Collected Wisdom

PORTFOLIO POINT: 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.
This has not been a great year for James Packer, but at least Crown (CWN) is getting the thumbs up. The gaming group recently completed a $300 million equity raising at $4.95 a share, with Packer’s private company Consolidated Press Holdings (CPH) snapping up one-third. In addition, the $3.97 billion company expects to raise funds under a share purchase plan that will allow existing shareholders to subscribe for shares to a value of $5000. Earlier this month, Crown said it had raised about $1.6 billion from 10 banks to fully repay its syndicated debt facility, so its next major refinancing is not due until the 2012 financial year. Its Las Vegas properties continue to be affected by the economic downturn: Nevada has been hit particularly hard by the credit crisis. At $5.75, Crown is down 57% for the year; well below many price targets. Underpriced and a solid market of punters, investors are advised to buy Crown.

No continuous disclosure issues at Harvey Norman (HVN): the electrical and whitegoods retailer has been updating the market about its sales on a weekly basis, trying to “give guidance as to what is really happening in the retail market”. The latest ASX announcement showed like-for-like sales for the 28 days to December 14 rose by 4.5%, but the company added that retail margins continued to be under pressure. One stock picker says that at $2.46 a share, the prospects of a difficult 2009 have been well and truly been factored in. One has placed a target price of $3.53 – more than $1 above current levels. With consumers seen tightening their belts and focusing on nights at home rather than in restaurants, Harvey Norman is seen as well-placed to pick up spending on improving the nest, particularly with the government’s multi-billion dollar stimulus package coming through the system. Chairman Gerry Harvey has warned he may close some stores, but admits others may be opened up elsewhere. Seen as one stock that will eventually rise in 2009, investors are advised to buy Harvey Norman at current downtrodden prices.

Merger talks between AWB and ABB Grain may have fallen by the wayside, but fellow agribusiness group GrainCorp (GNC) should remain in investors’ line of vision. GrainCorp hasn’t been a star performer this year – having reported a $19.9 million loss for 2007-08 – but notwithstanding poor weather, the grain handler expects to return to profitability this financial year. In a letter to shareholders this month, GrainCorp said early seasonal conditions have indicated a large winter crop harvest in Queensland, and northern and central NSW, while the drought in southern NSW and Victoria tempered the positive outlook. It added that heavy rain during harvest in southern Queensland and northern NSW had caused significant harvest delays and downgrading of milling wheat and malting barley, while sorghum tonnages would again be large in 2009.

One stock picker says the combination of improved seasonal conditions and boosted port charges should deliver a profitable year for the Sydney-based company. Now trading at $5.55, having fallen 43% for the year, the company is well below the publication’s target price of $10.82. The publication has predicted a 20¢ dividend for the 2008-09 year, ending September, with earnings per share of 43¢. Investors are strongly advised to buy GrainCorp at current prices.

Australian banks have committed a few misdemeanours this year, but Commonwealth Bank of Australia’s (CBA) botched capital raising last week was a doozy. The drama – CBA had to withdraw a $2 billion capital raising managed by Merrill Lynch after investors complained they had not been told that the bank’s bad debt charges had been lifted to 60 basis points, from the 40–50 forecast last month – was a low point for a bank once favoured by analysts, and pushed shares to a five-year low. While CBA did eventually raise the cash, with the help of rival investment bank UBS, the $26 per share placement was $1 cheaper than the original Merrill Lynch raising. Investors were rattled by not only the profit downgrade of about 7%, but damage to the bank’s reputation. Irrespective of whether Merrill Lynch was told of the bank’s increased bad debt charges, it’s not a good look for investors to find out after they have paid up about debts that will slice hundreds of millions from the bank’s profit.

Now stock pickers are adopting a once-bitten, twice-shy approach. Will the bad debt charges be increased again? And given CBA raised $2 billion in October – at $38 per share, no less – after its purchase of BankWest, how much dilution will existing shareholders be asked to take? One publication has cut its price target for CBA to $23, well below its already punished share price of $27.80. Another has placed the bank as his least-preferred of the big four. One stock picker has forecast CBA’s impairment charge will rise above 80 basis points by mid-2010. Earnings per share estimates have been sliced by 5–18%. Investors are advised Commonwealth Bank is now the least preferred of the big four banks.

