Collected Wisdom

This week we look at Funtastic, Leighton Holdings, Westpac Banking Corp, and SMS Management and Technology.

Summary: The newsletters are impressed with the toys wholesaler and distributor Funtastic, while there are concerns around construction group Leighton Holdings. Meanwhile, Westpac is seen as fairly valued, and the experts are watching developments at SMS Management and Technology.
Key take-out: The investment press believes there is good upside at Funtastic, with the group’s offshore operations delivering growth along with its recent homemade drinks business Chill Factor.

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.

Funtastic (FUN)

Toys wholesaler and distributor Funtastic achieved solid earnings growth and improved margins in FY13, despite the difficult retail environment. A promising future in overseas markets combined with efforts at debt reduction has the investment press rating Funtastic a buy.

Funtastic posted a net profit of $14 million for the full-year, an impressive 34% lift on the previous year. Overseas markets offset a weak performance at home, with international sales surging 73%. The group has further plans for building operations overseas, with Hong Kong and China being developed as manufacturing centres.

In contrast, the core domestic business saw revenue slip to $88.6 million from $101.3 million last year.

During the year, Funtastic undertook a series of capital raisings to reduce debt, including a $14.6 million issue in July to help fund the acquisition of homemade drinks business Chill Factor. This deal is proving to be a winner, with more than 2.4 million units sold since its launch in May 2013. The group’s fastest-growing brand has the potential to deliver in the long term, one source says.

The board is looking for earnings per share (EPS) growth of 10% in 2014. One source has gone one better, forecasting EPS growth of 16.6%. Currently trading on a forward PE of 7.8 times, Funtastic represents good value for those betting on a pick-up in discretionary consumer spending.

* According to our value investor partners, StocksInValue, the intrinsic value for Funtastic is $0.19. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to buy Funtastic

Leighton Holdings (LEI)

Leighton Holdings’ international construction business has come under fire in the past week, with allegations of bribery and corruption wiping $1 billion off its market value.

The construction giant was rocked after Fairfax Media reported it had obtained confidential company documents allegedly revealing widespread corruption in the company, including a memo purportedly written by former chief executive David Stewart in late 2010 that said his predecessor, Wal King, had approved more than $40 million in kickbacks to a Monaco firm nominated by Iraqi officials for a $750 million oil pipeline contract. Mr King denies the allegations.

The investment press is concerned about the impact of the allegations on the company’s reputation, but some are of the view that the reaction has been a little overdone. The share price has plunged 15% in the past week, but one source argues that the allegations have merely brought back into focus what is essentially a legacy issue.

The current chief executive, Hamish Tyrwhitt, appointed in August 2011, has worked to improve corporate governance, risk management and financial performance. But one source points out that a lack of transparency is a consequence of the scale of Leighton’s operations.

Still, it’s not all bad news. As Robert Gottliebsen points out this week, Leighton currently has $40 billion of work in hand and has obtained multiple new contracts in recent times (see Deconstructing Leighton’s problems).

Despite this, Gottliebsen rates Leighton as underperform. Three brokers also rate it a sell given the uncertainty around future earnings and the corruption allegations. Another three rate it a hold, while one source rates Leighton a buy.

* According to our value investor partners, StocksInValue, the intrinsic value for Leighton is $17.05. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to sell Leighton Holdings

Westpac Banking Corp (WBC)

There are growing expectations that the banks may be due for a pick-up in the coming weeks as investors rush in ahead of ex-dividend dates. Westpac has a reputation for delivering generous dividends and the investment press expects this time around to be no different. Westpac reports full-year earnings on November 4 and trades ex-div on November 8.

With its diversified market presence and strong capital position, Westpac is viewed as one of the best exposures to the Australian banking industry. Back in May, the bank reported a record first-half profit of more than $3.3 billion and rewarded shareholders with a special dividend of 10 cents per share, fully franked, in addition to the interim dividend of 86 cents.

The investment press expects another special dividend in November, with one source predicting another 10 cents per share. Meanwhile, the final dividend is also expected to lift from last year’s 84 cents.

Despite expectations of higher dividends, the investment press says Westpac is fairly valued and while share price gains are expected in the coming weeks, the newsletters rate the bank a hold.

As John Abernethy wrote in a Eureka Report article on Westpac last month, “the 2014 valuation of $35.47 will come into focus should the 2013 result be as expected. I still perceive a 10% return from this share over the coming 12 months and so remain a happy holder”. (see Projecting value on four growth stocks).

