Buying The Big Bank CBA

Commonwealth Bank (CBA) is the nation’s largest bank by market capitalisation, a true blue chip share that holds the greatest amount of deposits, the most home loans, and also controls a fair chunk of the wealth management market through Colonial First State.

The bank also operates Australia’s largest discount online brokerage operation, Commsec, as well as a multitude of international operations. Importantly, the bank has used its size to grow even bigger over the years. While many financial institutions collapsed over the global economic downturn – or neared collapse – CBA used its massive deposit base to maintain funding and buy depressed assets.

The banking giant also has diverse exposure geographically with stakes in several banks in the fast growing China.

1Q13 Trading Update

Despite facing slowing credit growth, CBA was still able to generate solid earnings growth in 1Q13. The group reported a 1Q13 statutory profit of $1.8 billion. Unaudited cash profit, a measure more reflective of underlying performance, was $1.85 billion, a 5.7% increase on the prior corresponding quarter. A breakdown of the results revealed net interest margins (NIM) were broadly stable in the quarter, relative to 2H12 NIM of 2.06%. The company noted that asset repricing impacts were largely offset by continued deposit pricing pressures. The company’s’ trading income improved to a level consistent with the company’s long-term average run-rate, the result was also helped by a positive Credit Valuation Adjustment.

CBA’s asset growth was mainly a function if of increased retail deposits, which now make up of 63% of the group’s total funding. The Australian Retail division had a particularly good quarter, with improved lending margins, improved credit quality and good growth in customer numbers at its Bankwest subsidiary. The Wealth Management and Insurance division produced solid volume growth, with Funds under Administration and Funds under Management growing by 6% and 4% respectively. Insurance premiums grew by 3%, with cross selling to the banks retail customer base showed signs of improved penetration. With regards to CBA’s other division, the bank said most were trending at similar run rates to the 2H12.

Looking ahead

CBA’s quarterly update was solid, with a clearly improved tone from previous periods. Although the company did note slower revenue growth, it did increase profits by over 5%, this is an indication that the group has been able cut its expenses to cover for any reduction in revenue. On a return on equity (ROE) basis, CBA does look attractive to its major rivals, with an average (ROE over the last three years of 17.6%, which is over 1% higher than any of its rivals.

Overall we expect a continuation of growth for CBA’s earnings in the current quarter, and this should hopefully translate into continued share price appreciation. This article was distributed to our members on November 30th, if you would like further information you can sign up for FREE 7day recommendations and access all our research files on not only Commonwealth Bank but all our current trading ideas. Simply click here and starting trading today.

The Reject Shop Limited (TRS) Solid Growth

The Reject Shop (TRS) is a discount variety retail company, targeting Australian consumers through low price points, bargain-purchasing and convenient shopping locations. The group has 239 stores in Australia, which includes the 18 new stores it added in FY12.

TRS offers a wide variety of general consumer merchandise, with a focus on everyday needs, such as toiletries, cosmetics, homewares, personal care products, hardware, basic furniture, household cleaning products, kitchenware, confectionery and snack food.

The company has two key advantages that many of its mid-to-upper market rivals don’t - a strong AUD benefits earnings due to lower import costs, whilst the substitute nature of its products can appeal to cost-conscious consumers.

FY12 results

After a somewhat disappointing FY11, TRS got itself back on track in FY12. The company grew its net profit by 35.6% on-year, to $21.9 million. The addition of 18 new stores helped sales climb 9.9% over the year, to $555.3 million.

An increase in the amount of stores was not the only reason for the jump in sales; comparable store sales grew 0.5% over the year, with a 3.2% jump in the second half.

The group’s balance sheet is also in a healthy position. TRS was able to reduce its debt by $16.9 million in FY12, while increasing free cash flow from $1 million in FY11 to $25.2 million in FY12.

A strong Aussie dollar combined with a reduction in shipping costs saw the company’s gross margin rise from 38.9% in FY11, to 44.1% in FY12.

Consumer environment

Australian retailers have been operating in an extremely challenging consumer environment, but we could be seeing a return to better conditions.

Last week saw the release of the Westpac Consumer Sentiment survey, which showed the consumer sentiment index rising 5.2% to 104.3. It is the highest level the index has been at in 19-months, and the first time over 100 in nine months. A reading above 100 indicates that more consumers are optimistic about the economy than pessimistic.

The main reason for the uplift in the consumer confidence is likely the recent series of rate cuts, and yesterday’s release of the RBA’s minutes from the October meeting did flag the possibility of further interest rates cuts in the coming period, which in turn could see a further increase in confidence.

Outlook

TRS’s FY12 results were impressive on several fronts. The group was able to grow sales on a comparable basis, improve its margins, increase its free cash flow, record a huge jump in profit, all while paying back $16.9 million in debt.

The recent pickup in consumer confidence could not have come at a more perfect time, with the busy Christmas season just around the corner. Whilst the company declined to provide any specific guidance for FY13, we feel that with the addition of 17 new stores before Christmas, strong sales growth is all but assured.

Overall we see continued growth for TRS, which should hopefully translate to further share price appreciation.

The Reject Shop Limited (TRS) Solid Growth

The Reject Shop (TRS) is a discount variety retail company, targeting Australian consumers through low price points, bargain-purchasing and convenient shopping locations. The group has 239 stores in Australia, which includes the 18 new stores it added in FY12.

TRS offers a wide variety of general consumer merchandise, with a focus on everyday needs, such as toiletries, cosmetics, homewares, personal care products, hardware, basic furniture, household cleaning products, kitchenware, confectionery and snack food.

The company has two key advantages that many of its mid-to-upper market rivals don’t - a strong AUD benefits earnings due to lower import costs, whilst the substitute nature of its products can appeal to cost-conscious consumers.

FY12 results

After a somewhat disappointing FY11, TRS got itself back on track in FY12. The company grew its net profit by 35.6% on-year, to $21.9 million. The addition of 18 new stores helped sales climb 9.9% over the year, to $555.3 million.

An increase in the amount of stores was not the only reason for the jump in sales; comparable store sales grew 0.5% over the year, with a 3.2% jump in the second half.

The group’s balance sheet is also in a healthy position. TRS was able to reduce its debt by $16.9 million in FY12, while increasing free cash flow from $1 million in FY11 to $25.2 million in FY12.

A strong Aussie dollar combined with a reduction in shipping costs saw the company’s gross margin rise from 38.9% in FY11, to 44.1% in FY12.

Consumer environment

Australian retailers have been operating in an extremely challenging consumer environment, but we could be seeing a return to better conditions.

Last week saw the release of the Westpac Consumer Sentiment survey, which showed the consumer sentiment index rising 5.2% to 104.3. It is the highest level the index has been at in 19-months, and the first time over 100 in nine months. A reading above 100 indicates that more consumers are optimistic about the economy than pessimistic.

The main reason for the uplift in the consumer confidence is likely the recent series of rate cuts, and yesterday’s release of the RBA’s minutes from the October meeting did flag the possibility of further interest rates cuts in the coming period, which in turn could see a further increase in confidence.

Outlook

TRS’s FY12 results were impressive on several fronts. The group was able to grow sales on a comparable basis, improve its margins, increase its free cash flow, record a huge jump in profit, all while paying back $16.9 million in debt.

The recent pickup in consumer confidence could not have come at a more perfect time, with the busy Christmas season just around the corner. Whilst the company declined to provide any specific guidance for FY13, we feel that with the addition of 17 new stores before Christmas, strong sales growth is all but assured.

Overall we see continued growth for TRS, which should hopefully translate to further share price appreciation.

Technology One Limited (TNE) On Track For Growth

Technology One (TNE) is an end-to-end software solutions provider, catering for a number of industries including government, education, financial services, health and community, utilities, and managed services such as mining, property and media.

Diversified product base

TNE is diversified across a number of different products in that it is able to tailor software solutions to meet the needs of its various clients. For example, TechnologyOne Financials offers solutions that can more easily interpret accounting and financial information.

Because it generates revenue from multiple streams including business and non-business, TNE is not as sensitive to the economic cycle as some other tech companies.

Strong operating metrics

TNE has a history of earnings and revenue growth. Revenue has increased at a compound annual rate of 14% per annum since 2003, with net profit growing at 10%.

Moreover, the group’s EBITDA margin has hovered around 20% over the past five six-month reporting periods. TNE derives the bulk of its revenue from software licensing and consulting fees. The company receives an initial licensing fee for each of its software, which is supplemented by annual licensing fees and consulting service fees.

In 1H12, TNE’s annual licensing fees grew 18% due to high customer retention and satisfaction rates. Although R&D expenses jumped 11% on-year, the Connected Intelligence (Ci) enterprise suite has enjoyed a positive reception thus far. Ci is the group’s flagship suite of products.

