Collected Wisdom

This week we look at AWE, QBE Insurance, ALS, Beach Energy and Independence Group.

Summary: The newsletters like the upside in oil and gas producer AWE, but that multinational insurer QBE is still undergoing repairs and ma find more damage. There are also ongoing concerns around mining services company ALS, and lower production forecasts by Beach Energy, while most newsletters believe nickel miner Independence Group is at fair value.
Key take-out: Oil and gas producer AWE has exceeded its production and sales guidance numbers, based on its latest quarterly figures, and newsletters believe this is not yet being factored into its share price. Most rate AWE a buy at current levels.
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.

AWE (AWE)

The market isn’t appreciating AWE’s stellar growth prospects among its numerous projects and relatively lower risk compared to its peers, according to the majority of newsletters.

Their reports come after the oil and gas producer released its June quarterly report last week (July 30, 2014), in which production and sales both beat guidance.

Full-year production rose 13% to 5.6 million barrels of oil equivalent (mmboe), above guidance of 5 mmboe to 5.5 mmboe, while sales revenue climbed 9% to $328 million, higher than the guidance range of between $290 million and $320 million.

On the other hand, earnings before interest, tax, depreciation, amortisation and exploration expenses (EBITDAX) for the quarter was below consensus forecasts at $31 million, primarily due to no gas being sold from Tui oil project offshore New Zealand, where inventory has now built up and revenue deferred.

Despite the EBITDAX miss, most newsletters rate AWE as a buy. Improved performance, particularly from the Sugarloaf project in Texas, US and the offshore BassGas joint venture in Tasmania, should continue to help drive growth and create significant free cash flow over the long term, they say.

“Our portfolio of valuable exploration, development and production assets will provide the foundation for a period of substantial growth for AWE over the next three to five years,” said managing director Bruce Clement.

One source says there’s also potential for unconventional gas in the Perth Basin. While shale gas in the region is long-dated and tests are still undergoing, the source says tight gas plays could create short-term growth opportunities, with results from two such wells expected between September and November.

However, other newsletters aren’t confident about management’s project guidance for the AAL oil project in Indonesia, with the final investment decision now forecast to be in mid-2015 and first oil in the second half of 2016-17.

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

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

QBE Insurance (QBE)

Several newsletters have cut their recommendations for QBE Insurance in response to the company’s fourth downgrade in 18 months.

Shares in QBE plunged 11.1% to $10.57 – their biggest fall since December last year – after the company said it expects an insurance margin of 7-8% compared to consensus expectations of 10% for the first half of 2014.

As in December the hit to profits came from offshore operations, but this time in Latin America. The downgrade was driven by claims reserve strengthening of around $170 million relating to QBE’s Argentine workers’ compensation business.

Newsletters are deeply mixed on the stock, with a range of buys, holds and sells. On balance, however, consensus is a hold after three analysts downgraded their recommendations.

Those still optimistic towards QBE say the stock now trades at a sizeable discount to its peers, which will disappear when the company starts hitting guidance or interest rates rally. The $1.7 billion in reserve top-ups since chief executive John Neal took the mantle are taking the company closer to being released from intensive care, one source says.

The stock also has a dividend yield of 4.8% in 2015 and 5.5% in 2016.

But more newsletters say the profit hit undermines confidence that QBE has regained control of its back book.

Moreover, the company has missed out on one of the best years for other insurers (see Collected Wisdom’s coverage of Insurance Australia Group last week) and now the company is ill-equipped to deal with the softening top-line growth environment, they say.

One newsletter which downgraded its recommendation to hold believes QBE may not be able to handle the impending premium rate decreases. If they were to fall sooner than expected, QBE would be forced to downsize its business yet again, the source says.

* According to our value investor partners, StocksInValue, the intrinsic value for QBE Insurance Group is $10.97. To find out more visit http://www.stocksinvalue.com.au/

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

ALS (ALQ)

ALS’s disappointing profit guidance for the first half of 2014-15 has reaffirmed newsletter perceptions that there is more pain in store for the mining services company.

The company (formerly known as Campbell Brothers) announced at its AGM last week (July 29, 2014) that it expects underlying net profit of $74 million for the six months to September 30, 26.5% below the previous corresponding period. As one source notes, this marks the weakest first-half result since 2010-11.

“We remain of the opinion that we have reached the bottom of the cycle and a modest recovery is not too far away,” the company said.

Shares in ALS plunged 6.5% to $7.50 after the news. With the fall, the stock has now largely reversed its gains from late May when the company surprised the market with a full-year result actually in line with guidance.

The investment press mostly rate ALS as a sell with a 12-month price target of $7.47 – 2.9% below Friday’s close – after lowering their earnings forecasts through to 2016-17.

Newsletters are less confident than management that a modest recovery is underway in the current environment, with China’s economy slowing, falling commodity prices and numerous mining exploration and development projects being delayed.

It’s not just the company’s minerals division which is feeling the heat either. The energy division is facing challenges in the US as companies switch to production from exploration, and the life sciences market are highly competitive on prices – limiting growth in that division.

Sources are attracted to ALS’s strong management team, scale and leading industry positioning, particularly in minerals, but these factors can’t offset limited earnings visibility in the area and the other problems.

* According to our value investor partners, StocksInValue, the intrinsic value for ALS is $5.63. To find out more visit http://www.stocksinvalue.com.au/

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

Beach Energy (BPT)

The investment press are split between telling their clients to hold or sell shares in Beach Energy following its lacklustre production guidance for 2014-15.

While production for 2013-14 hit the top of the guidance range at 9.6 million barrels of oil equivalent (mmboe), production guidance for 2014-15 was set at between 8.6 and 9.4 mmboe – below analyst expectations.

The stock fell 3.1% to $1.71 last Tuesday (July 29, 2014).

