Ten stocks in the takeover spotlight

Mergers and acquisition activity is on the rise again … here’s 10 companies in the spotlight.

Summary: A month ago we listed 10 takeover targets in the Australian market. The M&A market is building momentum, and now we have another 10, including several who are already under bid.
Key take-out: The recent contested bids for both Trust Co and RHG Ltd (formerly RAMS Group) suggest that merger activity in Australia is finally set to lift a gear.
Key beneficiaries: General investors. Category: Shares.
Only a month ago Eureka Report asked our takeover specialist, Tom Elliott, to compile a list of his top 10 takeover targets. The piece instantly become one of the most read pieces in recent months.

On August 14 Tom Elliott wrote: “2013 has been a little slower than some might have expected to date.

“But there are good reasons to think this state of affairs should change pretty soon.

“For a start, interest is cheap and debt relatively plentiful, meaning that potential buyers can raise affordable funds if they so desire. In addition, the slowing of the local economy means that organic growth might soon be hard to come by – so growth by acquisition could appear very attractive. And finally, in four weeks’ time the federal election will be over, meaning that uncertainty from the fear of ‘sovereign risk’ should dissipate.”

What splendid timing! In the last fortnight the world of M&A has been reignited, both at home and abroad, as the positive fundamentals set out by Tom for Eureka Report subscribers have come to life.

In the US the biggest takeover in recent years has been announced as Verizon launched an enormous $US130 billion ($A144 billion) takeover for Vodafone. Also the US technology sector has seen Microsoft launch a €5.44 billion ($A7.77 billion) takeover for the phone division of Nokia.

In Australia we have seen two takeovers hit the headlines in as many weeks in two very different sectors: Earlier this week Perpetual returned to the table with a renewed offer for Trust Company …a deal which could trigger new activity across the financial services sector. Meanwhile, in the resources sector, miner Perilya has become the subject of an $126 million bid from its major Chinese shareholder, Zhongjin Lignan Mining. Separately, a bidding war has opened up for the mortgage company RHG.

Well, with all that activity building up a head of steam, it only made sense to get Tom– who runs a takeover-based portfolio within the Beulah Capital group – to put pen to paper once more and identify 10 more targets for us. Nice Timing Tom! (James Kirby Managing Editor)

I recently wrote about my Top 10 Takeover Targets. At any given time, however, I’m usually looking at another 30-40 companies for potential inclusion in the portfolio. The recent contested bids for both Trust Co and RHG Ltd (formerly RAMS Group) suggest that merger activity in Australia is finally set to lift a gear. Here, then, are my second 10, or ‘B-Team’ takeover tips, in the current market:

Australand (ALZ)

Although real estate trust and developer ALZ recently closed its books to potential buyers after failing to lure a sufficiently attractive offer, in my view the stock remains in play. ALZ’s 59% shareholder, Singapore’s CapitaLand, is a confirmed seller, albeit only at the right price. And while the most likely buyer of this stake, GPT, has deemed CapitaLand’s desired sale price as too high, a prolonged period of low interest rates (see discussion on RHG) should mean that real estate values continue to rise. Over 50% of unsuccessful bids re-emerge in one form or another; for this reason, ALZ remains a medium-term takeover target.

Australand

2013

2014

Earnings/share (adj)

25.3c

26.4c

Dividend/share

21.6c

22.2c

EPS growth(adj)

-12.2%

4.6%

DPS growth

0.4%

2.8%

Price/Earnings

13.7 times

13.2 times

Dividend Yield

6.2%

6.4%

Source: Bloomberg


Clough (CLO)

Engineering Contractor CLO has a firm $1.46 per share bid from its majority shareholder, South Africa’s Murray & Roberts, already on the table. Unsurprisingly, CLO’s share price is currently trading at $1.46 – yet for some investors, the stock remains a buy. Why? Well, the $1.46 bid is made up of two components - $1.32 in capital plus a 14cps fully franked dividend. For those shareholders who can make maximum use of franking (please check with your accountant first), the CLO proposal has approximately 6cps of tax credits not currently being valued by the market. The risk of this deal falling over is also extremely low.

