Collected Wisdom

This week we look at Oil Search, JB Hi-Fi, Treasury Wine Estates, AWE, and Atlas Iron.

Summary: The newsletters like developments at Oil Search, including its higher oil production guidance, but are split on electronics retailer JB Hi-Fi. After its sharp price fall, Treasury Wine Estates’ investors are told to hold on, but the newsletters are positive on AWE. Meanwhile, Atlas Iron is viewed as a hold, despite the company’s growing cash pile.
Key take-out: The majority of newsletters have restated their buy recommendations on Oil Search as they expect accelerating earnings growth (largely from PNG/LNG) and further gas commercialisation opportunities.
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.

Oil Search (OSH)

Most newsletters have upgraded their earnings forecasts in response to Oil Search’s strong performance and upgraded outlook last week.

Oil Search lifted its production guidance to 12-15 million barrels of oil equivalent (mmboe) from 10-12 mmboe for 2014 in its fourth-quarter report following a faster-than-expected start-up at the LNG project in Papua New Guinea – in which it holds a 29% stake – and a successful drilling and well-intervention campaign at its own PNG oil fields.

Tim Treadgold pointed to the strong potential at Oil Search in his Eureka Report article last year, A gas giant in the making.

On top of the positive outlook, Oil Search produced 6.74 mmboe during 2013 after a solid second-half – above its guidance for 6.2-6.7 mmboe – and reported a 20% surge in revenue to $US210 million.

The vast majority of the investment press were pleased with the report and restated their buy recommendations on the stock, expecting accelerating earnings growth (largely from PNG/LNG) and further gas commercialisation opportunities to bolster the share price in the next 12 months.

Analysts have a one-year forward price target on the stock of $9.82, with forecasts for double-digit earnings growth in 2014 and triple-digit earnings growth the following year.

How Oil Search plans on distributing the build-up in free cash flows is also appealing to investors, with the market expecting a 3% dividend yield by 2015.

However, the newsletters that don’t agree with consensus say the company’s heady share price has already factored in its earnings growth potential. They believe the market is overlooking the amount of sovereign risk Oil Search faces in Papua New Guinea, and that the company’s debt is too high (Oil Search had net debt of $US3.8 billion at the end of December, with gearing at 115%).

But with capital expenditure winding down (PNG/LNG is 90% complete and on budget), Oil Search won’t have a problem repaying the debt, other sources say.

* According to our value investor partners, StocksInValue, the intrinsic value for Oil Search is $0.72 (The StocksInValue analyst team values companies based on their financial performance so far, rather than their potential performance in the future). To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to buy Oil Search at current levels.

JB Hi-Fi (JBH)

Interim results from JB Hi-Fi have reassured newsletters after lacklustre results from The Reject Shop (TRS) and Super Retail Group (SUL) in January cast doubt over the retail sector.

In a trading update last week followed by half-year results on Monday, JB Hi-Fi announced that net profit after tax increased by 10% to $90.3 million and total sales lifted by 6.8% to $1.94 billion.

The retailer expects to sustain the earnings momentum: it set full-year guidance for total sales to increase by 6-8%, with net profit to be in the range of $126 million and $129 million – an increase of 8.3%-10.8% on the previous year.

Following the news, the investment press are split between holding and buying the stock, but more advise to hold as they believe the company has reached or is near full value. Simon Bonouvrie of Cadence Capital last month put an outperform recommendation on JB Hi-Fi in a Eureka Report article, Tuning in to JB Hi-Fi, pointing to good earnings growth and the potential for valuation expansion.

After surging 80.8% over the past year to Tuesday’s close of $18.50, JB Hi-Fi now trades at a price-earnings ratio of 14.1 times, above the retailer sector’s 13.8 times.

While chief executive Terry Smart says JB Hi-Fi will be able to grow by pursuing new segments (such as the $4.6 billion home appliances market) and through its aggressive store roll-out model, some newsletters disagree.