Several newsletters say the lower guidance partly reflects timing, with the gas supply to Origin Energy now expected to commence towards the end of 2014-15, but they don’t see anything markedly positive from the result and view Beach Energy as expensive compared to its peers.

One source says the news highlights a key risk to earnings per share that investors must understand: oil production at the Western Flank in the Cooper Basin is most likely at its peak and natural field decline is inevitable.

The source also questions whether the drop in unconventional capital expenditure – Beach Energy is forecasting just $50-55 million for 2014-15 – signals that results have been underwhelming so far.

However, more newsletters think current share price levels adequately reflect the developments. Given management may be being conservative – as they have a tendency to be – and upside from shale gas in the Cooper Basin, consensus is to hold the stock.

The majority of analysts say the conventional side of the business remains compelling, given average production in 2013-14 was still 20% above the low point in 2010-11 while EBITDA per share has almost doubled to 40 cents. Further, the company has a healthy balance sheet and cash flow as well as projects which will last at least another decade.

* According to our value investor partners, StocksInValue, the intrinsic value for Beach Energy is $1.33. To find out more visit http://www.stocksinvalue.com.au/

  • Investors are generally advised to hold Beach Energy at current levels.

Independence Group (IGO)

Most newsletters are taking a cautious approach to Independence Group even after the each of the company’s three Western Australian mines beat expectations for 2013-14.

The Long Nickel mine produced 10,909 tonnes of contained nickel for the year, while the Jaguar Bentley mine produced 41,162 tonnes of zinc concentrate and 7,692 tonnes of copper concentrate. Attributable gold production at the Tropicana mine (a joint venture which Independence Group owns 30% and AngloGold Ashanti Australia the other 70%) was 100,167 ounces.

Independence Group also announced underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of $175 million. Net profit after tax was $46.2 million, which included an “abnormal asset impairment” of $17 million.

Together with cash costs generally below the company’s forecast, the full-year results were ahead of guidance and, for the most part, beyond what newsletters had been anticipating.

However, the majority of the investment press call Independence Group a hold following the news. They say the current share price represents fair value at current levels, given the stock’s strong performance recently amid the rebound in base metals prices.

Shares in Independence Group have surged 53.1% to Friday’s close of $4.76 this year. Along with nickel producer Western Areas (see last week’s Collected Wisdom), the miner is one of the best performers in the S&P/ASX 200 index over the period.

Guidance for 2014-15 was also modestly lower across the three mines than several newsletters were expecting. It suggests consistent production offset by lower grades, but one source thinks management could be being conservative.

That being said, sources agree that Independence Group can generate strong cash flow in 2014-15. This should allow room for the company to lift dividends while still funding exploration, one source says.

* According to our value investor partners, StocksInValue, the intrinsic value for Independence Group is $1.28. To find out more visit http://www.stocksinvalue.com.au/

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

Watching the Directors

The only director to make sizeable trades this week was Robert Millner. As non-executive chairman he bought $471,550 worth of shares in listed investment company Milton Corporation at $4.716 and $425,000 worth of shares in BKI Investment, also an investment company, at $1.70 each.

Takeover Action July 31-August 4, 2014

DateTargetASXBidder(%)Notes
01/08/2014Ambassador Oil and GasAQODrillsearch Energy30.43Decrease from Takeovers Panel order
10/06/2014Ambassador Oil and GasAQOMagnum Hunter Resources Corporation0.00
24/07/2014Aquila ResourcesAQABaosteel Resources International and Aurizon Holdings98.49
29/07/2014Australand Property GroupALZFrasers Centrepoint2.90
01/08/2014Bullabulling GoldBABNorton Gold Fields75.99
28/07/2014Clinuvel PharmaceuticalsCUVRetrophin4.88
25/07/2014Country RoadCTYWoolworths Holdings99.84
31/07/2014EnvestraENVCheung Kong Group24.06
24/01/2014Genesis ResourcesGESBlumont Group0.00
21/07/2014Gondwana ResourcesGDAOchre Group Holdings18.23
29/07/2014Kresta HoldingsKRSNingbo Xianfeng New Material Co27.83
28/05/2014Merlin DiamondsMEDBlumont Group8.22
06/06/2014Reef Casino TrustRCTAquis Casino Acquisitions 78.19
01/07/2014Robust ResourcesROLStanhill Capital Partners Holdings0.00
04/08/2014Roc Oil CompanyROCFosun International0.00
15/07/2014Strategic Minerals CorporationSMCQGold58.90
01/08/2014Westside CorporationWCLLandbridge Group Co91.19
Scheme of Arrangement
31/07/2014Atlantic GoldATVSpur Ventures0.00Approved
02/07/2014Goodman FielderGFFWilmar Intenational and First Pacific Company10.10Vote November
04/08/2014Horizon OilHZNRoc Oil Company0.00To be terminated due to Roc takeover
03/06/2014Papillon ResourcesPIRB2Gold Corp0.00Vote September
01/08/2014SFG AustraliaSFWIOOF Holdings15.66Approved
07/07/2014Wotif.com HoldingsWTFExpedia Group19.90Vote September
Foreshadowed Offers
21/07/2014Antares EnergyAZZUnnamed party0.00Indicative proposal
28/05/2014Australand Property GroupALZStockland19.90Increased final proposal
04/06/2014Crowe Horwath AustralasiaCRHFindex Australia0.00Scheme 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
07/07/2014Ten Network HoldingsTENPrivate equity firms0.00Media speculation
04/08/2014Treasury Wine EstatesTWEKohlberg Kravis Roberts & Co and Rhone Capital0.00Revised scheme proposal
25/06/2014WorleyParsonsWORUnnamed party0.00Media speculation
Source: Newsbites

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