Just when the Australian market seemed to have put behind it the awful start to the year – which opened with a double-digit loss before investors had even settled into the new year – and seemed poised to push into clear water, along came the announcement of a federal election.
All-but-confirmed for July 2, the national election is likely – being a longer-than-usual campaign – to see spending decisions by businesses and households shelved through the election campaign. Should this happen, it would delay the long-mooted transition of the Australian economy from being mining-driven to being powered by the non-mining sectors of the economy. Low interest rates and low petrol prices were supposed to help with this transition, by encouraging consumers to spend, but the election may act as lead in the economy’s saddlebags for a couple of months at least.
On the stock market, the focus on high-yield stocks that has ensued as the Reserve Bank of Australia has taken interest rates down to 2% has become a crowded trade, with many of the yield favourites pushed close to expensive, if not to record highs. Many investors are starting to look for capital-growth situations, even if they may not be fully prepared to trust the resources mini-rally. Analysts and fund managers say that the current market does not show any clear pointers to sectors that are more battered than others – meaning that the search for value is down to good old-fashioned stock-picking.
Switzer Super Report picked the brains of two of Australia’s best value-sniffers, Simon Mawhinney, managing director and chief investment officer at renowned ”deep-value, contrarian” house Allan Gray, and Geoff Wilson, chairman and portfolio manager at listed investment company (LIC) stable Wilson Asset Management, to find out where they perceive value in the current market.
Austal (ASB, $1.57)
Market capitalisation: $548 million
Forecast FY16 EPS growth –17.5%, PE 12.9, Yield 3.2% fully franked
Forecast FY17 EPS growth 9.8%, PE 11.8, Yield 3.5% fully franked
Consensus target price $1.99, +26%
(Estimates collated by FN Arena)
Perth-based shipbuilder is one of Australia’s manufacturing success stories, holding more than $US5 billion worth of contracts to build advanced aluminium warships for the US Navy. Austal operates shipyards at Henderson in Perth, in the USA (at Mobile, Alabama) and in the Philippines (Cebu). The major contracts for the US Navy are the $US3.5 billion Littoral Combat Ship (LCS) program, and the US$1.6 billion Expeditionary Fast Transport (EPF) program.
Austal has already delivered three Independence-variant LCS to the USN, two as subcontractor (LCS 2 and LCS 4) and one as prime contractor (LCS 6) under its separate ten-vessel contract. The company has seven LCS under construction at Mobile, with USS Montgomery (LCS 8) scheduled for delivery later in the year, and earlier this month won additional procurement and engineering work on the program. Six of the EPF vessels have already been delivered, with a further two being built at Mobile and the seventh ship, USNS Carson City, preparing for trials and scheduled to be delivered later this year.
Earlier this month Austal was awarded preferred tenderer status by the Australian government for the Pacific Patrol Boats Replacement (PPBR) Project, a potential $900 million contract under which Austal will build up to 21 steel-hulled patrol vessels for Australia and several Pacific Island countries, and maintain the ships at its service centre in Cairns.
The Henderson yard is also building eight Cape Class Patrol Boats for the Australian Customs and Border Protection Service, as well as two 72-metre High Speed Support Vessels (HSSVs) for the Royal Navy of Oman. Both the Omani vessels are expected to be delivered in 2016.
Simon Mawhinney describes Austal as “very cheap,” with the recent contract developments giving investors “even more confidence that the company’s earnings are sustainable.”
Source: Yahoo!7 Finance
Alumina (AWC, $1.44)
Market capitalisation: $4.2 billion
Forecast FY16 EPS growth 58%, PE 22.9, Yield 4.7% fully franked (at current A$/US$ exchange rate)
Forecast FY17 EPS growth 26.5%, PE 18.0, Yield 5.2% fully franked (at current A$/US$ exchange rate)
Consensus target price $1.38, –4.4%
Alumina is a 40% partner with Alcoa in Alcoa World Alumina and Chemicals (AWAC), the world’s largest alumina producer. The business mines bauxite, extracts alumina (aluminium oxide) and smelts aluminium metal. It has about 25% of the global alumina market. While aluminium, like all commodities, is a cyclical business, Alumina Limited is set to benefit from a series of contract wins that AWAC has signed over the last year, on the back of strong aerospace and automotive demand – the major new contracts were with Boeing, Airbus and Ford.
