Collected Wisdom

This week we look at Kathmandu, REA Group, Independence Group, Mineral Resources and Regis Resources.

Summary: Newsletters are positive on the outlook for outdoor adventure retailer Kathmandu as it continues to open up more stores, while they are mixed toward REA Group in response to its purchase of a 20% stake in US-based real estate company Move, Inc. Meanwhile, in the resources space, newsletters see Independence Group as a compelling opportunity, Mineral Resources as well placed thanks to its strong balance sheet and crushing business and Regis Resources as fairly valued following its share price plunge this year.

Key take-out: After bouncing back from tough conditions in 2013-14, Kathmandu will drive earnings growth through its store roll-out across Australia and New Zealand … but the UK expansion represents risks.

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.

Kathmandu (KMD)

Newsletters agree Kathmandu can extract more impressive growth in the next few years from its Australian and New Zealand operations, but are mixed over whether the company should spend more on expanding into the UK.

The outdoor adventure retailer announced in its full-year results (September 23, 2014) that it would invest an incremental $NZ5 million in the UK and Europe to build its brand, acquire members for its Summit Club program and grow online sales.

“Providing there is no deterioration in economic conditions we expect improved earnings from the Australasian businesses in 2014-15, however, the overall outcome will be impacted by the UK investment,” said chairman David Kirk.

With high returns on capital expected as Kathmandu rolls out its stores across Australia and New Zealand, newsletters largely call the stock a “buy”. Eight new stores are planned to open in Australia in the first half of 2014-15, bringing the total number to 157.

On average, analysts have a 12-month target price of $3.36, 23% above current levels, and forecast a yield of 4.2% in 2014-15 and 4.8% in 2015-16.

But several newsletters believe expanding into the UK is too risky at this stage, with one saying the UK consumer doesn’t appear to be a natural target group for Kathmandu’s products.

Nevertheless, they were surprised by how well Kathmandu bounced back from tough conditions in 2013-14. Despite an unusually warm start to winter and low consumer confidence, earnings per share (EPS) edged up 1.4% to $NZ64.3 million and sales climbed 2.3% to $NZ392 million. Same-store sales were a highlight at 6.9%.

“Given the reduced customer demand experienced during our key selling period in June, and the $NZ5.8 million adverse impact of exchange rates, a small increase in EBIT was a good performance,” said chief operating officer Mark Todd.

Todd will become acting chief executive on November 25 when Peter Halkett, who has had the top job for eight years, leaves the firm.

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

REA Group (REA)

Newsletters are divided over whether REA Group has made a good decision in acquiring a stake in US-based online real estate business Move, Inc.

Last week News Corp, REA Group’s parent company, acquired all the outstanding shares in Move for around $US950 million via an all-cash tender offer. News Corp will retain 80% of the company, while REA’s 20% stake will be purchased for $US200 million.

“We believe that our digital real estate know-how, combined with News Corp’s content, distribution and marketing strengths, will be a winning combination,” said newly appointed chief executive Tracey Fellows.

Several newsletters aren’t as convinced. The acquisition implies a 33-times price-earnings multiple – a hefty price tag for a company holding the number three market position, a publication says. Zillow and its subsidiary Trulia are the top players in the sector.

Another analyst acknowledges the opportunity from the US online classifieds, but questions whether Move can harness this growth. If the rationale was compelling enough, why not take a bigger stake?

However, others say the stake size was sensible. News Corp, owner of Eureka Report, is more capable of taking the bulk of the exposure given its sizeable cash balance, while REA Group’s smaller stake enables it to benefit from the upside without too much downside risk.

The majority of analysts call REA Group a “hold” after the news. They didn’t change their valuations given the transaction is still subject to shareholder approval. At its current price-earnings multiple, REA’s share price appears to already incorporate the potential for double-digit earnings growth, they say.

Shares in REA Group slipped 0.85% on the day of the news (October 1, 2014).

* According to our value investor partners, StocksInValue, the intrinsic value for REA Group is $41.44. To find out more visit

  • Investors are generally advised to hold REA Group at current levels.

Independence Group (IGO)

Three newsletters have upgraded their recommendations to “buy” for Independence Group in the past month as the diversified miner’s share price has fallen.

While shares in the miner have performed well this year with more than a 30% rise, they fell 13.1% to $4.06 in September amid the S&P/ASX 300 resources index’s 7.5% fall.

The stock has since recovered to $4.15, but newsletters – the majority of whom rate the stock a “buy” – see further price rises ahead with an average 12-month target price of $4.60. They are now more confident since Collected Wisdom last covered the miner in early August when the majority called it a “hold”.

Even with its capital gains this year, the stock has lagged other nickel producers in the rally over the past six months, say analysts. Independence Group’s various Australian mines produce nickel, gold and copper-zinc.

The share price lag is unwarranted given Independence Group has robust valuation metrics, with free cash flow generation of around $150 million expected this year alone, they say. One analyst forecasts the company to generate its billion dollar market capitalisation in cash flow within the next five years.

This enables Independence Group to pay out high dividends to shareholders – another bonus to newsletters. They expect the yield to grow to 3% in 2014-15 and 3.6% in 2015-16 on a fully franked basis.

However, one publication said management was somewhat stingy with dividends in its full-year results (August 28), largely because more exploration spending is required due to the short reserve life of the mines.

On the other hand, the latest drilling results (announced September 23) could extend the life of the Jaguar mine – the copper-zinc operation – adding more to the group’s valuation in the short term, another analyst points out.

* According to our value investor partners, StocksInValue, the intrinsic value for Independence Group is $3.28. To find out more visit

  • Investors are generally advised to buy Independence Group at current levels.

