Collected Wisdom

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.

Carsales.com (CRZ)

The acquisition of Stratton Finance Pty Ltd (Stratton) is yet another example of the ways Carsales.com can provide more growth to shareholders in the years ahead, say newsletters.

Last Thursday (July 1, 2014) Carsales.com purchased a 50.1% controlling interest in Stratton – an online financing company for buying cars and other assets – for $60.1 million.

While details were light, analysts describe the deal as fair. Carsales.com anticipates the purchase to be earnings-per-share (EPS) accretive immediately, given Stratton has achieved an earnings before interest, tax, depreciation and amortisation (EBITDA) growth rate of over 50% over the past few years.

Moreover, the deal gives Carsales.com exposure to the private car sales market, sources say. This market isn’t served well yet by the financing industry – representing an opportunity for Carsales.com to leverage its market position to accelerate growth in the area.

“We see significant potential in the provision of quality affordable finance and insurance products to our ever-growing private to private customer market place,” said chief executive Greg Roebuck.

Shares in the company jumped 3% on the day to $10.91, before climbing even higher to Tuesday’s close of $11.51.

Following the acquisition, newsletters overwhelmingly say the stock is a buy, with several having upgraded their recommendations since Collected Wisdom covered Carsales.com as a hold on March 12 this year.

Analysts on average forecast the stock to climb 7.1% to $12.33 over the next 12 months. When the expected grossed-up dividend yield of 4.7% is included, that’s around an 11.8% total return for 2014-15.

* According to our value investor partners, StocksInValue, the intrinsic value for Carsales.com is $10.73. To find out more visit http://www.stocksinvalue.com.au/.

• Investors are generally advised to buy Carsales.com at current levels.

OZ Minerals (OZL)

More newsletters believe OZ Minerals to be in the midst of a recovery after the copper and gold miner delivered its first reserve estimate for one of its projects at Prominent Hill.

The ore reserve at for the Malu underground project was estimated at 11 million tonnes at 1.5% copper and 0.6 grams per tonne of gold, while the mineral resources were forecast at 75 million tonnes – 10% more than previously thought.

When Collected Wisdom last looked at OZ Minerals in April, newsletters were deeply divided over the stock with most calling it a hold. Those analysts cautious toward the stock needed more evidence to prove the company’s project pipeline.

Following the latest development, the majority of newsletters now advise to buy the stock – even after its risen almost 20% since late April – though consensus is far from unanimous.

One source which upgraded its recommendation to buy says the reserve grade had been anxiously awaited because the project hadn’t justified any capital before it. Another source finds the update positive in that it delivers more options and extends the mine life.

Chief executive Terry Burgess was quick to point out that at Ankata, the project next to Malu underground which will share equipment and infrastructure, more than three years’ mine life has been added since its first ore reserve was estimated.

But other sources query whether the project is still economic because the resource to reserve conversion ratio is only 18%. Consequently, they believe the project would provide a poor return to investors.

OZ Minerals’ stronger outlook and the generally positive newsletter responses have driven the stock up 5.5% to Tuesday’s close of $4.39 since the news was announced, marginally above the average 12-month target price of $4.36.

* According to our value investor partners, StocksInValue, the intrinsic value for OZ Minerals is $2.19. To find out more visit http://www.stocksinvalue.com.au/.

• Investors are generally advised to buy OZ Minerals at current levels.

Computershare (CPU)

Newsletters have shrugged off Computershare’s write-down last week, instead choosing to focus on the company’s underlying earnings and growth potential.

The world’s biggest share registry announced on Monday last week (June 30, 2014) it would incur $US40 million in net write-downs after tax following its review of non-core and non-strategic assets, which included the shutdown of the Digital Post Australia joint venture with Zumbox and the sale of the Pepper business (located in Germany, Singapore and the US) at a loss.

“While Computershare has had a very successful history of expansion by acquisition and trying new initiatives, it’s equally important that we recognise when things have not worked out as we might have hoped,” said newly appointed chief executive Stuart Irving, who replaced Stuart Crosby at the beginning of July.

