Collected Wisdom

This week we look at Commonwealth Bank, Crown, Coca-Cola Amatil, Bradken and Incitec Pivot.

Summary: The newsletters still like the looks of Commonwealth Bank, with expectations it will hit a new profit high next year. Crown is viewed as a winner in light of recent casino deals, and also like the look of fertiliser group Incitec Pivot. Coca-Cola Amatil and Bradken are viewed as holds as their respective businesses deal with different pressures.
Key take-out: The investment press has lapped up Commonwealth Bank’s latest profit result, and a number of analysts have upgraded their full-year forecasts.
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.

Commonwealth Bank of Australia (CBA)

Commonwealth Bank of Australia reported another solid set of numbers for the first quarter, lifting cash profit by 14% to $2.1 billion. This puts Australia’s biggest bank on track to hit a record full-year profit of up to $8.4 billion for FY14.

The latest result beat expectations, leading a number of analysts to upwardly revise their forecasts on the view that CBA could repeat the impressive performance in the remaining three quarters.

Investors pushed CBA’s share price above $79 in the days following the news, but the newsletters are of the view that the share price is looking pretty lofty. Indeed, it’s significantly higher than the consensus target price of $75. Last week, Clime Asset Management’s John Abernethy also wrote a note on the ‘big four’, saying they’re no longer in value (see The ‘big four’ are overvalued).

In the quarterly update, CBA said that arrears rates were lower in home lending and stable in unsecured consumer lending. Meanwhile, impaired assets were marginally lower at $4.28 billion, the bank said. The bank is well capitalised with solid liquidity and funding, the newsletters say, while increased economies of scale should result in further cost efficiencies, one source says.

Aside from the better-than-expected quarterly result, analysts’ ears pricked up at the mention of the bank expanding into Asia. Chairman David Turner indicated this week that the bank is keen to build up its Asian presence, but gave little away, saying: “We are gradual movers and that is exactly what we need to continue to do but probably less gradually than we have before.”

* According to our value investor partners, StocksInValue, the intrinsic value for CBA is $67.57. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold CBA.

Crown (CWN)

When we last reported on Crown in September the newsletters were rating the company a hold. But more recent developments have spurred a rerating of the stock. Crown has just entered into agreements with the New South Wales government for the development of a six-star luxury resort at Barangaroo South in Sydney. The development is still subject to the passing of legislation as well as planning approvals and a gaming licence, but should go ahead, the newsletters say.

Expected to be open from late 2019, the new facility will be a VIP-only casino and will not have poker machines. The project is expected to cost about $1.3 billion, leading some to question whether the group will be able to make a reasonable return on capital without poker machines.

The casino operator is also still facing headwinds in the domestic market amid weak consumer sentiment.

However, others point to the success of James Packer’s Macau joint venture, which cost $US600 million ($632 million) and is now worth $US6.2 billion. Analysts have upgraded their forecasts of the joint venture on the back of the group’s latest quarterly result.

For investors looking for exposure to the tourism sector, Crown could offer solid long-term prospects. As well as the major projects being undertaken in Perth and Sydney, Packer continues to push for a five-star resort in Sri Lanka.

The latest announcement follows the news earlier this month that Crown will not increase dividends for the next four or five years. The group has paid out 37 cents per share annually for the past four years, with the company instead using free cash flow to upgrade facilities. With a current dividend yield of just 2.2%, this is not a stock for yield-seeking investors. Furthermore, John Abernethy rated Crown as underperform on October 2 in his article, Spotting stock bubbles.

* According to our value investor partners, StocksInValue, the intrinsic value for CWN is $8.13. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to buy Crown.

Coca-Cola Amatil (CCL)

Despite seeing an improvement in volume and market share in the Australian beverage business in the third quarter, Coca-Cola Amatil last week said the expected post-election uplift in consumer spending hasn’t yet materialised.

As a result, the beverage maker issued a profit warning, forecasting a 5-7% decline in earnings before interest and tax (EBIT) in FY13. Weaker-than-expected consumer demand and an increasingly competitive environment, as well as the high Australian dollar, were blamed for the warning.

In response, investors sent the share price sharply lower. Currently hovering around the $12 mark, the investment press largely retains a hold call on the basis that there could be some earnings upside in the coming months.

The third-quarter trading update highlighted difficulties in the Indonesian market, with demand slowing as the country adjusts to higher levels of inflation. Still, the investment press is confident the Indonesian business will continue to grow at a solid rate, and certainly well above the Australian division’s growth rate. The Indonesian business is the main driver of growth for the brand, and one source expects double-digit growth rates in this market for a number of years.

One concern for the newsletters is the group’s plan to re-enter the beer category later this year. Coca-Cola is due to start distributing America’s largest selling craft beer, Samuel Adams, from December.

