Collected Wisdom

This week we look at Scentre Group, Ansell, Tatts Group, Tabcorp and Caltex.

Summary: The newsletters see value in the Westfield spin-off Scentre Group, but they have concerns over the growth outlook for medical products company Ansell. Meanwhile, a Victorian Supreme Court ruling has put gaming groups Tatts and Tabcorp in the investment spotlight this week, and the newsletters have mixed views on oil company Caltex after its lacklustre profit guidance for the first half.

Key take-out: Scentre Group, the product of Westfield Group’s (WDC) Australian assets and Westfield Retail Trust (WRT), appears undervalued at current levels given its high-quality retail property assets and high occupancy levels combined with its extremely strong management structure.

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.

Scentre Group (SCG)

Scentre Group offers investors the highest-quality retail portfolio in Australia, coupled with an excellent management team, newsletters say.

The real-estate investment trust, which was created by combining Westfield Group’s (WDC) Australian assets and Westfield Retail Trust (WRT), debuted last Wednesday (June 25, 2014) at $3.21. After dipping initially to a low of $3.08, it has recovered and closed on Tuesday at $3.17.

Since listing a number of analysts have initiated coverage on Scentre Group, with most rating the stock a buy. At current share price levels the company looks undervalued compared to its peers, they say, when it should be trading at a premium given its better asset quality.

Indeed, on average analysts are forecasting the stock to rise to $3.40 in the next 12 months – 7.3% above yesterday’s price.

On top of that, one source forecasts an annualised dividend of 20.4 cents for 2013-14 (equating to a 6.4% yield) and has factored in a dividend payout ratio of 95% from 2014-15.

And while operational conditions may be soft, newsletters think they appear to be stabilising. In such an environment Scentre Group is well positioned, they say, given it has had 99% occupancy in its retail portfolio over the past two decades and has the highest specialty sales productivity.

Newsletters also prefer Scentre Group’s internal management structure – removing the big fees of external management – and its growth prospects compared to Westfield Retail Trust. The company is capable of first-class development as it inherited Westfield Group’s old ANZ operating platform, a source says.

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

Ansell (ANN)

The majority of newsletters aren’t convinced Ansell’s business restructure can arrest the surgical glove and condom manufacturer’s declining organic growth.

Ansell told the market on Monday (June 30, 2014) the company will be reorganised into four global business units in the process of integrating BarrierSafe Solutions International (BSSI) – the glove maker it acquired in January for $US615 million. Two manufacturing sites will be closed and around 300 jobs will be cut.

Synergies from the restructure are expected to save $US10-11 million in 2014-15 and $US21-22 million in 2015-16.

“The changes today mark the beginning of the next phase of our growth journey,” said chief executive Magnus Nicolin.

But most of the investment press disagree and are advising their clients to sell the stock at current levels. They are sceptical the restructure can fix Ansell’s slowing top-line growth – which appears to be at odds with industrial production data – and believe risks are heavily skewed to the downside because of a lack of balance sheet capacity.

The changes are expected to cost the company $124.7 million in earnings write-downs in 2013-14, translating to a reduction in earnings per share (EPS) by US80 cents. Excluding the one-off charge, Ansell announced that underlying EPS for the financial year should be at the lower end of its guidance range of $US1.10 to $US1.16.

Ansell says the changes shouldn’t affect the full-year dividend, given that the changes are mostly non-cash in nature and the company retains strong cash flow. Indeed, analysts have pencilled in a final dividend of 22.5 cents a share, above the previous year’s 22 cents a share.

The news of the restructure sent the stock down 3.2% to $19.19 on Tuesday.

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

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

Tatts Group (TTS)

Shares in Tatts Group received their biggest two-day boost in five-and-a-half years last week when the company won a $450 million-plus payout from the Victorian government and secured its grip on Queensland’s betting sector in a 30-year deal.

While the news resulted in two newsletters upgrading their recommendations to buy, the majority still say Tatts Group is a hold. After its two-day surge of 7.2%, the stock now hovers at $3.36 – its highest point since the GFC.

Despite the stock’s heady levels, the investment press is relatively optimistic about the outlook for the company, though they remain cautious about innovative competitors in the digital distribution space.

For one, sources are confident the judgement by the Victorian Supreme Court will be upheld. On Thursday (June 26, 2014) the court ordered the Victorian government to pay the gambling services provider $450 million in compensation as well as any interest over the breach in contract. The company estimates the amount of interest to be $89.1 million.

The ruling concludes – barring an appeal – a saga which began in 2012 when the Victorian government altered the industry structure so it didn’t have to put gaming licences up for tender, instead auctioning entitlements to smaller players.

Secondly, the deal with the Queensland government was much better than the newsletters had expected. Under the agreement announced on Friday (June 26, 2014), Tatts is the exclusive retailer operator of betting in the state until 2044 and its licence is extended by 61 years, expiring at June 30, 2098.

Though Tatts has to pay $150 million to the state for the privilege, in four instalments over the next decade, the earnings upside should outweigh the fee, sources say.

* According to our value investor partners, StocksInValue, the intrinsic value for Tatts Group is $1.95. To find out more visit http://www.stocksinvalue.com.au/.

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

Tabcorp (TAH)

The investment press were surprised when Tabcorp, unlike Tatts Group, lost in its legal action against the Victorian government for $686 million in compensation over the lost gaming machine licences.

Shares in the company had jumped on Thursday (June 26, 2014) in anticipation of a win, before sliding 5.6% to $3.40 the next day (resuming previous levels) in response to the judgement.

