Andrew Ballard, Author at The Motley Fool Australia

Bunnings rights issue announced

Andrew Ballard — Thu, 08 Aug 2013 04:05:56 +0000

As expected, Bunnings Trust (ASX: BWP) has announced along with its annual results a capital raising to purchase and leaseback another 11 sites, said to be in prime retail locations throughout the country.

The $300 million raising will be a 1 for 6.18 accelerated non-renounceable entitlement offer to help buy 10 Bunnings Warehouses and one bulky goods centre, realising $271 million for ultimate owner Wesfarmers (ASX: WES), which said this morning it was also having discussions with "other parties that would result in a separate transaction involving a Bunnings portfolio of freehold properties to release further capital from (its) balance sheet".

The total price for the assets now being sold is $312 million at an overall yield of 7.35 per cent and the share offer will be at $2.30, compared to $2.41 when Bunnings went into a trading halt yesterday, saying a media inquiry indicated confidentiality about the raising may have been breached.

The purchase is reckoned to have a neutral effect on Bunnings balance sheet in 2014, but the company has forecast a 2% increase in distribution in 2015 over the 14.6 cents per unit forecast for 2014.

Bunnings Trust earns more than 90% of its income from the sites it leases to 67 Bunnings Warehouses owned by Wesfarmers. After being spun off by Wesfarmers in 1998, it has a current market capitalisation of $1.3 billion and is expected to resume trading tomorrow.

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Motley Fool contributor Andrew Ballard owns shares in Bunnings Trust and Wesfarmers.

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Bunnings Trust: No price guarantee

Andrew Ballard — Wed, 07 Aug 2013 20:58:20 +0000

It's unfortunate that Bunnings Trust (ASX: BWP) can't offer something like the price guarantee touted by its market-leading hardware store tenants: find a stocked item at a lower price and they'll beat it by 10%. In fact, even after recent falls, the Wesfarmers (ASX: WES) 1998 property spin-off (formerly Bunnings Warehouse Property Trust) seems to coming at a premium of greater that margin.

That's because investors have seen it as such a great stock, offering potential price growth, a handsome dividend yield (currently at 6%) and providing exposure to some of Australia's best quality commercial real estate. Still, after a meteoric rise from mid-2011 and at a current price earnings ratio of 16.9, it doesn't seem the bargain it once was.

Yesterday afternoon Bunnings went into a trading halt until tomorrow because news of an imminent cash raising somehow seeped into the market. In its request to the ASX the company said a media inquiry had indicated "that confidentiality may have been breached in relation to an incomplete proposal involving a potential equity raising".

The Australian Financial Review was reporting a $150-$200 million raising to purchase properties controlled by Wesfarmers worth more than $300 million. The newspaper added that the company's high share price made an equity raising the best option and that the proposal was in line with the trust's sale and leaseback strategy.

The last time Bunnings raised funds was in mid-February 2011, when it made a 1:4.84 fully underwritten non-renounceable entitlement offer at an issue price of $1.70 to raise $150 million. That didn't greatly affect it share price in the short term, with it struggling to get past $1.80 in ensuing weeks, but it did crash to $1.546 in early that August.

Before trading was halted yesterday Bunnings was around $2.41, up 0.42%, an excellent performance in a market that fell by 1.8%. And it's currently trading ex-dividend with 7.1 cents per share to be paid on August 28.

But it's still hard not to view the stock as expensive. Its rolling year price is up about 25%, easily outpacing the S&P/ASX 200 Index (ASX: XJO). It looked a lot more attractive when it was barely over $1.90 just a year ago. Investors piled on board to push it as high as $2.79 mid-May. In hindsight its June 26 $2.17 low was a good opportunity. It still managed $2.64 less than a month ago before pulling back to more reasonable levels.

So is it a buy or not? Morningstar has maintained its reduce rating on it and has its intrinsic value at $2.10. Investors love this stock enough to make it unlikely it will revisit those levels in the current market, and anyone convinced by its story would probably have to look at paying quite a bit more than that.

How will the market react to the capital raising and today's results? Probably not in a way that would make you want to rush out and buy it, but if things cool off later this is still a good defensive stock, as the market has been judging for quite some time.

Foolish takeaway

Bunnings has been very popular and that reflects in it looking overvalued, but it's still a worthwhile consideration for a long-term portfolio if it can be bought at a good enough price.

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Motley Fool contributor Andrew Ballard owns shares in Bunnings Trust and Wesfarmers.

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Treasury Wine worth chucking out

Andrew Ballard — Thu, 25 Jul 2013 23:00:10 +0000

Just as Treasury Wine Estates (ASX: TWE) thought it best to cut its losses with millions of litres of wine in its United States market, investors should think about doing the same with the stock. You'd be hard pressed to mount a good case to buy it, and if you're holding it you'd have to seriously consider either reducing your exposure or selling.

The near-term picture ain't too pretty and it's hard to see when there could be signs of a turnaround. If you'd managed to offload Treasury Wines when it was higher than, or trading around, $6 from mid-May to earlier this month you'd have to be pretty content with the decision.

Yesterday's 19-cent rebound of more than 4% looks more like a dead cat bounce than anything and any more upwards movement will be more likely an opportunity to dump it than buy it.

The worst recent news was chief executive David Dearie's July 15 announcement that the company would write down the value of its wine stocks and other assets by $160 million, cut the price of some brands and destroy $35 million of its cheaper US stocks. North America was thought to account for 38% of 2011-12 earnings and it was an improving market there and a falling Australian dollar that were fuelling hopes.

It might be a long haul, but with prudent management the world's largest pure wine play one day could be worth buying again. The only thing you can say about when that will be is that it won't be soon.

Such is the fall from grace that Morningstar, which not surprisingly has a reduce recommendation on the stock, sets its intrinsic value at $3.70, meaning it sees it as almost 30% overvalued even at the current price so far from recent highs. The agency had recommended a sell at $5.82 in early March. Even though it got to $6.47 just a couple of months ago, you'd have to say that was a good call.

Bell Potter recently put a sell on Treasury Wine and reduced its underlying 2013-14 earnings per share estimate by 30%. Worse still, it reduced its 12-month price target from $4.18 to $2.81. That makes getting out at the recent $4.92 worth considering.

Investors could be reasonably confident they won't see any more one-day falls like the 8%-plus on July 15, but unless there is some particularly good news the stock price may keep gradually spilling towards Bell-Potter's pessimistic projection.

