Collected Wisdom

This week we look at Caltex, Alumina, Insurance Australia Group, nib Holdings and Wotif.com.

Summary: The newsletters like the look of Caltex, including its move away from oil refining and greater focus on retailing, but have mixed feelings about aluminium producer Alumina. Insurance Australia Group’s acquisition of Wesfarmers’ insurance division is seen as generally positive, and the newsletters see a healthy outlook for health insurer nib Holdings, but there are concerns around the profit outlook for online travel booking services group Wotif.
Key take-out: The investment press are mixed on Caltex, but welcome the company’s strategy to reduce its exposure to the fuel refinery business.
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.

Caltex (CTX)

Caltex shares have rallied more than 15% over the Christmas break after the fuel supplier and retailer surprised newsletters with better-than-expected earnings guidance for its marketing division in 2013.

Fears of a cost blow-out also passed unrealised, with Caltex’s closure of its loss-making Kurnell refinery on schedule and on budget.

While Caltex’s oil refining business continues to perform poorly – posting an earnings before interest and tax loss of $175 million for the period – its marketing segment will rise around 4% to a record earnings before interest and tax (EBIT) of $765 million.

Overall, the company expects underlying profits to fall around 30% to between $320 million and $340 million for 2013, within market consensus for $336 million.

On the day of the announcement (December 19) the stock jumped 12.8% to $19.07, and has since built on those gains to sit at $19.04 at Tuesday’s close. Before the good news negative sentiment and analyst downgrades had sent the stock to its lowest price in over a year.

When Collected Wisdom last looked at Caltex in August last year, the consensus was to hold the stock. This time around more newsletters say the stock is a buy.  They welcome the company’s strategy to reduce its exposure to the fuel refinery business and instead focus on fuel retailing and convenience store sales. Caltex forecasts Lytton, which will remain its sole operating refinery, to be EBIT positive for the full year.

Further, one source’s concerns about the Australian dollar falling further by year’s end – to below Caltex’s assumed 89c for its earnings guidance – didn’t eventuate. Caltex is exposed to any future currency movements: the Australian dollar’s sharp decline during May and June last year had resulted in a net loss of US dollar payables of around $80 million and had harmed profits in its marketing segment.

* According to our value investor partners, StocksInValue, the intrinsic value for Caltex is $12.56. To find out more visit http://www.stocksinvalue.com.au/

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

Alumina (AWC)

Alumina’s partner Alcoa delivered worse-than-expected fourth-quarter results last week, with the aluminium producer swinging to a $US2.34 billion loss compared with net earnings of $US242 million the year before.

Earnings were hit by a $US384 million settlement in a bribery case – which Alumina has to pay 15% of – as well as poor performance from Alcoa’s upstream segments brought on by low aluminium prices. Overall the company’s underlying earnings were worse than newsletters anticipated, coming in at US4 cents a share when analysts were forecasting US6 cents a share on average.

Alumina and Alcoa jointly own Alcoa World Alumina and Chemicals (AWAC), split 40% and 60% respectively. Alumina received a fully-franked dividend of $US25 million and distributions of $US3 million during the quarter.

The investment press was mixed after Alcoa’s announcement. However, since the recommendations were made the Indonesian government surprised the market by blocking the export of unprocessed minerals, including bauxite – the world’s main source of aluminium.

As Indonesia accounts for about 10% of the world’s bauxite supply, its decision could have huge ramifications on the aluminium market, one source points out.

Following the ban Alumina shares have lifted 3½ cents to $1.15 and a newsletter has come across the Eureka Report desk with a buy call. However, Indonesian policy is far from stable and the consensus view is to hold the stock. By and large newsletters are less optimistic than they were in July last year, when most were rating it a spec buy.

What’s promising is that Alcoa’s aluminium division was already performing better than many newsletters expected before the added development, though the company anticipates its costs to increase in the first quarter of 2014. The business’s earnings before interest, tax, depreciation and amortisation (EBITDA) margin picked up in the quarter, lifting to $US46 a tonne compared to $US44 a tonne the same time last year.

* According to our value investor partners, StocksInValue, the intrinsic value for Alumina is $0.28. To find out more visit http://www.stocksinvalue.com.au/

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

Insurance Australia Group (IAG)

Insurance Australia Group is raising $1.4 billion via an institutional placement and share purchase plan (SPP) to buy Wesfarmers’ insurance division.

Shareholders can subscribe to up to $200 million, while institutions have been allocated $1.2 billion. Each shareholder may apply for parcels of shares ranging between $1,000 and $15,000 at the lesser of $5.47 per share, or at the 2% discount to the five-day volume weighted average price in the lead up to the SPP close at January 24.

Newsletters are split on whether shareholders should subscribe to the SPP. On the one hand, the issue price represents a forward price earnings ratio of 11.5 times and a fully-franked dividend of 5.7% – an attractive proposition, one source notes.

But retail investors receive a disproportionately small amount of shares compared to institutions; they take up over 30% of the share register, but are only offered 14% of the new shares on offer. A heavy scale back is also likely given there are well over 750,000 eligible shareholders, a newsletter points out.

Despite retail shareholders getting the raw end of the deal, the majority of the investment press support the acquisition. IAG becomes the largest intermediated insurer in Australia, it solidifies its market-leading position in New Zealand, and it gets a 10-year exclusive distribution agreement with Coles.

Shares in IAG have risen around 7% to Tuesday’s close of $5.65 since the company announced the acquisition on December 16, capping off a stellar 2013. At these levels, IAG’s price earnings ratio is roughly in line with its global peers.

The majority of the newsletters say the stock is a hold. Several believe now is the wrong time to buy the insurer given its lucky run in 2013 where conditions permitted insurance margins to rise to over 17%.

