Collected Wisdom

This week we look at Flight Centre, ALS, Harvey Norman, Transfield Services and AGL Energy.

Summary: The newsletters have a buy on Flight Centre at the current price levels, a sell on ALS, which suffered its worst share price fall in five years last week after it significantly undershot expectations in a trading update last week. Harvey Norman, Transfield Services and AGL Energy remain a hold.

Key take-out: After a stellar result, analysts agree with Flight Centre management that continued strength from the Australian business will drive outperformance in the short term as attractive ticket prices keep Australians travelling.

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.

Flight Centre (FLT)

Flight Centre is well positioned to beat its full-year guidance as the weakening Australian dollar fails to deter overseas travel, most newsletters say.

The travel services company is targeting profit before tax (PBT) of between $370-385 million – 8-12% above the previous year – after posting a record first-half result last week, where PBT surged 19.7% to $129.5 million.

“At the end of the first half, our profit trajectory was tracking slightly above our full-year target,” managing director Graham Turner said.

Following the stellar result, the investment press overwhelmingly say Flight Centre is a buy – even as the stock approaches record highs at yesterday’s share price of $52.63. The market darling has surged 59.9% over the past year and 10% since Eureka Report rated it as outperform in October.

Newsletters believe earnings upgrades will drive outperformance in the short term due to continued strength from the Australian business. For the most part, they agree with management that leisure expenditure isn’t impacted by fluctuations in the Australian dollar, but rather ticket prices (and therefore airline capacity).

In the longer term the investment press anticipate Flight Centre’s overseas segments to increasingly contribute to overall growth, particularly through corporate travel. While the US result was disappointing in the first half amid bad weather, corporate travel in the country performed well and now accounts for nearly half of total revenues, up from 40% two years ago.

Lastly, sources say Flight Centre’s healthy balance sheet enables it to pursue small scale acquisitions or capital management options such as a higher payout ratio. Indeed, the company lifted its interim dividend by 19.6% to 55 cents a share, and analysts anticipate the full-year dividend to increase by 11% to $1.01 cents a share.

* According to our value investor partners, StocksInValue, the intrinsic value for Flight Centre is $43.05. To find out more visit

  • Investors are generally advised to buy Flight Centre at current levels.


ALS suffered its biggest one-day sell off in five years on Thursday after providing a trading update that missed market expectations.

The stock plummeted 10.8% to $7.50 – its lowest price in two years – in response to ALS’s announcement that net profit for the December quarter was $44 million and that it expects underlying net profit for the full year to be between $160-170 million.

Analysts on average had forecast an underlying net profit of $190.3 million for the full year.

When Collected Wisdom last looked at ALS during its lacklustre half-year results in November, the market was left floundering as the analytical testing services company hadn’t provided guidance because of a lack of visibility in the minerals and oil & gas sectors.

Newsletters haven’t budged in their outlook for ALS since then, with the bulk still calling the stock a sell despite the share price slide as they slash earnings forecasts.

The results showed weak conditions in almost every division, sources say. ALS is highly exposed to commodity markets and exploration, which is problematic given that major miners are cutting spending to focus on cash returns to shareholders, while junior miners are capital constrained. 

Newsletters are also perturbed about signs of a shift away from exploration to production in the oil & gas division, given ALS’s recently acquired Reservoir business is mostly exposed to exploration.

If this wasn’t enough, the cold weather in the US also resulted in its North American laboratories being closed for 16 days through January and February.

However, sources agree that ALS has quality management who are navigating the downturn well through cost initiatives, and that the company should be well placed to benefit from a cyclical pick up in resources.

* According to our value investor partners, StocksInValue, the intrinsic value for ALS is $5.70. To find out more visit

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

Harvey Norman (HVN)

Harvey Norman blamed soft consumer spending over the summer period for weak sales in the first half of 2013-14.

The retailer reported net profit increased 36% to $111.42 million, behind consensus forecasts for $128 million. Revenue crept upwards 3.6% to $2.99 billion.

Newsletters are divided over Harvey Norman, with a number of buy, hold and sell calls issued on the stock. But with an average target price of $3.03, consensus is to hold.

Those upbeat toward Harvey Norman think the stock is the best way for an investor to leverage against a domestic housing recovery through retail, given its wide range of household goods.

Though sales have been weak so far, management pointed to strong momentum in the second quarter and is upbeat about the rest of the year.

They also point to the retailer’s strong property portfolio. Real property assets totalled $2.27 billion, up from $2.21 billion in June 2013.

