Collected Wisdom

Buy AMP, hold Fairfax, Qantas and Coca-Cola Amatil, and sell Oroton, 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.

Fairfax (FXJ). How low can Fairfax go? With the share price already a shrunken sorry sight, the market wiped a further 20% off late last week after a dismal full-year result to close on Friday at 45.5c.

The hard-to-ignore number is $2.73 billion – the size of Fairfax’s reported net loss for the year. However, as previously foreshadowed in Collected Wisdom, this was caused by a significant but largely expected write-down to the value of its print mastheads The Age and The Sydney Morning Herald. The company had been carrying billions in goodwill and intangibles, and the roughly $2.8 billion non-cash impairment reflects a much weaker media landscape in general. With $140 million of other significant items, that means the underlying assets are, as chief Greg Hywood is at pains to point out, actually still profitable. ‘Normalised’ NPAT was $205 million and EBITDA remained above $500 million in what is generally agreed to be a media perfect storm of weak advertising coupled with online change.

The investment press has suggested for a while now that a break-up of Fairfax would be a boon for investors as the radio assets, remaining stake in Trade Me (TME), and regional newspapers are weighed down by the metropolitan mastheads. While Fairfax has to date consistently ruled this out, ongoing poor performance can change a board’s perspective and media reports this morning suggested major shareholders were urging asset sales. Also, though Gina Rinehart may be attempting to sell down her stake further, now she has secured the board seat she was after her involvement with the company is not over yet.

The major restructuring being implemented could also see a leaner, cleaner company emerge from the wreckage. The ‘Fairfax of the future’ plan is drastically cutting staff and hopefully creating more revenue stream from the internet – turning a current point of weakness into a potential strength. It may be an uphill battle, but one that would be helped by a cyclical turn in the ad market and a few select asset sales. All this, as well as the deeply discounted share price, has the investment press suggesting that it can’t really get much worse. There is a smattering of calls for a speculative buy, but the general mood is that if you somehow haven’t sold yet, hold on – this looks like the bottom.

  • Investors are advised to hold Fairfax at current levels.

Oroton Group (ORL). Long-time luxury darling Oroton, the group which consistently added profits and preserved shareholder value through the recent retail malaise, has had a sharp wake-up call. The company lost its exclusive licence to distribute Ralph Lauren in the region as of June 30 next year, and that means a reluctant farewell to 45% of sales and 35% of net profit.

The market wasn’t exactly delighted about this, and the share price dropped from $7.74 before the announcement to $6.16 on resumption of trading, before recovering slightly to sit at $6.40 for much of last week.

The newsletters went through a brief period of consideration in that week, reviewing whether the loss of the licence was really as bad as it seemed. The initial mood from broker research seemed to be that it was a setback for the company, but not a disaster. Oroton itself said contingency plans were in place. The newsletters considered all this and disagree – it looks ugly.

Not only does the loss of the Ralph Lauren licence reduce the financial side of things, it also cuts diversity of brands and leaves the company open to business risk as it repositions. While some have pointed to the better margins at the Oroton brand, and freed-up working capital, the fact remains it’s a bad time in the retail market to take a hit like this and have to recover and reposition.

An announced push into Asia with the Oroton brand also adds to the risk profile, and though management is well-regarded it just doesn’t seem worth it to stick with an embattled luxury retailer on the hopes of a fresh start.

  • Investors are advised to sell Oroton at current levels.

Qantas (QAN). Like Fairfax (see above), Qantas was another big-name company that topped off a horror year with a sizeable loss. However, again like Fairfax, investors should consider holding on as this was a combined result of large one-off costs and a single poorly-performing division.

The Qantas share price has slid roughly 20% this year, with most of that coming in June as the market realised a serious loss was expected when full-year results rolled around. That loss ended up at $244 million after tax, with a $398 million restructuring expense.

As well as battling higher fuel prices and increasing competition, the industrial dispute that culminated in the global grounding of Qantas’s fleet late last year cost the company almost $200 million. The real drag, as expected, was the international division, which lost $450 million for the year. That’s a completely unsustainable performance, and the focus of concerns from both the investment press and Qantas management.

Outside of this division things don’t look nearly as bad. The domestic division’s performance kept the Qantas brand to a slim EBIT loss, while the Jetstar business grew EBIT by 20%. Jetstar Japan has just launched, and will be closely watched through the coming half for some market traction in Asia.

Importantly, the company achieved positive free cash flow in the second half as the airline wound back its hefty capex bill. Qantas is aiming to keep capex under $2 billion through aircraft order cancellations and capacity reductions in the coming two years, and has trimmed the bill from $2.5 billion in FY11 to $2.3 billion this fiscal year.