TNE’s R&D spend is being ploughed into the next generation Ci, and we would expect the product improvement to be a key driver of sales going forward.

Future is in the cloud

TNE is currently in the process of building its own cloud product, TechnologyOne Cloud. The aim is to offer the Ci enterprise suite through the TechnologyOne cloud.

Cloud computing is the process of storing applications and other data on web-based servers, enabling end users to access the centrally-stored information from multiple locations.

The cloud’s key benefit for TNE’s clients is that they don’t have to install software on all of their computers and devices, which significantly reduces the cost of doing business.

The tech industry is only beginning to scratch the surface with cloud services. Apple released their own version of the cloud with the iPhone 4S, known as the iCloud, late last year.

TNE’s version is currently in the trial phase, but we would expect strong demand for this service once it is up and running after the next few years.

Outlook

TNE has enjoyed solid growth since 2003 due to the quality of its product and service offering. The software industry has low barriers to entry, so there has to be a continual focus on maintaining higher customer satisfaction levels and investing in future technology.

The 18% growth in 1H12 annual licensing fees demonstrates TNE’s customer focus, whilst its investment in TechnologyOne cloud is expected to reap long-term benefits.

This article was distributed to our members on November 20th, if you would like further information you can sign up for FREE 7day recommendations and access all our research files on not only Technology One but all our current trading ideas. Simply click here and starting trading today.

Whitehaven Coal Limited (WHC) Outlook White Cold

Whitehaven Coal Limited (WHC) mines and sells metallurgical and thermal coal to the global steel power generation and metallurgical industries.

The company is a coal producer in the Gunnedah Basin and has an interest in tenements covering the Gunnedah, Werris and Ashford Coal Basins of New South Wales.

Earlier this year WHC completed a merger with Aston Resources and Boardwalk Resources, which made it Australia’s largest independent coal company.

The group has been in the headlines as of late, after largest shareholder Nathan Tinkler failed to have company directors ousted.

FY12 results

WHC’s FY12 results were not good, but not exactly a surprise given the well publicised weakness in the coal industry.

Revenue over the year slipped 1% to $618.1 million, whilst NPAT before significant items dropped 21.1% to 57.8 million.

The most worrying part of the results was the significant increase in average cash cost of sales, which rose 15.6% to $69.93 per ton.

This saw EBITDA margin contract from 41% to 33%, which is obviously not a good sign as the company attempts to ramp up production.

Coal prices

Coal prices have endured a dramatic fall since the start of the year.

The price has fallen from a little under $120 a ton to now be trading around the $85 mark. This represented a 36.3% decline.

If the trend continues WHC could face continued pressure and the possibility of some of their planned ramp-ups becoming economically unviable.

The International Energy Agency (IEA) this week said in its World Energy Outlook that although coal would remain the world's leading fuel for power generation in the next two decades, its share would drop.

The IEA also outlined another scenario which could see coal’s share of global energy crash to 16%, from its current 30%.

This scenario could occur in the next 10 years if the demands by current climate change scientists are met that there be no more than 450 parts per million of carbon dioxide in the atmosphere.

Outlook

WHC FY12 results were disappointing, but besides form the fall in profit it was the increase in the average cash cost of sales that was the most alarming factor.

The report by IEA this week did not provide a good outlook for the coal market especially if the more unlikely climate change scenario comes into play.

Overall we see further declines in the coal price and we see this translating into further share price deterioration for WHC.

Tabcorp Holdings Limited (TAH) Stock To Sell

Tabcorp Holdings Limited (TAH) is a gambling and entertainment group involved in a combination of wagering and media activities across Australia.

The company is divided into four main segments: Wagering, which includes totalisator and fixed odds betting; Media & International, including Sky Racing and Sky Sports Radio; Gaming, which includes a variety of Tabaret venues across Victoria; and Keno, which mostly operates in NSW and QLD clubs and hotels.

Back in June 2011, TAH successfully completed the demerger of its Casino business into the Echo Entertainment Group.

Promotional spend hurts margins

TAH’s FY12 core net profit rose 12.7% to $340 million. Revenue was up 3.1% as growth in Fixed Odds offset declines in totaliser revenues. Wagering costs climbed as TAH invested in technology and expanded its promotion and sponsorship activities.

This meant EBITDA margin fell sharply from 37.6% in FY11 to 23.2% in FY12.

Competitive pressures

The concerning aspect of the promotional activities expense was that TAH felt the need to boost its profile from increased competition. The explosion in online betting over the past few years has intensified competition in the wagering industry.

TAH has recognised this change and part of the reason behind its FY12 margin contraction was the amount of money it is being forced to spend on technology upgrades at its Trackside, Fixed Odds and self-service terminals.

Highlighting the competitive threat, Bet365, UNiTAB and Tom Waterhouse Betting have begun making their presence known in the past six months by ramping up advertising.

To boost its own profile, TAH needs to increase technological and advertising spending, which is going to be detrimental to margins in the short-term.

Outlook

Unfortunately for TAH, FY13 has got off to a shaky start.  1Q13 wagering revenue fell 2.4% on-year, with the result hurt by the changes to the Victorian Wagering and Betting Licence terms.

TAH was awarded a 12 year wagering and betting license by the Victorian government in July 2011 for $410 million. A tough trading environment in the Victorian and club network contributed to the fall in wagering revenue.

In our view a continuation of the weak trading conditions will limit revenue growth in FY13, putting further pressure on already strained profit margins.

Tox Free Solutions: Growth Prospects

Tox Free Solutions (TOX) is a hazardous and toxic waste disposal company focusing on the recovery and recycling of hydrocarbons and other waste streams.

The company implements technologies for the remediation of contaminated soils recovery and recycling of waste oils, treatment of oil contaminated water, treatment of acids and alkalies and separation of hazardous waste.

TOX operates in three main segments: Waste Services, Hazardous Waste Services, Industrials Services

The group has operations throughout Australia with a growing presence on the east coast via recent acquisitions.

FY12 results

TOX’s FY12 results continued to impress especially given the current environment. FY12 revenue was $207.9 million, a massive 45% increase on the prior year’s result.

Over the year NPAT grew 31% to 17.2 million, whilst EPS increased 15% to 16.3 cents a share. The company also managed to increase its dividend over the period by 33% to 4 cents a share, fully franked.

The group’s gearing ratio rose from 11% to 30%, but that was largely due to the acquisition of DoloMatrix earlier in the year. Despite the rise in gearing TOX’s balance sheet remained healthy, with free cash flow increasing from $63.4 million in FY11 to $142.5 million in FY12.

Diversification and growth

The above graph shows the diversity of TOX’s earnings stream. The segments we would consider to be most at risk are oil and gas, and mining.

TOX’s client base in these areas include Woodside Petroleum, Fortescue Metals and Origin Energy, all of which are less likely to cut TOX’s services than the smaller commodity players.

The acquisition of DoloMatrix, which was completed in February, only contributed about a quarter’s worth of revenue in FY12 and as such we see it being a major contributor to growth in FY13.

The synergy benefits of the acquisition should begin to come through in the coming year, and are likely to fully materialise following the acquisition’s successful integration.

Outlook

TOX’s FY12 results represented another year of stellar growth. We are expecting another strong year from the company, with the DoloMatrix acquisition likely to spur growth in the current period.

We see this growth translating to further share price gains in the near-to-medium term.

This article was distributed to our members on November 2nd, if you would like further information you can sign up for FREE 7day recommendations and access all our research files on not only Tox but all our current trading ideas. Simply click here and starting trading today.

Origin Energy Limited (ORG) Stock To Sell

Origin Energy (ORG) is involved in gas and oil exploration and production, power generation and energy retailing.

As a leading Australasian integrated energy company, ORG participates in most segments of the energy supply chain, including natural gas and oil exploration and production, electricity generation, and energy retailing.

The group has significant operations in New Zealand through its 52.8% interest in Contact Energy, New Zealand’s largest energy provider. ORG and Conoco Phillips each hold a 37.5% stake in the Australia Pacific LNG Project (APLNG), which supplies gas to power stations in South East Queensland.

ORG also has a 42.5% stake in the Victorian BassGass project (AWE owns 57.5%), which supplies gas to Victoria from the Yolla gas field in Bass Strait.

Weak start to FY13

It was a disappointing September quarter for ORG, which reported a 3% year-on-year on fall in revenue to $224.5 million.  This was despite a rise in average selling prices.

Production of 33.1 petajoules (pj) was 10% lower than the same period the year before as BassGass was shut down due to the Yolla Mid Life Enhancement project.