* According to our value investor partners, StocksInValue, the intrinsic value for Westpac is $29.56. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Westpac

SMS Management and Technology Ltd (SMX)

SMS Management and Technology has acquired Perth-based Birchman Group Asia Pacific for $25 million, comprising an upfront payment of $12.5 million in cash, funded by debt. This will be followed by two further payments, conditional on profit performance over a two-year period. The investment press is divided on this one, but for the most part rate the company a hold.

The decision to fund the acquisition with debt caught the attention of the newsletters, given the group has a net cash position on its balance sheet. One source says it’s an indication that SMS is holding onto the cash, either to fund another acquisition or to increase the dividend payout ratio in FY14.

Shareholders focused on yield will be hoping it’s the latter. Given the payout ratio has traditionally hovered around the 65-70% mark, there is scope to push this higher to compensate for expected weakness in FY14 earnings.

FY14 is likely to be a cyclical low point for the group, analysts say. Operating in the current difficult economic environment is keeping downward pressure on earnings, but the investment press notes that businesses can’t put off IT spending forever, and SMS is well positioned to take advantage of an upturn in the market. Earnings recovery is expected in FY15 at the earliest, the newsletters say.

* According to our value investor partners, StocksInValue, the intrinsic value for SMS Management and Technology is $4.95. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold SMS Management and Technology Ltd (SMX).

Watching the Directors

  • Beadell Resources’ directors Robert Watkins and Michael Donaldson were big sellers last week. Watkins sold 2,000,000 options for $1,416,779 “to finance house building costs”, while Donaldson sold 500,000 shares for $445,500 “to finance book production costs”.
  • Elsewhere, Vita Life Sciences managing director Eddie Tie sold 500,000 of the company’s shares for $700,000.
  • Meanwhile, on the buying side, Treasury Wine non-executive director Lyndsey Cattermole splashed out $199,778 for 44,004 of the company’s shares on-market.

Takeover Action October 3-9, 2013

DateTargetASXBidder(%)Notes
03/10/2013Argosy MineralsAGYBaru Resources73.34Closing Oct 31
03/10/2013Australian Power & Gas CompanyAPKAGL Energy96.56
03/10/2013Breakaway ResourcesBRWMinotaur Exploration85.10
27/09/2013Central Australian PhosphateCENRum Jungle Resources82.15Ext to Oct 11
01/10/2013CoalbankCBQLoyal Strategic Investment40.9075% proportional offer
03/10/2013Elemental MineralsELMDingyi Group Investment25.04
01/10/2013Emerald Oil & GasEMRConfederate Capital Pty Ltd14.0730% proportional offer
26/07/2013Energia MineralsEMXCauldron Energy0.00Closing Nov 16
28/08/2013EnvestraENVAPA Group33.00
04/10/2013GraincorpGNCArcher Daniels Midland27.98FIRB decision by Dec 17
26/09/2013Lemur ResourcesLMRBushveld Minerals53.67
17/09/2013Trust CompanyTRUEquity Trustees2.54Mutual due diligence. Ext to Nov 29
08/10/2013Warrnambool Cheese & ButterWCBSaputo Inc0.00Closing early Dec 
Schemes of Arrangement
29/08/2013CloughCLOMurray & Roberts Holdings61.60Vote mid-Nov
08/10/2013Emerald Oil & GasEMROchre Group Holdings16.00Terminated 
23/08/2013Platinum AustraliaPLAJubilee Platinum0.00Vote adjourned for amendments. Suspended from ASX.
11/09/2013RHGRHGResimac-Australian Mortgage Acquisition Co0.00Superior to Pepper's 
03/09/2013Trust CompanyTRUIOOF Holdings0.00Vote Nov
27/09/2013Trust CompanyTRUPerpetual0.00Board supports proposal. ACCC and Monetary Auth S'pore, NZIO clearance
Foreshadowed Offers
04/10/2013Billabong InternationalBBGCoastal Capital7.59Post re-financing/equity proposal
19/09/2013Billabong InternationalBBGAltamont Consortium4.00Post re-financing/equity proposal
19/09/2013Billabong InternationalBBGCenterbidge/Oaktree Consortium33.90Post re-financing/equity proposal
30/09/2013Continuation InvestmentsCOTDMX Corporation2.91Bid for two thirds withdrawn. To advise on any further offer
10/07/2013RHGRHGPepper Australia0.00Competing proposal 
12/09/2013Warrnambool Cheese & ButterWCBBega Cheese18.00
Source: NewsBites