The shareholders who hang on may find themselves clutching for straws when the company announces its full-year results on August 22.

Foolish takeaway

There might be a time when this stock looks a vintage worth buying again, but at the moment don't expect it to age well in your portfolio.

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Motley Fool contributor Andrew Ballard does not own shares in Treasury Wine Estates.

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Resmed sleeping on the job

Andrew Ballard — Tue, 23 Jul 2013 03:26:28 +0000

Despite investors doing their best to push Resmed (ASX: RMD) back over $5, the global innovator of respiratory products, used to treat sleep apnea, looks to be having a quiet doze.

While Resmed has had a stunning run in returning value over the past year, coming off a $2.93 low a year ago and up almost 26% on the year to date — and has been expected to benefit greatly from the falling Australia dollar — its share price has been rather prostrate the past couple of months, when the market has been recovering.

From an all-time high of $5.28 on May 29 it's been struggling to stay above $5 since, falling to $4.84 last Thursday, after Goldman Sachs had downgraded it from buy to neutral. It was trading down 0.6% to $4.93 mid-session Tuesday in a market up by about the same margin.

Despite being seen as defensive stock and one that can help preserve capital in a volatile market, Resmed is going to have to show it can preserve margins among increasing cost pressures, keep dominant market share in the face of stiffer competition and stay innovative to keep its products out in front. To that end, it spent $31.2 million on R&D for the quarter ended March 31, an increase of $2.8 million.

You'd think that announcing record revenue (up 10% to $383.6 million) and net income (up 31% to $84.9 million) for the same quarter would mean Resmed is in a rather unassailable position. But Goldman Sachs analysts said increased competition put downside risk on its revenue forecasts in both the 2013-14 and 2014-15 financial years. It even expected zero earnings growth in 2013-14, aside from any benefit in the falling Aussie dollar.

Morningstar has a hold recommendation on Resmed, upgraded on July 1 from reduce, but also puts its intrinsic value at $4.50.

Two bits of good news for investors in the dual-listed company is that it now pays dividends (and quarterly), and that it announced a couple of weeks ago it had won a patent dispute over sleep apnea products being distributed by a United States competitor Apex.

Even better is that one US market researcher has forecast the global sleep apnea market is expected to be worth $19.72 billion by 2017, up from an estimated $7.96 billion in 2011.

Foolish takeaway

It could get tough out there for the Australian market leader, but it's an extremely well-run, solid company too. Major pullbacks may present a buying opportunity, but Resmed is probably still pricey at current levels.

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Motley Fool contributor Andrew Ballard does not own shares in Resmed.

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Stockland in Australand takeover?

Andrew Ballard — Tue, 23 Jul 2013 00:16:44 +0000

Rumours yesterday that property group Stockland (ASX: SGP) might be making a move on Australand (ASX: ALZ) were countered with an announcement that the target's majority Singapore-based owner was planning to hold on to its stake.

The possible move on Australand was reported online and in The Australian, but The Australian Financial Review said this morning that after concluding a review, Capitaland would keep its 59% stake in the $2 billion real estate developer and property manager. The apparent decision comes after reports in January that analysts were tipping Capitaland's departure because after a restructure Australia was no longer seen as part of the company's core market.

However, Capitaland's review had been preceded last December by a move on Australand's commercial and industrial assets by GPT Group (ASX: GPT), so the Singapore company's decision to stick with Australand may be motivated more by the prospects of selling its stake for a higher price if Stockland is actually interested.

GPT pulled out of the prospective purchase on May 28. At that time Australand was trading at $3.50 and Stockland $3.75. At yesterday's close they had reversed positions with Australand valued more at $3.61, up just one cent after being up three cents on Friday, and Stockland trading evenly at $3.49. Stockland is about four times the size, with a market capitalisation of just over $8 billion.

Capitaland was reported to have said there had been approaches (plural) for Australand, but none of them compelling, that the Australian company was providing a "stable stream of recurring income" and was well-placed to benefit from an improving real estate sector.

Australand's half-year results are to be announced tomorrow. It will be interesting to hear if there is any news from Stockland. Australand hit a high of $3.77 in April but fell back to $3.20 when the GPT interest fell through.

Australand has a dividend yield of 6.0%. Stockland's is 6.9%. The bigger company's 52-week high is $3.98.

Stockland's new chief executive officer Mark Steinert revealed a new strategy in May, involving more investment in industrial development and the possibility of tactical investments in office assets. It didn't sound as a grand a plan as taking out a rival.

Foolish takeaway

A-REITs (ASX real estate investment trusts) are usually dividend yield investments, not speculative buys as prospective takeover targets, but Australand could yet prove to be both. And you'd expect Stockland to be strengthened by any acquisitions.

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Motley Fool contributor Andrew Ballard own shares in Stockland and Australand.

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Would you buy Carsales.com?

Andrew Ballard — Thu, 18 Jul 2013 22:00:36 +0000

At first glance it was hard to see why Carsales.com (ASX: CRZ) was hit so hard by the federal government's announcement of a review of FBT (fringe benefit tax) concessions on company cars in salary packages. Opening Wednesday at $9.60, it closed at $9.32 in a flat market, with even an intraday low of $9.10.

You wouldn't think even a major decline in new car sales from smaller fleet purchases would make that much difference to a company that relies primarily on online sales of mostly used vehicles. After all, it has nearly a quarter of a million of cars for sale on its website. How much impact could this one decision have?

Perhaps the thinking was that if there were less fleet sales, there'd be a trickle-down effect of fewer good quality used cars going into the market. Maybe it was an expression of concern over the overall state of our nation's vehicle industry, already hit by Ford's decision to withdraw from manufacturing and banter about what level of manufacturing is domestically sustainable. Not many of the FBT concession company cars are made here anyway.

Or perhaps investors are getting jittery about whether Carsales.com is starting to be overvalued and are looking for an excuse to bring it back to the field. Morningstar puts its intrinsic value at just $7.20 and has a reduce recommendation on it.

Certainly the company is mature and dominant in its market niche and is looking for ways it can continue to grow. It recently signed a binding agreement to acquire 30% of Brazil's leading motoring website WebMotors for about $89 million. In March it bought 19.9% of iCar Asia, which operates in Indonesia, Malaysia and Thailand, for $13.4 million. More importantly, its chief information officer Ajay Bhatia was reported to have said it was considering offering its technology platform to other companies as it sought to build stakes in overseas markets.

