Collected Wisdom

This week we look at Aristocrat Leisure, Cochlear, Karoon Gas, Ausdrill and Pacific Brands.

Summary: The newsletters believe Aristocrat Leisure is a good bet based on its earnings performance and outlook, but have mixed recommendations on hearing implants device maker Cochlear, despite its unblemished dividend growth record. Karoon Gas gets a big tick based on the $US800 million sale of its Poseidon gas tenement stake to Origin Energy, but there are concerns over mining services group Ausdrill after the company downgraded its earnings guidance for 2013-14. Furthermore, the newsletters are divided on Pacific Brands followings its latest earnings downgrade, with most expecting various developments will keep the company’s share price depressed.
Key take-out: While Aristocrat Leisure’s shares have already surged almost 30% in the past year, and some analysts believe the company’s growth prospects are already priced in, many expect the stock to continue to outperform.
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.

Aristocrat Leisure (ALL)

Aristocrat Leisure’s strong first-half result points to an even better second half for the company, the majority of newsletters say.

The poker machine maker reported net profit lifted 9.1% to $57.4 million for the six months to the end of March, ahead of analyst expectations for $51.8 million on average. Sales climbed 7.6% to $412.5 million.

“This result was driven by improving operational delivery, particularly share growth in the critical US gaming operations segment, as well as foreign exchange and tax benefits,” the company said.

Following the result most newsletters advise their clients to buy Aristocrat Leisure, though consensus is far from unanimous with a number of holds and sells as well.

A few newsletters, while they like Aristocrat’s opportunities in the medium term, think much if not all of the growth is already priced into the stock over the next 12 months. The company’s shares have surged 27.6% to yesterday’s share price of $5.23 in the past year.

But more sources believe Aristocrat shares should outperform in the short term. Earnings are set for solid growth in the second half and into 2014-15, sources say, as Aristocrat continues to gain market share in the US and further boosts its sales online through its social gaming business.

The emerging segment, which has almost doubled to 500,000 daily users, will expand to mobile devices by June this year – driving further growth. Sources positive on the stock are forecasting the segment will contribute around $15 million in earnings before tax, depreciation, amortisation and depreciation (EBITDA) for the full financial year.

The investment press say Aristocrat’s growing dividend yield will continue to attract shareholders. Though the yield is only at 3.3% in 2013-14, analysts expect it to jump to 4% by 2014-15.

* According to our value investor partners, StocksInValue, the intrinsic value for Aristocrat Leisure is $2.72. To find out more visit http://www.stocksinvalue.com.au/.

  • Investors are generally advised to buy Aristocrat Leisure at current levels.

Cochlear (COH)

Newsletters are split between advising their clients to hold or sell Cochlear stock following the company’s relaunch of one of its products into Europe.

The implantable hearing solutions company announced last week (June 2, 2014) that it is launching the Cochlear Nucleus Profile series across Europe this month. The series had been voluntarily recalled in September 2011 over concerns about malfunctioning electronic components.

The company says the introduction supports a wider range of surgical techniques among implanting surgeons, which offers patients greater choice.

While the market reacted warmly to the news, sending the stock up 2.7% to $61.50 on the day – its highest point since September last year – responses from the investment press are more sober.

The launch is a positive for the stock, newsletters say, given it is the thinnest product on the market and consequently will be favoured more by surgeons.

But several sources believe a number of issues need to be resolved to justify Cochlear’s current share price. Among others, these include stabilising the company’s market share, formal approval from the Food and Drug Administration (FDA) for key features of the Nucleus 6 processor and improved conversion of EBITDA to gross cash flow.

The majority of newsletters, however, say Cochlear trades around fair value at current share price levels. Cochlear remains the dominant leader in the hearing implant market and is still the best innovator in novel technologies, despite encouraging results from US company Advanced Bionics, one source says.

Sources also believe the stock will be supported its unblemished record of growing dividends, with analysts forecasting a 4%-plus yield into the next financial year.

* According to our value investor partners, StocksInValue, the intrinsic value for Cochlear is $37.47. To find out more visit http://www.stocksinvalue.com.au/.

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

Karoon Gas (KAR)

Newsletters applaud Karoon Gas’s sale of a gas stake offshore north-western Australia for $US800 million.

Shares in the emerging oil and gas operator surged 42.7% to $3.51 – its biggest one-day rise on record – when it announced last week (June 2, 2014) it had sold its 40% stake in the Poseidon gas discovery in the Browse Basin to Origin Energy (ORG).

Under the deal, Karoon receives an upfront payment of $US600 million, followed by $US75 million when the project gets its final investment decision and another $US75 million on first production.

Collected Wisdom covered the investment press’s warm reception to the deal from Origin’s perspective last week.

Newsletters overwhelmingly say Karoon Gas is a buy after the sale. Karoon’s shareholders could be forgiven for thinking the worst when the stock was suspended for a month with only $64.8 million cash in the bank at the end of March and forecast outlays of $52 million in the June quarter, one source says.

