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.

Telstra Corporation. With no end to the turbulence surrounding this stock, Telstra’s next foot forward promises to be crucial for shareholders. The newsletters all agree that the government is “holding a gun at Telstra’s head”, but generally conclude that the situation is not as bad as it looks. They believe that the negatives are already “priced into” the share price and that it is onwards and upwards from here on.

Telstra has held a virtual monopoly over Australia’s communication networks for many years, so many pundits thought is was inevitable it would follow the UK and NZ path to separation, although there is considerable conjecture about how this will take place. Most of the newsletters say Telstra will choose to separate “voluntarily”. One newsletter says the threat of exclusion from acquiring additional spectrum for advanced wireless broadband is too great, impacting on its best-performing profit centre.

If Telstra chooses to ignore the government it would be forced to demerge its hybrid fibre-coaxial network from the retail company or sell it outright. One newsletter says Telstra would be stupid to lose this asset, as the NBN Company may feel obligated to compensate Telstra if an agreement can be reached.

If Telstra chooses the less combative path, the next step is to submit to the ACCC its version of how it wants to be separated. There are many views on the form of separation Telstra may ultimately choose, but the key takeaway from the newsletters is that they are convinced of its ability to release value. One newsletter has gone as far to say that over three to five years there will be significant value will be released and that shareholders will share in the spoils.

• Investors are advised to buy shares in Telstra at current levels.

Suncorp-Metway. After posting a dismal profit result for the year to June, new chief executive Patrick Snowball faces the challenging task of recreating value in this bancassurer. Shareholders have paid a high price for poor management decisions, the global financial crisis and larger claims from natural disasters, which the industry is hoping will not become the norm.

One newsletter says valuations of Suncorp should contain a small premium for mergers and acquisitions involving the bank. There has been plenty of takeover speculation, and talk of the bank splitting its banking and insurance units has persisted for some time. One newsletter urges caution on this point because any sale will need to get past the competition watchdog, which is considerably more active in the financial services sector than many others.

Another reason for optimism comes from the strength of management, which is highly dependable on the line Snowball takes at the company’s annual general meeting in late October. As there are no synergies between its three business units, many view the company as a second-tier investment, but the newsletter maintains the belief that Snowball can change this.

Another publication says the 2009-10 outlook for the domestic general insurance industry is better than for some time, and with Suncorp’s shares having lost 4% in the past 12 months, there could be some bounce back to boot.

• Investors are advised to hold Suncorp-Metway shares at current levels.

Paladin Energy. After completing a $429 million private placement last week, this uranium producer says it will use the proceeds to fund growth and expand exploration projects in Australia.

Paladin produces uranium at Langer Heinrich in Namibia. Its Kayelekera mine in Malawi is due to begin production later this month, and one newsletter says this will be the biggest catalyst for a rerating of the stock in the next few months.

Most analysts like the outlook for the uranium market (see Pin a red flag on uranium stocks), and the newsletter says Paladin is currently the pick of the sector, with the potential for further gains in due course. Over the past year the stock has traded between $1.63 and $5.88. Chief executive John Borshoff said he is aiming to have a mine operating in Australia by 2013 at the latest, identifying Queensland as the state most likely despite a ban prohibiting uranium mining in the Smart State.

The newsletter says the most obvious target for acquisition, and value accretive for shareholders, is listed emerging uranium explorer Deep Yellow, where it holds a 19.29% stake. Deep Yellow could be bought with the proceeds from its planned $391 million placement and a little more.

• Investors are advised to buy Paladin at current levels.

REA Group. Operating real estate online classifieds site, realestate.com.au, REA is the leader in the field and one newsletter says is more popular than its next 15 competitors combined.

REA has diversified its brand strength, entering commercial property and businesses for sale, and one newsletter says the business could grow significantly if international growth is successful. If this is the case, what is clouding the outlook for the stock?

There is an emerging threat from search engine giant Google, which is using its Google Maps platform to list Australian real estate sales in particular areas. House-hunters can use Google to look at the area of interest, and even into the front yard of a house for sale. The newsletter believes this is of significant threat to the longer-term dominance of realestate.com.au in residential listings, which is its main revenue driver.

The company is still expected to deliver strong earnings in 2009-10, and to build revenue in new areas such as Italy, but questions remain about where REA will focus next. The concern looks not to be about the company’s performance, but that if shareholders were interested in being invested in an online classifieds-style stock another newsletter says there are better options currently in the market.

The recent float of motor vehicle classifieds site Carsales.com following several years of fragmentation in the market, with newspaper groups establishing their own websites, was a good example. The stock made its debut at a 14% premium to the listing price of $3.50 a share. The newsletter says there can be many parallels found with online recruitment website Seek. Like Carsales.com.au, Seek is a clear leader in its field, and the newsletter believes there are better options, with Seek being the preferred stock, with its larger, more established businesses.

• Investors are advised to sell REA.

Biota Holdings. The pharmaceutical sector is still continuing to benefit from the swine flu pandemic, or what has become of it, with Biota’s share price continuing to exhibit strength.

The drug marker’s major customer GlaxoSmithKline (GSK) tripled its requirement of the flu treatment Relenza, which Biota developed, as governments around the world buy up the drug. Biota receives royalties of 7% worldwide from GSK for the drug, and 10% in Australia.

One newsletter says the current sales spike won’t last forever, but Biota said in August that it is focusing on expanding its drug portfolio and aims to have two or three products in the market generating royalties soon.