Carsales.com reported NPAT up 14% to $37.57 million for the half-year to last December. Revenue was 17% above the same period last year. The stock price quickly came off its late May peak of $10.54, but started steadily rebuilding to hit $10 a little more than a week ago. It was trending down again before Wednesday's fall and opened Thursday at $9.31.

Foolish takeaway

The top automotive accessory in Brazil might be a bulletproof window, but Carsales.com is not a bulletproof stock. Investors wanting to hitch a ride to its growth story need to do so with caution.

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Motley Fool contributor Andrew Ballard does not own shares in any company mentioned.

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How far can Iluka go now?

Andrew Ballard — Wed, 17 Jul 2013 23:00:45 +0000

Yesterday's price hike for Iluka Resources (ASX: ILU) came as a bit of surprise — up 4.7% to close at $10.91 when the S&P/ASX 200 Materials Index (ASX: XMJ) managed just 1.7% and the S&P/ASX All Ordinaries Index (Index: ^AXAO) (ASX: XAO) was marginally down. At one stage it was up more than 5%.

And that was in the face of yesterday's pre-market June quarterly production report that revenue from its mineral and sands operations had dropped 42% in the first half of 2013 after lower prices and falling demand forced it to cut production.

Clearly, the market liked what it heard, despite it ostensibly being bad news; perhaps because there was renewed optimism about how the company's management was positioning itself for demand to return after a downturn that included cutting 200 jobs in March.

And it wasn't all bad news. Iluka, the world's biggest zircon producer, said prices appeared to have stabilised and had even increased slightly towards the end of the financial year. Rutile and synthetic rutile prices had continued to slide, but apparently in line with its expectations.

The biggest fillip seemed to be growing confidence in how the company had been handling its zircon trade with China, the world's biggest importer of zircon, which is used among other things to glaze tiles.

Iluka had been lowering production and reducing its inventory, but now forecasts sales to exceed production. There were signs of stronger demand not just in China but also in North America and even modest indications in Europe, it said.

At its May 22 annual general meeting the company did not expect positive cashflow in the first half. Expectations of a reversal of that in the second half will now be heightened and it will make for an interesting interim report on August 22.

From humble beginnings Iluka had steady growth until late 2005, after which it trailed off to mid-2010. Regaining its top price late that year, it went on a stellar run-up from around its current trading price to two years ago an all-time high of $19.46. It fell dramatically from April to July last year, most notably when it plummeted 24% in just one day (July 9) to $8.88. It was punished for saying it was no longer able to provide longer-term forecasts, partly due to moving to short term sales contracts.

Foolish takeaway

Iluka can be a volatile stock and it's not for the feint-hearted, relying heavily on demand from China. It could retrace some of yesterday's jump, but in a recovering global economy it also could extend gains for years to come.

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Motley Fool contributor Andrew Ballard does not own shares in any company mentioned.

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Time to buy Bank of Queensland?

Andrew Ballard — Wed, 17 Jul 2013 03:26:08 +0000

Stronger capital management and a firm strategy seem to have Bank of Queensland (ASX: BOQ) on course to maintain its steady lift in fortunes. The stock has been recovering strongly since its profit slump brought about by lending losses incurred in the 2010-11 Queensland floods.

After earlier outperforming and then tracking along with its S&P/ASX 200 Financials Index (ASX: XFJ), Bank of Queensland has been trading below its peers since that slump. However, its price has now risen by 35% in the past year and by more than 24% in the year to date, among the best returns in the S&P/ASX 200 Index (ASX: XJO).

That's a big turnaround from its disastrous fall to $6.66 exactly a year ago because of those bad debts. Its price has retraced from a year-high of $10.08 at the end of May to hover above $9, the price at which analyst Morningstar ascribes its intrinsic value.

Now Standard & Poor's might upgrade the bank's BBB+ long-term issuer credit rating. Its decision to put the stock on positive credit watch had affirmed the bank's "strategic direction and the progress it has made over the last 18 months", chief financial officer Anthony Rose said, adding, "Under its new management team, BOQ has strengthened its balance sheet and capital position, reduced costs by focusing on operational efficiency and improved asset quality by introducing a new risk appetite framework and loan origination strategies."

The agency's decision on the long-term rating should be known within 90 days, probably before the bank's October annual report. At the end of this month, current director Roger Davis will take over as chairman. His appointment follows the retirement of Neil Summerson, under whom the bank made a number of key acquisitions, including Virgin Money Australia.

Analysts cited by Comsec — Bell Potter, CBA Institutional Equities, JP Morgan and Morningstar — are neutral overall on the stock, with two recommending a hold, one a strong buy and one a strong sell.

Because of the bank's better financial position, reporting strong first-half 2013 profits (compared to a previous $72 million first-half loss), Morningstar upgraded its rating to hold. Activo changed its view from unfavourable to neutral at the end of May. Columbine's capital methodology had earlier downgraded it from a hold to sell (trading at $9.09) because it found it cash flow indicators unattractive. Technical analyst Trading Central believes the stock will rise short-term but that it's becoming overbought.

Capitalised at $2.9 billion, Bank of Queensland has a 6.1% dividend yield and a 13.7 price to earnings ratio.

Foolish takeaway

Bank of Queensland is more solid than when it was caught short with bad debts a couple of years. You'd expect a credit rerating and a new chairman would help. It's a worthy addition to any long-term portfolio, but investors need to be careful to not pay too much. Best to buy in an overall market dip.

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Motley Fool contributor Andrew Ballard own shares in Bank of Queensland.

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How Aurizon delivered

Andrew Ballard — Sun, 14 Jul 2013 23:00:44 +0000

When the Queensland government decided to deregulate its railways in 2010 to form QR National a friend expressed surprise to me that I would buy the shares, but I thought a government-owned monopoly being privatised sounded like an interesting investment. And, living in Queensland, I qualified for the bonus 1:15 share offer if I hung on to them for a year.

Eventually that bonus lowered my cost base for those shares from the $2.45 they started trading at in November 2010 to $2.30. With QR National trading a year later at $3.50, having received the bonus shares and being past the level of any profit being 100% capital gains tax liable, offloading them was tempting. But with coal and iron exports raging and the company's wagons full, I decided to keep them for a bit longer. Just seeing one train with dozens of carriages go through a bush rail crossing was enough to inspire you.

