Collected Wisdom

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.

National Australia Bank (NAB)

The big four banks have had a strong run in the past year, with National Australia Bank (NAB) leading the charge. Australia’s leading business bank has seen its share price rise more than 33% in the past 12 months, compared with Westpac’s 29%, Commonwealth Bank’s 27%, and ANZ’s 23%.

But the investment press thinks NAB has further to climb, with some even putting a hefty $40 price tag on the bank. The increased confidence comes as analysts reassess the bank’s outlook, as it looks to have turned a corner after a decade littered with errors.

NAB’s foray into the UK was one of these well-known blunders, with its ownership of two UK banks, Clydesdale and Yorkshire, hurting profits in recent times. But an improving economic outlook in the UK has contributed to positive sentiment among investors and the newsletters alike. Nonetheless, one source suggests now may be an opportune time to consider an exit from this market.

Better management is a key factor in the improved outlook, the media reports, with one source saying its focus on the lower-risk domestic banking and wealth management divisions underpins confidence in the bank.

As Australia’s biggest business bank, NAB is also best placed to take advantage of a rebound in business credit, another says. Others detail the potential for earnings per share growth. NAB has seen just 12% EPS growth in the 12 years to 2012, compared with an average of 137% its peers have seen, says one. Looking ahead, some expect NAB to have the best earnings growth in the sector in FY14.

* According to our value investor partners, StocksInValue, the intrinsic value for NAB is $31.81. To find out more visit http://www.stocksinvalue.com.au/

• Investors are generally advised to buy NAB at current levels.

David Jones (DJS)

It’s been a tough few years for retailer David Jones and despite chief executive Paul Zahra being adamant that the department store has “achieved a hell of a lot” with its restructuring, the newsletters are keeping DJs on the sell list.

FY13 numbers broadly met expectations, with a normalised net profit after tax of $101.6 million, after adjusting for a $9 million charge related to the sale of the electronics division to Dick Smith. The investment press says the result is reflective of weak retail conditions. With consumers watching their pennies and focusing on debt reduction, further weakness in retail is expected.

The rise of online retailers is another thorn in DJ’s side. Competition from both domestic and international e-tailers continues to grow, while consumers flock to the cheaper, online alternative.

In response to competitive concerns, DJs has been embarking on its future strategic direction plan. The company is on its way to becoming a fully-integrated digital retailer, implementing both physical and technological infrastructure.  

The last time Collected looked at DJs, back in May, it was rated sell (see Collected Wisdom). With ongoing competitive pressures, a weak retail environment and a growing shift to online retail, the newsletters are sticking with the sell call, with a majority saying it’s overvalued at the current price.

* According to our value investor partners, StocksInValue, the intrinsic value for David Jones is $2.21. To find out more visit http://www.stocksinvalue.com.au/

• Investors are generally advised to sell David Jones at current levels.

TPG Telecom (TPM)

Internet service provider TPG Telecom is closing the gap with the first tier telcos, with bold expansion plans and strong earnings growth. After seeing its share price rally almost 95% over the past year, the investment press rates this one hold.

For FY13, TPG reported net profit of $149.2 million, a 63% rise on the previous year. Excluding a one-off $23.2 million tax expense incurred in FY12, net profit lifted 31%.

Competitive pricing and a solid reputation has seen the group grow its subscriber base, with 76,000 broadband subscribers added in FY13. This compares with the 47,000 added the previous year. Mobile subscriptions also increased.

Getting more attention from the newsletters are the group’s fibre expansion plans. TPG already has around 670,000 subscribers, or 12% of the nation’s broadband market. From next year, the group is expected to expand its fibre network to 500,000 residential and commercial properties in densely populated areas in Sydney, Melbourne, Brisbane, Adelaide and Perth. The investment press expects improved margins once the rollout commences.

The newsletters say TPG’s fibre network expansion means it is well positioned for potential changes to the national broadband network (NBN), although regulatory risk is an issue, with one source noting that legislation to protect the interests of NBN Co may prevent others from rolling out a fibre network.

