Collected Wisdom

Buy Santos, sell Carsales, and hold PanAust, Whitehaven Coal and Qantas, the newsletters say.

Summary: Analysts rate Santos a buy and Carsales a sell, while PanAust, Whitehaven Coal and Qantas are rated hold, the newsletters say.
Key take out: As energy demand from Asia increases, some believe Australian oil and gas producers are poised to benefit.
Key beneficiaries: General investors. Category: Portfolio management.

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.

Santos Limited (STO)

At first glance, Santos Limited’s full-year results leave a lot to be desired. The oil and gas producer saw net profit decline by 31% to $519 million in the year to December 31. But looking beyond the bare numbers, the newsletters think Santos might not be in such bad shape. The decline in profit was actually due to a lack of asset sales that had helped profit numbers the previous year, while the company’s underlying profit came in better than expected, rising 34% to $606 million. At the current share price, the newsletters see Santos as a good value buy.

Santos recorded its highest oil production in four years during the year, with a 10% increase to 52 million barrels of oil equivalent. The increase was largely driven by new projects in Vietnam and Western Australia. Meanwhile, the company expects to grow production again in the coming year, and is targeting between 53 and 57 million barrels of oil equivalent for 2013.

As energy demand from Asia, and especially China, ramps up, the newsletters believe Australian oil and gas producers are primed to reap the benefits. Santos is also in a decent position to take advantage of coal seam gas reserves, if regulatory arrangements don’t get in the way. Given the outlook for energy demand from overseas, the newsletters believe Santos is a good buy at the current price of $13. But that’s assuming the price of oil stays elevated and costs don’t spiral out of control.

  • Investors are advised to buy Santos at current levels.

PanAust Limited (PNA)

The last time Collected Wisdom looked at PanAust in July 2012, the newsletters viewed it as a decent buy option, since the share price had dropped 37% in the previous six months to $2.21.

Fast forward eight months, and the investment press is again generally positive on the company’s latest set of numbers even though PanAust's share price has taken another battering of late. Today its shares dropped around 6% to $2.59 on heavy volume, meaning they are down almost $1 since December. Yet, its latest results were quite promising. Net profit after tax (NPAT) for 2012 came in at $US159 million, 8% higher on the previous year, while gold production surged 154% in the year, due to the successful commissioning of its Ban Houayxai mine.

The company has also confirmed that it’s looking at significantly increasing production at the Ban Houayxai mine in the next few months. Investors will be keeping a keen eye on PanAust, as it’s due to announce its decision on increasing output in the coming weeks.

The newsletters have also indicated that PanAust could soon find itself on the receiving end of a bid in the future. One source noted that JPMorgan has PanAust at the top of its Australian merger and acquisition picks list for this year.

“Our no.1 pick for 2013 will be PanAust. Copper consolidation continues globally, and PanAust is one of the largest listed players left. It will only be a matter of time before it gets acquired," JPMorgan said in a report.

The newsletters think it’s a good one to hold onto for now, and investors could potentially benefit from a takeover tilt in the near term.

  • Investors are advised to hold PanAust at current levels.

Qantas Airways Limited (QAN)

It’s no secret that Qantas has had a bumpy rise in the past few years, but the group looks to be staging an impressive turnaround, as illustrated in its first-half results. For the six months to December, Qantas delivered a net profit after tax of $223 million. The airline is continuing with its aggressive cost cutting strategy, which is starting to pay off, but still faces the volatility of cyclical demand

Qantas International is on track to break even in 2015, while on the domestic front it is aggressively holding onto its dominant market share, despite rivals trying to get in on the action. But pricing pressure will remain as the competition for passenger growth heats up. This will have an ongoing effect on investor return on capital, the newsletters warn.

But the airline’s strategy of reducing unprofitable routes and making better use of its alliance agreements has already had a positive impact on capital expenditure, which fell 43% in the six months to $833 million.

Qantas is a high-risk holding, but the flying kangaroo is an Australian icon that many will be hoping can eventually return to the glory days. The newsletters are giving Qantas a hold recommendation for now, but warn of further turbulence ahead.

  • Investors are advised to hold Qantas at current levels.

Whitehaven Coal Limited (WHC)

A first- half loss combined with a non-existent dividend equals trouble for Whitehaven Coal. The newsletters see a lot of risk in the coal miner due to soft coal prices, but the appointment of Paul Flynn has been viewed as a positive, given his relationship with coal baron Nathan Tinkler.

Whitehaven swung to a massive $47 million loss in the six months to December 31 on the back of weak coal prices and a strong dollar. The result was below analyst expectations, and the share price has consequently dropped 5% in the past week. Given the miserable numbers, Whitehaven took the decision to not pay an interim dividend for the first time in six years, but says it is committed to its cost-cutting drive and completing a review of the overall business.

Pulling in its favour is the recent approval from the Federal Government for its Maules Creek coal mine, the newsletters say. Maules Creek is Whitehaven’s major growth project and its approval was crucial for improved investor confidence.

The investment press also sees Paul Flynn taking the helm as a good sign. He will likely be tasked with reducing tensions between Tinkler and the rest of the board. Flynn was previously chief executive of Tinkler’s Aston Resources and managing director of the Tinkler Group, so he knows how to best handle the reclusive coal baron. And while his relationship with Tinkler took a negative turn last year, it’s hoped that Flynn will be able to put the focus back on the company’s performance.

At the current price, the newsletters see Whitehaven as a hold, although uncertainty surrounding the coal price and Nathan Tinkler’s financial woes remain.

  • Investors are advised to hold Whitehaven Coal at current levels.

Carsales.com Limited (CRZ)

Carsales is racing along at full speed, having reported another solid set of numbers last month. But the share price has rocketed in the past year, rising almost 50% since March 2012. The newsletters say it’s time to reduce holdings and lock in a profit before it puts the brakes on.

Carsales.com has a distinct competitive advantage on the domestic market. Up to 80% of time spent looking at automated classifieds in Australia is via a Carsales.com website. The investment press says there is potential to deliver greater returns given its dominant market position.

Still, there are others, such as Carsguide, determined to close the gap, and Carsales.com is having to pump more money into its advertising to ensure it keeps its top place. The group’s strategy to grow outside Australia through acquisitions in developing countries is also seen by the investment press as a risk, given the cyclical nature of emerging markets.

But the key concern for the newsletters is the lofty share price and the newsletters think it’s a good opportunity to reduce holdings and score a decent profit.

  • Investors are advised to sell Carsales.com at current levels.

Watching the directors

  • The Lowy Family Group sold off its 7.1% stake in Westfield Retail Trust last week for a massive $663.7 million as part of an investment strategy to “diversify its investments internationally”. But its interest and continuing commitment in the Westfield Group remains unchanged, a statement said.
  • Village Roadshow Corporation directors, Robert Kirby and Graham Burke, sold 10.9 million shares in the company through Village Roadshow Corporation Pty Ltd for just under $46 million through an accelerated book-build. The move came after the group posted an 18% rise in profit for the half year. Both directors said the sale was to increase liquidity in the company and they had no intention to sell down their stakes further.
  • ANZ Bank’s Mike Smith offloaded 102,000 shares for $2.9 million, “in order to meet forthcoming Australian tax obligations.” But don’t worry, Smith is still a significant shareholder in the bank, with a holding of 1,410,445 shares.
  • Elsewhere, BHP Billiton’s Pat Davies was in the mood to spend last week, forking out $632,753 for 20,000 shares on the Johannesburg stock exchange.