Whilst BassGass has come back on line, it has been a major headache for ORG.  The project’s cost has blown out from the original $345 million estimate in 2009 to up to $580 million.

The September quarter production numbers followed a solid FY12 result that included a 33% lift in underlying profit to $893 million. The Energy Markets business experienced strong 33% growth in underlying EBITDA, with electricity volumes rising 26% following the acquisition of NSW’s power assets.

Offsetting this, however, gas volumes in Victoria and NSW fell during the year due to mild weather.  Also, ORG was forced to pay more for natural gas and electricity, which impacted gross margins.

Poor FY13 guidance

ORG’s FY13 guidance was disappointing to say the least. The group forecast no growth in underlying profit, citing fewer new capital investments, volatile commodity prices, regulatory uncertainty and changing demand patterns in Australia.

Capital spending plans have been curtailed, with ORG instead focussed on the delivery of APLNG. As a result of this change in strategy, ORG recorded significant impairment of projects in FY12 including Transform Solar, wind and geothermal developments and other upstream assets.

ORG’s share of APLNG underlying EBITDA fell 25% on-year, driven by the group’s sell-down of its stake to 37.5% following an agreement with Sinopec, which upped its share from 15% to 25%.

ORG failed to provide clarity on the timeframe for the remaining divestiture of its APLNG stake.

Outlook

For ORG, the significant scale back of its capital spending plans signals a diminished growth outlook. Sentiment towards ORG has worsened considerably since the FY12 profit release in late August, with investors taken aback by the weak FY13 outlook.

We expect the negative sentiment to continue in the near-to-medium term, which is likely to further weigh on the stock price.

Bradken Limited (BKN) Stock To Sell

Bradken Limited (BKN) manufactures and supplies industrial products and maintenance services to the mining minerals processing rail and industrial markets.

The company's products include ground engaging tools, mill liners, crusher liners, freight wagons, bogies wear plates, crawler systems, along with mining services and rail maintenance. BKN’s five divisions are mining products, rail, power and cement, engineered products and industrial.

FY12 results

BKN’s FY12 results did not really surprise the market too much given it downgraded guidance in late April. NPAT for FY12 was $100.5 million, a 15% climb on the FY11 result.

Sales over the 12-month period jumped by 26% to $1.45 billion. Earnings per share actually decreased over the year from 60.7 cents, to 60.5 cents, as the company expanded its capital base.

The most worrying aspect about BKN’s results was the decline in margins. EBITDA margin decreased from 17.07% to 14.93%, a significant move and the first contraction since 2009.

Commodity prices and the mining industry

The above chart shows the Commodity Price Index (CRB Index), which comprises 19 different commodities and represents broad commodity price trends.

The CRB index clearly shows a decline in commodity prices over the last six weeks. How does this affect BKN? In FY12, 78.2% of the company’s sales came from resources related companies.

As commodity prices decrease new mining projects and expansion plans become less viable, which in turn leads to less capital expenditure, which ultimately hurts BKN.

The correlation between BKN (green line) and the CRB index (white line) is evident in the above chart.

Outlook

BKN’s FY12 results may not have looked bad on the surface, but were beginning to show some worrying signs.

Declining margins are a real concern especially in the current environment where increased competition is likely to lead to all contractors having to lower their bid prices to get any work.

The group reframed from giving qualitative or quantitative FY13 guidance during the release of its FY12 results or at its AGM.

This is usually a worrying sign, because if they had good results they would be inclined to mention them either with specific numbers, or at least comment on whether the results would be similar to the previous period.

The correlation between the CRB index and BKN is unmistakable; and given the future uncertainty surrounding the US elections and the US ‘fiscal cliff’, we see more commodity price weakness on the horizon and thus a further deterioration in the BKN share price.

This article was distributed to our members on November 1st, if you would like further information you can sign up for FREE 7day recommendations and access all our research files on not only Bradken but all our current trading ideas. Simply click here and starting trading today.

Macquarie Group Limited (MQG) Stock To Buy

Macquarie Group (MQG) is Australia’s leading listed Investment bank and has offices all around the globe.

The company is well diversified with six different operating groups which include:

- Macquarie Capital: Which includes corporate advisory, equity, debt and private capital markets businesses, and undertakes principal investing

- Macquarie Securities: Activities include institutional and retail derivatives, structured equity finance, arbitrage trading, synthetic products, capital management, collateral management and securities borrowing and lending

- Fixed Income: Currencies and Commodities: Provides a variety of trading, research, sales and financing services across the world with an underlying specialisation in interest rates, commodities or foreign exchange

- Macquarie Funds Group: Full-service asset manager

- Banking and Financial Services: The primary relationship manager for Macquarie Group’s retail client base

- Corporate and Asset Finance Group: The lending and leasing business of Macquarie Group

1H13 Results

Today MQG reported its 1H13 results with its first-half dividend and pre-tax profit beating market expectations.

The company’s 1H13 net profit was $361 million, up 18% on the prior corresponding period. This actually missed consensus earnings by 3%.

Operating income dropped to $3.1 billion, a 5% fall on 1H12.

What impressed was MQG’s ability to adjust for the loss of income with a 9% reduction in operating expense, showing its focus on cost savings.

Return on equity (ROE) increased from 5.7% in 1H12 to 6.6% in 1H13, highlighting a more profitable deployment of shareholder funds.

The group’s EPS grew by 22% on the prior corresponding half to $1.06. As the above shows, this is the company’s first half of positive EPS growth in more than five years and with think this could be the turnaround for the company’s fortunes.

Another item we found impressive with the results was the dividend payment. It climbed $0.10 from the 1H12 payment, to $0.75.

Outlook

MQG’s 1H13 results were impressive to say the least.

Out of all the figures released today the numbers we liked the most were the reduction in operating expenses, the increased dividend payment, and the return to EPS growth.

All the above mentioned figures show us that MQG has turned a corner and we believe this will lead to continued share price appreciation.

Crown Limited (CWN) FY12 Results Impress

Crown (CWN) manages a variety of gaming and entertainment facilities, including, bars, restaurants, nightclubs, cinemas and retail outlets. It also develops hotels and conference center facilities.

The company wholly owns and operates two integrated resorts; the Crown Entertainment Complex in Melbourne and Burswood Entertainment Complex in Perth. Mr James Packer currently owns a 48.1% stake in the group.

CWN also has an interest in several different projects including: 33.6% interest in Melco Crown entertainment, which is based in Macau, 50% interest in online gambling site Betfair, 24.5% interest in Cannery Casino Resorts in the US, 50% interest in Aspers Holdings (UK) which operates three regional casinos in Newcastle Swansea and Northampton, 10% interest in Echo Entertainment.

FY12 Results

CWN’s FY12 results continued to impress against the backdrop of a challenging consumer environment. The company reported normalised FY12 NPAT of $415.0 million, which was an increase of 22% on the prior corresponding year.

CWN’s Australian casinos reported revenue growth of 8.9% to $2,630.1 million, with normalised EBITDA up 5.1% to $736.9 million. A breakdown of the two main facilities showed that Crown Melbourne’s normalised EBITDA grew 1% to $510.6 million, whilst Burswood EBITDA gained 15.9% to $226.3 million.

The company declared a final dividend of 19 cents, which equates to a healthy yield of over 3.5%.

Six-star hotel

Today CWN announced that it had had received stage one approval from the NSW government to build a new $1 billion six-star hotel resort with VIP-only gaming facilities at Sydney’s Barangaroo.

This is stage one of a three stage process and if approved would be Australia’s first six-star Casino. This is an interesting move for CWN as it had been previously thought that it would try to take over Sydney’s Echo Entertainment (EGP).

The whole development faces an uphill battle, with EGP currently holding the only casino licence in Sydney, and an exclusivity agreement in place until November 14, 2019.

CWN will have a casino business in Sydney, Mr Packer has made this abundantly clear in the past. The questions that remain are when it will happen and whether it will be a takeover of EGP or a new complex all together.

The new complex won’t happen until the exclusivity agreement expires as the project would be unviable without at least a VIP gaming facility.

Outlook

CWN”s results speak for themselves, they were able to grow earnings in a tough consumer environment. The purchase of EGP could still be CWN’s ultimate plan, as it has applied to increase its stake in the company to 25%.

Whilst a new gaming facility may be a longer-term plan for CWN, we see it more as a back-up if it can’t acquire EGP. There is also a possibility that the whole plan is a move to scare EGP into selling as the increased completion in the VIP segment may be too damaging to EGP’s earnings.

Overall we see any move that CWN makes into the Sydney’s casino market as good one.

