Collected Wisdom

This is an edited summary of Australia’s best-known investment newsletters and major daily newspapers. The recommendations offered represent the views published in other publications and may not represent those of Eureka Report.
With sentiment surrounding Australia’s listed property trust (LPT) sector at an all-time low, shares in Mirvac (MGR) were sold off last week despite it’s reporting an 86% rise in profit to $388 million. The result was inflated by strategic asset sales, which concealed a rather ordinary performance. Investors had expected underlying earnings to contribute more and as a result Mirvac closed at an 18-month low of $4.33 on February 15. Market chatter about the potential for a merger between Mirvac and Lend Lease has virtually ceased and the group’s attempt to diversify away from residential property might be a case of too little, too late. Although Barclays Global Investors has spent a quarter of a billion dollars acquiring Mirvac stock over the past three months, one particular publication isn’t convinced that the bad times are behind us. On February 13, Citigroup reaffirmed a sell rating on the stock. One popular stock tipping publication agrees. Sell Mirvac at current levels.

Credit Corp’s (CCP) second profit downgrade in the past three months has prompted a rush for the exits by those passengers that remained in the debt collection. After hitting a high of $12.56 on July 9, the group has lost more than 90% of its value, closing at 92¢ on February 2. The first profit downgrade occurred in November when profit was revised downward from $24 million to $18 million. On February 11 that was revised down again, to $12 million. Bad things tend to come in threes so heaven help Credit Corp if there are any material disclosures in coming months. As part of an aggressive expansion program the group focused on acquiring new debt, which produced lower-than-expected returns. High staff turnover and poorly managed growth have contributed to the group’s woes and as a result the chairman has resigned from the board. None of this seems to worry fund manager Investors Mutual, which topped up its holdings to 7.6% of the company. A suspension of trading in the securities is a very real fear. Sell Credit Corp at current prices.

Accounting software company MYOB (MYO) believes it can continue to grow in the face of any economic downturn. Chief executive Craig Winkler says his company enjoyed its strongest expansion during the economic downturn of the 1990s, an explanation that conveniently overlooks the boom in personal computing that occurred around the same time. More recently the company has focused on its suite of products for accounting firms but growth in the area seems limited, with only 9000 accounting practices registered in Australia. The company recently broke out of its trading range when news of a private equity takeover bid emerged. The $731 million cash bid has been rejected by Winkler, who owns 27% of the company. At the close of trade on February 15, MYOB was trading for $1.59 but there is a real concern it could weaken significantly in the absence of another offer. Trading on a price/earnings multiple of 28 times, it looks considerably more expensive than its rivals which have significantly better prospects. Sell MYOB at current levels.

The January selloff was a bad time for long-only funds but good for the ASX (ASX), which saw volumes rise 115% when compared with the same month last year. But revisions to a rebate system designed to reward high-volume clients is beginning to bite: in the December half, returns to clients rose by 181% from $7 million to $19.7 million. Unfortunately for shareholders, this represents 20% of net revenue and is expected to rise over the coming year. Separately, it’s high time the exchange took the rival exchange proposal from AXE ECN seriously now it has the support of not only the NZ exchange but six local brokers. Taking into account developments with Telstra and AWB, some analysts are predicting that the days of exchange monopolies are over. After hitting a high of $60.59 on December 28 2008, the stock has eased to $42.65 at close on February 15. At current levels ASX is still priced for growth, so investors building portfolios are advised to avoid the stock. ASX is a hold at current levels.

Sino Gold Mining Ltd (SGX) explores, operates mines and produces gold in China. It is set to have a big year in 2008 as its focus turns from the development of prospects to the production of gold from its Jinfeng and White Mountain mines. Sino Gold has been one of the ASX’s biggest winners from the recent surge in gold prices, consistently outperforming the S&P/ASX 200 in recent months. A small amount of hedging leaves the company open to price fluctuations. The company recently announced an 81% increase in its ore reserve estimate for White Mountain, to 6.5 million tonnes at 3.8 grams per tonne of gold, or 800,000 ounces. White Mountain now has a mine life of at least 10 years, based on this update. Commercial production for the site is expected to start late this year or early next. A recent power outage at Jinfeng led to production being revised down to 12,700 ounces for February. Normal production is expected to return later this month. Despite corporate appeal, sovereign and development risks remain very real concerns. On a price/earnings multiple of about 50, Sino Gold is too expensive at current levels. Avoid Sino Gold.