Another newsletter questions the run-up of the share price over the past month on no news, but this could be in the expectation that Biota may release information about its latest projects. Analysts have pencilled in bullish sales forecasts as higher-than-expected sales royalties flow through due to the anticipation of a worsening northern hemisphere flu season.

• Investors are advised to hold Biota Holdings shares at current levels.

Watching the directors

• REA Group director and Sydney real estate agent to the stars, John McGrath, sold two million shares for $14,400,000 to institutional shareholders on September 16, representing 1.6% of the company's issued capital. He retains 139,086 shares. McGrath said he simply wanted to diversify his investment portfolio, but how badly does he need the money? See above for the outlook on this company, which may be losing out to other online classified businesses with better and or more established models.
• In a statement covering three months worth of trades, Primary Health Care director and founder Edmund Bateman confirmed he had sold down close to a third of his stake – from 10.84% to 7.4%. Bateman sold 11,333,290 shares between June 10 and September 16 for $70,580,433.02. The medical services company is seeking to draw down a $900 million debt facility via a $180 million institutional placement and a $20 million share purchase plan, together with a $125 million refinancing from Deutsche Bank. The $180 placement was for 29.85 million shares at $6.03 per share. The shares are currently trading at $6.13.
• Directors at retail giant Harvey Norman have been selling off scrip with gay abandon, with director John Slack-Smith letting go of a whopping 1,400,000 shares worth $6,041,760.72 on September 17. Matthew Ackery indirectly sold 350,000 shares on-market on September 17, for $1,507,205. At the end of last month, Harvey posted a 40.2% drop in profit for the full year, but said it remains cautiously optimistic on the outlook for the market. Broker’s earnings estimates remain for the retailer; however one has issued a downgrade on the stock, telling investors it is a pure valuation issue as it is time to take some profits off the table – which hopefully is all these directors are doing.
• OneSteel chief executive Geoffrey Plummer paid $1,121,999 for 340,316 shares on-market on September 11. Plummer now holds 682,468 shares and 90,000 options and 1,038,567 share rights in Australia’s second-largest steelmaker. OneSteel has had to cope with a poor domestic year for the local steel sector and there are growing concerns Australian producers may miss out on major contracts. A key development they are set to miss out on is the newly approved $50 billion Gorgon LNG development in Western Australia as reports claim operator Chevron will Japanese contractors on the project. The report says only around 20% of the construction project will involve Australian steel makers, distributors and fabricators.
• Chief financial officer of Australian grocery wholesaler Metcash, director Edwin Jankelowitz, has made a cool $900,000 after selling 200,000 shares he had in indirect interest in between September 11 and 15. He indirectly holds 320,000 shares and 650,000 options. At the beginning of the month, Metcash reached a $250 million supply deal for 10 years with the Coles supermarket chain, owned by Wesfarmers, which is a big boost for its sales. Six days later, however, it lost an estimated $420 million contract as Woolworths decided it would service its Queensland liquor business via it s own distribution solution when its current contract with Metcash expires mid-way through next year. Director Neil Hamilton bought 20,000 shares for $90,990 on-market on September 11, 2009, and now holds 20,000 shares.

nRecent transactions over $200K in value
Date	Company	ASX	Director	Quantity	Price	Total	Action
07/09/09	Chalice Gold Mines	CHN	Tim Goyder	1,250,000	0.341	$426,034	Buy
04/09/09	Challenger Financial Services	CGF	Ashok Jacob	250,000	3.2	$800,223	Buy
04/09/09	Whitehaven Coal	WHC	Hans Mende	75,000	3.46	$259,500	Buy
04/09/09	Magellan Financial Group	MFG	Paul Lewis	331,000	0.786	$260,075	Buy
03/09/09	Whitehaven Coal	WHC	Hans Mende	144,861	3.389	$490,982	Buy
02/09/09	PMP Limited	PMP	Richard Allely	285,000	0.795	$226,685	Buy
02/09/09	Whitehaven Coal	WHC	Hans Mende	180,139	3.366	$605,267	Buy
02/09/09	Suncorp-Metway	SUN	Patrick Snowball	66,123	7.55	$499,229	Buy
02/09/09	Healthscope	HSP	David Evans	210,000	4.52	$949,560	Buy
01/09/09	Healthscope	HSP	Zygmunt Switkowski	70,000	4.46	$312,017	Buy
31/08/09	Jumbuck Entertainment	JMB	Tom kiing	2,600,000	0.32	$836,576	Buy
28/08/09	PrimeAg Australia	PAG	Stephen Williams	200,000	1.028	$205,504	Buy
27/08/09	Oceania Capital Partners	OCP	Peter Yates	171,524	2.915	$500,000	Buy
26/08/09	Whitehaven Coal	WHC	John Conde	71,800	3.46	$248,428	Buy
25/08/09	Newcrest Mining	NCM	Richard Knight	9,815	28.94	$284,046	Buy
24/08/09	Challenger Diversified Property	CDI	Robert Woods	500,000	0.43	$215,000	Buy
21/08/09	Nexbis Limited	NBS	Dato Sri Johann Young	500,000	0.45	$225,000	Buy
19/08/09	Oakton Limited	OKN	Paul Holyoake	75,000	2.89	$216,750	Buy
17/08/09	Aquarius Platinum	AQP	David Dix	89,943	5.58	$501,882	Buy

Source: The Inside Trader