Goodman Group (GMG) Good Assets Combined With Solid Growth

Goodman Group (GMG) is an integrated commercial and industrial property group that owns, develops and manages real estate including warehouses, large scale logistics facilities business parks and offices globally.

The group also offers a range of investment property funds, giving investors access to specialist fund management services and commercial and industrial property assets.

The company is broken up into three main divisions:

• Investment


• Development


• Management

The company operates in Australia, New Zealand, Asia, Europe and the United Kingdom. GMG is a stapled security comprising a unit in the trust and a share in the management company.

FY12 Results

GMG’s FY12 results showed another year of continued growth.  Operating profit was $463 million, up 21% on FY11. Operating EPS was 30.5 cents a security, which was an 8% improvement on the FY11 result.

The group was also able to increase its dividend on FY11 by 3% to 18 cents a security. GMG’s results were impressive and the group guided for continued growth in FY13, with an expected operating profit increase of 13.2% to $524 million.

The assets

A breakdown of the GMG’s divisions shows the quality of its assets. The investment division managed to maintain an occupancy ratio of 96%, a retention rate of 80% and like-for-like rental growth of 2.8%.

These are tremendous results given the state of global economy and are real reflection of the quality of the property portfolio and the quality of GMG’s customers.

The group’s development division has over $1.9 billion in work in development spread around Europe, Asia, and Australia. GMG also expects to grow its work in development to $2.5 billion in this half, with entry into the North America market adding to diversity.

The development segment takes a low risk strategy on new developments, getting an average of 80% pre-commitment on all new projects. This ensures that that the group is not left ‘holding the bag’ with excess properties.

The management division grew its assets under management by 12% in FY12. We expect continued growth in this segment as the hunt for yield continues.

Outlook

GMG’s FY12 results were impressive, with all divisions recording solid growth. The group is also expecting double digit growth in FY13.

We are inclined to believe that they will achieve these results, given the quality and diversity of its asset base. Overall we think GMG has good growth prospects and quality assets that will see continued share price appreciation.

This article was distributed to our members on October 23rd, if you would like further information you can sign up for FREE 7 day recommendations and access all our research files on not only Goodman Group but all our current trading ideas. Simply click here and starting trading today.

Stock To Watch JB Hi-Fi (JBH)

JB Hi-Fi (JBH) is a chain of electrical stores, selling leading brands of hi-fi, speakers, televisions, DVDs, cameras, car sound, home theatre, computers, white goods, portable audio and a variety of music, games and movies.

The company has been able to grow its sales over the last 5 years in what can only be described as the most difficult trading conditions for retailers in 20+ years.

JBH’s strategies for growth are simple; increase the number of stores, increase sales, and through that, increase profit. JBH’s expansion is not only in the Australian market, but also in New Zealand. Since entering the New Zealand market in early 2007 it has opened 13 stores.

FY12 Results

JBH’s FY12 results were ok without being great, but in context of the consumer environment over the twelve months, the results was great in our view.

Sales for the twelve months to June 30 were $3.13 billion, up 5.7% on the prior year. This was a solid result given that major retailers including Myer, David Jones and Harvey Norman all recorded negative growth.

Net profit was $104.6 million, down 4.6% on the FY11 result. The company blamed heavy price-cutting by rivals which saw its EBIT margin decrease by 33 basis points to 5.2%.

What is one of JBH’s major strengths is its cost of doing its business (CODB). Its COBD fell 70 basis points to 14.9%, which is much lower than competitors Dick Smith, David Jones and Myer, which were at 23.5%, 29.0%, and 32.1% respectively.

Consumer environment

As mentioned JBH has been operating in a weak consumer environment, however it could be on the verge of a turnaround. The consumer sentiment index rose 1.0% to 99.2 in October.

A reading below 100 indicates that more consumers are pessimistic about the economy than optimistic. Despite more pessimist than optimists the index is at its highest point since February 2012.

Helping sentiment was the RBA earlier this month cutting the official cash rate by 25 basis points and hinting it was moving towards a more easing bias. We believe this move will help grow consumer confidence which in turn should help grow retail sales.

The turnaround in consumer sentiment may be closer than many think with Woolworths CEO Grant O’Brien saying yesterday “I think there's a little bit of light at the end of the tunnel in terms of the customer feeling better.”

Looking ahead

JBH’s full year results showed sales growth, which in an environment where other retails are contracting, is a positive.

The company’s low CODB when compared with its competitors also allows it to continue its aggressive pricing strategy; this ensures it does not lose its current market share and helps it actually gain market share.

As for the consumer environment we are finally seeing signs of a turnaround and we would not be surprised if the next consumer confidence reading indicates more optimists than pessimist.

We have been hesitant to recommend longs on any retailers as of late given the tough environment, but if there is a turnaround in this area we believe JBH will be one the first to benefit.

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Wotif Holdings Stock To Sell

Wotif.com Holdings (WTF) provides online travel services via itswww.wotif.com website. The website offers last-minute travel accommodation, across hotels, motels, serviced apartments, resorts, guesthouses and bed & breakfasts.

While the company is the dominant hotel booing site in Australia, it is attracting more competition and the historically strong rates of growth are becoming increasingly hard to replicate.

The company’s recent results saw higher revenue and profits but still disappointed the market, with the high Aussie dollar constraining overseas booking of Australian hotel rooms

FY12 results

At first glance, WTF’s FY12 results weren’t that bad. Net profit rose 14% to $58 million, with total revenue up 5% on the back of accommodation and flight booking growth.

EBIT margin increased from 56% to 59%, with the group demonstrating good cost control in a period of revenue growth.

However the operating environment has weakened noticeably in the opening months of FY13, reducing the odds of a repeat performance this financial year.

CEO resigns

Last month, WTF CEO Robbie Cooke announced he would leave the group at the end of the year to take up the top role at Tatts Group (TTS). Cooke’s intention to depart was met with a negative reaction, as his seven year tenure coincided with a period of strong growth for the group.

Given there was no immediate successor, his departure introduces leadership uncertainty just as the company is grappling with a slowing domestic economy.

Squeezed by competition

The biggest long-term threat to WTF is the entrance of new competition in the online accommodation market. The market itself has very low barriers to entry, meaning it wouldn’t be that hard for WTF’s competitors to muscle into its territory.

Indeed this seems to be happening already with US-based Expedia and Priceline expanding their presence in Australia through the development of smart phone apps.

Increased competitive pressures are also a likely reason why the value of room nights sold through WTF has stagnated around $7 million a year from FY10.

Outlook

The near-term outlook for WTF is uncertain at best. Its domestic-oriented business faces a period of weak revenue growth as TTV declines amid cutbacks in consumer discretionary spending.

Moreover, the Aussie dollar is still trading at lofty enough levels to encourage consumers to travel internationally rather than domestically. WTF admitted as much in its FY12 results, saying the high dollar was “situation normal”.

Flight bookings make up less than 10% of overall revenue, so whilst there may be some benefit to WTF from increased offshore travel, it won’t be enough to mitigate the impact to domestic accommodation revenue.

Moreover, greater competition from companies like Expedia and Priceline is expected to eat into WTF’s domestic market share, potentially resulting in slower revenue growth and margin pressure over the longer-term.

Karoon Gas Australia (KAR) Stock To Watch

Karoon Gas Australia (KAR) is an energy exploration company and is a member of the S&P ASX200. The company is focused on identifying, exploring and developing acreage that is highly prospective for oil and gas.

KAR currently has four focus areas - the Browse Basin (Western Australia), the Santos Basin (Brazil), Tumbes Basin (Peru) and the Maranon Basin (Peru).

Santos Basin

KAR has a 100% equity interest in five oil blocks in the Santos Basin, offshore Santa Catarina in Brazil.

The Basin has a history of oil discoveries, and importantly, KAR anticipates that new fields within its acreage can quickly be brought to production due to relatively shallow water depths and their proximity to existing infrastructure.

Recently KAR announced that it had reached a farmout agreement with Pacific Rubiales Energy (PRE) for the Santos Basin. The agreement was for 35% equity of its 100% interest in four offshore exploration blocks, with options for a fifth.

KAR will receive $40 million in cash and PRE has agreed to pay for the first US$70 million of the costs for each of the first two wells in KAR’s upcoming 3-well Santos Basin exploration program.

PRE will also share its 35% of the costs and KAR will remain the operator.

Browse Basin

KAR’s Browse Basin drilling campaign holds long-term promise for the group. It owns 40% of the project with the remainder being owned by joint venture

KAR will begin drilling at the Browse Basin in Western Australia in the coming weeks. The drilling will begin at the Boreas-1 well, the first of up to an eight well exploration and appraisal project.

