Collected Wisdom

This week we look at Nufarm, TPG Telecom, Premier Investments, Sigma Pharmaceuticals and Qube Holdings.

Summary: The newsletters have upgraded their recommendations on Nufarm on the basis that short-term challenges will ease over time, but believe that at current record levels it’s time to reassess holdings in TPG Telecom. Premier Investments also has reached record levels, and newsletters regard it as a hold at this point. They also recommend investors sit tight on Sigma Pharmaceuticals despite its recent profit slip, and to stay on-board transport and logistics group Qube.

Key take-out: While Nufarm shares are likely to remain weak because of short-term challenges, newsletters say the market isn’t properly considering the likelihood of those pressures easing. The majority say Nufarm is undervalued and advise their clients to buy the stock.

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.

Nufarm (NUF)

Nufarm shares dipped last week as a bleak outlook for the Australian market overshadowed a better-than-expected half-year performance from the global crop protection company.

The stock fell 5.3% to $3.91 – erasing its gains from a week earlier when Nufarm announced the reorganisation of its Australian operations – after the market was told that business conditions in Australia will remain challenged.

“While much needed-rainfall would drive increased applications of product, channel inventories are estimated to be high and pricing pressure is expected to continue for the balance of the year,” Nufarm said.

However, underlying earnings before interest and tax (EBIT) came in at $56.7 million, above earlier guidance for at the lower end of $50-60 million. Further, sales beat most analyst forecasts due to the strength of the business in South America, surging 22% to $1.14 billion.

While Nufarm shares are likely to remain weak because of the short-term challenges facing the Australian business, newsletters say the market isn’t properly considering the likelihood of those pressures easing later on.

Consequently, most newsletters say Nufarm is undervalued and advise their clients to buy the stock, with analysts’ average target price at $4.63.

When Collected Wisdom looked at Nufarm in January the majority said it was a hold, with debt too much of a concern and too much risk associated with earnings volatility.

This time around several newsletters have upgraded their recommendations. They believe the company’s recent debt deal removes the risk of an equity raising and accommodates the seasonal build-up in the booming South American area.

* According to our value investor partners, StocksInValue, the intrinsic value for Nufarm is $2.63. To find out more visit http://www.stocksinvalue.com.au/.

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

TPG Telecom (TPM)

The investment press can’t agree on whether TPG Telecom shares deserve their hefty premium after the market darling wowed the market with another impressive result.

The telecommunication services provider announced that net profit increased 15% to $90.1 million and sales inclined 11% to $394.6 million for the six months to January 31.

Earnings guidance for the full year was also upgraded. The company lifted its earnings before interest, tax, depreciation and amortisation (EBITDA) forecast by up to $40 million to between $325-$330 million, not including the recent acquisition of AAPT, which is expected to add up to another $25 million.

The stock soared 7.3% to a record high of $6.18 on the day of the news. After climbing another 3.9% to yesterday’s close of $6.42, TPG shares have now doubled over the past 12 months.

Newsletters are largely divided between buying and selling TPG following the news, but more say to take profits at current levels. Though none dispute the strength of the result or the quality of the company, for most analysts the share price is far too stretched. TPG trades at a price-earnings multiple at 32.2 times, substantially above the telecommunication sector’s 20.7 times.

One source says that the market puts TPG’s earnings on a high-growth multiple even though the company is in a mature industry that might face pressure in the medium term. And while the drivers for the excellent result look sustainable, they don’t look necessarily repeatable – which is what TPG needs for continued share price support at these levels.

Another source says the share price is incorporating expectations about its fibre to the building (FTTB) ambitions, which it says are unlikely to be realised and face a regulatory threat as it could significantly impact the federal government’s NBN.

Analysts on average forecast TPG’s share price to be $5.72 in 12 months.

* According to our value investor partners, StocksInValue, the intrinsic value for TPG Telecom is $3.92. To find out more visit http://www.stocksinvalue.com.au/.

  • Investors are generally advised to sell TPG Telecom at current levels.

Premier Investments (PMV)

Solomon Lew’s Premier Investments leapt to a record high after posting better-than-expected sales growth for the first half of 2013-14.

Shares in the specialist retailer jumped 15.7% to $9.35 on Tuesday and Wednesday last week – their biggest two-day rise in more than seven years – following the half-year report.

While net profit was largely in line with expectations with a 12.1% increase to $52.1 million, total sales caught analysts by surprise, climbing 5.5% to $468.4 million amid strong growth from Peter Alexander and Smiggle.

The standout was a 4.4% boost in like-for-like sales growth, with Dotti, Portmans Jacqui E and Just Jeans also contributing to the strong performance. Premier Investments had been lacking in like-for-like sales for several years, one newsletter says, so it was pleasing to see a number of its brands moving in the right direction.

Sources agree that Jay Jays is still a work-in-progress, but sales momentum is improving and the women’s fashion retailer appears to be in a slow turnaround.

The investment press are split between buying and holding Premier Investments after the news, but the consensus is to hold the stock.

Newsletters support the company’s strategic growth initiatives, particularly for more Peter Alexander stores and the launching of Smiggle into the UK. Premier currently has four Smiggle stores trading in the country and plans to open another six by July.

“We are confident that unlocking the value of uniquely positioned brands like Peter Alexander and Smiggle will continue to deliver returns to our shareholders,” said Lew.

But the stock has continued to lift in the days after the company’s announcement and newsletter responses. At Tuesday’s close they sit at $9.77 – 7% above the consensus price target.