One source forecasts earnings to start declining by 2017 as the store portfolio reaches maturity and online retail becomes more of a threat and, as a result, thinks JB Hi-Fi shares are overvalued.

While several other newsletters do share similar concerns about the long term, they say strong and improving earnings momentum should buffer the share price.

The dividend yield is also increasingly appetising, with analysts forecasting it to lift to 4.6% by 2014-15 after JB Hi-Fi announced a 55 cents per share dividend for the interim – up 10% from the previous year.

* According to our value investor partners, StocksInValue, the intrinsic value for JB Hi-Fi is under review. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold JB Hi-Fi at current levels.

Treasury Wine Estates (TWE)

Treasury Wine Estates plunged the most on record last week after the wine producer slashed its earnings guidance before tax (EBITS) by up to 42.8% to between $42 million and $46 million for the first half of 2013-14.

Shares in the company fell 20% on the day and have since slipped another 3.6% to Tuesday’s close of $3.51. The performance marks Treasury’s fourth downgrade since October 2012. In July last year the stock slumped 12% when company was forced to write down its US inventory, with the revelations costing former chief executive David Dearie his job.

This time around it was weakness in the Australian division that was to blame. Treasury said its decision to increase prices on some of its commercial portfolio and to reduce its participation in pre-Christmas marketing activities had caused higher-than-expected volume declines.

Newsletters are more negative about the stock given the developments in Australia and are split over whether to hold or sell the stock. At its downtrodden share price levels, however, more say it is a hold, with a consensus price target of $3.87.

Unlike the downgrade last year in the US, the Australian downgrade represents a reduction in the sustainable earnings base, one source says. It also raised the prospect of another earnings guidance downgrade when Treasury selects a permanent chief executive, given they may want to reset expectations.

Another newsletter disputes Treasury’s brand power. While it does have a few well-known premium wines, they only comprise 15% of its volume, with 60% derived from low-end commercial production. This area is highly competitive and commoditised, where consumers care far more about price than the brand, the source says.

* According to our value investor partners, StocksInValue, the intrinsic value for Treasury Wine Estates is under review. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Treasury Wine Estates at current levels.

AWE (AWE)

AWE was right to sell part of its stake in the BassGas project and the company should reach its full-year production guidance despite the dip in the December quarter, the investment press says.

Last week the emerging oil and gas producer made two separate announcements: that it had sold 11.25% of BassGas for $85 million to Hindustan Petroleum, reducing its interest in the project to 35%, and it released its results for the December quarter. Production slipped by 6% to 1.45 mmboe during the period, but production had increased by 21% to 3 mmboe for the first half of the year.

This should make AWE’s production guidance for 5-5.5 mmboe obtainable, especially since the latest result had been below forecast due to downtime at a number of projects, newsletters say.

Though AWE has to realise a $10 million one-off loss on the sale of BassGas, the investment press think it was sold at a good price. Analysts had been cutting their valuations of the troubled project due to expensive maintenance, cost overruns and asset write-downs.

Most newsletters say AWE is a conviction buy. They say the company has been sharply undervalued by the market following years of volatile earnings, but smart acquisitions and divestments have begun to turn that around.

According to Bloomberg, the average price target on the stock is $1.86 – implying a potential return of around 45% to shareholders in the next 12 months.

AWE is also a potential takeover target, one source says. The company rejected a $752 million takeover from Senex Energy in December as the company felt it wasn’t in the best interests of shareholders, but more offers are anticipated.

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

Atlas Iron (AGO)

Atlas Iron shares jumped 10% to $1.05 last Wednesday when the iron ore miner delivered a better-than-expected first-half result and upgraded its guidance for 2013-14.

The company expects to ship between 10.2 and 10.7 million tonnes of iron ore this financial year, up from its previous guidance of between 9.8 and 10.3 million tonnes, after delivering a record 5.1 million tonnes in the first half.

