Collected Wisdom

This week we look at Telstra, JB Hi-Fi, Newcrest mining, Cochlear and Amcom.

Summary: The newsletters believe Telstra is a good hold, while Newcrest Mining is struggling to impress.
Key take-out: Amcom is expected by the newsletters to outperform, while Newcrest Mining is tipped to underperform, and Telstra, JB Hi-Fi and Cochlear are in neutral territory.
Key beneficiaries: General investors. Category: Shares.

This is an edited summary of the Australian investment press: It includes investment newsletters, major daily newspapers and broker reports. The recommendations offered represent the views published in the other publications and may not represent those of Eureka Report. This article is general advice only which has been prepared without taking into account your objectives, financial situation or needs. Before acting on it you should consider its appropriateness, having regard to your objectives, financial situation and needs.

Telstra (TLS)

Telstra may not be the most exciting stock on the market, but its full-year results illustrated exactly why it’s so popular. The share price is now agonisingly close to its recent high of $5.15, leading much of the investment press to rate it a hold for now.

The country’s biggest telco reported a 12.9% rise in net profit for FY13, to $3.9 billion. The dividend has been the obvious lure for investors for some time, and remained steady at 28 cents per share for the year, fully franked. The telco has firmly established itself as a yield play, and will likely want to keep it that way. At the current price the yield is a fairly uninspired 5.5%, but grossed up that translates to about 8%, certainly better than what you’d receive keeping your money in the bank.

The telco saw solid growth in retail mobile customers during the year, with mobile revenue rising 6%. Its mobile network increased by 1.3 million in the period and Telstra now boasts more than 15 million retail customers on its mobile network. The fixed line business didn’t fare as well, with revenues falling 2.7% to $7.3 billion. It lost more than 300,000 fixed line customers in the year.

Looking ahead, some analysts suggest the FY14 numbers will be little changed from this year’s. Commentators are divided as to what to expect next year for the dividend, with some estimating it could rise to 30 cents per share. For the moment at least, Telstra management is not giving guidance on future dividends.

Its $11 billion NBN agreement with the government also started to pay dividends this year, with a $400 million NBN payment received. The newsletters say Telstra's superior mobile and fixed network sets it apart from competitors, but there are headwinds ahead, including from the declining fixed line and Yellow Pages segments.

  • Investors are generally advised to hold Telstra.

JB Hi-Fi (JBH)

Investors took a shine to JB Hi-Fi after the retailer reported its full-year numbers this week, sending the share price above $19 for the first time since May 2011.

For the most part, the investment press doesn’t share investors’ enthusiasm for the stock and a number rate it a hold given the current share price.

Now to the numbers. Net profit after tax rose 11.2% for FY13, to $116.4 million. Total sales for the year grew 5.8%, buoyed by second half sales, which increased 10.3%.

This may have impressed the market in the short term, but sales in the previous corresponding period were actually especially weak due to heavy discounting by rival Dick Smith. 

Looking ahead, the company expects total sales to rise between 6% and 8% in 2014. At the same time, store numbers are also expected to increase 6% as JB Hi-Fi continues on its quest to operate a total of 214 stores across Australia and New Zealand (it currently operates 177 stores).

Sales growth of 6-8% and store growth of 6% means minimal improvement in same stores sales growth over the period, notes one source.  Others say long-term sales growth and margin outlook could some come under pressure given the deteriorating economic outlook.

The structural challenges facing the industry are another challenge. One source is optimistic, saying JBH is well positioned to capture opportunities in the online segment, but others are more cautious.

  • Investors are generally advised to hold JB Hi-Fi

Newcrest Mining (NCM)

Lower gold prices and gold production, alongside $6.2 billion in write-downs and impairments … not exactly a good look. This was the background for Australia’s largest listed gold miner, Newcrest Mining, reporting a statutory loss of $5.778 billion for FY13, down 600% on the prior year.

The losses were the second-largest reported by an Australian listed company and the biggest ever reported by a mining company.

In spite of these dismal numbers, investors sent the share price 7.9% higher shortly after the result:

However, this was largely a reaction to the group announcing it will halve capital expenditure. For the most part, the investment press does not share the same enthusiasm and a number rate it a sell.

Looking at the numbers, there wasn’t much to be cheerful about. Sales revenue fell 15%, or $641 million, to $3.775 billion. Gold production missed expectations, coming in at 2.11 million ounces, while the average gold price received during the year dropped 4%, to $1550 per ounce.

The focus for Newcrest now has to be on cutting costs and repairing its reputation, the newsletters say. Costs for the year were up 6% – in part due to a 12% rise in employee costs and a 31% increase in energy costs.

The real challenge will be to repair its battered reputation. Newcrest is currently under review by tax offices in both Indonesia and Australia. The Australian investigation is reportedly looking at financial reports from 2005 to 2011 and analysing both research and development claims made by the company during the period. There are also potential class actions on the way following its infamous market update at the start of June.

No final dividend will be paid, as expected, leaving the total dividend for the year at just 12 cents per share, unfranked. One source doesn’t think a dividend will be on the cards until at least FY16.

