Collected Wisdom

This week we look at Woolworths, REA Group, Echo Entertainment, Tabcorp and Virgin Australia.

Summary: The newsletters consider Woolworths is still a good buy, and online real-estate company REA is worth holding, even at current high levels. Casino group Echo is worth a punt, they say, but the newsletters are split of wagering group Tabcorp, and airline Virgin Australia is a bit up in the air.
Key take-out: Poor sales returns from the new home improvements chain Masters have been a focus for the financial newsletters, but most feel parent company Woolworths is still worth adding to your investment cart.
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.

Woolworths (WOW)

An underwhelming sales performance from Woolworths’ Masters home improvements division in the half-year hasn’t deterred most newsletters from having positive outlooks on the retail stock.

Woolworths announced last week that sales from continued operations increased 6%, or $1.8 billion, to $31.8 billion in the first-half of 2013-14, with the company’s core Australian food and liquor division growing 4.8%.

The result was at or above most analysts’ forecasts for the period. The New Zealand operations were surprisingly good, thanks to the weakening Australian dollar, while the online division already exceeded Woolworths’ target for 2013-14, having reached $1 billion in sales during calendar 2013.

But Masters continues to be a drag. Newsletters weren’t impressed with the unit’s sales growth of 25%, given the aggressive rollout of stores, and say this segment poses the biggest amount of downside risk for the stock. Incoming managing director of home improvement, Matt Tyson, will face steep challenges in turning around the business, they say.

Even so, the majority of newsletters say the stock is a buy. Indeed, they are more optimistic on Woolworths than they were in July last year when most rated it as hold.

The performance of Masters, while troubling, is unlikely to have a material effect on group profit this year, one source says, and the momentum Woolworths has displayed in its core division over the past 18 months – with 920 supermarkets now operational – should keep sustaining the company’s growth above its peers.

Analysts forecast Woolworths to announce a dividend of 66 cents per share for the half-year, with a forecast yield of 4% (not including franking credits) for 2013-14.

* According to our value investor partners, StocksInValue, the intrinsic value for Woolworths is $35.90. To find out more visit http://www.stocksinvalue.com.au/

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

REA Group (REA)

Shares in market darling REA Group jumped 5% to a record high of $43.78 early last week when the online real-estate company announced first-half results ahead of already high expectations.

Net profit surged 37% to $70.7 million – above analyst forecasts for $67.7 million – and revenue soared 30% to $209.4 million.

Positive sentiment toward the company propelled the stock another 8.8% to $47.64 at Tuesday’s close since the performance update.

Newsletters almost unanimously agree that REA is a hold, despite the company’s dizzying price-earnings multiple of almost 48 times. Its brand commands a huge competitive advantage over its peers: nine out of 10 real-estate agents use its services, and 78% of all time spent looking for property in Australia is through its site.

The company also has room to grow by continuing to break into new product areas, one source says. For example, revenue from its new ‘listing depth’ products, which enable agents to enhance their property listings through the website, grew 67% during the period.

“We saw where the property advertising market was headed and made a deliberate decision to shift our focus from subscriptions to depth products which meet specific market needs,” chief executive Greg Ellis said.

However, REA has exceeded the average target price of $44.98 following the recent run-up in the share price over the past few days.

Newsletters also don’t like the uncertainty surrounding who will replace Ellis and when, with the company currently in the midst of interviewing candidates. When the company announced Ellis was resigning in December, the stock dived 6.88% on the day.

* According to our value investor partners, StocksInValue, the intrinsic value for REA Group is $31.54. To find out more visit http://www.stocksinvalue.com.au/

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

Echo Entertainment (EGP)

Echo Entertainment slumped to a record low last week when the casino operator announced disappointing half-year results and the resignation of chief executive John Redmond.

Net income came in at $46.1 million for first-half of 2013-14, missing consensus estimates for $55.8 million. A poor performance from the VIP business and one-off expenses of $22.2 million from restructuring harmed the result.

Shares in Echo fell 6% to $2.18 on the day, but rebounded 6.4% – the most in almost two years – the day after as the market took the price fall as a buying opportunity. As of Tuesday’s close, the company sits at $2.38

The majority of newsletters now say Echo is a buy, up from a hold the last time Collected Wisdom looked at the company in December. Two sources upgraded their recommendations on the results.

Echo is one of the cheapest casinos in the world after its 35% plummet in the past year, one newsletter notes. It is priced at a one-year forward earnings multiple of 14.3 times, while the average of its global peers is 19.1 times, according to Bloomberg.

Earnings should begin to improve as Echo’s cost reduction programs pay off and domestic gaming revenues improve, the newsletter says.

Another source notes that the change in chief executive to Matt Bekier should also bring more conservatism to capital expenditure in Brisbane. Bekier, who was previously chief financial officer for the group, may be more frugal if Echo chooses to build a casino at Brisbane’s Queen Wharf. Perpetual (the largest shareholder of Echo) also backed Bekier.

Several newsletters negative towards Echo, however, say long-term earnings are threatened by Crown’s entry into the NSW market, and that the group may have to tap shareholder funds to build a casino in Queensland.