But given Karoon’s distressed position, newsletters think the price of the sale was an excellent outcome. Though the initial price was at a discount to what PetroChina paid to ConocoPhillips (the two other stakeholders) for its 20% stake in the project, it actually comes out as an 8% premium when the milestone payments are included.

Further, LNG projects are better suited to big energy players with a low cost of capital because they are long-dated and capital intensive, one source says.

With the sale giving Karoon more than a buffer for its existing operations, one source says management has also flagged the possibility for a capital return to shareholders.

On average, analysts forecast the share price to almost double to $6.25 in the next 12 months.

  • Investors are generally advised to buy Karoon Gas at current levels

Ausdrill (ASL)

Shares in Ausdrill suffered their biggest one-day drop in seven months after the mining services company downgraded its earnings guidance for 2013-14.

Underlying net profit is now anticipated to be between $25 million and $30 million, up to 29% below the previous guidance announced in February. Ausdrill’s earnings are now forecast to fall 70-75% from the previous year.

The company blamed its mining services joint venture (JV) in Africa for the downgrade, saying that while all other businesses are performing in line with expectations, the JV’s performance has been inferior.

The stock slid 11.3% to 86.5 cents in response to the news on the day (June 2, 2014).

Newsletters are divided over the outlook for Ausdrill in their reports after the news, with several rating the stock either a buy or sell, but the majority say it is a hold at current levels. While Ausdrill is anticipating a “substantially improved result” in 2014-15 based on preliminary forecasts, most newsletters aren’t as confident.

Most analysts say current share price levels accurately reflect the threats to profitability over the next two years. These include weaker mining exploration activity, project delays, increased competition and mining cost-cutting.

These factors, as well as Ausdrill’s steep gearing levels and exposure to gold price volatility, should keep the share price depressed despite its current discount to net tangible assets, sources say.

One source believes that while Ausdrill offers a well-managed exposure to mining services, consensus earnings will have to stabilise for the share price to improve

This will prove to be a challenge as any turnaround in mining services demand in Australia and Africa is difficult to predict, another source says. This is particularly the case with the drilling services market, with demand and supply fundamentals highly volatile.

* According to our value investor partners, StocksInValue, the intrinsic value for Ausdrill is $1.61. To find out more visit http://www.stocksinvalue.com.au/.

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

Pacific Brands (PBG)

Pacific Brands blamed unseasonably warm weather and a slump in consumer sentiment for its profit downgrade yesterday (June 10, 2014).

Australia’s largest listed clothing manufacturer, which owns brands including Bonds, Clarks and Mossimo, revealed on Tuesday that underlying earnings before interest and tax (EBIT) would be between $90 million and $93 million.

Earnings have now been cut four times this financial year, with the latest cut 14% below the previous guidance issued in February and around 26% less than last year.

“A combination of challenging markets, declines in consumer sentiment and a warm autumn … have led to lower-than-expected sales growth and increased margin pressure,” the company said.

As a result, Pacific Brands has implemented restructuring initiatives that are expected to cost between $25 million and $30 million and has appointed Macquarie Capital to conduct a strategic review.

The news sent the stock down 8.9% to 51 cents on the day.

Newsletter responses are mixed following the development, with most recommendations divided between holds and sells. One newsletter upgraded its recommendation, however, the consensus is to hold the stock.

The newsletter believes that, despite the difficult outlook, Pacific Brands’ core brands hold value for potential acquisitions and places a 25% chance on the company being broken up. If this were to occur, there would be significant upside potential to the share price.

But most newsletters don’t ascribe such value in their forecasts and believe other factors will keep the share price depressed. These include the likely takeover of David Jones, which could mean fewer of the company’s brands in the retailer, the high likelihood that the dividend will be cut given its stretched balance sheet, and a delay in benefits to flow through from the strategic restructuring.

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

  • Investors are generally advised to hold Pacific Brands at current levels.

Takeover Action June 5-11, 2014

DateTargetASXBidder(%)Notes
28/05/2014Ambassador Oil and GasAQODrillsearch Energy19.90
10/06/2014Ambassador Oil and GasAQOMagnum Hunter Resources Corporation0.00
05/05/2014Aquila ResourcesAQABaosteel Resources International and Aurizon Holdings19.79
04/06/2014Australand Property GroupALZFrasers Centrepoint0.00
03/06/2014Bullabulling GoldBABNorton Gold Fields15.90
06/06/2014Dampier GoldDAUOrd River Resources1.01To be withdrawn
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
06/06/2014Reef Casino TrustRCTAquis Casino Acquisitions 78.19
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
10/03/2014TriAusMinTROHeron Resources0.00Vote June
Foreshadowed Offers
28/05/2014Australand Property GroupALZStockland19.90Increased final proposal
04/06/2014Crowe Horwath AustralasiaCRHFindex Australia0.00Scheme proposal
28/04/2014Goodman FielderGFFWilmar Intenational and First Pacific Company10.10Non-binding scheme proposal
09/06/2014Kresta HoldingsKRSNingbo Xianfeng New Material Co0.00Takeover 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