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.

Cabcharge (CAB). After taking the ACCC’s $15 million rap on the knuckles for engaging in anti-competitive behaviour in its stride, Cabcharge’s list of potential headwinds is looking pretty short.

Cabcharge had a tough 2009-10, and while its 6.2% drop in profit, to $57.6 million, wasn’t well received, according to newsletters, this is still a well-built business, which investors should not be in a hurry to divest. As one publication points out, almost every time a person takes a taxi in Australia, Cabcharge makes money.

The company has big plans to do the same in the UK, with taxis and with passenger bus transport. Its growth potential has also caught the eye of Singaporean consortium and public transport operator ComfortDelGro, which recently acquired $14.1 million of shares in the company, lifting its stake to 9.64%. This move came shortly after ComfortDelGro declared a takeover bid for Swan Taxis, which itself held Cabcharge shares. Newsletters tip that as one of the world’s largest transport groups, it will probably eye off an even bigger chunk of Cabcharge in the future.

Cabcharge’s disappointing full-year result was due to costs associated with the ACCC case, as well as the effects – particularly on its UK operations – of the aftermath of the GFC.

Executive chairman Reg Kermode says, however, that Cabcharge is cautiously optimistic about signs of improvement in the Australian economy. Things should also pick up in the UK, he says, particularly in connection with the lead-up to the 2012 London Olympic Games.

Newsletter forecasts place Cabcharge’s 2010-11 price/earnings multiple at 11.2, or a 20% discount to the historical average. With a strong return on equity of 20% and a net profit margin of 30.6% achieved last year in spite of a range of challenges, this stock appears to be well on the path to greater stability and growth, with a range of opportunities ahead to keep an eye on.

• Investors are advised to hold Cabcharge shares at current levels.

Wotif (WTF). The founder of internet startup Wotif.com, Graeme Wood, who has done plenty of cost-benefit analysis in his time, is questioning the cost of the National Broadband Network and the necessity of having such high speeds available to private internet users across the board.

Wood should be happy about the benefits the NBN will bring to his business, which is sitting pretty as market leader in the online accommodation-booking service sector. Online sales have risen from just 5% of the accommodation market in 2002 to 16%, and are forecast to reach 26% by 2014.

The newsletters are in lock-step on this stock, attracted by its online niche, which makes it an up-and-coming business with attractive long-term growth prospects. Wotif has the first-mover advantage and is tipped to deliver strong, organic growth for years to come as the shift in online travel continues.

Launched in March 2000, Wotif has proved its resilience already, refusing to be dragged down as it caught the tail-end of the implosion of the high-technology bubble, to become an internet success story.

This doesn’t mean it’s a guaranteed dream run for the company and shareholders alike, however, as a strong Australian dollar is pushing holiday-makers offshore, and weak consumer discretionary demand means there will be some struggle to show strong earnings growth in 2010-11.

Newsletters forecast a 2010-11 P/E of 17.4, which may seem high but is actually a 32% discount to the historical average for Wotif shares. The company has almost $90 million in cash, no debt and strong cash flows from operations. According to reports, a boost to earnings growth may come from further bolt-on acquisitions such as GoDo – an online booking service for leisure activities.

This is a company with a 67.4% return on equity and a 38.9% net profit margin, newsletters note, which makes for a rare opportunity to invest in a company with real legs.

• Investors are advised to buy Wotif.com shares at current levels.

Metcash (MTS). Metcash operates in the fast-paced food and consumer goods industry, and newsletters note that since its Foodland acquisition, it has become a significant third player in the Australian grocery market.

Metcash has been soft of late, because the ACCC is not entirely happy with the company’s proposed $215 million acquisition of its rival Franklins. Newsletters say, however, that this response by the regulator came as no surprise and as yet is of no material concern.

While Metcash has to watch the resurgence of its larger rival Coles and the growing market share being eaten up by Woolworths, it has a highly competitive liquor distribution division.

The newsletters urge investors to persevere with the stock as it continues to make progress through brand consolidation, while its Campbells Wholesale division is expanding into the convenience store segment. The company’s main driver is food distribution, and it is realising growth and margin improvement through scale efficiencies.

Publications offer a note of caution that Metcash is a defensive stock in its sector, and not one to favour in a rally. However, industry dynamics are changing as independents continue to increase market share, while Metcash should benefit from changes to the industry and consumer trends.

Metcash has reaffirmed its guidance for 2010-11 of 6–8% earnings per share growth, with its IGA Distribution business unit to contribute about 84% of group earnings. Metcash is expected to have significant future growth driven by store expansion.

Notwithstanding the difficult competitive landscape, Metcash is still good value at current levels, and could thus rise further in line with the market as a whole.

• Investors are advised to hold Metcash shares at levels up to $4.75.

The Reject Shop (TRS). Following on from last week’s sell recommendation for The Warehouse Group (click here), this week one analyst is also putting fellow discount retailer The Reject Shop in the reject bin, saying that the stock is too high at current levels.

