Collected Wisdom

Buy Newcrest, hold Coca-Cola Amatil and Commonwealth Bank, and sell Toll, the newsletters say.

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.

Toll (TOL). And then there are companies like Toll, which take a thumping on the markets because their prospects really don’t look so good, or able to be turned around easily.

The transport and freight company announced a significant full-year earnings guidance downgrade last week to $400-420 million (about 3.5%-8.5% off last year’s $436 million), when expectations were for a rise to $450 million.

But the real Toll devils came in the detail, as it wrote down its Japanese Footwork Express business ahead of a possible sale and its Australian commercial property portfolio.

Japan is not recovering well from the 2011 earthquake and tsunami disasters, and the $146-$166 million writedown of its Footwork parcel freight business – fully acquired in 2009 – comes amid a strategic review expected to result in a sale. The writedown wipes all goodwill and intangibles, as well as some property value, leaving the business valued at roughly $200 million. Australian commercial property was written down $56 million pre-tax, or $39 million after tax.

In addition, Toll has structural issues to deal with. The freight forwarding and logistics businesses are susceptible to changes in the retail and non-mining economies, which are experiencing some less-than-ideal conditions lately. Toll is also exposed to international economic cycles, and decreasing Asian demand adds to concerns in marine and refrigerated transport divisions.

Internally, the company lost long-term managing director and company founder Paul Little at the end of last year and replacement Brian Kruger has done little to stem extensive capex spending and a debt-heavy balance sheet due to acquisitions and international expansion.

The investment press has lowered its expectations for growth and margins as a result of the earnings update, and there’s plenty to suggest this is just beginning to pave the way for future bad news.

  • Investors are advised to sell Toll at current levels.

Newcrest (NCM). Risk and volatility are suddenly the name of the equities game again, which means a buying opportunity for some, and the chance for safe(r) havens to shine.

One such shiny stock is gold miner Newcrest, which distinguishes itself in the eyes of the investment press by not only being a producer of a commodity with price upside, thanks to fear spikes, but also by being a sound company with very good growth prospects in general.

However, the share price has deflated somewhat in the past fortnight due to some negative results. Newcrest’s recent third-quarter gold production release contained the double-barrel bad news of declining production quarter-on-quarter and lower guidance for fiscal 2012. Production dropped 8% on the quarter (12% year-on-year), and guidance was lowered from 2.43-.55 million ounces of gold and 75-85,000 tonnes of copper to 2.25-.35 million ounces and 70-75,000 tonnes, respectively.

This was the second production guidance downgrade this year, largely as a result of rainfall hampering mining, and the sharemarket has voiced its displeasure, lopping off more than 6% since the start of May – and that’s even with Friday’s rally in gold stocks.

The problems for Newcrest lie outside of Australia. A new Indonesian tax on metal ores, announced in early May, won’t affect the company’s Gosowing project due to existing contracts, but its Lihir mine off Papua New Guinea is another matter. Acquired in 2010, the resource is vast, but is also trapped under a dormant volcano that makes it difficult and expensive both to mine and treat the ore. Mechanical problems and maintenance issues are also adding to costs at an already expensive facility in terms of capex.

But, argue the newsletters, all this is small potatoes which has led to short-term, knee-jerk selling of a stock with tremendous long-term potential. Newcrest’s value lies in the latter half of this decade, and beyond, as its long mine lives – and the $1 billion required to bring Lihir up to scratch – pay off.

Good management, which Newcrest has, can overcome the problems it faces in the short term, and even with very conservative longer-term price outlooks for gold and copper – at about $US1000 an ounce and $US3.20 a pound – it appears undervalued, and should still generate decent cashflow. It may be a bumpy 12-18 months for Newcrest, but the direction looks promising and, at the right price, the miner provides an excellent option for gold exposure.

  • Investors are advised Newcrest is a long-term buy at current levels.

Coca-Cola Amatil (CCL). When a company has such a mature cornerstone product in such developed markets as CCA does, it helps when it has a great marketing strategy and growth prospects as well.

