Collected Wisdom

Andrew Mohl’s departure as chief executive of AMP Limited (AMP) has given cause for one newsletter to rethink its recommendation. With Mohl at the helm, AMP has successfully steered the course from basket case to star performer, during a period that included the stockmarket slump of 2003. The company’s interim results were strong – good growth in its financial services division and its funds management operation contributed to a record profit of $470 million while it paid down $500 million of debt. But the nervous nellies at one newsletter believe that favourable market conditions such as legislated superannuation has already been fully priced in. They also note with some disappointment that the strong upward momentum AMP has enjoyed has begun to taper off. On a more positive note, when AMP fell to a nine-month low of $9.19 during the recent volatility it was quickly rejected by the market and was trading above $10 in less than a week. Nevertheless, the risk of further volatility remains ever present in the minds of our tipsters. Sell AMP Limited at $10.35.

One company that has been featuring heavily in the news for all the wrong reasons is Gunns Limited (GNS). Gunns is behind a controversial $1.7 billion pulp mill proposed for Tasmania’s Tamar Valley. The Federal Government was set to make an announcement regarding its approval last week but instead simply extended the deadline for another six weeks. Credit Suisse believes that should the mill get approval it will be a “company-transforming event” but others believe that pulping capacity coming online in Brazil, Chile and China will satisfy the bulk of demand. Full-year profits were in line with expectations, which means that analysts weren’t expecting much because net earnings rose just 1% to $88 million. On the acquisition front, Gunns has taken possession of more than half of rival outfit Auspine. But Auspine managing director Adrian de Bruin remains obstinate and refuses to accept the offer. And, in fact, has been continuing to buy shares on market. In summary, there are too many variables surrounding Gunns at the moment to generate an accurate picture of future earnings. Reduce your holding in Gunns Limited.

Ramsay Healthcare (RHC) owns and operates private hospitals throughout Australia. It currently has 68 hospitals and 7200 beds under management. The company maintains a decentralised structure that empowers management and allows them to decide what works best. The potential for exporting the Ramsay model overseas offers shareholders considerable upside. The expiry of an agreement with the Department of Veterans Affairs will see the level of veterans in the patient mix fall from 35% to 17%. Ramsay is exposed to Queensland where nurses’ wages are set to rise 35% over the next three years, but a change of government at a federal level would be unlikely to produce any material difference to its bottom line. Net profit after tax beat most analyst estimates – rising 22% to $109 million. Acquire Ramsay Healthcare to $11.50.

Cabcharge (CAB) shareholders dropped the stock like a hot rock on August 29, the day the company delivered results showing a rise in net profit of 36% to $52 million. The company owns proprietary technology found in most taxis, and also about 4800 taxis in Sydney and Melbourne. What spooked shareholders was a comment by chief executive Reg Kermode about expanding into other transport businesses, given that the particular example he used was of a much maligned public transport contractor from Victoria named Connex. This is not the first time Cabcharge has ventured away from its core business. The last time was when the company was seen sniffing around the Cross City Tunnel disaster and the stock was duly punished the moment the market got wind of it. Cabcharge also has plans to diversify into the operation of bus lines, via a 49% holding in transport company ComfortDelGlo. Making the contestable assumption that the day-to-day running of a bus line or a train line really shouldn’t differ materially from its taxi fleet operations, one stock tipper has upgraded his recommendation. Cabcharge is a long-term buy at current prices.

One of our favourite speculators has set his sights on the Perth based/Africa focused oil and gas company Cityview Corporation (CVI). The board includes ex-British Petroleum and Westpac alumni, and since March 2006 veteran gold miner Mark Smyth has been at the helm. The African tenements are located in Angola and Cameroon, both of which carry varying degrees of sovereign risk, which goes some way to explain why they are underexplored. One project is focused on carbonatite, the other on a more lucrative copper-gold deposit. A $250,000 drilling program is set to commence in the first week of September and decent results may see the stock retest its April 2006 high of 22¢. Cityview closed at 12.5¢ on August 31, for a market cap of $32.9 million with about 263 million shares on issue. Cityview Corporation is a speculative buy at current levels.

