difficult trading conditions.

“Our Australian operations have experienced a substantial slowdown in the demand for our historically higher margin operations of construction materials testing combined with minimal recovery in demand for engineering services from the mining sector,” said chief executive Michael Renshaw.

The market release sent the stock down 24.9% to $3.69 on the day (November 21, 2014) – its lowest point in more than five years.

Despite three newsletters cutting their recommendations, consensus is to “hold” Cardno.

On a positive note, the company has flagged a better performance for the rest of the year due to a pick-up in demand for infrastructure and urban development related engineering services, with contracts weighted towards the second half.

But most newsletters say the contracts won't be enough to offset the gap in earnings left by the higher margin resource and energy markets. The ongoing decline in commodity prices – particularly oil and iron ore – suggest further headwinds are imminent, one analyst says.

Mining services companies like Cardno are battling to find organic growth amid difficult industry conditions, another analyst says, where miners are cutting costs and curtailing project expansions to support cash flow.

Nevertheless, the majority of publications believe these ongoing risks are reflected in the share price.

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

Toll Holdings (TOL)

Newsletters endorse the move by Toll Holdings to exit most of its offshore operations, with a capital return seen as the most likely outcome from the asset sales.

The logistics and transport services company reported last week (November 25, 2014) its plans to sell major non-core assets over 2014-15 for more than $100 million and to “pursue options for monetising” its Singapore offshore petroleum base (TOPS).

The exit of loss-making businesses, the release of capital and the disposal of minority interests are expected to contribute positively to reported earnings over the full year.

“These decisions reflect our drive to improve sustainable shareholder returns through our focus on return on capital employed,” said managing director Brian Kruger.

Proceeds from the sale will be used to reduce debt, fund growth opportunities, and undertake capital management, newsletters say. One analyst estimates that, including the potential sale of TOPS, Toll could realise around $400 million in cash – of which $250 million could be paid to shareholders via a special dividend in 2015-16.

With debt already low, the remaining $100 million capital could be used to invest in domestic mergers & acquisitions, the analyst says.

Despite the support for Toll's decision, however, the investment press are mixed over the outlook for Toll Holdings. On balance, consensus is to “hold” the stock.

Those more optimistic believe the market undervalues Toll due to concerns regarding the weak retail sector outlook. With these latest developments, the company can reposition itself with a higher return on invested capital.

But others continue to see issues ahead. One publication believes the benefits will be offset by challenges confronting Toll's express freight business, particularly the 130% increase in industry sortation capacity.

Another newsletter thinks the offshore business Toll isn't selling – Toll Global Forwarding – will drag on the stock. It notes that Toll has around $700 million of invested capital in the business and there is no apparent buyer.

• Investors are generally advised to hold Toll Holdings at current levels.

Directors' trades

• The biggest trade was on the selling side this week, with Skilled Group chief executive offloading $2,255,227 worth of shares in the labour hire firm. He sold 1,026,569 shares at $2.197 each.
• On the buying front, four Seven Group directors increased their holdings in the conglomerate, headed by Richard Uechtritz. The former chief executive of JB Hi-Fi traded $684,400 for 116,000 shares at $5.90 each.