There’s a lot to like about this company, which aside from bottling and distributing Coke and its affiliated soft drinks in the Australia-Pacific region also owns the SPC Ardmona brands, as well as interests in bourbon and the pending acquisition of a Fijian brewery. The newsletters agree all is roughly where it should be in terms of growth and strategy, and encourage investors to hold on.
After its AGM last week (May 15), the company’s share price lifted more than 1% against a benchmark decline of about the same amount, and it fell less than 1.5% last week as the market wiped off more than 5.5%.

This performance, along with a generally solid upward trajectory since March, comes down to growing volumes in Indonesia, and a developing alcoholic beverages strategy in Fiji and New Zealand that has excellent potential to transfer to Australia in the medium term.

After a slower-than-expected start to the year, attributable to cooler weather, volumes in the core Australian business are set to rise 1-2% for the first half, with group profit guidance for a 4-5% H1 increase.

While SPC Ardmona continues to struggle with the high dollar and cheap imports, the Beam spirits business spun off the Pacific Beverages joint venture is performing well. Due to selling out of that JV, CCA can’t enter the Australian beer market until late 2013, but it’s still doing plenty to prepare for this. Link-ups with Carlsberg and Grupo Modelo to distribute in the Pacific region, as well as the $62 million acquisition of Fiji Brewery from Foster’s, all enable CCA to develop experience in alcoholic beverages before Australian entry.

Temporary economic downturns may hit the company in less-developed markets, and the coming supermarket retail wars in Australia could impact some of the less secure brands, such as Mount Franklin or Vitamin Water, but are unlikely to affect Coke. The newsletters are particularly keen on the longer-term outlook for Indonesia, with 240 million people and an appetite for tea and juice (in which CCA has several leading brands).

  • Investors are advised to hold Coca-Cola Amatil at current levels.

Commonwealth Bank (CBA). There may be divergent opinions on the attractiveness of Australian bank stocks as a class, but either way the investment press sees Commonwealth as a strong bank with good-looking earnings – if a touch on the pricey side.

A third-quarter trading update last week did little to change minds, as unaudited cash NPAT of $1.75 billion, or 3% year-on-year, met expectations and displayed strength considering higher funding costs, lower margins and thin lending growth.

Bad debt expenses were particularly impressive, falling 23% on Q3 2011 to just $232 million. This is not only a far cry from the $700 million or so each quarter in second-half 2009 and first-half 2010, but also a stark contrast to Westpac’s 31.3% year-on-year increase in bad debt expenses in its half-year results.

This highlights the relative conservatism at Commonwealth, where provisioning and balance sheet management serves it well in comparison with the other three majors.

Steady earnings growth also supports near-term profit forecasts and expected dividend yields. Fully-franked dividends are expected to rise from about 6% yield to 7% in the next 24 months, grossing up to more than 9%. Given the relative safety generally afforded the big four banks, and given that Commonwealth is considered one of the safest and most conservative of the four, these yields look good. The newsletters also predict the bank’s return on equity to outstrip its peers by several percentage points and the increasing capital base, coupled with moderate lending, positions the bank well for Basel III requirements in the future.

Headwinds for the bank are not easily quantifiable, but at least they are identifiable. The intense competition for deposits, coupled with lower rates and expensive wholesale funding, is putting pressure on margins, though this is hardly unique to Commonwealth. The European crisis is shutting down credit markets there, but deposit growth and debt issues are likely to offset some of the impact. Of further concern is the impact nervous investors may have on the wealth management division, which benefits from a strong sharemarket, and declines in home loan demand and market share.
The leading market share position of Commonwealth in home loans also makes it the most vulnerable of the four to trouble in the property market, which remains an uncertain sector.

Overall though, Commonwealth is a resilient performer with established weight, and its third-quarter results raise nothing to dispel that status.

  • Investors are advised to hold Commonwealth Bank at current levels.

Mirabela Nickel (MBN). While sometimes it’s a good idea to get out of a stock taking a beating on the markets – certainly if it’s taking one for good reason – there are other times when it can pay to hold on. The newsletters are somewhat divided on which side of the coin Mirabela Nickel is coming down on, but are looking at staying in for the time being.

