Collected Wisdom

This week we look at Origin Energy, Suncorp, ALS, Toll Holdings and Southern Cross Media.

Summary: The newsletters are impressed with Origin Energy following the group’s acquisition of strategic natural gas assets in northern Western Australia. High-yielding financial services group Suncorp is viewed as a hold, with most seeing it as fairly valued, while there are concerns over mining services group ALS despite it meeting its full-year profit guidance. Meanwhile, a restructure announcement from Toll Holdings helped drive up the company’s shares, but not all are convinced, and the earnings picture remains unclear at Southern Cross Media.

Key take-out: While Origin Energy lost ground on the sharemarket following its $US800 million Poseidon gasfield announcement this week, analysts believe the company has paid a good price and there is good upside for Origin’s shares.

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.

Origin Energy (ORG)

Newsletters are largely advising their clients to buy Origin Energy after the energy company acquired a 40% stake in natural gas prospects in the Browse Basin offshore north-Western Australia.

Origin bought the interest in two exploration permits in the Poseidon gasfield from Karoon Gas (KAR) for an upfront payment of $US600 million in cash, which is to be followed by $US75 million once the final investment decision has been made and another $US75 million on first production.

Origin will own the permits together with ConocoPhillips, the project operator with a 40% stake, and PetroChina, with the remaining 20% holding.

The purchase is to be funded through a $1 billion equity entitlements issue. Sources believe the extra funds of around $400 million are opportunistic, and are to be used to fund the Otway and Ironbark developments.

While the market initially reacted negatively – sending the share price down 4.3% to $14.55 on Monday – newsletters have a far more positive take.

Sources say Origin bought the stake at an attractive price of $US0.46 per 1,000 cubic feet equivalent (mcfe), cheaper than PetroChina’s entry into the project at $US0.57 mcfe.

Moreover, the Poseidon project has merits given its proximity to the Bayu-Undan oil and gasfield (which already pipes output to Darwin and ConocoPhillips is a partner in), one newsletter says.

The source says this could reduce capital expenditure to $US6-8 billion from $US13-14 billion if it were a standalone project, improving the likelihood of confirmation of a final investment decision and subsequent production.

Analysts on average forecast Origin Energy’s share price to climb 9.4% to $15.74 in 12 months’ time.

* According to our value investor partners, StocksInValue, the intrinsic value for Origin Energy $7.06. To find out more visit http://www.stocksinvalue.com.au/.

  • Investors are generally advised to buy Origin Energy at current levels.

Suncorp (SUN)

Suncorp can sustain its 9%-plus grossed-up yield despite forecasting for lower growth and flagging a $500 million write-down to its life insurance business, say newsletters.

The company, whose operations also include banking and general insurance, recognised the impairment amid deteriorating trends in the life insurance industry, noting worse-than-expected future claims and lapse assumptions in the next few years.

Suncorp also cut its growth target to 4-6% in 2014-15, from 7-9% previously. The change reflects the lower natural hazard environment in Australia and an expected reduction in reinsurance premiums.

Shares in Suncorp fell 2% on the day of the news (May 27, 2014) to $13.42.

Despite the lower growth outlook, newsletters are split between buying and holding Suncorp, with the majority advising their clients to hold onto the stock.

Since the write-downs don’t affect the group’s cash earnings or dividends and only impact its capital surplus by $27 million, Suncorp remains in a strong capital position, newsletters say. Suncorp’s capital is currently around $1.5 billion above its operating targets.

Following the downgrade, sources say there is only limited downside to the life insurance business – which only accounts for about 5% of cash earnings anyway.

Since Suncorp confirmed its policy to pay out 60-80% of earnings as dividends, analysts on average forecast a yield of 9.3% for 2013-14 and 9.4% in 2014-15 including franking credits. Several sources include the possibility for a special dividend at the full-year results in their forecasts.

“Subject to appropriate regulatory approvals, the group expects to be in a position to announce further capital management initiatives in conjunction with the release of its 2014 financial results,” the company said.

