Peet is well positioned in an improving property market
As the resources boom eases after a decade of helter-skelter activity the natural conclusion would be that residential property in Perth must be under pressure. Strangely, this would not seem to be the case. Historically low interest rates and steady employment seem to have sparked activity.
One way to play this improving trend is developer and funds management outfit Peet. We wrote last year about the potential of Peet, saying its exposure to Perth, Melbourne and south-east Queensland made it a proxy for a recovering residential market.
Since hitting a low of 63¢ in early July 2012, the stock has risen 120 per cent to $1.40.
A big concern for investors has been Peet's relatively high gearing and the genuine prospects of a capital raising. Cleverly the company looks to have killed off this worry by announcing a $76 million takeover of developer CIC. It is also raising extra funds to reduce its own gearing to 31 per cent.
The capital raising is being done at $1.15 a share, a discount of 17 per cent. If the takeover goes through, it should be a good entry point to play an improving property market.
Management said on Wednesday that the Perth property market had seen a marked improvement in recent times. If this activity continues, the 2014 profit could rocket, driving the share price closer to $1.80.
It has been four months since GrainCorp rejected Illinois-based Archer Daniel Midland's non-binding indicative takeover offer of $12.20 a share.
Initially, hedge funds snapped up GrainCorp stock, pushing it to $12.40 in the hope of a higher bid. But there was none and the stock has drifted back to $11.55.
Now the story becomes more interesting. To win GrainCorp by getting the nod from the board, ADM will have to bid between $13 and $13.50 a share, in line with the price Viterra paid for rival ABB a few years back.
The GrainCorp board will also be acutely aware that competition from the likes of Melbourne-based Emerald is mounting in its grain-handling division.
Without corporate activity, most analysts believe GrainCorp is worth $9 to $10. So investors have to decide on buying GrainCorp to make $1.40 to $1.90 a share on the back of another bid or lose up to $2.50 if ADM decides to sell and walk. If GrainCorp's price drifts below $11.30 in coming weeks, and decent rain encourages a broad planting of the winter crop, then it might be worth betting that ADM could
"Do I start buying mining and mining services stocks?" This is the No.1 question confronting professional money managers after 18 months of beating the index by simply avoiding the volatile commodity sector.
For me, this remains a difficult call despite stock prices being on their knees. Few of the small miners and mining services stocks are liquid enough and their earnings are not always transparent.
A far easier way to attack the sector is pick on the bigger companies that provide sufficient liquidity and have understandable business models.
Andrew Forrest's Fortescue fits neatly into this basket.
If the iron ore price stays above $US110 a tonne over the next two years while Fortescue increases production then it will not only survive but deliver enormous amounts of cash over the coming 20 years. If it sinks below $US110 in the next two years then Fortescue is a strong sell as it struggles to pay down its enormous debt between now and 2016.
Fortescue looks interesting given iron ore continues to hover around $US130 a tonne. If the iron ore price is able to hold on to the current level, Fortescue's recent bounce to $4 a share could continue all the way to $5.
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