Mirabela’s share price was flat in last week’s volatile market, but has fallen more than 38% since the start of May. The chief driver of this has been the fall in nickel prices to $US8 a pound, which created cashflow problems in ramping up the miner’s primary Santa Rita mine in Brazil. This in turn had led to a $120 million equity raising, with a $20 million placement to Resource Capital Funds (a US hedge fund) at 40c a share – an 18% premium to its last closing price.

The remainder will be raised in an 8-for-13 accelerated non-renounceable rights offer, priced at 30c – or 12% below its closing price at the announcement – with last Friday as the last date for eligibility.
It’s not all bad news for Mirabela: obviously at least someone at RCF sees value in the company, which has solved its short-term funding issues with this raising. Full-year guidance remains unchanged, both in terms of concentrate volumes and cash costs per pound (19-21,000 pounds, and $US6, respectively), although current costs of $US7.37 a pound will be problematic if they don’t fall in line with expectations.

Capex guidance was also maintained at $42 million and the mine is expected to be profitable in current conditions by the end of the year.

While it is hardly a situation without considerable risk, there are two things going for Mirabela. Firstly, there’s a longer-term supply gap in global nickel production of more than half a million tonnes, with few new projects on the horizon. Secondly, the issues for the miner were apparently related to cashflow only, while the underlying position is sound, with exploration upside.

Debt of $US456 million remains a concern, and growth in production is sorely required, but these aspects have not changed as a result of the recent ructions.

  • Investors are advised to hold Mirabela Nickel at current levels.

Watching the directors

As Toll Holdings’ (TOL) share price took a hit of more than 20% last week, amid a market that saw plenty of losers, the chairman stepped up to show some faith. Ray Horsburgh bought $49,592 worth of Toll stock, or 11,276 shares, at $4.40 each. Toll closed well below that figure today, falling to $4.27.

There were buyers at DuluxGroup (DLX) as well last week, which has copped a mixed reaction to its expansion plans taking over garage door-maker Alesco (ALS). Non-executive directors Judith Swales and Chew Gaik Hean bought 20,000 and 19,000 shares, respectively, for $2.98 and $3 a share. Dulux closed below this level as well today, ending today 3.02% lower at $2.89, spelling a few early losses on paper for the directors.

On the selling side of the equation, Villa World (VLW) managing director John Potter offloaded 1.3 million shares for 86c each, a total of just under $1.12 million. The sale represented about a third of his total stake in the housing group and leaves him indirectly holding 2.25 million shares.

Ziggy Switkowski led a charge of on-market share purchases from Oil Search (OSH) board members today. The former Telstra head picked up 75,000 shares in Oil Search, where he is a non-executive director, at $6.77 each for a total purchase of more than half a million dollars. Also adding to their stakes were non-executive directors Richard Lee, who bought 15,000 shares at $6.75 and $6.60 for a total of $100,500, and Agu Kantsler, who bought 10,000 shares at $6.85 each. Oil Search last week said it had received some attractive bids for its Papua New Guinea exploration acreage.

Finally, Fairfax (FXJ) CEO Greg Hywood has opened his account at Fairfax-controlled Trade Me Group (TME), where he is a director. Hywood paid $156,000 for 50,000 shares in the company, which is dual-listed on the NZX and ASX. The move follows last month’s announcement that the New Zealand-based online company is buying the AutoBase car listing aggregator.

-Recent large directors' trades
Date Company
Code
Director
Volume
Price
Value
Action
14/05/12 New Zealand Oil & Gas
NZO
Rodger Finlay
500000
0.79
$NZD394,934
BUY
10/05/12 Jumbo Interactive
JIN
Mike Veverka
250000
1.44
$360,070
SELL
9/05/12 Hydromet Corporation
HMC
Lakshman Jayaweera
29643498
0.048
$1,422,888
SELL
7/05/12 Webjet
WEB
Steven Scheuer
1000000
3.45
$3,451,290
SELL
4/05/12 Western Areas
WSA
Julian Hanna
69321
4.97
$344,400
SELL

Source: The Inside Trader

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