As featured in the Herald Sun on May 5th 2013 here are the latest buy, sell and hold recommendations from Geoff Saffer Equity Analyst & Educational Facilitator at the Australian Stock Report.

Geoff has over 10 years’ experience researching and analysing Australian stocks, with a passion for fundamental analysis and specialty in identifying undervalued companies – particularly at the smaller end of the market.

Shares To Buy -

The Reject Shop (TRS) – Recent capital raising to fund expansion a positive. Same store sales growth running ahead of targets. Expect outperformance to continue.

Energy Action (EAX) – Small energy services kicking goals with its energy management services and novel energy auctions. Company on track for fifth straight year of revenue and profit growth.

Shares To Hold -

Seek Limited (SEK) – High quality company enjoying strong domestic and international growth. ROE and margins remain very high, but valuation looks stretched at current levels.

James Hardie (JHX) – US property market continues to turn around and there is room for fibre cement to increase market share, but sales growth looks more than priced in.

Shares To Sell –

Matrix Engineering (MCE) – Embattled engineering company’s recent quarterly results showed some signs of life but we still expect FY13 results to underwhelm investors.

Elders Limited (ELD) – Still faces a bleak future despite selling off assets to reduce debt. Chances of a bailout via takeover look stymied by existence of hybrid securities.

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Newcrest Mining (NCM) is Australia’s largest gold producer and one of the world’s top five gold mining companies by production, reserves, and market cap. NCM’s main operations are in Australia, Indonesia, Papua New Guinea, Fiji and West Africa, and has a global workforce exceeding 19,000.

The company has a portfolio of predominantly low-cost, long-life operating mines, although it also has a history of operations troubles at its key projects (both operational and developmental).

1H13 Results

NCM’s 1H13 results were disappointing on several fronts. Gold production for the half was 953,000 ounces, down 18% on prior corresponding half.

Cash costs increased 8% on same period in FY12. The poor production results led to revenue falling 28% and underlying profit plummeted 48%.

Guidance downgrade

Late last month, the group downgraded its full year production – its fifth downgrade in the last two years. Gold production was lowered from 2.3 to 2.5 million ounces of gold to 2.0 to 2.15 million ounces.

The company cited operational issues at Lihir and Gosowong as the reason for the downgrade. While the downgrade was not a massive shock given the poor 1H results, it is yet more evidence of management inability to forecasts its own production.

Gold Prices

While the groups poor results have contributed to recent share price weakness, it correlation to the gold price has also contributed.

The above shows the gold price (white line) and NCM share price (yellow line) over the last nine month.

As is shown, the fall in the gold price has dragged on NCM’s share price. With fears of monetary easing-induced hyperinflation are abating, other asset classes such as equities are offering relatively stronger returns.

Outlook

NCM’s 1H13 results showed the effects of both poor production and a falling gold price.

Disappointingly, the group last month downgraded its full year guidance. This downgrade was already from what we would consider low-end guidance and while not a complete surprise it does not leave us with much faith its management’s ability to forecast its own production.

With the flight to stronger returning asset classes likely to continue in the near-term, we see continued weakness for the gold price and as a by-product NCM’s share price.

Newcrest was issued as a share to sell to our members on April 11th, if you would like further information you can sign up for FREE share recommendations and access all our research files on not only NCM but all our current trading ideas. Simply click here and starting trading today, free for 7 days.

Kingsgate Consolidated (KCN) is a gold miner, operating in South East Asia, South America and Australia. The company’s major operation is the Chatree Mine in Thailand, and it also has the smaller Challenger Mine in South Australia.

Rising cash costs squeezing margins

In late January, KCN revealed a 13.4% slide in 2Q13 gold output relative to the same period a year earlier. Compared to 1Q13, gold output rose slightly by 4%.

Production was affected by the temporary closure of the Chatree North Expansion Plant (Plant 2) and interruptions at Challenger following the establishment of two new mining fronts.

The biggest disappointment with the result was another rise in the group’s cash costs. Cash costs rose 37% from 1Q13 to US$975/oz. However, compared to 2Q12 costs surged 60%.

KCN attributed the cost squeeze to lower ore grades at Chatree and ore sourced from an area of Chatree’s Pit A that was known to have lower recoveries.

The poor 2Q13 production result contributed to a 76% slide in 1H13 net profit to $8.1 million. Revenue was up 10% on-year, however the growth was driven primarily from stronger gold sales. Weaker output from Challenger and a lower realised average gold selling price detracted from the growth in revenue.

Gold prices trending down

The price of gold has weakened noticeably in recent months. Spot gold is trading around 7% below KCN’s 1H13 average realised selling price of US$1676.

The outlook for the precious metal has declined amid signs of weakening physical demand and diminished prospects for further monetary easing. In an example of waning demand, the US Mint sold 62,000 ounces of American Eagle gold coins last month.

This was much lower than the sale of 80,500 ounces in February and 150,000 ounces in January. Holdings in gold-backed exchange-traded funds are also 6.9% weaker in the year-to-date.

Furthermore, with the world economy stabilising, central banks like the US Federal Reserve are less inclined to implement additional monetary easing measures.

In our view these are among the key factors that will handicap gold prices, and by extension, KCN’s revenue growth.

Outlook

KCN stuck to its FY13 gold production guidance of between 200,000 and 220,000 ounces. 1H13 production totalled 90,413 ounces, meaning KCN is relying on stronger 2H13 output numbers in order to meet its guidance. Although Chatree’s Plant 2 is now back online, development at Challenger is expected to continue.

Also, the limited availability of stoping areas at Challenger the company highlighted in its 2Q13 production report indicates difficulties accessing the ore body being mined. Therefore we don’t share KCN’s optimism that full year production guidance will be met.