When the price spiked at $3.59 in early May 2011 and then fell away for several months, I thought I'd missed the opportunity for a good profit. So when they hit $3.68 December last year, I decided it was time to take some profits and I sold my personal holding. That was the same month the company was rebranded to its current incarnation, Aurizon (ASX: AZJ), so it seemed even more appropriate. I kept the shares I owned in my super fund, but when the stock hit $4 late last January it got too much for me and I sold those too.

But what about now? Would I buy back in confident of another good profit? No, I don't think so. The rail freight business still presents opportunities of course, but business has gotten a lot harder. Coal exports on the east coast and iron exports on the west are under pressure from lower commodity prices. Aurizon is positioning itself for expansion into the Pilbara and may eventually do really well there too.

However, with the stock closing Friday at $4.36, down 0.46% in a market up by much the same margin, it seems under pressure. Morningstar puts its intrinsic value at $3.70, about the price I first sold it at. I think I've seen the best from this stock I'm going to see over a short time. Long-term prospects are another matter, but require an understanding of a very complicated business, better than I can probably muster. Mind you, if it went back a long way under $4 again, I could be tempted!

Foolish takeaway

The moral of this story is: The conventional wisdom of course is to cut your losses and let your profits run, to hang on to the stocks that are doing well for you. But with every stock, eventually, there comes a time when you should be content to sell and put the profits to some other use.

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Motley Fool contributor Andrew Ballard does not own shares in any company mentioned.

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Bendigo and Adelaide a buy?

Andrew Ballard — Thu, 11 Jul 2013 04:14:28 +0000

Getting an even break from the stranglehold the big four have on Australia's banking is always the hope of the smaller finance market players such as Bendigo and Adelaide Bank (ASX: BEN).

There are plenty of reasons to like this stock. Sure, it's had its ups and downs during the resources boom, its spikes with investors desperate for high-yielding stocks to better their fixed interest accounts, but Bendigo is a solid business with a clear vision.

Its strategy was made even plainer when it was reported in May that it was looking to redress the income share with its 300 franchises. The locally owned community banks currently retain about 60% of their revenue, but Bendigo has a "restoring the balance" (a nice pun) program to get it back closer to the 50-50 partnership model.

It's that model that Bendigo pushes to set itself apart, but others have been lately emulating its community feel, notably Bank of Queensland (ASX: BOQ), which has a smaller market capitalisation at $2.8 billion, and Suncorp (ASX: SUN), which is much larger but gets only a quarter of its revenue from banking.

Investors might think that with a year-to-date share price performance increase of more than 22% and a one-year increase of almost 35% there isn't much steam left in Bendigo's current run-up. But its stock price has been as healthy as an intraday high of $11.38 as recently as May 3, and its chart has shown a strong upward trend towards the $10.50 mark since it hit a recent low of $9.31 on June 13.

Unless bank stocks fall suddenly out of favour — and with interest rates tipped to head even lower that's perhaps unlikely — there is every reason to think Bendigo will be close to that recent high before the end of the year, if not surpass it. Seeing it back to its 2007 all-time high of $17.81 is a big call, but still more chance in the longer term than revisiting its post-GFC 10-year low of $5.73.

Bendigo seems fairly valued with a price earnings ratio of 10.96, lower than other banks, and it has an attractive dividend yield of 6.3%, bettered only among the banks by National Australia Bank (ASX: NAB), which is currently 6.4%.

With Morningstar setting Bendigo's intrinsic value at $10 and it trading well under that most of the time since late May, there could be better entry points than now. But if analyst consensus that we'll see a stronger market by year's end is correct, investors wanting to get onboard should not leave it too late.

Foolish takeaway

A high-yielding bank play outside the big four and good growth prospects make Bendigo and Adelaide worthy of consideration in any portfolio, especially if market dips present some entry points.

If you're looking for a solid investment idea, click here now to get The Motley Fool's special FREE report, "3 Stocks For the Great Dividend Boom". The report lists the names, stock symbols, and full research for our three favourite income ideas, all completely free!

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Motley Fool contributor Andrew Ballard owns shares in BEN, BOQ and NAB.

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AGL Energy: Buy or sell?

Andrew Ballard — Wed, 10 Jul 2013 21:30:45 +0000

Just what to make of AGL Energy (ASX: AGK) is a tough question. The market seems to have almost conflicting views on where the $8.1 billion energy giant, which operates retail and merchant energy businesses, power generation and upstream gas assets, is headed. It has fought off some disconcerting news recently to keep its stock price fairly stable.

Mid-session Wednesday, it was trading in the low $14.80s, but not doing not quite as well as the overall market. However, after struggling to keep up with the S&P/ASX 200 Utilities Index (ASX: XUJ) in the past year, since June 21 it has been outstripping it, recovering from a June 13 low of $13.89 after a mid-March high of $16.60.

After tracking in the low $14s for the past couple of months, AGL looks to be heading back in line with recent market rises to the $15 mark. Morningstar has an intrinsic value of $16 and a hold recommenation on it, a reduction from accumulate. Analysts Activo (from unfavourable to most unfavourable) and Columbine (from buy to hold) also downgraded it in the past few days.

It had come as a surprise to many that CommSec early last month had upgraded its rating on AGL from neutral to overweight, despite decreasing its 12-month price target to $16.85 and downgrading its FY14 earnings forecast. That was when AGL was trading at $14.24.

Comsec's assessment was largely based on the broker's confidence that the company could withstand a 12-18 month delay in developing its Gloucester acreage. There are concerns that delays could mean AGL losing some of its higher margin gas customers. The broker said the investment case was also supported by three-year earnings per share growth and a projected compound annual growth rate of 9%.

So in hindsight Comsec's call at $14.24 seems to have been borne out in the past few weeks, but now that AGL looks to be heading back to over $15 perhaps much of the window of opportunity has already closed.

AGL had a great run in the first half of fiscal 2013. It increased customer numbers and profit margins while competitors struggled. But now price competition is closing in and projected profit targets are looking to be under pressure.

Current investors would seem to have little reason to dump the stock. Its price-to-earnings ratio of 13.3 is one of the lowest in its sector, and it has a dividend yield of 4.2%. But perhaps new investors shouldn't be rushing in at current prices to add it to their portfolio.

