Collected Wisdom

Analysts from the newsletters this week cover Origin Energy, Boart Longyear, Toll Holdings, BOQ and Asciano.

Summary: Analysts from the newsletters this week cover Origin Energy, Boart Longyear, Toll Holdings, BOQ and Asciano. 
Key take out: Origin’s purchase of the Eraring coal fired power station from the NSW government delivers flexibility and should appease investor concern over the liquidity situation.
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.

Origin Energy (ORG)

Origin Energy has just paid $50 million for the Eraring coal-fired power station in New South Wales, completing a deal worth a hefty $659 million that was begun in 2011 when Origin spent $609 million to purchase Eraring’s output.

The deal with the NSW government also sees the Cobbora Coal Supply Agreement terminated, providing Origin with $300 million in compensation and leaving it to enter into an eight-year deal with Centennial Coal to supply the coal used at Eraring.

Investors sold off Origin shares on the news, sending the share price 3.1% lower, but the newsletters took an entirely different tack and rate Origin a buy. Investors obviously had a rethink following the hasty selloff, and the share price has since bounced back to about $12.60.

The investment press says this deal will give Origin the flexibility of an operator as well as increased confidence as a retailer. Under the terms of the deal with Centennial, Origin will receive 24.5 million tonnes of coal from 2015 to 2022.

The $250 million cash payment to Origin also helps the liquidity situation, which has been a concern for some investors.

Furthermore, the newsletters think too much emphasis has been placed on the risks posed by the Australia Pacific liquid natural gas project. The investment press likes the growth potential for energy demand from Asia, and say this will help support energy prices. It provides an element of diversification that the newsletters welcome.

Boart Longyear (BLY)

Boart Longyear shares plummeted 14% after ratings agency Moody’s downgraded the group’s debt rating, citing “a significant shift in the downside in the company’s core business evidenced by the pullback in exploration and drilling expenditures as well as new capital investment”.

After numerous downgrades and uncertainty surrounding future earnings due to falling commodity prices, the investment press looks to have lost all patience with Boart Longyear, and most rate it a sell.

Moody’s downgrade came just a day after Boart again warned of lower earnings for 2013, and only weeks after the last downgrade. At the annual general meeting in May, Boart forecast full-year earnings of $US200 million for 2013. But on Monday, the drilling services company said that current expectations for 2013 full-year revenue and EBITDA should be reduced below $US1.355-$US1.556 billion and $US176-$US211 million respectively, given the significant industry volatility that persists at present.

The lack of quantitative guidance unnerved some of the investment press, and indicates an absence of earnings visibility for the drilling services company, some say.

Despite Boart restructuring its $450 million bank debt facility following to the weaker conditions, the newsletters think it may not be enough to bring the balance sheet risk down to acceptable levels.

Toll Holdings (TOL)

Transport and logistics group Toll Holdings was the bearer of bad news last week, announcing a $200 million write-down on the value of its global forwarding operation and warning more job cuts are on the way. But the investment press took the news in their stride and rate Toll a hold.

Announcing the write-down, head of global forwarding, Paul Coutts, said conditions were the worst he had seen in 35 years, while managing director Brian Kruger said: “While we still see global forwarding as an attractive market longer term, this impairment decision reflects the combination of current weak market conditions and uncertainty over the timing and extent of any recovery”.

Toll is looking to cut between $15-$20 million in costs in 2014, and $40-$50 million over the longer term.

Investors worried about the impact of the write-down will be relieved to hear it will not impinge on Toll’s ability to pay out dividends, the company said.

Investors can’t have been too concerned, with the share price rising more than 2% following the news. Investors and newsletters were obviously reassured by Toll confirming EBIT guidance of $200-$300 million in the second half, meeting market expectations.

Bank of Queensland (BOQ)

The big four banks might receive all the attention on the market, but the newsletters think Bank of Queensland deserves a look in too. BOQ has seen a pretty sharp share price fall in recent times, declining about 15% since April, and the investment press says it’s a hold at current levels.

Having staged a decent turnaround over the past few years, the newsletters are most impressed that the bank has reduced impairment loan levels while improving capital and provisioning levels.