* According to our value investor partners, StocksInValue, the intrinsic value for CCL is $8.87. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Coca-Cola.

Bradken (BKN)

Bradken has resolved its dispute with Norcast, with an undisclosed settlement to be paid to Norcast as part of an agreement reached between the two parties.

The news of the settlement came as Bradken, a manufacturer and supplier of consumable and capital products, issued first-half guidance for FY14, with earnings before interest, tax, depreciation and amortisation (EBITDA) – excluding a one-off item that is not expected to be significant –expected to come in at $85 million, 19% below the previous corresponding period.

The updated full-year guidance from the group, based on recent improvements in order intake, is for earnings to be “broadly comparable with the operating fiscal 2013 result".

Whether or not the full-year guidance will be achieved, the first-half numbers highlight the tough conditions resources-exposed companies are facing. In a bid to lower production costs, Bradken has just opened a new industrial facility in China.

Alongside the new China facility, other acquisitions and capital expenditure have increased the group’s debt levels significantly, one source notes, which poses a risk if there’s a downturn in commodity prices. The newsletters are looking for Bradken to improve its balance sheet by cutting back on expenditure and acquisitions in the near to medium term.

* According to our value investor partners, StocksInValue, the intrinsic value for BKN is $4.90. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Bradken.

Incitec Pivot (IPL)

Incitec Pivot posted a 27% fall in profit to $372 million in FY13 on the back of low global fertiliser prices, a decline in demand for explosives and the strong Australian dollar. Undeterred, investors pushed the share price sharply higher, with the shares lifting 7% on the news. The investment press thinks this one has a way to run yet, and rate it a buy.

The explosives and fertiliser manufacturer had previously flagged the weak result, so it came as no surprise to investors. The sharp share price rise has more to do with the positive outlook from management, the newsletters say.

While giving no formal guidance, chief executive James Fazzino said that the explosives division will benefit from the ramp-up of production at its Moranbah plant in Queensland , which is expected to produce 300,000 tonnes of ammonium nitrate in 2014. Continued demand from the resources sector means the outlook for explosives remains positive over the medium term.

Over the longer term, the investment press says Incitec Pivot’s fertiliser business has the potential to benefit from rising living standards in countries such as China and India. However, in the near term weakness in global fertiliser markets is expected to continue.

* According to our value investor partners, StocksInValue, the intrinsic value for IPL is $1.94. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to buy Incitec Pivot.

Watching the Directors

  • Premier Investments’ Lindsay Fox topped the seller’s list last week, netting himself $23 million after offloading 3,000,000 of the company’s shares on market.
  • In second place on the selling side was Wotif co-founder Graeme Wood, who sold 2,000,000 shares for $8,900,000 on market.
  • Meanwhile, PanAust managing director Gary Stafford spent $484,000 for 250,000 of the company’s shares.

Takeover Action November 7-13, 2013

DateTargetASXBidder(%)Notes
31/10/2013Argosy MineralsAGYBaru Resources86.83Closing Oct 31
12/11/2013Central Australian PhosphateCENRum Jungle Resources89.03
01/11/2013CoalbankCBQLoyal Strategic Investment62.2775% proportional offer
12/11/2013Elemental MineralsELMDingyi Group Investment29.46Ext to Jan 31
04/11/2013Emerald Oil & GasEMRConfederate Capital Pty Ltd24.7330% proportional offer
06/11/2013Energia MineralsEMXCauldron Energy0.00Closing Feb 6
28/08/2013EnvestraENVAPA Group33.00
11/11/2013Inova ResourcesIVAShanxi Donghui69.15Chinese Mofcom approves
29/10/2013GraincorpGNCArcher Daniels Midland28.32FIRB decision by Dec 17
11/11/2013Kuth EnergyKENGeodynamics73.73
21/10/2013Marathon ResourcesMTNBentley Capital19.98
13/11/2013Trust CompanyTRUEquity Trustees1.85Revised offer unconditional
31/10/2013Warrnambool Cheese & ButterWCBBega Cheese18.00ACCC clearance
12/11/2013Warrnambool Cheese & ButterWCBSaputo Inc0.00FIRB clearance. Closing early Dec 
18/10/2013Warrnambool Cheese & ButterWCBMurray Goulburn Co-operative Co0.00
Schemes of Arrangement
11/10/2013CloughCLOMurray & Roberts Holdings61.60Vote Nov 15
07/11/2013RHGRHGResimac-Australian Mortgage Acquisition Co0.00Vote Nov 18
03/09/2013Trust CompanyTRUIOOF Holdings0.00Vote Nov
16/10/2013Trust CompanyTRUPerpetual0.00Board supports proposal. ACCC and Monetary Auth S'pore, NZIO clearance. Vote Nov 28
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
12/11/2013Commonwealth Property Office FundCPADexus Property & Canada Pension Plan24.73Indicative offer
Source: NewsBites

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