* According to our value investor partners, StocksInValue, the intrinsic value for Premier Investments is $6.60. To find out more visit http://www.stocksinvalue.com.au/.

  • Investors are generally advised to hold Premier Investments at current levels.

Sigma Pharmaceuticals (SIP)

Sigma Pharmaceuticals has built a strong position that should be able to weather the sector’s tough operating environment, newsletters say.

The response follows the pharmaceutical company’s full-year results last week, where net profit declined 2.2% to $51.1 million and sales edged upwards 1.1% to $3.02 billion, and company’s $24.5 million acquisition of Central Healthcare.

While net profit beat analyst expectations for net profit at $47.9 million thanks to good cost control and the effective use of capital, sales lagged forecasts.

“To deliver sales growth in a market that is under pressure from the government PBS (pharmaceutical benefits scheme) price disclosure reform and generally difficult retail trading conditions reinforces the recent investment decisions taken and the direction we are heading, said chief executive Mark Hooper.

For the most part newsletters agree, with the majority saying the stock is a hold at current levels given sluggish top-line growth will continue. Several sources say Sigma’s recent cost and revenue initiatives should dilute the impact of PBS reforms, while the recent acquisition of Central Healthcare should help to provide revenue growth.

Sigma also offers an attractive dividend yield; analysts on average anticipate the stock to yield 5.2% in 2015 and 6.5% in 2016.

However, one source is concerned that further cuts to prices paid by the federal government in the $9 billion PBS scheme could be more aggressive and may shrink the market. That being said, Sigma is offsetting this by stealing market share.

The consensus price target for the stock is 67 cents, in line with Tuesday’s close.

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

  • Investors are generally advised to hold Sigma Pharmaceuticals at current levels.

Qube Holdings (QUB)

Qube Holdings is cashed up and ready to pounce on further growth opportunities ahead after its $230 million equity raising, newsletters say.

The transport logistics company announced last week that it will undertake a $200 million fully underwritten placement and a $30 million non-underwritten share purchase plan to eligible shareholders.

Qube says the capital will be used to fund its newly formed joint venture (JV) with Noble Group, reduce debt and allow it to pursue other strategic acquisitions ahead.

The JV, called Quattro Grain, is to develop and operate a grain handling facility capable of exporting 1.3 million tonnes of grain per annum at Port Kembla in New South Wales. It is expected to cost Qube up to $50 million.

Qube also announced it has completed its two acquisitions: Walmsley Bulk Haulage and Beaumont Transport, for a total cost of $40 million.

As one newsletter is quick to point out, Qube has raised $100-115 million above the capital requirements and should have between $300-310 million in cash and undrawn debt after the equity raising and JV investment.

Despite the strong balance sheet, most newsletters say to hold Qube Logistics with an average target price of $2.18, 8 cents below Tuesday’s close. They are waiting to see whether Qube is successful in bidding to develop the Moorebank intermodal terminal in Sydney and Webb Dock in Port Melbourne before placing higher price targets on the stock.

Decisions over the two growth opportunities are expected to arrive in April – a month one source describes as company-defining for the stock. While it’s unclear how much Moorebank will cost, another source estimates Qube will spend around $350 million to fit out a new container terminal in 2015 and 2016.

* According to our value investor partners, StocksInValue, the intrinsic value for Qube Logistics is $0.74. To find out more visit http://www.stocksinvalue.com.au/.

  • Investors are generally advised to hold Qube Logistics at current levels.

Watching the Directors

  • The biggest trades this week were on the selling side. Non-executive director and former managing director of Whitehaven Coal, Anthony Haggarty, offloaded $9,447,315 in the coal miner’s stock at $1.74 a share.
  • Elsewhere, James Hardie chief executive, Louis Gries, again sold his stock in the building construction company, netting $7,543,326 from the sale of 535,202 shares.
  • Meanwhile, on the buying side, Andrew Forrest bought scrip in Fortescue Metals Group for the second consecutive week. This time the iron ore miner’s chairman acquired 500,000 shares at $4.89 each for a total of $2,445,424.
  • But the top purchase for the week went to Madam Freada Cheung, who bought $3,000,000 in Kazakhstan Potash Corporation off-market. The non-executive chairman snapped up 3 million shares in the suspended mineral exploration company.
Takeover Action March 27-April 2, 2014
DateTargetASXBidder(%)Notes
31/03/2014Armidale Investment CorporationAIKGEGM Investments15.19Discontinued
06/11/2013Energia MineralsEMXCauldron Energy0.00Ext to May 1
24/01/2014Genesis ResourcesGESBlumont Group0.00
28/02/2014Merlin DiamondsMEDBlumont Group0.00
31/03/2014Real Estate CorpRNCLittle Group94.88
31/03/2014Reef Casino TrustRCTAquis Casino Acquisitions 1.04
10/03/2014Westside CorporationWCLLandbridge Group Co0.00
Scheme of Arrangement
17/12/2013EnvestraENVAPA Group33.00Vote May
17/03/2014Murchison MetalsMMXMercantile Investment CompanyVote June
31/03/2014Nexus EnergyNXSSeven Group Holdings0.00
27/03/2014SteriHealthSTPCatilina Nominees47.00Vote May
10/03/2014TriAusMinTROHeron Resources0.00Vote June
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
19/03/2014Crowe Horwath AustralasiaCRHAnchorage Capital Partners0.00Indicative proposal
Source: NewsBites