Looking at the balance sheet, the newsletters say it’s in good shape, with strong cash flow generation during the year allowing it to pay down debt.

The rising share price means TPG is now trading on a forward PE ratio of 22 times, but the newsletters say it’s justified given the group’s track record and expansion plans.

* According to our value investor partners, StocksInValue, the intrinsic value for TPG Telecom is $2.89. To find out more visit http://www.stocksinvalue.com.au/

• Investors are generally advised to hold TPG Telecom at current levels.

Boart Longyear (BLY)

Boart Longyear has successfully issued $US300 million of five-year senior secured notes, alleviating some pressure in the short term, but the newsletters say the group’s problems are far from over and there are a number of downside risks.

This week, Boart flagged a continued reduction in demand for its drilling rigs in the near term. Drill rig utilisation rates fell from 60% in May to 50% in August and declined further to 45% in September. The drill rig utilisation rates are now below the levels seen in the global financial crisis, and are expected to decline toward the end of the year. As mining companies continue to focus on cutting costs, the outlook for Boart is dimming rapidly.

But the group is putting up a fight and is focused on the continued reduction of its debt levels. Still, it hasn’t been easy. As Ian Verrender wrote yesterday, “the refinancing – forced upon the company by its banking syndicate, which offloaded two thirds its $450 million exposure to investors – came at an enormous cost to the company.” (see Boart braces for pain).

Management’s focus on debt reduction is the right strategy, analysts say, but it will have an impact on growth rates in the medium term. It’s also having a negative impact on morale and culture in the company.

The group’s share price has plunged 72% in the past 12 months, and it’s significant that a number of analysts still rate it a sell. Others say it’s currently trading at fair value, but with uncertain trading conditions, future earnings are difficult to predict.

* According to our value investor partners, StocksInValue, the intrinsic value for Boart Longyear is $0.50. To find out more visit http://www.stocksinvalue.com.au/

• Investors are generally advised to sell Boart Longyear at current levels.

Kathmandu (KMD)

Outdoor adventure retailer Kathmandu has done well to set itself apart from its peers, the newsletters say, recording healthy sales and margins in FY13.

Full-year net profit came in at a record $NZ44.2 million ($40 million), a 26.6% rise on the previous year, while like-for-like sales grew to $NZ384 million. The newsletters see this as a solid result, particularly given the subdued retail environment and the milder-than-usual winter just past. One source notes that Kathmandu is still trading at a substantial discount to both the market and its peers.

The focus now is on growth, according to the investment press, as the group looks to expand further across Australia and New Zealand. Kathmandu opened 17 new stores during the year, bringing the total store network to 136 stores; 87 in Australia, 44 in New Zealand and five in the UK. Management is looking to open another 15 new stores in the current financial year, with an ultimate target of 170 stores further down the line.

The retailer has had some issues with its UK division in the past, but with management now indicating that issues there have been resolved, one source says it could be a growth driver going forward.

Online retail is another area that Kathmandu needs to build on, the newsletters say. Chief executive Peter Halkett is looking to grow online sales to 10% of total sales within three years, up from the current 4%. To do this, the group needs to create a true omni-channel offering, but Halkett says it’s in the pipeline. “It’s not an omni channel yet, we haven’t got some of the enhancements that we think are important to be a modern online retailer, so in many ways we have still got a lot of things to do,” he says. Shareholders will be hoping he doesn’t take too long getting the omni-channel offering up and running.

• Investors are generally advised to buy Kathmandu at current levels.

Watching the Directors

The Millner family spent a pretty penny last week, splashing out $1,111,686 for 80,000 Washington H Soul Pattinson shares on market. The family must have been in a buying mood; they followed that purchase up with a further 30,000 Brickworks shares worth $386,907.

Elsewhere, iSelect non-executive director Shaun Bonett bought $200,000 of the company’s shares for $259,981. He was the last of the six-man board to take the plunge, with the other five board members buying up shares in the company in recent weeks.

Meanwhile, the big seller of the week was Monadelphous chief executive Robert Velletri. He netted $9,500,000 after selling 500,000 of the engineering group’s shares on-market through the family trust.