Bank of Queensland (BOQ)
As the first Australian bank to report a net loss for decades, Bank of Queensland has earned itself something of a dubious honour. As bad debts pile up for the lender, the newsletters are concerned about its exposure to ongoing loan losses and flat performance in the second half but are holding on for now.
Net losses for the full year after tax were $17 million, with a $31 million cash profit excluding significant items – a fall of almost 83%. Interest income rose 5%, but non-interest income fell 10%, and bad debts doubled to more than $400 million. That’s the bad news, but it’s also in the past. A capital raising and management focus on the balance sheet this year has strengthened the outlook, and the majority of the bad debts were incurred in the first half. Retail deposit funding is just shy of 60%, and on the rise. Core tier 1 capital is at 8.5% and core earnings (before the bad debts kick in) were broadly in line with 2011.
Essentially, Bank of Queensland is a bank that needed to take a hit at some point, as the Queensland economic picture deteriorated and the difficulty of being a regional bank in the post-GFC world piled up stress. It took that hit in the first half of FY12, and while far from perfect the newsletters don’t consider the company to be a basket case.
Total dividends for the year were 52c, fully franked, delivering grossed-up yields above 10% at current prices. While the final dividend was down 2c a share compared with the same half in 2011, the yield still provides a further reasons to hold onto the stock.
- Investors are advised to hold Bank of Queensland at current levels.
Ten Network (TEN)
It’s been a big week in free-to-air television, as Nine Entertainment came up trumps in its negotiations with the US hedge funds that had been buying up its debt. That’s to be turned into equity, and has taken the pressure off the network, which has had a small ratings renaissance thanks to the Olympics coverage and a few popular shows.
And so the focus of free-to-air TV problems turns to Ten, which just reported a loss for the full year, and a lack of popular shows is just one of the things the competitor has to do to recover. The newsletters say cost cutting and balance-sheet maintenance are good signs, but that in the short term it all looks too difficult and analysts are inclined to stay away.
The loss for the year came in at $12.9 million, on a 14% revenue drop to $862 million. Television revenue fell 14.5%, and although costs came down by more than 7% it was not enough to offset redundancy costs and write-downs to several side businesses including Eye Corp.
Eye Corp remains a thorn in Ten’s side, as its would-be buyer Outdoor Media Operations has apparently pulled out after falling revenues triggered an escape clause. It took a $12.3 million impairment and the $145 million (reduced) sale price now looks unlikely.
Then there are the shows. Experiments such as The Shire, Everybody Dance Now, and I Will Survive all bombed, and popular rating shows such as Homeland and Modern Family aren’t drawing the audiences expected. Ten has consistently chopped and changed its news and current affairs line-up, and the new chairman, Lachlan Murdoch, and chief executive, James Warburton, are evidently still finding their feet.
There doesn’t appear to be a need for a capital raising at the moment, but regardless the short-term outlook is weak, the advertising market is in a tailspin, and the newsletters think it’s better to avoid the whole mess.
- Investors are advised to sell Ten at current levels.
Stockland (SGP)
Property is a fickle field for investors, and as last covered in July, retail, commercial and retirement-residential owner Stockland is in for a challenging year.
Long-time chief executive, Matthew Quinn, is on the way out, and as Victorian state government housing incentives ended with the past financial year one of the company’s more profitable regions has seen sales volume collapse. This has led to last week’s guidance downgrade at the company’s AGM: Earnings per share are now expected to be 10% lower in FY13, potentially 15% lower if conditions in Victoria don’t improve.
Quinn said it was the worst new housing market in more than 20 years, and the year started with 700 fewer deposits on contracted sales.
However commercial income for the company is stable, and retail assets are more than 99% occupied with an average lease expiry of nearly six years. With strong occupancy in office and industrial space as well, the investment press expects rental income to lift in the modest 2-3% range given in guidance. Many retail leases are tied to CPI, which is also currently within that range.
The newsletters note that the weakening of Victorian residential development earnings was expected with the end of the First Homebuyer’s grant – and the average achieved price decline of $13,000 is the same as the $13,000 grant amount. Margins are in the range of 12-14% now, down from 18%. The newsletters attribute roughly half of the downgrade to this alone, and as the impact of this steadies and home buying returns to undistorted levels, this should be an area with more transparent performance.
The newsletters also note that interest rates have come down this year, and are predicted to head lower, leading to several years of anticipated ‘wash through’ effect, lifting real estate volumes and residential earnings for Stockland. Improved housing finance data last week also suggest a residential property market uptick. With a strong stable of other diversified property assets and a troubled residential sector showing signs of improvement, the downgrade was bad news, but enough to get out yet.
- Investors are advised to hold Stockland at current levels.
M2 Telecommunications (MTU)
Eureka readers would be familiar by now with the pleasing performance of the listed telecommunications companies in 2012, and several fundamentals driving this are unlikely to change. With that in mind, the newsletters are quick to praise the agile and opportunistic M2, which has a solid earnings trajectory, a history of accretive acquisitions and a favourable growth operating environment.
On acquisitions, the recently completed purchase of Primus adds data centres, tens of millions of dollars in earnings, 165,000 customers and – most importantly – its own network infrastructure. M2 is expected to use the purchase to expand its 5% stake in the small business market, where Primus has a decent presence, and offer cloud services. The newsletters note that for a deal of this size and quality the four-times-earnings price tag appears cheap.
The company has consistently grown core earnings and net profit, without a global financial crisis ‘blip, and dividends have increased every year since 2006, providing shareholder returns. While yield is not stellar, at about 4.5%, this should be read in context with a 37.5% share price appreciation this year.
Looking ahead, the newsletters note guidance currently forecasts a 38% net profit increase in the coming year, from $33 million to $43-48 million. Revenue is set to jump roughly 60% to as much as $650 million, and free cash flow is also expected to lift more than 50%. The company has a successful history of acquisitions, but remains a potential target as well in the eyes of the investment press, as consolidation in the sector is expected to continue through 2013.
In short, M2 has had a very good year, but the newsletters see this as the middle, not the end, of a strong growth period. In the near-term, some argue the share price looks like it will move sideways, but all the prospects look positive for the firm.
- Investors are advised to buy M2 at current levels.
CSL (CSL)
Another company with a gradually departing long-standing chief executive is the blood-business success story CSL, and its CEO Brian McNamee. The company’s running well, growing at a modest clip, and despite trading on a peaky-looking multiple the newsletters are confidently holding on.
Another $900 million share buyback was announced last week, as the company continues to deploy its hefty cash holdings, and guidance for 12% growth provided the currency stays steady was affirmed. The newsletters note revenue growth is expected to continue its steady and strong rise, and the company continues to hold a strong US market position, including a near-monopoly in subcutaneous immunoglobin therapy.
The investment press was also excited early in the month by indications that plasma-derived immunoglobins could effectively treat Alzheimer’s. Trials from US competitor Baxter International showed encouraging results, and the same company is expected to release results of a much larger trial in 2013. With more than five million US Alzheimer’s sufferers, and CSL holding a strong market position there, the newsletters estimate that further success of this therapy could add 20-25% to the company’s value.
New CEO, Paul Perreault, will take the helm of a company next year with strong growth, strong earnings upside through research and development, and rival Baxter facing capacity constraints through a plant closure. The newsletters definitely think with a profile like that, it’s worth holding onto.
- Investors are advised to hold CSL at current levels.
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