Collected Wisdom

Buy ANZ, sell BlueScope, and hold Bendigo and Adelaide Bank, AMP and Goodman Group, the newsletters say.

Summary: Analysts rate ANZ a buy and BlueScope Steel a sell, while Bendigo, AMP and Goodman Group are rated hold, the newsletters say.
Key take out: Despite the rising market, some believe ANZ shares are still undervalued.
Key beneficiaries: General investors. Category: Portfolio management.

This is an edited summary of Australia’s best-known investment newsletters and major daily newspapers. The recommendations offered represent the views published in other publications and may not represent those of Eureka Report.

Australia and New Zealand Banking Group Ltd (ANZ)

ANZ Banking Group’s push into Asia has been viewed by many as a risky strategy and has drawn some hefty criticism, but chief executive Mike Smith could soon have the last laugh if the latest results are anything to go by. The newsletters are increasingly of the view that ANZ is undervalued, and should be considered a buy at current prices.

Last week, ANZ reported that earnings from China, Hong Kong and Taiwan are its third-biggest source of profits. Growth overseas allows for greater earnings diversification, thereby reducing the impact of volatility on the domestic front.

Despite the recent surge in its share price (it was trading just above $20-per share last May), some of the investment press believe it is still trading below fair value. Its current share price is around the $28.50 mark, but a number of sources give it a fair value of between $29.81 and $32.

At 65%, the dividend payout ratio is below its peers, whose payout ratio is more toward the 70-75% range. This is due to ANZ positioning itself for further growth, a strategy that could well see it outperform in the medium to long term.

Australian banking shares are an essential component of any portfolio and investors should consider buying up ANZ shares while they’re still undervalued, the newsletters say.

  • Investors are advised to buy Australia and New Zealand Bank at current levels.

Bendigo and Adelaide Bank Ltd (BEN)

A lull in the deposit war looks to be upon us as Australia’s banks once again enjoy wider profit margins in lending. With the dark clouds beginning to recede on wholesale funding, keep hold of those Bendigo shares, the newsletters say.

The global financial crisis brought about an era in Australian banking that saw savers enjoying relatively high interest rates on term deposits and savings accounts as banks sought to get a larger amount of their funding from stable sources. It also resulted in the banks stepping back from a tradition of passing on the RBA’s cash rate cuts to mortgage borrowers. But with the global economy tentatively recovering, the war for deposits looks to be on the turn.

A strong balance sheet and a less risky business model than its regional peers makes Bendigo the go-to regional bank for investors looking for financial holdings outside the major banks, one source says.

The top dog of the regional banks, Bendigo is more dependent on easing prices than the major banks, since deposits account for roughly 80% of its funding book. In its half-yearly results last week, management were quick to point out both business conditions and overall sentiment had improved in recent months.

On the downside, the bank also noted that it was still awaiting the recent market rally to translate into improved demand for credit. This is likely to be an ongoing challenge for the lender, the investment press says.

The investment press is quick to point out that Bendigo’s lack of scale and funding pressures remain a risk, but Bendigo is still seen an attractive holding and one to keep for now.

  • Investors are advised to hold Bendigo and Adelaide Bank at current levels.

BlueScope Steel (BSL)

Despite the ongoing headwinds facing BlueScope Steel, its share price has defied onlookers by surging from $1.50 in mid-2012 to just below $4.50. The investment press is largely concerned that the share price doesn’t reflect performance or outlook, and while some are giving BlueScope the benefit of the doubt, many believe that there are just too many challenges to overcome. There are likely to be rocky times ahead, so for those looking to reduce risk, consider selling BlueScope, the newsletters say.

BlueScope reported a net loss of $12 million for the first half, a much improved result from the $530 million loss in the first half of 2012. The turnaround reflects the massive restructuring undertaken by the steelmaker to offset the high dollar and competition from overseas. The restructuring centred on a dramatic slashing of costs and jobs and a move away from exporting steel with the closure of its Port Kembla plant in New South Wales.