Foolish takeaway

AGL Energy is getting mixed reviews from market analysts. That doesn't help investors deciding their position. Certainly, there seems little downside in holding it longer term, but there might not be that much upside short-term either.

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Motley Fool contributor Andrew Ballard owns shares in AGL.

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Fairfax is no screaming buy

Andrew Ballard — Wed, 03 Jul 2013 00:43:00 +0000

I'm one of the few people to make money from Fairfax Media (ASX: FXJ) in recent years. Not as an investor, mind you, but as a contractor for 16 years. Not being on the payroll meant I didn't partake of the employee share plan. What a lucky break, huh?

That's because, unlike my colleagues who unfortunately got those shares, I didn't have to watch their value gradually whittled away over the years. The media giant's newspapers and, more lately radio stations, have reported some tragic events, but the state of the company is a pretty sad story in itself.

With its iconic mastheads The Sydney Morning Herald, The Age and The Australian Financial Review, most of us know at least a bit about Fairfax. What made the metropolitan mastheads enjoy such a golden era for so long was their proverbial "rivers of gold" — the massive revenue that flowed into the company's coffers from their fat classified advertising, overshadowing income from display advertising and newspaper sales and — dare I say it? — supporting such an admirable investment in quality journalism.

Not only are those days well and truly gone, thanks to the company completely missing the boat on the next great thing, online/digital publishing. Fairfax came to the party too late and was beaten by start-ups that at the time knew less about media.

How much you can blame the management, probably particularly under the stewardship of 1998-2005 chief executive officer Fred Hilmer, is now immaterial. The company's share price may have peaked at $5.79 under his early leadership, and revived a bit after he left, but after hanging around the $4.50 mark for a year from late 2006 it has been all downhill from there. So downhill, in fact, that it was languishing at an all-time low of $0.35 in October last year.

Like the pages of a newspaper from the last century, that's all history. What's important now is, can the $1.15 billion ship still be turned around? The market doesn't seem to think so. From $0.67 just a few weeks ago, it managed an intraday low of $0.455 before the end of the financial year.

So Tuesday's 5.1% lift — double the market — might look good on paper, but it's coming off a very low base. And perhaps it was buoyed by hopeful expectations for the digital subscriptions for The Sydney Morning Herald and The Age mobile, website and tablet apps launched the same day.

The stock may be offering a 4.9 per cent dividend yield, but the June 6 investor presentation seemed to have little to inspire the share price, reporting current revenues down, as expected, by 9-10%. The pdf of the presentation looks great, but Fairfax has been promising for a long time. We've heard a lot about cost savings — like CEO Greg Hywood's comment that "ongoing cost management is now in our DNA". What was it doing before, spending for the sake of it? And what about actually making some new revenue?

On that point there were a couple of bright spots: increased digital advertising revenue from the former Financial Review Group and growing revenue from the Stayz accommodation website. There will need to be a lot more across all divisions for Fairfax to look like the company it would like us to think it is.

Actually, come to think of it, I did make money as a Fairfax investor, too. In 2009, I got as many shares in the retail rights offer at $0.75 as I could. And, as I recall, I sold them soon after for $0.83. Then I looked for a market recovery and a good opportunity to offload the rest of my shares. To this day, I'm glad I did.

Foolish takeaway

It's possible Fairfax could be a screaming buy again one day. Whether it will happen in our lifetimes is another matter.

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Motley Fool contributor Andrew Ballard does not own shares in Fairfax Media.

The post Fairfax is no screaming buy appeared first on The Motley Fool Australia.

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Tabcorp still a comfortable bet

Andrew Ballard — Tue, 02 Jul 2013 22:30:03 +0000

After flirting with a price under $3.00 on Monday, Tabcorp (ASX: TAH) opened stronger Tuesday and then handsomely outperformed the market by the close of trade. With the S&P/ASX All Ordinaries Index (Index: ^AXAO) (ASX: XAO) up almost 1.3% mid-session, Tabcorp was going along quite nicely at more than double that. As the market continued rebounding on news of the Reserve Bank decision to keep rates on hold, Tabcorp added 5%.

The greater premium was helped by its reported $863,000 purchase of Tab Active, the television wagering service of small-cap casino operator Donaco International (ASX: DNA). Linked to the Sky racing channels through Foxtel TV subscription, it gives punters the option of being able to place bets from their armchair using their remote control.

Operating for five years, the system links into the betting engines of Tabcorp, TattsBet, and Racing and Wagering Western Australia (RWWA), allowing TAB customers to place bets using their Foxtel subscription in all states except Tasmania. Tattsbet is the wagering division of Tabcorp's rival Tatts Group (ASX: TTS), which with a lottery business as well as wagering has almost doubled Tabcorp's $2.2 billion market capitalisation. RWWA is the Western Australian government-owned betting operator.

The acquisition is not expected to have an impact on the service's current operation, which is not used as much by TAB punters as other forms of online betting like the internet or smartphone apps. But the purchase still shows Tabcorp's enthusiasm to strengthen its hold on betting in all its forms. There's a chance that if Tatts continues to branch out more into its lottery business, Tabcorp might pick up gambling assets it puts up for sale.

Tuesday's slight recovery was good news for patient investors who saw their investment plummet from its most recent peak of $3.42 in late February, the best price it had seen since hitting a rock bottom of $2.05 in the market crash of 2008. Tabcorp rebuilt its price steadily until late May, when it fell away again with the overall market. It's been trading in a $3.10-$3.20 range since, and marginally outperforming the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO).

Tabcorp is of course one of the Australian market's great defensive and most recession-proof stocks. People will gamble no matter how dire the overall economy or sometimes even their personal circumstances become. Obviously, it's not a prospect for investors concerned with the ethics of that. But it does have dividend stability and a 6.2% dividend yield.

Foolish takeaway

This latest purchase is not a reason in itself to buy Tabcorp, but its should be considered as part of the portfolio of anyone looking for a stable and reliable return. In that sense, the odds are in your favour.

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Motley Fool contributor Andrew Ballard owns shares in TAH and TTS.

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Lynas rollercoaster just goes on

Andrew Ballard — Tue, 02 Jul 2013 02:10:14 +0000

What a wild ride it has been for investors and speculators alike in rare earths producer Lynas (ASX: LYC). It's hard to see it getting smoother, but recent developments are giving rise to more optimism, despite a heavily crunched share price recently.