Despite Tabcorp being specifically legislated to receive a payment if the Victorian government terminated the licences under the Gaming and Betting Act 1994, the court took the view that amendments to the legislation in 2008 removed any obligation, sources say.

Tatts Group, on the other hand, held a separate set of legal agreements.

While the news is disappointing, newsletters say it’s premature for shareholders to give up on the 94-cents-per-share value ascribed to winning the case as Tabcorp is likely to appeal the ruling.

Analysts updated their recommendations for Tabcorp, though most hadn’t factored any upside from the claim into their valuations. Most are split between saying the stock is a buy or a hold, but at current share price levels, the consensus is to hold the stock.

At the moment Tabcorp’s price-earnings ratio hovers around 16.4 times, marginally above the 15.4 times of the wider casinos and gaming sector.

On average analysts forecast the share price to rise only 5.7% to $3.55 over the next 12 months, however they also estimate a grossed-up dividend yield of 7.2% in 2014-15.

* According to our value investor partners, StocksInValue, the intrinsic value for Tabcorp is $2.12. To find out more visit http://www.stocksinvalue.com.au/.

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

Caltex (CTX)

Newsletters are mixed over Caltex after the company provided lacklustre profit guidance for the first half of 2014.

For the six months to June 30, Caltex has forecast a profit of $155-175 million on a replacement cost basis (which doesn’t include oil price changes and aims to show underlying performance), compared to its previous year’s profit of $171 million.

When Collected Wisdom last covered Caltex on January 15 this year, most newsletters rated the stock a buy. This time around, however, sources are largely split between calling the stock a hold or a sell.

Analysts labelling Caltex as a sell say its valuation has become far too stretched. Indeed, since mid-January the company has climbed 13.7% to yesterday’s close of $21.64.

Further, they say that industry trends for both of the company’s segments – marketing and refining – are challenging at present. While Caltex is mitigating the tough environment in marketing via a higher market share and expanding its transport fuel margins, one source questions whether this is sustainable.

But more newsletters believe Caltex is a hold. The company’s focus away from oil refining to becoming chiefly a retailer and fuel importer is on schedule, with oil refining operations expected to cease at the end of the year at the Kurnell refinery in Sydney.

Though the closure is weighing on profits, with the company booking a loss of $65-85 million in the refining and supply operations for the first half, sources don’t expect the division to affect earnings going into 2015.

Further, Caltex is well positioned in the fuel retailing market because purchases should go back to being mostly driven by service station location amid the return of normal petrol discounting levels, translating into improved volumes for the company.

* According to our value investor partners, StocksInValue, the intrinsic value for Caltex is $20.30. To find out more visit http://www.stocksinvalue.com.au/.

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

Watching the Directors

  • Stephen Copulos, chairman of Crusader Resources, took the mantle of the biggest trade over the past week. He bought $3,313,001 worth of shares in the gold and iron ore explorer at 31.7 cents a share.
  • Elsewhere, non-executive director Chiat Kwon Ching bought scrip in NewSat once again, this time picking up 3,347,283 shares in the satellite communications company at 27.9 cents each for a total of $933,152.

Takeover Action June 26-July 2, 2014

DateTargetASXBidder(%)Notes
27/06/2014Ambassador Oil and GasAQODrillsearch Energy52.97
10/06/2014Ambassador Oil and GasAQOMagnum Hunter Resources Corporation0.00
01/07/2014Aquila ResourcesAQABaosteel Resources International and Aurizon Holdings29.14
04/06/2014Australand Property GroupALZFrasers Centrepoint0.00
01/07/2014Bullabulling GoldBABNorton Gold Fields41.35Offer increased
24/06/2014Country RoadCTYWoolworths Holdings87.88
30/05/2014EnvestraENVCheung Kong Group17.46
24/01/2014Genesis ResourcesGESBlumont Group0.00
09/05/2014Gondwana ResourcesGDAOchre Group Holdings17.65
26/06/2014Kresta HoldingsKRSNingbo Xianfeng New Material Co0.00
28/05/2014Merlin DiamondsMEDBlumont Group8.22
06/06/2014Reef Casino TrustRCTAquis Casino Acquisitions 78.19
01/07/2014Robust ResourcesROLStanhill Capital Partners Holdings0.00
18/06/2014Strategic Minerals CorporationSMCQGold51.75
27/06/2014Westside CorporationWCLLandbridge Group Co23.28
Scheme of Arrangement
07/04/2014Atlantic GoldATVSpur Ventures0.00Vote July
19/06/2014David JonesDJSWoolworths0.00Postponed to July 14
30/05/2014EnvestraENVAPA Group33.00Meeting cancelled
02/07/2014Goodman FielderGFFWilmar Intenational and First Pacific Company10.10Vote November
29/04/2014Horizon OilHZNRoc Oil Company0.00Vote July
12/06/2014Nexus EnergyNXSSeven Group Holdings0.00Rejected by shareholders
03/06/2014Papillon ResourcesPIRB2Gold Corp0.00Vote September
16/05/2014SFG AustraliaSFWIOOF Holdings15.66Vote August
01/07/2014TriAusMinTROHeron Resources0.00Vote late July
Foreshadowed Offers
28/05/2014Australand Property GroupALZStockland19.90Increased final proposal
04/06/2014Crowe Horwath AustralasiaCRHFindex Australia0.00Scheme proposal
13/05/2014PanAustPNAGuangdong Rising Assets Management23.00Indicative proposal
25/06/2014ROC Oil CompanyROCUnnamed party0.00Indicative 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
25/06/2014WorleyParsonsWORUnnamed party0.00Media speculation
Source: Newsbites

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