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
A 33.6% rise is profit to $1.05 billion sounds pretty good on paper, but Wesfarmers’ (WES) full-year result was below market expectations and sent the diversified retailer’s shares south. But the WA conglomerate represents good value to some, including one stock picker, who has set a target price of $37.50, well below Friday’s closing price of $31.95.

Despite predicting the retail sector would be “patchy”, Wesfarmers chief executive Richard Goyder said last week he expected earnings to rise in the current financial year. Some have questioned whether Wesfarmers paid too much – $18.5 billion – for Coles, prompting Goyder to walk the fine line between promoting the deal as a good investment while emphasising that it will take some years for the good times to roll.

Although the ACCC, the market regulator, recently found grocery prices are generally cheaper in Coles supermarkets than Woolworths, Coles’ market share and profitability are threatened by the supermarket chain Aldi and the imminent arrival of Costco.

Still, there is more to Wesfarmers than Coles: hardware giant Bunnings reported a 13.9% rise in cash sales; while the resources (coal) division reported earnings before interest and tax of $423 million, up 25% on the previous year. Describing the result as solid, one newsletter advises Wesfarmers investors to sit tight and hold the stock for the long-term.

While Woodside Petroleum (WPL) fights against Federal government plans for a condensate tax (condensate is a byproduct of natural gas used to make gasoline and diesel) one stock picker says it's time for investors to sell out from the oil and gas exploration and production company.

The $39.23 billion company is overpriced, the publication suggests. Its shares closed at $57 on Friday, representing a price/earnings multiple (P/E) of more than 37.

Last month, in its second-quarter report, Woodside said revenue was up 52% over the corresponding quarter last year and ruled out building a liquefied natural gas export plant in East Timor to process gas from its Greater Sunrise fields in the Timor Sea.

One stock picker has forecast that earnings will fall by 10–21% in 2008-09 and has advised investors sell Woodside at current prices.

Investors and stock pickers alike have gone sour on Perpetual (PPT), but one stock picker has adopted a contrarian view. The diversified financial group missed forecasts with its annual results last week. The fund manager reported a 29% fall in net profit to $128.8 million profit for the year to June '¦ below analyst expectations of $134.21 million, leading the Sydney-based company to say it was disappointed its results had not been consistent with previous results.

“Our environment has a defining influence on the performance of our business and we were clearly not immune to these market forces in 2008,” chief executive officer David Deverall said. In any event, operating profit fell 8% to $133.5 million, while funds under management were down by $8.8 billion to $30.3 billion, partly because of outflows from Perpetual’s credit and fixed interest and Australian equities institutional businesses.

In common with other financials, Perpetual has had a rough trot during the credit crunch, starting the year at $66.62, and closing on Friday at $44. Nonetheless, with a P/E of just over 14, the $1.85 billion company remains well-priced, according to one newsletter.

While the company expects the current financial year to present tough times – the newsletter says now is a good time for retail investors to pick up quality stocks suffering a decline in popularity. The publication also noted the performance of Perpetual’s private wealth division, which contributed 21% of group profit, up from 8% five years ago, and said the company had developed a strong brand and reputation. Investors are advised to buy Perpetual to $45.60.

The decline in discretionary spending has not dampened sales at JB Hi-Fi (JBH), with people still willing to part with money for home entertainment products and electronics. JB Hi-Fi recently posted a $65.1 million net profit for the year to June, up 61% from the previous year, while revenue rose 42.65% to $1.8 billion.

The Melbourne-based retailer said as at June 30, it had 93 Australian and 12 New Zealand stores, and plans to open 24 new stores during 2008-09. It also maintained sales guidance of $2.35 billion for the year, a 28% increase. Throw in takeover talk from Woolworths, and speculation it will earn 75–80¢ a share next year, up from 60¢, and this amounts to one hot little stock.

Nonetheless, one stock picker has cooled on JB Hi-Fi, describing it as at risk from price deflation and increased competition from rival retailers. International giant Costco, soon to arrive in Australia, is expected to snare some of JB Hi-Fi’s market share.

Closing on Friday at $13.30, JB Hi-Fi has a P/E of over 20 and, despite a strong management track record, is viewed by some as overpriced and too risky for conservative investors. Investors are advised to reduce JB Hi-Fi at current prices.

Australia’s biggest gas and electricity supplier, AGL Energy (AGK), reckons its business is in good shape, maintaining guidance for underlying earnings this financial year of $360–390 million. AGK recently reported a 44.2% fall in net profit for 2007-08 of $229 million, in line with market expectations.

New chief executive Michael Fraser has sought to pay down debt through asset sales: selling Chilean gas distributor GasValpo for $90 million and offloading the north Queensland pipeline for $102 million. The Elgas LPG business is also for sale, believed to be worth about $150 million. AGL is expected soon to announce bids for its Papua New Guinea petroleum assets, worth about $600 million.

Of particular interest is AGL’s 25% stake in coal seam gas producer Queensland Gas Corp, which recently announced plans to swallow fellow Queenslander Sunshine Gas. (See today's column from Tom Elliott.) AGL is also mulling the sale of its 32.5% stake in the coal-fired Loy Yang A power plant in Victoria, given the likely implementation of an emissions trading scheme.

In the same vein, Fraser seems to have lost some enthusiasm for NSW’s coal assets, slated for sale as part of the state’s $1 billion electricity asset privatisation plans.

One stock picker sees an increase in net profit to $427 for 2009-10, and says all operating indicators are heading in the right direction. AGL closed on Friday at $14.01; investors are advised to hold it at current prices.

