Collected Wisdom

This week we look at ANZ Bank, Westpac, PanAust, Mirvac, and Harvey Norman.

Summary: The newsletters prefer ANZ to the other banks because of its stronger outlook, despite holding some concerns over its dividend sustainability, but they also like the earnings outlook for Westpac. The overall consensus on copper and gold miner PanAust is very positive, while there are mixed views on Mirvac following a key Sydney office property sale, and other sales on the horizon, and retailer Harvey Norman is on the watch and see list for now as its margins remain under pressure.
Key take-out: Although ANZ’s dividend payout ratio is below its peers, newsletters point out that the bank’s Asian strategy will require it to increase its capital levels, and this could impact ANZ’s capacity to pay higher fully franked dividends.
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.

Australia and New Zealand Banking Group (ANZ)

Most newsletters reacted positively to ANZ’s record first-half earnings last week, though several questioned the validity of the bank’s dividend strategy.

Australia’s third-largest bank announced shareholders would receive a 14% increase in dividends to 83 cents a share, higher than analyst forecasts for 81 cents a share.

Cash profit also came in above market expectations, rising 11% to $3.52 billion.

Newsletters are largely split between buying and holding ANZ. With queries over future dividends, other short-term concerns and a consensus target price of $34.33, the majority advise to hold the stock.

One newsletter says ANZ must choose whether it wants to diversify and grow into Asia or to be a dividend stock. The source believes the bank needs to move its dividend payout ratio to more sustainable levels because, currently, the higher payouts to shareholders are coming at the expense of capital.

Indeed, the share price slid 1.2% to $34.07 on the day of the results as the market reacted poorly to the bank managing its capital so tightly. ANZ’s common equity tier 1 capital was down around 15 basis points to 8.3% – below forecasts.

Though ANZ’s dividend payout ratio is 65-70%, below its peers’ 70-75%, there are indications its regulatory capital intensity is rising, another source says. The Australian Prudential Regulation Authority (APRA) may require ANZ to hold more capital than the other banks because of its Asian strategy – potentially representing a headwind in dividend growth.

Further, ANZ’s higher proportion of international earnings – at 42% of total earnings in the first-half – means that it will pressure its capacity to fully frank its dividends in the future, the source says.

That being said, many newsletters prefer ANZ to the other banks because of its stronger outlook, more diversified revenue base and discount; even after rising 17% since the beginning of February, the stock is priced at an earnings multiple of around 13 times, compared to the banking sector’s 14.2 times.

* According to our value investor partners, StocksInValue, the intrinsic value for Australia and New Zealand Banking Group is under review. To find out more visithttp://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Australia and New Zealand Banking Group at current levels.

Westpac Banking Corporation (WBC)

As with ANZ a week before, Westpac shares slipped on Monday despite the bank delivering half-year earnings ahead of market estimates.

The stock fell 1.2% to $34.45 on what was a standard day’s volume, even after Westpac announced a cash profit of $3.77 billion, above forecasts for $3.64 billion. The dividend was 90 cents a share, up 2 cents on the prior period but in line with analyst expectations.

Newsletters commonly describe the result as clean, comfortable and predictable, with few surprises – not a bad thing for a bank, one source notes. But when the stock is trading at such a premium, investors require something truly special to fire it up even higher.

The vast majority of newsletters say the stock is a hold following the result, with a target price of $34.91 – in line with current share price levels.

Sources say that Westpac displayed encouraging revenue growth, good margin improvement and a strong balance sheet. Westpac’s common equity tier 1 for the period was well above its peers at 8.82%, enabling greater dividend flexibility.

However, the results were flattered by bad and doubtful debt charges being at their lowest point since 1996-97, mainly due to write-backs in the institutional banking division. Newsletters say charges at this level are unsustainable as write-backs can’t last forever, but they could stay low for a while amid low interest rates and unleveraged corporate balance sheets.

One source highlighted another weakness: that Westpac will step-up its software amortisation expense in 2014-15 (see Three weak spots in the big four).

* According to our value investor partners, StocksInValue, the intrinsic value for Westpac Banking Corporation is under review. To find out more visithttp://www.stocksinvalue.com.au/

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

PanAust (PNA)

PanAust remains a favourite among the investment press even after delivering a mixed March-quarter result from its mines in Thailand.

The miner’s flagship mine, Phu Kham, produced 18,123 tonnes of copper in concentrate and 16,149 ounces of gold, while Ban Houayxai, the company’s other operating mine, produced 23,356 ounces of gold and 197,316 ounces of silver. Production guidance for the full year was maintained for both projects.

While most newsletters say production at Phu Kham was strong, at Ban Houayxai it disappointed, with cash costs at $US711 an ounce higher than many analysts had pencilled in.

Cash generation for the quarter was weak, sources say, falling to $US117 million from the previous quarter’s $US130 million. The company said the fall was due to late payments for its delivered shipments and a build-up in finished product inventory.

However, the investment press almost unanimously advise their clients to buy PanAust at current share price levels. One recommendation that crossed Eureka Report’s desk labels the company as a key pick in the copper universe because of its mixture of compelling free-cash flow generation, organic growth potential, greenfield options and the potential upside to its price target.

The biggest takeaway, the source said, was that crushing and conveying capacity at the Phu Kham mill can sustainably achieve a run-rate of 19-20 million tonnes a year, which will help production going forward.

Analysts on average forecast PanAust’s share price to surge 34.8% to $2.13 in the next 12 months.

Another source says that PanAust’s ability to improve the economics of its core projects will be the main catalyst ahead for the share price.

* According to our value investor partners, StocksInValue, the intrinsic value for PanAust is $1.06. To find out more visithttp://www.stocksinvalue.com.au/

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

Mirvac Group (MGR)

Newsletters agree Mirvac’s stock should at least sustain its current levels in the short term after the diversified property group sold a 50% stake in Westpac Place in Sydney and posted a third-quarter trading update.

