Collected Wisdom

Buy Brickworks, sell Asciano, and hold TPG Telecom, Premier Investments and Aurizon Holdings, the newsletters say.

Summary: Analysts rate Brickworks a buy and Asciano a sell, while TPG Telecom, Premier Investments and Aurizon Holdings are rated as holds, the newsletters say.
Key take out: Brickworks is seen as a buy, providing investors with exposure to a cyclical business at the bottom of the cycle.
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.

Brickworks (BKW)

Despite the subdued housing market, Brickworks’ revenue grew 13% to $56 million in the first six months, while property sales from its Land and Development division gave earnings before interest and tax (EBIT) a welcome $37 million boost. This brought the total EBIT figure to $76.5 million, a 16% rise on the previous corresponding period.

Building conditions in the domestic housing market remain patchy, but there are signs of a pick-up in activity, most notably in New South Wales and Western Australia. As Australia’s largest brick manufacturer, and lowest-cost producer, Brickworks is well positioned to take advantage of any improvement in the market.

While some investors are concerned that the group’s cross-shareholding agreement with Washington H. Soul Pattinson & Co (Brickworks has a 42.85% holdings in Soul Patts, while Soul Patts has a 44.6% holding in Brickworks) is not to the benefit of all shareholders, the newsletters see it as providing Brickworks with ample protection from the cyclical nature of the residential building sector, giving Brickworks exposure to a wide range of sectors including coal mining, retail and telecommunications. It also helps to protect Brickworks from any unwelcome takeover tilts.

The newsletters think the company has been conservatively managed with a solid balance sheet and the ability to maintain sustainable dividends. Investors looking for a long-term buy and exposure to a cyclical business at the bottom of the cycle should take a look at Brickworks, say the investment press.

  • Investors are advised to buy Brickworks at current levels.

TPG Telecom (TPM)

TPG has grown to become Australia’s third-largest listed telecommunications company, with over 630,000 subscribers. The newsletters see TPG as well positioned to take advantage of the structural changes taking place in the industry, and were impressed with the group’s latest set of numbers.

First-half net profit rose 41% to $78.3 million, while revenue grew 10% to $357 million. But the share price has risen 20% in the past week alone, and the newsletters can’t see the justification for such a massive surge.

TPG cut its debt in the six months, reducing it from $149 million to $95 million. The healthier balance sheet will do little to dampen speculation that TPG is on the lookout for a well-valued acquisition to beef up its business. Chatter has focused on rival iiNet as the obvious candidate for a takeover. M2 Telecommunications’ recent acquisition of Dodo and Eftel could push TPG to make a move sooner rather than later, as without further growth, TPG will be relegated to fourth place on the list of telcos.

Increasing pricing pressure from competitors is also likely to have an impact on the smaller telcos, which could slow its efforts to build up its subscriber base.

  • Investors are advised to hold TPG at current levels.

Premier Investments (PMV)

Premier Investments, which owns Just Jeans, Jay Jays, Dotti, Smiggle, Peter Alexander and other brands, has just reported a net profit of $46.5 million for the first half, a rise of 20.7% on the previous corresponding period. Despite the headwinds facing the retail sector, including intense online competition, and chairman Solomon Lew himself pointing out that retailers still face ongoing structural pressures, the newsletters are relatively positive and rate Premier a hold.

Smiggle’s recent expansion into Singapore has proved a hit – out of Smiggle’s 10 best performing stores worldwide, eight are in Singapore. If the “fun, fashion-forward stationery” retailer can replicate that success as it expands into Japan, Malaysia and Indonesia, the investment press says it could be a great profit engine for the group.

Investing in a decent online strategy is starting to pay off and Premier Investments is positioning itself well to take advantage of the continued move to online shopping. Internet sales increased 51% in the six months to December, and 30% of Dotti sales are now purchased online.

The newsletters are also keen to see what the company plans to do with the $317 million cash that’s lying around, just waiting to be spent. Speculation is mounting that the group may be eyeing a potential acquisition or two.