* According to our value investor partners, StocksInValue, the intrinsic value for Echo Entertainment is $1.39. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to buy Echo Entertainment at current levels.

Tabcorp (TAH)

The investment press are split over Tabcorp after the wagering and gaming services group posted its half-year results last Thursday.

For the six months to December 31 underlying net profit lifted 4% to $70 million and revenue crept up 1% to $1.05 billion.

While the results were largely in line with consensus expectations, the company’s stock lifted 4.8% to $3.51 on the day and has remained relatively flat since then.

The increased demand for the stock certainly wasn’t thanks to widespread support from the investment press, with a range of buy, hold and sell calls hitting Eureka Report’s desk since the release of the results. However, consensus is for shareholders to hold onto the stock, given its 2013-14 price-earnings multiple of 17.2 times.

One newsletter with a buy call says Tabcorp has a solid outlook for 2014 from its ongoing expansion overseas, the ramp-up of products in the Keno division and the boost to wagering from the FIFA World Cup.

This, along with Tabcorp’s focus on cost control and margin expansion, should increase cash flow and therefore provide the scope for higher dividends in 2014-15, the source says. A decision against the Victorian government in the court case (which is expected to reach an initial decision in around six months) would also inject more cash into the company.

The dividend yield for Tabcorp is expected to increase from this year’s 4.3% to 4.8% in 2014-15.

But others say the company is failing to adapt to changing customer behaviour, as evidenced by the 5% fall in totalisator revenues in the period. More competition in the online space, as well as customer preference for fixed on wagering, will continue to erode the wagering business.

* According to our value investor partners, StocksInValue, the intrinsic value for Tabcorp is $2.05. To find out more visit http://www.stocksinvalue.com.au/

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

Virgin Australia Holdings (VAH)

Virgin Australia announced its first-half earnings would meet broker forecasts in response to an ASX price query last week.

Prior to the announcement, shares in Virgin had slid as much as 20% to 28 cents – their lowest point since January 2012 – in intra-day trading, with the market fearing the airline would miss market expectations. Virgin noted that its low free float of 26% means that analysts are typically slow in updating their forecasts for the stock.

After informing the market there would be a loss of $49 million pre-tax for the period, the stock recovered, climbing 21.4% to 34 cents as of Tuesday’s close.

Most newsletters are mixed between holding and selling the stock following the developments, but at its current depressed price levels more say it as a hold.

Though Virgin has moved its business toward being a genuine competitor in the budget and premium segments of the travel market, its ongoing battle with Qantas to gain market share has caused excess capacity for both carriers. This has damaged profitability despite the higher returns from the premium end due to weakness in the overall passenger market.

Early in January Virgin reported its yields had been positive between July and November despite a 0.3% fall in domestic passenger numbers.

The majority of newsletters don’t see Virgin returning to profitability until underlying demand catches up to the capacity. This might not occur until 2015-16, one source notes.

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

Watching the Directors

Hamish McLennan, TEN Network’s chief executive, was awarded more than $4.8 million worth of shares under the “TEN executive incentive share plan”. A total of 14,522,059 shares were added to his name at 33.2 cents a share.

Buru Energy’s non-executive chairman, Graham Riley, parted with 1,500,000 shares worth more than $3 million in the oil and gas exploration company, “pursuant to an order of the Family Court of Western Australia”.

Takeover Action February 6-12, 2014

DateTargetASXBidder(%)Notes
11/02/2014Ampella MiningAMXCentamin44.81
04/02/2014Asia MineralsAMCBrighton Mining Group0.00
05/02/2014Blackwood CorporationBWDCockatoo Coal89.06Ext to Feb 28
04/02/2014Brighton MiningBMLBrighton Mining Group0.00
04/02/2014Carabella ResourcesCLRChina Kingho Energy Group92.80
01/11/2013CoalbankCBQLoyal Strategic Investment62.2775% proportional offer
11/02/2014Commonwealth Property Office CPADexus Property & Canada Pension Plan54.42
30/01/2014Continuation InvestmentsCOTDMX Corporation2.33Closing Feb 18
06/11/2013Energia MineralsEMXCauldron Energy0.00Ext to May 1
31/01/2014e-pay AsiaEPYGHL Systems93.42Ext to Feb 21
24/01/2014Genesis ResourcesGESBlumont Group0.00
11/02/2014Glory ResourcesGLYEldorado Gold97.17
11/02/2014Jacka ResourcesJKATangiers Petroleum2.87
10/02/2014Keybridge CapitalKBCOceania Capital Partners27.36Ext to Feb 14
05/02/2014PaperlinX SPSPXUPaperlinX3.70Offer for all step-up preference securities. Ext to Feb 28
09/02/2014Real Estate CorpRNCLittle Group19.90
04/02/2014Scott CorporationSCCK & S Corporation81.5375% minimum
07/02/2014Tranzact Financial ServicesTFSGro-Aust97.75
11/02/2014Warrnambool Cheese & ButterWCBSaputo Inc83.29FIRB 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