* According to our value investor partners, StocksInValue, the intrinsic value for Insurance Australia Group is $3.66. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Insurance Australia Group at current levels.

nib Holdings (NHF)

Shares in nib Holdings have surged after the federal government gave approval for Australia’s only listed health insurer to increase its premiums to 7.99% – well above the 6.2% average increase across the entire private health insurance industry.

Since the news was announced two days before Christmas nib’s share price has climbed 24 cents, or 9.8%, to Tuesday’s close of $2.63. The stock has soared almost 30% over the past year.

Like the market, newsletters see the approval as a positive development for the company, but at current price levels, most advise to hold the stock. nib’s one-year forward price earnings multiple is at 16.2 times, compared to the wider financial sector’s 15.3 times.

And while the premium hike is consistent with nib’s positive outlook, the major reason for it is to offset the risk equalisation scheme, according to chief executive Mark Fitzgibbon. Because most of nib’s policyholders are young and healthy, the company must subsidise other insurers whose policyholders are older and chronically ill.

“An easier way to look at it is that our forecast risk equalisation expense has contributed more than 1.5% to our 7.99% price increase,” Fitzgibbon said.

In this context, the insurer’s premium increases are comparable to Medibank Private, BUPA and others, one source says.

However, the investment press agrees that nib has a bright outlook with its strategy to target younger Australians and roll them over into premium products as they age. Further, the federal government will keep supporting nib in its aim to get more Australians to adopt private health insurance and unburden the public healthcare system.

* According to our value investor partners, StocksInValue, the intrinsic value for nib Holdings is $2.01. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold nib Holdings at current levels.

Wotif.com Holdings (WTF)

Most newsletters advise shareholders to hold on to Wotif.com Holdings after the stock plunged 31.8% – the most on record – over a profit downgrade the week before Christmas.

Since the news the online travel booking services company has lifted by 5% to Tuesday’s close of $2.61. Before the shock announcement, the lowest the stock had ever been was $2.75 during the GFC in 2008.

Wotif expects net profit to be between $21.9 million and $22.6 million for the first half of 2013-14, compared to 27.5 million in the previous corresponding period and consensus at the time for $56 million.

The investment press sees the profit warning as another signal of rising competitive pressures that Wotif has failed to respond to effectively. Operating costs are expected to lift by $9 million – more than offsetting the 4.5% increase in revenue – as the company spends more on marketing and salaries and wages in its attempt to defend market share against its large US competitors Expedia and priceline.com (the owner of Booking.com).

Wotif said the outlook for the second half of 2013-14 remains volatile with retail conditions in Australia and New Zealand continuing to be soft and was not able to provide guidance. Newsletters anticipate margins will be further eroded over the period.

But at current price levels Wotif trades below most newsletters’ fair value forecasts. Its price-earnings ratio sits at 11.4 times, more than half of the wider internet retail sector’s 24.7times.

To take a more positive stance on the stock, one analyst wants to see evidence of a volume recovery in Wotif’s core business. While the company is progressing in its strategy to expand into other accommodation-related areas such as travel and hire, most newsletters don’t believe this will make material differences in the near term.

* According to our value investor partners, StocksInValue, the intrinsic value for Wotif.com Holdings is $2.65. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Wotif.com Holdings at current levels.

Takeover Action December 19, 2013-January 15, 2014

DateTargetASXBidder(%)Notes
10/12/2013Ampella MiningAMXCentamin18.88
10/01/2014Blackwood CorporationBWDCockatoo Coal73.52
14/01/2014Carabella ResourcesCLRChina Kingho Energy Group20.02
01/11/2013CoalbankCBQLoyal Strategic Investment62.2775% proportional offer
13/01/2014Commonwealth Property OfficeCPADexus Property & Canada Pension Plan25.35
14/01/2014Commonwealth Property OfficeCPAGPT Management11.72Not to lift offer
14/01/2014Continuation InvestmentsCOTDMX Corporation0.07
18/12/2013Elemental MineralsELMDingyi Group Investment31.61Ext to Jan 31. Trading halt
29/11/2013Emerald Oil & GasEMRConfederate Capital Pty Ltd34.5430% proportional offer. Closes Nov 30. Unconditional
06/11/2013Energia MineralsEMXCauldron Energy0.00Closing Feb 6
13/01/2014e-pay AsiaEPYGHL Systems84.49
19/12/2013Glory ResourcesGLYEldorado Gold45.02
05/12/2013Jacka ResourcesJKATangiers Petroleum0.00
28/11/2013Keybridge CapitalKBCOceania Capital Partners20.77
11/12/2013Kuth EnergyKENGeodynamics90.45Compulsory acquisition
21/10/2013Marathon ResourcesMTNBentley Capital19.98
05/12/2013PaperlinX SPSPXUPaperlinX0.00Offer for all step-up preference securities
13/01/2014Scott CorporationSCCK & S Corporation72.9175% minimum
09/01/2014Tranzact Financial ServicesTFSGro-Aust78.20
11/12/2013Warrnambool Cheese & ButterWCBBega Cheese18.00ACCC clearance. Ext to Dec 20
10/01/2014Warrnambool Cheese & ButterWCBSaputo Inc26.45FIRB clearance. Closing Jan 10
18/10/2013Warrnambool Cheese & ButterWCBMurray Goulburn Co-operative Co0.00
Schemes of Arrangement
17/12/2013EnvestraENVAPA Group33.00
10/01/2014RHGRHGResimac-Australian Mortgage Acquisition Co0.00Delisted after scheme approved
Foreshadowed Offers
17/12/2013Automotive HoldingsAHEAP Eagers19.50No AP Eagers comment on AFR offer speculation
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
Source: NewsBites