Mineral Resources (MIN)

The mining services division of Mineral Resources should help the company withstand the weakened iron ore price, according to the investment press.

Shares in Mineral Resources have slumped by 20% over the past month to Friday’s close of $8.58 – their lowest levels since July last year – as the iron ore price slumped below $US80 a tonne.

Over that period newsletters have reassessed their iron ore forecasts and have updated their recommendation on Mineral Resources. With consensus forecasts for the iron ore price to trade at around $US98 a tonne in 2014-15, the majority call the stock a “hold”.

While Mineral Resources’ high-cost iron ore operations won’t cope well in the environment – with first production at its Iron Valley mine facing possible delays – newsletters say its mining services division should provide some protection.

Indeed, analysts applaud the company for building an “annuity style” crushing business in such a short space of time. Because the crushing and screening divisions are linked to production volume, Mineral Resources should be more resilient to price weakness, one publication says.

Mineral Resources’ solid balance sheet also provides a buffer, newsletters say. With $280 million in net cash and $400 million in available debt facilities, the company is not only protected but it can also snap up acquisitions in the mining space in its strategy to be more involved in operations and infrastructure opportunities (see Collected Wisdom’s last coverage of the company).

However, the company’s disclosure on its operations leaves much to be desired, a newsletter says. It’s difficult to properly evaluate the contract crushing business and iron operations because Mineral Resources doesn’t report the earnings or revenue split.

* According to our value investor partners, StocksInValue, the intrinsic value for Mineral Resources is $9. To find out more visit

  • Investors are generally advised to hold Mineral Resources at current levels.

Regis Resources (RRL)

Regis Resources stock currently trades around fair value even after more than halving in price over the past year, say newsletters.

Their updates come after the gold miner released its full-year report on September 22. While earnings were in line with expectations (they had been pre-released in late July), the financials revealed cash generation that was lower than some analysts had anticipated.

Production guidance and cash costs for 2014-15 were unchanged at between 305,000 and 355,000 ounces of gold and between $835 and $915 an ounce respectively.

At share price levels of around $1.60, most newsletters call Regis Resources a “hold”. Though the miner still generates free cash flow at current gold spot prices of around $1,200 an ounce, most analysts believe much of it will be used to pay down debt in 2014-15.

Regis had to draw down more debt as it faced a disastrous year in 2013-14 where its open cut mine at its Duketon operations were flooded. Higher capital expenditure forced the miner to drawn down $40 million from its $70 debt facility with Macquarie Bank in the June quarter.

As a consequence newsletters disagree about whether Regis can return to paying out dividends this financial year. One publication believes it’s unlikely due to debt repayments, but others say the company is well positioned with conservative guidance and a difficult year behind it.

Indeed, analysts on average forecast a yield of 3.7% in 2014-15 and 6.1% in 2015-16. The most bullish analyst on the stock believes the company could pay out dividends of 18 cents a share – representing a 60% payout ratio and yield of 19.3% in 2014-15.

* According to our value investor partners, StocksInValue, the intrinsic value for Regis Resources is $1.66. To find out more visit

  • Investors are generally advised to hold Regis Resources at current levels.

Directors’ trades

  • Glen Richards, chief veterinary officer of Greencross, took the mantle of the biggest trade this week with a $24,375,000 disposal of shares in the pet care group. He sold 2,500,000 shares at $9.75 apiece.
  • Meanwhile, Ramsay Health’s managing director’s Christopher Rex, also netted a tidy sum, offloading $6,507,006 worth of shares at $50.785 each.
  • On the buying side, non-executive director Raymond Barro bought 2,000,000 shares in cement manufacturer Adelaide Brighton at $3.29 each for a total of $6,580,000.

Takeover Action September 30-October 6, 2014

30/09/2014Cape AluminaCBXMetroCoal63.37
09/09/2014Clinuvel PharmaceuticalsCUVRetrophin7.80
02/10/2014Iron Ore HoldingsIOHBC Iron83.00
18/08/2014Genesis ResourcesGESBlumont Group5.81
04/09/2014Gondwana ResourcesGDAOchre Group Holdings18.23
25/08/2014Merlin DiamondsMEDBlumont Group13.19
25/09/2014Neon EnergyNENEvoworld Corporation19.99Unsolicited proportional bid
02/10/2014Nido PetroleumNDOBCP Energy International76.83
22/09/2014Reef Casino TrustRCTAquis Casino Acquisitions 80.31
03/10/2014Robust ResourcesROLStanhill Capital Partners & Droxford International50.12
03/10/2014Roc Oil CompanyROCFosun International11.42
Schemes of Arrangement
06/10/2014Crowe Horwath AustralasiaCRHFindex Australia0.00Vote December
08/09/2014Goodman FielderGFFWilmar International and First Pacific Company10.10Vote Q1, 2015
28/08/2014Intrepid MinesIAUBlackthorn Resources0.00Vote November
05/09/ HoldingsWTFExpedia Group19.90Vote Oct 9
Foreshadowed Offers
21/07/2014Antares EnergyAZZUnnamed party0.00Indicative proposal
08/08/2014Gondwana ResourcesGDAUnnamed party0.00Indicative proposal
25/09/2014Guildford CoalGUFSino Construction0.00Intends to make bid
13/05/2014PanAustPNAGuangdong Rising Assets Management23.00Indicative proposal
17/09/2014SAI GlobalSAIPacific Equity Partners and KKR Asia 0.00No final offer
17/09/2014SAI GlobalSAIUnnamed parties0.00Proposals received
07/07/2014Ten Network HoldingsTENPrivate equity firms0.00Media speculation
25/06/2014WorleyParsonsWORUnnamed party0.00Media speculation

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