Now that Premier Investments has effectively swallowed Just Group, our attention is turned to another Australian clothing retailer, Pacific Brands (PBG). The maker of Bonds, Holeproof and Berlei has been under pressure for a while now, vacillating around the $2 mark.

The Melbourne-based Pacific Brands group recently reported a $119.3 million profit before amortisation for the 2008 financial year, up 11.1% from the previous year. Despite seeing flat to negative sales for the remainder of 2008, the group’s chief executive, Sue Morphet, expects profit to grow by up to 5% during 2008-09, saying its wholesaling capabilities would provide some protection from softer retailing conditions.

According to one stock picker, while softer retail conditions are likely to eat into Pacific Brands’ 2008-09 result, the stock remains attractive, particularly in light of its strong brands, cheap method of manufacturing, and wide spread of products. Closing on Friday at $2.15, Pacific Brands is considered a solid buy for yield investors; as such, investors are advised to buy it at current prices.

What a difference a year makes. This time last year Lihir Gold (LGL) had reported a $46.5 million half-year loss; this year the gold producer released a half-year profit of $36.5 million. Sales rose 17%, the Papua New Guinea-focused company said, with chief executive Arthur Hood adding he is confident of reporting a “solid improvement” in operating cash flows and net profit this year. So what has changed? A solid gold price – currently about $US840 an ounce, though well below its peak of more than $US1000 in March – and the end to unprofitable gold hedging arrangements.

Lihir Gold has had no shortage of critics, who point out that the purchase of Ballarat Goldfields in 2007 and Equigold this year has increased diversification and exploration, but development and sovereign risks remain.

As last year’s half-year results suggest, Lihir Gold has had profitability issues and, for some, the stock remains the domain of patient gold bugs. One newsletter has reduced its 2008 net profit forecast to $222.6 million, and has cut its valuation for the stock to $2.15 per share. Despite its Friday closing price of $2.33, investors are advised to hold Lihir Gold.

Watching the directors

Week to August 22

• David Flanagan, a director of Atlas Iron Limited (AGO), has just purchased shares. This is in addition to two purchases made by David Hannon earlier this month.
• Richard Swann of Compass Resources NL (CMR) has just purchased a parcel of shares.
• Seth Harrison of Heartware (HTW) has purchased another $100,000 worth of shares. He has now bought more than $500,000 of shares in the past couple of weeks.
• Continued buying by Stephen de Belle of Mantle Mining Corporation (MNM).
• Over $1.7 million worth of stock purchases by Thinksmart (TSM) director Natale Montarello.
• CSL Ltd (CSL) director Elizabeth Alexander bought 1,200 shares worth $45,225 on August 22. She holds 15,006 shares and indirectly bought 10,953 shares.
• MMC Contrarian Ltd (MMA) director Peter Charles Constable sold 1.5 million shares off-market on July 15. He holds 4,240,254 shares.
• Lynas Corporation Ltd (LYC) director Nicholas Anthony Curtis bought 1.5 million shares worth $1.6 million off-market on August 20.

Previous week

• Former Deutsche Bank chief economist and Praemium Ltd (PPS) director Don Stammer indirectly bought 232,980 shares worth about $50,000 on-market. He holds 4.6 million shares.
• Buying by Minara Resources (MRE) directors Peter Coates and Peter Johnston.
• Just Group Ltd directors sold their shares into the Premier Investments Ltd takeover offer on August 14 and 15.
• Australian Power and Gas Company Ltd (APK) director Richard Poole indirectly bought 171,000 shares worth $34,276 on-market on August 12.
• Nicholas Politis, a director of AP Eagers (APE), has been buying parcels of shares over the past few weeks. Politis and two other directors have been purchasing parcels of shares over the past five months.
• David Hannon, a director of Atlas Iron Limited (AGO), has bought $240,000 worth of stock.
• Cockatoo Coal (COK) director Paul Chappell has purchased $400,000 worth of stock in two transactions this week.
• Dr Seth Harrison, a director of Heartware Limited (HTW), has just purchased $444,000 worth of stock.

nRecent directors’ trades worth more than $200,000
Date	Code	Director	Volume	Price	Total	Action
18/08/08	TSM	Natale Montarello	2,133,472	0.767	$1,636,778	BUY
14/08/08	WSA	Terence Streeter	875,000	7.53	$6,586,253	BUY
13/08/08	HTW	Dr Seth Harrison	735,000	0.605	$444,735	BUY
07/08/08	PRT	Paul Ramsay	1,291,807	2.35	$3,035,746	BUY
07/08/08	AGO	David Hannon	100,000	2.403	$240,300	BUY
06/08/08	KZL	K Robinson	75,000	3	$225,000	BUY
06/08/08	COK	Paul Chappell	470,000	0.711	$334,358	BUY
24/07/08	TYS	Various	3,803,500	0.2	$760,700	BUY
17/07/08	MLI	Various	1,118,569	0.2	$223,714	BUY
17/07/08	OCE	David Kingston	500,000	0.4	$200,000	BUY
11/07/08	RSN	Stephen Bizzell	15,000,000	0.015	$226,237	BUY
11/07/08	RHI	Neil Tomkinson	75,200	6.085	$457,612	BUY
03/07/08	ASL	Ronald Sayers	308,587	2.472	$762,906	BUY
02/07/08	RHL	Michael Millner	296,000	4.2	$1,243,200	BUY
30/06/08	KLM	Peter Jinks	800,000	0.25	$200,000	BUY

Source: The Inside Trader