Earnings before interest, tax, depreciation and amortisation are forecast to be between $193 million and $203 million for six months to December, above most analyst expectations, with stable iron ore prices (averaging $US120 per tonne) and weaker Australian dollar helping to drive the result.

“With the prices we have received, our cost discipline and further record shipments… we have increased our cash on hand to $389 million,” said managing director Ken Brinsden.

While Atlas Iron shares trade at a discount to many of the analysts’ valuations, with an average target price of $1.27, several concerns stop most newsletters from advising their clients to buy the stock (apart from its leveraged exposure to the iron ore price), and most say it is a hold.

There is too much uncertainty on growth projects, one source says. While Atlas’s pipeline of projects could provide extensions to mine lives or increase production rates – with a particularly interesting new discovery at Miralga Creek – exploration is too early to attribute any value to the stock.

If Atlas does choose to invest in new projects, another newsletter questions whether shareholders will ever see returns. Though gross cash was high, the source estimated net cash was just $56 million when the decline in the $A/$US exchange rate is factored in – below what it was six months ago.

Analysts estimate Atlas Iron’s dividend yield to fall to 2.6% in 2015 from 3.2% this financial year.

* According to our value investor partners, StocksInValue, the intrinsic value for Atlas Iron is $0.42. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Atlas Iron at current levels.

Watching the Directors

  • Nufarm chief executive Doug Rathbone netted himself $31.86 million after offloading 8,382,940 shares at $3.80 in a block trade. The trade’s size caused a stir since it was the week after the crop protection company downgraded its earnings, but it had nothing to do with Nufarm; the cash was used to repay debt and stop the sale of Rathbone’s prized winery assets. Rathbone Wine Group is now entering into distribution joint venture with winemaker Grant Burge, split 22.5% and 77.5% respectively.
  • Meanwhile, chief executive David Lord made $1,215,288 after his company, Warrnambool Cheese & Butter, accepted Saputo’s takeover offer. He sold 129,286 shares at $9.04 each.

Takeover Action January 30-February 5, 2014

DateTargetASXBidder(%)Notes
04/02/2014Ampella MiningAMXCentamin32.45
04/02/2014Asia MineralsAMCBrighton Mining Group0.00
30/01/2014Blackwood CorporationBWDCockatoo Coal87.83Closing Jan 31
04/02/2014Brighton MiningBMLBrighton Mining Group0.00
04/02/2014Carabella ResourcesCLRChina Kingho Energy Group92.80
01/11/2013CoalbankCBQLoyal Strategic Investment62.2775% proportional offer
4/02/2014Commonwealth Property Office CPADexus Property & Canada Pension Plan45.78
30/01/2014Continuation InvestmentsCOTDMX Corporation2.33Closing Feb 18
06/11/2013Energia MineralsEMXCauldron Energy0.00Closing Feb 6
31/01/2014e-pay AsiaEPYGHL Systems93.42Ext to Feb 21
24/01/2014Genesis ResourcesGESBlumont Group0.00
04/02/2014Glory ResourcesGLYEldorado Gold88.05
21/01/2014Jacka ResourcesJKATangiers Petroleum0.50
21/01/2014Keybridge CapitalKBCOceania Capital Partners20.77Ext to Feb 14
03/02/2014PaperlinX SPSPXUPaperlinX2.29Offer for all step-up preference securities. Ext to Feb 28
04/02/2014Scott CorporationSCCK & S Corporation81.5375% minimum
05/02/2014Tranzact Financial ServicesTFSGro-Aust96.43
30/01/2014Warrnambool Cheese & ButterWCBSaputo Inc78.09FIRB clearance. 
18/10/2013Warrnambool Cheese & ButterWCBMurray Goulburn Co-operative Co0.00
Scheme of Arrangement
17/12/2013EnvestraENVAPA Group33.00
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
Source: NewsBites