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.

Shopping Centres Australia Property Group (SCP)

Joining the Australian Securities Exchange today was the Woolworths property trust spin-off Shopping Centres Australia Property Group, or SCA.

The creation of the entity was overwhelmingly approved by shareholders at Woolworths’ AGM last Thursday, with 99% voting for the resolution creating SCA. There were two parts to the listing: An in-specie transfer of 247 million stapled units to Woolworths shareholders on a one-for-five basis (so for every five Woolworths share held, investors received one SCA unit) and a 337-million-unit offer priced at $1.40.

SCA traded above the issue price (which raised $472 million) throughout the day today, gradually increasing to put on 2.5% and close at $1.44. With net tangible assets of $1.58, the issue price reflected an 11% discount to NTA, while the closing price is roughly 9% below. The dividend yield is forecast to be above 7%, with the first distribution expected in August 2013.

The trust performed strongly today, but the view for investors is diverse. Eureka Report’s John Abernethy likes the look of it, and argues that compared with BWP (BWP) and Charter Hall (CQR) the trust ranks well on a range of metrics, and has a structure which offers growth. He writes that he believes the units will trade above $1.50, and expects plenty of support below that level.

Elsewhere, the investment press is more hesitant. Many note the restrictive lease terms, including five years without increases for Woolworths (60% of income), constraining the outlook, and point out that this is related-party transaction after Woolworths failed to sell many of the properties. Then there is the 40% of income from speciality stores, which currently have a 20% vacancy rate in the portfolio. There’s a two-year rental guarantee for the 20% vacant stores, so after that expires the yield will almost certainly drop off. Some have even suggested the name – completely unrelated to Woolworths – is a sign the company may wish to distance itself from the new entity.

For now, the trust has performed well on its opening day, albeit in a rising market hungry for yield and favourable to REITs at present.

• Investors are advised to hold Shopping Centres Australia Property Group at current levels.

David Jones (DJS)

Investors looking for positive signs at embattled department store retailer David Jones in recent weeks would have been encouraged by quarterly results – but anyone looking at the overall picture may not have been so pleased. The newsletters are far from impressed, and are keeping DJs in the sell column for now.

First-quarter like-for-like sales rose 0.3% on the same quarter last year, stemming a two-year run of decline. There are two ostensible problems with this: firstly, it lags major competitor Myer’s (MYR) 1% like-for-like sales growth in the same period, and secondly, it is meagre growth off a low base. Like-for-like sales in 1Q12 fell more than 10% on 1Q11, so a 0.3% improvement in 1Q13 may be a step in the right direction, but is not much to crow about.

Then there’s Christmas. It will be the last Christmas chairman Robert Savage leads the company, after he announced his retirement last week ahead of the company’s AGM, and it’s looking flat. The company and the newsletters expect flat performance, and weak consumer sentiment is weighed further by deflation pressure. Chief executive Paul Zahra said the retailer was battling deflation of about 2%.

A smaller note, but also concerning to some observers, was ‘Christmas Frenzy’ – the online shopping sale organised to compete with the ‘Click Frenzy’ promotion. The crash of the company’s website under pressure demonstrated not only the appetite for online retail threatening the traditional department stores, but also David Jones’ incapacity to deal with it currently. The newsletters recognise that it was a small hiccup in the early stages, but does the online image of the company no favours.

Despite falling dividends, yield from the retailer is impressive at above 6%, and the well-regarded property assets remain another positive for the company, but the newsletters see little comfort in thin-to-flat sales and a changing retail landscape.

• Investors are advised to sell David Jones at current levels.

CFS Retail Trust (CFX)

Real Estate Investment Trusts, or REITs, fell out of favour with the global financial crisis, but (as Ian Verrender pointed out on Friday), they are now back on the menu and returning attractive yields at a time when this is becoming more desirable. That doesn’t mean it’s all good news for every REIT, and the newsletters say while there are some positive signs for CFS and the sector in general, there are potential headwinds to come.

CFS has a portfolio of premium eastern states shopping centres, including Chadstone in Melbourne and Chatswood Chase in Sydney, and is almost 75% weighted to Melbourne and Brisbane locations.

