Collected Wisdom

This week we look at Metcash, Ansell, Aristocrat Leisure, Shopping Centres Australasia Property Group, and Programmed Maintenance.

Summary: The newsletters are concerned over Metcash’s ability to maintain market share in the face of intense competition in the grocery sector. They are generally neutral on Ansell following the group’s latest acquisition, see opportunities for gaming machine maker Aristocrat Leisure, but point to Shopping Centres Australasia Property Group being fully valued, and have mixed views on services company Programmed Maintenance.
Key take-out: The investment press sees Metcash will find it difficult to hold its market position against ongoing tough competition from Coles and Woolworths, and believe its turnaround strategy will require more capital.
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.

Metcash (MTS)

Shares in Metcash jumped 7.5% – the most in five years – to $3.28 on Monday after the grocery wholesaler reported a 1.9% fall in underlying earnings to $119 million and delivered an outlook that wasn’t as bad as the market feared.

Despite trading conditions in food and grocery remaining challenging, the company “has developed a clear plan to adapt … to the increasingly competitive deflationary environment,” Metcash said.

Most newsletters weren’t convinced, however, and their reaction helped pull the stock back down the following day. It closed on Tuesday at $3.15.

On September 4 Collected Wisdom noted newsletters were saying Metcash was a hold. But the majority of newsletters now say the company is overvalued and rate it as sell. They pinpoint ongoing pressure from Woolworths and Coles through price discounting. This further damages margins and profits in the supermarket and liquor divisions  – segments that make up around 80% of Metcash’s revenue.

The Metcash strategy, which is to span five years, relies on top-line sales growth in the fresh food and produce segment by securing better prices from suppliers and providing a bigger range of products, said chief executive Ian Morrice, who took over from Andrew Reitzer in June.

The investment press say the turnaround strategy requires more capital, which dilutes near-term returns. Indeed, Metcash reconfirmed its lower full-year guidance for earnings per share (EPS) to the mid-to-high single digits and cut its interim dividend to 9.5 cents a share from 11.5 cents a share.

Consumers are also less likely to sacrifice value for convenience in the deteriorating economic environment, one newsletter says. This reduces a significant point of differentiation for independent grocers such as IGA, which Metcash supplies to.

* According to our value investor partners, StocksInValue, the intrinsic value for Metcash is$3.42. To find out more visit http://www.stocksinvalue.com.au/

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

Ansell (ANN)

Ansell announced last week it will acquire US glove maker BarrierSafe for $US615 million ($671.6 million) as part of its strategy to add shareholder value through organic and acquisition driven growth.

The surgical glove and condom manufacturer expects the deal to be marginally dilutive to EPS when one-off transaction and integration costs are included for 2013-14, but that it will add to EPS by a low-to-mid digit percentage in the following year.

While the purchase is much larger than previous acquisitions, the majority of newsletters see it as a good fit within the company’s strategy and say the stock is a hold. BarrierSafe has a respected suite of products and a strong reputation, and will give Ansell exposure to a number of single-use glove segments in the US market, with the two businesses now capturing a 20% share as the number one player.

BarrierSafe will increase Ansell’s proportion of revenue derived from the US to 42% from 31%, and should represent around 17% of the total revenue at about $US1.6 billion.

However, some newsletters are worried about how the acquisition will affect the company’s balance sheet capacity. Ansell is funding the purchase with a new debt facility of $US300 million as well as a fully-underwritten private placement of $338 million and a further $100 million through a share purchase plan.

This severely limits any further acquisition opportunities for the time being, removing one of the most attractive features of the stock, according to one source, who also questions whether the acquisition will relieve or even add to its concerns about Ansell’s organic growth.

* According to our value investor partners, StocksInValue, the intrinsic value for Ansell is $10.56. To find out more visit http://www.stocksinvalue.com.au/

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

Aristocrat Leisure (ALL)

Aristocrat Leisure posted a 17% rise in net profit to $107.2 million for the full year as a strong performance in the gaming machine maker’s US business offset weakness from its Australian operations.

Earnings after tax in the US surged 20% to $154 million, spurred on by weakness in the Australian dollar, but Australian operations experienced flat earnings due to “stronger competitive market conditions and gaps in the games portfolio.” The result was also impacted in Japan, because only two games were released during the period instead of three.

For the most part, newsletters see growth opportunities in the emerging markets as more countries open up to gambling, with immediate opportunities in Macau and the Philippines.

Online retail also offers growth potential in both social and real money gambling in the US, the investment press says. Aristocrat acquired Product Madness, a social media gaming platform, during the year, and has begun releasing its games through Product Madness’s Heart of Vegas Facebook application. The scalability of this new distribution channel will support margin improvement, one source says.

However, at $4.67, most newsletters rate the stock at or above fair value and say the stock is a hold. Aristocrat has a price-earnings ratio at around 20 times, compared to the wider casino and gaming sector’s roughly 18 times. While Aristocrat has built this premium by having a competitive advantage with its line-up of gaming content, such as the new Tarzan and Superman themed machines, analysts don’t see its share price going any higher, with a consensus price target of $4.53.

Further, Aristocrat’s cash flow from the annual results was disappointing. Operating cash flow of $98 million was 40% below the previous correspond period and led to net debt increasing by 8.6% to $208.2 million. The market was looking for declining net debt and the potential for capital management.

* According to our value investor partners, StocksInValue, the intrinsic value for Aristocrat Leisure is $2.13. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Aristocrat Leisure at current levels.

Shopping Centres Australasia Property Group (SCP)

SCA Property Group is expanding into Tasmania by purchasing seven shopping centres in the state for $145.7 million on a capitalisation rate of 8%.