Following the write-downs the investment press, on the whole, advise to hold onto Computershare. They note that no detail was provided on the earnings contributions of the exited businesses, and until that time, most have left their valuations unchanged.

The market also looked past the profit warning, with shares in the company climbing 0.4% to $12.53, and staying stables in the days after, closing on Tuesday at $12.78.

Indeed, though the write-downs will be reflected in Computershare’s statutory earnings figures, they won’t affect management earnings per share – the company’s underlying reporting measure – which is still expected to be 5-10% higher.

The market factors at least double-digit growth in Computershare, with analysts on average forecasting around 11% net profit increases in 2014-15 and 2015-16. However, they believe the prospects are already priced in by the market given its forward price-earnings multiple of 18 times.

* According to our value investor partners, StocksInValue, the intrinsic value for Computershare is $9.48. To find out more visit http://www.stocksinvalue.com.au/.

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

Wotif.com (WTF)

A higher takeover bid for Wotif.com looks unlikely following Expedia’s $700 million offer, according to most newsletters.

On Monday (July 7, 2014) US-based online travel company Expedia lobbed a $3.30 a share bid for Wotif.com. The consideration comprises $3.06 a share of cash and $0.24 of a fully-franked special dividend paid by Wotif.com by the scheme implementation date.

Shares in the company jumped 24.6% on the day to close at $3.29, just below the takeover price.

Newsletters call the stock a hold after the takeover bid, with most advising their clients to accept the bid by Expedia despite it being heavily opportunistic.

Indeed, sources point out that Wotif.com is in the midst of its strategic review to key into growth and that the offer price is still 20% below the company’s share price of $4.18 in December last year.

That being said, Wotif.com faces a number of structural challenges in the form of the high Australian dollar and low levels of domestic tourism, sources say.

Only one newsletter believes a counter-bid by another party would be easily justified and is possible. Most analysts, however, say it would be very unlikely considering the directors and the founder have agreed to sell up to 19.9% of their stake in the company to Expedia already.

Newsletters say the deal will probably succeed, though one highlights the number of obstacles in its way. An independent report would be required, as well as Australian Competition and Consumer Commission (ACCC) and Foreign Investment Review Board (FIRB) approval.

* According to our value investor partners, StocksInValue, the intrinsic value for Wotif.com is $2.76. To find out more visit http://www.stocksinvalue.com.au/.

• Investors are generally advised to hold Wotif.com at current levels.

Pacific Brands (PBG)

The market’s apathetic response to the resignation of Pacific Brands chief executive hasn’t been reciprocated by the investment press, with several analysts issuing sell recommendations in response.

Shares in Australia’s largest listed clothing manufacturer drifted one cent higher to 55 cents on Monday (July 7, 2014) despite chief executive, John Pollaers, quitting over a “divergence” between him and the board about how the company should progress.

Just last month the majority of newsletters were labelling Pacific Brands as a hold after the company downgraded its profit forecast for 2013-14 and announced it was implementing restructuring initiatives. Shares in the company plunged 8.9% on the day to 51 cents.

With the resignation of Pollaers, however, newsletters say to sell the stock. One source which downgraded its recommendation to sell can’t see anyone stepping up to properly fulfil his role, and the business will deteriorate as a result.

Further, the source thinks the differences arose out of Pollaers’ desire to spend more on marketing and wonders whether more executives will also quit the company.

“In the time that John Pollaers has been in the role he has led a revitalisation of the culture of the company, further simplified the business model and has worked hard to drive the performance of key businesses,” said Peter Bush, who will take over as executive chairman.

Another newsletter was surprised by the resignation. While earnings haven’t stabilised at the company, revenue has stopped falling: analysts on average forecast sales to stay around $1.3 billion over the next few years.

At current depressed share price levels, analysts estimate a dividend yield of 6.2% for 2014-15 before franking credits are included.

* According to our value investor partners, StocksInValue, the intrinsic value for Pacific Brands is $0.58. To find out more visit http://www.stocksinvalue.com.au/.

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