These contracts help to boost the outlook for Alumina, after the 2015 result (the company uses the calendar year as the financial year) was its best since 2008: net profit came in at $US88 million ($122 million), compared with a net loss of $US98 million in 2014. Despite a fall in the alumina price in the first quarter of 2016, Alumina is expected to show strong earnings growth this year and next.
Analyst consensus does not think much of Alumina’s capital growth prospects, but Mawhinney does not share that view: he says Allan Gray has “invested heavily” in the stock. He says Alumina’s operations are “at the very low end of the cost curve,” and the company has no debt. “We think Alumina is outstanding value,” he says.
Source: Yahoo!7 Finance
Peet & Co. Limited (PPC, 95 cents)
Market capitalisation: $465 million
Forecast FY16 EPS growth 10%, PE 11.2, Yield 4.7% fully franked
Forecast FY17 EPS growth 5.9%, PE 10.6, Yield 5.3% fully franked
Consensus target price $1.35, +41.6%
(Estimates collated by FN Arena)
Western Australia-based residential property developer Peet & Co. has projects in every mainland state and territory, but is “priced as if it is 100% exposed to WA,” says Mawhinney. Peet owns land and develops high-quality residential projects, often on behalf of syndicate, joint venture or co-investment partners. Peet expects to have more than 80% of its land bank in various stages of development by the end of FY17. The focus on land – as opposed to houses and apartments – is also poorly understood by the market, says Mawhinney. Nearly two-thirds of new projects are on the east coast, and the company has no exposure to the Sydney apartment market. Earnings growth expectations for Peet have come down, as has the target price, but on consensus, analysts expect Peet & Co. to reach $1.35, which would represent a significant gain from the current share price.
Source: Yahoo!7 Finance
Southern Cross Electrical Engineering Limited (SXE, 49 cents)
Market capitalisation: $77 million
Forecast FY16 EPS growth 224%, PE 20.2, Yield 5.6% fully franked
Consensus target price 38 cents, –22.4%
(Estimates collated by Thomson Reuters)
Perth-based Southern Cross Electrical Engineering is a specialist provider of electrical and instrumentation (E&I) services to the resources sector, in construction and over the life of a project. Southern Cross operates through three divisions: Construction, which installs and commissions power projects; Infrastructure, which provides the power infrastructure at a resources site; and Service, which offers maintenance services.
Analyst consensus sees Southern Cross Electrical Engineering shares falling from here, but Geoff Wilson argues that the analysts’ view is wrong. Wilson says investors looking at the recent rally in commodities prices who are looking for a safer way of participating will be drawn to those service providers to the sector that have (a) a strong business and (b) little or no debt. Wilson says Southern Cross Electrical Engineering has $55 million in cash on the balance sheet (compared to a market capitalisation of $77 million) and has announced several new contracts so far this year. “We think SXE will earn $5 million in EBIT (earnings before interest and tax) this year, and on our analysis, it looks fundamentally cheap,” he says.
Source: Yahoo!7 Finance
Macmahon Holdings (MAH, 10.5 cents)
Market capitalisation: $131 million
Forecast FY16 EPS 0.9 cents, versus loss of 1.48 cents FY15
No dividend forecast
Consensus target price 11.3 cents, +7.6%
(Estimates collated by Thomson Reuters)
Mining contractor Macmahon has been hard-hit by the resources downturn, but Wilson believes the company has worked hard to re-establish itself as a good value proposition in a beaten-down sector.
Last financial year, several of Macmahon’s major contracts concluded and others were terminated early, resulting in a significant hit to revenue and a net loss of $218 million. But Macmahon used cash from the $US65 million sale of its Mongolian coal operations to pay off its bank debt and it has net cash of $66.7 million on the balance sheet, and undrawn banking facilities available. The company also more than halved its workforce.
The company says the poor market conditions are making mine owners look for further cost reductions, resulting in opportunities for mining contractors. Given its strengthened financial position, Macmahon is able to look for these opportunities, and has won three new contracts so far this financial year, taking the order book to $1.5 billion. It is one of only a few contractors with complete surface and underground mining capabilities. In the first half of the financial year, Macmahon generated $11.7 million from operations despite the tough conditions. On the negative side, Macmahon concedes that its Nigerian operations are under-performing.
Wilson says Macmahon is in a similar position as Southern Cross Electrical Engineering: “it has no debt, it’s making money at a depressed point in the cycle, and it’s fundamentally cheap,” he says.
Source: Yahoo!7 Finance
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