The real estate investment trust (REIT), created last year through an in-specie distribution to Woolworth shareholders, is funding the transaction by offloading seven “non-core” smaller shopping centres for $76 million, a $10 million placement to the private investment group it’s buying the properties off, and the rest from existing debt facilities.

After inspecting the new developments, most of the investment press rate the stock as a hold. On the positive side, SCA Property Group expects the combined impact of the acquisitions to be around 1% earnings accretive to distributed earnings on a neutral-gearing basis this year.

And while the REIT’s gearing will be at the higher end of its peers, increasing by 2.8% to 33%, one source doesn’t see this as a problem given each of the properties benefit from long-term leases from either Woolworths or Wesfarmers (owner of Coles, Target and Kmart).

However, SCA Property is looking fully valued with a price-earnings multiple at 12.3 times and its share price at $1.54 trades only marginally below the consensus price target of $1.61.

Newsletters point out several potential problems facing SCA Property Group down the track as well. The REIT’s shopping centres are in a smaller format, meaning low barriers to entry and therefore no sustainable competitive advantages. And, despite a relatively defensive earning stream – with 60% of income coming from supermarkets – the company might not be able to fully lease the portfolio before its rent guarantee expires two years after listing.

  • Investors are generally advised to hold SCA Property Group at current levels.

Programmed Maintenance (PRG)

Programmed Maintenance reported flat earnings, with net profit edging up 1% to $12.3 million for the half-year ended September 30.

The staffing, maintenance and facility management company – viewed as a barometer for the wider economy given the wide range of sectors it services – anticipates full-year earnings will be flat compared to the previous year as activity remains subdued in some industries.

Newsletters are mixed on the company, but most say it is a hold as opportunities in some industries offset ongoing weaknesses in others.

The resources division was the worst performer in the period, suffering from reduced activity on onshore mining projects. But, as one source highlights, the company’s marine services division that focuses on the oil and gas sector has a big pipeline of projects extending into 2015-16.

The group’s workforce division faces structural headwinds as customers increasingly recruit through channels such as LinkedIn, which is cutting into placement free revenue. Programmed recently acquired a 27.5% stake in emerging online recruitment business, OneShift, for $5 million.

The investment press also sees good opportunities emerging within the property and infrastructure division (from which PRG derives nearly half its revenue) from the public space.

“As governments and businesses seek to lower costs, new outsourcing opportunities often eventuate, and we have a pipeline of opportunities developing in the public infrastructure sector,” said managing director Chris Sutherland.

One of the other reasons newsletters advise investors to hold onto the stock is Programmed Maintenance’s attractive forecast yield of 5.5% for 2013-14. This was upped after the interim dividend was lifted by 20% to six cents a share and is sustainable, one source says.

* According to our value investor partners, StocksInValue, the intrinsic value for Programmed Maintenance is $2.43. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Programmed Maintenance at current levels.

Watching the Directors

  • Members of the Singapore-based Lim family topped the directors’ trades this week following their sales of shares in Vietnamese casino and hotels operator Donaco International. Chief executive Joey Lim and non-executive director Benjamin Lim received $16,800,100 after offloading 19,535,000 shares in the company.
  • In other trades, five of the six directors in retail group RCG Corporation (operator of brands including The Athletes Foot) sold $19,904,521 worth of shares to institutions this week.
  • Also on the selling side, Penelope Maclagan, a non-executive director of share registry manager Computershare, sold 460,000 shares in the company for $5,006,995.
  • Meanwhile, Jonathan Ling, who became managing director of appliances maker GUD Holdings in August, bought 85,470 shares in the stock for a total of $492,285.

Takeover Action November 28-December 4, 2013

DateTargetASXBidder(%)Notes
15/11/2013Argosy MineralsAGYBaru Resources87.85Closing Nov 30
26/11/2013Central Australian PhosphateCENRum Jungle Resources90.80Compulsory acquisition
01/11/2013CoalbankCBQLoyal Strategic Investment62.2775% proportional offer
19/11/2013Commonwealth Property OfficeCPAGPT Management6.46
26/11/2013Elemental MineralsELMDingyi Group Investment31.61Ext to Jan 31
22/11/2013Emerald Oil & GasEMRConfederate Capital Pty Ltd25.7330% proportional offer. Closes Nov 30. Unconditional
06/11/2013Energia MineralsEMXCauldron Energy0.00Closing Feb 6
28/08/2013EnvestraENVAPA Group33.00
22/11/2013Glory ResourcesGLYEldorado Gold19.90
22/11/2013e-pay AsiaEPYGHL Systems61.60
02/12/2013GraincorpGNCArcher Daniels Midland19.85Withdrawn
28/11/2013Keybridge CapitalKBCOceania Capital Partners20.77
25/11/2013Kuth EnergyKENGeodynamics83.79
21/10/2013Marathon ResourcesMTNBentley Capital19.98
13/11/2013Scott CorporationSCCK & S Corporation0.0075% minimum
21/11/2013Tranzact Financial ServicesTFSGro-Aust60.43
13/11/2013Trust CompanyTRUEquity Trustees1.85Revised offer unconditional
26/11/2013Warrnambool Cheese & ButterWCBBega Cheese18.00ACCC clearance. Closes Dec 12
03/12/2013Warrnambool Cheese & ButterWCBSaputo Inc13.56FIRB clearance. Closing early Dec 
18/10/2013Warrnambool Cheese & ButterWCBMurray Goulburn Co-operative Co0.00
Schemes of Arrangement
07/11/2013RHGRHGResimac-Australian Mortgage Acquisition Co0.00Vote Dec 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 OfficeCPADexus Property & Canada Pension Plan24.73Indicative offer
Source: NewsBites

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