Mirvac reaffirmed its full-year guidance for earnings per share of between 11.8 to 12 cents per stapled security – up 8-10% on 2012-13. Occupancy across the property portfolio was steady, nudging down to 97.6% from 97.8% in December last year.

Mirvac kept its dividend guidance at 8.8-9 cents per share. This translates to a yield of 5.2% for 2013-14, not including franking credits.

The office property, located at 275 Kent Street, was sold to US private equity giant Blackstone for $435 million. Though the sale was only 1.7% above book value for a premium grade asset, newsletters say it was reasonable for a number of reasons. They include the financing deal Mirvac has set up with Blackstone, with $156 million of vendor financing at 8% per annum, and the fact that the sale dilutes Mirvac’s exposure to the office sector to 10% from 18%.

Mirvac also granted Blackstone call options to buy seven other non-core assets worth $391 million, also at a premium to book value.

Following the developments, newsletters are largely split between buying and holding Mirvac shares. With consistent execution and management maintaining a clear and simple strategy, Mirvac represents one of the lower-risk exposures to residential property.

On valuation grounds, however, the majority of the investment press say to hold the stock.

One newsletter is also concerned about Mirvac looking to buy more land. This could destroy value, the source says, because it believes prices are being pushed up to inflated levels by a combination of demand from domestic and offshore developers, in particular from Asia.

* According to our value investor partners, StocksInValue, the intrinsic value for Mirvac is $0.75. To find out more visithttp://www.stocksinvalue.com.au/

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

Harvey Norman (HVN)

Harvey Norman is beginning to show improvements from its leverage to the housing sector, but the retailer’s franchisee cost structure is unsustainable, according to newsletters.

The company reported global sales lifted 4% to $4.33 billion for the nine months to the end of March, above most analyst expectations. On a like-for-like basis, sales increased by 5.2% for the period.

While the result was boosted from the New Zealand dollar and stronger euro in Ireland, Australian sales were also strong with a 4.7% increase.

Newsletters are mostly split between buying and holding Harvey Norman after the sales update. Like Mirvac in residential property, the investment press like Harvey Norman because it provides exposure to the housing market in the household goods category.

Typically household goods lag the housing cycle, but sources believe the benefits are finally beginning to flow through, with consumers starting to buy more electrical goods, furniture, bedding and white-goods.

However, there are obstacles for Harvey Norman to overcome. Most newsletters believe the fourth quarter could be weak for the retailer amid the heightened uncertainty before the federal budget and the likelihood of increased fiscal tightening afterwards.

Further, Harvey Norman is still closing underperforming stores. While this is rational, margins will be squeezed as the company allows costs to drift higher, one source says.

As a result consensus is to hold Harvey Norman shares. The stock appears to be fully valued with a price-earnings multiple of 15.2 times and a target price of $3.11, roughly in line with Tuesday’s close.

* According to our value investor partners, StocksInValue, the intrinsic value for Harvey Norman is $2.27. To find out more visithttp://www.stocksinvalue.com.au/

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

Watching the Directors

  • Fortescue Metals chairman, Andrew Forrest, bought another $2 million of the mining group’s shares this week for $9.74 million. After two other share purchases over a month ago, Forrest has now sunk more than $17 million worth of shares into the iron ore miner recently.
  • The Miller family also continued to buy scrip, but this time only $186,090 in Washington H. Soul Pattinson, acquiring 11,944 shares at $15.58 each in the investment company.
  • On the selling side, former Seven Group chief executive and current director, David Leckie, netted $1,699,500 after offloading 200,000 shares in the equipment and media company.

Takeover Action May 1-7, 2014

DateTargetASXBidder(%)Notes
05/05/2014Aquila ResourcesAQABaosteel Resources International and Aurizon Holdings19.79
17/04/2014Bullabulling GoldBABNorton Gold Fields0.00
06/05/2014Cape AluminaCBXMetroCoal57.22Closed
02/05/2014Challenger Diversified Property GroupCDIChallenger80.37
29/04/2014Dampier GoldDAUOrd River Resources0.00
01/05/2014Energia MineralsEMXCauldron Energy0.00Closed
24/01/2014Genesis ResourcesGESBlumont Group0.00
06/05/2014Leighton HoldingsLEIHOCHTIEF63.82
28/02/2014Merlin DiamondsMEDBlumont Group0.00
30/04/2014Reef Casino TrustRCTAquis Casino Acquisitions 77.03
24/04/2014Westside CorporationWCLLandbridge Group Co19.99
Scheme of Arrangement
07/04/2014Atlantic GoldATVSpur Ventures0.00
09/04/2014David JonesDJSWoolworths0.00Vote June
17/12/2013EnvestraENVAPA Group33.00Vote May
29/04/2014Horizon OilHZNRoc Oil Company0.00Vote July
17/03/2014Murchison MetalsMMXMercantile Investment CompanyVote June
31/03/2014Nexus EnergyNXSSeven Group Holdings0.00
24/02/2014Sierra MiningSRMRTG Mining0.00Vote April
27/03/2014SteriHealthSTPCatilina Nominees47.00Vote May
10/03/2014TriAusMinTROHeron Resources0.00Vote June
Foreshadowed Offers
23/04/2014Australand PropertyALZStockland19.90Indicative proposal
05/05/2014Azure HealthcareAZVUnknown party0.00Discussions terminated
19/03/2014Crowe Horwath AustralasiaCRHAnchorage Capital Partners0.00Indicative proposal
28/04/2014Goodman FielderGFFWilmar Intenational and First Pacific Company10.10Non-binding scheme proposal
Source: NewsBites