Moreover, the upward trend in its cash costs is coming at a time when gold prices have been retreating. This is creating pressure on cash margins and will ultimately translate into poor earnings in our view.

Transpacific was issued as a share to sell to our members on April 3rd, if you would like further information you can sign up for FREE share recommendations and access all our research files on not only KCN but all our current trading ideas. Simply click here and starting trading today, free for 7 days.

Sims Metal Management (SGM) collects, sorts and processes scrap metal materials that are recycled for resale.

The company’s divisions include ferrous recycling, non-ferrous recycling, secondary processing of non-ferrous metals and plastics, international trading of metal commodities and the merchandising of semi-fabricated steel products.

SGM has operations in Australia, New Zealand, the United Kingdom, North America, Asia and Europe and is the world’s largest listed metal recycler with approximately 270 facilities and 6,600 employees globally.

The company is currently in a global search for a new CEO after current CEO Daniel Dienst announced he would retire when his contract concludes on June 30 2013.

1H13 Results

The group’s 1H13 results were disappointing to say the least. Revenue came in at $3.4 billion, a 25% decline on the prior corresponding half, due to a reduction of intake shipments in North America.

SGM reported a 1H13 net loss of $295.5 million, 53.3% better than the prior corresponding period’s $633.2 million loss. The result was attributed to goodwill impairments and inventory writedowns totalling $291.3 million.

On an underlying basis, the group did record a $10 million profit, although the rest was down from $42 million a year earlier. Given the poor result, management decided not to declare a dividend for the first half – the first time the company has not paid an interim dividend since listing.

US and UK Businesses

On 21 January 2013, SGM announced that it will form a special committee to investigate the inventory valuation issues in the company’s UK business.

The result of the committee’s investigation was a $78 million write-down of inventory, of which $16 million was allocated to 1H13 and the remaining balance resulted to a restatement of prior period results.

The write-down represents a massive 29% of the value of inventories in its UK business. That trouble does not stop in the UK.

SGM’s US division, which contributes around 60% f the group’s overall sales, also suffered impairment charges in the first half. The company recorded a goodwill impairment charge of $291 million in the 1H13.

Excluding the write-downs, the US business barely made a profit, reporting an underling EBIT of $2.1 million–a 30% drop from the prior corresponding period.

Looking ahead

The outlook does not look pretty for SGM, at least in the short-term. The $78 million writedown on its UK inventory is extremely alarming because it shows the company’s lack of adequate financial controls in relation to its inventory reporting.

It also brings into question the company’s financial controls in other regions and raises the possibility of further write-downs. Poor management has led to the decision not to distribute a dividend for the first time since it listed, which does not bode well for shareholder confidence.

Moreover, the group downgraded its guidance three times in 2012. Without a significant pickup in US economic activity, we cannot see this year being any different. As such, we feel there is more downside to SGM’s share price in the near-term.

Seek Limited was issued as a share to buy to our members on March 22nd, if you would like further information you can sign up for FREE share recommendations and access all our research files on not only SGM but all our current trading ideas. Simply click here and starting trading today, free for 7 days.

Perseus Mining (PRU) is a gold explorer and producer, focused on under-explored gold belts in West Africa. The group’s main assets are located in Ghana and the Ivory Coast, consisting of the Edikan Gold Mine (EGM), the Tengrela Gold project (TGP) and the Grumesa Gold Project (GGP).

The Edikan Gold Mine in Ghana has 5.6Moz of Measured and Indicated gold resources, including reserves of 3.4 million ounces of gold, and 1.7Moz Inferred gold resources. Production began at the mine in the 3rd Quarter of 2011.

The Sissingue Gold Project which is part of the Tengrela Gold Project. It is the group’s most advance non-producing project.

Quarterly Production

As mentioned, EGM has been producing gold since the third quarter of 2011.  Since the initial ramp of production PRU has reported four quarters worth of production numbers.

The first two quarters were within guidance, however the last two set of figures released have missed. The December 2012 quarterly production result was the more disappointing of the two misses.

Gold production over the quarter was 51,090 ounces, 13% below the lowered guidance provided in November and also below the previous quarter’s production of 52,610 ounces.

Cash costs for the December quarter was $588 per ounce, 2.3% higher than the revised guidance and much higher than the $475 per ounce in the September quarter. The group blamed the production short-fall principally on lower crusher output since its initial downgrade on 23 November 2012.

The Sissingue Gold Project

The Sissingue Gold Project located in the Ivory Coast is the project PRU is planning on getting to production. The group is targeting a mid-2014 commissioning date, but given its 12-month build time from the start of construction we see this timeframe as unrealistic.  PRU still needs to:

 
Finally PRU will need to approve development of the project, which it has put on hold pending clarity of the some of the aforementioned tasks.

Outlook

PRU has missed two quarterly production results in a row. The production issue of late is relating to a mechanical issue to do with the drive shaft for the crusher, which has results in poor mill utilisation.

The drive shaft is scheduled to be replaced in February, but given the downtime that will be required for the replacing and testing of the new shaft we can’t see the group meeting its previous guidance range of between 127,000 to 143,000 ounces.

PRU offers long-term value at these levels, but until the company can stick to its guidance we have too many short-term concerns.

This article was distributed to our members on February 8th, if you would like further information you can sign up for FREE 7day recommendations and access all our research files on not only PRU but all our current trading ideas. Simply click here and starting trading today.

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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.

This article was distributed to our members on November 16th, if you would like further information you can sign up for FREE 7day recommendations and access all our research files on not only Whitehaven but all our current trading ideas. Simply click here and starting trading today.

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.

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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.

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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.