After rising 13% since an eight-month low in February, however, sources believe Suncorp is fairly valued with a price-earnings multiple of 13.1 times on a one-year forward basis, in line with the financial sector.

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

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

ALS (ALQ)

Shares in ALS (formerly Campbell Brothers) received their biggest two-day boost in over six years after the embattled mining services company shocked the market by announcing a full-year result in line with guidance.

Underlying net profit for the period came in at $163.1 million for 2013-14, 31% below the previous year but in the middle of guidance for $160-$170 million. The full-year dividend of 39 cents a share was also a surprise, resulting in a yield of 5% (not including franking credits) over the past 12 months.

“Businesses across all sectors remain challenged,” said chief executive Greg Kilmister. “There was a constant global focus by all market sectors on reducing costs, and the Australian dollar remained stubbornly strong.”

The stock jumped 8.9% to $7.96 when ALS made the announcement (May 27, 2014), then leapt another 8% the day after. At Tuesday’s close the stock sits at $8.55.

Despite a couple of sources upgrading their recommendations following the results, newsletters still overwhelmingly say ALS is a sell at current levels.

While one source which upgraded its recommendation says the worst is behind the stock, most believe current share price levels don’t account for limited earnings visibility and the tense competition in the life science and industrial sectors.

Management needs to make more acquisitions in the oil and gas division so that it can broaden the service offering towards production services, given exploration weakness, one source says.

Another source says that it’s attracted to the business’s industry positioning as the leading provider for testing services in minerals as well as its scale and management track record, but it’s too difficult to determine when a turnaround in minerals could occur.

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

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

Toll Holdings (TOL)

Newsletters support Toll Holdings’ business restructure, but most believe it won’t alleviate the pressure to the company’s operations amid a tough environment.

The logistics and transport services company expects to save $10-$12 million by cutting its business divisions from six to five, resulting in 100 job redundancies. The ‘domestic forwarding’ and ‘specialised & domestic forwarding’ divisions are to be merged.

“This restructure will help mitigate near-term ongoing margin pressures as well as ensure that we maximise the leverage that our company has to any improvements in the external environment,” Toll said.

Toll’s shares leapt 4.9% to $5.53 in response to the news on Thursday (May 29, 2014) – their biggest rise in almost two years.

After a couple of downgrades, newsletters are mostly divided between holding and selling Toll. However, at current share price levels, the majority rate the stock as a hold.

Sources approve management’s ongoing focus on efficiency and streamlining its operations, but they say it doesn’t tackle the overwhelming threats to earnings growth: the persisting absence of a volume recovery and margin pressures in the domestic businesses.

Toll reiterated its earnings guidance, expecting earnings before interest, tax, depreciation and amortisation (EBITDA) to be broadly on par with the previous year.

One newsletter also thinks the restructure adds complexity. Toll has a history of making regular changes to its reporting structure, the source says, which makes it difficult to track performance across each of the divisions in the long term as well as assess the benefits of acquisitions.

* According to our value investor partners, StocksInValue, the intrinsic value for Toll Holdings is $3.52. To find out more visit http://www.stocksinvalue.com.au/.

  • Investors are generally advised to hold Toll Holdings at current levels.

Southern Cross Media (SXL)

The investment press are divided over their outlook for Southern Cross Media after the company downgraded its profit forecast for 2013-14.

The broadcaster, which owns regional and metropolitan radio and TV assets, now anticipates underlying net profit for the full year to be around $80 million – 10% below the previous year and its earlier guidance.

Shares in the company shed 3.2% to $1.06 on Monday (June 2, 2014) in response to the news. Since hitting a more than two-year high in October last year, the stock has plummeted more than 45% to Tuesday’s close of $1.05.

Southern Cross Media largely blamed its earnings performance on poor ratings as a result of its television affiliate Ten Network (TEN), as well as a softer advertising market and the increased investment across its metropolitan radio network.

As detailed by Collected Wisdom in April, Ten Network has a shortage of enduring content in competition with Seven and Nine. Since about 70% of Southern Cross Media’s revenue comes from the Ten content, this puts increased pressure on advertising sales.