Meanwhile, the recent acquisition of Virgin Money Australia is expected to enhance the Bank’s distribution and online capabilities as it seeks to offer its products to a wider demographic and broaden its customer base.

There are concerns that its exposure to the mining and mining services sectors could be a problem if the slowdown gets any worse – which is what plenty out there are predicting.

But the newsletters are hopeful of the bank’s outlook for the residential property market in Queensland, which is showing signs of improvement.

The increase to the interim dividend, from 26 cents to 28 cents, fully franked, was welcomed by the newsletters and investors alike, and represents a dividend ratio of 87%. The dividend yield of above 6% at current prices is also likely to keep investors satisfied.

Asciano (AIO)

In a trading update last week, Asciano warned the year ahead will be a challenging one, given the deteriorating economic conditions. Container volumes are expected to grow by just 1-2% in the year, while intermodal rail volumes are forecast to remain flat.

But the ports and rail operator also had some good news, confirming that second half revenue and earnings before interest and tax (EBIT) will be higher than the previous corresponding period. Earnings per share growth for the full year is expected to come in above 30%.

The newsletters rate Asciano a hold following the news, despite the headwinds it’s facing. A large part of the reason for this is because of the strong market positions in its four divisions; Pacific National Coal, PN Rail, terminal & logistics, and bulk & automotive port services. Limited competition in each of these businesses is a benefit to earnings stability, the investment press says.

The company’s response to the tough economic conditions – focusing on cost cutting and reducing its capital expenditure spending – should also deliver decent benefits, the newsletters say. Asciano is in the midst of implementing a five-year business improvement and cost-reduction strategy that should see annual operating costs reduced by about $150 million.

The newsletters touch on the low dividend payout ratio as a result of high debt levels and capex requirements. It is likely to remain at 20-30% of underlying net profit for the next five years, which could turn some off, but at least there’s potential for this to grow in the long term.

Watching the Directors

Sundance Energy director Henry Holcombe was in the mood to spend last week, snapping up 100,000 shares in an on-market trade for a tidy $82,000.

Meanwhile, Primary Health Care director Henry Bateman was on the sellers list, netting himself $92,100 after offloading 20,000 shares in an on-market trade.

Elsewhere, Technology One operating officer Edward Chung was also a seller last week, disposing of 200,000 shares in an on-market trade for a healthy $341,000.

Takeover Action June 26-July 3, 2013

DateTargetASXBidder(%)Notes
01/07/13ActivEXAIVASF Group 42.75Closed
02/07/13Argosy MineralsAGYBaru Resources0.00
02/07/13Azimuth ResourcesAZHTroy Resources78.86
1/07/2013Central Australian PhosphateCENRum Jungle Resources32.37
20/05/2013CIC AustraliaCNBPeet84.17
1/07/2013Elemental MineralsELMDingyi Group Investment13.69
18/03/2013Energia MineralsEMXCauldron Energy0.00
29/04/2013Firestone EnergyFSEWaterberg Coal Co27.42Takeovers Panel application
26/04/2013GraincorpGNCArcher Daniels Midland19.90Bid implementation deed
1/07/2013Kalgoorlie Mining CompanyKMCNorton Gold Fields77.57
15/05/2013Lemur ResourcesLMRBushveld Minerals2.70
21/06/2013Merlin DiamondsMEDInnopac Holdings67.25
7/05/2013Trust CompanyTRUEquity Trustees2.54
11/06/2013World Oil ResourcesWLRHoldrey10.91

Schemes of Arrangement

15/04/2013Norfolk GroupNFKRCR Tomlinson0.00Vote July 17
2/07/2013Platinum AustraliaPLAJubilee Platinum0.00Vote July 30
8/04/2013Polymetals MiningPLYSouthern Cross Goldfields0.00Vote July 31
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
28/06/2013Bravura SolutionsBVAIronbridge Capital0.00Scheme proposal
22/05/2013RHG RHGAustralian Mortgage Acquisition Company0.00Scheme proposal
Source: NewsBites