Another former market darling, Macarthur Coal (MCC), has lost the support of many analysts, having cut its profit and production guidance last week. The world’s largest exporter of pulverised coal says an “unprecedented reduction” will cut profit for the six months to December to between $75 and $125 million – well down from the $150–160 million guidance of last month. Macarthur Coal also downgraded its sales targets for the 2009 financial year to 3.9 million tonnes, down from 5 million, and said it would not declare an interim dividend. Other cost-saving measures announced were production cuts at mines, deferral of uncommitted capital and exploration expenditure, a project review, and job cuts.

Macarthur Coal’s share price was severely punished by the news of the production reductions: The stock price was pushed from $3.48 on Monday to end the week at $2.77. It’s been a spectacular fall from grace for a stock that pushed past $20 in June on takeover talk and ended with ArcelorMittlal and Posco taking 20% and 10% stakes; major investor Nathan Tinkler pocketed $400 million, and Macarthur founder Ken Talbot $850 million. One publication has cut its price target to $3.80 from $4.70, while others have suggested investors hold the stock. One has set a price target of $2.50. The numbers are different but the sentiment remains one of disappointment: investors are advised to keep an eye on the company, sell if necessary.

Not everyone is convinced former investment banker Steve McCann is the medicine required to cure Lend Lease (LLC). One publication is disappointed with McCann’s depth of management experience, and noted that chief operating officer Ross Taylor and EU/UK chairman Nigel Hugill have both resigned from the real estate giant. McCann, formerly chief financial officer, will replace Greg Clarke as chief executive at Australia’s largest developer in 2009 and will have plenty of things on his to-do list: dealing with an anaemic share price, finding buyers for its asset sales, finding funding for major projects among them. McCann says Lend Lease remains on track to deliver 25% of profit this financial year from selling assets, but with property prices falling, getting the right price in a timely manner will be a delicate balancing act.

Lend Lease is not as highly geared as some of its peers: it had $800 million in cash reserves of the end of October, its gross debt is about 20% and its net debt to tangible assets is about 7–8%. Nonetheless, it is down 60% for the year and people are keeping a watchful eye to see it will produce a 2008-09 profit of $380–402 million. At $6.90, Lend Least is trading slightly above one publication’s price target. Risk-averse investors are advised to sell Lend Least at current prices.

It’s been not a bad year for Australia’s largest gold company, the Melbourne-based Newcrest Mining (NCM). Newcrest rose last week on news US funds giant Capital Group had acquired 5% of the $14 billion company. Investors were also impressed with news that gold production in the September quarter had risen 8.5% and Newcrest had maintained its full-year output forecast. One publication expects earnings per share to fall about 6% for 2008-09, but notes Newcrest is cashed up and has low gearing. Further, the publication sets a price target of $47, so says the current price of 33.50 a share represents good value. With gold a defensive asset in difficult times, and director Richard Lee picking up 5000 shares last month, investors are advised to buy Newcrest Mining at current prices.

