Collected Wisdom

Buy Transpacific and Cochlear, sell Cabcharge, and hold Suncorp and Wesfarmers.

Summary: Analysts rate Transpacific and Cochlear a buy, but recommend selling Cabcharge, while Suncorp and Wesfarmers are holds, the newsletters say.
Key take-out: After suffering sharp sell-offs on the back of profit downgrades, the newsletters say Transpacific Industries and Cochlear could be bargain buys.
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.

Transpacific Industries (TPI)

The profit downgrades are still coming in strong, with waste management and recycling group Transpacific the latest in a long line of companies to add to the pain.

Chief executive Kevin Campbell handed in his resignation this week after cutting forecast underlying earnings from $440 million to between $405 and $415 million. Investors didn’t like what they heard, and the share price has plunged more than 15% since. But following such a sharp fall, the newsletters think it could be time to buy.

Weak landfill volumes on soft economic conditions in Victoria, South Australia and Western Australia have had an impact on the Cleanaway division, the company said, while the downturn in the manufacturing sector has affected the performance of the industrials division, with reduced volumes in liquid processing waste streams.

“Market conditions were tough in the first half and have generally deteriorated further,” Campbell said on announcing the latest result.

But one source is feeling pretty positive on Transfield, and notes that its industry leading landfill networks would be difficult for competitors to replicate.

It wasn’t all doom and gloom in the update, with Transpacific saying trading conditions in New Zealand have improved and the commercial vehicles business is tipped to report decent profit growth for the year.

The focus now for the company is on cost-cutting and debt reduction as it tries desperately to get back on track. It is currently undertaking a detailed business and operational review to find more savings, and has already flagged the sale or closure of a number of underperforming operations.

Despite its issues, the newsletters say Transpacific is resilient and its dominant market share in services that the entire community needs should see it come good in the end.

  • Investors are advised to buy Transpacific at current levels.

Cochlear (COH)

Cochlear’s share price took a battering this week, after the company issued a profit downgrade. But after a share price drop of 16%, the newsletters think it may be a good time to consider buying in while the going’s cheap.

Cochlear chief executive, Chris Robert, gave the market a shock this week, announcing that annual profit is now expected to come in between $130 million and $135 million, significantly lower than the consensus forecast of $156 million. Weaker sales and slower market growth in the US were blamed for the profit downgrade.

A leading manufacturer and distributor of implantable hearing devices, the key to Cochlear’s success has always been innovation. The company spends 12% of sales in research and development (R&D), which ensures it’s at the forefront of any technological breakthroughs. It will shortly release its new Nuclear 6 hearing implant in Canada and Korea, with Europe and the US expected to follow before the end of the year.

But the competition is heating up, with rival Advanced Bionics narrowing the gap on technology. Its new system is believed to match Cochlear’s in many ways and outstrips the market leader on connectivity.

For the newsletters, the positives outweigh the negatives. But investors don’t seem to be of the same mind.

Perhaps it’s because it’s the second time in a row the company has failed to deliver on expectations. In February, the company reported a $77.7 million profit for the first half, below the $80 million expected.

Those only looking at the short term may not see the appeal of Cochlear, but for longer-term investors the investment press says, at the current share price, there could be some healthy gains to be had.

  • Investors are advised to buy Cochlear at current levels.

Suncorp (SUN)

Suncorp has reportedly seen some strong interest from suitors for its “bad bank”, and expectations of a sale sooner rather than later have settled some nerves. The newsletters rate it a hold for now.

At the latest strategy update, Suncorp chief executive Patrick Snowball gave very little away in the review of the non-core bank, but said the loan book would be “significantly below” $2.7 billion by June 30.

The focus was very much on how well its simplification program is going, and Suncorp says it has made it more efficient and improved productivity. The program is expected to produce benefits of $225 million in FY15 and $265 million in FY16. Plans to deliver a 10% return on equity by 2015 also got the newsletters’ attention, and the investment press is generally hopeful of a turnaround for the insurance giant.

If the sale of the “bad bank” goes ahead, the newsletters think investors may see a nice reward in the form of higher dividends. One source says a special dividend of 10-15 cents could also be on the way for investors.

The insurance industry has had a tough few years, but if Suncorp delivers on its promises, investors could soon be reaping some pretty good benefits.

  • Investors are advised to hold Suncorp at current levels.

Cabcharge (CAB)

Cabcharge’s fortunes have changed dramatically in the past few days following the Victorian Government’s ruling on the taxi industry review. This one is just too risky for the newsletters, who rate it a sell.

