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.

ANZ Banking Group (ANZ)

Ian Verrender provided an excellent breakdown of the banking sector investment landscape last week, with a particular focus on credit growth (Why ANZ and NAB are most loved). In it, he noted the brokers are divided on ANZ, but that it was emerging as a clear winner of market share and, in a tough credit environment, it had hit a good patch. The newsletters agree.

ANZ’s key point of differentiation for the future is its Asia strategy, so the newsletters note the resignation of International and Institutional Banking division head Alex Thursby is a setback. However, they argue CEO Mike Smith is clearly committed to Asian expansion and the bank has the talent to fill the gap. A bigger change might be the departure of Smith, expected in the next few years, though the newsletters name both CFO Shayne Elliott and Australian head Phil Chronican as strong internal contenders.

The Asian differentiation may be helped by the announcement today ANZ has been granted rights, along with Westpac (WBC), to trade directly in Australian dollars and Chinese yuan.

Aside from this, the bank’s most recent trading update showed it’s travelling well, with cash profit up 6.2% to the end of 2012, yet its share price remains in buying range – unlike competitors such as CBA. Clime Asset Management recently named ANZ as having good discount to value (see The Great Sharemarket Return: ANZ’s value proposition).

One point to note for yield-conscious investors, however, is the low dividend payout ratio. While most of the major banks pay out roughly three quarters of earnings in dividends, ANZ pays just 65%. The newsletter don’t expect this to change – but nor do they expect the many positives of regional growth, stock price value and market share aggression to change either.

• Investors are advised to buy ANZ at current levels.

Coca-Cola Amatil (CCL)

The leaves are turning brown, the jackets are coming out of the wardrobe, and Coca-Cola is again booking robust profits after a summer of cool drink sales. The investment picture for one of Australia’s last listed branded beverage companies has looked rosy for a while now – and the newsletters say there should be more steady, logical growth ahead.

Back in February the company reported a 5% net profit increase (before significant items) – along with a 13.3% increase in total dividends – for the full year. Other highlights included increased operating cash flow of $794 million, up more than $128 million, and 16.8% EBIT growth in Indonesia and Papua New Guinea. Its performance has seen the stock price rise by roughly 7% in the year so far, and 15% in the past 12 months.

The real positive for the newsletters, however, is alcohol. As discussed in Collected Wisdom last year, the re-emergence of the company into the Australian beer market is a key potential growth area.

Meanwhile, the rest of the Australian business is not falling behind. Volume grew 3.3% in the past year here, although SPC continues to struggle, and the newsletters praise the company for maintaining market share in the face of fresh competition from the launch of Pepsi’s ‘Next’ product.

Indonesia continues to provide stellar growth, and the company has made solid investment decisions in the region to help production. Though this has led to high capex, which increased more than 25% in FY12, the newsletters expect that to peak this year with an increase of just 5% more. In all, little has changed to suggest investors should not maintain some exposure to this steadily growing business.

• Investors are advised to hold Coca-Cola Amatil at current levels.

Boart Longyear (BLY)

Investment gurus may love the catchy ‘trend is your friend’ rhyme, but there’s plenty of reason to look at sectors in a cyclical downturn. It’s not about trying to pick the bottom, but the newsletters think holding onto a business with good underlying metrics – such as mining services firm Boart Longyear – could be worthwhile.

It’s no secret Boart Longyear has had a rough year. Its share price has lost more than 70% of its value in the past 12 months and there appears to be little faith in the market for a turnaround. Results for the 2012 year saw net profit fall by 57.4%, and dividends shrink from a total of 10.4c to 7.4c a share.

But there is change on the horizon – most immediately in a shake-up of senior management. Richard O’Brien, former head of major international gold miner Newmont, has taken over as CEO this month, and the company today [Monday] announced CFO Joseph Ragan would be leaving the business – though no date has been set for departure. The newsletters consider O’Brien to be a significant boon for the company in terms of experience.

The investment press also notes Boart has completed a cost-cutting program, and argues the company has the balance sheet to withstand the current downturn.

That’s not to say there aren’t problems. Drilling services EBITDA fell 2% for the year, but drilling products EBITDA dropped almost 20% after a second-half slump.

• Investors are advised to hold Boart Longyear at current levels.

Starpharma (SPL)

When Collected Wisdom last looked at Starpharma, the company had just hit a phase two testing hurdle, and dropped a third of its value.

Since then, the share price recovered, then slid back, and spiked briefly last week on the release of the very positively titled press statement: ‘VivaGel study demonstrates reduced risk of recurrent BV’. This was an area identified by the newsletters several months ago as one of the potentially redeeming features of the company because BV recurrence prevention is linked to its condom licencing business.

Unfortunately, the newsletters and the market soon noted the study wasn’t as much of a green light as hoped. While those treated with the VivaGel product showed a 12% risk of recurrence after 16 weeks, compared with 28% for a placebo, these results are only “close to” statistical significance. Other results from combined testing criteria were even further off statistical significance.

It is perhaps not a major setback considering the small size of the study, and the funding Starpharma has to proceed, but it’s not exactly a ringing endorsement of a key product either. A second disappointment here may mean it’s time for investors to look elsewhere among the growth health stocks.

• Investors are advised to sell Starpharma at current levels.

Lynas Corporation (LYC)

What should investors do about Lynas? It’s a stock that’s seen its fair share of ups and downs, and the past 12 months have unfortunately brought more of the latter. However, the investment press notes there are some developments that mean good news could be coming for anyone still riding this rollercoaster.

Lynas closed today at 52 cents, more than 50% lower than a year ago despite several double-digit percentage point rises on single trading days throughout the year.

There are some positives, though. The company is actually producing now, and quickly moving out of development, something it says has prompted the appointment of new CEO Eric Noyrez. It is also moving closer to some relief on its Lynas Advanced Materials Plant (LAMP) in Malaysia, to which vocal political opposition has caused so much trouble for the business. The newsletters point out that the dissolution of Malaysian parliament means a long-awaited election is likely there within a month – and that will determine whether Prime Minister Najib Razak and the ruling party remain in power, or if the anti-LAMP Anwar Ibrihim coalition take over. The former could finally put a floor under the whole affair, even though the Plant has been successful commissioned and is producing.

There has long been an investment thesis behind Lynas as a viable non-Chinese rare earths producer. The successful move to production and the potential removal of a political roadblock would return the focus to the fundamentals – and that would be good news for the embattled stock.

• Investors are advised Lynas is a high-risk buy at current levels.

Watching the Directors

Western Areas (WSA) non-executive director Julian Hanna could have afforded a few extra Easter eggs this year after selling 360,875 shares in the company – or roughly a third of his stake. Hanna shifted the shares for an average of $3.53 each at the end of March, more than $1.27 million in total, for ‘an upcoming real estate property transaction’. Possibly mingling at the housewarming will be Hanna’s fellow board members CEO Daniel Loughter and chairman Terence Streeter, who bought 10,000 and 25,000 at $2.90 a share last week. All three have made a good decision on paper, with the stock currently trading at $3.02.

Doug Rathbone was also in a buying mood last week, picking up 50,000 shares in Nufarm (NUF) where he is chief executive. Rathbone paid $4.03 a share, or just over $200,000, prior to a run-up in the past few days which has seen the stock close at $4.35 tonight. This short-term gain however must be set against the 15% fall Nufarm stock took in late March on the release of a 53% net profit slump, and the 25% in value it’s lost in the year to date.