“Ownership of real property is an absolute competitive strength when compared with the intangibles and goodwill that figure prominently on the balance sheets of many of our competitors,” Harvey Norman chairman Gerry Harvey said.

But while Harvey Norman operates under a relatively high cost structure, other competitors like JB Hi-Fi and Bunnings can offer price-wary consumers generally better offers, one source points out. With the internet enabling consumers to easily compare prices, price becomes a key differentiator.

Several newsletters also noted that cost cuts have been delayed. This means a return to peak margins in the short term is unlikely.

* According to our value investor partners, StocksInValue, the intrinsic value for Harvey Norman is under review. To find out more visit

  • Investors are generally advised to hold Harvey Norman at current levels.

Transfield Services (TSE)

Shares in Transfield services endured a volatile ride last week, soaring 24.5% over a $1.2 billion contract win but then losing more than half those gains three days later because of a disappointing half-year result.

The stock tumbled 11.9% to 85 cents after Transfield announced operating revenue declined 2.6% to $1.8 billion amid difficult conditions, while underlying net profit leapt 48% to $9.9 million. Full-year guidance was reaffirmed at between $65-70 million.

What was most alarming to newsletters was the asset management firm’s higher debt. With net debt up to $639 million compared to $566 million in June last year and gearing up to 46%, they say the balance sheet is too stretched and that Transfield would be vulnerable if any problems were to arise.

Further, Transfield’s earnings margins are compressing more than many sources expected, with problem contracts in the transport and utilities sectors eroding growth in the immigration and defence works.

Several newsletters are sceptical about the Transfield’s ability to reach guidance. One source points out the group would have to make 75% of its net profit in the second half, a tough ask since the company typically makes only 60%.

As for the latest contract to provide garrison and welfare services at Naura and Manus Island in Papua New Guinea, one source questions whether the reward is worth the political and reputational risk.

Following the developments, the investment press are largely split between holding and selling Transfield, however, the majority say it is a hold despite its many problems.

With a 2013-14 price-earnings multiple of 7.4 times, well below the five-year average of 33.7 times, the bad news appears to be factored into the share price. Indeed, the average target price on the stock is 93 cents – in line with Tuesday’s close.

* According to our value investor partners, StocksInValue, the intrinsic value for Transfield Services is $0.56. To find out more visit

  • Investors are generally advised to hold Transfield Services at current levels.

AGL Energy (AGK)

AGL Energy reported a soft first-half result as an unusually warm winter and strong competition harmed the gas and electricity retailer’s profits.

Net underlying profit fell 11.4% to $242 million and revenue slipped 2.6% to $4.84 million amid declining electricity volumes. Retail (which makes up 42% of revenues) was the major disappointment with net earnings flat at $136 million.

Though the results elicited a couple of downgrades, newsletters are overwhelmingly split between holding and buying AGL Energy after the news. More advise to hold the stock, as they believe the stock is fairly valued. At current levels AGL is priced at a multiple of 13.6 times – slightly below the utility sector’s 16 times.

Most newsletters are confident AGL can meet its full-year guidance for an underlying net profit of between $560-610 million despite the slant needed in the second half. While it seems aggressive, management has the insight of the summer performance where volume demand normalised, one newsletter says.

Further, the source believes the NSW market could stabilise after irrational discounting occurred last year. Consequently, there’s a good chance margins could rebuild in the fourth quarter.

And while the acquisition of Macquarie Generation was rejected by the ACCC on Tuesday – sending the share price down 2.5% to $15.05 – there are other drivers, says another source. On top of the potential for a retail recovery and deregulation in the NSW market, AGL may be able to contract higher pricing for gas at Wallumbilla in Queensland.

Lastly, newsletters say AGL generates an attractive and dependable dividend. The interim dividend was unchanged at 30 cents – as expected – setting the company up for a dividend yield of 4.3% for the full year.

* According to our value investor partners, StocksInValue, the intrinsic value for AGL Energy is under review. To find out more visit

  • Investors are generally advised to hold AGL Energy at current levels.

Watching the directors

  • Directors were selling big again this week, with Seek chief executive Andrew Bassat claiming the top spot. Bassat offloaded $17,710,000 worth of shares at $16.10 a piece in the online job classifieds company “in order to meet personal obligations”.
  • Bassat was followed closely by ANZ boss Mike Smith, who sold 545,000 shares in Australia’s third largest bank at $31.821 for $17,342,365. Smith said the sale included a family transfer of ANZ shares and was also to help with personal tax obligations and the purchase of a property in Australia.
  • On the buying side, M2 Group executive director Vaughan Bowen purchased 500,000 shares in the telecommunications services provider at $6.092 each for $3,045,850.

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