Collected Wisdom

Buy UGL, sell Ramsay Healthcare, and hold Funtastic and DuluxGroup, the newsletters say.

Summary: Analysts rate UGL a buy and Ramsay Healthcare a sell, while Funtastic and DuluxGroup are rated holds, the newsletters say.
Key take out: The shares of diversified services company UGL have tumbled in recent times, but a plan to spin off its property business has led some analysts to tip a price revival.
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.

UGL Limited (UGL)

UGL surprised investors and the newsletters alike last week when it announced a review of its corporate structure, with a view to spinning off its lucrative property service business. Just a few weeks ago, management said that such a move was a long way off. Some of the investment press sees UGL as a hold pending further developments from the review, but one says it’s a buy at current levels.

UGL has had a tough few months, with the share price falling sharply after the group revealed a 53% decline in profit, to $26 million, in the first half. Revenue was 13% lower, at $2.1 billion. Despite the disappointing numbers, the property services arm recorded a rise in revenue to $920 million and earnings before interest and tax (EBIT) of $45 million.

The newsletters think a demerger could unlock hidden value and would allow for a sharper focus on the individual businesses. But they’re also mindful of the underlying problems facing UGL, including the need to build up its market position in its engineering and operations and maintenance arms, as well as its relatively high net debt, which one source says is a risk, given the group’s exposure to the resources sector.

Investors were initially excited at the prospect of the group spinning off the successful property arm, with the share price rising 12% shortly after the announcement, but the hype was short-lived, and the share price has fallen back a bit. Now could be a good time to get in before it gets too hot.

  • Investors are advised to buy UGL at current levels.

Funtastic (FUN)

Funtastic is back in the game, having just paid out its first dividend in six years. Announcing the 0.5 cent per share fully franked dividend, the company said it expects to deliver a reliable dividend regime for the foreseeable future.

The toy supplier reported a 68% lift in net profit in the first half to $9.27 million, boosted by a one-off $3.27 million payment relating to the early termination of an earn-out agreement on its Lego licence. The newsletters hold a broadly positive view of the results and rate Funtastic a hold.

Funtastic has the rights to a range of toys, including Leapfrog, Ben 10, Floaties and Razor Scooters, but the real gems in the first half were the Pillow Pets soft toys and the licences to manufacture and distribute certain Lego products, both of which were bought in 2012 and were the main drivers of growth in the period.

The newsletters are somewhat concerned over short-term headwinds facing the company, including the still-challenging retail environment, and its cautious outlook reflects this. But the media are hopeful that Funtastic's plans to build up its own suite of products rather than relying on third-party goods will keep the shoppers coming. It has just announced plans to launch a silicone cup called “Chill factor” that turns soft drinks into slushy drinks in under a minute.

  • Investors are advised to hold Funtastic at current levels.

DuluxGroup (DLX)

Despite soft construction markets and the costs and risks associated with integrating Alesco into the business, DuluxGroup has maintained guidance for profit growth in its latest trading update. The newsletters see a lot to be positive about, at least in the domestic market, and rate Dulux a hold.

Just three months on from completing the Alesco takeover, Dulux has indicated it is close to finding twice the amount savings as initially expected. Dulux managing director, Patrick Houlihan, last week noted that the group has already “identified cost synergies of $9 million, ahead of the original estimate of $5 million”.

On the home front, the group has seen solid growth from its suite of products that include paints, home improvement and gardening products. The newsletters see Dulux’s wide distribution network and extensive brand portfolio as providing significant potential for the future as the hardware market continues to expand. One source notes that the market leader should be well represented in the Masters home improvement stores that are being rolled out across the nation.

But the newsletters have concerns over its operations overseas, specifically New Zealand and China. They expect soft economic conditions in both countries to have an effect in the short term, but one source notes Dulux remains confident of growth in Asia in the long term and is impressed with Dulux’s commitment to further investment in the market.

For investors hunting yield, Dulux’s high dividend payout ratio provides another reason to hold onto the shares for now.

  • Investors are advised to hold DuluxGroup at current levels.

Ramsay Healthcare (RHC)

Private hospital operator Ramsay Healthcare confirmed last week that it has entered into a $500 million deal with Malaysian group Sime Darby Berhad to combine Ramsay’s three Indonesian hospitals with Sime Derby’s three Malaysian hospitals. The move is part of Ramsay’s long-term plan to build a network of hospitals in Asia to take advantage of the region’s ageing population and rising middle class.

The newsletters are cautious of the benefits that the tie-up can bring in the short term. One source notes that the JV is expected to account for just 4.5% of the group’s net profit in fiscal 2014.

The newsletters are also mindful of the company’s current share price, and its continued deviation from their own estimates of fair value. One source has given the share price fair value at around $22, well off the $32.30 that it’s currently trading at, suggesting that now may be an opportune time to take some profits.

Ramsay could well be a sound investment for those looking to the long term, given the group’s position to benefit from the ageing population both at home and in Asia. But the newsletters are quick to point out the extensive reforms taking place within Australia’s public healthcare system that could pose a significant competitive threat in the future. The concern over changes to the public healthcare system have led to one source labelling Ramsay a sell, and another putting it in the avoid category.

  • Investors are advised to sell Ramsay Healthcare at current levels.

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