Collected Wisdom

PORTFOLIO POINT: This is an edited summary of Australia's best-known investment newsletters and major daily newspapers. The recommendations offered represent the views published in other publications and may not represent those of Eureka Report.

Orica (ORI): As commodities prices appear to be going into hibernation for winter, the newsletters are saying Orica might be a good prospect for the colder months ahead – even after accounting for a full-year profit downgrade of about 3% thanks to the impact on the half-year results of the extreme weather in summer and the high Australian dollar.

The results themselves for the chemicals and explosives company weren’t bad, with net profit rising 5% or 379% – depending on how you look at it – to $253.6 million on the prior corresponding period. Orica demerged its Dulux Group unit in June 2010 so the 5% increase doesn’t include the $45 million contribution from the paint company, while the latter figure reflects how much better off the business is as a standalone entity. Orica’s revenue rose 8% and ammonium nitrate volumes increased 4%, despite the rain.

Orica commands about 70% of the Australian ammonium nitrate explosives market, which is worth about $900 million in sales to the company annually. Ammonium nitrate-based explosives are mostly used in the coal industry – which is currently booming – and a small fraction is used to mine iron ore.

Orica also has an exposure to the US coal mining industry, a sector that after many years of decline is now starting to improve and flow through to Orica’s Minova business. Minova, which makes specialty bolts and chemicals for underground mines, has been a distinct drag on earnings at Orica and is one of the reasons EBIT only rose a minimal 1% in the half.

The investment press says the mining services business is a good way to play the Chinese economic boom, and is putting a 12-month price target of about $30, compared with versus Friday’s closing price of $26.70. And while the strong currency is putting pressure on profits that must be translated back from US dollars, Orica has hedged two-thirds of the second-half exposure, which will protect it from effects of the dollar staying at record high levels.

The newsletters see fiscal 2012 as being the year the demerged Orica will really come into its own, as the 300 kilo tonne Indonesian ammonium nitrate plant comes on line in the first half of 2011-12 and a $100 million detonator plant in Hunan, China, is expected to be commissioned too.

• Investors are advised to buy Orica at current levels.

Ansell (ANN): The high Australian dollar is a two-edged sword for the rubber gloves and condom maker: a stronger local unit of currency impacts on earnings per share and produces lower valuations for shareholders, but it’s also cheaper for foreign buyers to buy the products (65% of all sales are to the US).

Headwinds include steadily rising rubber and latex prices; the willingness of customers to absorb price rises; the ability of governments to financially support services that require rubber gloves and condoms, such as sexual health programs and non-essential surgery; and weak demand for industrial gloves, as orders rely on good or recovering economic activity.

Balancing these drawbacks is the fact that Ansell’s business is protected from some of the global economic travails due to the essential nature of its products. Ansell is also experimenting with different materials, debuting two types of surgical gloves in April made of synthetic polyisoprene, which is designed to reduce skin irritation. It has reduced the amount of latex it uses by 25% since 2007, and has made contracts more flexible to deal with volatile latex costs.
Price targets are not high with estimates ranging between $12.80 and $14 (it closed Friday at $13.88), but the four-five year revenue growth expectations are 5–6%.

One newsletter says Ansell has large growth opportunities ahead as developing and emerging countries modernise their healthcare sectors and become stricter about surgical hygiene. It says the company is also well placed to capitalise on the huge growth in China, India and Indonesia. Add to this its technological capacity, the diverse array of products it produces, and a very low net debt to equity position of 7% as at the last results announcement in December, and Ansell is not sitting in a bad spot, despite the headwinds it faces.

• Investors are advised to hold Ansell at current levels.

Consolidated Media Holdings (CMJ): Many in the investment press are falling over themselves to recommend all businesses associated with the winners of the AFL television rights, and this week it’s Consolidated Media.

The investment company, though its Publishing & Broadcasting Ltd days are well behind it, is part of the tortuous and labyrinthine ownership structure that is the Australian media scene: it owns 25% of Foxtel and 50% of Premier Media Group (which owns Fox Sports).

The newsletters think that the $600 million-plus Foxtel paid for to be the main owner of the rights to televise AFL games between 2012 and 2016 will be easily covered by higher subscriptions to the service. This is important because the integration of digital channels into the free-to-air offering has hit the pay-TV sector much harder than anyone imagined, while consumer confidence and spending remain at low levels, making it harder to persuade viewers to pay extra for television.

Foxtel’s penetration in the key AFL states of South Australia and Victoria has frozen at 30%, so the fact that all eight games every week will be shown in full is expected to pump up those figures and therefore revenues. Back in February, Consolidated Media reported a 5% dip in half-year profit to $45.3 million, on the prior corresponding period.