Outlook

KAR is an exciting oil and gas explorer, with several promising drilling campaigns about to get underway.

In particular, drilling at the first well, Kangaroo 1, at the Santos basin will commence in November this year and will take anywhere between 60 to 80 days. The company is also beginning drilling at the Boreas-1 well, which has some very promising targets.

Overall we think the company has plenty of near-term catalysts on the horizon with the aforementioned drilling projects likely to drive KAR’s share price.

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Mount Gibson Iron (MGX) Poor FY12 - Stock To Sell

Mount Gibson Iron (MGX) is Western Australia’s fifth-largest iron ore miner based on export volume. The company was one of the first new iron ore producers in the mid-west region of Western Australia and it took advantage of that position.

MGX experienced a considerable boost in 2006, when it acquired Aztec Resources and its Koolan Island project. However, the group’s FY12 result showed contraction in profit in over five years.

FY12 Results

MGX’s FY12 performance was a real change from its previous years of growth.

Tonnes of ore sold for FY12 was 5.21 million, which down a 0.5% on FY11.  Whilst this may not look like that bad of a result, it came on the back of a 29% increase in production, which is an indication of a lower grade of ore.

Sales revenue over the 12 months decreased 3.5% to 648.5 million, with the company blaming a lower price for its ore. Net profit was down a massive 28%, to 172.5 million.

The group did have $292.7 million of cash on hand, but this was down from $387 million a year earlier. Operating cash flow fell 75.6% to $56.2 million over the financial year, and if we see a repeat decline in FY13, MGX’s cash balance is likely to experience another steep drop.

Iron ore

Iron ore prices had a dramatic fall since the end of the financial year, dropping from a little under $135 a ton to a low of around $86 a ton early September. This represented a massive 36.3% decline.

Since then the iron ore price has risen over 32% on the back of an increase demand by China. China, which accounts for over the 60% of global demand for the ore, saw its exports grow at the fastest rate in over three months in September.

Exports grew by 9.9% compared to a year earlier, which was well above the 5.5% forecasted by economists. What we think is alarming for MGX is that over the period of this increased demand MGX’s share price has been more or less flat.

This compares to other pure-play iron produces like Fortescue Metals and Atlas Iron which have seen their share price increase by over of 30%.

Outlook

MGX’s FY12 results were disappointing to say the least, and unless there is a material pick up in iron ore prices we don’t see a return to growth in the near term. Whilst the iron ore price has recovered 32% since its September low it is still down over 15% since the end of FY12.

What is worrying is that despite the recent rise in the ore price, MGX’s share price was not able to hold on to any of its gains like its peers did. This indicates that the selling pressure relates to deteriorating company fundamentals such as the lower grades it mined in FY12.

Toll Holdings (TOL) Stock To Sell

Toll Holdings (TOL) is Australasia's largest provider of integrated logistics services.  The company’s assets are wide-ranging in the transport space, and cover trucking, rail, air, shipping and ports.

It generates annual revenue of $8.2 billion and operates an extensive network of over 1,200 sites in 55 countries, with in excess of 45,000 employees.

The group is divided into six segments:

• Toll Global Express


• Toll Global Logistics


• Toll Global Forwarding


• Toll Specialized and Domestic Freight


• Toll Domestic Forwarding


• Toll Global Resources

FY12 results

TOL’s FY12 results were disappointing to say the least.

On a reported basis, FY12 NPAT was $71 million, a 75.9% decrease on the FY11 numbers. The result was hampered by a $215 million impairment charge relating to Toll Express Japan (Footwork Express) and properties in Australia.

FY12 EPS on an underlying basis was 41.4 cents per share which was a 7.1% decrease on the prior year’s result. The fall in profit came despite a 5.9% increase in sales revenue, which is evidence of a contraction in margins.

Pressures

TOL seems to be fighting a war on several fronts at the moment, with many of its operations under pressure.

The group’s domestic operations are being squeezed by rival Linfox, which is pricing its services aggressively in an attempt to gain market share.

This is a trend we think will continue over FY13, and TOL’s margins are likely to contract further as it becomes forced to respond to Linfox’s pricing moves.

We also expect Toll Global Resources to come under pressure, with our major concern being its leverage to the mining capex cycle. As miners cut back their capital expenditure we expect TOL’s resources division to also face some hardships.

Outlook

TOL did not provide any specific guidance for FY13, but management did indicate earnings growth could be achieved without a macro recovery. We think management are being optimistic and are setting up their shareholders for disappointment.

Overall we cannot see much positive news on the horizon for TOL and as such there is likely to be further weakness for its share price.

Positive Momentum Makes NIB (NHF) Stock To Watch

NIB Holdings (NHF) is a health insurance company, providing affordable health cover to almost 880,000 people nationwide.

Established over 50 years ago, with premium revenue of more than $1 billion in 2012, NHF is Australia’s fifth largest health fund and the only ASX-listed health insurer.

The company offers a wide range of policies suitable for customers across the board, but its focus on the youth market has helped it to achieve the fastest growth amongst the major players in the sector.

FY12 Results

NHF’s FY12 results continued to show the growth that we have come to expect from the company, as the below demonstrates.

Premium revenue over FY12 grew 11.5% to $1.12 billion.

Net underwriting profit was $70.7 million, which was a 15% increase on the prior corresponding years. EPS was 14.8 cents per share, which was a jump of 8% on the prior years.

Impressively, return on equity climbing 31.5% over 2012, to 21.7%. The group also has a healthy balance sheet, with no debt and operating cash flow increasing 52.4% to $134.6 million.

Strategy for growth

NHF has solid policy growth of 4.7%, which was well above the average industry growth rate of 3.7%.

The company’s growth has been driven by its focus on people under the age of 40, but has been slowly expanding its base and looking to increase in the following areas:

• Over 55s


• Corporate market


• Western Australian market


• International workers and students

We believe that increased investment on the above mentioned areas will be of benefit to NHF going forward. The company also has room for expansion, with no debt and $134.6 million in operating cash flow generated over FY 2012.

Outlook

NHF’s core health insurance business saw all of its key metrics improve in FY12, with policy subscriber growth complemented by a successful implementation of a price increase.

We think the company is in a great financial position to grow its earnings either via acquisition or organic investment. Given the current falling interest rate environment we could see another movement back into income stocks such as NHF – with a current dividend yield of 5.5%.

We think the NHF’s earnings growth potential and solid dividend yield will continue to deliver gains for its share price.

Transfield Services (TSE) Shares To Sell

Transfield Services (TSE) delivers essential services to key industries in the resources and industrial, infrastructure services and property and facilities management sectors.

A leading global provider of operations, maintenance, and asset and project management services, TSE’s operations span Australia, New Zealand, the United States, the United Arab Emirates, Qatar, New Caledonia, South East Asia, India, Chile and Canada.

Late August the company released its FY12 results and announced the departure of CEO Peter Goode.

Earnings disappoint

TSE’s FY12 results showed a return to profit that fell short of market expectations. The company reported FY12 NPAT profit of $85.0 million which was a swing from the $19.2 million loss a year earlier.

However on an underlying bias NPAT was down 15.1%.  Revenue over the period jumped 13.9% to $3.14 billion. Another worrying sign was return on capital employed, which fell to its lowest level in over five years, to 8.8% from 12.4% in FY11.

Easternwell and Goode

Back in December 2010 TSE purchased Queensland-based resources services provider, Easternwell, for $575 million. The business has generally disappointed with FY12 earnings missing the guidance the company provided in April.

The business is going to be under continued pressure as conditions in the mining sector remain subdued on the back demand weakness out of China.

We make mention of the Easternwell business because we think that the incoming CEO may look at writing down some of the $346 million in intangibles assets currently on the books.

Outlook

TSE’s underwhelming FY12 results and lacklustre guidance of $125 million -$135 million are not good signs for the company. The share buy-back, which we believe has been underpinning the stock price, has now ended, so that’s one piece of support that is no longer there.

Whilst TSE is less leveraged to the mining sector than other service contractors, it has some exposure which will come under pressure. We believe these concerns, combined with the possibility of writedowns in the future, will weigh on TSE’s share price in the near-term.

CSL Limited (CSL) Helped By Weaker Dollar

CSL Limited (CSL) develops, manufactures and markets human pharmaceutical and diagnostic products derived from human plasma.

The company’s operations are concentrated in Australia, Germany, Switzerland and the US, although its reach extends to almost 27 countries with over 10,000 employees. CSL’s main operational businesses include CSL Behring (including CSL Plasma) and CSL Biotherapies.