The merger between Fairfax (FXJ) and Rural Press is only a couple of months old, so comparing recent results with historic figures is largely pointless The merger was supposed to deliver about $50 million of synergies a year, but this has been revised downwards to $35–45 million. Advertising revenue has been harmed by poor economic conditions in both NSW and New Zealand, but property advertising in Victoria remains strong. With the “rivers of gold” in serious decline the focus turns to its digital wing, where revenues rose 38% to $132.9 million and EBITDA rose 52% $37 million.

The Rural Press assets offer exposure to rural and regional Australia, where despite tough conditions EBITDA rose 7% to $210 million. The company is also in the midst of acquiring Southern Cross Broadcasting where the mix of radio and production assets will complement its existing asset mix. Despite a lack of guidance and the end of fully franked dividends, one tip sheet maintains its bullish stance. Acquire Fairfax Media below $4.70.

Caltex (CTX) is the only listed Australian company offering investors direct exposure to fuel refinery. The risk associated with Caltex is low but the business is not as high quality as other oil plays such as Woodside. Interim results showed net profit after tax rising by 46% to $255 million, which was at the top end of management guidance. The interim dividend was increased from 32¢ to 47¢ fully franked. The stronger Australian dollar reduced margins significantly, but this is expected to abate looking forward. Major refineries at Kurnell and Lytton operated at near capacity despite scheduled maintenance interfering with production for as long as six weeks. Strength of management team is a huge plus for investors looking to increase their oil exposure. Buy Caltex to $24.25.

Watching the directors

This latest week’s highlights

• Michael Katz just bought $53,000 worth of shares in Everest Babcock & Brown (EBB). This stock is now only half the price it was a month ago.
• Andrew Peacock and Geoffrey Williams just picked up some shares in MFS Ltd (MFS).
• Kim Robinson of Apex Minerals (AXM) has just purchased $390,000 worth of stock. This stock has recently seen a stellar rise to $1.20 and has fallen back with the overall market.
• James Packer just grabbed $500,000 of shares in Ellerston Gems Fund (EGF). This is on top of the $1.1 million worth of shares he bought last week.
• A couple of directors just purchased shares in Energy Ventures (EVE) for about 20¢. The price was over 40¢ in April.
• Terry Streeter of Fox Resources (FXR) just bought $60,000 worth of shares.
• Gerrit de Nys bought $62,000 worth of Horizon Oil (HZN).
• Legend Mining (LEG) has just seen two directors buying shares after a price drop.
• Three directors have just bought into Traffic Technologies (TTI) after a recent large price drop.
• Buying by two directors into Virgin Blue Holdings (VBA).

Previous week

• Frank Wilson, a director of TFS Corporation (TFC) has just purchased $171,000 worth of stock. This is in addition to other purchases he has made this year.
• Greg Bundy, a director of Peptech (PTD), has just purchased about $30,000 worth of stock. He is the third director to buy in the past couple of months.
• Buying by two directors this month into Praemium Limited (PPS) as the price has come down.
• Continued buying by a director of Pluton Resources (PLV), Raymond Schoer. He has purchased shares in four transactions this month.
• Buying by two directors of Pioneer Nickel (PIO).
• Another $450,000 worth of stock was purchased by Christopher Mackay, a director of Magellan Flagship Fund (MFF). He has now purchased more than $1.3 million if stock since May this year.
• Robert Humphries, a director of Leighton Holdings (LEI), has purchased almost $140,000 worth of stock this week.
• Continued buying by Eddie Smith, a director of Impress Energy (ITC). He has been steadily purchasing over the last couple of months.
• More buying by the directors of Incremental Petroleum (IPM).
• Buying by two directors of Entertainment Media & Telecoms Corporation (ETC).
• James Packer has purchased $1.1 million worth of shares in Ellerston Gems Fund (EGF).
• Chris Morris, a director of Computershare (CPU), has bought $880,000 worth of stock this week as the price has come down.
• Buying by a director of Cochlear (COH).
• Buying by two directors of Challenger Diversified Property Group (CDI).
• Adrianus de Bruin is still buying shares in Auspine Limited (ANE). He has just bought another $550,000 worth of stock.
• Neil Lewis, a director of Allco Finance Group (AFG), has just purchased $170,000 worth of stock.

Source: The Inside Trader