Clough

2013-14

2014-15

Earnings/share (adj)

10.2c

9.8c

Dividend/share

7c

5.6c

EPS growth (adj)

1.6%

-3.6%

DPS growth

-

-20.5%

Price/Earnings

14.3 times

14.9 times

Dividend Yield

4.8%

3.8%

Source: Bloomberg


GrainCorp (GNC)

In the lead-up to the federal election, GNC’s share price drifted a little as traders worried about whether a Liberal/National Party government might refuse to approve the bid from American firm Archer Daniels Midland (ADM). Since GNC has just paid 25cps in fully franked dividends, ADM’s bid now consists of $12.20ps in capital and 75cps in dividends, which at a total of $12.95ps represents a healthy premium to the current share price of $12.47. I feel that ultimately our new government will approve ADM’s purchase. Add in the fact that any delays to the bid beyond September 30, 2013 will attract additional payments of 3.5cps per month, and GNC looks a most attractive arbitrage play.

GrainCorp

2013

2014

Earnings/share (adj)

77.5c

68.3c

Dividend/share

61.9c

39.2c

EPS growth (adj)

-24.4%

-11.9%

DPS growth

33.1%

22.1%

Price/Earnings

16.1 times

18.2 times

Dividend Yield

5%

3.2%

Source: Bloomberg


Insurance Australia Group (IAG)

There are many reasons to include IAG in this portfolio. Several years ago it was the subject of an unsuccessful takeover from QBE Insurance (QBE). And unlike QBE, which has a great deal of problematic international exposure, the bulk of IAG’s activities are located in Australia. In recent times IAG’s management has been adept at avoiding the worst of this country’s natural disasters (e.g. the Queensland floods of 2011 and the Victorian bushfires of 2009), and this aided the company’s consistent profit results. Eventually, overseas insurance companies like the UK’s Royal Sun & Alliance will look to re-enter the Australian market – and IAG is the logical target to acquire immediate and large market share.

IAG

2013-14

2014-15

Earnings/share (adj)

44.7c

47c

Dividend/share

29.9c

30.9c

EPS growth (adj)

-3.5%

5.2%

DPS growth

-17%

3.4%

Price/Earnings

13.2 times

12.4 times

Dividend Yield

5.3%

5.5%

Source: Bloomberg


M2 Telecommunications (MTU)

In my original ‘Top 10 Takeover Targets’ article I listed second-tier internet service provider iinet (IIN) as one of my favourite M&A plays. Well, it’s really a case of first among equals in this space when one considers IIN’s competitor, MTU. In its recent full-year profit result, MTU’s revenue, net profit after tax, earnings per share and dividend per share all grew at a handsome pace. And while MTU is itself on the hunt for acquisitions, as evidenced by its recent purchase of Dodo and Eftel, the ‘land grab’ for customers I believe will accompany construction of the NBN could also turn MTU from predator into prey.

M2 Telecommunications

2013-14

2014-15

Earnings/share (adj)

47.1c

51.8c

Dividend/share

25.8c

30.1c

EPS growth (adj)

29.9%

9.9%

DPS growth

29.2%

16.6%

Price/Earnings

12.3 times

11.2 times

Dividend Yield

4.4%

5.2%

Source: Bloomberg


RHG (RHG)

Like TRU, the stock formerly known as RAMS and infamously floated at the beginning of the GFC by John Kinghorne, has multiple bidders chasing it. Although RHG sold the RAMS Home Loan brand and business to Westpac some time ago, the renamed RHG retained a rump portfolio of loans that in the current low interest rate environment look attractive. One potential buyer, Resimac, has already bid 49.5cps for RHG; since then, a consortium made up of Pepper Loans (an unlisted company) and private equity firm Cadence Capital has topped this with an offer of 50.8cps. There is a limit to how much either bidder can pay in these circumstances – but I don’t believe either has reached its final price yet.