The government announced Cabcharge will be forced to cut the card surcharge on its electronic payment system from 10% to 5%, putting a massive dent in its future earnings; the service fee delivered $89.6 million in revenue in FY12. The newsletters are also worried that other states will soon follow suit, dealing another blow to the payments operator.

That’s not the only bad news. The government’s plans to shake up the taxi industry include that any EFTPOS terminal should be able to process the Cabcharge cards, and that mandatory network affiliation be axed. New taxi licences will also be made available at an annual fee of $22,000, much lower than the current 30,000 pa fee.

These measures are designed to improve taxi services, increase competition and reduce costs. But with more competition, the newsletters say Cabcharge’s market share will continue to decline. One source says that as new competitors enter the market, Cabcharge may have to offer taxi drivers part of the surcharge to maintain market share, which will add to its woes and reduce margins.

  • Investors are advised to sell Cabcharge at current levels.

Wesfarmers (WES)

The diversified conglomerate is still looked on with favourable eyes by the newsletters.  With operations that include coal mining, supermarkets, insurance, hardware stores, and a fertiliser business, Wesfarmers has access to a huge proportion of the population and can apparently do little wrong. The newsletters are confident Wesfarmers is a solid investment, and rate it hold.

At the latest investor day, Wesfarmers reiterated plans to increase store numbers, ramp-up production and look at further acquisitions as a means of growth. The coal production outlook for next year was weaker than some expected, and the newsletters have their hopes pinned on Bunnings and Coles delivering the goods for this year.

Target is also expected to underperform in the current market, and the recent profit downgrade for the retailer reflects this. Earnings before interest and tax for FY13 are expected to be in the range of between $140 and $160 million, significantly lower than last year’s $244 million in earnings.

Inventory issues and write-downs were given as reasons for the downgrade, with chief executive Richard Goyder saying action had been taken to improve Target's future earnings and competitive position in the market.

The newsletters want to see better management of Coles over the long term, and are concerned about the effect of volatility in the coal price over time.

  • Investors are advised to hold Wesfarmers at current levels.

Watching the Directors

  • The buyers deserve most of the attention this week. Boart Longyear directors continued to take advantage of the slump in the share price, with chairwoman Barbara Jeremiah buying 155,000 shares at 0.66 cent apiece, and director Roy Franklin snapping up 50,000 shares at 67.5 cents.  But chief executive Richard O’Brien got the better deal, buying 200,000 shares at just 63 cent each.
  • Elsewhere, OZ Minerals chairman Neil Hamilton spent $28,560 for 7,000 shares in the company for his family trust.
  • On the sellers’ side, Adelaide Brighton managing director, Mark Chellew, netted $1,576,462 after disposing of 475,200 of the company’s shares.
  • Meanwhile, Coca-Cola Amatil director, Tony Froggatt, sold 9,985 of the company’s shares for $130,704.

Takeover Action May 29-June 5, 2013

04/06/13ActivEXAIVASF Group 29.51
03/06/13Azimuth ResourcesAZHTroy Resources15.98
24/04/2013Central Australian PhosphateCENRum Jungle Resources0.00See also Foreshadowed Offers
20/05/2013CIC AustraliaCNBPeet84.17
18/03/2013Energia MineralsEMXCauldron Energy0.00
29/04/2013Firestone EnergyFSEWaterberg Coal Co27.42Takeovers Panel application
26/04/2013GraincorpGNCArcher Daniels Midland19.90Bid implementation deed
15/05/2013Lemur ResourcesLMRBushveld Minerals2.70
22/05/2013Merlin DiamondsMEDInnopac Holdings63.48
7/05/2013Trust CompanyTRUEquity Trustees2.54Closing June 5
4/06/2013UCL ResourcesUCLMawarid Mining88.82
4/06/2013World Oil ResourcesWLRHoldrey12.34
Schemes of Arrangement
15/04/2013Norfolk GroupNFKRCR Tomlinson0.00Vote July 17
3/05/2013Platinum AustraliaPLAJubilee Platinum0.00Vote June
7/05/2013Trust CompanyTRUPerpetual0.00Vote July
Foreshadowed Offers
21/03/2013Billabong InternationalBBGAltamount/VF Consortium0.00Indicative proposal
24/04/2013Billabong InternationalBBGExec Paul Naude-Sycamore Consortium0.00Exclusivity ext to May 8
22/05/2013RHG RHGAustralian Mortgage Acquisition Company0.00Scheme proposal
30/04/2013Trust CompanyTRUIOOF Holdings0.00AFR reports possible bid
Source: NewsBites

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