Collected Wisdom

Hold Seven West and Patties Foods, buy Woodside and PanAust, and sell CSG, 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.

Seven West Media (SWM). It has not been a good run for media companies in the past year as the advertising downturn has bitten at the same time as deep structural changes to newspaper consumption. Seven West has been hit hard – the share price is down more than 50% year to date. However the investment press is starting to find some value.

The latest development is a $440 million accelerated renounceable one-for-two capital raising at $1.32 a share, which was widely expected by analysts and foreshadowed in the media in the week leading up to it. At the same time, Seven West also provided a trading update – on the upside – with full-year EBIT guidance lifted above the prior $460-470 million range to $473 million.

The moves come along with the appointment of the former Woodside chief, Don Voelte, as the company’s chief executive following the widely respected David Leckie. Voelte has been on the Seven West board for several years, so the newsletters acknowledge he should be across the issues it faces. But he lacks extensive media experience, and some interpret his appointment as transitional.

In spite of the poor conditions for the sector, the newsletters remain cautious on abandoning the stock, which maintains a strong national stable of assets across a range of media and evidently some profitability. They note that while there are no immediate signs revenue will be improving, it’s not getting much worse either. As such, the worst may be behind the company after the capital raising reduces debt and the share price has more than fully absorbed the shock of the massive April profit guidance downgrade.

Media companies are highly cyclical, and while there are some deeper structural problems at play and it’s debatable whether the bottom of the advertising cycle is near, the newsletters believe this stock has taken too much of a share price battering for a company with decent profitable assets and big dividend payments.

  • Investors are advised to hold Seven West at current levels, and participate in the capital raising.

Woodside (WPC). Over at Don Voelte’s former home, things are looking decidedly rosier.

As discussed in Collected Wisdom several months ago, Woodside has begun production from the massive Pluto liquid natural gas project and the first quarterly production update to include Pluto exceeded almost everyone’s expectations. In addition, the sale of its 14.7% minority stake in Browse has passed FIRB approval, which will inject $2 billion into the company, and the project there has conditional Environmental Protection Agency approval.

FY12 production targets include 20-23 million barrels of oil equivalent from Pluto, lifting total production targets by 2-5%, and actual capacity utilisation for the new project was 80% – against expectations of 36%. Output was up 43% for the quarter in total, and LNG production lifted 92%.

Investors should also remember Shell’s 24% stake in company, which was confirmed as up for sale in February. The eventual home for that large stake in Australia’s premier oil and gas producer adds the chance of a takeover to a share price that the investment press already see as well below value.

  • Investors are advised to buy Woodside at current levels.

PanAust (PNA). It’s all well and good to have a highly successful and profitable new project come online, such as Woodside with Pluto, but it’s also sometimes valuable to not proceed with a weak project. This is the case at PanAust’s Inca de Oro copper prospect in northern Chile, which has been put on the back burner after a poor bankable feasibility study.

However, the newsletters aren’t too put off by this development, as the outlook for copper demand is uncertain and a quarterly production update on the rest of the business shows it is in very good health. Production guidance was maintained at 63-65,000 tonnes of copper and while gold production slightly missed expectations for the quarter at 12,664 ounces, this was achieved at $US514 per ounce. The industry average is $US600-800 per ounce, and with the gold price still above $US1500 an ounce on the London market margins are very favourable.

PanAust is mostly based in Laos, and the main Phu Kham mine is on track to expand in the coming half, pumping out 34,000 tonnes of copper and 30,000 ounces of gold.

In addition, the company’s share price is down 37% in the past six months, mostly on fears of a global commodities slowdown and concerns about the price of copper going forward. But at current prices the newsletters see plenty to like in a company with consistently solid production, promising exploration and development, and no major downside to the sidelining of the Inca de Oro project.

  • Investors are advised to buy PanAust at current levels.

CSG (CSV). The poor performance of the Australian stock market through the second half of 2011, and since May this year, has left many companies oversold in the eyes of the investment press. In a weak market it can be easy to see companies as a ‘buy’, as investors look for value in cyclical downturns. And then there are companies such as CSG, with Canon and Xerox print and printed-photo businesses that seem almost quaintly outdated, and have few prospects for improvement.

After completing the $227.5 million sale of its Technology Solutions business to NEC earlier this month, the company is left as a purely print services play, and has, in the eyes of the investment press, sold off the better half of its business.

The most recent EBIT forecast for the full year – and results are expected in late August – has earnings declining 30% and results will include a write-down of the Australian Print Services business.

CSG acquired the Canon dealership in 2010, and the newsletters say it has neither performed to expectations, nor kept to manageable costs. With the print services business in the midst of a restructure to cut costs and deliver $13 million of savings by September, and a further $4 million the following year, it may be tempting to see some positive management action. However the outlook for print in an online world is looking increasingly bleak – and the newsletters have given up on CSG.

  • Investors are advised to sell CSG at current levels.

Patties Foods (PFL). In tough retail conditions and despite rising costs, Patties has forecast a 4-7% full-year net profit increase.

NPAT is now expected at $19.2 to $19.7 and while this gain was short of some of the investment press’s forecasts, the view of the business as a sound method of branded consumer food exposure is maintained.

Margins are the biggest headwind for Patties, and despite increased pressure from the major supermarkets on price and rising inputs, the strength of brands – Four ‘n’ Twenty being a prime example – is holding it in good stead. Market share is estimated at above 50%, providing a buffer against generic brand pressure. This is also a potential concern, but strength of brand and perceived taste and quality differences do affect consumers in this regard.

More importantly, new packaging technology is scheduled to be introduced in September, which will cut staff numbers and increase efficiency.

Patties has new contracts in the convenience store sector through BP service stations and Coles Express locations, as well as in Brumbies bakeries – and this is increasing its reach and getting its brands in more locations.

The newsletters like the smell of this company’s core products, like the flavour of its management and a fully-franked dividend with an expected grossed-up yield of almost 8% is just sauce on top.

  • Investors are advised to hold Patties at current levels.

Watching the directors

Trading is thin amongst the directors as earnings season ramps up, restricting their ability to trade. The main splash this week came from AP Eagers (APE) non-executive director Nicholas Politis, who snapped up 1 million shares in the company for $3.55 apiece. It’s more than he paid for his two most recent, smaller, purchases in May at $2.97 a share, and follows a string of small buys – some just a few hundred shares – throughout April and May. AP Eagers, a major car dealership company, took a strategic stake in fellow car dealer Automotive Holdings (AHE) earlier this month.

Also on the buying side was Integra Mining (IGR) executive director and company secretary Peter Ironside, who paid just shy of $200,000 on-market for 615,000 shares. Integra recently announced a $25 million share placement at 29c a share, and a $20 million project finance facility, and shares in the company are down 39% in the past three months, 22% for the month, including a 6.5% drop today to close at 29c.

Gryphon Minerals (GRY) chairman Norman Mel Ashton was the major seller, offloading 300,000 shares for $179,195 – or just under 60c each. Gryphon shares rose back above 70c each in the week following the sale, and have been on a bit of a rollercoaster following a massive upgrade to its West African Banfora gold resource earlier this month, more than doubling its gold reserves from 2 million ounces to 4.5 million ounces.

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