Speculation is rife that with Kerry Stokes and James Packer owning about 70% of the stock, perhaps the two might like to take the company private at some point, but stop short of recommending this as a reason to buy shares in the company. Consolidated Media closed on Friday at $2.85 and the newsletters have a 12-month price target of about $3.30 on its head.

• Investors are advised to hold Consolidated Media Holdings at current levels.

Alacer Gold (AQG): The newsletters have taken note of the combined Avoca-Anatolia company Alacer Gold and while they like what they see, the prospect of volatile gold prices and economic uncertainty has dampened their enthusiasm somewhat.

Alacer plans to have production at 800,000 ounces of gold by 2015, with current output coming from Higginsville, South Kalgoorlie, a 49% stake in a joint venture called the Frog’s Leg, and the 95%-owned Copler project in Turkey. The company is aiming for production of 400,000 ounces this year, and it’s well on track to achieve that.

Copler started its first commercial production in May, and the investment press is very pleased that this began right from the start of the month. Total output from February (when the merger was completed) to March 31 was 91,259 ounces, while in the first month of production the combined entity turned out 37,040 ounces, which is more than it needs to hit the yearly guidance.

Management expects production for the second quarter to be 90,000–95,000 ounces.

But some newsletters are sceptical. After breaching and remaining above the $US1500 target, gold has dipped back under the high-water mark and the newsletters are wondering whether these are signs that it is wobbling off its pedestal. Given Alacer is a pure play gold company the investment press suggests that, for those uncertain about the sustainability of gold prices, it might be time to take the money and run.

• Investors are advised to sell Alacer Gold at current levels.

Newcrest Mining (NCM): Politics and weather have been the drivers of Newcrest’s latest performance, with the Lihir mine in PNG not getting enough rain (the mine needs fresh water for the “flotation circuit” used to separate gold from other ore), the NSW Cadia Valley mine receiving too much, and Ivory Coast production halted altogether for a period thanks to former president Laurent Gbagbo refusing to relinquish the post and finally being captured in early April.

The result of these events was a 100,000 ounce drop in gold production, or 16% below the previous quarter’s output; full year product guidance has been wound down to 2.82 million ounces.

Newcrest’s exploration efforts will relieve any tension investors might have about the size of the downgrades the summer has wrought. The upgrade of the million-ounce plant at Lihir is close to being finished while a joint venture exploration of Wafi-Golpu, also in PNG, has increased the suspected amount of ore in the area to 30 million ounces of gold and 8 million tonnes of copper.

As a pure gold-copper company, Newcrest is at the mercy of gold prices. Gold hit $US1489.40 on Friday, down from its $US1500 an ounce highs and questions are being raised about the sustainability of the remaining at record highs.

Despite being a miner that produces low-cost, high-quality gold, Newcrest’s high share price is a factor that has the newsletters advocating a hold on the stock rather than a buy. It’s shares closed Friday at $39.38.

• Investors are advised to hold Newcrest Mining at current levels.

Watching the directors

RHG (RHG) non-executive director John McGuigan has sold his entire holding in the mortgage broker on his resignation, following the failed share buyback that he recommended. McGuigan indirectly sold on-market 80,000 shares for $98,320, or $1.229 each. He now holds no stock in the company.

Coalspur Mines (CPL) Canada-based director Denis Turcotte has bought 125,000 shares in his wife Julie’s name. The total cost was $C223,205, or $C1.79 a share, and he now has a total of 250,000 shares in the miner. Coalspur appointed Turcotte in December as it begins a push into Canada and further afield overseas.

Carsales (CRZ) chairman Wal Pisciotta is continuing to buy shares in the company he co-founded, in a spree that goes back to the company’s float in September 2009. This time Pisciotta bought two lots of shares – 5000 for $4.78 each and 10,000 for $4.79 each – on-market for one of his two indirect holdings. The total cost was $71,800 and lifts his indirect stake to 18.8 million shares and leaves his direct stake at 250,000 shares.

Beach Energy (BPT) director Franco Moretti bought 45,000 shares for his super fund. The stake, at $0.905 each, cost Moretti a total of $40,725 and was the first investment he’s made in the company for his retirement. He now owns indirectly 230,698 Beach shares. Beach completed a takeover of oil minnow Impress Energy in February.

-Recent directors' trades worth more than $150,000
Date	Company	ASX	Director	Volume	Price	Value	Action
29/04/11	Clime Invest Mgt	CIW	Neil Schafer	500,000	$0.45	$225,000	Buy
15/04/11	K&S Corporation	KSC	John Winser	528,000	$1.63	$862,467	Buy
15/04/11	K&S Corporation	KSC	John Winser	528,000	$1.63	$862,467	Buy
14/04/11	White Energy	WEC	Travers Duncan	100,000	$2.79	$278,800	Buy
13/04/11	White Energy	WEC	Travers Duncan	200,000	$2.85	$569,060	Buy

Source: The Inside Trader