Collected Wisdom

Kerr Neilson’s reputation as a savvy fund manager is well established, but it doesn’t make it any easier to swallow the 76% premium applied to Platinum Asset Management (PTM) since listing. The float was more than five times oversubscribed. The stock stunned market analysts last week when it rose 76% in its first day’s trading to close at $8.80.
What might have gone unnoticed in the flurry of trading around the stock was an exquisitely timed sale of stock from interests connected with the key man – founder and managing director Kerr Neilson. An announcement issued to the ASX on May 25 outlined three million shares sold by Neilson and his wife Judith over a period of two days. The sale netted $25 million for the Neilson family.

It seems there are no escrow limitations on the Neilson interests. What's more, it looks as though Neilson timed his sale perfectly: as soon as trading began on the $5 stock its price started climbing. Stockbrokers estimate its fair value is closer to $7; stockbroker Credit Suisse has a 12-month target of $7.25. Platinum has been fading this week. On Monday afternoon, May 28, it was trading at $7.80.

With the founder selling, the stock falling, and newer investors looking on in wonder, it's hardly a surprise to see some investment commentators putting a “Sell” note on Platinum. As one well known pundit suggested: “Platinum is a well-managed operation but there are no escrow arrangements in place. The market value implies that every $1 under management is equal to 25¢ of market capitalisation”. Reduce your holding in Platinum at current levels.

Meanwhile, Suncorp-Metway’s (SUN) acquisition of Promina took its toll and the company now trades at a discount to some of its peers, but this discount has triggered some positive coverage. The $8 billion takeover gives Suncorp-Metway added muscle in distribution as it moves up from fourth to third-biggest general insurance group. Its roots in Queensland are enviable, offering excellent exposure to its rising population and booming industries. Interim results were positive, showing a 13% rise in profit and a reduction in the all important cost-to-income ratio from 45.5% to 44.4%. With strong investor support below $21, Suncorp-Metway is a buy at current levels.

Insurance Australia Group (IAG) is trading above its recent lows but it is still at a discount to conservative valuations. The company is Australia’s and New Zealand’s largest general insurer with interests in both the UK and Asia. Growth in existing markets is running at about 3–4% but a long-standing strategy to push into China has still to convince investors. The current share price of less than $6 fails to reflect upside of new markets, a yield of 5% is even suitable for income-oriented investors. Insurance Australia Group is a buy at current levels.

Nickel producer Jubilee Mines (JBM) has been riding the crest of a boom in nickel prices. Over the past 12 months the stock has risen more than 140%. Third-quarter numbers were in line with expectations after production was moved to a new site. Costs involved were largely offset by the rising nickel price. Production is expected to sit at current levels until the September quarter when new projects come on line. Exploration remains a feature of the company, offering a degree of upside but the quality of tenements remains a concern for shareholders. For the time being, though, the share price appears above fair value. Sell Jubilee Mines at current levels.

Since hitting a 12-month high of 65¢ on April 23, St Barbara (SBM) has pulled back substantially due to a softening gold price and its recent capital raising. The miner successfully raised $100 million to fund its ongoing expansion at the old Sons of Gwalia mine, where it aims to produce 200,000 ounces a year by the end of 2009. At the same time the price of gold has come off by about 5% and as a result the stock closed at 50¢ on May 25. The pull back in price offers investors an excellent entry point. Buy St Barbara at current levels.

Online accommodation booking service Wotif (WTF) has performed strongly since listing about a year ago. Units were offered at $2 and the stock debuted at $3.46 on June 5, 2006. Since then the stock has strengthened even further despite travel heavyweights Expedia entering the market. Wotif was trading at $5.03 on May 25, 2007. Last week the company made two announcements: the first was the termination of an agreement by ninemsn to promote it via its popular website and the second was a profit forecast revised upwards from $19 million to $25 million. Each of these events should be evaluated on their own merits, but even if Wotif banks $25 million its price/earnings multiple will be as high as 40. Sell Wotif at current levels.

After being punished for its poor management, investor confidence has returned to Australian Pharmaceutical Industries (API) as evidenced by its share price, which has risen about 20% over the past three months. The company’s core business is drug distribution to pharmacies but its expansion into health and beauty products is worth examining. Priceline is the company’s retail arm, with about 260 stores nationwide. The company has been the target of unsuccessful takeover activity in the past but the possibility of spinning off some its brands is more likely. Major shareholders include Soul Pattinson with 20% and Solomon Lew with just under 5%. Buy Australian Pharmaceutical Industries at current levels.

Watching the Directors

Change of directors’ holdings highlights, for the week ending May 25.

• Along with Kerr Neilson's well-timed selloff of Platinum shares, there was continued buying by the directors of Trust Company (TRU). They have now bought more than $250,000 worth this month
• James Squire, a director of Tamaya Resources (TMR) has purchased over $240,000 worth of stock this week. This continues on from a lot of director buying over the past couple of months
• Alfred Moufarrige, a director of Servcorp (SRV) has bought more than $500,000 worth of stock. He is the second director to purchase shares in SRV this month
• George Sakalidis, director of Image Resources NL (IMA) has purchased more shares this week
• A director ofIluka Resources (ILU), Gavin Rezos has just purchased almost $150,000 worth of stock
• John Humphrey, a director of Horizon Oil (HZN) has bought $185,000 of shares, bringing his total to more than $470,000 this year.

Source: insidetrader.com.au