Lynas is definitely at the speculative end of the scale. It's made some good returns for day traders and speculators over its 27-year history, but it's always been a stock whose good news seems just around the corner and not quite in sight.

With some regulatory, jurisdictional and production hurdles now out of the way, whether investors think the company is finally close to streamlined production, steady profits and consistent share price growth rests still with the future of the global economy and, more particularly, the market prices for the rare earths it produces. It's the magnetic properties of rare earths that make them so useful in information technology manufacturing. China utterly dominates the world's market, and in the 1990s was undercutting prices to pressure its minnow competitors.

Lynas hopes to meet one-third of the world's demand with processing at its refinery at the Malaysian east coast industrial port of Kuantan, shipping its ore from its Western Australian Mount Weld mine out of Fremantle. The company issued an upbeat production report a month ago and has been trying hard to assuage environmental concerns that had led to unrest. On June 18 it said it would discontinue defamation action against the Save Malaysia Stop Lynas protest group, saying:

"The actual emission monitoring results … available from the websites of the Malaysian Department of Environment (DoE) and the Atomic Energy Licensing Board (AELB … prove to everyone that our products and processes are safe for people and safe for the environment."

Lynas might feel it's close to being able to get on with the job, but it has to contend with a fickle market too. It also said in its operations update that although rare earths prices had continued to fall in the calendar year, it could see signs of stabilisation emerging. And in any case, in "response to the macro environment" it had a program to reduce operating costs and optimise production.

It needs all the macro economic help it can get. The company's fortunes seemed to have changed with the recent Malaysian election, which seemed to assure its plants licensing and operation. The share price peaked at $0.70 on May 13, but has since fallen right away to close Monday at $0.375. In the heady days of optimism about the global economy after the GFC and booming sales of the information technology that relies on rare earths, like smart phones and tablets, Lynas hit a rather unrealistic $2.70. That was just a little over two years ago. On the year to date it's down almost 35%.

Foolish takeaway

Lynas has been an exciting story so far, but it's the world economy and buoyant rare earths prices that will determine whether there's a happy ending. It's not a stock for the feint-hearted or those looking for income (there's no dividend), just those confident enough of a long term capital gain. That's by no means impossible though.

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Motley Fool contributor Andrew Ballard owns shares of Lynas.

The post Lynas rollercoaster just goes on appeared first on The Motley Fool Australia.

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Computershare for the long haul

Andrew Ballard — Mon, 01 Jul 2013 01:19:20 +0000

Global share registry operator Computershare (ASX: CPU) is a solid Australian company with an interesting history and a very bright future. From humble beginnings in 1994, it has grown to a market capitalisation of just over $5.8 billion. Its share price made slow but steady progress from $0.14 until 2000 when it joined, a little unfairly, the other victims of the tech wreck/dot com bubble.

Computershare had peaked at $11.70, the like of which it didn't see again until early 2010, when it made $12.90 before again succumbing to broader market forces. For two years now, it's been steadily rebuilding from a low of $6.55, with its most recent peak a month ago at $11.35. The fundamentals of the business remain sound and its growth prospects seem to make it a compelling story now worth looking at. You'd expect it to do well from growing sharemarket activity.

Friday saw Computershare fall 2.1%, substantially more than the market average, to close at $10.27 after opening at $10.50. With the S&P/ASX 100 Index (Index: ^AXTO) (ASX: XTO) likely to track Wall Street down Monday, Computershare starts to present itself more and more as a buying or accumulation opportunity.

Computershare is uniquely positioned as the only global share registrar. It services 14,000 corporations and administers 100 million shareholder accounts in 20 countries overall. It leverages its core business into providing many different services. But it's also now diversifying into activities not directly sharemarket-related.

Although it could arguably be more exposed than other businesses to short-term sharemarket volatility, that diversification across services and different markets and economies should mean solid long-term growth. And of course its ability to scale its activities, cross-sell products and find new synergies in growing markets gives it a big advantage over competitors.

The company announced the middle of the last month that it would be offshoring some Australian jobs to the Philippines and India — 50 in its Melbourne office from a total of about 1900. It emphasised that it was not closing any Australian facilities and was making the move to better service clients. However, it's an indication of how the company is looking to streamline global operations, not just for the benefit of clients, but to increase profitability.

In April, Computershare announced it would spend about $US10 million acquiring 25% of United States-based shareholder communications provider INVeSHARE in a deal that would allow it move to full ownership in 2018-19. That follows the bedding down of its then biggest US competitor, the shareholder services division of The Bank of New York Mellon Corporation. US revenue increased in the 2012 financial year by 28%, the biggest rise among any of the company's global divisions, followed next by continental Europe at 19%. Asia had falling revenue, but still offers plenty of opportunities.

Foolish takeaway

Computershare offers a good growth story for investors wanting long-term prospects rather than a strong yield or quick capital gain. Look to buy on market weakness, especially if it revisits levels under $10 — it could well be worth setting an alert for.

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Motley Fool contributor Andrew Ballard does not own shares in CPU.

The post Computershare for the long haul appeared first on The Motley Fool Australia.

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Does Myer come gift-wrapped?

Andrew Ballard — Thu, 27 Jun 2013 22:30:18 +0000

Not once since Myer (ASX: MYR) was floated in late October 2009 has it reached its issue price of $4.10. At the time that price was at the lower end of expectations, but the issue raised $2 billion with strong institutional and retail demand.

Myer's price got close in late September 2010, but since then has mostly underwhelmed the market and disappointed investors, falling to a low of $1.53 a year ago. There was a big glimmer of hope with the overall rising market in the first few months of the year to a much healthier $3.26 a couple of months ago, but then fell with the broader market.

Now, two buoyant days on the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has Myer's chart ticking up again and it was looking positively bullish, being up more than 6% intraday Thursday. Hovering around the $2.40 mark made the $2.19 bid 10 days ago look a real bargain. Like it has since late last year, Myer was also outperforming main rival David Jones (ASX: DJS), although the price of that company, at around a 4% rise, was also well above the market.

Despite the difficulties facing the retail sector, including a falling dollar increasing the cost of imports and scrutiny of the ethics of using overseas clothing suppliers, there is plenty of reason to expect Myer is going to keep trending upwards to Christmas. Increasing employment in the retail sector to May and 3.1% higher retail turnover compared to this time last year are good indicators.