While one has Newcrest as a buy, with a price target above $20, among the rest the consensus price target is considerably lower. For those who can’t resist the lure of the spec buy, Newcrest may be one to look at, but for the conservative investor, it’s one to consider selling.

  • Investors are generally advised to sell Newcrest Mining.

Cochlear (COH)

There was little in the way of surprises in Cochlear’s full-year results, given it only issued a profit warning just a couple of months ago. The numbers broadly met expectations, with net profit declining 16% to $133 million for FY13, excluding product recall costs of its C1500 implant in 2012. Investors bumped the share price up closer toward $60 on the result, but for the newsletters, the price doesn’t reflect the outlook. Cochlear is a hold for now.

The big news of course was the approval received for the sale of the Nucleus 6 processor in Europe. Cochlear is counting on this new processor to drive growth, but some of the newsletters are wary of this strategy, since competitor Advanced Bionics already has a similar device in the market.

The newsletters are worried over the delay in approval in the US and are hopeful it won’t be too much longer before the processor can hit the market there. Growing pressure on market share from competitors including Sonova / Advanced Bionics and Med-EL doesn’t help.

Weaker sales in Europe and the Americas during the year were a disappointment, but not a surprise. Mitigating the weaker sales in these regions were stronger sales in Asia Pacific on the back of a Chinese tender sale.

However, again competition is the problem, with Chinese bionic ear maker Nurotron Biotechnology receiving approval last month to compete with Cochlear for Chinese government contracts. The concern is that Nurotron will be able to provide a low-cost alternative to Cochlear’s implant in the market.

Cochlear will need to stay on its toes to hold its position as market leader. To that end, spending on R&D continued to grow in the year and accounted for 18% of revenue in the second half, which investors will be hoping translates into improved returns in the not-too-distant future.

  • Investors are generally advised to hold Cochlear.

Amcom (AMM)

Amcom Telecommunications delivered the goods again for shareholders this week, reporting above 20% growth in net profit after tax (NPAT) for the 11th consecutive year. There is ongoing debate among the investment press on this market darling, given the share price has risen sharply over the past year, but a small majority believes it has further to run and rate it a buy.

The fibre data and communications company reported NPAT before significant items for the year of $20.8 million, a 23% lift, while earnings per share rose 22% to 8.5 cents per share. Investors liked what they saw and pushed the share price up to $2 on the news.

The focus for Amcom will be on building annuity-style revenue streams across both existing and developing lines of business, chief executive Clive Stein said. This should help provide a measure of predictability in forward earnings, one source notes. The company is currently trading on a PE of 19.7x on FY14 estimates and 17.1x on FY15 estimates.

The newsletters are expecting double-digit earnings growth in FY14 on the back of its new focus on cloud IT services and its hosted collaboration services partnership with Cisco Systems. The potential for success from its partnership with Cisco Systems is one the newsletters are keen to watch.

The company has minimal debt and says there is significant capacity to fund growth opportunities in the future.

  • Investors are generally advised to buy Amcom.

* An earlier version of this article incorrectly stated Telstra's all-time share price high was $5.15. This has now been corrected.

Takeover Action August 7-14, 2013

DateTargetASXBidder(%)Notes
02/07/2013Argosy MineralsAGYBaru Resources0.00
15/07/2013Australian Power & Gas CompanyAPKAGL Energy19.90
16/07/2013Breakaway ResourcesBRWMinotaur Exploration19.90
07/08/2013Central Australian PhosphateCENRum Jungle Resources69.65
20/05/2013CIC AustraliaCNBPeet84.17
01/07/2013Elemental MineralsELMDingyi Group Investment13.69
18/03/2013Energia MineralsEMXCauldron Energy0.00
31/07/2013Firestone EnergyFSEWaterberg Coal Co45.07
01/08/2013GraincorpGNCArcher Daniels Midland24.66
06/08/2013Kalgoorlie Mining CompanyKMCNorton Gold Fields90.57
08/08/2013Lemur ResourcesLMRBushveld Minerals16.77
13/08/2013Red River ResourcesRVRIron Mountain Mining68.97
07/05/2013Trust CompanyTRUEquity Trustees2.54
11/06/2013World Oil ResourcesWLRHoldrey10.91
Schemes of Arrangement
17/07/2013Bravura SolutionsBVAIronbridge Capital0.00Vote September
02/08/2013Emerald Oil & GasEMROchre Group Holdings16.00Vote November 1
30/07/2013Platinum AustraliaPLAJubilee Platinum0.00Vote adjourned for amendments
15/07/2013RHGRHGResimac-Australian Mortgage Acquisition Company0.00Accepts counter proposal
07/05/2013Trust CompanyTRUPerpetual0.00
Foreshadowed Offers
31/07/2013CloughCLOMurray & Roberts Holdings61.60Scheme proposal
12/08/2013Continuation InvestmentsCOTDMX Corporation0.00Bid for two thirds of shares
16/07/2013EnvestraENVAPA Group33.00Indicative proposal
10/07/2013RHGRHGPepper Australia0.00Competing proposal
Source: NewsBites