The company’s products include pediatric and adult vaccines, infection and pain medicine, skin disorder remedies, antivenoms, Albumin, anticoagulants and immunoglobulin’s (IG).

FY12 results:

As the above shows CSL has a solid history of growing its earnings. Total sales for FY12 were $4.4 billion, which was on a constant currency basis is a 12% jump on FY11.

On a constant currency basis CSL’s FY12 NPAT was $983 million, a 14% increase on the previous year’s result. The balance sheet is also healthy with FY12 cash flow from operations was up 14% to $1.16 billion and $1.16 billion of cash on hand.

Aussie dollar:

Given the company earns a majority of its earnings in US dollars the falling Aussie dollar is a benefit to CSL. Several of the pillars that have been holding up the Aussie dollar are not looking as stable as they once were.

One of these pillars being Chinese demand for Australian commodities is not as strong as it once was, and this in turn means less demand for our currency. Another fact hurting the Aussie dollar is the RBA moving to an easing bias, as characterised by this week’s interest rate cut.

Buy-Back

Another factor likely to underpin the company’s stock price is the undertaking of share-buybacks. The company is currently in the middle of an on-market share buy-back that it is 77% complete.

What was interesting in the release of CSL’s FY12 results was the fact it flagged the potential for another on-market share buy-back. Given its strong cash flow, we think the company will be able to complete another buy-back without stretching its balance sheet.

Outlook:

CSL appears to be in solid shape as we move further into FY13.

The company is expecting constant currency NPAT growth of 12% in FY13, which we think is achievable given its recent history of meeting or exceeding guidance. We also think that a weaker Aussie dollar and the likelihood of another share-buyback will underpin further share price gains.

Our Recommendations:

On the 5th of October 2012 we issued a recommendation to our clients of the  Traders Report to purchase CSL at $46.10. The stock has since moved to a price of $47.17 as of 11:30am October 11th.

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iiNet (IIN) Web Grows FY12 operating profit up 47%

iiNet (IIN) is the third largest Internet Service Provider (ISP) in Australia.

IIN has built its own network (the iiNetwork), boasts the largest Voice over IP network in the country, abolished monthly phone line rental with Naked DSL and has released wireless modem-and-phone-in-one BoB to the world.

Acquisitions driving growth

A large part of IIN’s growth has come from acquisitions and evidence suggests the group is effectively managing their integration into the current business structure.

In late 2011, IIN purchased TransACT, an ISP provider in regional Victoria and the ACT. Early this year, it acquired South Australian-based ISP Internode.

The acquisitions helped lift FY12 revenue by 19%. IIN was able to report another blockbuster earnings result, with full year operating profit rising 47% to $145 million.

The group expanded its profit margins thanks to revenue increases, efficiency gains and operational cost-outs. The robust growth in profit also helped deliver a 17% jump in the full year dividend, to 14 cents (8 cent final dividend).

Cross selling benefits

A key benefit of IIN’s growth strategy is the cross selling opportunities available to it.

IIN offers a range of products and services to both residential and business customers. In addition to providing internet access, the company offers hardware (modems, routers, etc.), television (fetchtv), NBN, and phone services.

The complementary nature of these products, and the recent growth of IIN’s client base, sees it well placed to deliver on its aim of increasing the average product per customer from 2 to 3.

Outlook

A large part of IIN’s earnings growth has come from acquisitions, and the group is on track to achieve cost synergies from TransACT and Internode in FY13. The synergies are expected to drive cash flow and net profit growth this financial year.

Longer-term, the growth in IIN’s customer base, coupled with its expanded product offering, should provide the company with more cross selling opportunities.

We are confident in IIN’s ability to continue its strong growth path, helping to boost dividends and the return to shareholders.

Caltex Australia (CTX) Stock To Watch

Caltex (CTX) is Australia's leading transport fuel supplier and convenience retailer and the only integrated oil refining and marketing company listed on the ASX.

CTX operates two major refineries, at Kurnell in Sydney, and Lytton in Brisbane. The company's products include petroleum motor oil lubricants diesel and jet fuel.  Caltex also operates convenience stores, fast food stores and service stations throughout Australia.

Caltex supplies approximately 35% of all transport fuels in Australia, and is a net importer of petroleum products.

1H Results

CTX’s 1H12 results were a marked improvement on the first half in 2011. On a replacement cost, basis EBIT was 329 million, a jump of 70%. EPS was 74 cents a share, compared to 43 cents per share in 2011.

The result was underpinned by CTX’s marketing division which supplies and distributes transports fuels. The major drag on the result was its refining business, specifically the Kurnell refinery.

Closing down Kurnell

On July 26 2012 CTX announced that following a major review of its operations it would be closing down refining at its Kurnell plant. The site will be converted to a major import terminal, which is expected to begin by the end of 2014.

The new terminal will be supported by a long-term product supply agreement with Chevron. As Chevron own 50% of CTX we believe this agreement will be on beneficial terms to CTX.

The conversion is expected to cost approximately $430 million, of which the company has already raised the cash via a subordinate notes issue. We like this decision as it reduces the company’s exposure to refining earnings volatility and asset concentration risks.

Outlook

Last Friday the group reported an increase in August refining margins. The un-lagged margin increased to US$17.35 a barrel, 42.33% higher than July’s figures.

Margins were supported by strong regional demand, whilst supply continued to be impacted by continual regional shutdown activity. We believe that the improvement in margins and the de-risking of its earnings via the shutdown of the Kurnell refinery will continue to drive the share price.

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Regis Resources (RRL): Garden Well Project Begins

Regis Resources (RRL) is an Australian gold production and exploration company. Its management team has a successful track record of developing mid-sized gold operations within Australia and Africa.

RRL’s flagship asset is the Duketon Gold Project in Kalgoorlie, in WA. The project comprises of 387 leases that cover over 2,030 sqkm of ground. These leases contain three main deposits in Moolart Well, Garden Well and Erliston.

FY12 results

RRL’s only producing mine is the Moolart Well. The group reported June quarterly gold production of 26,228 ounces, at a cash cost of $532 (pre-royalties).

Although cash costs rose slightly from the March quarter’s $519, RRL’s costs were still lower than its major peers due to the higher reserve grade mined and the low-cost nature of its operations.

RRL had guided for FY12 production to be between 95,000 ounces – 105,000 ounces, but beat its own guidance with 105,413 ounces produced. The company reported an FY12 net profit of $74.7 million, which was almost double FY11’s result and came on the back of a 58% jump in gold sales.

Projects with significant potential

The Moolart Well mine is projected to consistently produce around 100,000 ounces of gold a year for at least the next 4 years.

The company began producing from Garden Well earlier this month, and has forecast output from this mine to be between 220,000 240,000 ounces in 2013, at a cash cost of $400 - $450 an ounce.

RRL expects to commence development of the Rosemont Gold Deposit in the coming quarter. Taking into account Garden Well’s output and the development of Rosemont, RRL expects to produce over 400,000 ounces of per annum, significantly higher than FY12’s number.

Outlook

With FY12 now over, FY13 and FY14 earnings expectations will become more prominent in valuation models.

RRL is planning a dramatic increase in production over the coming years, which is likely to translate into a massive increase in earnings and cash flow from FY13.

With Garden Well and Rosemont about to ramp up output, the catalysts are in place for RRL to re-rate to a higher price earnings multiple, which is expected to translate into further share price gains.

Australian Pharmaceutical (API) Resilience In A Tough Economy

Australian Pharmaceutical Industries Limited (API) is engaged in the distribution of pharmaceutical and healthcare products in Australia and New Zealand.

The company is divided into three main segments; Pharmacy Distribution, Retail, and Manufacturing.

Pharmacy Distribution distributes pharmaceutical and medical products to pharmacies. The division distributes to customers from its Distribution Centres throughout Australia.

Through Retail, API sells various health, beauty and lifestyle products and operates retail store brands including Soul Pattinson, Priceline, Priceline Pharmacy and Pharmacist Advice.

The Manufacturing business involves the ownership of rights in pharmaceutical medicines and consumer toiletries.

Latest results

API’s 1H12 results were a marked improvement on the same period in 2011. Underlying net profit was $11.8 million, up 10.3% from the prior corresponding half.

Profit growth came despite revenue dropping 12.5% to $1.61 billion. Underlying operating margin increased from 1.5% to 1.8%, highlighting the effectiveness of cost cutting strategies the company has been implementing.

Another aspect that impressed was the 3.1% growth in the group’s retail sales on the prior period. Comparable store sales also grew at a solid 2.8%. The retail growth is especially encouraging considering the tough trading environment in which several other retailers have been experiencing.