Market-wide sentiment will play the biggest part in the equation — increasing consumer and business confidence might not come with changing the Prime Minister, but will come with the certainty of an election date, will surely help. And Myer can fare better than many of its peers.

Myer has a national network of 67 stores in prime retail locations across Australia. Its restructuring with the 2009 float means it can develop new sites in emerging metropolitan regions and growth corridors where department stores are still under-represented. It has longer term plans to expand to 100 stores, but perhaps more importantly has started to implement an "omni-channel" strategy to counter online competition.

However, a sleeper might be how it handles the issue of the ethics of using cheap overseas suppliers like those in Bangladesh highlighted in last Monday's Four Corners program on the ABC. Unlike Wesfarmers' Target, Myer has not yet signed the Banglasdesh Safety Accord. Along with David Jones, it's always prided itself on being a little bit more upmarket, and probably needs to maintain that impression now more than ever.

Myer has a $1.3 billion market capitalisation, just under David Jones', but has a much more attractive dividend yield of 8.4%, compared to 6.8%. On price to earnings ratio, Myer at 10.18 is well under its main rival, which at 13.73 is bang on its sector average.

Foolish takeaway

It's not exactly a bargain basement buy after a 6% one-day rally Thursday, but Myer seems to be throwing off the shackles. It wasn't clear why the retailer was outperforming the market so much, but it indicated that investors should be keeping an eye on it as a real opportunity.

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Motley Fool contributor Andrew Ballard owns shares in Myer.

The post Does Myer come gift-wrapped? appeared first on The Motley Fool Australia.

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Tatts in it to win it?

Andrew Ballard — Wed, 26 Jun 2013 22:45:23 +0000

Gaming and lottery business Tatts Group (ASX: TTS) already has an investment in United Kingdom gaming venues, but it might be considering a further move offshore by entering the draw for Ireland's national lottery.

The Brisbane-based company is yet to announce a position on the tender, which is expected to close in September, with the lucky winner probably to start operations in November. However, there have been suggestions that with the core gambling business mature and lacking opportunities for organic growth, strengthening the lotteries side with acquisitions could be a good move.

The Australian Financial Review even went so far as to speculate that it could lead to Tatts divesting its gaming assets, with Tabcorp (ASX: TAH) the obvious likely buyer. Both Tatts and Tabcorp had good news in Monday's announcement that the Victorian Supreme Court had found against the state treasury's attempt to impose on them a health levy of more than $42 million. With the overall market being battered, it didn't do much for their stock prices.

Tatts has five operating segments, of which lotteries is the biggest, providing 45% of its revenue and operating everywhere nationally except Western Australia where they are run by the government: Tattersalls provides lottery products in Victoria, Tasmania and the Northern Territory; Golden Casket is Queensland's only licensed lottery operator; NSW Lotteries also runs the Australian Capital Territory business; and Tatts owns SA (South Australian) Lotteries.

Gaming machines account for 32% of the revenue and TattsBet, a provider of totaliser and fixed price betting in Queensland, South Australia, Tasmania and the Northern Territory 16%. The other two segments contribute less than 8%.

The Irish lottery business is said by some to be worth as much as $850 million. Others reckon the sale of the 20-year operating licence is likely to net the government between $425 and $565 million. The proceeds will go towards shoring up the national finances and the government hopes the new operators will be able to increase the business's current annual $320 million funding of good causes to $425 million within five years.

The only formal statement Tatts has made is that is examining the opportunity. One stumbling block may be that the Irish government announced earlier this week that the successful tenderer must base its operations in Ireland for corporation tax purposes. It also will be looking for assurances for the future of its current 107 National Lottery employees.

And there will be competition in the bid too, reportedly from the Italian-owned GTECH and the Ontario Teachers' Pension Plan, which in 2010 acquired Camelot Group, the owner of the United Kingdom's national lottery.

Tatts's share price gain on the year to date is a modest 3.32%, but it has still outperformed its sector over the past three years and since September been discernibly ahead of its nearest rival Tabcorp. It has a healthy dividend yield of 6.1% and a share price with a $3.42 year high and $2.56 year low. Morningstar's intrinsic valuation is $2.90.

Foolish takeaway

We should know well before its annual report in September if Tatts is buying a ticket in the Irish sweepstakes. But analysts are still lukewarm on the stock and even investors confident of a bid being successful and a breakthrough move should be looking to buy only on market weakness.

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Motley Fool contributor Andrew Ballard's super fund owns shares in TAH but not TTS.

The post Tatts in it to win it? appeared first on The Motley Fool Australia.

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What is the ASX up to?

Andrew Ballard — Fri, 21 Jun 2013 21:30:50 +0000

Australia's stock exchange owner and operator ASX (ASX: ASX) seems to be up to something more than its stated objective with its surprise $553 million renounceable rights issue. Just what that is has become the source of much speculation among analysts and the media, and it's going to be very interesting to eventually find out.

Certainly current shareholders have not been that well served with the rights move so far. When the stock resumed trading a week ago it fell 6.1% — and that came on top of a 2.3% decline the day before. Its chart has looked exceedingly ugly since a few weeks ago when it seemed to be closing in on its 52-week high near $40. But interestingly, it fared better than most when our market was battered at the end of the week.

What could happen further down the track though is tantalising. Investors are hanging in. The 2 for 19 rights to $30 shares are being thinly traded at a rather poor price. With the market tanking after Wall Street and the stock trading under $33 Friday, the buyers are starting to come out.

It's not so much what the ASX will do with the money raised that is in question. It has said all but about $100 million will be used to retire debt and meet the expected increased costs of new capital standards for international clearing. It is positioning itself with such a healthy balance sheet that's leading to the speculation. And the most obvious guess from analysts and commentators is that the ASX will revisit its proposal to merge or acquire offshore. That prospect becomes shorter odds with a change of government in September.

It was in April 2011 that Treasurer Wayne Swan finally rejected the ASX's proposal to "merge' with the smaller capitalised Singapore Stock Exchange (SGX), saying it was not in the national interest. Shadow Treasurer Joe Hockey criticised the assessment process but did not actually indicate the Coalition's policy on the proposal. It, or something similar, could be in the cards again.

There have been successful exchange mergers elsewhere and the Australian Stock Exchange could probably now argue a better case for no loss of regulatory authority. However, revisiting a Singapore Exchange merger per se may not be the actual game plan. With global markets and their products becoming more complicated, there are more opportunities for synergies between businesses now, even after just a couple of years, than straight-out mergers or, in what was more likely the SGX-ASX case, takeovers.