Based on Friday's close of $17.35, The Reject Shop effectively trades at 19.47 times the company's most recent earnings, and well over 17 times’ forward earnings. This is a significant premium to the retail sector at large, perhaps ironic for a company that specialises in cheap goods. Then again, the skittish market has been favouring defensive stocks in otherwise cyclical industries.

The Reject Shop has certainly been a strong performer to date, gaining more than 20% in the past 12 months, but newsletters say that now is the time to take profits.

Although one newsletter has highlighted that the company’s share price has broken a key technical resistance level at $17 per share, the fundamental analysts believe this is yet another reason to sell. Indeed, The Reject Shop has seemed to reject the laws of technical analysis in the past.

As far as the business goes, the past year for The Reject Shop has been good. A record 27 new stores were rolled out, the company reported a 23% increase in full-year net profit and significant cost savings were made on the back of improved supply chain management. Nonetheless, other retailers have also improved their supply chains amid a tough year for retail and while The Reject Shop shares have been rewarded, theirs haven’t.

The Reject Shop is now looking expensive. The pundits say to take profits now, and buy back when this discount store is, once again, at a discount.

• Investors are advised to sell The Reject Shop shares at current levels.

Bendigo & Adelaide Bank (BEN). Public goodwill, newsletters say, is the key to Bendigo & Adelaide Bank’s competitive advantage, after rolling out branches in locations deserted by larger banks in the 1990s. But this stock has more going for it than merely feel-good vibes, as it continues to reap the rewards from the 2007 merger with Adelaide Bank. This union diversified the business’s balance sheet and also expanded the bank’s geographical footprint.

According to newsletters, Bendigo’s relatively large proportion of non-interest rate sensitive customer deposits neatly complements Adelaide’s focus on third party mortgages. A business such as this will always be vulnerable to asset quality and funding pressures, however. A regional bank by its very nature cannot compete with the big four for scale, diversification and credit ratings.

Conversely, image among the banks is undoubtedly an important consideration in the current environment. Bendigo & Adelaide Bank has not been tarnished by the outcry against high fees currently associated with the major banks. Nor is it weathering the resultant customer churn in the wake of such incidents as the recent class action against ANZ for fee gouging.

Bendigo & Adelaide Bank booked a solid $246.6 million full-year profit, up from $83.8 million in the previous year and managing director Mike Hirst flagged has flagged optimism in terms of future funding. Publications note that smaller operators like this are capturing a greater share of both savings and loan books.

Newsletters say the lender’s management needs to deliver a strong recovery in underlying earnings and build on recent momentum before market confidence is 100% restored. Also on the radar for shareholders are the persistent talks of a tie-up with another solid regional business in the form of Bank of Queensland. Any deal is pure speculation at this stage, but Hirst has himself touted his business’s proven track record for opportunistic and value-creating M&A activity.

• Investors are advised to hold Bendigo & Adelaide Bank shares at current levels.

Watching the directors

Commonwealth Bank of Australia (CBA) chief executive Ralph Norris is set to be seriously cashed-up in the wake of his 75% pay rise to $16.2 million – which has the Financial Services Union up in arms. His personal balance sheet, however, has also been swelled by his September 17 sale of 75,000 ordinary shares for $52.85 a share (a total of $3.96 million) or roughly one quarter of his holdings of directly held ordinary shares. With the CBA share price experiencing some resistance at the $53 mark and some funds promoting the idea of shorting CBA as a way to play overvalued Australian house prices, this might prove very prescient.

Allied Gold (ALD) executive chairman Mark Caruso has lifted his stake by 100,000 shares for $45,530 at 45.5¢ a share just after the miner boosted gold reserves at its Simberi project in Papua New Guinea to 7.8 million ounces. With his stake of ordinary fully paid shares now at $7.68 million, Caruso may have made his move with the potential of this minor miner in mind as the gold price continues to head north.

Ramsay Health (RHC) director Bruce Soden has sold 1335 Ramsay CARES (RHCPA) through the Soden Superannuation Fund at $98.25 per CARE in an on-market trade. Soden now indirectly holds 2000 of the hybrid instruments, which Eureka Report reviewed earlier this month (click here). Meanwhile, on September 20 Ramsay managing director Christopher Rex bought 21,906 ordinary shares at $14.67 each for $321,466.

IOOF (IFL) managing director Christopher Kelaher has disposed of 195,314 ordinary shares over September 16 to September 20 at around $6.86 a share, bringing in $1.33 million. Kelaher has lightened his load to 4,049,504 ordinary shares and 134,048 options over ordinary shares exercisable at $9.99. The IOOF head may be licking his wounds as his vision of acquiring AXA’s North investment platform for a “marriage made in heaven” appears – for the time being at least ­– to have been quashed by the end of NAB’s pursuit of AXA APH.

Source: The Inside Trader