Moving forward

Approximately 75% of API’s earnings in the first half were from its wholesale business. The company is targeting an even split in earnings between its retail and wholesale divisions. The retail growth is expected to come from Priceline pharmacy.

API has been working on infrastructure for several years and the company believes it has the ability to double the current number of Priceline stores. We believe the split will be beneficial for the group’s bottom line given the gross profit margin for its retail arm is 23%, compared to wholesale’s 7.6%.

On September 24th, API announced that Priceline has expanded its store network to 350 stores. This decision reflects increased interest from pharmacists in joining Priceline, and highlights the growth potential of the Priceline chain.

Outlook

API has undertaken some significant structural changes that are starting to deliver benefits. Through increased operating margins the company was able to record an increase in profit despite a fall in revenue.

We believe that given the tough consumer environment, companies that are able to achieve efficiency gains will be well placed to prosper when consumer sentiment improves, and API is a prime example of this.

PanAust Limited (PNA) Stock To Watch

PanAust (PNA) is a mid tier miner that holds mineral assets in Laos and Thailand.

In Laos, PanAust operates the large Phu Kham copper-gold operation, which commenced production of copper-gold concentrate in April 2008. The Ban Houayxai Gold-Silver mine which is also located in Laos commenced commercial production in June 2012.

First half results

PNA reported a first-half net profit of $65.7 million, which was a 5.4% fall on the prior corresponding period. The fall came despite a 1.5% rise in revenue to $306.2 million, with a sharp fall in copper and gold prices to blame for the differential.

On the positive side PNA announced a maiden interim dividend of 3 cents a share, as it wraps up a two-year, US$450 million capital expenditure program.

The company reiterated its full-year production guidance of around 64,000 tons of copper, 135,000 troy ounces of gold and 650,000 ounces of silver.

Growth

As mentioned the group has spent US$450 million on capital expenditure which should hopefully result in further production growth.

PNA recently upgraded certain facilities at its Phu Kham mine and as a result, copper production is expected to rise to between 65,000 tons and 70,000 tons in 2013.

Gold production is also expected to increase by 7,500 ounces.

The Ban Houayxai Gold-Silver commenced commercial production in June 2012.

The second half is expected to deliver over 65,000oz of gold at a cash cost of approximately US$500/oz after silver credits.

Gold and Copper markets

.

The above two charts show the spot price of gold and copper since the start of July.

Both commodities have moved strongly higher, both boosted by the US announcing further quantitative easing.

China manufacturing data continues to be weak. This was today characterised by the reading of the HSBC's Flash September Purchasing Managers Index, which was 47.8.

A reading below 50 indicates contraction.

As such we believe that these continued weak numbers will force the Chinese government into action and provide further stimulus, which in turn will see commodity prices continue to strengthen.

Outlook

PNA produced solid 1H results despite the fall in profit which was due to falling commodity prices.

The company is moving into an interesting phase with much of the previous year’s capital expenditure beginning to pay dividends in the production sense.

We also think that the positive momentum surrounding gold will continue over the next few months, providing further support for PNA shares.

Weekly Update: Stock To Watch G8 Education (GEM)

G8 Education (GEM) is an Australian child care operator, managing 134 centres throughout the country.

The Australian child care centres are concentrated mostly in Queensland and NSW, while in Singapore the group owns or operates 20 child care centres. GEM is the only listed child care operator on the ASX, following the much publicised collapse of ABC Learning in 2008.

Acquisition success

A key plank of GEM’s strategy is buying up independent childcare operators, and extracting synergies from the businesses.

During the half, GEM acquired two child care centres and divested an underperforming centre. This followed a busy FY11 in which the group purchased 54 centres. Importantly, the integration of the acquisitions into the current group structure has been well executed.

Demonstrating this point, GEM’s Kindy Patch acquisition (settled March 14, 2011) helped lift 1H11 revenue 14.4% and EBIT margin 21.5%. In 2H11, revenue was boosted by 16.4% and EBIT margin by 24.4%.

GEM has produced similar outcomes with its other acquisitions because a) it doesn’t overpay for the businesses (its acquisition multiple is only 4x the target’s one-year forward EBIT), b) the businesses are profitable, and c) the centres are in ideal locations, which increases scale.

Yesterday, the group announced that it had acquired 7 more premium childcare and education centres in NSW for $9.2 million (representing 4x EBIT and funded from existing cash and debt).

In addition to expanding GEM’s presence in NSW, the acquisitions were expected to contribute to EBIT immediately post-settlement.

Healthy balance sheet and history of growth

Prior to 2H09, GEM was a loss making entity, but since then the rate of profit growth has been impressive.

Since 2H09, half-year revenue has risen at a 35% compound rate of growth, with the rate of profit growth an even more robust 65.4%.

The balance sheet was in healthy shape, with a net debt to equity ratio of just 19.2% at the end of 1H12.

GEM had a $50 million debt facility which, when combined with existing cash, gives it the flexibility to make acquisitions without undertaking a dilutive capital raising.

With the group now generating positive free cash flow, we are confident in its ability to grow dividend payments. The latest quarterly dividend was 1.5 cents.

Favourable industry dynamics

GEM’s Australian operations receive a crucial level of support from the government with the child care rebate.

The increase in the rebate has significantly outpaced the rate of inflation over the past seven years, and the higher the rebate, the greater the incentive for parents to put their children in day care centres.

The longer term demographic trends are also supportive of GEM’s business. The group noted that since 2006, the percentage of 0-5 year olds attending childcare has risen to 38%, from 33% in 2006.

Moreover, the 0-5 year old population since 2006 has grown at 6 times the rate of the prior 20 years. What these trends tell us is that GEM’s target market is experiencing strong growth, and the child care rebate is increasing the incentive for parents to use the company’s centres.

Outlook

Since turning in a profit in 2H09, GEM has been on a strong revenue and earnings growth path.

The group’s strategy is to grow by acquisitions, and on this front it has succeeded. In addition to increasing market share and boosting scale efficiencies, the acquisitions have been earnings accretive.

Going forward, the government’s child care rebate will continue to offer incentives for parents to place their children in care centres. We believe the market is recognising GEM’s potential, and as such we think GEM is defiantly a stock to watch in the near-to-medium term.

Kathmandu Holdings Limited (KMD) Report Net Profit Decline

Kathmandu Holdings Limited (KMD) is a provider of clothing and equipment for the travel and adventure market.

Retail locations are spread across Australia and New Zealand offering a range of products with technical specifications for different conditions. The company listed on the Australian Stock Exchange in the latter half of 2010.

Kathmandu Holdings has reported an FY12 net profit of NZ$34.85 million, a 10.8% fall on the prior corresponding period.

Revenue over the period was up 13.4% to $347.1 million. Same store sales growth was 5.7% in the year to July.

Despite the sale growth, profit was hurt by lower margins and store refurbishment costs. The group will pay a final dividend of seven NZ cents, fully franked, taking its total dividend for the year to 10 cents.

Fortescue Metals Group Out Of Trading Halt

Fortescue Metals Group Ltd. explores for and produces iron ore. The company conducts business worldwide and is listed on the Australian Stock Exchange.

Fortescue came out of trading halt after it announced that it had  struck a deal to refinance all of its existing bank facilities in order to provide it with additional liquidity and stave off looming debts.

Specifically the group said "this new facility removes these covenants and extends the Company’s debt maturity profile. The earliest repayment date for any of the company’s debt is now November 2015.”

Fortescue said it had received strong interest from a range of parties over potential partnerships on several of its assets, but will only undertake them if they add shareholder value.

Weekly Update: Stock To Watch Oil Search (OSH)

Oil Search (OSH) explores, develops and produces oil and gas in Papua New Guinea (PNG) and Australia.

OSH's major producing operations are the Kutubu and Gobe oil fields and the Moran development.

However, much of OSH's perceived value is in its substantial PNG gas resources, which have been given a boost by partners such as Exxon Mobil investing huge amounts of money in the project.

The company is poised to enter a major new growth phase, driven by its 29% interest in PNG LNG. The gas will be sourced from the Hides, Angore and Juha gas fields, as well as the Kutubu, Agogo, Moran and Gobe Main oil fields.

1H12 results

Although OSH’s 1H12 results showed a 6% fall in net profit to US$107.5 million, much of the fall was attributable to a jump in exploration costs. An interim dividend of US$0.02 a share was declared.

The increase in exploration costs came as OSH seeks more natural gas to underpin an expansion of PNG LNG.

Whilst an increase in costs is generally not desirable, in OSH’s case, the payoff from finding more gas is worth it if this leads to a third LNG train (plant) at PNG.

A positive takeout from the result was a 7% lift in revenue, which occurred amid stronger sales prices and production volumes.