Australia’s leading independent haematite iron ore producer, Mount Gibson Iron Limited (MGX), recently posted some strong half-year results assisted by higher ore prices and increased production. The company operates three sites – Tallaring Peak, Koolan Island, and Extension Hill – of which only one is fully operational. A declared EBITDA of $144.6 million on a margin of 83% looks spectacular but doesn’t reflect the company having capitalised more than half its operating costs. Earnings before interest and tax is a more descriptive measure because it includes deferred waste mining costs. EBIT jumped from $12 million to $51.9 million on a 30% margin. Overall, Mt Gibson is in good shape, with little net debt and is well-placed to benefit from the current boom in iron ore prices. However, the aggressive growth strategy and volatility in commodity prices may give many investors enough reason to give Mount Gibson a wide berth. Avoid Mount Gibson. (To read more on haematite miners, see Tim Treadgold’s feature Rio could trample iron minors.)

The national shortage of pilots has hit leading independent airline Regional Express Holdings Limited (REX) hard, causing it to suspend and modify a number of services. Regional Express is the sole provider on the majority of its routes, many of which are too small to attract the interest of the larger carriers. To capitalise on booming interest in domestic travel, the big three players – Qantas, Virgin Blue and Jetstar – are aggressively expanding their fleets and poaching available pilots. With their larger planes and passenger capacity, they can offer much higher salaries than Regional Express. It’s expected that Tiger Airways’ arrival will only increase competition for pilots – Regional Express forecasts an attrition rate of 60% for its pilots over the year, compared to 18.4% in 2006-07. To address the shortage, Regional Express management established a pilot school last year but there is still a pressing need for more experienced pilots to captain flights. At the moment, Regional Express is focused on damage control rather than on growth. It is unclear whether the group can benefit from the increase in domestic travel. Sell Regional Express.

Watching the directors

Week to February 14

• Buying by Peter Smith and Christopher Greig, directors of Western Metals (WMT).
• Two directors buying shares in Style (SYP).
• Andrew Kemp has continued buying small parcels of shares in Silver Chef Limited (SIV).
• Continued buying by the directors of Paladio Group (PDO).
• Four directors buying Alesco Corporation (ALS) shares.
• Ron Grogan and David Macoboy are buying Ammtec (AEC) stock.
• Michael McFarlane and Victor Cottren, directors of Australian Education Trust (AEU), have purchased parcels of shares.

Previous week

• Continued buying by the directors of Western Areas NL (WSA). Craig Oliver has purchased another parcel of shares, adding to other purchases in mid-January by both himself and Terence Streeter.
• Dr Leon Pretorius of Deep Yellow (DYL) has just purchased $965,000 worth of stock.
• Over the past month, three directors have purchased small parcels of shares in Spitfire Resources (SPI), which floated in December.
• Andrew Kemp, a director of Silver Chef Limited (SIV), has been buying small parcels of shares over the past couple of months.
• Buying by two directors of Nylex Limited (NLX).
• David Humann, a director of Mincor Resources NL (MCR), has just purchased $62,000 worth of stock. This stock has recently experienced a significant price fall.
• Buying by two directors of Jackgreen Limited (JGL).
• Directors Denis Wade and Robert Thomas have both purchased Heartware (HTW), shares this week.
• Joakim Sundell of GBST Holdings (GBT) has purchased $284,000 worth of stock. This is in addition to a $1.2 million purchase in early December.
• Buying by Peter Simpson, a director of Drillsearch Energy Limited (DLS).
• Buying by the directors of Colorpak (CKL).

Source: The Inside Trader