The Qantas Frequent Flyer program also continues to rake in cash and provide a nice sideline for the business.

As a whole, it’s evidently been a mixed year for the group. But with an eye on the restructuring and potential improvements to the international business, the stock does still look worth holding on to.

  • Investors are advised to hold Qantas at current levels.

Coca-Cola Amatil (CCL). The beverage sector has enjoyed a frothy period on the Australian market over the past year, with several brewers bought out at premiums and Coca-Cola Amatil’s share price up almost 20% since January.

With a first-half result beating the guidance range and momentum moving in the right direction, as well as a freshly inked deal to eventually re-enter the Australian beer market, the newsletters see few reasons not to keep holding on.

Interim profit came in at $247.1 million, a gain of 5.6% in a half that included a wet and cold January and February for much of eastern Australia – definite downsides for cold beverage sales. Core product sales remain strong, new products like Powerade Zero are developing well, and the company aims to move from 70% to 97% self-sufficiency in producing its own plastic bottles by the end of next year.

This is solid, but the real growth upside is in alcohol. Last week the company signed a $46 million joint venture agreement with Casella Group to significantly expand a brewery in Griffith, NSW, in expectation of CCA’s return to the Australian market in December next year. As part of a deal stemming from the Foster’s takeover, it’s currently locked out of the beer market here, but has been developing expertise in Fiji and has distribution rights for several major beers in the Pacific region.

The joint venture aims to capture 15% of the premium beer market on or soon after CCA’s return, a market worth an estimated $200 million at the moment. Under the Casella agreement, the groups would split profits but CCA will be behind sales, marketing and distribution.

Some of these positives should be weighed against the strong performance of the share price, and the recent rally has some of the investment press taking partial profits on valuation grounds. However the company looks to have too much underlying strength, and enough positive future growth plans, to get out of at the moment.

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

AMP (AMP). It’s been a steady year so far for the financial services group, and first-half earnings impressed the newsletters as the AXA merger begins to bear fruit. With market position expected to improve, dividends to grow, and an innovative push into the SMSF market on the cards, the newsletters see good value in AMP.

Net profit of $383 million was 11% higher, and this should be read with an underlying profit of $491 million with some market-value readjustment. The AXA merger is delivering real benefit to the company, both sooner than expected and more than expected, as synergy estimates rise to $150 million.

The largest division, AMP Financial Services, grew 9% for the year and cut costs by more than 5%, with a growing adviser network. The launch last month of AMP SMSF, following a buyout of self-managed super specialists Cavendish, aims to move from administrating 5,000 to 10,000 funds, and provide cross-pollination with AMP’s other businesses.

The newsletters also point to a dividend yield of more than 6%, rising to more than 7.5% grossed up, as a positive for investors, and a signal the market may be undervaluing the company in light of the general financial market volatility.

There are risks for the business, but with many of regulatory changes from the Future of Financial Advice reform known and being incorporated, and the situation in Europe appearing to settle down for the time being, the half-year result should be a signpost of a strong business. After a fairly flat year in terms of share price, the investment press see upside as some blood returns to the sector.

  • Investors are advised to buy AMP at current levels.

Watching the directors

Directors began to trade again this week as corporate earnings season winds down, and there were some big splashes from both buyers and sellers. Adelaide Brighton (ABC) non-executive director Raymond Barro’s company Barro Properties acquired nearly $15.5 million of shares, buying 4 million and 1.2 million on two consecutive days. The company now owns just shy of 150 million shares in Adelaide Brighton.

On the selling side, directors at four-wheel drive accessories maker ARB Corporation (ARP) offloaded some very sizable stakes in their indirect holdings of the company. Chairman Roger Brown, along with brother and managing director Andrew Brown, sold off 1.4 million shares in the company for $9.70 apiece, or $13.6 million. Company secretary John Forsyth sold off 600,000 shares in which he had an indirect interest for the same amount each, or roughly $5.8 million. ARB shares have appreciated 27.5% year to date, closing today at $9.86.

Then there was ANZ (ANZ) chief executive Mike Smith, who exercised $6.2 million of options and sold at $24.74 to make a little less than $10.9 million. In a statement, the company said Smith was exercising the options “to fund a forthcoming income tax payment and to repay debt”.

Computershare (CPU) non-executive director Penelope Maclagan was another big seller, shifting 440,000 shares for a total of $3,778,141… and 20c. Webjet (WEB) non-executive director Steven Scheuer was also pleasantly exact in reporting what he made to the cent, selling 336,000 shares for $1,388,519.89.

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