Nearing first PNG LNG production

The PNG LNG project is the big driver of OSH’s share price, as it has the potential to transform the company into a major energy producer.

The project has an expected life of 30 years, a resource estimated at over nine trillion cubic feet of gas and over 200 million barrels of associated liquids.

The project’s two trains will produce close to 6.6 million tons per annum (mtpa), with OSH’s 29% stake yielding approximately 2 mtpa.

There is also the possibility that a third train could operate in the field, which may increase the project’s production to over 8 mtpa.  OSH is currently looking for the gas needed to support the third train, and we are confident of exploration success.

There is around 20 trillion cubic feet of gas in Gulf of Papua and OSH holds significant acreage in the area.

Demonstrating how significant the step change in production will be, OSH’s output is expected to increase to over 16 mmboe in FY14, with that figure then jumping again to just below 25 mmboe in FY15.

This compares to FY12’s production estimate of 6.2-6.7 mmboe, thus implying a significant boost to earnings and cash flow in coming years.

Outlook

With second half production expected to remain strong, OSH stuck to its previous guidance for FY12 production to be within a range of 6.2 - 6.7 million barrels of oil equivalent (mmboe).

Complementing its output, OSH is also likely to benefit from the price of oil, which has risen around 15% since the latter part of June. The key value driver, however, remains PNG LNG.

As we head closer to first output in 2014, and barring no unexpected cost overruns with the project, we expect PNG LNG to become a bigger factor behind OSH’s share price strength.

We anticipate these factors will continue to underpin OSH share price and as such think it’s a stock to watch in the near-to-medium term.

Weekly Update: Cochlear (COH) Stock To Watch

COH clear for gains

Cochlear (COH) researches, develops and markets cochlear implant systems for hearing impaired individuals.

The company currently occupies a ~70% share of the world market for the profoundly hearing impaired (PHI).

COH hearing implant systems include Nucleus and Baha, and are sold in over 100 countries, with direct operations in over 20 countries.

With well over 80% of the group’s earnings not denominated in Australian dollars, the company’s bottom line is sensitive to currency translation.

FY12 Results

COH’s FY12 results don’t look that impressive at first glance.

Net profit was $56.8 million, down 68% on the prior year’s result.

However, this did include a $101.3 million (post-tax) charge relating to the voluntary product recall of its implanted Nucleus CI500 range after an increase in failures in its Nucleus CI512 implants.

Total revenue over the period was down 4% to $779 million.

However if we look at sales on a constant currency terms they were actually up 1%.

Implant sales for the full year were 23,087 units, which was down 6% on the prior year.

Whilst the fall in implant sales would normally give us some cause for concern, especially given the recall issues, the second half sales showed a 15% improvement on the first half.

Aussie dollar

As previously mentioned, COH’s earnings are very sensitive to Australian dollar movements given that over 80% of its earnings are sourced overseas.

Over the last month the Australian dollar has fallen against most currencies, and against the US dollar it has fallen from a little over $1.06 to $1.02.

Against the euro, the Aussie has fallen from about $0.86 to $0.81.

It is well known that there is a strong positive correlation between the Australian dollar and the country’s mining industry.

As such, the recent weakness in the sector is likely to see continued weakness in the Aussie dollar.

Outlook

The recall appears not to have affected COH’s revenue, at least on a constant currency terms.

The company’s long-term position still remains strong, with an aging population likely to support growth for many years to come.

COH’s earnings have always been defensive in nature and we don’t see this changing in the future.

As such we believe that the short-term weakness in the Aussie dollar will continue to see COH’s share price to appreciate in the near-term.

Fortescue Metals (FMG) Announce Power Station Sale

Fortescue Metals Group Ltd. explores for and produces iron ore. The company conducts business worldwide and is listed on the Australian Stock Exchange.

Fortescue Metals announced the sale of the power station at its Solomon iron ore mine in the Pilbara region of Western Australia to TransAlta Corporation for net proceeds of US$300 million.

The company has concurrently entered into a long term Power Purchase Agreement with TransAlta for 100% of the power station’s capacity over the current life of the Solomon mine.

Fortescue CEO Nev Power said the agreement provides for long-term security of power supply to the 60 million tonne per annum Solomon mine, which is currently under construction.

Weekly Update: Res Med (RMD) Stock To Watch

ResMed (RMD) is a leading developer, manufacturer and distributor of medical equipment for treating, diagnosing, and managing sleep-disordered breathing and other respiratory disorders such as sleep apnoea.

RMD operates in over 65 countries through 16 direct offices and a network of distributors, including Australia, France, Germany, New Zealand, Singapore, the UK and the United States.

Latest results

RMD delivered an outstanding FY12 result that came in ahead of market expectations.  Revenue for the June 2012 quarter totalled $3.6 million, a 9% increase on June 2011’s result (constant-currency terms.).

Net income was up an impressive 31% in the same period to $76.8 million. For the full year, revenue grew 10% to $1.4 billion, whilst net profit rose 12% to $254.9 million.

The strong fourth quarter came on the back of healthy flow generator and mask sales in RMD’s core America’s division.

Flow generator sales growth came despite a slowing US economy, highlighting the success RMD is experiencing in penetrating the American sleep-disordered breathing market.

RMD achieved the profit result whilst benefiting from a lower Australian dollar, which helped contain general and R&D expense growth. Quarterly general and R&D expenses were up 3% on-year.

Importantly, the strong result allowed the group to declare a maiden quarterly dividend of 1.7 cents per Australian share.

Strong financials

The strong FY12 result bolster’s our confidence in RMD’s ability to maintain its high profit margins.

FY12 gross margin was 60%, with EBIT margin a similarly robust 21.5%. The numbers were similar to FY11, where gross margin was 59.6% and EBIT margin was 21.5%.

The strong margins came as the group benefited from favourable exchange rate movements and cost control measures such as supply chain efficiencies and expanding manufacturing in Malaysia.

Continued growth in flow generator sales combined with cost control measures and are likely to support margins going forward.

The balance sheet was also in healthy shape, with the group having a net cash position of $558,706 at the end of FY12.

Outlook

RMD’s FY12 results show a company growing its share of the lucrative US sleep-disordered breathing market.

American flow generator sales were healthy despite concerns over the economy, and RMD demonstrated operational efficiency through good cost control.

RMD’s balance sheet was in pristine shape, and in our view, the company’s already robust margins will benefit from continued flow generator and mask sales growth.

As such we think RMD is a stock to watch in the coming months.

MBN Cash Problems Despite Capital Raising

[caption id="attachment_22461" align="alignleft" width="195" caption="MBN Cash Problems Despite Capital Raising"][/caption]

Mirabela Nickel (MBN) is a mining company focused on the production and sale of nickel concentrate.

The miner’s key asset is the Santa Rita nickel operation in Bahia, Brazil.

MBN has faced a number of headwinds in recent times, ranging from lower nickel prices, higher cash costs and a deteriorating cash position.

Cost pressures

Sentiment towards MBN has nosedived since it announced an 11% surge in December quarter cash cost to US$7.42/lb.

Although cash costs fell slightly to US$7.37/lb in the March quarter, investors are still questioning whether the group can fulfil its aim of getting cash costs down to US$6/lb by year end.

Cost reductions are expected to come from higher nickel production volumes (through improved grades and increased plant throughput), as well as lower staff costs and rationalisation of contractor costs.

MBN therefore has little margin for error in its attempt to bring costs down, and we would expect a harsh reaction from investors if the group falls short on this aim.

Cash problems despite capital raising

MBN’s problems led to a very low cash balance of US$41 million as at May 9. At the end of March, cash on hand totalled US$60 million.

In less than two months cash reserves slid ~33% due to the rapid deterioration in the nickel market.

Ratings agency, S&P, picked up on this in late March when it downgraded MBN’s credit rating due to concerns over a prolonged period of negative operating cash flow.

It therefore came as no surprise when MBN announced a $120 million capital raising in mid-May.  The group said the funds would be used to strengthen its balance sheet.

Whilst the raising may have alleviated short-term funding pressures, the group is still likely to face cash flow problems given its operational issues and the dire outlook for nickel prices.

Outlook

As an unhedged producer, MBN is particularly sensitive to the recent weakness in nickel prices.

Lower selling prices compound the problems for higher cost miners. In MBN’s case, we have seen just how severely cash reserves can get depleted from a weaker nickel market.

The group’s deteriorating financial position necessitated a capital raising, but we are of the view that its cash flow problems are likely to persist unless nickel prices stage an unexpected recovery in the near-term.

We at Australian Stock Report believe these headwinds are likely to weigh on MBN’s share price for a while yet.

 

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