While the restructuring was viewed as essential for the steelmaker, there are other headwinds that are more difficult to deal with. Falling steel prices and doubts over the group’s ability to inform policy on anti-dumping measures are serious challenges, and one source has doubts about its chances on both fronts.

High labour costs and low capital productivity will also hinder its chances of returning to profit, while there is little indication that steel prices will recover in the near term. All of this has led some of the investment press to put a sell call on the stock as the high-risk challenges increasingly outweigh the hopes for a recovery.

  • Investors are advised to sell BlueScope Steel at current levels.

AMP Limited (AMP)

Despite a disappointing performance in its life insurance division, the newsletters say AMP’s future is looking pretty rosy thanks to its merger with AXA, which is currently tracking well ahead of schedule. The investment press is broadly optimistic for AMP, seeing it as a solid performer to hold on to in the current environment.

AMP is characterised by relatively low costs, a strong brand, a large customer base and a competitive advantage over its peers. While its life insurance business continues to struggle, its wealth management business, AMP Financial Services, is booming thanks in part to a jump in self-managed super funds. In the full year, the company reported $1.6 billion in gross inflows. Of this, $844 million stemmed from SMSFs. This compares with net outflows of $581 million in the previous year.

The SMSF administration division also tripled the number of accounts under administration in the year, a strong indication of the increasing interest in SMSFs. Changing demographics will likely see strong growth continue for some time.  

AMP will likely face continued pressure on the personal insurance side, but its integrated business model, offering a range of financial products and services, means it is perfectly positioned to take advantage of improving investor confidence and improved market conditions.

  • Investors are advised to hold AMP Limited at current levels.

Goodman Group

Following its stronger-than-expected first-half result, the newsletters are viewing Goodman Group in a new light, particularly on its growth prospects following the move into Brazil and the US. For those interested in medium to long-term investing, Goodman has the potential to deliver.  The investment press says now is the time to hold on to Goodman shares.

About 70% of Goodman’s earnings come from its investment property and funds management, while the remainder comes from development activity, which is riskier due to volatility. Investors should note that the group is looking to grow development activity, which will bring increased risk into the business.

Goodman’s current development work in progress comes in at $2 billion, with $1.1 billion of new commitments across 34 projects. But this doesn’t include projects in the Americas and includes just $200 million from China, one source says. Its funds management platform is also expected to grow significantly in the future, with the majority of its completed developments being acquired by funds.

Goodman is dependent on continued high demand for industrial property in the near-to-medium term but a more stable Europe, ongoing recovery in the US and improved activity in China and its Australian operations should all have the desired effect and keep demand levels elevated.

  • Investors are advised to hold Goodman Group at current levels.

Watching the Directors

  • News Corp chairman Rupert Murdoch unloaded 1 million Class B shares last week in two transactions worth $28.9 million. The move comes days after the media tycoon sold off just under 1.4 million Class B shares the worth $39 million. While it may sound like a lot, the sale of just under 2.4 million shares reduces the Murdoch family’s voting stake just a fraction; from 39.7% to 39.4%. News Corp is the owner of Eureka Report.
  • Elsewhere, ANZ’s Mike Smith sold 102,000 shares at $28.41 each, netting himself $2.9 million, which will come in handy as he satisfies “forthcoming Australian tax obligations”.
  • Meanwhile, Alumina’s chief executive John Bevan was obviously in a buying mood as spent $375,100 buying 302,500 shares just days after China’s government-owned CITIC acquired a 13% stake in the company.
  • FlexiGroup’s Andrew Abercrombie scored himself a cool $8.1 million by offloading 2 million shares at $4.05 apiece, while chairman Margaret Jackson also sold off a fairly substantial amount, disposing of 200,000 for $810,000.
  • Meanwhile, Ten Network’s new chief executive, Hamish McLennan, was quick to get in on some share action this week. Despite his appointment only being confirmed late last Friday, McLennan announced today that he had acquired 3.13 million Ten shares on market. The price of the shares was not provided in the statement issued by Ten. Mr McLennan said he bought the shares as a sign of his enthusiasm for the network.

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