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.

Ten Network (TEN)

It’s out with the new and in with the new at Ten – but the share price is looking like more of the same.

Hamish McLennan took over as CEO and managing director in mid-March, replacing James Warburton after just over a year. McLennan (a special adviser to News Corp CEO and chair Rupert Murdoch, ultimate publisher of Eureka Report) has a background in marketing and was the first non-American head of Young & Rubicam.

McLennan took the reins just in time to announce a $243.3 million first-half loss last week, mostly comprised of write-downs and one-off expenses. However, earnings before interest and tax fell to $27.1 million from $47.4 million in the same period last year, and the loss was greater than the $230 million raised in December. The newsletters point out that operating cash flow for the half was negative $38.7 million, and this can be a destructive feedback loop – without cash it’s hard to bid for great content, and without content it’s hard to attract advertising cash.

One major problem the newsletters identify is sporting coverage. Since losing the partnership with Seven for AFL coverage last year, and with cricket and NRL currently on Nine, Ten lacks a weekly sporting audience drawcard. The view is that without a major national weekly sports program, Ten will continue to struggle attracting advertiser dollars.

There have also been rumours of corporate action in the stock, largely based on the low share price and some notable media figureheads as major shareholders, which may entice some speculative buyers. However, as Tom Elliott wrote last week, Ten’s core strategy is under threat and management appears to be flip-flopping. Elliott suggests investors should only buy into a company for the chance of a takeover if they’d be happy to own it otherwise. He, along with the investment press, are staying away for the time being.

• Investors are advised to sell Ten at current levels.

Astro Japan Property Group (AJA)

One of the big investment stories at the moment is the sudden shift in Japan’s monetary policy (see John Abernethy’s Japan program a winner for yields). The Bank of Japan, under new Prime Minister Shinzo Abe, has commenced a massive and unprecedented asset purchase program that has sent the yen sharply lower – but lifted the Nikkei more than 55% in the past six months.

One difficulty for Australians is accessing this remarkable economic environment, but the investment press suggests Astro Japan may be one attractive prospect.

Astro Japan is an ASX-listed company with interests in a portfolio of retail, office and residential property in Japan. After being crushed – along with much of the listed property sector – in the global financial crisis, Astro Japan’s share price has gained more than 30% in 2013. The general return to favour of the REITs sector, and the Japanese stimulus push, are creating a kind of sweet spot for the group.

With most of its property located in Tokyo and Osaka, the newsletters argue it is well-positioned for urban property price revival and occupancy rates are high – particularly in retail where the majority of income is derived.

Net property income has remained in decline since the GFC, but the real focus should be on property values. If Japan’s three- pronged fiscal, monetary and structural policy shift leads to a long-awaited period of property price growth, then Astra Japan may just be an easy way in for Australian investors.

• Investors are advised to buy Astro Japan Property at current levels.

Woolworths (WOW)

Coles is grabbing all the headlines with one dollar a litre milk and FlyBuys, but Woolworths doesn’t seem to mind. And nor should investors, say the newsletters, since Woolworths is providing perfectly acceptable sales growth and earnings as well.

Same store sales in the key food and liquor division grew 3.1% for the third quarter (adjusting for Easter), compared with 2.4% growth in the first half, suggesting acceleration where it matters as well as a general improvement in consumer confidence. Total sales from continuing operations grew 5.7% for the quarter, and the newsletters identify this as a stellar performance across almost every business.

Big W is still the laggard of the group, competing with the Wesfarmers success story of Kmart, but the newsletters note its numbers were better than expected as well, growing sales 1.8% for the quarter, though comparable sales fell 0.8%. Importantly, home improvement sales were up 37.4% for the quarter as the company developed the Masters hardware brand rollout. There are now 29 Masters stores operating and Woolworths says it is pleased with the progress despite ‘challenging’ conditions in the segment.

The newsletters took much of the sales report in their stride, as did the market, and the share price sits roughly where it did a month ago. Solid earnings are expected, the newsletter say, and investors should have little to fear from the latest numbers.

