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.

Myer (MYR). Now that the iron ore price scare has calmed down (for the time being), and the various market reactions to worldwide stimulus programs have settled, Myer’s full-year results have turned the investment press’ attention once again to the consumer.

Reportable net profit for the year was a little more than 14% lower than last year, at $139.3 million, but margins improved and like-for-like revenue was held to a 2% decline on FY11. The profit result was also in line with guidance of a less-than-15% decline.

The newsletters were particularly impressed by the improvement in gross margin, to 41.3%. This was a rise of more than 100 basis points, and was achieved in the face of a 175 basis point rise in the cost of doing business. As well as refusing to bow completely to widespread sales and price deflation pressure in department store retail, Myer also cut jobs and held the losses from stolen or damaged goods to less than 1% of sales.

The problem, of course, is not really with Myer. Excellent merchandise management, prudent store growth strategies, a lucrative loyalty program and selective cuts to back-room support staff are all positives – but not enough to offset the prolonged slide in department store sales growth that has ruled the past three to five years. Government stimulus has not pulled the sector back enough to counter the general reduced attitudes to spending and the rise of online shopping. On the latter point Myer is gradually and belatedly coming around to setting up some capability but the investment press is sceptical until some results can be seen.

With a 70-80% dividend payout ratio, and 19c of total fully franked dividends for the year, Myer does provide a very strong yield for investors willing to bear the retail risk. Moreso, it is well positioned for a pickup in retail sentiment if interest rates continue to fall and, of the major listed retailers and the latest round of results, appears to be well-managed and switched on to the threats it faces. It may be a slow turnaround, with no guarantees, but in terms of larger discretionary retail exposure Myer is still worth holding on to.

• Investors are advised to hold Myer at current levels.

ANZ Banking Group (ANZ). The international strategy that distinguishes ANZ from its big bank peers looks a little shakier in the face of a widespread slowdown in Asia, and reports of a Hong Kong bank deal falling through, but still promising enough for the newsletters to retain a ‘buy’ call on the stock.

As a solid play for both income and growth, the newsletters like ANZ on both counts. Paying an interim dividend of 66c in the most recent half, returns to shareholders are steadily growing as with most of the Australian banks, with a better international outlook than National Australia Bank (NAB) and better domestic momentum than Westpac (WBC).

ANZ’s full-year earnings are due in late October, as most of the banks report outside of the earnings cycle, and analysts expect an underlying profit of roughly $6 billion, up from $5.7 billion in FY11. This is on the back of strong momentum in the local market, and in the past 12 months ANZ has outperformed the other banks on both home loan and business credit growth by near 10%, while with 13.4% household deposit growth it trails only NAB – by just 0.2%.

Revenue and earnings are expected to continue to rise, along with dividends, and while growing overseas and into Asia comes with its risks, to date the strategy of growing organically rather than through a major acquisition has minimised this. A funding crunch or serious deterioration in Europe would hurt ANZ, but the risk of this appears to be receding. The bank’s balance sheet is strong, and improving, and it has the highest level of Basel III common equity tier 1 capital of all the big four – though all are roughly in line between 7% and 8%.

Barring a serious Asian financial crisis, ANZ remains a company with strong growth prospects, a well-managed balance sheet and a decent outlook for investors.

• Investors are advised to buy ANZ at current levels.

Whitehaven Coal (WHC). Along with iron ore, Australia’s other major hard commodity export – coal – has taken a price pummelling in recent months as well. It was therefore a less than ideal time for Nathan Tinkler to make a high-profile, highly-leveraged, and eventually failed tilt at Whitehaven. But now the dust has settled and the share price (which never even approached the $5.20 bid price anyway) has corrected, the newsletters are once again stepping back to examine the company absent takeover action. The verdict isn’t great, but it’s OK.

The company expects annual sales of 25 million tonnes by 2016, which would be an aggressive expansion on the 5.5 million tonne FY12 figure. As is often stated, coal is not a particularly rare resource, and much comes down to infrastructure capabilities, which is well established for Whitehaven in New South Wales in both port and rail facilities. Thermal coal prices have come down off 2010 peaks, but analysts expect them to return safely well back above $100 a tonne and for higher metallurgical coal sales to offset lower thermal coal prices.

One of the biggest risks with such expansion is capital expenditure, and investors should note this means free cash flow could be squeezed for the next couple of years. Whitehaven also runs the risk of missing price, cost or production targets if overly ambitious, and a year’s delay to the potentially very profitable Maules Creek project has already been highlighted by the newsletters.

None of the investment press think the ‘fair value’ of the company will return any time soon to the $5.20 heights of the recent bid, but nor do they see a slowdown in the commodities boom and weaker demand from Asia to be a major stumbling block at this point. Whitehaven has to date been a well-managed and, importantly, a growing company that has handled its growth well. If that can continue, investors should benefit from its profitable collection of resources and expertise.