The ASX itself has hinted as such a couple of times. Here are two examples:

A few months after his April 2011 appointment as ASX chief executive officer, Elmer Funke Kupper said in the Listed @ ASX newsletter it was one of his priorities to "better link ASX to global capital markets over time. Collaboration with other exchanges may also help to improve liquidity, reduce costs and broaden the products available to our customers."

And in a talk on the future of Australia's capital markets published as a video by The Australian Financial Review on May 30, Kupper stressed how much ASX could learn from Singapore, praising its stock exchange for the consistency it managed between stakeholders.

Kupper made no mention of any corporate moves, of course, but he made a point about the opportunities of looking over the horizon:

"If you look at Singapore, for example, what you have to admire is the consistency between the government, the regulators, the exchange, the banks, the brokers, the investment community, the tax office and everybody else in determining what's important and they develop a 10-20 year vision for their markets… (They are) sort of very externally focused … and I think we still sometimes spend, you know, too much time with ourselves. I think that's changing …"

The take-home message from that is anyone's guess, except that we can expect some major changes. With the ASX's price currently under so much pressure, there's a lot of upside in there for a company with a good plan.

Foolish takeaway

The ASX has something up its sleeve other than a lot of cash. Current shareholders have little choice at the moment but to go along for the ride. Those with faith in the future of our bourse and overall economy should consider getting on board if they can get what looks like a cheap ticket.

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Motley Fool contributor Andrew Ballard does not own shares in any company mentioned.

The post What is the ASX up to? appeared first on The Motley Fool Australia.

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Has Treasury Wine matured enough?

Andrew Ballard — Thu, 20 Jun 2013 00:27:38 +0000

Just like there comes a time to open a bottle of good wine, there comes a time to sell a good stock. The time to look at taking profits on Treasury Wine Estate (ASX: TWE) may soon be approaching – particularly if its price appreciates soon for no better reason than a falling Australian dollar.

Eighty percent of Treasury's sales volume is in Australia, but 43% of its income is from the United States, so it stands to benefit from our falling currency. It has been more of a capital growth play than a yield stock. Its price is up 24% on the year to date, but its dividend yield is a low 2.2% on a price earnings ratio of 29%, double the average of its food and beverage industry sector.

A market outperforming 3.43% gain on Wednesday pushed it back over the $6 mark. That made it look like long-term holders should start keeping an eye on whether it could return to its 52-week high of $6.47 on May 20. But the closer it gets to that point the less of a "hold" it looks.

Other recent price spikes were $6.18 on March 20 when it had been hovering around $5 just a month earlier; and $5.60 on October 19 last year when it had traded as low as $4.27 mid-August. So there is some volatility there and anything looking like another spike would have to get investors thinking. Some believe the price has a fairly healthy prospective takeover premium in it.

Morningside reckons Treasury is trading about 60% above an intrinsic value of $3.70. Following a previous 8.2% growth in earnings, its consensus forecast for current year earnings for Treasury is a flatline 0%, leading it to join other analysts in recommending a "sell" on the stock.

Foolish takeaway

It might not be quite the time to sell Treasury Wine Estate — maybe our lower currency can see its value mature that little bit closer to the high $6.40s again; but investors hoping to reap some rewards should not leave it so long that it goes off. The further it rises above $6 the more they should think about taking some profits off the table.

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Motley Fool contributor Andrew Ballard does not own shares in any company mentioned.

The post Has Treasury Wine matured enough? appeared first on The Motley Fool Australia.

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Should you offload Transurban?

Andrew Ballard — Thu, 20 Jun 2013 00:13:15 +0000

It will be a long way down the road before investors know whether Transurban (ASX: TCL) will fulfill its expectations of a bright future. Recent news has been mixed and it looks to be getting expensive.

Whichever way you look at it, the toll road owner and operator's decision to consider bankruptcy for its first United States toll road investment, the Pocahontas Parkway in Virginia, is not good news. The company acquired it from the state government there in 2006 for $638 million, which included $202 million equity. But the failure of a new housing estate to go ahead and generate traffic sealed its fate.

Last June the company wrote down to zero value its 75% in the asset, ownership of which will most likley be transferred to the parties that financed it. Consequently, there is no impact on the current balance sheet and it averted drawn-out finance restructuring talks and the prospect of putting up more cash for a failing business.

Transurban said the issue was "asset specific", but one of its other two USA assets, the express lanes project near Washington DC that opened last November, is now reporting less traffic than expected.

At home the business is performing well. Transurban owns Melbourne's CityLink and Sydney's Hills M2 and Lane Cove Tunnel, the latter for which it announced on Tuesday the refinancing of $260 million in debt due to expire in August. The company reported a 5.6% revenue increase to $196.4 million for the March quarter.

However, despite a respectable dividend yield of 4.4% and an attractive forecast earnings increase from a current 4 cents per share to 37.7 in 2015, the stock has a staggering price to earnings ratio of 174 and a worrying debt to equity ratio of 129%.

But the real difficulty for shareholders and would-be investors is not assessing the current business but understanding Transurban's future prospects, most notably whether it can pull off its unsolicited joint proposal for a $3 billion tunnel linking Sydney's M2 Motorway and the F3 freeway, using a new patronage risk-sharing approach said to be "innovative" for infrastructure projects. Less than a third of the project's finance would come from future toll revenue.

Because Transurban owns all the Lane Cove Tunnel that connects to the M2 and half the Westlink M7 that connects to it, as well as all of the M2 itself, it would expect to do well out of the construction of the city's so-called "missing link". After a year the proposal is now in its third and final stages of assessment, but it's not a dead certainty yet.

If the stock price goes through $7 towards its 52-week high of $7.18 on May 22, you'd have to think most of the upside at this stage is priced in. Pre-GFC Transurban once hit $8.60. If you'd managed to pick it up around its March 2009 low of $3.49, that would be a pretty handsome profit in four years.

Foolish takeaway

Transurban could be heading back into overvalued territory. Investors believing its story of long-term income could look to buy on sizeable market dips, but those sitting on good gains could understandably be taking some profits soon.

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Motley Fool contributor Andrew Ballard owns shares in Transurban.

The post Should you offload Transurban? appeared first on The Motley Fool Australia.

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Andrew Ballard, Author at The Motley Fool Australia

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