• Investors are advised to hold Woolworths at current levels.

Challenger (CGF)

The wealthy, or, as it turns out, not so wealthy (see Ask Max: Superannuation Reforms Special Edition) who will be stung by the government’s changes to superannuation taxation could just sit around and mope. Or one might take a more proactive approach and find a way to benefit from it. One such way, the newspapers suggest, is by investing in Challenger.

One of the proposals announced by Treasurer Wayne Swan and Superannuation Minister Bill Shorten earlier this month is an extension of concessional tax treatment to lifetime annuities (also see Deferred annuities get new lease of life). As this is a key Challenger product, the newsletters view the change as broadly positive.

The company is tracking modest growth in annuities sales, with the focus shifting to more profitable, longer-term products, and if annuity sales pick up considerably in the coming years Challenger has an advantage of market position and experience in this segment.

Additionally, the stock is paying a dividend yield of more than 4% on a consensus FY13 forward PE ratio of just 7. The newsletters acknowledge concerns about margins, but suggest these are not a serious problem, and note the company’s competitive advantages are increasing at the same time as the retirement sector is gaining traction.

Annuities and other methods of dealing with ‘longevity risk’ are set to be a key theme of the financial industry in the coming years, and the government’s latest changes support this. Challenger may be one solid way for investors to benefit from this.

• Investors are advised Challenger is a long-term buy at current levels.

Telstra (TLS)

The National Broadband Network just keeps providing reasons to invest in Telstra. After the company signed an historic multi-billion-dollar deal with the federal government in 2011, the stage was set for a share price rocket. Thanks to effectively government-backed high dividends, investors poured into the stock on the hunt for yield and the share price has improved more than 65% in the past two years.

Now an election looms in September, and the Coalition (backed to win on Black Caviar-level odds) spent last week fronting the media about its proposed alternative. Essentially, Labor plans to replace Telstra’s copper with fibre (and pay it a large amount of money in the process) while the Coalition plans to use fibre, copper and hybrid coaxial fibre together. That means renegotiating the deal, and has given Telstra a strong bargaining position.

Notably, opposition communications spokesman Malcolm Turnbull said the Coalition’s plan was “somewhere between neutral and a mild positive for Telstra shareholders” – something the newsletters agree with. Despite the changes to the market generally, they view Telstra as well placed to defend market share for fixed broadband – and retaining ownership of backhaul infrastructure and potentially ‘last mile’ copper infrastructure is expected to be very valuable.

The plan would allow Telstra and Optus to compete with NBN Co, and the rollout is expected to be faster. Putting aside the politics, cost questions and public elements of the NBN, the fact remains that the developments of last week should leave Telstra shareholders sleeping sound.

• Investors are advised to hold Telstra at current levels.

Watching the Directors

Financial planning group Countplus (CUP) has been in a purple patch, with the share price rising almost 10% in the year to date. Chairman Barry Lambert got amongst it late last week, picking up 526,229 shares for $1.90 apiece, or small change short of a million dollars – $999,835.10. Lambert now owns more than 4 million shares.

On the topic of chairmen buying roughly a million dollars of shares, home designer and builder Tamawood (TWD) chair Robert Lynch picked up 500,000 shares for $1.87 each, or a total of $935,000. Non-executive director Lev Mizikovsky also sold the same amount for the same price, strongly suggesting who the counterparties here are. Tamawood’s share price is up 10% in the year to date, despite having to deal with an internal fraud issue at one of its subsidiaries to the tune of $2.4 million.

Also buying was Wellcom’s (WLL) CEO and chairman Wayne Sidwell. He picked up 350,000 shares for $850,000 in the printing and design group which has slipped almost 10% on the market so far this year on the back of a weak half-yearly profit report. Wellcom has a bit of cash up its sleeve and no debt, so some of the newsletters like the look of it as an investment – as, evidently, did its chairman.