• Investors are advised to hold Whitehaven at current levels.

Onthehouse (OTH). Relatively new, and relatively quiet since listing in mid- 2011, Onthehouse has been catching the eye of the newsletters recently as the small company reported a decent final result and made a small but useful acquisition.

For those who have never heard of the online start-up, and there are likely still many, the company is attempting to gain a foothold in the web-based real estate sector (currently dominated by REA Group) by providing far more information for the public, for free. The idea is to emulate successful similar operations in the US and UK, offering detailed real estate information to all, including historical sales data, title, rental yields, trends in the area and more.

Stumping up $3.5 million for the half of property data provider Residex it didn’t already own, Onthehouse has acquired a useful bank of data to this end, and a useful revenue channel into corporate finance.

Revenue for the year came in at $20.3 million, which was vastly higher than its pro-forma 2011 revenue included in its prospectus, and earnings were just below $8 million, in line with forecasts. Net profit of $2.1 million was small, but the trend for cash flow improved throughout the year – indicating things are moving in the right direction. A small maiden dividend of 0.6c also sweetened the investment picture, and this would grow with the company.

While share price performance has been patchy (rising to peak of 71c in March but now in a holding pattern around 40-50c), this small-cap is no penny-dreadful and its solid results indicate it is capable of pulling in the revenue required of an online business that wants to be taken seriously. If it can continue to improve its presence in the market, the wealth of data it offers could outshine its standard-fare rivals and pay off for investors.

• Investors are advised Onthehouse is a high-risk buy at current levels.

Macmahon (MAH). In spite of Fortescue Metals Group’s (FMG) debt pirouette last week, the words of new Macmahon chief executive Ross Carroll last week sum up the views of many: “The boom’s over”.

Former chief executive Nick Bowen stepped down last week after the company’s August guidance of a 20% increase in the coming year on its $56.1 million profit was very hastily and sharply revised down to $20-40 million – or a 30-65% decrease. The newsletters were duly sceptical of the very early-stage guidance, especially considering the nature of Macmahon’s contractor-type work, but Macmahon had also assured much of the order book for the year was “already secured”.

Problems for the company go beyond potentially weaker demand from customers such as Fortescue, however, and the end of the boom. The company faces difficulties in finding skilled workers and good equipment, at the same time as costs are escalating in the sector. This is expected to put pressure on margins and as demand drops off so does the company’s negotiating power in contracts. Cost overruns on its Hope Downs contract in earthworks and construction do not help the picture.

Construction contract work is also deteriorating, and since it contributes 60% of revenue further cutbacks in infrastructure spending throughout Australia in general does not bode well for the outlook.

With just 23% net debt to equity the balance sheet could certainly look worse, and the investment press notes undrawn debt facilities also encouraging, but the bottom line is that there’s just too much uncertainty around the potential pipeline of work. Until new management is settled in, and the contracts and costs for the coming fiscal year become clearer, it may not be worth the risk to stay in.

• Investors are advised to sell Macmahon at current levels.

Watching the Directors

Directors were clamouring for the exits this week, at least in terms of big stock sales, led by carsales.com (CRZ) chairman Walter Pisciotta. He sold a shave under 2 million shares of which he had indirect ownership, or about 10% of his stake, for $14.8 million, or about $7.40 each. Carsales scrip is up more than 55% year-to-date, vastly outperforming the market, and closed today at $7.41.

Also selling was high-profile Myer (MYR) chief executive Bernie Brookes, who offloaded a little more than 600,000 shares in total over five separate days for $1.1 million. Brookes retains roughly 9 million shares in the department store, and options and performance rights for a little over the same amount again. On the other hand, some of Brookes’ fellow board members were trading against him last week, as non-executive chairman Paul McClintock bought 100,000 shares for $1.85 apiece and fellow Myer board freshman non-executive director Ian Morrice paid $1.83 a share for 82,000 shares. Myer closed today at $1.79.

There were also big-name buyers on the board of Fairfax (FXJ), as newly-minted director, fast food king and presumed Gina Rinehart ally Jack Cowin bought a million shares at 44c each. Fairfax shares are going cheap at the moment, down from highs of 82.5c in February, and CEO Greg Hywood took the opportunity to buy a few as well, picking up 200,000 for a total of $87,620.

However, those kind of purchases just didn’t match up to the size of some sales, as evidenced by Decmil (DCG) founder and non-executive director Denis Criddle. He sold 3.5 million shares for $2.90 each, or a total of more than $10 million, at a time when mining and engineering services work is on something of the back foot (see Macmahon above). Decmil closed at $2.96 today.