Collected Wisdom

This week we look at Transpacific Industries, carsales.com, Ausdrill, Macquarie Atlas Roads and Lynas Corporation.

Summary: This week the newsletters have a buy on Transpacific Industries, and a hold on carsales.com, Ausdrill, Macquarie Atlas Roads and Lynas Corporation.
Key take-out: Transpacific Industries' sale of its New Zealand waste management business was welcomed by the newsletters, which also applauded its succession in paying off debt and its strategy of selling non-core assets.
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.

Transpacific Industries (TPI)

Most newsletters label Transpacific Industries’ sale of its New Zealand waste management business as yet another sign of the company’s return to form.

Transpacific, which operates in a number of industries across recycling, industrial services and waste management, sold its New Zealand arm for $NZ950 million (around $A880 million) to Beijing Capital Group last week.

The majority of newsletters say Transpacific is a buy after the news. The price was above what many had valued the business at, as it more than captured the strength of the New Zealand economy and the earnings boost from the rebuild in Christchurch.

Moreover, the sale enables Transpacific to deleverage and repair its ailing balance sheet, with the proceeds being used to redeem step-up preference securities and refinance the debt facility.

Whereas in December last year Transpacific was weighed down by net debt of $754 million and step-up shares preference shares of $250 million, now it should be virtually debt free, one newsletter points out.

Newsletters also support Transpacific’s strategy to divest non-core divisions and redeploy its capital to its Australian operations. Though the company faces muted revenue growth and intense competition domestically, most sources believe its reducing costs will result in earnings per share (EPS) growth in the next few years.

“We will look to enhance our Australian waste management businesses, capture long-term growth opportunities and generate improved shareholder value,” chief executive Robert Boucher said.

What’s also encouraging for investors is that management has flagged the potential reintroduction of a dividend in the near term. This would be the first dividend declared since August 2008.

Even after climbing 60% since June lows amid the positive sentiment, Transpacific’s share price of $1.17 at yesterday’s close is below analysts’ average target price of $1.29.

* According to our value investor partners, StocksInValue, the intrinsic value for Transpacific Industries is $0.38. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to buy Transpacific Industries at current levels.

Carsales.com (CRZ)

The purchase of a 49.9% stake in South Korea’s leading online car classifieds business creates significant growth opportunities for carsales.com, newsletters say, though much of it appears to be factored into the share price.

Last week carsales.com soared 12.8% over two days to a record high of $11.89 after announcing it had paid $126 million for half of the online assets of SK Encar. Under the transaction, carsales.com will own almost half of a new company called SK Encarsales.com, with the other half (50.1%) owned by SK C&C.

Carsales.com said it expects the acquisition to be earnings per share (EPS) accretive this year.

The investment press are mixed between holding and buying carsales.com, with two analysts upgrading the stock. Carsales.com is taking a dominant position in a market roughly 60% larger than Australia with 84% internet penetration – an attractive proposition, one newsletter notes.

Newsletters say the deal also meshes well with the company’s strategy to partner with international partners in underpenetrated or developing markets so that it can help improve their performance.

The SK Encar purchase follows a string of other acquisitions overseas. The day before the acquisition in South Korea, carsales.com had paid $7.18 million to increase its holding in iCar Asia to 22.9% from 19.9%.

“With Korea joining interests in Brazil, Malaysia, Indonesia, Thailand, China and New Zealand, carsales.com has a significant and growing international portfolio,” managing director Greg Roebuck said.

However, consensus is to hold carsales.com, as the stock’s surge to Tuesday’s close of $11.77 puts the company past the average broker target price of $11.70.

While the market is prepared to pay big premiums for quality online stocks like carsales.com, most newsletters agree that at current levels it’s running too hot. And as John Abernethy states in today’s edition, it represents too much speculation as not enough information was supplied.

* According to our value investor partners, StocksInValue, the intrinsic value for carsales.com is $8.62. To find out more visit http://www.stocksinvalue.com.au/

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

Ausdrill (ASL)

Ausdrill shareholders hoping for any respite from the malaise affecting the mining services sector were disappointed when the company downgraded its earnings guidance for 2013-14 yet again in its half-year report.

The results for the six months to December were largely as expected, with revenue down 26.9% to $424.2 million and underlying net profit slashed 60% to $18.6 million.

But the cut in full-year guidance to $35 million – at the lower range of previous guidance for between $35 million and $40 million – was worse than most analysts had pencilled in for the period.

“Ausdrill has experienced the toughest business conditions for some years, largely as a result of the sharp curtailment of spending by the mining companies and deferral of new companies,” managing director Ron Sayers said.

While the news sent the share price down 4.6% to 93 cents on the day, most newsletters advise to hold the stock. Given the poor conditions mining services companies face in Australia and Africa, they say Ausdrill’s stock – after declining 70.5% over the past year –is around fair value at current levels.

However, one source warns that a drop in the gold price could cause another major downturn.

Ausdrill’s gearing also remains a concern. While cash flow from operations was up 24.3% to $65.7 million, the company’s high leverage is elevated and heightens further potential risks such as additional impairments or more downside to operating earnings.

On the positive side, newsletters think Ausdrill is reasonably well placed in the sector because of its production stage exposure and diversification (with major exposure to gold and copper).

