Collected Wisdom

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.

M2 Telecommunications (MTU)

M2 Telecommunications saw revenue jump 65% to $305 million in the first-half of fiscal 2013, while net profit surged 47% to $25 million. The strong result was aided by the acquisition of Primus, an infrastructure-based telco. The newsletters are impressed by the smooth integration of Primus and see it as one of the main drivers of growth.

Combined with management’s long-term view of controlling costs, finding operating efficiencies and building scale, one source believes there is still a decent amount of upside to the share price. The newsletters also like the look of M2’s balance sheet, and say it should allow for further acquisitions to build market share.

Illustrating this was today’s announcement that M2 has just acquired telco group Dodo Australia and has entered into a binding agreement to buy Eftel Group. Combined, the deals are worth $248 million, and M2 expects they will add over $400 million revenue and $50 million in earnings before interest tax, depreciation and amortisation (EBITDA). The share price rose sharply to $4.99 before falling back slightly in later trade.

The company has demonstrated that returns to shareholders remain a priority, with consistent growth in dividends and earnings per share.

The newsletters see M2 as a growth story in coming years and think now is a good opportunity to buy in.

• Investors are advised to buy M2 Telecommunications at current levels.

Fortescue (FMG)

Fortescue is looking to offload its minority stake in the rail and port infrastructure it built in the Pilbara to pump the cash into increasing capacity as an iron ore producer from 55 million tonnes to 155 tonnes in the coming year. Such a deal would allow the miner to reduce debt to the point where it could be rated investment grade. But the newsletters are concerned about the expected fall in demand for iron ore and rate Fortescue as a sell.

Investors need to weigh up the risks of the miner’s pure iron ore exposure, and high debt against the chance of significant expansion in the coming months. Even if the miner’s expansion plans come to fruition, it’s at a time of great uncertainty for mining, and iron ore in particular. The price of iron ore continues to slide and if it continues, will have a significant impact on miners like Fortescue (see: Iron ore in a steel trap).

Although a reduction in debt would help alleviate concerns over the miner withstanding the storm ahead, for Fortescue the shrinking margins are the issue. The miner’s margins are lower than BHP and Rio enjoy due to production costs, while one newsletter expects the margins to be squeezed even further in the coming years.

If the expansion plans are a success, the share price should see a bounce, but the outlook for iron ore in the long term leads the newsletters to favour Fortescue as a sell.

• Investors are advised to sell Fortescue at current levels.

Westpac (WBC)

The big banks have had a strong run in the past few months, and some believe they are getting a little pricey. That said, the newsletters still see value in Westpac and rate it as a hold.

Its competitive advantages – including scale and pricing power – should see the bank enjoy solid earnings growth in the medium term, the investment press says. Separately, funding costs are tipped to decline in the coming year, adding to the expected boost in earnings. Improved productivity and cost-cutting measures should also help the bank’s performance as it continues to focus on the domestic market. Westpac’s planned expansion of its wealth management division comes at an opportune time as the bank looks to capitalise on the growing demand for financial advice.

The investment press is optimistic at the prospect for increased dividends in the near term, with one source predicting an announcement alongside the full-year results in November. The fully-franked dividends from the major banks are a great attraction for investors increasingly on the hunt for yield, and at current prices, Westpac delivers a slightly better yield than ANZ or CBA.

• Investors are advised to hold Westpac at current levels.

Crown (CWN)

As speculation mounts that Crown may be able to do the impossible and somehow sidestep the exclusivity issue holding it back from opening a casino in New South Wales, the newsletters are broadly positive for future earnings and rate it a hold.

In a recent interview, NSW Premier Barry O’ Farrell remarked that Crown’s proposed casino at Barangaroo may not require a casino licence, but could instead operate as a “gaming facility” under a separate gaming licence. It would cater for high-rollers on an invite-only basis and would not have any poker machines. Crown successfully getting a gaming licence would effectively render Echo Entertainment’s exclusivity agreement, due to remain until 2019, useless.

The prospect of Crown opening its “gaming facility” earlier than expected is a positive for the company, the newsletters say, although one source notes there is a risk that Crown could be outbid if the gaming licence were to go to tender. If this does happen, Crown could move to take over rival Echo. Crown has already applied for regulatory approval to increase its stake in Echo to 25%, although if it gets the NSW gaming licence it is likely to reduce its holding.

• Investors are advised to hold Crown at current levels.

Mesoblast (MSB)

Mesoblast specialises in stem cell medicine, specifically developing therapies that use mesenchymal precursor stem cells extracted from bone marrow. The company has just completed a $170 million capital raising, leaving it with cash reserves of $332 million. The newsletters are relatively optimistic for the company’s outlook, and rate it as a hold.

The funds from the raising are expected to go towards phase-three clinical trials of its spinal fusion product and for working capital for the next few years. Other trials in progress include those related to the treatment of diabetes, eye disease and bone fractures.

Clinical trials have largely been successful, but as with other research and development stocks, there is a high risk of share price volatility. Investors are also still waiting for confirmation of a start date for the phase 3 trial of the Revascor congestive heart failure program, putting into doubt whether partner Teva Pharmaceuticals remains committed to the program.

Another obvious concern for investors is the sector is characterised by unknowns, making it difficult to predict future earnings. The newsletters are cautious but hopeful.

• Investors are advised to hold Mesoblast at current levels.

Watching the directors

• Vocus Communications director James Spenceley sold 1,367,576 shares worth $2.4 million in order to “complete a residential property settlement”. Spenceley advised the company that he had “no present intention to make any further share sales”. He still holds six million shares.
• Elsewhere, Woolworths’ Thomas Pockett sold 121,750 shares on market after exercising options. The exact price that the shares were sold at was not provided, but would have netted him around $4.2 million or so. The shares were sold to fund the exercise price and associated tax liability arising from the exercise of the options”, a statement issued to the ASX said.
• Finally, billionaire Bruce Mathieson, the owner of ALH Group and a director Mayne Pharma, bucked the current director selling trend and bought 1,325,000 Mayne Pharma shares for $583,000.