Almost all of the main concerns about CFS stem from changing consumer behaviour, and the high number of tenants in the mid-level clothing sector that is being squeezed hardest by these changes. Weakened consumer confidence is coinciding with pressure from international competition and the internet, and the worse off these retailers are the lower the expected rent for the landlords can be going forward.

CFS was also hit with a downgrade in initial yield for the Emporium development in Melbourne, which is roughly a year behind schedule, and may not attract some of the rents and demand from specialty stores expected – and lead to further writedowns.

There are plenty of positives however. Consumer sentiment is improving and speciality sales lifted more than 4% in the most recent quarter. Most retailers are optimistic heading into the peak Christmas season, and rates are in an easing cycle freeing up household cash. CFS is selling 50% stakes in some of its larger sites, such as Myer Centre in Brisbane, to reinvest money in developments or buybacks. At the current share price, the newsletters recognise there’s plenty of risk priced in already, and some decent reasons to keep holding on – with an eye to the broader long-term retail trends.

• Investors are advised to hold CFS at current levels.

Origin Energy (ORG)

With one-third of the Australian market, Origin is not only providing the proverbial ‘power to the people’, but making plenty of money of it too – perhaps not what John Lennon had in mind. Its share has price also came under pressure over the past fortnight, falling more than 10% amid growing investor concerns about cost blowouts at liquefied natural gas projects, and the potential for this to spread to Origin’s stake in the APLNG project. The newsletters aren’t too concerned, though, and are firmly calling the stock a ‘buy’.

Comparisons are often made in the energy retailing business with AGL (AGK), recently discussed in Collected Wisdom, and Origin’s business has roughly half a million more customers. There are compelling reasons to suggest Origin’s 37.5% stake in APLNG could add a further $4 billion or so to its value, though its eventual stake is likely to be 30% after an intended reduction.

The investment press agrees cost blowouts at LNG projects are a reality, but argues that the share price risk discount may be excessive, with 70% of costs fixed and the same amount denominated in Australian dollars.

Far from being wary of the company’s prospects, the view is that Origin is a company with ample funding headroom, billions of dollars of undrawn debt in case costs do increase, stable revenue streams, underlying profits of nearly $900 million last year, tremendous upside in the LNG assets and a forecast dividend yield of 7% after franking credits are factored in. It’s an attractive picture.

• Investors are advised to buy Origin at current levels.

Cardno (CDD)

Last week Collected Wisdom looked at QBE, which tucked some concerning US drought-based costs into the headline hit from Hurricane Sandy. Now engineering professional services firm Cardno has also pointed to the storm, which left its New York office without power for several weeks, as a source of trouble – although the newsletters agree the company has bigger problems.

Cardno shares are more than 20% lower since guidance last week for a net profit between $36-$40 million. While the previous year posted $36.1 million, 2012 has seen several acquisitions and sales growth the newsletters expect to be somewhere in the range of 13-20% thanks to those purchases.

That buzzword of acquisitions – synergies – is turning into a bugbear for the investment press, with some noting the company’s portfolio of businesses offer few savings and opportunities for cross-selling.

Almost 60% of the company’s revenue is now derived from the US, and Sandy actually offers some upside from the clean-up work it has created, and the investment press notes the environment sector there is essential to Cardno’s growth prospects there.

Finally, the newsletters urge better transparency – particularly in light of the significant recent swathe of acquisitions. Clarity on earnings, and the performance of the major businesses purchased (if not all operations), may help to explain the disappointing profit outlook, the newsletters say, and avoid the overselling of stock in anticipation of further problems. Without that clarity, the investment press have little faith.

• Investors are advised to sell Cardno at current levels.

Watching the Directors

Directors are pocketing profits at McMillan Shakespeare (MMS) after chief executive Michael Kay and non-executive director Ross Chessari each sold large parcels of stock last week. Chessari moved a total of 174,122 shares for $2,177,525 over two days, while Kay sold 219,576 shares in total over four days, for a total of $2,740,853. McMillan Shakespeare’s share price is up more than 50% in the year to date.