* According to our value investor partners, StocksInValue, the intrinsic value for Ausdrill is $1.62. To find out more visit http://www.stocksinvalue.com.au/

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

Macquarie Atlas Roads (MQA)

Macquarie Atlas Roads has climbed 7.7% to yesterday’s $3.20 after announcing a return to profit in 2013 and a better full-year dividend than analysts were anticipating.

The toll operator, which holds a global portfolio of roads across Europe and the US, posted a $41.9 million net profit from continuing operations, up from a $58.1 million loss a year earlier. Proportionate revenue increased 3.6% to $682.9 million, with traffic volumes 0.9% above the previous year.

More activity – particularly from the APRR motorway network in France – boosted the result, enabling the company to reintroduce its dividend at 5 cents a share.

Newsletters are mixed over Macquarie Atlas Roads, but most say it is a hold. The stock has more than doubled since April last year, and at current levels, they say it is around fair value.

Those positive toward the stock point to the likelihood of more attractive dividends for the second half of 2014, with many lifting their dividend forecasts after Macquarie Atlas Roads said it expected a higher cash flow from APRR due to lower financing costs and tax deductions.

Analysts forecast Macquarie Atlas Road’s yield to be 3.8% on average this year, bolstered by the weak Australian dollar as the Eurozone economy picks up.

Further, the deconsolidation of M6 Toll in the UK has enabled the company to focus on its core operations. After agreeing in June to forgo future profits from the M6 toll road, Macquarie struck a deal with banks to receive $1.4 million a year.

However, others point out that peer Transurban (TCL) offers a better yield at 4.9%, also with the bonus of franking credits on top.

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

Lynas Corporation (LYC)

Lynas Corporation plummeted the most in nine months yesterday after reporting it may need to tap shareholders for additional funding in the year ahead.

Investors sent the shares in the rare earths miner down 8.5% to 27 cents following the half-year report. Though the company said it was in talks with its creditors over funding, shareholders would be the next source if that fails.

Lynas said the capital is needed to provide a sufficient liquidity buffer as the principal repayments for its debt facilities were due and it expected costs to increase in the ramp up to phase one of its plant in Malaysia.

The company posted a first-half loss of $59.3 million, wider than its loss of $54.5 million and worse than what several analysts were expecting.

The majority newsletters are still telling their clients to hold onto the stock, despite the poor result and the threat of an equity dilution as the stock appears incredibly cheap, having fallen 55% over the past year.

Indeed, the average target price on the stock is 42 cents, according to Bloomberg.

However, one source that downgraded its recommendation to sell said any future funding will be restricted by the weak rare earths’ outlook and poor visibility. As such, Lynas may be limited to a deeply discounted equity raising or rights issue, debt refinancing or asset sell down.

It also said the company may not reach its production capacity at its Malaysian plant until 2017 – beyond what the company was anticipating.

* According to our value investor partners, StocksInValue, the intrinsic value for Lynas Corporation is $0.11. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Lynas Corporation at current levels.

Watching the directors

  • Directors’ trades were dominated this week with the sale of large stakes in their respective companies following reporting season. To begin, executive chairman Paul Ramsay offloaded $95,615,996 in Prime Media  –  his entire 30% stake – at 87 cents a share. Media reports suggest the sale may even precipitate a board spill at the regional free-to-air broadcaster.
  • Elsewhere, Hansen Tech chief executive, Andrew Hansen, sold 17,171136 shares in the IT solutions company at $1.20 a share, netting $20,605,363.
  • The last big sale went to Village Roadshow’s Graham Burke. The co-chief executive also sold out of his whole stake, making $18,878,007 from trading 2,603,863 shares at $7.25 each in the entertainment company.

Takeover Action February 20 March 12, 2014

DateTargetASXBidder(%)Notes
10/03/2014Ampella MiningAMXCentamin86.97Ext to March 24
06/03/2014Armidale Investment CorporationAIKGEGM Investments15.19
27/02/2014Blackwood CorporationBWDCockatoo Coal91.65
01/11/2013CoalbankCBQLoyal Strategic Investment62.2775% proportional offer
7/03/2014Commonwealth Property Office CPADexus Property & Canada Pension Plan94.82Closed
06/11/2013Energia MineralsEMXCauldron Energy0.00Ext to May 1
24/02/2014e-pay AsiaEPYGHL Systems96.08Closed
24/01/2014Genesis ResourcesGESBlumont Group0.00
11/03/2014Jacka ResourcesJKATangiers Petroleum10.87
28/02/2014Merlin DiamondsMEDBlumont Group0.00
03/03/2014PaperlinX SPSPXUPaperlinX7.84Closed
12/03/2014Real Estate CorpRNCLittle Group62.02
04/03/2014Scott CorporationSCCK & S Corporation98.2575% minimum
10/03/2014Westside CorporationWCLLandbridge Group Co0.00
Scheme of Arrangement
17/12/2013EnvestraENVAPA Group33.00
10/03/2014TriAusMinTROHeron Resources0.00Vote June
Foreshadowed Offers
04/10/2013Billabong International (2)BBGCoastal Capital7.59Post re-financing/equity proposal
19/09/2013Billabong International (2)BBGAltamont Consortium4.00Post re-financing/equity proposal
19/09/2013Billabong International (2)BBGCenterbidge/Oaktree Consortium33.90Post re-financing/equity proposal
Source: NewsBites

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