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.

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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.