RHG

2012-13

Earnings/share

10c

Dividend/share

12c

EPS growth

-25.8%

DPS growth

-17.2%

Price/Earnings

5 times

Dividend Yield

24.5%

Source: Bloomberg


Seek (SEK)

Recently James Packer sold out of both internet employment classifieds company SEK, as well as funds manager Magellan. At the time, many analysts wondered why Packer exited two such successful businesses. As we subsequently learnt, Packer has decided to divorce his wife Erica, meaning he’ll be up for a hefty settlement. As a result I’m going to break my usual rule of following strategic shareholdings in companies and recommend SEK as an ongoing takeover target. Like Realestate.com.au and Carsales.com.au, SEK is one of the main reasons old media companies like Fairfax (FXJ) are struggling. SEK has an excellent business model here in Australia, where it dominates its market, and is rapidly expanding into various Asian markets too. With a current price/earnings ratio of almost 23 times, SEK isn’t super cheap – but the best companies rarely are.

Seek

2013-14

2014-15

Earnings/share (adj)

48c

57.4c

Dividend/share

24.5c

30.9c

EPS growth (adj)

14.5%

19.6%

DPS growth

11.2%

26.2%

Price/Earnings

24.1 times

20.1 times

Dividend Yield

2.1%

2.7%

Source: Bloomberg


Trust Co (TRU)

As I’ve written before, the financial services sector is in for a period of consolidation as the “Big Four” banks attempt to expand into areas that are currently quite fragmented in terms of market share. One such area is administration and trust services. Several months ago, Equity Trustees (EQT) launched a bid for competitor TRU. Since that time, both IOOF Ltd (IFL) and industry giant Perpetual (PPT) have entered the fray. Although TRU’s share price has understandably rallied from around $5.60 to $7.10, I still think it has further to run. With three bidders still chasing it, TRU remains a ‘buy’.

Trust Co

2013-14

2014-15

Earnings/share (adj)

37c

40.7c

Dividend/share

32c

33c

EPS growth (adj)

5.4%

10.1%

DPS growth

6.7%

3.1%

Price/Earnings

19.5 times

17.7 times

Dividend Yield

4.4%

4.6%

Source: Bloomberg


Qube Holdings (QUB)

I’m keenly interested in import and export logistics services company QUB. It’s chaired by Chris Corrigan, and has a major shareholder private equity investor the Carlyle Group (which owns 14%). QUB owns 67% of a large parcel of land at Moorebank (in Sydney), for which the NSW state government is considering a new freight terminal. In addition, QUB recently announced a substantial contract in WA with Chevron, which QUB says will increase earnings from 2014 onwards. I like QUB because Chris Corrigan is an excellent operator with a long track record. Despite the fact logistics is an intensely competitive industry, if anyone can create medium to long-term value for shareholders, it’s Corrigan. In addition, private equity shareholder The Carlyle Group will eventually want an exit from its investment, something best provided by a takeover premium.

Qube Holdings

2013-14

2014-15

Earnings/share (adj)

9.3c

10.6c

Dividend/share

5.1c

5.7c

EPS growth (adj)

16.2%

13.7%

DPS growth

12.6%

13.3%

Price/Earnings

21.1 times

18.5 times

Dividend Yield

2.6%

2.9%

Source: Bloomberg


Warrnambool Cheese & Butter (WCB)

Since the bid by ADM for Graincorp, I’ve been trying a find a suitable portfolio replacement in the agricultural space. From a big picture perspective, growing food for both ourselves and Asia’s burgeoning middle class is something Australia does very well, and hence is an area likely to attract further takeover activity. WCB is a listed collective that represents dairy farmers in Victoria’s highly productive south-west region. Like all such farming businesses it is at the mercy of both the weather and prices for its produce, yet the increasing ‘Westernisation’ of Asian dietary preferences suggests that milk and associated products (e.g. yoghurt and cheese) will prove profitable well into WCB’s future. A strong sectoral buy.

Warrnambool

2013-14

2014-15

Earnings/share (adj)

29.5c

30.8c

Dividend/share

14.6c

15.6c

EPS growth (adj)

116.7%

4.4%

DPS growth

33%

6.4%

Price/Earnings

15.3 times

14.7 times

Dividend Yield

3.2%

3.5%

Source: Bloomberg



Tom Elliott, a director of Beulah Capital and MM&E Capital, may have interests in any of the stocks mentioned.

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