Collected Wisdom

Investors worried about Amcor’s (AMC) prospects focus less on its role in the price-fixing scandal and more on the soaring Australian dollar. Amcor’s culpability in the ACCC's cardboard cartel case has been effectively minimised, though there remains a $120 million damages claim from Cadbury Schweppes. Moreover, with 60% of its operations outside Australia, currency risk is a real concern. Not only does the soaring dollar eat away at profits coming earned offshore but it also affects the company’s sizeable export business. Chief executive Ken MacKenzie said as much at last week’s results presentation, suggesting that currency concerns could wipe as much as $35 million from the bottom line. At the same time key production materials such as oil and resin have risen significantly. The company is two-thirds of the way into a savings and divestment program that would see it raise $1.5 billion but profit warnings and write-downs from competitors loom large. Sell Amcor at current levels.

Highly geared private equity vehicle Babcock & Brown Capital (BCM) has experienced significant volatility since the August credit crisis, falling about 30% from $5.49 on July 24 to a low of $3.80 on August 16. Since then the company kicked off a buyback program that aimed to snare up to 5% of the stock for about $444 million. The stock has since recovered and closed on October 26 at $4.91. Babcock & Brown Capital’s most recent acquisition was the Israeli directory and search business Golden Pages with an enterprise value of $248 million. One investment publication with a strong line in charting believes that the upward momentum in the share price will continue in the short term. It must not be too confident in the short term, though, because it is advising investors to take part profits. Sell half of Babcock & Brown Capital at $4.85.

Annual results from ANZ Bank (ANZ) provided incoming chief executive Mike Smith with the perfect opportunity to assert himself. Which he did in spades. The headline profit figure of $4.1 billion was under median forecasts and the disappointing result has been explained away as a cost blowout due to a rise in staff numbers. The results show a 17% rise in earnings from personal banking and the more modest 6% rise from institutional banking. Referring to the institutional bank's poor result, Smith said that if the current management team could not turn around institutional banking then he would not hesitate to install talent that could. He has also been very forthright about his desire to push into Asia, which, according to Smith, “could be the growth story of the century and possibly the biggest growth story in history”. Investors, however are understandably nervous about such expansion and the market sliced 3.7% off the share price. One stock tipper believes in the ANZ story and suggests you buy into the weakness. Buy ANZ Bank at current prices. (To read Ian Rogers' feature today on Mike Smith and the outlook for ANZ stock price, click here.)

Platinum Asset Management (PTM) is one of the strongest brands in fund management today but since listing in May sentiment has turned against the Kerr Neilson star vehicle. Platinum was offered at $5 share in the IPO. On its debut it hit a high of $9.11 and has been on the slide ever since, closing at $5.68 on October 26. Platinum’s strategy is mostly value based and as a result it ended up long in Japan and has been hurt by that market’s comparative underperformance. Fund inflows for the September quarter were below forecasts but most analysts regard this as an anomaly and expect it to pick up soon. Platinum Asset Management is a quality diversification play away from the Australian market. The talent is tops and volatility is to be expected. Acquire Platinum Asset Management to $5.75.

On November 23 Publishing & Broadcasting (PBL) shareholders will get to vote on the proposed demerger that would see the company split into a gaming vehicle (Crown) and a media vehicle (Consolidated Media Holdings). The deal sees a share in each entity plus $3 cash exchanged for each PBL share – but shareholders will be able to take more Crown shares or more cash subject to conditions. Risk tolerant investors may consider taking more Crown shares. Crown contains 19.6% of US casino operator Fontainebleau, 41% of the Melco PBL joint venture as well as its Australian casino operations. It has also signalled its intention to proceed with a $3 billion casino in Las Vegas. Importantly, the US and Macau assets are not expected to be earnings accretive until 2010 but from that point there is a whole lot of upside. Consolidated Media Holdings will feature 25% of PBL’s media assets, which includes a stake in Channel Nine, Foxtel, Australian Consolidated Press and various online properties. CMH will deliver smaller but steady cash flows in comparison and therefore lower multiples. Acquire PBL to $19.60.

Allco Finance Group (AFG) is a diverse financial services group that excels in niche such areas as equipment leasing, funds management and securitisation. This year has not been kind to the group with the collapse of the Qantas takeover in May and the subsequent turmoil in international credit markets. As a result, Allco has fallen more than 40% from its $13.23 high from February 9 to close at $7.83 on October 26. Despite these key events, results were better-than-expected with net profit after tax up 41% to $201 million. One publication in particular is bullish on Allco Finance Group in light of its most recent acquisition – Rubicon Holdings. Rubicon operates three international trusts with around $5.6 billion worth of assets under management including: Rubicon America, Rubicon Japan and Rubicon Europe. Given that AFG already owns 20% of Rubicon, it only needs to stump up $277 million to conclude the deal on a sober price/earnings multiple of 11.7 times earnings. Buy Allco Finance Group up to $9.70

A stronger Australian dollar is hurting margins at Caltex (CTX) – shaving an estimated $30 million off profits for 2006-07. With currency analysts forecasting an even stronger Australian dollar in the near future, one newsletter has taken the opportunity to reduce 2007 estimates for Caltex from $525 million to $505 million and 2008 from $545 million to $520 million. This has stripped out some of the optimism surrounding the stock and returned Caltex to its longer-term average. Despite the currency risk, the fundamentals are still sound. Caltex is the largest listed refinery exposure in Australia and refining capacity in the region remains restricted. Its production efficiency program is on track to deliver a 20% uptick in output by 2009. Buy Caltex at current levels.

Watching the directors

Week to October 26

• Ronald Dewhurst, director of Australian United Investment Company (AUI) has just purchased $230,000 worth of stock.
• John Roy, a director of Eagle Bay Resources NL (EBR), bought stock on October 22. The price has risen significantly since then.
• Michael Hale, director of Ebet (EBT) has recently purchased two parcel of shares.
• Three directors have purchased shares in Goldstar Resources NL (GDR) in the past week.
• More buying by Eddie Smith, a director of Impress Ventures (ITC). He has been continually buying small parcels of shares over the past few months.
• More than $300,000 worth of stock purchased by Christopher Mackay, director of Magellan Flagship Fund (MFF).
• $740,000 worth of stock bought by a director of MFS Limited (MFS), the second large transaction for the month!
• Large buying by Geoffrey Wilson, a director of Wilson Investment Fund (WIL)

Previous week

• Geoffrey Wilson, adirector of Wilson Investment Fund (WIL), has just purchased over $430K worth of stock.
• Two directors of Wesfarmers (WES), Colin Carter and Patricia Cross, have both purchased parcels of shares.
• Buying by Linda Nicholls, director of Sigma Pharmaceuticals (SIP). The price of this stock has recently fallen.
• Robert Aitken, a director of Rubicor Group (RUB), has purchased two parcels of shares of approximately $130K each in the last fortnight.
• Christopher Cooper, a director of Redflex Holdings (RDF) has been purchasing parcels of shares over the past couple of weeks.
• Vanda Gould, a director of Cyclopharm (CYC), has about more than $419,000 worth of stock. This stock has recently experienced a significant price fall.
• Continued buying by the directors of Apex Minerals (AXM) and the stock price is still rising.

Source: The Inside Trader