  • Investors are advised to hold Premier Investments at current levels.

Aurizon Holdings Ltd (AZJ)

Aurizon Holdings, formerly QR National, saw a boost to its share price last week following the Queensland government’s $806 million selldown of its stake in the company. The view from the newsletters is that the move will benefit shareholders in the long term and helps to reduce the uncertainty that the large overhang of shares in the market had created.

The sale of the government’s 200 million shares at $4.03 per share indicates institutional confidence in the group’s operations and the coal sector as a whole, the newsletters say. Aurizon is currently Australia’s largest coal haulage operator. The government remains the group’s largest shareholder and says it has no plans sell the remaining 8.9% stake for the time being.

Separately, the newsletters are impressed that Aurizon has just secured a number of new contracts, including a new 12-year contract to haul up to 65 million tonnes of coal per year for BHP Mitsubishi Alliance and BHP Mitsui Coal. Beginning in 2015, one source notes it is the largest contestable coal haulage contract seen in the domestic market in the past decade.

Aurizon has not provided in-depth details on the new contracts, and one source is concerned that the market is taking an overly-positive view on both the pricing and terms of the contracts. The newsletters are also worried that down the line, the mining companies could bring the transportation of coal in-house to reduce costs.

  • Investors are advised to hold Aurizon at current levels.

Asciano (AIO)

Aurizon’s main competitor, Asciano, is not seen in the same favourable light by the newsletters.

The company has four divisions: Pacific National Coal, Pacific National Rail, Terminals & Logistics and Bulk & Automotive Port Services. PN Coal currently holds 15-20% of the market share in the Queensland coal market and about 60% market share in the smaller New South Wales market. But even though it is the dominant player in NSW, PN Coal recently failed to win a large contract from Whitehaven Coal in NSW. Instead, it went to Aurizon, as it was ''prepared to offer terms and conditions that PN Coal was not able to match,'' Asciano reportedly said.

On a more positive note, PN Coal lifted coal haulage by 14% to 67.9 million tonnes in the first half of fiscal 2013 and has secured haulage contracts for 176 million tonnes for fiscal 2014. But one source is concerned that falling coal prices, the persistently high Australian dollar, and increasing costs in the medium term threaten to derail its progress. The company is currently reviewing its coal haulage business strategy in light of these developments.

Its stevedoring business is also set to face further headwinds in the near term, as rival Hutchison Port Holdings Australia is set to begin operating from a $250 million Brisbane facility this year. Hutchison is entering the market at a time when a slowdown in container volumes in Australia and East Asia is forecast in the coming year. Even Asciano’s chief executive, John Mullen has warned that having three competing stevedores in Australia is unlikely to work in the long term.

The newsletters see growth potential for Asciano, but the headwinds it’s facing are a big concern, and the lofty share price seems a bit too high. Combined with the dividend payout ratio being limited to between 20-30% of underlying net profit in the next five years, due to high capital expenditure requirements and elevated debt levels, and the investment press thinks now could be a good time to reduce holdings.

  • Investors are advised to sell Asciano at current levels.

Watching the directors

  • The Service Stream board was in a shopping mood last week, when three of the four-member board went out and increased holdings after the share price tumbled over 50% in the space of two days. Chairman Peter Dempsey increased his holding by 78%, spending $48,407 for 250,000 shares, while managing director Graeme Sumner increased his stake by 43%, forking out $32,256 for 150,000 shares. Stephe Wilks also increased his holding.
  • Elsewhere, Stockland’s Mark Steinert spent $200,605 buying 53,000 shares in on-market trades, increasing his direct holding to 80,000.
  • Meanwhile on the selling side, Mastermyne co-founder and executive director Andrew Watts sold 3,500,000 shares for $4,900,000. The interest is held indirectly through CARM NQ Pty Ltd as trustee for the Carnhogan Family Trust, which still holds 10,505,428 shares.

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