Analysts are mixed over the stock. Those optimistic say the pressure on TV and radio stems from recent rating outcomes (such as the defection of 2Day FM broadcasters Kyle and Jackie O to competitor KISS), which should wash through in the medium term.

Further, at current depressed share price levels the stock has an attractive grossed up yield of 11.1% in 2013-14.

But sources more negative toward Southern Cross Media say there is a risk that the dividend could be cut. The ratio of net debt to EBITDA of three times is a risk, they say, given earnings headwinds and a debt covenant of 3.5 times.

The majority of newsletters, however, say Southern Cross Media is a hold, with the current share price reflecting current rating trends and elevated gearing.

* According to our value investor partners, StocksInValue, the intrinsic value for Southern Cross Media is $1.12. To find out more visit http://www.stocksinvalue.com.au/.

  • Investors are generally advised to hold Southern Cross Media at current levels.

Watching the Directors

Directors were mostly selling scrip this week, with the biggest trade coming from Qube Logistics’ Christopher Corrigan. The logistics company’s chairman netted $11,500,000 from selling 5,000,000 shares at a price of $2.30 off-market.

  • Another chairman selling big this week was Peter Dunai. The founder of Iress, which provides financial markets information and trading systems, offloaded $5,846,578 worth of shares at $8.352 each, cutting his stake in the company by 78%.
  • On the buying side, Stephen Atkinson, non-executive director at TFS Corporation, traded $2,488,000 for 1,400,000 shares in the sandalwood plantation company at $1.777 a share.

Takeover Action May 29-June 4, 2014

DateTargetASXBidder(%)Notes
28/05/2014Ambassador Oil and GasAQODrillsearch Energy19.90
05/05/2014Aquila ResourcesAQABaosteel Resources International and Aurizon Holdings19.79
04/06/2014Australand Property GroupALZFrasers Centrepoint0.00
03/06/2014Bullabulling GoldBABNorton Gold Fields15.90
27/05/2014Challenger Diversified Property GroupCDIChallenger93.49
26/05/2014Dampier GoldDAUOrd River Resources1.01
30/05/2014EnvestraENVCheung Kong Group17.46
24/01/2014Genesis ResourcesGESBlumont Group0.00
09/05/2014Gondwana ResourcesGDAOchre Group Holdings17.65
28/05/2014Merlin DiamondsMEDBlumont Group8.22
30/04/2014Reef Casino TrustRCTAquis Casino Acquisitions 77.03
24/04/2014Westside CorporationWCLLandbridge Group Co19.99
Scheme of Arrangement
07/04/2014Atlantic GoldATVSpur Ventures0.00Vote July
09/04/2014David JonesDJSWoolworths0.00Vote June
30/05/2014EnvestraENVAPA Group33.00Meeting cancelled
29/04/2014Horizon OilHZNRoc Oil Company0.00Vote July
17/03/2014Murchison MetalsMMXMercantile Investment CompanyVote June
31/03/2014Nexus EnergyNXSSeven Group Holdings0.00Vote June
03/06/2014Papillon ResourcesPIRB2Gold Corp0.00Vote September
16/05/2014SFG AustraliaSFWIOOF Holdings15.66Vote August
03/06/2014SteriHealthSTPCatilina Nominees47.00Approved
10/03/2014TriAusMinTROHeron Resources0.00Vote June
Foreshadowed Offers
28/05/2014Australand PropertyALZStockland19.90Increased final proposal
04/06/2014Crowe Horwath AustralasiaCRHFindex Australia0.00Scheme proposal
28/04/2014Goodman FielderGFFWilmar Intenational and First Pacific Company10.10Non-binding scheme proposal
13/05/2014PanAustPNAGuangdong Rising Assets Management23.00Indicative proposal
26/05/2014SAI GlobalSAIPacific Equity Partners0.00Indicative scheme proposal
02/06/2014SAI GlobalSAIUnnamed parties0.00Expressions of interest
20/05/2014Treasury Wine EstatesTWEKohlberg Kravis Roberts & Co0.00Indicative scheme proposal
Source: Newsbites

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