Watching the directors

Week to December 19

• The executive most closely linked with the resurgence of Tower Australia Group Ltd (TAL) in the insurance market has been selling off stock. Jim Minto, chief executive of the company that has bucked the trend inside the insurance sector this year with a strong profit performance and an above-average share price performance, sold 1,049,783 shares worth $2,106,390 on-market on December 18, a parcel he had acquired two days earlier for $1,270,237 by exercising options. Tower is trading at about $2.30, up from a low for the year of $1.90 set in September. It had been trading as high as $3 earlier in the year. Minto continues to hold 19,615 shares and 4,000,000 unquoted options
• Virgin Blue Holdings Ltd director Brett Godfrey obviously is buying up. He bought 500,000 shares worth $136,891 on-market on December 11, taking his direct holding to 845,000 shares.
• Leighton Holdings Ltd director Ian Macfarlane bought 500 shares worth $11,840 on-market on December 15, 2008. He holds 4,215 shares.
• Large buying by David Austice of CSL Limited (CSL).
• Sae Peng Cheong gets a majority stake in AVJennings by buying 1.1 million shares in the property group on December 18, increasing from 136,270,023 shares (49.63%) to 137,370,023 shares (50.03%).
• Bank of Queensland Ltd director David Liddy indirectly bought 25,415 shares worth $250,007 on-market on December 9. He directly holds 846,915 shares and 1,000,000 options.
• James Hardie Industries NV director David D Harrison indirectly bought 1000 American depositary receipts (ADR) worth $US13,656 ($A19,900), equivalent to a holding of 5000 CHESS units of foreign securities (CUFS) on-market on December 17. He indirectly holds 2000 ADRs, equivalent to a holding of 10,000 CUFS.
• Bow Energy Ltd director Stephen Bizzell bought 1,000,000 shares for $140,000 via off-market trade and acquired 1,000,000 options on December 17, 2008. He holds 2,795,168 shares and 1,000,000 options.
• Ivanhoe Australia Ltd director Robert Friedland bought 10,000 shares worth $C31,400 on-market on December 11. He directly holds 19,810,801 shares, 4,000,000 performance rights and 2,375,000 unquoted options. He indirectly holds 340,141,525 shares.
• Iluka Resources Ltd director Jennifer Anne Seabrook bought 1,898 shares on-market for $9,756 on December 16. She directly holds 15,714 shares and indirectly holds 1,898 shares.
• Brickworks Investment Company Ltd director Alexander James Payne bought 20,000 shares for $19,000 on-market on December 16. He indirectly holds 74,694 shares and directly holds 68,786 shares.
• Mitchell Communication Group Ltd director Peter Nankervis indirectly bought 65,000 shares worth $30,550 on-market on December 15. He holds 65,000 shares.
• Large buying by Alan Brierty of Brierty Limited (BYL). This is in addition to buying by another director, Dalton Gooding in November.
• $478K worth of stock purchased by Tom Kiing of Jumbuck Entertainment Limited (JMB).
• Buying by Neil Tomkinson of Pan Pacific Petroleum NL (PPP).
• Buying by multiple directors of Quantum Energy (QTM) this week.
• Gloucester Coal Ltd director John Hamilton Bryan bought 15,000 shares for $43,650 on-market on December 18. He holds 54,000 shares. Fellow director Andy John Hogendijk directly and indirectly bought 6,000 shares worth $15,788 on-market on December 19.

nRecent directors' trades worth more than $200,000
Date	Company	Ticker	Director	Volume	Price	Value
15/12/08	Jumbuck Entertainment	JMB	Tom Kiing	1,228,023	0.39	$478,929
11/12/08	Aequs Capital	AQE	Drew Metcalfe	916,723	0.234	$214,841
11/12/08	National Hire Group	NHR	Dale Elphinstone	941,711	1.88	$1,770,276
11/12/08	Mintails Limited	MLI	Bryan Frost	13,000,000	0.026	$340,000
09/12/08	Collection House	CLH	Dennis Punches	3,707,283	0.35	$1,297,549
08/12/08	Origin Energy	ORG	Gordon Cairns	23,000	16.22	$373,060
08/12/08	Ramsay Health Care	RHC	Kerry Roxburgh	21,439	9.679	$207,514
04/12/08	North Australian Diamonds	NAD	Joseph Gutnick	78,205,715	0.009	$706,174
01/12/08	CI Resources	CII	Lip Sin Tee	655,162	1.055	$691,196
01/12/08	Headline Group	HLD	Brent Dennison	16,375,000	0.13	$2,128,750
28/11/08	Lycopodium Limited	LYL	Michael Caratti	159,475	2.01	$320,525
27/11/08	Melbourne IT	MLB	Lucinda Turnbull	155,995	1.721	$268,421
25/11/08	Bank of Queensland	BOQ	David Liddy	24,266	10.302	$249,988
24/11/08	Inventis Limited	IVT	Tony Noun	2,732,952	0.078	$212,319
24/11/08	Mitchell Communication Group	MCU	Harold Mitchell	779,000	0.351	$273,160
21/11/08	Babcock & Brown Japan Property Trust	BJT	Eric Lucas	1,050,000	0.375	$394,000
20/11/08	Billabong International	BBG	Gordon Merchant	39,646	9.077	$359,871

Source: The Inside Trader