Collected Wisdom

This week we look at Westfield Retail Trust, Harvey Norman, Flight Centre and Metcash.

Summary: The newsletters believe that Westfield Retail Trust is undervalued at current levels, the poor results from retailer Harvey Norman make it a sell, while the travel agent Flight Centre and grocery group Metcash are both seen as holds.
Key take-out: Westfield says the plan now is to grow future earnings through its redevelopment program and capital management initiatives.
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.

Westfield Retail Trust (WRT)

Westfield Retail Trust battled difficult retail conditions in the first half but managed a net profit of $402.1 million for the six months to June 30, a 3.6% fall on the previous corresponding period. Negotiating lower-than-anticipated rental deals during the period certainly didn’t help. Still, a majority of the investment press believe the stock is undervalued at current levels and rate it a buy.

While the tough trading conditions are set to continue, with rental declines expected on both new and renewal leases, occupancy stands at 99.5%. Westfield says the plan now is to grow future earnings through its redevelopment program and capital management initiatives.

The trust currently has three centres under redevelopment at a cost of $332 million. Westfield Garden City in Brisbane and Westfield Miranda in Sydney are expected to be completed late next year, while Westfield West Lakes in South Australia is due to finish this year.

One source says continued earnings and distribution growth is likely, but structural challenges in the retail sector will put further pressure rental growth rates. A major risk is the deterioration in economic conditions, which would likely lead to fewer renewals of leases and hurting consumer sentiment.

Looking at the balance sheet, the investment press says gearing is low, at 22%. A few sources note it’s currently trading at a 16% discount to the value of its net tangible assets, with a dividend yield of close to 7%.

  • Investors are generally advised to buy Westfield Retail Trust at current levels.

Harvey Norman (HVN)

Retail heavyweight Harvey Norman reported a 17.5% drop in full-year profit to $142.2 million for fiscal 2013. Write-downs on the value of its properties dragged down the result, as did core franchising operations, the newsletters say. Some of the investment press are keeping the faith and hoping for a turnaround, but a majority think it’s a sell.

Global sales fell 3% to $5.57 billion during the period, with New Zealand the only territory to report an increase in sales revenue. Australian sales fell 4.2%.

Despite the result, the retailer remains upbeat about the outlook for the year ahead, saying it’s already started to see improvements in the domestic market. Indeed, sales stabilised in the second half, the investment press says, and the numbers for July and August are encouraging.

Gerry Harvey had some encouraging words, saying “It looks like we’ve climbed off the bottom – we’ve had a pretty dreadful period for the past three or four years”.

Still, sliding margins in the franchise division have the newsletters worried. More than one wants to see margins improve through an overhaul of the division. Elsewhere, another source put a dampener on the improving sales figures, saying it’s unlikely they’ll last.

Ongoing competition is the major problem. Public perception that bricks-and-mortar retailers like Harvey Norman are more expensive than their online counterparts continues to drive customers online. The retailer isn’t doing enough to counter the risk of online retailers stealing more market share, the investment press says.

  • Investors are generally advised to sell Harvey Norman at current levels.

Flight Centre (FLT)

Flight Centre continues to defy the critics, reporting another stellar result for FY13. Net profit after tax (NPAT) rose 23% to $246 million in the 12 months to June 30, with record earnings in its three largest businesses — Australia, the US and UK. The investment press found little fault with the result and a majority rate it a hold at the current price.
Cost control was a focus for the year, helping to push profit higher. Rent costs increased at a slower rate than shop and business growth, while sales and marketing costs declined year-on-year, the group said.

The investment press notes that earnings diversification is getting better, although India, Canada and Dubai were identified as weak performers. Corporate traffic is rising and the group’s scale and brand are seen as key strengths in the domestic market.

Growth of online travel is a risk, the newsletters say, but one notes that its blended online and bricks-and-mortar offering should help offset the threat of increased competition.

And while younger generations may be comfortable booking flights online, the baby boomers are the group’s bread and butter, the investment press. This group is expected to underpin growth in the near to medium term as they move into retirement and start to travel more.

The investment press is divided on the outlook for dividends, with some expecting a higher payout ratio given the strong balance sheet, but others more cautious, saying the group will want to hold onto its large cash stockpile given the volatility of the sector.

Either way, shareholders didn’t fare too badly this year. Flight Centre increased the final dividend by 28% to 91 cents per share fully franked, bringing the total dividend to $1.37 per share fully franked, up 22% on last year.

On the impact of the lower dollar, chief executive Graeme Turner maintained he isn’t overly concerned about it, saying he doesn’t see it stopping Australians from travelling overseas.

The hold rating seems largely due to the share price (it’s currently trading on a forward PE of 18), leading some to conclude upside is limited.

  • Investors are generally advised to hold Flight Centre at current levels.

Metcash (MTS)

The ongoing price war between Coles and Woolworths alongside subdued consumer confidence is hurting other players in the industry, and Metcash is no exception, with the sustained price deflation in the market having a significant impact. Despite the ongoing headwinds, and the sharp share price fall on the news, the investment press says this is a hold for now.

Providing a trading update to shareholders at its annual general meeting, Metcash said all divisions were performing to plan in the year to date with the exception of the food and grocery division, which has lost market share.

The retailer expects the challenging conditions to remain for the rest of the year, with earnings per share (EPS) dilution for the year expected to be in the high single digits, management said. Investors sent the share price sharply lower on the news.

A strategic review of the business is underway, with an update due in December. The newsletters have some ideas about what needs to be addressed, including under investment in the wholesaler-retailer system. Further investment in food distribution is also needed to improve efficiency, one source says.

And while Metcash may be able to compete with Woolworths and Coles on grocery prices to an extent, the heavy petrol discounting by the big two is a major issue that puts Metcash at a considerable disadvantage, the investment press says.

The high dividend ratio has attracted a lot of investors to Metcash, but one source thinks there’s a risk this ratio could be reduced due to the continued competitive pressures.

  • Investors are generally advised to hold Metcash at current levels.

Graph for Collected Wisdom

Watching the Directors

iiNet chief executive Michael Malone and director Simon Hackett made headlines last week when they offloaded a hefty number of the company’s shares. Malone sold 5,000,000 shares for $28.5 million, while Hackett netted himself more than $34.4 million after selling 6,036,332 shares.

Elsewhere, Carsales.com chief executive Gregory Roebuck sold 768,836 of the company’s shares for a $8,478,482 in an on-market trade. He also exercised $1.7 million of options at the same time.

Meanwhile, Echo Entertainment chief John Redmond was in a buying mood, snapping up 150,000 Echo shares for $417,566 in an on-market trade.

Takeover Action August 29-September 4, 2013

DateTargetASXBidder(%)Notes
02/07/2013Argosy MineralsAGYBaru Resources0.00
30/08/2013Australian Power & Gas CompanyAPKAGL Energy43.50
03/09/2013Breakaway ResourcesBRWMinotaur Exploration53.59
03/09/2013Central Australian PhosphateCENRum Jungle Resources79.72
07/06/2013CIC AustraliaCNBPeet85.40Ext to Jun 21
30/08/2013Elemental MineralsELMDingyi Group Investment17.86
18/03/2013Energia MineralsEMXCauldron Energy0.00
28/08/2013EnvestraENVAPA Group33.00
30/08/2013Firestone EnergyFSEWaterberg Coal Co45.07Ext to Sept 6
30/08/2013GraincorpGNCArcher Daniels Midland27.98
03/09/2013Lemur ResourcesLMRBushveld Minerals48.27
13/08/2013Red River ResourcesRVRIron Mountain Mining69.11Closed
28/08/2013Rockwell MineralsELTElementos90.0090% acceptance condition satisfied 
14/08/2013Trust CompanyTRUEquity Trustees2.54Mutual due diligence
11/06/2013World Oil ResourcesWLRHoldrey15.10
Schemes of Arrangement
21/08/2013Bravura SolutionsBVAIronbridge Capital0.00Vote September 23
31/07/2013CloughCLOMurray & Roberts Holdings61.60Vote min-Nov
02/08/2013Emerald Oil & GasEMROchre Group Holdings16.00Vote Nov 1
30/07/2013Platinum AustraliaPLAJubilee Platinum0.00Vote adjourned for amendments
15/07/2013RHGRHGResimac-Australian Mortgage Acquisition Company0.00Accepts counter proposal
03/09/2013Trust CompanyTRUIOOF Holdings0.00Vote Nov
04/09/2013Trust CompanyTRUPerpetual0.00Perpetual has until Sept 9 to match IOOF proposal
Foreshadowed Offers
22/08/2013Continuation InvestmentsCOTDMX Corporation0.00Bid for two thirds of shares delayed.
10/07/2013RHGRHGPepper Australia0.00Competing proposal
Source: NewsBites